UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 29, 2001
Commission file number 0-22192
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PERFORMANCE FOOD GROUP COMPANY
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(Exact name of Registrant as specified in its charter)
Tennessee 54-0402940
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
12500 West Creek Parkway
Richmond, Virginia 23238
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code:
(804) 484-7700
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Rights to Purchase Preferred Stock
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(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant on March 26, 2002 was approximately $1,353,856,000. The market
value calculation was determined using the closing sale price of the
Registrant's common stock on March 26, 2002, as reported on The Nasdaq Stock
Market.
Shares of common stock, $.01 par value per share, outstanding on March 26, 2002
were 43,974,154.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Documents from which portions are incorporated by reference
------------------ -----------------------------------------------------------
Part III Portions of the Registrant's Proxy Statement
relating to the Registrant's Annual Meeting of
Shareholders to be held on May 15, 2002 are
incorporated by reference into Items 10, 11, 12 and
13.
TABLE OF CONTENTS
Part I
Item 1. Business................................................................................................ 3
The Company and its Business Strategy................................................................. 3
Growth Strategies..................................................................................... 4
Customers and Marketing............................................................................... 5
Products and Services................................................................................. 6
Information Systems................................................................................... 7
Suppliers and Purchasing.............................................................................. 8
Operations............................................................................................ 8
Competition........................................................................................... 11
Regulation............................................................................................ 11
Intellectual Property................................................................................. 12
Employees............................................................................................. 12
Executive Officers.................................................................................... 12
Forward-Looking Statements............................................................................ 13
Risk Factors.......................................................................................... 14
Item 2. Properties.............................................................................................. 18
Item 3. Legal Proceedings....................................................................................... 19
Item 4. Submission of Matters to a Vote of Shareholders......................................................... 19
Part II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters................................................................................................. 20
Item 6. Selected Consolidated Financial Data.................................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................................. 22
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.................................................................................................... 31
Item 8. Financial Statements and Supplementary
Data.................................................................................................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................................................. 32
Part III
Item 10. Directors and Executive Officers of the
Registrant.............................................................................................. 32
Item 11. Executive Compensation.................................................................................. 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................................................................. 32
Item 13. Certain Relationships and Related
Transactions............................................................................................ 32
Part IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form
8-K.................................................................................................... 32
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PERFORMANCE FOOD GROUP COMPANY
Unless this Form 10-K indicates otherwise or the context otherwise
requires, the terms "we," "our," "us" or "Performance Food Group" as used in
this Form 10-K refer to Performance Food Group Company and its subsidiaries. We
use a 52/53-week fiscal year ending on the Saturday closest to December 31.
References in this Form 10-K to the years or fiscal years 2001, 2000, 1999, 1998
and 1997 refer to our fiscal years ended December 29, 2001, December 30, 2000,
January 1, 2000, January 2, 1999 and December 27, 1997, respectively, unless
otherwise expressly stated or the context otherwise requires. All share and per
share data has been adjusted to reflect the two-for-one common stock split that
we paid on April 30, 2001. As a result of our merger with NorthCenter
Foodservice Corporation on February 26, 1999, which we accounted for as a
pooling-of-interests, we have restated the consolidated financial statements for
years prior to the merger to include the accounts and results of operations of
NorthCenter.
The following discussion and analysis should be read in conjunction
with "Selected Consolidated Financial Data" and our consolidated financial
statements and the related notes included elsewhere in this Form 10-K.
PART I
ITEM 1. BUSINESS.
THE COMPANY AND ITS BUSINESS STRATEGY
Performance Food Group, a Tennessee corporation, was founded in 1987 as
a result of the combination of various foodservice businesses and has grown both
internally through increased sales to existing and new customers and through
acquisitions of existing foodservice distributors. (Further discussion of recent
acquisitions is contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations under Business Combinations.) Performance
Food Group is the nation's third largest broadline foodservice distributor based
on 2001 net sales of $3.2 billion. We market and distribute over 44,000 national
and proprietary brand food and non-food products to approximately 33,000
customers in the foodservice or "food-away-from-home" industry. Our extensive
product line and distribution system allow us to service both of the major
customer types in the foodservice industry: "street" foodservice customers,
which include independent restaurants, hotels, cafeterias, schools, healthcare
facilities and other institutional customers; and multi-unit, or "chain,"
customers, which include regional and national quick-service and casual-dining
restaurants. In addition, we are a major processor of fresh-cut produce that we
market and distribute to retail and foodservice customers.
We service our customers through three operating segments. Note 17 to
the audited financial statements in this Form 10-K presents financial
information for these segments.
o Broadline. Our broadline distribution segment markets and distributes
more than 39,000 national and proprietary brand food and non-food
products to a total of approximately 32,000 customers, including street
customers and certain corporate-owned and franchisee locations of
chains such as Burger King, Church's, Popeye's, Subway and Wendy's. In
the broadline distribution segment, we design our product mix,
distribution routes and delivery schedules to accommodate the needs of
a large number of customers whose individual purchases vary in size.
Generally, broadline distribution customers are located no more than
250 miles away from one of our 14 broadline distribution facilities,
which serve customers in the eastern, northeastern, southern and
southeastern United States.
o Customized. Our customized distribution segment focuses on serving
casual-dining chain restaurants such as Cracker Barrel Old Country
Store, Outback Steakhouse, Ruby Tuesday and TGI Friday's. We believe
that these customers generally prefer a centralized point of contact
that facilitates item and menu changes, tailored distribution routing
and customer service. We generally can service these customers more
efficiently than our broadline distribution customers by warehousing
only those stock keeping units, or SKUs, specific to customized segment
customers and by making larger, more consistent deliveries. We have
five customized distribution facilities currently serving 11 customers
nationwide and internationally.
o Fresh-cut. On October 16, 2001, we acquired Fresh International Corp.,
referred to as Fresh Express, which sells packaged, ready-to-eat salads
under its "Fresh Express" label. (For more information on the
acquisition of Fresh Express, see the Business Combinations section of
Management's Discussion and Analysis of Financial Condition and Results
of Operations.) With five processing facilities located throughout the
United States, we process, package and
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distribute over 240 different Fresh Express products nationwide to food
retailers such as Albertson's, Kroger, Safeway and Wal-Mart, as well as
to foodservice distributors and operators and quick-service restaurants
such as Taco Bell. Another portion of our fresh-cut segment purchases,
processes, packages and distributes over 760 fresh produce offerings
under our "Fresh Advantage" and "Redi-Cut" labels. These fresh-cut
operations are conducted at four processing facilities. These fresh-cut
products are sold mainly to third-party distributors for resale
primarily to quick-service restaurants such as Burger King, KFC,
McDonald's, Pizza Hut, Subway and Taco Bell, located in the midwestern,
northeastern, southeastern and southwestern United States.
GROWTH STRATEGIES
Our business strategy is to grow our foodservice business through both
internal growth and acquisitions, and to improve our operating profit margin. We
believe that we have the resources and competitive advantages to maintain our
strong internal growth and we are well positioned to take advantage of the
consolidation occurring in our industry.
Our key growth strategies are as follows:
Increase broadline sales to existing customers and within existing
markets. We seek to become a principal supplier for more of our broadline
distribution customers and to increase sales per delivery to those customers. We
believe that a higher penetration of our existing broadline distribution
customers and markets will allow us to strengthen our relationships with our
current customers and to realize economies of scale driven by greater
utilization of our existing distribution infrastructure.
We believe that we can increase our penetration of the broadline
distribution customer base through focused sales efforts that leverage our
decentralized decision-making process, our distribution infrastructure and our
quality products and value-added services. We also believe that the typical
broadline customer in our markets uses one principal supplier for the majority
of its foodservice needs, but also relies upon a limited number of secondary
broadline suppliers and specialty food suppliers. We believe those customers
within our existing markets for whom we are not the principal supplier represent
an additional market opportunity for us.
We seek to maintain our price competitiveness in the broadline
distribution segment by investing in technology aimed at enhancing our
purchasing leverage. We are currently implementing a program to standardize
product descriptions across our broadline information systems, which is intended
to allow us to enhance coordination of our buying activity and enable us to
improve our purchasing power. In addition, we are continuing to invest in
technology to provide our sales force with better information with which to
assist broadline customers and grow sales.
Increase sales to street customers. Within our broadline segment, we
plan to focus on increasing sales to street customers, which typically utilize
more of our value-added services, which generate higher operating margins than
our sales to chain accounts. We plan to increase our penetration of the street
customer base by leveraging our broad range of products and value-added services
and by continuing to invest in enhancing the quality of our sales force through
improvements in our hiring and training efforts and in our utilization of
technology. Our training programs and sales compensation system are designed to
encourage our sales force to grow sales to new and existing street customers.
Increase sales of proprietary brands. We seek to increase sales of our
proprietary brands, which typically generate higher margins than national
brands. We believe that our proprietary brands, which include AFFLAB,
Brilliance, Colonial Tradition, Empire's Choice, Empire's Treasure, First Mark,
Gourmet Table, Healthy USA, Pocahontas, Premium Recipe, Raffinato, Village
Garden and West Creek, offer customers greater value than national brands and
allow us to reduce our purchasing cost compared to the higher purchase prices
typically associated with national brands. We also seek to increase our sales of
proprietary brands through our sales force training program and sales
compensation system.
Grow our customized segment with existing and selected new customers.
We seek to strengthen our existing customized distribution relationships by
continuing to provide quality products at competitive prices and by offering a
high level of service through initiatives, such as electronic data transfer of
ordering, billing and inventory information, which help ensure on-time delivery
and more accurate filling of orders. We also seek to selectively add new
customers within the customized distribution segment. We believe that potential
customers include large chains that have traditionally relied on in-house
distribution networks and customers that are dissatisfied with their existing
distributor relationships, as well as new or growing restaurant chains that have
yet to establish a relationship with a primary foodservice distributor.
Expand our leadership position in fresh-cut produce. We believe that
our acquisition of Fresh Express in October 2001, and our acquisition of
Redi-Cut Foods, Inc. and its affiliates, Kansas City Salad, L.L.C. and K. C.
Salad Real Estate,
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L.L.C., collectively "Redi-Cut," in December 2000 increased our national
presence in the fresh-cut produce market. We intend to expand our national
presence in the fresh-cut produce segment by continuing to introduce innovative
products, such as our diced and sliced tomato products and other growing produce
categories, leveraging our core products and building our customer base by
capitalizing on our expertise in food safety and preservation.
We believe that we can increase sales in this segment through
cross-selling of our products. We believe that packaged, pre-cut salads
represent a significant business opportunity for foodservice operators, as they
can provide a cost-effective alternative compared to salads prepared by the
operators' own employees, while providing a product with a longer shelf life. We
will also seek to leverage Fresh Express' well-established brand name and
existing relationships with major food retailers to increase the sales of our
existing fresh produce offerings, which we currently sell mainly to foodservice
distributors and operators. In addition, the recent addition of five Fresh
Express processing facilities, including a strategically important facility in
Salinas, California, should allow us to enhance our nationwide marketing
capabilities and better service our customers.
Improve operating efficiencies through systems and technology. We seek
to increase our operating efficiencies by continuing to invest in training and
technology-related initiatives to provide increased productivity and value-added
services. These productivity-related initiatives include automated warehouse
management systems using radio frequency scanning for inventory put-away and
selection and computerized truck routing systems. In addition, we have developed
and are rolling out an Internet-based ordering system that allows customers to
have real-time access to product information, inventory levels and their
purchasing histories.
Actively pursue strategic acquisitions. Over the past decade, we have
supplemented our internal growth through selective, strategic acquisitions. We
believe that the consolidation trends in the foodservice distribution industry
will continue to present acquisition opportunities for us, and we intend to
continue to target acquisitions both in geographic markets that we already
serve, which we refer to as fold-in acquisitions, as well as in new markets. We
believe that fold-in acquisitions can allow us to increase the efficiency of our
operations by leveraging our fixed costs and driving more sales through our
existing facilities. Acquisitions in new markets expand our geographic reach
into markets we do not currently serve and can also allow us to leverage fixed
costs.
CUSTOMERS AND MARKETING
We believe that a foodservice customer selects a distributor based on
timely and accurate delivery of orders, consistent product quality, value-added
services and price. Value-added services include assistance in managing
inventories, planning menus and controlling costs through, among other means,
increased computer communications and more efficient deliveries. In addition, we
believe that some of our larger street and chain customers gain operational
efficiencies by dealing with one, or a limited number of, foodservice
distributors.
FOODSERVICE DISTRIBUTION. In our foodservice distribution business, we
focus on two closely related business segments - Broadline and Customized. Our
broadline segment primarily services two types of customers - street customers
and chain customers. Our customized segment distributes to casual-dining chain
customers.
Street Customers. Our broadline segment services our street customers.
Our street customers include independent restaurants, hotels,
cafeterias, schools, healthcare facilities and other institutional
customers. We seek to increase our sales to street customers because,
despite the generally higher selling and delivery costs we incur in
servicing these customers, street customers typically utilize more of
our value-added services, which generate higher operating profit
margins than sales to chain customers. As of December 29, 2001, our
broadline segment supported sales to street customers with more than
480 sales and marketing representatives and product specialists. Our
sales representatives service customers in person or by telephone,
accepting and processing orders, reviewing account balances,
disseminating new product information and providing business assistance
and advice where appropriate. Sales representatives are generally
compensated through a combination of commission and salary based on
several factors relating to profitability and collections. These
representatives typically use laptop computers to assist customers by
entering orders, checking product availability and pricing and
developing menu-planning ideas on a real-time basis.
Chain Customers. Both our broadline and customized segments service
chain customers. Our principal chain customers generally are
franchisees or corporate-owned units of family-dining, casual-theme and
quick-service restaurants. Our broadline segment customers include over
3,000 Burger King, Church's, Popeye's, Subway, Wendy's, and Zaxby's
quick-service restaurant locations. Our customized segment customers
include casual-dining restaurant concepts, such as Cracker Barrel Old
Country Store, Outback Steakhouse, Ruby Tuesday and TGI Friday's. Our
sales
5
programs to chain customers tend to be tailored to the individual
customer and include a more specialized product offering than the sales
programs for our street customers. Sales to chain customers are
typically high volume, low gross margin sales which require fewer, but
larger, deliveries than those to street customers. These programs offer
operational and cost efficiencies for both the customer and us, which
can help compensate us for the lower gross margins. Dedicated account
representatives who are responsible for ensuring that customers' orders
are properly entered and filled support our chain customers. In
addition, more senior members of management assist in identifying
potential new chain customers and managing long-term account
relationships. Two of our chain customers, Outback and Cracker Barrel,
account for a significant portion of our consolidated net sales. Net
sales to Outback accounted for 15%, 16% and 16% of our consolidated net
sales for 2001, 2000 and 1999, respectively. Net sales to Cracker
Barrel accounted for 14%, 16%, and 17% of our consolidated net sales
for 2001, 2000 and 1999, respectively. No other chain customer
accounted for more than 5% of our consolidated net sales in 2001.
FRESH-CUT PRODUCE. In our fresh-cut produce business, we service two
customer types - retail customers and foodservice customers.
Retail customers. Our fresh-cut segment provides packaged, ready-to-eat
salads to both national and regional food retailers, including over
9,300 Albertson's, Food Lion, Kroger, Safeway and Wal-Mart locations.
Our retail packaged salad business is supported by a dedicated sales
and marketing organization, which has regional business managers who
are responsible for sales to retail grocery accounts within their
geographic regions. These sales managers work with a network of brokers
across the country to sell our products, gain business with new retail
accounts and introduce new products to existing retail accounts. We
also have business development managers to add focus for specific
geographic areas or retail accounts. Brokers are responsible for
store-level selling and merchandising activities on our behalf. We have
a marketing department that focuses primarily on packaged products and
assists the sales department in the development of account-specific
sales promotion plans. It is also responsible for market, product line
and customer profitability analysis.
Foodservice customers. Our fresh-cut segment also provides fresh-cut
lettuce, tomatoes, spinach, cabbage, broccoli and cauliflower to
foodservice distributors such as The Markon Company and McLane
Foodservice, Inc., and to other foodservice distributors who resell
these products to foodservice operators, including over 24,000 Burger
King, KFC, McDonald's, Pizza Hut, Subway and Taco Bell locations. We
employ customer sales representatives and account managers to service
our foodservice customers. We seek to continually develop innovative
products and processing techniques to reduce costs, improve product
quality and reduce price.
PRODUCTS AND SERVICES
We distribute more than 44,000 national and proprietary brand food and
non-food products to a total of approximately 33,000 foodservice customers.
These items include a broad selection of "center-of-the-plate" entrees, canned
and dry groceries, frozen foods, refrigerated and dairy products, fresh-cut
produce, paper products and cleaning supplies, other produce, restaurant
equipment and other supplies. We also provide our customers with other
value-added services, which are described below.
Proprietary brands. We offer customers an extensive line of products
under various proprietary brands such as AFFLAB, Brilliance, Colonial Tradition,
Empire's Choice, Empire's Treasure, First Mark, Gourmet Table, Healthy USA,
Pocahontas, Premium Recipe, Raffinato, Village Garden and West Creek. The
Pocahontas brand name has been recognized in the food industry for over 100
years. Products offered under our various proprietary brands include canned and
dry groceries, tabletop sauces, shortenings and oils, among others. Our
proprietary brands enable us to offer customers an alternative to comparable
national brands across a wide range of products and price points. For example,
the Raffinato brand consists of a line of premium pastas, cheeses, tomato
products, sauces and oils tailored for the Italian foods market segment, while
our Healthy USA brand is tailored to meet the needs of the health-conscious
market segment. We seek to increase the sales of our proprietary brands, as they
typically carry higher margins than comparable national brand products. We also
believe that sales of our proprietary brands can help to promote customer
loyalty.
National brands. We offer our customers a broad selection of national
brand products. We believe that national brands are attractive to chain accounts
and other customers seeking recognized national brands throughout their
operations. We believe that distributing national brands has strengthened our
relationship with many national suppliers that provide us with important sales
and marketing support. These sales complement sales of our proprietary brand
products.
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Innovative products. We believe that the ability to provide quality
products with an acceptable shelf life is key to the success of our fresh-cut
produce business. We distribute over 30 varieties of packaged, ready-to-eat
salads to retailers and foodservice operators, sold under three product lines:
Garden Salads, World Blends and Specialty Kits. Garden Salads include
traditional iceberg and romaine garden salads and coleslaw. World Blends contain
a combination of more exotic, darker leaf lettuces and vegetables and sell at
higher price points and profit margins than Garden Salads. Specialty Kits
contain ready-to-eat salads along with other items such as croutons, salad
dressings, or cheese and crackers. We focus on continually providing innovative
products to our customers, as well as improving processing and packaging
technology to extend the shelf life of our salads. This extended shelf life can
be especially valuable to food retailers, as it helps improve inventory
management, which can result in reduced costs. We also offer
controlled-atmosphere systems to third parties for their packaging and shipping
needs.
In addition, we offer fresh-cut products, such as pre-cut lettuce,
onions and green peppers, coleslaw, and diced, sliced and bulk tomatoes, that we
market under our Fresh Advantage and Redi-Cut labels. As quick-service
restaurants seek to increase their profitability by reducing reliance on
labor-intensive tasks conducted on-site, we believe that there is an opportunity
for us to capture market share by introducing innovative products. For example,
we believe that sliced tomatoes are one of the few remaining produce items still
processed on-site in quick-service restaurants. We believe that sliced tomatoes,
when individually sliced by quick-service restaurant employees, are generally
characterized by inconsistent slice thickness, relatively high waste and
increased food-safety risk. To help resolve this problem, we have developed
equipment that allows us to process sliced tomatoes with consistently high
quality and to sell them at a price that we believe can allow quick-service
restaurants to realize savings when compared to the total costs of procurement
and on-site processing.
Value-added services. We provide customers with other value-added
services in the form of assistance in managing inventories, planning menus and
improving efficiency. As described below, we also provide procurement and
merchandising services to over 170 independent foodservice distributor
facilities and over 460 independent paper and janitorial supply distributors, as
well as to our own distribution network. These procurement and merchandising
services include negotiating vendor supply agreements and providing quality
assurance related to our proprietary and national brand products.
The following table sets forth the percentage of our consolidated net sales by
product and service category in 2001:
PERCENTAGE OF
NET SALES
FOR 2001
-------------------
Center-of-the-plate................................................................ 34%
Canned and dry groceries........................................................... 18
Frozen foods....................................................................... 14
Refrigerated and dairy products.................................................... 10
Fresh-cut produce.................................................................. 10
Paper products and cleaning supplies............................................... 7
Other produce...................................................................... 5
Equipment and supplies............................................................. 1
Procurement, merchandising and other services...................................... 1
-------------------
Total................................................................... 100%
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INFORMATION SYSTEMS
In our broadline segment, 11 of our 14 distribution operations
currently manage the ordering, receiving, warehousing and delivery of products
through the newest version of our Foodstar(R) software, which allows our
customers to electronically place orders with us and permits us to record sales,
billing and inventory information. The software also aids in the timely and
accurate financial reporting by our subsidiaries to our corporate headquarters.
Software development and maintenance on this platform is managed on a
centralized basis by our corporate information technology staff. This platform
is being enhanced to provide standardized product identifiers to facilitate
leveraging our purchasing volume across our distribution network. In addition,
we continue to implement a warehouse management system that uses barcode
scanning to track products within our distribution centers. This technology is
intended to enhance productivity by reducing errors in inventory put-away and
selection. We have also implemented truck routing software to optimize the
distribution routes traveled by our trucks in order to reduce excess mileage and
improve the timeliness of customer deliveries. Lastly, we continue to have
success with our Internet-based ordering system which allows customers to have
real-time access to product information, inventory levels and their purchasing
history.
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In our customized distribution segment, we use a similar software
platform that has been customized to manage large, national accounts. This
system, which is managed centrally at our customized distribution headquarters,
provides product information across our customized distribution network and
facilitates item and menu changes by customers. We have also implemented
warehouse management systems and truck routing systems at all of our customized
distribution locations. Our customized distribution customers also utilize our
computer-to-computer ordering system, PFG Connection, to place orders.
In our fresh-cut segment, Fresh Express manages its manufacturing and
distribution, as well as its accounting and customer service, with the Computer
Associates PRMS enterprise resource planning software, supported by a data
center and information technology staff in Salinas, California. We are
implementing this software at our other Fresh-Cut locations. This software
allows Fresh Express to execute various components of its manufacturing supply
chain including customer orders, scheduling, receiving, production, and
distribution. It also serves as a platform for the raw product supply chain,
including harvesting, receiving, cooling and distribution of produce items to
the manufacturing plants. Fresh Express' systems also manage product quality and
food safety standards across all growing and production operations.
Additionally, integrated optimization software is used at each of the
manufacturing plants and raw product operations centers for daily truck routing
and trailer cube utilization, providing efficient, timely deliveries to
customers.
SUPPLIERS AND PURCHASING
We procure our products from independent suppliers, food brokers and
merchandisers, including our wholly owned subsidiary, Pocahontas Foods.
Pocahontas procures both nationally branded items as well as items marketed
under our proprietary brands. Independent suppliers include large national and
regional food manufacturers and consumer products companies, meatpackers and
produce shippers. We seek to enhance our purchasing power through volume
purchasing. Although each of our subsidiaries generally is responsible for
placing its own orders and can select the products that appeal to its own
customers, we encourage each subsidiary to participate in company-wide
purchasing programs, which enable it to take advantage of our consolidated
purchasing power. We were not dependent on a single source for any significant
item and no third-party supplier represented more than 5% of our total product
purchases during 2001.
Pocahontas selects foodservice products for our Brilliance, Colonial
Tradition, Gourmet Table, Healthy USA, Pocahontas, Premium Recipe and Raffinato
brands and markets these brands, as well as nationally branded foodservice
products, through our own distribution operations and to over 170 independent
foodservice distributor facilities nationwide. For our services, we receive
marketing fees paid by vendors. More than 15,000 of the products sold through
Pocahontas are sold under our proprietary brands. Approximately 500 vendors,
located throughout the United States, supply products through the Pocahontas
distribution network. Because Pocahontas negotiates purchase agreements on
behalf of its independent distributors as a group, the distributors that utilize
the Pocahontas procurement and merchandising group can enhance their purchasing
power.
Our fresh-cut segment purchases produce from growers in various
locations. Our fresh-cut segment often enters into short-term contracts to
purchase raw materials to help reduce supply risk and manage exposure to
fluctuations in costs. The fresh-cut segment also works with suppliers to
develop innovative, quality-enhancing and cost-effective production techniques.
These techniques include proprietary seed varieties, which are intended to
produce superior raw product quality, development of larger beds to increase
yield and "in-field lettuce coring," which reduces transportation and production
costs while reducing processing time.
OPERATIONS
Our subsidiaries have substantial autonomy in their operations, subject
to overall corporate management controls and guidance. Our corporate management
provides centralized direction in the areas of strategic planning, general and
financial management and sales and merchandising. Individual marketing efforts
are undertaken at the subsidiary level and most of our name recognition in the
foodservice business is based on the trade names of our individual subsidiaries.
In addition, we have begun to associate these local identities with the
Performance Food Group name. Each subsidiary has primary responsibility for its
own human resources, governmental compliance programs, accounting, billing and
collections. Financial information reported by our subsidiaries is consolidated
and reviewed by our corporate management.
Distribution operations are conducted out of 19 distribution centers
located in California, Florida, Georgia, Louisiana, Maine, Maryland,
Massachusetts, New Jersey, Tennessee, Texas and Virginia. Customer orders are
assembled in our distribution facilities and then sorted, placed on pallets, and
loaded onto trucks and trailers in delivery sequence. Deliveries covering long
distances are made
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in large tractor-trailers that we generally lease. Deliveries
within shorter distances are made in trucks that we either own or lease. We
service some of our larger chain customers using dedicated trucks due to the
relatively large and consistent deliveries and the geographic distribution of
these customers. The trucks and delivery trailers we use have separate
temperature-controlled compartments. We use a computer system to design
efficient route sequences for the delivery of our products.
Fresh-cut produce processing operations are conducted out of nine
fresh-cut processing plants, located in California, Colorado, Georgia, Illinois,
Missouri, Pennsylvania and Texas. The facility located in Colorado Springs is
owned by a joint venture in which we are a 50% partner with an unaffiliated
third party. Once harvested, produce is typically shipped by
temperature-controlled trucks to one of our facilities where it is inspected,
processed, packaged and boxed for shipment. The packaged, ready-to-eat salads
are generally shipped to food retailers within 24 hours from the time of
processing. Other fresh-cut produce orders are processed and delivered in less
than 24 hours from the time of order placement to third-party distributors,
primarily for use in quick-service restaurants. We make deliveries in
temperature-controlled trucks that we generally either own, lease or contract
for hire.
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The following table summarizes certain information for our principal
operating divisions:
APPROX.
NUMBER
OF
CUSTOMER
LOCATIONS
LOCATION OF CURRENTLY
NAME OF SUBSIDIARY/DIVISION PRINCIPAL REGION(S) FACILITIES SERVED MAJOR CUSTOMERS
------------------------------ -------------------- ------------------ ---------- -----------------------
BROADLINE DISTRIBUTION:
AFFLINK Nationwide Tuscaloosa, AL 470 Independent paper
distributors
Empire Seafood Florida Miami, FL 1,900 Carnival Cruise
Lines, Royal
Caribbean Cruise
Lines and other
cruise lines and
restaurants
PFG - AFI Foodservice New Jersey and New Elizabeth, NJ 2,500 Restaurants,
York City healthcare facilities
metropolitan area and schools
PFG - Caro Foods South Houma, LA 1,900 Church's, Popeye's
and Wendy's and other
restaurants,
healthcare facilities
and schools
PFG - Carroll County Foods Baltimore, MD and New Windsor, MD 1,400 Restaurants,
Washington, DC area healthcare facilities
and schools
PFG - Florida Florida Tampa, FL 2,500 Restaurants,
healthcare facilities
and schools
PFG - Hale Kentucky, Morristown, TN 900 Restaurants,
Tennessee and healthcare facilities
Virginia and schools
PFG - Lester South Lebanon, TN 2,500 Wendy's and other
restaurants,
healthcare facilities
and schools
PFG - Milton's South and Southeast Atlanta, GA 4,900 Subway, Zaxby's and
other restaurants,
healthcare facilities
and schools
PFG - NorthCenter Maine, Augusta, ME 2,000 Restaurants,
Massachusetts and healthcare facilities
New Hampshire and schools
PFG - Powell Alabama, Florida Thomasville, GA 1,600 Restaurants,
and Georgia healthcare facilities
and schools
PFG - Temple South and Southwest Temple, TX 4,300 Church's, Dairy
Queen, KFC, Popeye's
and Subway and other
restaurants,
healthcare facilities
and schools
PFG - Victoria South and Southwest Victoria, TX 1,200 Burger King, Subway
and other
restaurants,
healthcare facilities
and schools
PFG -Virginia Foodservice Virginia Richmond, VA 1,400 Texas Steakhouse and
Group other restaurants and
healthcare facilities
Pocahontas Foods USA Nationwide Richmond, VA 170 Independent
foodservice
distributors and
Springfield Foodservice New England and Springfield, MA 3,800 Restaurants,
portions of New healthcare facilities
York State and schools
10
APPROX.
NUMBER OF
CUSTOMER
LOCATIONS
NAME OF LOCATION OF CURRENTLY
SUBSIDIARY/DIVISION PRINCIPAL REGION(S) FACILITIES SERVED MAJOR CUSTOMERS
-------------------------- -------------------- -------------------- ------------- ------------------------
CUSTOMIZED DISTRIBUTION:
PFG Customized Nationwide Bakersfield, CA 1,800 Cracker Barrel,
Distribution Elkton, MD Outback Steakhouse,
Gainesville, FL Ruby Tuesday and TGI
Lebanon, TN Friday's, and other
McKinney, TX multi-unit restaurants
FRESH-CUT PRODUCE:
Fresh Express Nationwide Atlanta, GA 590 Approximately 9,300
Chicago, IL food retail locations,
Colorado Springs, CO* including Albertson's,
Greencastle, PA Food Lion, Kroger,
Salinas, CA Safeway and Wal-Mart.
Redi-Cut Foods Midwest, Carrollton, GA 360 Distributors who
Northeast, Franklin Park, IL resell our products
Southeast and Kansas City, MO primarily to over
Southwest Grand Prairie, TX 24,000 chain
restaurant
locations, including
Burger King,
KFC, McDonald's,
Pizza Hut,
Subway, Taco Bell
and other
foodservice
and retail
customers
* The Colorado Springs, Colorado facility is a 50/50 joint venture with an
unaffiliated third party.
COMPETITION
The foodservice distribution industry is highly competitive. We compete
with numerous smaller distributors on a local level, as well as with a limited
number of national foodservice distributors. Some of these distributors have
substantially greater financial and other resources than we do. Bidding for
contracts or arrangements with customers, particularly chain and other large
customers, is highly competitive and distributors may market their services to a
particular customer over a long period of time before they are invited to bid.
In the fresh-cut segment of our business, we compete with a variety of branded
and private label competitors in the packaged, ready-to-eat salad market. The
competitors in this market include Dole Food Company and several large regional
or smaller local processors. Competition comes mainly from smaller processors,
although we encounter intense competition from national and larger regional
processors when selling produce to chain restaurants. We believe that most
purchasing decisions in the foodservice business are based on the distributor's
ability to completely and accurately fill orders and to provide timely
deliveries, on the quality of the product, and on price.
REGULATION
Our operations are subject to regulation by state and local health
departments, the U.S. Department of Agriculture and the Food and Drug
Administration, which generally impose standards for product quality and
sanitation. State and/or federal authorities generally inspect our facilities at
least annually. In addition, we are subject to regulation by the Environmental
Protection Agency with respect to the disposal of wastewater and the handling of
chemicals used in cleaning.
The Federal Produce and Agricultural Commodities Act, which specifies
standards for sale, shipment, inspection and rejection of agricultural products,
governs our relationships with our fresh food suppliers with respect to the
grading and commercial acceptance of product shipments. We are also subject to
regulation by state authorities for accuracy of our weighing and measuring
devices.
Some of our distribution facilities have underground and aboveground
storage tanks for diesel fuel and other petroleum products that are subject to
laws regulating such storage tanks. These laws have not had a material adverse
effect on our results of operations or financial condition.
11
The Surface Transportation Board and the Federal Highway Administration
regulate our trucking operations. In addition, interstate motor carrier
operations are subject to safety requirements prescribed by the U.S. Department
of Transportation and other relevant federal and state agencies. Such matters as
weight and dimension of equipment are also subject to federal and state
regulations. Management believes that we are in substantial compliance with
applicable regulatory requirements relating to our motor carrier operations. Our
failure to comply with the applicable motor carrier regulations could result in
substantial fines or revocation of our operating permits.
INTELLECTUAL PROPERTY
Except for the Fresh Express, Pocahontas, Redi-Cut and TECHTROL trade
names, we do not own or have the right to use any patent, trademark, trade name,
license, franchise or concession, the loss of which would have a material
adverse effect on our results of operations or financial condition.
We have patents to protect some of our methods of maintaining produce
products. We also have patents covering a number of our proprietary
technologies, including atmospheres used in packaging our salads and atmospheres
protecting products from decomposing. In connection with some of our other
fresh-cut produce processing, we rely heavily on certain proprietary machinery
and processes that are used to prepare some of our products. Although we believe
that the cost and complexity of our machinery has been and will continue to be a
barrier to entry to other potential competitors in the fresh-cut segment, we
have not protected that machinery or those other processes through patents or
other methods. As a result, some of our existing or potential competitors could
develop similar machinery or processes. If this occurred, it could substantially
increase competition in the fresh-cut segment, thereby reducing prices and
materially adversely affecting our results of operations in this segment.
EMPLOYEES
As of December 29, 2001, we had approximately 8,400 full-time
employees, including approximately 1,400 in management, administration,
marketing and sales and the remainder in operations. As of December 29, 2001, a
union or a collective bargaining unit represented 1,835 of our employees. We
have entered into six collective bargaining and similar agreements with respect
to our unionized employees. Agreements with respect to 445, 38, 124, 23, 1,106
and 99 of our union employees expire in October 2002, November 2003, December
2003, December 2003, December 2005 and June 2006, respectively. We consider our
employee relations to be satisfactory.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning our
executive officers and certain key employees as of December 29, 2001:
Name Age Position
---- ----- ---------------------
Robert C. Sledd.......................... 49 Chairman of the Board
C. Michael Gray......................... 51 President, Chief Executive Officer and Director
Roger L. Boeve........................... 63 Executive Vice President and Chief Financial Officer
Thomas Hoffman........................ 62 Senior Vice President
G. Thomas Lovelace, Jr................. 48 Vice President
John D. Austin........................... 40 Vice President - Finance and Secretary
John R. Crown........................... 55 Broadline Regional President
Joseph J. Paterak, Jr.................... 50 Broadline Regional President
Steven Spinner........................... 41 Broadline Division President
Robert C. Sledd has served as Chairman of the Board of Directors since
February 1995 and has served as a director of Performance Food Group since 1987.
From 1987 to August 2001, Mr. Sledd served as Chief Executive Office of
Performance Food Group. Mr. Sledd served as President of Performance Food Group
from 1987 to February 1995. Mr. Sledd has served as a director of Taylor & Sledd
Industries, Inc., a predecessor of Performance Food Group, since 1974, and
served as President and Chief Executive Officer of that company from 1984 to
1987. Mr. Sledd also serves as a director of SCP Pool Corporation, a supplier of
swimming pool supplies and related products.
C. Michael Gray has served as President of Performance Food Group since
February 1995, has served as Chief Executive Officer since August 2001, and has
served as a director of Performance Food Group since 1992. Mr. Gray served as
12
Chief Operating Officer of Performance Food Group from February 1995 to August
2001. Mr. Gray served as President of Pocahontas Foods USA, Inc., a wholly owned
subsidiary of Performance Food Group, from 1981 to 1995. Mr. Gray had been
employed by Pocahontas since 1975, serving as Marketing Manager and Vice
President of Marketing. Prior to joining Pocahontas, Mr. Gray was employed by
Kroger Company as a produce buyer.
Roger L. Boeve has served as Executive Vice President and Chief
Financial Officer of Performance Food Group since 1988. Prior to that date, Mr.
Boeve served as Executive Vice President and Chief Financial Officer for The
Murray Ohio Manufacturing Company and as Corporate Vice President and Treasurer
for Bausch and Lomb. Mr. Boeve is a certified public accountant.
Thomas Hoffman has served as Senior Vice President of Performance Food
Group and as President of Customized Distribution since February 1995. Since
1989, Mr. Hoffman has served as President of Kenneth O. Lester Company, Inc., a
wholly owned subsidiary of Performance Food Group. Prior to joining Performance
Food Group in 1989, Mr. Hoffman served in executive capacities at Booth
Fisheries Corporation, a subsidiary of Sara Lee Corporation, as well as C.F.S.
Continental, Miami and International Foodservice, Miami, two foodservice
distributors.
G. Thomas Lovelace, Jr. has served as Vice President of Performance
Food Group since February 2001 and as President of Fresh Advantage, Inc., a
wholly owned subsidiary of Performance Food Group, since 1996.
John D. Austin has served as Vice President-Finance since January 2001
and as Secretary of Performance Food Group since March 2000. Mr. Austin served
as Corporate Treasurer from 1998 to January 2001. Mr. Austin also served as
Corporate Controller of Performance Food Group from 1995 to 1998. From 1991 to
1995, Mr. Austin was Assistant Controller for General Medical Corporation, a
distributor of medical supplies. Prior to that, Mr. Austin was an accountant
with Deloitte & Touche LLP. Mr. Austin is a certified public accountant.
John R. Crown has served as Broadline Regional President of Performance
Food Group since January 1999. Mr. Crown served as Vice President, Business
Development of Performance Food Group from January 1997 to January 1999. From
1987 to 1996, Mr. Crown served as President of Burris Retail Food Systems, a
subsidiary of Burris Foods, Inc., and as Executive Vice President and General
Manager of Institution Food House. Mr. Crown is immediate past Chairman of the
National Frozen Food Association and a member of the board of Food Distributors
International, two food industry trade associations.
Joseph J. Paterak, Jr. has served as Broadline Regional President of
Performance Food Group since January 1999. Mr. Paterak served as Vice President
of Performance Food Group from October 1998 to January 1999. From 1993 to
September 1998, Mr. Paterak served as Market President of Alliant Foodservice,
Inc.
Steven Spinner has served as Broadline Division President of
Performance Food Group since August 2001. Mr. Spinner served as Broadline
Regional President of Performance Food Group from October 2000 to August 2001,
and served as President of AFI Foodservice Distributors, Inc., a wholly owned
subsidiary of Performance Food Group, from October 1997 to October 2000. From
1989 to October 1997, Mr. Spinner served as Vice President of AFI.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K and the documents incorporated by
reference herein contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements, which are based on assumptions
and estimates and describe our future plans, strategies and expectations, are
generally identifiable by the use of the words "anticipate," "will," "believe,"
"estimate," "expect," "intend," "seek," "should" or similar expressions. These
forward-looking statements may address, among other things, our anticipated
earnings, capital expenditures, contributions to our net sales by acquired
companies, sales momentum, customer and product sales mix, expected efficiencies
in our business and our ability to realize expected synergies from acquisitions.
These forward-looking statements are subject to risks, uncertainties and
assumptions. Important factors that could cause actual results to differ
materially from the forward-looking statements we make or incorporate by
reference in this annual report on Form 10-K are described under "Risk Factors"
and in the documents incorporated by reference herein.
If one or more of these risks or uncertainties materialize, or if any
underlying assumptions prove incorrect, our actual results, performance or
achievements may vary materially from future results, performance or
achievements expressed or implied by these forward-looking statements. All
forward-looking statements attributable to us or persons acting on our behalf
13
are expressly qualified in their entirety by the cautionary statements in this
section. We undertake no obligation to publicly update or revise any
forward-looking statements to reflect future events or developments.
RISK FACTORS
Foodservice distribution is a low-margin business and may be sensitive
to economic conditions. We operate in the foodservice distribution industry,
which is characterized by a high volume of sales with relatively low profit
margins. A significant portion of our sales is at prices that are based on
product cost plus a percentage markup. As a result, our results of operations
may be negatively impacted when the price of food goes down, even though our
percentage markup may remain constant. The foodservice industry may also be
sensitive to national and regional economic conditions, and the demand for our
foodservice products has been adversely affected from time to time by economic
downturns. In addition, our operating results are particularly sensitive to, and
may be materially adversely impacted by, difficulties with the collectibility of
accounts receivable, inventory control, price pressures, severe weather
conditions, and increases in wages or other labor costs, energy costs and fuel
or other transportation-related costs. There can be no assurance that one or
more of these factors will not adversely affect our future operating results. We
have experienced losses due to the uncollectibility of accounts receivable in
the past and could experience such losses in the future. In addition, although
we have sought to limit the impact of the recent increases in fuel prices by
imposing fuel surcharges on customers, we cannot assure you that the increases
in fuel prices will not adversely affect our results of operations.
We rely on major customers. We derive a substantial portion of our net
sales from customers within the restaurant industry, particularly certain chain
customers. Net sales to Outback Steakhouse accounted for 15% and 16% of our
consolidated net sales in 2001 and 2000, respectively. Net sales to Cracker
Barrel Old Country Store accounted for 14% and 16% of our consolidated net sales
in 2001 and 2000, respectively. Sales to these customers by our customized
segment are generally lower operating margin sales than sales to customers in
other areas of our business. We do not have agreements requiring these or other
customers to purchase any specified amount of goods from us, although the prices
paid by them may depend on the level of their purchases; and we do not have any
assurance as to the level of future purchases by our customers. Likewise, our
customers generally have the ability to stop buying from us at any time, with
some customers being required to give us advance notice of their intent to stop
buying. A material decrease in sales to any of our major customers or the loss
of any of our major customers would have a material adverse impact on our
operating results. In addition, to the extent we add new customers, whether
following the loss of existing customers or otherwise, we may incur substantial
start-up expenses in initiating services to new customers. Also, certain of our
customers have from time to time experienced bankruptcy, insolvency, and/or an
inability to pay debts to us as they come due, and similar events in the future
could have a material adverse impact on our operating results. In particular, we
believe that one of our customers, who accounted for approximately 4% of our
consolidated net sales in 2001, may be experiencing financial difficulties;
therefore, this customer pays for its purchases upon delivery.
Our growth is dependent on our ability to complete acquisitions and
integrate operations of acquired businesses. A significant portion of our
historical growth has been achieved through acquisitions of other foodservice
distributors, and our growth strategy includes additional acquisitions. There
can be no assurance that we will be able to make acquisitions in the future or
that any acquisitions we do make will be successful. Furthermore, there can be
no assurance that future acquisitions will not have a material adverse effect
upon our operating results, particularly in periods immediately following the
consummation of those transactions while the operations of the acquired business
are being integrated into our operations.
We make acquisitions with the expectation that these acquisitions will
result in benefits to us. Achieving these benefits depends on the timely,
efficient and successful execution of a number of post-acquisition events,
including integrating the business of the acquired company into our purchasing
programs, distribution network, marketing programs and reporting and information
systems. In general, we cannot offer assurances that we will be able to
successfully integrate the acquired company's operations or personnel or realize
the anticipated benefits of the acquisition. Our ability to integrate
acquisitions may be adversely affected by many factors, including the relatively
large size of a business and the allocation of our limited management resources
among various integration efforts.
In connection with the acquisitions of businesses in the future, we
may decide to consolidate the operations of any acquired business with our
existing operations or make other changes with respect to the acquired business,
which could result in special charges or other expenses. Our results of
operations also may be adversely affected by expenses we incur in making
acquisitions, by amortization of acquisition-related intangible assets with
definite lives, and by additional depreciation expense attributable to acquired
assets. Any of the businesses we acquire may also have liabilities or adverse
operating issues, including some that we fail to discover before the
acquisition, and our indemnity for such liabilities typically has been limited
and may, with respect to future acquisitions, also be limited. Additionally, our
ability to make any future acquisitions may
14
depend upon obtaining additional financing. There can be no assurance that we
will be able to obtain additional financing on acceptable terms or at all. To
the extent that we seek to acquire other businesses in exchange for our common
stock, fluctuations in our stock price could have a material adverse effect on
our ability to complete acquisitions.
Managing our growth may be difficult and our growth rate may decline.
We have rapidly expanded our operations since inception. This growth has placed
and will continue to place significant demands on our administrative,
operational and financial resources, and we cannot assure you that we will be
able to successfully integrate the operations of acquired businesses with our
existing operations, which could have a material adverse effect on our business.
We also cannot assure you that this growth will continue. To the extent that our
customer base and our services continue to grow, this growth is expected to
place a significant demand on our managerial, administrative, operational and
financial resources. Our future performance and results of operations will
depend in part on our ability to successfully implement enhancements to our
business management systems and to adapt those systems as necessary to respond
to changes in our business. Similarly, our growth has created a need for
expansion of our facilities from time to time. As we near maximum utilization of
a given facility, operations may be constrained and inefficiencies may be
created, which could adversely affect our operating results unless the facility
is expanded or volume is shifted to another facility. Conversely, as we add
additional facilities or expand existing facilities, excess capacity may be
created. Any excess capacity may also create inefficiencies and adversely affect
our operating results.
Our debt agreements contain restrictive covenants, and our debt and
lease obligations require substantial future payments. At December 29, 2001, we
had approximately $272.5 million of outstanding indebtedness, including
approximately $201.3 million of 5 1/2% convertible subordinated notes due 2008,
referred to as the Convertible Notes, and $50.0 million of outstanding 6.77%
senior notes due 2010. In addition, as of December 29, 2001, we were a party to
operating leases requiring approximately $130.9 million in future lease
payments. Accordingly, the total amount of our obligations with respect to
indebtedness and leases is substantial. In addition, we intend to make
borrowings under our credit facility, as needed, in connection with funding our
future business needs, including capital expenditures and acquisitions.
Our debt instruments contain financial covenants and other restrictions
that limit our operating flexibility, limit our flexibility in planning for and
reacting to changes in our business and make us more vulnerable to economic
downturns and competitive pressures. Our indebtedness and lease obligations
could have significant negative consequences, including:
o increasing our vulnerability to general adverse economic and industry
conditions;
o limiting our ability to obtain additional financing;
o requiring that a substantial portion of our cash flows from operations
be applied to pay principal and interest on our indebtedness and lease
payments under our leases, thereby reducing cash flows available for
other purposes;
o limiting our flexibility in planning for or reacting to changes in our
business and the industry in which we compete; and
o placing us at a possible competitive disadvantage compared to
competitors with less leverage or better access to capital resources.
In addition, some of our borrowings, including borrowings under our credit
facility and lease payments under our master operating lease facilities are and
will continue to be at variable rates based upon prevailing interest rates,
which expose us to risk of increased interest rates. Some of our debt
instruments, including our Convertible Notes, our credit facility and our senior
notes, require that we comply with various financial tests and impose certain
restrictions on us, including, among other things, restrictions on our ability
to incur additional indebtedness, create liens on assets, make loans or
investments and pay dividends.
The cost of fresh produce could have an adverse effect on our business.
Prices of high-quality, fresh produce can be volatile and supplies may be
limited due to, among other things, factors such as weather, disease and level
of agricultural production. Although we have contracts to purchase some of our
produce, the cost and quality of available produce, particularly during periods
of severe shortages of high-quality produce, could have a material adverse
effect on both our sales and results of operations.
Product liability claims could have an adverse effect on our business.
Like any other distributor and processor of food, we face an inherent risk of
exposure to product liability claims if the products we sell, or the products
sold by companies
15
acquired by us, cause injury or illness. We may be subject to liability, which
could be substantial, because of actual or alleged contamination in products
sold by us or by companies we have acquired, including products sold by those
companies before we acquired them. We have, and the companies we have acquired
have had, liability insurance with respect to product liability claims. We
cannot assure you, however, that this insurance will continue to be available at
a reasonable cost or at all, or will be adequate to cover product liability
claims against us or companies we have acquired. We generally seek contractual
indemnification from resellers of our product, but any such indemnification is
limited, as a practical matter, to the creditworthiness of the indemnifying
party. If we or any of our acquired companies do not have adequate insurance or
contractual indemnification available, product liability claims and costs
associated with product recalls, including a loss of business, could have a
material adverse effect on our business, operating results and financial
condition.
Competition in the foodservice distribution industry is intense, and we
may not be able to compete successfully. The foodservice distribution industry
is highly competitive. We compete with numerous smaller distributors on a local
level, as well as with a limited number of national foodservice distributors.
Some of these distributors have substantially greater financial and other
resources than we do. Bidding for contracts or arrangements with customers,
particularly chain and other large customers, is highly competitive and
distributors may market their services to a particular customer over a long
period of time before they are invited to bid. In the fresh-cut produce area of
our business, competition comes mainly from smaller regional processors,
although we encounter intense competition from large national and smaller local
processors in our packaged salad business. We believe that most purchasing
decisions in the foodservice business are based on the distributor's ability to
completely and accurately fill orders, provide timely deliveries, on the quality
of the product and on price. Our failure to compete successfully could have a
material adverse effect on our business, operating results and financial
condition.
Our success depends on our senior management and key employees. Our
success is largely dependent on the skills, experience and efforts of our senior
management. The loss of one or more of our members of senior management could
have a material adverse effect upon our business and development. In addition,
we depend to a substantial degree on the services of certain key employees. Any
failure to attract and retain qualified employees in the future could have a
material adverse effect on our business.
The market price for our common stock may be volatile. In recent
periods, there has been significant volatility in the market price for our
common stock. In addition, the market price of our common stock could fluctuate
substantially in the future in response to a number of factors, including the
following:
o our quarterly operating results or the operating results of other
distributors of food and non-food products;
o changes in general conditions in the economy, the financial markets or
the food distribution or foodservice industries;
o changes in financial estimates or recommendations by stock market
analysts regarding us or our competitors;
o announcements by us or our competitors of significant acquisitions;
o increases in labor, energy, fuel costs or the costs of produce or
other food products; and
o natural disasters, severe weather conditions or other developments
affecting us or our competitors.
In addition, in recent years the stock market has experienced extreme price
and volume fluctuations. This volatility has had a significant effect on the
market prices of securities issued by many companies for reasons unrelated to
their operating performance. These broad market fluctuations may materially
adversely affect our stock price, regardless of our operating results.
Our identification of certain accounting errors at one of our
subsidiaries may result in legal or other regulatory proceedings that have an
adverse effect on us. In March 2002, we announced that we had identified certain
accounting errors at one of our broadline operating subsidiaries, as more fully
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." In that regard, we have included the effect of the
correction of the accounting errors in our consolidated financial statements and
the related notes as of and for the year ended December 30, 2000 included in
this annual report on Form 10-K and the previously reported quarterly amounts
for each of the first three quarters of 2001 and each of the last three quarters
of 2000. While no claims have been made to date, it is possible that claims may
be brought by shareholders against us in connection with the accounting errors;
costs related to the claims, including defense costs, could have an adverse
effect on our financial condition or results of operations. In addition, as part
of our inquiry into the accounting errors, we reported our
16
identification of the accounting errors to the staff of the Securities and
Exchange Commission, or SEC, and intend to cooperate with the staff of the SEC
in any review or inquiry they may conduct related to the accounting errors.
17
ITEM 2. PROPERTIES.
The following table presents information about our primary real
properties and facilities and our operating subsidiaries and divisions:
APPROX. OWNED/LEASED
AREA (EXPIRATION DATE
LOCATION IN SQ. FT OPERATING SEGMENT IF LEASED)
------------------------------------------- ------------- ------------------- ------------------------
AFFLINK
Tuscaloosa, AL 45,000 Broadline Leased (2016)
EMPIRE SEAFOOD
Miami, FL 68,000 Broadline Leased (2004)
FRESH EXPRESS
Atlanta, GA 175,000 Fresh-cut Owned
Chicago, IL 52,000 Fresh-cut Owned
Greencastle, PA 60,000 Fresh-cut Owned
Salinas, CA 120,000 Fresh-cut Owned
Salinas, CA 19,000 Fresh-cut Leased (2003)
PERFORMANCE FOOD GROUP COMPANY
Richmond, VA 35,000 Corporate Leased (2005)
PFG - AFI FOODSERVICE
Elizabeth, NJ 160,000 Broadline Leased (2024)
Newark, NJ 21,000 Broadline Leased (2005)
PFG - CARO FOODS
Houma, LA 157,000 Broadline Owned
PFG - CARROLL COUNTY FOODS
New Windsor, MD 90,000 Broadline Leased (2005)
PFG - CUSTOMIZED DISTRIBUTION
Bakersfield, CA 20,000 Customized Leased (2002)
Elkton, MD 135,000 Customized Leased (2005)
Gainesville, FL 150,000 Customized Owned
Lebanon, TN 225,000 Customized Owned
McKinney, TX 160,000 Customized Owned
PFG - FLORIDA
Tampa, FL 145,000 Broadline Owned
PFG - HALE
Morristown, TN 100,000 Broadline Leased (2005)
PFG - LESTER
Lebanon, TN 160,000 Broadline Leased (2002)
PFG - MILTON'S
Atlanta, GA 260,000 Broadline Owned
PFG - NORTHCENTER
Augusta, ME 145,000 Broadline Owned
PFG - POWELL
Thomasville, GA 75,000 Broadline Owned
PFG - TEMPLE
Temple, TX 290,000 Broadline Leased (2002)
18
APPROX. OWNED/LEASED
AREA (EXPIRATION DATE
LOCATION IN SQ. FT OPERATING SEGMENT IF LEASED)
------------------------------------------- ------------- ------------------- ------------------------
PFG - VICTORIA
Victoria, TX 250,000 Broadline Owned
PFG - VIRGINIA FOODSERVICE GROUP
Richmond, VA 93,000 Broadline Leased (2005)
Norfolk, VA 18,000 Broadline Owned
POCAHONTAS FOODS USA
Richmond, VA 116,000 Broadline Leased (2005)
REDI-CUT FOODS
Carrollton, GA 105,000 Fresh-cut Owned
Franklin Park, IL 115,000 Fresh-cut Leased (2006)
Franklin Park, IL 66,000 Fresh-cut Leased (2010)
Kansas City, MO 53,000 Fresh-cut Leased (2020)
Grand Prairie, TX 105,000 Fresh-cut Leased (2002)
SPRINGFIELD FOODSERVICE
Springfield, MA 127,000 Broadline Leased (2004)
ITEM 3. LEGAL PROCEEDINGS.
In March 2002, we discovered certain accounting errors at one of our
Broadline operating subsidiaries, the effects of the corrections of which are
more fully described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." At the time of the announcement of the
identification of the accounting errors, we contacted the staff of the SEC to
inform them of our identification of the errors and of our intention to update
the SEC on the status of the inquiry into the accounting errors and to cooperate
with the staff with respect to any review or inquiry the SEC may conduct. We
conducted an inquiry into the accounting errors and are in the process of
evaluating and developing appropriate remedial actions to be taken in connection
with the investigation.
From time to time, we are also involved in legal proceedings and
litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such other proceedings and litigation currently
pending will not have a material adverse effect on our results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
No matters were submitted to a vote of the shareholders during the
quarter ended December 29, 2001.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Our common stock is quoted on the Nasdaq Stock Market's National
Market under the symbol "PFGC." The following table sets forth, on a per share
basis, for the fiscal quarters indicated, the high and low bid prices for our
common stock as reported on the Nasdaq Stock Market's National Market. The stock
prices set forth below are adjusted to reflect our two-for-one common stock
split paid on April 30, 2001.
2001
-------------------------------------------------------------
HIGH LOW
------------- ------------
First Quarter $ 26.81 $ 22.38
Second Quarter 28.48 22.52
Third Quarter 34.90 24.42
Fourth Quarter 36.09 24.85
For the Year 36.09 22.38
2001
-------------------------------------------------------------
HIGH LOW
------------- ------------
First Quarter $ 12.66 $ 9.69
Second Quarter 16.00 11.19
Third Quarter 18.81 15.81
Fourth Quarter 28.06 16.63
For the Year 28.06 9.69
As of March 26, 2002, we had approximately 3,200 shareholders of
record and approximately 18,500 additional shareholders based on an estimate of
individual participants represented by security position listings. We have not
declared any cash dividends, and the present policy of our board of directors is
to retain all earnings to support operations and to finance our growth.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per share
amounts) 2001 2000 1999 1998 1997
--------------------------------------------- ----------- ------------- ----------- ------------ -----------
(Restated)(6)
-------------
STATEMENT OF EARNINGS DATA:
Net sales $ 3,237,248 $ 2,605,468 $ 2,055,598 $ 1,721,316 $ 1,331,002
Cost of goods sold 2,780,128 2,254,394 1,773,632 1,491,079 1,159,593
----------- ------------- ----------- ------------ -----------
Gross profit 457,120 351,074 281,966 230,237 171,409
Operating expenses 381,135 302,176 242,625 198,646 146,344
----------- ------------- ----------- ------------ -----------
Operating profit 75,985 48,898 39,341 31,591 25,065
----------- ------------- ----------- ------------ -----------
Other income (expense):
Interest expense (8,807) (6,593) (5,388) (4,411) (2,978)
Loss on sale of undivided interest in receivables (1,445 ) - - - -
Nonrecurring merger expenses - - (3,812) - -
Gain on sale of investment - - 768 - -
Other, net (438) (66) 342 195 111
----------- ------------- ----------- ------------ -----------
Other expense, net (10,690) (6,659) (8,090) (4,216) (2,867)
----------- ------------- ----------- ------------ -----------
Earnings before income taxes 65,295 42,239 31,251 27,375 22,198
Income tax expense 24,812 16,051 12,000 9,965 8,298
----------- ------------- ----------- ------------ -----------
Net earnings $ 40,483 $ 26,188 $ 19,251 $ 17,410 $ 13,900
----------- ------------- ----------- ------------ -----------
PER SHARE DATA:
Weighted average common shares outstanding 37,957 28,336 27,544 26,796 25,621
Basic net earnings per common share $ 1.07 $ 0.92 $ 0.70 $ 0.65 $ 0.54
Pro forma net earnings per common share (1) (2) 1.07 0.92 0.77 0.63 0.53
Weighted average common shares and
dilutive potential common shares outstanding 39,328 29,539 28,437 27,850 26,683
Diluted net earnings per common share $ 1.03 $ 0.89 $ 0.68 $ 0.63 $ 0.52
Pro forma diluted net earnings per common share
(1) (2) 1.03 0.89 0.75 0.60 0.51
Book value per share 13.90 10.06 6.71 5.84 5.17
Closing price per share 36.10 25.64 12.19 14.07 10.50
BALANCE SHEET AND OTHER DATA:
Working capital (4) $ 69,755 $ 95,572 $ 70,789 $ 63,280 $ 60,131
Property, plant and equipment,
net 247,197 143,142 113,930 93,402 78,006
Depreciation and amortization 31,981 17,877 14,137 11,501 8,592
Capital expenditures 30,136 30,992 26,006 26,663 9,054
Total assets 1,277,791 710,271 462,045 387,712 308,945
Short-term debt (including
current
installments of long-term debt) (5) 1,879 1,966 703 797 867
Long-term debt (5) 270,594 114,492 92,404 74,305 54,748
Shareholders' equity 608,197 357,024 189,344 157,085 137,949
Total capital 880,670 473,482 282,451 232,187 193,564
Debt-to-capital ratio 30.9% 24.6% 33.0% 32.3% 28.7%
Pro forma return on equity (1) (2) (3) 9.2% 12.1% 12.3% 11.4% 11.2%
P/E ratio 35.0 28.8 18.1 22.5 20.2
(1) Pro forma adjustments to net earnings per common share and return on equity
add back nonrecurring merger expenses related to our acquisition of NorthCenter
and adjust income taxes as if NorthCenter, which merged with one of our
subsidiaries in February 1999, was taxed as a C-corporation for income tax
purposes rather than as an S-corporation prior to the merger. As an
S-corporation, NorthCenter was not subject to income taxes for periods prior to
the merger. NorthCenter became subject to income taxes for all periods following
the merger.
(2) 1999 excludes a nonrecurring gain of $768 on the sale of an investment.
(3) Return on equity for 2001 and 2000 is adjusted for the impact of the common
stock offerings, completed in October 2001 and December 2000.
(4) In July 2001, we entered into a $90.0 million receivables purchase facility
under which we have sold and in the future intend to sell undivided interests in
some of our receivables to a financial institution. These sales have resulted in
a decrease in our current assets and working capital in 2001.
(5) Short-term and long-term debt does not include our obligations under our
$115.0 million master operating lease facilities, which we use to finance the
construction or purchase of distribution centers and office buildings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and the notes to our consolidated
financial statements included elsewhere in this annual report on Form 10-K for
additional information about these facilities.
(6) Results for 2000 have been restated to reflect the correction of the
accounting errors described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with "Selected Consolidated Financial Data" and our consolidated financial
statements and the related notes included elsewhere in this Form 10-K. The
following text contains references to years 2001, 2000 and 1999, which mean our
fiscal years ended December 29, 2001, December 30, 2000 and January 1, 2000,
respectively. We use a 52/53-week fiscal year ending on the Saturday closest to
December 31. Consequently, we periodically have a 53-week fiscal year. Our 2001,
2000 and 1999 fiscal years were all 52-week years. As a result of our merger
with NorthCenter on February 26, 1999, which we accounted for as a
pooling-of-interests, the consolidated financial statements for periods prior to
the merger have been restated to include the accounts and results of operations
of NorthCenter. All share and per-share data has been adjusted to reflect the
two-for-one common stock split that we paid on April 30, 2001.
INTRODUCTION
Performance Food Group was founded in 1987 as a result of the
combination of various foodservice businesses, and has grown both internally
through increased sales to existing and new customers and through acquisitions
of existing foodservice distributors. We derive our revenue primarily from the
sale of food and non-food products to the foodservice, or "food-away-from-home,"
industry. The principal components of our expenses include cost of goods sold,
which represents the amounts paid to manufacturers and growers for products
sold, and operating expenses, which include primarily labor-related expenses,
delivery costs and occupancy expenses related to our facilities. A portion of
our growth in net sales during the years discussed below was due to
acquisitions. The "Business Combinations" section below summarizes our
acquisitions since the beginning of 2000.
In March 2002, we announced that we had identified certain accounting
errors at one of our operating subsidiaries in our broadline segment. The errors
resulted primarily from the failure of the accounting staff at this subsidiary
to properly reconcile its accounting records to supporting detail and their
failure to appropriately account for intercompany transactions with a division
of this subsidiary, which resulted in an understatement of cost of goods sold
for the subsidiary. The effect of the correction of the errors was to reduce
previously reported net income by $693,000 related to 2000 and $2.9 million
related to previously reported quarterly earnings for the first three quarters
in 2001. Additionally, $290,000 of the impact of the correction of the errors
related to 2001 fourth quarter earnings. The consolidated financial statements
as of and for the year ended December 30, 2000 and notes thereto included in
this annual report on Form 10-K have been restated to include the effects of the
corrections of these errors. The quarterly restatement for the corrections of
these errors in each of the impacted quarters is contained in the "Quarterly
Results and Seasonality" section of this annual report on Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the components
of our consolidated statements of earnings expressed as a percentage of net
sales:
2001 2000 1999
------- -------- -------
(Restated)
----------------------------------------------
Net sales 100.0 % 100.0 % 100.0 %
Cost of goods sold 85.9 86.5 86.3
Gross profit 14.1 13.5 13.7
Operating expenses 11.8 11.6 11.8
------- -------- -------
Operating profit 2.3 1.9 1.9
------- -------- -------
Other expense, net 0.3 0.2 0.4
------- -------- -------
Earnings before income taxes 2.0 1.7 1.5
Income tax expense 0.8 0.7 0.6
------- -------- -------
Net earnings 1.2 % 1.0 % 0.9 %
------- -------- -------
22
COMPARISON OF 2001 TO 2000
Net sales. Net sales increased 24.2% to $3.24 billion for 2001 from
$2.61 billion for 2000. Net sales in our existing operations increased 9.8% over
2000, while acquisitions contributed the remaining 14.4% of our total net sales
growth for 2001. Net sales in existing operations exclude the net sales of an
acquired business for the first 12 months following the acquisition date of that
business. We estimate that inflation contributed approximately 2.1% to the
increase in net sales in 2001. During 2001, the growth in net sales in our
existing operations was below the rate of growth experienced in 2000, reflecting
weaker general economic conditions in the latter half of 2001.
Gross profit. Gross profit increased 30.2% to $457.1 million in 2001
from $351.1 million in 2000. Gross profit margin, which we define as gross
profit as a percentage of net sales, increased to 14.1% in 2001 compared to
13.5% in 2000. The increase in gross profit margin was due primarily to
increased contribution from our fresh-cut segment, mainly as a result of the
acquisitions of Fresh Express in October 2001 and Redi-Cut in December 2000,
which typically have had higher gross profit margins than many of our other
operating companies.
Operating expenses. Operating expenses increased 26.1% to $381.1
million in 2001 from $302.2 million in 2000. As a percentage of net sales,
operating expenses increased to 11.8% in 2001 from 11.6% in 2000. The increase
in operating expenses as a percentage of net sales was due mainly to the
acquisition of Fresh Express in October 2001, which has higher operating
expenses as a percentage of net sales than our other operating companies.
Operating profit. Operating profit increased 55.4% to $76.0 million in
2001 from $48.9 million in 2000. Operating profit margin, which we define as
operating profit as a percentage of net sales, increased to 2.3% in 2001 from
1.9% in 2000, as a result of the increase in gross profit margin discussed
above.
Other expense, net. Other expense, net, increased to $10.7 million in
2001 from $6.7 million in 2000. Included in other expense, net, was interest
expense of $8.8 million in 2001 compared to interest expense of $6.6 million in
2000. The increase in interest expense was due primarily to higher average
levels of borrowing in 2001 and the issuance of approximately $201.3 million of
Convertible Notes, partially offset by lower interest rates. In 2001, other
expense, net, also included a loss on the sale of the undivided interest in
receivables of approximately $1.4 million, related to the receivables purchase
facility, referred to as the Receivables Facility. The Convertible Notes and the
Receivables Facility are discussed in "Liquidity and Capital Resources."
Income tax expense. Income tax expense increased to $24.8 million in
2001 compared to $16.1 million in 2000. As a percentage of earnings before
income taxes, the provision for income taxes was 38.0% in 2001 and 2000.
Net earnings. Net earnings increased 54.6% to $40.5 million in 2001
from $26.2 million in 2000. For 2001, net earnings as a percentage of net sales
increased to 1.2% from 1.0% in 2000.
COMPARISON OF 2000 TO 1999
Net sales. Net sales increased 26.7% to $2.61 billion for 2000 from
$2.06 billion for 1999. Net sales in our existing operations increased 22.6%
over 1999, while acquisitions contributed the remaining 4.1% of our total net
sales growth for 2000. We estimate that inflation contributed approximately 1.0%
to the increase in net sales in 2000.
Gross profit. Gross profit increased 24.5% to $351.1 million in 2000
from $282.0 million in 1999. Gross profit margin decreased to 13.5% in 2000
compared to 13.7% in 1999. The decrease in gross profit margin was due primarily
to increased sales to certain of our chain customers, which generally are higher
volume, lower gross margin accounts.
Operating expenses. Operating expenses increased 24.5% to $302.2
million in 2000 from $242.6 million in 1999. As a percentage of net sales,
operating expenses decreased to 11.6% in 2000 from 11.8% in 1999. The decrease
in operating expenses as a percentage of net sales was due mainly to increased
sales in our customized distribution segment, which has a lower operating
expense ratio, which we define as the ratio of operating expenses to net sales,
than our broadline and fresh-cut segments, offset in part by higher fuel costs.
Operating profit. Operating profit increased 24.3% to $48.9 million in
2000 from $39.3 million in 1999. Operating profit margin was 1.9% for 2000 and
1999.
23
Other expense, net. Other expense, net, decreased to $6.7 million in
2000 from $8.1 million in 1999. Other expense, net, included interest expense of
$6.6 million in 2000 and $5.4 million in 1999. Other expense, net, for 1999 also
included nonrecurring merger expenses related to the NorthCenter merger of $3.8
million and a gain of $768,000 on the sale of an investment.
Income tax expense. Income tax expense increased to $16.1 million in
2000 compared to $12.0 million in 1999. The effective tax rate decreased to
38.0% in 2000 from 38.4% in 1999. The fluctuation in the effective tax rate was
due primarily to the merger with NorthCenter, which was taxed as an
S-corporation for income tax purposes prior to the merger with us during the
first quarter of 1999.
Net earnings. Net earnings increased 36.0% to $26.2 million in 2000
from $19.3 million in 1999. For 2000, net earnings as a percentage of net sales
increased to 1.0% from 0.9% in 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations and growth primarily with
cash flows from operations, borrowings under credit facilities, the issuance of
long-term debt, operating leases, normal trade credit terms and the sale of our
common stock. Despite our growth in net sales, we have reduced our working
capital needs by financing our investment in inventory principally with accounts
payable and outstanding checks in excess of deposits.
Cash and cash equivalents totaled $68.3 million at December 29, 2001,
an increase of $49.7 million from December 30, 2000. The increase was primarily
a result of cash provided by operating activities of $165.2 million and proceeds
of $201.3 million and $143.4 million, respectively, from the issuance of the
Convertible Notes and 5,750,000 shares of our common stock, discussed below.
This increase was partially offset by cash used in investing activities of
$422.9 million and payments of $47.0 million on our existing revolving credit
facility.
Cash flows from operating activities. Cash provided by operating
activities was $165.2 million in 2001. In 2001, the primary sources of cash from
operating activities were net earnings, deferred income taxes, increased levels
of trade payables and accrued expenses and decreased levels of trade
receivables, partially offset by increased levels of inventories and decreased
levels of income taxes payable, net. The decrease in trade receivables was due
primarily to proceeds received of $78.0 million from the sale of an undivided
interest in receivables under the Receivables Facility, discussed further below.
Cash provided by operating activities was $11.4 million and $47.0 million in
2000 and 1999, respectively. In 2000, the primary sources of cash from operating
activities were net earnings and increased levels of trade payables, accrued
expenses and income taxes payable, partially offset by increased levels of trade
receivables and inventories. In 1999, the primary sources of cash from operating
activities were net earnings and increased levels of trade payables and accrued
expenses, partially offset by increased levels of inventories.
In July 2001, we entered into the Receivables Facility, under which PFG
Receivables Corporation, a wholly owned, special-purpose subsidiary, sold an
undivided interest in certain of our trade receivables. PFG Receivables
Corporation was formed for the sole purpose of buying receivables generated by
some of our operating units and selling an undivided interest in those
receivables to a financial institution. Under the Receivables Facility, our
operating units transfer a portion of their accounts receivable to PFG
Receivables Corporation, which in turn, subject to certain conditions, may from
time to time sell an undivided interest in these receivables to a financial
institution. Our operating units continue to service the receivables on behalf
of the financial institution at estimated market rates. Accordingly, we have not
recognized a servicing asset or liability. The amount of the undivided interest
in the receivables owned by the financial institution cannot exceed $90.0
million at any one time.
We received approximately $78.0 million of proceeds from the undivided
interest in receivables sold under the Receivables Facility in 2001. At December
29, 2001, securitized accounts receivable totaled approximately $116.0 million,
which includes $78.0 million sold to the financial institution and derecognized
from the consolidated balance sheet and includes our residual interest in
accounts receivable of $38.0 million, which was included in accounts receivable
on our consolidated balance sheet. The residual interest represents our retained
interest in receivables held by PFG Receivables Corporation. We measured the
residual interest using the estimated discounted cash flows of the underlying
accounts receivable, based on estimated collections and a discount rate
equivalent to our incremental borrowing rate. The loss on sale of receivables of
approximately $1.4 million in 2001 is included in other expense, net, and
represents our cost of securitizing those receivables with the financial
institution.
24
We record the sale of the undivided interest in accounts receivable to
the financial institution according to Statement of Financial Accounting
Standards, or SFAS, No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. Accordingly, at the time the
undivided interest in accounts receivables is sold, the receivables are removed
from our balance sheet. We record a loss on the sale of the undivided interest
in the receivables, which includes a discount based upon the receivables' credit
quality and a financing cost for the financial institution, based upon a 30-day
commercial paper rate. At December 29, 2001, the rate under the Receivables
Facility was approximately 2.55%.
Cash used in investing activities. Cash used in investing activities
was $422.9 million in 2001. Investing activities include the acquisition of
businesses and additions to and disposals of property, plant and equipment.
Capital expenditures, excluding acquisitions of other businesses, were $30.1
million in 2001. Net cash paid for acquisitions in 2001 was $395.4 million,
including $296.4 million, $41.0 million and $54.3 million paid for the
acquisitions of Fresh Express, Springfield Foodservice Corporation and Empire
Seafood Holding Corp. and Empire Imports, Inc., collectively referred to as
Empire Seafood, respectively, net of cash on hand at these acquired companies.
Net cash paid for acquisitions also included $3.8 million paid for the
acquisition of other businesses in 2001 and to the former shareholders of
Carroll County Foods, Inc., State Hotel Supply Company, Inc. and AFFLINK
Incorporated (formerly Affiliated Paper Companies, Inc.), which we acquired in
2000, 1999 and 1998, respectively, as a result of certain contractual
obligations in the purchase agreements related to those acquisitions. For
further discussion of acquisitions, see the "Business Combinations" section
below. In 2001, proceeds from the sale of property, plant and equipment totaled
$3.2 million. Cash used in investing activities was $153.7 million in 2000.
Capital expenditures in 2000, excluding acquisitions of businesses, were $31.0
million. Cash used in investing activities in 2000 included $124.2 million paid
as a portion of the purchase price of Redi-Cut and Carroll County, net of cash
on hand at these acquired companies, and payments made to the former
shareholders of AFFLINK and Dixon Tom-A-Toe Companies, Inc., as a result of
certain contractual obligations in the purchase agreements related to those
acquisitions. In 2000, proceeds from the sale of property, plant and equipment
totaled $1.4 million. Cash used in investing activities was $41.8 million in
1999. During 1999, we paid $18.1 million for the acquisition of businesses, net
of cash on hand at the acquired companies. Total capital expenditures, excluding
acquisitions of businesses, for 1999 were $26.0 million. In 1999, proceeds from
the sale of property, plant and equipment totaled $1.1 million. Investing
activities in 1999 also included $1.6 million from the sale of an investment.
Cash provided by financing activities. Cash provided by financing
activities was $307.4 million in 2001. In 2001, cash flows from financing
activities included proceeds from the issuance of long-term debt of $202.2
million, consisting primarily of proceeds of $201.3 million from the issuance of
the Convertible Notes, discussed below. Cash flows from financing activities in
2001 also included $143.4 million from the issuance of common stock in October
2001, discussed below, an increase in outstanding checks in excess of deposits
of $12.1 million and proceeds of $7.0 million from the exercise of stock
options. Cash used in financing activities in 2001 included payments of $47.0
million on our revolving credit facility, debt issuance costs of $8.0 million
related to our Convertible Notes and new revolving credit facility, both
discussed below, and principal payments on other long-term debt of $2.2 million.
Cash provided by financing activities was $155.2 million in 2000. In 2000, cash
flows from financing activities included proceeds of $124.4 million from the
issuance of common stock, discussed below, an increase in outstanding checks in
excess of deposits of $22.4 million, net borrowings of $12.0 million on our
revolving credit facility, $3.5 million of proceeds from industrial revenue
bonds issued to finance the construction of a new produce-processing facility,
and proceeds of $5.1 million from the exercise of stock options. In 2000, cash
used by financing activities included $812,000 of principal payments on
long-term debt and $11.9 million paid by us to repurchase shares of our common
stock in the open market for use in connection with our employee benefit plans.
Cash used in financing activities was $7.4 million in 1999. Financing activities
in 1999 included net borrowings of $13.3 million under our revolving credit
facility. Financing activities in 1999 also included a decrease in outstanding
checks in excess of deposits of $20.1 million, principal payments on long-term
debt of $9.2 million and $1.0 million distributed to the former shareholders of
NorthCenter prior to its merger with one of our subsidiaries. Finally, in 1999,
we received cash flows of $5.0 million from the exercise of stock options and
proceeds of $4.6 million from the issuance of industrial revenue bonds to
finance the construction of a new produce-processing facility.
Financing Activities
In October 2001, we issued approximately $201.3 million aggregate
principal amount of 5 1/2% convertible subordinated notes due in 2008. The net
proceeds from the issuance of the Convertible Notes and from our concurrent
offering of common stock discussed below, were used to repay our borrowings
outstanding under our existing revolving credit facility and to fund the
acquisition of Fresh Express. The Convertible Notes are subordinated to all
existing and future senior debt and are convertible at any time until maturity
into shares of our common stock at a conversion price of $32.95 per share,
subject to adjustment. The Convertible Notes are redeemable at our option, in
whole or in part, at any time on or after October 16, 2004. Each holder of the
Convertible Notes has the right to cause us to repurchase all of such holder's
Convertible Notes at 100% of
25
their principal amount plus accrued interest upon a change of control of the
Company, as defined in the indenture governing the Convertible Notes, and upon
the occurrence of certain other events. Interest is payable semiannually.
Also in October 2001, we issued 5,750,000 shares of our common stock at
an offering price of $26.36 per share. The proceeds from this offering of
approximately $143.4 million, after deducting underwriting discounts and
estimated offering expenses, and proceeds from the concurrent offering of
Convertible Notes were used to repay our borrowings outstanding under our
existing revolving credit facility and to fund the acquisition of Fresh Express.
In October 2001, we entered into a $200.0 million revolving credit
facility, referred to as the New Credit Facility, with several financial
institutions which replaced our existing $85.0 million credit facility and $5.0
million working capital line of credit. The New Credit Facility expires in 2006
and bears interest at a floating rate equal to, at our election, the agent
bank's prime rate or a spread over LIBOR, which varies based upon our leverage
ratio, as defined in the credit agreement. The New Credit Facility has a
commitment fee, ranging from 0.20% to 0.25% of the average daily unused portion
of the total facility, based on our leverage ratio, as defined in the credit
agreement. The New Credit Facility also requires the maintenance of certain
financial ratios, as defined in the credit agreement, and contains customary
events of default. The New Credit Facility allows for the issuance of up to
$40.0 million of standby letters of credit, which reduce borrowings available
under the New Credit Facility. At December 29, 2001, we had approximately $14.1
million of outstanding letters of credit under the New Credit Facility. The New
Credit Facility also requires that our existing subsidiaries and, subject to
limited exceptions, future subsidiaries, guarantee all of our borrowings,
letters of credit and other obligations under the New Credit Facility. At
December 29, 2001, we had no borrowings outstanding under the New Credit
Facility.
In December 2000, we issued 6,440,000 shares of our common stock
generating proceeds to us, after deducting underwriting discounts and offering
expenses, of approximately $124.4 million, which we used to pay the cash portion
of the purchase price for Redi-Cut and repay amounts outstanding under our
existing credit facility.
In March 1999, one of our subsidiaries issued $9.0 million of
tax-exempt industrial revenue bonds to finance the construction of a
produce-processing facility. In January 2001, these bonds were refinanced with
the proceeds of $9.0 million taxable revenue bonds, in order to free us from
certain restrictive covenants applicable to the subsidiary that issued the
tax-exempt bonds. Like the tax-exempt bonds, these taxable bonds bear interest
at a rate determined weekly by the remarketing agent for the bonds, are secured
by a letter of credit issued by a commercial bank, and mature in March 2019. The
interest rate for these bonds was approximately 2.05% per annum at December 29,
2001.
In September 1997, we entered into our first master operating lease
facility. In February 2001, we increased this master operating lease facility
from $47.0 million to $55.0 million. This facility was used to construct four
distribution centers. Two of these distribution centers became operational in
early 1999, one became operational in the second quarter of 2000, and the
remaining property became operational in the second quarter of 2001. Under this
facility, the lessor owns the distribution centers, incurs the related debt to
construct the properties, and thereafter leases each property to us. We have
entered into leases for each of the properties. All of these leases end on
September 12, 2002, including extensions. Upon the expiration of the leases, we
may seek to renew the leases. If we are unable to or choose not to renew the
leases, we have the option of facilitating the sale of the properties to third
parties or purchasing the properties at their original cost. If the properties
are sold to third parties for less than 88% of their aggregate original cost, we
are obligated, under a residual value guarantee, to pay the lessor an amount
equal to the shortfall. There can be no assurance that we will be able to renew
the leases or sell the properties to third parties, and we may require
substantial additional financing if we are required to purchase these properties
upon the expiration of the master operating lease facility. Because of the
location and condition of each of the four properties referred to above, we
believe that the anticipated fair value of these properties could eliminate or
substantially reduce the exposure under the residual value guarantee, although
there can be no assurance that we will not be required to make payments to
satisfy this guarantee. Through December 29, 2001, construction expenditures by
the lessor under this facility were approximately $50.1 million.
In June 2000, we entered into a $60.0 million master operating lease
facility to construct or purchase various office buildings and distribution
centers. As of December 29, 2001, two distribution centers had been purchased,
one office building had been completed and one distribution center had become
operational under this facility. Under this facility, the lessor owns the
properties, incurs the related debt to construct or purchase the properties and
thereafter leases each property to us. We have entered into leases for each of
these properties. The leases relating to the four properties referred to above,
as well as any other leases that we may enter into under this facility in the
future, end on June 9, 2005. Upon the expiration of the leases, we may seek to
renew the leases. If we are unable to or choose not to renew the leases, we have
the option of facilitating the sale of the properties to third parties or
purchasing the properties at their original cost. If the properties are sold to
third parties for less than 85% of their aggregate original cost, we are
obligated, under a residual value guarantee, to pay the lessor an amount equal
26
to the shortfall. There can be no assurance that we will be able to renew the
leases or sell the properties to third parties, and we may require substantial
additional financing if we are required to purchase these properties upon the
expiration of the master operating lease facility. Because of the location and
condition of each of the four properties referred to above, we believe that the
anticipated fair value of these properties could eliminate or substantially
reduce the exposure under the residual value guarantee with respect to these
four properties, although there can be no assurance that we will not be required
to make payments to satisfy this guarantee either with respect to these four
properties or any other properties which may be constructed or purchased in the
future under this facility. Through December 29, 2001, construction expenditures
by the lessor under this facility were approximately $32.6 million.
In light of our identification of the accounting errors and the
restatement of our financial condition, results of operations and cash flows for
the year ended December 30, 2000 included in this annual report on Form 10-K and
the restatement of previously reported results of operations for the first three
quarters of 2001, we believed it was appropriate to obtain waivers of certain
possible breaches of representations or warranties or failures to comply with
covenants included in the Receivables Facility, the New Credit Facility and the
master operating lease facilities. We have obtained those waivers.
The table below presents contractual minimum cash obligations under all
of our existing debt and lease agreements. Lease payments include payments due
under our existing non-cancelable operating leases, including payments under our
master operating lease facilities. The table does not include, however, the
residual value guarantees under our master operating lease facilities. This
table should be read in conjunction with Notes 9 and 11 to the consolidated
financial statements, included elsewhere in this annual report on Form 10-K.
Contractual Minimum Cash Obligations
(In thousands) Debt Payments Lease Payments Total
------------------------------------- --------------- -------------- ---------------
2002 $ 1,879 $ 33,011 $ 34,890
2003 2,610 26,032 28,642
2004 901 19,067 19,968
2005 448 14,364 14,812
2006 340 9,728 10,068
Thereafter 266,295 28,690 294,985
-------------- -------------- ---------------
Total minimum cash obligations $ 272,473 $ 130,892 $ 403,365
============== ============== ===============
We believe that our cash flows from operations, borrowings under our
New Credit Facility, our master operating lease facilities and the sale of
undivided interests in trade receivables under the Receivables Facility will be
sufficient to fund our operations and capital expenditures for the foreseeable
future. However, we will likely require additional sources of financing to the
extent that we make additional acquisitions in the future.
Off Balance Sheet Financing Activities
We utilize two sources of funding that could generally be described as
off balance sheet financing - the Receivables Facility and our master operating
lease facilities, all described above. The Receivables Facility represents off
balance sheet financing because the financial institution's ownership interest
in certain of our accounts receivable results in assets being removed from our
balance sheet to the extent that the undivided interest qualifies for sale
treatment under generally accepted accounting principles. This treatment allows
us to account for the transaction with the financial institution as a sale of
the undivided interest in the accounts receivable instead of reflecting the
financial institution's net investment of $78.0 million as debt. Under the terms
of our master operating lease facilities, the third party lessor owns the
properties, incurs the related debt to construct the properties, and thereafter,
leases each property to us. We enter into leases for each of the properties,
which we may seek to renew upon their expiration. If we are unable to or choose
not to renew the leases, we have the option of facilitating the sale of the
properties to third parties (subject to a residual value guarantee) or
purchasing the properties at their original cost. Our leases under the master
operating lease facilities qualify for operating lease accounting treatment
under SFAS No. 13, Accounting for Leases, and, as such, the buildings, and the
debt incurred to construct them, are not included on our balance sheet. The cost
of these buildings and the debt incurred to construct them of $82.7 million were
not recorded on our balance sheet as of December 29, 2001. See Notes 7 and 11 to
the consolidated financial statements for further discussion of the Receivables
Facility and the master operating lease facilities.
27
BUSINESS COMBINATIONS
On October 16, 2001, we acquired all of the outstanding stock of Fresh
Express. Based in Salinas, California, Fresh Express sells packaged,
ready-to-eat salads under its "Fresh Express" label. With five processing
facilities located throughout the United States, Fresh Express processes,
packages and distributes its products nationwide to food retailers such as
Albertson's, Kroger, Safeway and Wal-Mart, as well as to foodservice
distributors and operators and quick-service restaurants such as Taco Bell. We
believe that our acquisition of Fresh Express will allow us to increase our
sales of fresh-cut produce through continued product innovation, expanded
geographic coverage, expanded customer relationships and enhanced purchasing
leverage. We paid approximately $296.4 million, net of cash acquired, for Fresh
Express. In addition, in connection with the acquisition of Fresh Express, we
entered into an earnout agreement whereby we will be required to pay the former
shareholders of Fresh Express up to $10.0 million in cash if Fresh Express
achieves certain operating targets during a three-year period following the
acquisition.
On September 10, 2001, we acquired all the outstanding common stock of
Springfield Foodservice Corporation, a privately owned broadline foodservice
distributor based in Springfield, Massachusetts. Springfield provides products
and services to traditional foodservice accounts in a region covering New
England and portions of New York State. We believe that our acquisition of
Springfield will allow us to develop a contiguous Northeast market by connecting
the regions served by two of our other subsidiaries with the regions served by
Springfield, and adds a distributor with a history of growth in a densely
populated market. We paid approximately $80.7 million for Springfield,
consisting of approximately $41.0 million in cash and approximately 1.3 million
shares of our common stock valued at $31.30 per share. In addition, in
connection with the acquisition, we entered into an earnout agreement whereby we
will be required to pay a former shareholder of Springfield up to $3.9 million
as additional purchase price over a three-year period if Springfield achieves
certain operating targets, payable in cash and shares of our common stock.
On April 2, 2001, we acquired all of the outstanding stock of Empire
Seafood, a privately owned distributor and processor of seafood. Based in Miami,
Florida, Empire Seafood processes, markets and distributes a broad array of
seafood directly to cruise lines, independent restaurants and other foodservice
operators, primarily in Florida. We paid approximately $75.0 million for Empire
Seafood, consisting of approximately $54.3 million in cash, net of cash
acquired, and approximately 803,000 shares of our common stock, valued at $24.42
per share. In addition, in connection with the acquisition, we entered into an
earnout agreement whereby we will be required to pay certain former shareholders
of Empire Seafood up to $7.5 million as additional purchase price over a
three-year period if Empire Seafood achieves certain operating targets, payable
in cash and shares of our common stock.
Also in 2001, we paid a total of approximately $3.8 million in cash and
issued approximately 15,000 shares of our common stock for the acquisition of
other businesses in 2001 and to the former shareholders of Carroll County, State
Hotel and AFFLINK, which were acquired in 2000, 1999 and 1998, respectively, as
a result of certain contractual obligations in the purchase agreements related
to those acquisitions.
On December 13, 2000, we acquired the capital stock of Redi-Cut, a
privately owned fresh-cut produce processor with facilities in Franklin Park,
Illinois, a suburb of Chicago, and Kansas City, Missouri. Redi-Cut provides
fresh-cut produce mainly to third-party distributors for resale primarily to
national quick-service restaurants and other sectors of the
"food-away-from-home" industry. On August 4, 2000, we acquired the common stock
of Carroll County, a privately owned, broadline foodservice distributor based in
New Windsor, Maryland. Carroll County provides products and services to
traditional foodservice accounts in a region that includes Baltimore, Maryland
and Washington, D.C. In 2000, we paid a total of approximately $124.2 million,
net of cash acquired, and issued a total of approximately 1.3 million shares of
our common stock for the acquisitions of Redi-Cut and Carroll County and to the
former shareholders of Dixon and AFFLINK which were acquired in 1999 and 1998,
respectively, as a result of certain contractual obligations in the purchase
agreements related to those acquisitions. In connection with the Carroll County
acquisition, we entered into an earnout agreement whereby we are required to pay
the former shareholders of Carroll County up to $3.8 million in additional cash
or shares of our common stock if Carroll County achieves certain operating
targets during a four-year period following the acquisition.
On December 13, 1999, our subsidiary, Virginia Foodservice Group, Inc.,
acquired certain net assets of Nesson Meat Sales, a privately owned meat
processor based in Norfolk, Virginia. Nesson supplies Certified Angus Beef and
other custom-cut meats to restaurants and other foodservice operations in the
mid-Atlantic region. On August 31, 1999, our subsidiary, AFI Foodservice
Distributors, Inc., acquired certain net assets of State Hotel, a privately
owned meat processor based in Newark, New Jersey. State Hotel provides Certified
Angus Beef and other custom-cut meats to restaurants and other food service
operations in New York City and the surrounding region. On August 28, 1999, we
acquired the common stock of Dixon , an Atlanta-based privately owned processor
of fresh-cut produce. Dixon has operations in the southeastern and midwestern
United States. Its operations have been combined with our subsidiary Fresh
Advantage, Inc.
28
On February 26, 1999, we completed a merger with NorthCenter, in which
NorthCenter became our wholly owned subsidiary. NorthCenter was a privately
owned foodservice distributor based in Augusta, Maine, and had 1998 net sales of
approximately $98 million. The merger was accounted for as a
pooling-of-interests and resulted in the issuance of approximately 1.7 million
shares of our common stock in exchange for all of the outstanding stock of
NorthCenter. Accordingly, our consolidated financial statements for periods
prior to the merger have been restated to include the accounts and results of
operations of NorthCenter.
CRITICAL ACCOUNTING POLICIES
The increasing complexity of the business environment and applicable
authoritative accounting guidance requires us to closely monitor our accounting
policies. We have identified the following five critical accounting policies:
Accounting for Business Combinations. Our goodwill and other intangible
assets include the cost of acquired subsidiaries in excess of the fair value of
the tangible net assets recorded in connection with acquisitions. We must
exercise certain judgments and make estimates for business combinations. We have
some discretion in determining the fair value of assets acquired and liabilities
assumed, lives assigned to acquired intangibles, the resulting amortization
period, what indicators will trigger an impairment, whether those indicators are
other than temporary, what economic or competitive factors affect valuation,
valuation methodology, and key assumptions including discount rates and cash
flow estimates.
As described below under "Recently Issued Accounting Pronouncements,"
the provisions of SFAS No. 142 require that goodwill no longer be amortized, and
that goodwill and other intangible assets be tested for impairment upon adoption
of this standard and at least annually thereafter. Therefore, beginning in 2002,
we will no longer record amortization expense for goodwill and other intangible
assets with indefinite lives. Instead, we will be required to perform an annual
assessment of whether there is an indication that goodwill and any other
intangible assets are impaired. Based on our assessment as of December 29, 2001,
we do not expect to record any transitional impairment loss as a result of the
adoption of SFAS No. 142. Thereafter, in connection with our annual evaluation,
we would be required to record impairment losses on goodwill and other
intangible assets when events and circumstances indicate that those assets have
been impaired, by examining the fair value of the reporting units which include
the businesses whose acquisitions gave rise to the goodwill or other intangible
assets. As of December 29, 2001, our unamortized goodwill was approximately
$425.2 million.
Accounting for Off Balance Sheet Financing Activities. We have two
sources of funding which could generally be described as off balance sheet
financing activities - the Receivables Facility and our master operating lease
facilities, described above. The sale of the undivided interest in our accounts
receivable qualifies for sale treatment under generally accepted accounting
principles; therefore, these receivables have been removed from our balance
sheet. We measure the Residual Interest in the undivided interest in receivables
sold under our Receivables Facility using the estimated discounted cash flows of
the underlying accounts receivable based on estimated collections and a discount
rate equivalent to our incremental borrowing rate. Our leases under the master
operating lease facilities qualify for operating lease accounting treatment
under SFAS No.13, Accounting for Leases, and, as such, the buildings, and the
debt incurred to construct them, are not included on our balance sheet.
Accounting policies related to the Receivables Facility and the master operating
lease facilities are among topics currently under reexamination by the Financial
Accounting Standards Board, or FASB, and regulators.
Allowance For Doubtful Accounts. We evaluate the collectibility of our
accounts receivable on a case-by-case basis, and make adjustments to the bad
debt reserve for expected losses. We consider such things as ability to pay,
bankruptcy, credit ratings and payment history. We generally estimate reserves
for bad debts based on historical experience and past due status of the
accounts.
Inventories. We record inventories at the lower of cost or market, cost
being determined primarily on the first-in, first-out method. Reserves for slow
moving and obsolete inventories are provided based on historical experience and
current product demand. We evaluate the adequacy of these reserves quarterly.
Income Tax Matters. At December 29, 2001, we had approximately $3.1
million of net operating loss carryforwards for federal and state income tax
purposes that expire in years 2010 through 2021. We had approximately $584,000
of state income tax credit carryforwards, which expire in 2005. The realization
of these deferred tax assets is dependent upon future taxable income. Based upon
recent levels of taxable income, we expect that our deferred tax assets will be
fully realized.
29
Other significant accounting policies in addition to those discussed
above, are nevertheless important to an understanding of the financial
statements. See Note 2, Summary of Significant Accounting Policies, which
discusses accounting policies that must be selected by management when there are
acceptable alternatives.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS
No. 141 requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method and specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported apart from goodwill. We adopted SFAS No. 141 in the third quarter of
2001 for our acquisitions of Springfield and Fresh Express.
Also in June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. The provisions of SFAS No. 142 require that goodwill no
longer be amortized, and that goodwill and other intangible assets be tested for
impairment upon adoption of the standard and at least annually thereafter. We
will be required to adopt the provisions of SFAS No. 142 at the beginning of
2002, except for goodwill and other intangible assets acquired in the Fresh
Express and Springfield acquisitions, for which the provisions of this standard
were effective at the acquisition dates. After full adoption of the provisions
of this standard at the beginning of 2002, we will no longer record amortization
expense for goodwill and any other intangible assets with indefinite lives. We
are also required to perform an assessment of whether there is an indication
that goodwill and other intangible assets are impaired as of the beginning of
2002. If applicable, any transitional impairment loss would be recognized as a
cumulative effect of a change in accounting principle in our consolidated
statement of earnings in 2002. We do not expect to record any transitional
impairment loss as a result of the adoption of SFAS No. 142. The provisions of
SFAS No. 142 also require us to evaluate our existing goodwill and other
intangible assets that were acquired in purchase business combinations, and to
make any necessary reclassifications in order to conform to the new
classification criteria in SFAS No. 141 for recognition apart from goodwill. As
of December 29, 2001, our unamortized goodwill was approximately $425.2 million.
Amortization expense related to goodwill was approximately $6.6 million and $3.1
million for 2001 and 2000, respectively.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. We will be required to adopt the provisions of SFAS No.
143 at the beginning of 2003. In August 2001, the FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. We will be
required to adopt the provisions of SFAS No. 144 at the beginning of 2002. We do
not expect the adoption of SFAS No. 143 and SFAS No. 144 to have a material
effect on our financial condition or results of operations.
Effective January 1,2001, we adopted the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended. The
adoption of this standard did not have a material effect on our financial
condition or results of operations.
30
QUARTERLY RESULTS AND SEASONALITY
Set forth below is certain summary information with respect to our
operations for the most recent eight fiscal quarters. All of the fiscal quarters
set forth below had 13 weeks. Historically, the restaurant and foodservice
business is seasonal, with lower sales in the first quarter. Consequently, we
may experience lower net sales during the first quarter, depending on the timing
of any acquisitions. Management believes our quarterly net sales will continue
to be impacted by the seasonality of the restaurant business. The first three
quarters of 2001 and the last three quarters of 2000 have been restated to
reflect the effects of the corrections of the accounting errors announced in
March 2002. For further discussion of these accounting errors, refer to the
"Introduction" section of this discussion.
2001
(In thousands, except per share amounts)
----------------------------------------------------
1st 1st 2nd 2nd 3rd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
As As As
Previously Previously Previously
Reported Restated Reported Restated Reported Restated
----------- --------- ------------ --------- ----------- ---------- ----------
Net sales................... $ 723,475 $ 723,475 $ 794,822 $ 794,822 $ 798,807 $ 798,807 920,144
Gross profit................ 95,375 93,597 108,616 108,456 110,897 108,210 146,857
Operating profit............ 11,786 10,008 20,170 20,010 22,954 20,267 25,700
Earnings before income
taxes....................... 10,160 8,382 17,535 17,375 20,841 18,154 21,384
Net earnings................ 6,299 5,197 10,872 10,773 12,921 11,255 13,258
Basic net earnings per
common share.............. 0.18 0.15 0.30 0.29 0.35 0.30 0.31
Diluted net earnings per
common share.............. 0.17 0.14 0.29 0.28 0.34 0.29 0.30
2000
(In thousands, except per share amounts)
----------------------------------------------------
1st 2nd 2nd 3rd 3rd 4th 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
As As As
Previously Previously Previously
Reported Restated Reported Restated Reported Restated
----------- --------- ------------ --------- ----------- ---------- ----------
Net sales................... $579,750 $654,603 $ 654,603 $ 693,127 $ 693,127 $ 677,988 677,988
Gross profit................ 77,409 86,979 86,628 93,223 91,936 94,580 95,101
Operating profit............ 7,564 12,388 12,037 15,139 13,852 14,924 15,445
Earnings before income
taxes....................... 6,244 10,860 10,509 13,433 12,146 12,819 13,340
Net earnings................ 3,871 6,733 6,516 8,329 7,530 7,948 8,271
Basic net earnings per
common share.............. 0.14 0.24 0.24 0.30 0.27 0.27 0.28
Diluted net earnings per
common share.............. 0.13 0.23 0.23 0.28 0.26 0.25 0.26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary market risks are related to fluctuations in interest rates
and changes in commodity prices. Our primary interest rate risk is from changing
interest rates related to our outstanding debt. We currently manage this risk
through a combination of fixed and floating rates on these obligations. As of
December 29, 2001, our total debt consisted of fixed and floating rate debt of
$253.8 million and $18.6 million, respectively. Substantially all of our
floating rate debt is based on LIBOR. Because most of our debt at December 29,
2001 was at fixed interest rates, a 100 basis-point increase in market interest
rates would not have a material effect on our 2001 results of operations or cash
flows.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page of Form 10-K
-----------------
Financial Statements:
Report of Independent Auditors........................................ F-1
Consolidated Balance Sheets........................................... F-2
Consolidated Statements of Earnings................................... F-3
Consolidated Statements of Shareholders' Equity....................... F-4
Consolidated Statements of Cash Flows................................. F-5
Notes to Consolidated Financial Statements............................ F-6
Financial Statement Schedules:
Independent Auditors' Report on Financial Statement Schedule.......... S-1
Schedule II - Valuation and Qualifying Accounts....................... S-2
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Proxy Statement issued in connection with the shareholders'
meeting to be held on May 15, 2002 contains under the caption "Proposal 1:
Election of Directors" information required by Item 10 of Form 10-K and is
incorporated herein by reference. Pursuant to General Instruction G (3), certain
information concerning our executive officers is included in Part I of this Form
10-K, under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION.
The Proxy Statement issued in connection with the shareholders'
meeting to be held on May 15, 2002 contains under the caption "Executive
Compensation" information required by Item 11 of Form 10-K and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Proxy Statement issued in connection with the shareholders'
meeting to be held on May 15, 2002 contains under the captions "Security
Ownership of Certain Beneficial Owners" and "Proposal 1: Election of Directors"
information required by Item 12 of Form 10-K and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Proxy Statement issued in connection with the shareholders'
meeting to be held on May 15, 2002 contains under the caption "Certain
Transactions" information required by Item 13 of Form 10-K and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. See index to Financial Statements above.
2. Financial Statement Schedules. See index to Financial
Statement Schedules above.
32
3. Exhibits:
Exhibit
Number Description
------ -----------
A. INCORPORATED BY REFERENCE TO OUR REGISTRATION STATEMENT ON FORM
S-1 (NO. 33-64930)
3.2 Restated Bylaws of Registrant.
4.1 Specimen Common Stock certificate.
4.2 Article 5 of the Registrant's Restated Charter (included in
Exhibit 3.1).
4.3 Article 6 of the Registrant's Restated Bylaws (included in Exhibit
3.2).
10.1 Loan Agreement dated July 7, 1988, as amended by various
amendments thereto, by and between the Pocahontas Food Group,
Inc., Employee Savings and Stock Ownership Trust, Sovran
Bank/Central South, Trustee, Pocahontas Food Group, Inc., and
Third National Bank, Nashville, Tennessee.
10.2 Guaranty Agreement dated July 7, 1988 by and between Pocahontas
Food Group, Inc. and Third National Bank, Nashville, Tennessee.
10.3 1989 Non-Qualified Stock Option Plan.
10.4 1993 Outside Directors' Stock Option Plan.
10.5 Performance Food Group Employee Savings and Stock Ownership Plan.
10.6 Trust Agreement for Performance Food Group Employee Savings and
Stock Ownership Plan.
10.7 Form of Pocahontas Food Group, Inc. Executive Deferred
Compensation Plan.
10.8 Form of Indemnification Agreement.
10.9 Pledge Agreement dated March 31, 1993 by and between Hunter C.
Sledd, Jr. and Pocahontas Foods, USA, Inc.
B. INCORPORATED BY REFERENCE TO OUR ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED JANUARY 1, 1994:
10.10 First Amendment to the Trust Agreement for Pocahontas Food Group,
Inc. Employee Savings and Stock Ownership Plan.
10.11 Performance Food Group Employee Stock Purchase Plan.
C. INCORPORATED BY REFERENCE TO OUR QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED APRIL 2, 1994:
33
10.12 Amendment to Loan Agreement dated March 4, 1994 by and among
Performance Food Group Company Employee Savings and Stock
Ownership Plan, First Tennessee Bank. N.A., Performance Food Group
Company and Third National Bank, Nashville, Tennessee.
D. INCORPORATED BY REFERENCE TO OUR REPORT ON FORM 8-K DATED JANUARY
3, 1995:
10.13 Second Amendment to Loan Agreement dated January 3, 1995 between
Performance Food Group Company Employee Savings and Stock
Ownership Trust, First Tennessee Bank, N.A. as trustee,
Performance Food Group Company and Third National Bank, Nashville,
Tennessee.
E. INCORPORATED BY REFERENCE TO OUR ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 28, 1996:
10.14 Performance Food Group Company Employee Savings and Stock
Ownership Plan Savings Trust.
34
Exhibit
Number Description
------ -----------
F. INCORPORATED BY REFERENCE TO OUR REPORT ON FORM 8-K DATED MAY 20,
1997:
10.15 Rights Agreement dated as of May 16, 1997 between Performance Food
Group Company and First Union National Bank of North Carolina, as
Rights Agent.
G. INCORPORATED BY REFERENCE TO OUR QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED SEPTEMBER 27, 1997:
10.16 Participation Agreement dated as of August 29, 1997 among
Performance Food Group Company, First Security Bank National
Association and First Union National Bank (as agent for the
Lenders and Holders).
10.17 Lease Agreement dated as of August 29, 1997 between First Security
Bank National Association and Performance Food Group Company.
H. INCORPORATED BY REFERENCE TO OUR ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 27, 1997:
10.18 Form of Change in Control Agreement dated October 29, 1997 with
Blake P. Auchmoody, John D. Austin, Roger L. Boeve, John R. Crown,
C. Michael Gray, Thomas Hoffman, Mark H. Johnson, Kenneth Peters,
Robert C. Sledd and David W. Sober.
10.19 Form of Change in Control Agreement dated October 27, 1997 with
certain key executives.
I. INCORPORATED BY REFERENCE TO OUR QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED JUNE 27, 1998:
10.20 Form of Note Purchase Agreement dated as of May 8, 1998 for 6.77%
Senior Notes due May 8, 2010.
J. INCORPORATED BY REFERENCE TO OUR ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED JANUARY 2, 1999:
10.21 Performance Food Group Company Executive Deferred Compensation
Plan.
K. INCORPORATED BY REFERENCE TO OUR QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED APRIL 3, 1999:
10.22 Letter of Credit and Reimbursement Agreement by and among KMB
Produce, Inc. and First Union National Bank, dated as of March 1,
1999.
10.23 Guaranty Agreement by and among Performance Food Group Company and
First Union National Bank, dated as of March 1, 1999.
L. INCORPORATED BY REFERENCE TO OUR QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED OCTOBER 2, 1999:
10.24 First Amendment to Certain Operative Agreements dated August 31,
1999.
M. INCORPORATED BY REFERENCE TO OUR QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED JULY 1, 2000:
10.25 Participation Agreement dated as of June 9, 2000 for the $60
million master operating lease agreement.
10.26 Lease Agreement dated as of June 9, 2000 for the $60 million
master operating lease agreement.
N. INCORPORATED BY REFERENCE TO OUR REPORT ON FORM 8-K DATED NOVEMBER
27, 2000:
2.1 Stock and Membership Interest Purchase Agreement, dated as of
October 30, 2000 by and among the stockholders of Redi-Cut Foods,
Inc., the members of Kansas City Salad, L.L.C., the members of
K.C. Salad Real Estate, L.L.C., Performance Food Group Company and
K.C. Salad Holdings, Inc. (Pursuant to Item 601(b)(2) of
Regulation S-K, the schedules of this agreement are omitted, but
will be provided supplementally to the Securities and Exchange
Commission upon request.)
35
Exhibit
Number Description
------ -----------
10.27 Amendment No. 1 to Rights Agreement dated June 30, 1999 between
Performance Food Group Company and American Stock Transfer Trust
Company, as subsequent Rights Agent.
10.28 Amendment No. 2 to Rights Agreement dated November 22, 2000
between Performance Food Group Company and American Stock Transfer
Trust Company, as subsequent Rights Agent.
O. INCORPORATED BY REFERENCE TO OUR ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 30, 2000:
10.29 First Amendment to Certain Operative Agreements dated as of
December 13, 2000.
10.30 Second Amendment to Certain Operative Agreements dated as of
December 13, 2000.
P. INCORPORATED BY REFERENCE TO OUR QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED MARCH 31, 2001:
10.31 Third Amendment to Certain Operative Agreements and consent dated
as of March 6, 2001.
10.32 Trust Indenture between Fresh Advantage, Inc. and First Union
National Bank dated as of February 1, 2001.
10.33 Confirmation of Guaranty between Performance Food Group Company
and First Union National Bank dated as of February 1, 2001.
10.34 Amendment No. 1 of Irrevocable Letter of Credit with First Union
National Bank dated as of February 1, 2001.
Q. INCORPORATED BY REFERENCE TO OUR REGISTRATION STATEMENT ON FORM
S-4 (NO 333-61612)
3.1 Restated Charter of Registrant
R. INCORPORATED BY REFERENCE TO OUR QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED JUNE 30, 2001:
10.35 Second Amendment to Certain Operative Agreements and Consent dated
as of April 27, 2001.
10.36 Receivables Purchase Agreement dated July 3, 2001, by and among
PFG Receivables Corporation, as Seller, - Performance Food Group
Company, as Servicer, Jupiter Securitization Corporation and Bank
One, NA as Agent. (Schedules and other exhibits are omitted from
this filing, but the Registrant will furnish supplemental copies
of the omitted material to the Securities and Exchange Commission
upon request.)
S. INCORPORATED BY REFERENCE TO OUR REPORT ON FORM 8-K DATED
SEPTEMBER 10, 2001:
2.2 Agreement and Plan of Merger, dated as of August 9, 2001, by and
among Fresh International Corp., Performance Food Group Company
and PFGC Acquisition, Inc. (Pursuant to Item 601(b)(2) of
Regulation S-K, the schedules of this agreement are omitted, but
will be provided supplementally to the Securities and Exchange
Commission upon request.)
T. INCORPORATED BY REFERENCE TO OUR REPORT ON FORM 8-K/A DATED
OCTOBER 15, 2001:
10.37 Indenture to be entered into, dated as of October 16, 2001,
between Performance Food Group Company and Bank One Trust Company,
N.A.
10.38 First Supplemental Indenture to be entered into, dated as of
October, 16, 2001, between Performance Food Group company and Bank
One Trust Company, N.A.
36
Exhibit
Number Description
------ -----------
U. INCORPORATED BY REFERENCE TO OUR REPORT ON FORM 8-K/A DATED
NOVEMBER 2, 2001:
10.39 Credit Agreement dated as of October 16, 2001, by and among
Performance Food Group Company, as Borrower, the Lenders referred
to therein, First Union National Bank, as Administrative Agent,
and Merrill Lynch Capital Corporation as Syndication Agent.
10.40 Guaranty Agreement dated as of October 16, 2001, among certain
subsidiaries of Performance Food Group Company in favor of First
Union National Bank, as Administrative Agent.
V. FILED HEREWITH:
10.41 First Amendment to Credit Agreement dated as of December 18, 2001,
among Performance Food Group Company, the lenders party thereto
and First Union National Bank.
10.42 1993 Employee Stock Incentive Plan (restated electronically for
SEC filing purposes only)
12 Schedule of Earnings to Fixed Charges.
21 List of Subsidiaries.
23.1 Consent of Independent Auditors.
(b) Report on Form 8-K:
We filed a Form 8-K/A on October 15, 2001 and November 2, 2001,
during the quarter ended December 29, 2001, to report our
acquisition of Fresh Express. Both reports contained unaudited pro
forma condensed consolidated financial statements reflecting our
acquisition of Fresh Express and the issuance of common stock and
Convertible Notes.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on March
28, 2002.
PERFORMANCE FOOD GROUP COMPANY
By: /s/ C. Michael Gray
--------------------
C. Michael Gray
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ C. Michael Gray President, Chief Executive Officer and March 28, 2002
------------------- Director (Principal Executive Officer)
C. Michael Gray
/s/ Roger L. Boeve Executive Vice President and Chief March 28, 2002
------------------ Financial Officer (Principal Financial
Roger L. Boeve Officer and Principal Accounting
Officer)
/s/ Robert C. Sledd Chairman and Director March 28, 2002
-------------------
Robert C. Sledd
/s/ Charles E. Adair Director March 28, 2002
--------------------
Charles E. Adair
/s/ Fred C. Goad, Jr. Director March 28, 2002
---------------------
Fred C. Goad, Jr.
/s/ Timothy M. Graven Director March 28, 2002
---------------------
Timothy M. Graven
/s/ H. Allen Ryan Director March 28, 2002
-----------------
H. Allen Ryan
/s/ John E. Stokely Director March 28, 2002
-------------------
John E. Stokely
38
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Performance Food Group Company:
We have audited the accompanying consolidated balance sheets of Performance Food
Group Company and subsidiaries (the "Company") as of December 29, 2001 and
December 30, 2000, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the fiscal years in the
three-year period ended December 29, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Performance Food
Group Company and subsidiaries as of December 29, 2001 and December 30, 2000,
and the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended December 29, 2001, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial statements, the
accompanying consolidated balance sheet as of December 30, 2000 and the related
consolidated statements of earnings, shareholders' equity and cash flows for the
fiscal year then ended have been restated.
As discussed in Note 16 to the consolidated financial statements, effective July
1, 2001, the Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 141, Business Combinations, and certain provisions of
SFAS No. 142, Goodwill and Other Intangible Assets, as required for goodwill and
intangible assets resulting from business combinations consummated after June
30, 2001.
/s/ KPMG LLP
Richmond, Virginia
March 26, 2002
F-1
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share amounts) 2001 2000
------------------------------------------------------- ----------- ------------
(Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 68,274 $ 18,530
Trade accounts and notes receivable, net, including retained
interest in securitized receivables 140,851 167,814
Inventories 176,245 123,586
Prepaid expenses and other current assets 11,406 4,364
Income taxes receivable 12,181 -
Deferred income taxes 8,832 10,332
Total current assets 417,789 324,626
Property, plant and equipment, net 247,197 143,142
Goodwill, net of accumulated amortization of $15,625 and $9,025 425,186 234,421
Other intangible assets, net of accumulated amortization of $6,950 and $2,840 179,126 4,890
Other assets 8,493 3,192
Total assets $ 1,277,791 $ 710,271
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Outstanding checks in excess of deposits $ 50,996 $ 36,724
Current installments of long-term debt 1,879 1,966
Trade accounts payable 183,457 133,285
Accrued expenses 111,702 49,769
Income taxes payable - 7,310
Total current liabilities 348,034 229,054
Long-term debt, excluding current installments 270,594 114,492
Deferred income taxes 50,966 9,701
Total liabilities 669,594 353,247
Shareholders' equity
Preferred stock, $.01 par value; 5,000,000 shares authorized,
no shares issued, preferences to be defined when issued - -
Common stock, $.01 par value; 100,000,000 shares authorized,
43,768,462 and 35,480,336 shares issued and outstanding 438 355
Additional paid-in capital 453,419 243,408
Retained earnings 155,528 115,045
Loan to leveraged employee stock ownership plan (1,188) (1,784)
Total shareholders' equity 608,197 357,024
Commitments and contingencies
Total liabilities and shareholders' equity $ 1,277,791 $ 710,271
See accompanying notes to consolidated financial statements.
F-2
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts) 2001 2000 1999
---------------------------------------- ------------- ----------- -------------
(Restated)
Net sales $ 3,237,248 $ 2,605,468 $ 2,055,598
Cost of goods sold 2,780,128 2,254,394 1,773,632
Gross profit 457,120 351,074 281,966
Operating expenses 381,135 302,176 242,625
Operating profit 75,985 48,898 39,341
Other income (expense):
Interest expense (8,807) (6,593) (5,388)
Loss on sale of receivables (1,445) - -
Nonrecurring merger expenses - - (3,812)
Gain on sale of investment - - 768
Other, net (438) (66) 342
Other expense, net (10,690) (6,659) (8,090)
Earnings before income taxes 65,295 42,239 31,251
Income tax expense 24,812 16,051 12,000
Net earnings $ 40,483 $ 26,188 $ 19,251
Weighted average common shares outstanding 37,957 28,336 27,544
Basic net earnings per common share $ 1.07 $ 0.92 $ 0.70
Weighted average common shares and dilutive
potential common shares outstanding 39,328 29,539 28,437
Diluted net earnings per common share $ 1.03 $ 0.89 $ 0.68
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Loan to Total
Common Stock paid-in Retained leveraged shareholders'
(Dollar amounts in thousands) Shares Amount capital earnings ESOP equity
----------------------------- ---------- ------ ------- -------- ------ -------
Balance at January 2, 1999 26,917,546 $ 270 $ 89,053 $ 70,631 $ (2,869) $ 157,085
Issuance of shares for acquisitions 607,856 6 8,504 - - 8,510
Employee stock option, incentive
and purchase plans and related
income tax benefits 698,900 6 4,983 - - 4,989
Principal payments on loan to
leveraged ESOP - - - - 534 534
Distributions of pooled company - - - (1,025) - (1,025)
Net earnings - - - 19,251 - 19,251
Balance at January 1, 2000 28,224,302 282 102,540 88,857 (2,335) 189,344
Proceeds from offering of common stock 6,440,000 64 124,333 - - 124,397
Issuance of shares for acquisitions 1,274,688 13 23,353 - - 23,366
Repurchases of common stock (958,600) (10) (11,897) - - (11,907)
Employee stock option, incentive
and purchase plans and related
income tax benefits 499,946 6 5,079 - - 5,085
Principal payments on loan to
leveraged ESOP - - - - 551 551
Net earnings, restated - - - 26,188 - 26,188
Balance at December 30, 2000, restated 35,480,336 355 243,408 115,045 (1,784) 357,024
Proceeds from offering of common stock 5,750,000 58 143,333 - - 143,391
Issuance of shares for acquisitions 2,087,338 21 59,726 - - 59,747
Employee stock option, incentive
and purchase plans and related
income tax benefits 450,788 4 6,952 - - 6,956
Principal payments on loan to
leveraged ESOP - - - - 596 596
Net earnings - - - 40,483 - 40,483
Balance at December 29, 2001 43,768,462 $ 438 $ 453,419 $ 155,528 $ (1,188 ) $ 608,197
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands) 2001 2000 1999
----------------------------- --------- ------------ --------
(Restated)
Cash flows from operating activities:
Net earnings $ 40,483 $ 26,188 $ 19,251
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation 21,716 13,879 11,081
Amortization 10,265 3,998 3,056
Loss (gain) on disposal of property, plant and equipment 1,140 302 (32)
Deferred income taxes 13,239 (1,520) 226
ESOP contributions applied to principal of ESOP debt 596 551 534
Gain on sale of investment - - (768)
Changes in operating assets and liabilities, net of effects
of companies acquired:
Decrease (increase) in trade accounts and notes receivable,
including proceeds received of $78.0 million from the sale of
undivided interests in receivables under the
receivables purchase facility 92,077 (38,009) 213
Increase in (21,543) (11,112) (15,519)
inventories
Decrease in prepaid expenses and other current assets 470 174 6
Increase in trade accounts payable, net 9,314 7,217 17,161
Increase in accrued expenses 6,413 6,565 7,118
Increase (decrease) in income taxes payable, net (8,949) 3,164 4,676
---------- -------------- ---------
Net cash provided by operating activities 165,221 11,397 47,003
---------- -------------- ---------
Cash flows used in investing activities, net of effects of companies acquired:
Net cash paid for acquisitions (395,439) (124,193) (18,066)
Purchases of property, plant and equipment (30,136) (30,992) (26,006)
Proceeds from sale of property, plant and equipment 3,160 1,382 1,061
Decrease (increase) in intangibles and other assets (447) 110 (366)
Proceeds from sale of investment - - 1,563
---------- -------------- ---------
Net cash used in investing activities (422,862) (153,693) (41,814)
---------- -------------- ---------
Cash flows from financing activities:
Increase (decrease) in outstanding checks in excess of deposits 12,093 22,398 (20,124)
Net proceeds from (payments on) revolving credit facility (46,998) 12,004 13,317
Proceeds from issuance of Industrial Revenue Bonds - 3,455 4,640
Principal payments on long-term debt (2,172) (812) (9,176)
Proceeds from issuance of long-term debt 202,157 600 -
Debt issuance costs (8,042) - -
Proceeds from issuance of common stock 143,391 124,397 -
Repurchases of common stock - (11,907) -
Distributions of pooled company - - (1,025)
Employee stock option, incentive and purchase plans
and related income tax benefits 6,956 5,085 4,989
Net cash provided by (used in) financing activities 307,385 155,220 (7,379)
Net increase (decrease) in cash and cash equivalents 49,744 12,924 (2,190)
Cash and cash equivalents, beginning of year 18,530 5,606 7,796
---------- -------------- ---------
Cash and cash equivalents, end of year $ 68,274 $ 18,530 $ 5,606
========== ============== =========
See accompanying notes to consolidated financial statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2001 and December 30, 2000
1. DESCRIPTION OF BUSINESS
Performance Food Group Company and subsidiaries (the "Company") markets
and distributes over 44,000 national and propriety brand food and
non-food products to approximately 33,000 customers in the foodservice
or "food-away-from-home" industry. In addition, the Company is a major
processor of fresh-cut produce marketed and distributed to retail and
foodservice customers. The Company services both of the major customer
types in the foodservice industry: "street" foodservice customers,
which include independent restaurants, hotels, cafeterias, schools,
healthcare facilities and other institutional customers; and
multi-unit, or "chain," customers, which include regional and national
quick-service and casual-dining restaurants.
The Company services these customers through three operating segments:
broadline foodservice distribution ("Broadline"); customized
foodservice distribution ("Customized"); and fresh-cut produce
processing ("Fresh-cut"). Broadline markets and distributes more than
39,000 national and proprietary brand food and non-food products to a
total of approximately 32,000 street and chain customers. Broadline
consists of 14 operating locations that design their own product mix,
distribution routes and delivery schedules to accommodate the needs of
a large number of street and chain customers whose individual purchases
vary in size. Customized focuses on serving casual-dining chain
restaurants. These customers generally prefer a centralized point of
contact that facilitates item and menu changes, tailored distribution
routing and customer service. The Customized distribution network
distributes nationwide and internationally from five distribution
facilities. Fresh-cut purchases, processes, packages and distributes a
variety of packaged, ready-to-eat salads and other fresh-cut produce to
food retailers and to third-party distributors for resale primarily to
quick-service restaurants located throughout the United States.
Fresh-cut operations are conducted at nine processing facilities.
The Company uses a 52/53-week fiscal year ending on the Saturday
closest to December 31. The fiscal years ended December 29, 2001,
December 30, 2000 and January 1, 2000 are referred to herein as 2001,
2000 and 1999, respectively. All share and per-share data has been
adjusted to reflect the two-for-one common stock split that the Company
paid on April 30, 2001. (See Note 10.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Performance Food Group Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated.
(B) REVENUE RECOGNITION
Sales are recognized upon the shipment of goods to the customer.
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of less than three months to be cash equivalents.
(D) ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts and notes receivable represent receivables from
customers in the ordinary course of business. These amounts are
recorded net of the allowance for doubtful accounts in the accompanying
consolidated balance sheets. The allowance for doubtful accounts is
based upon the expected collectibility of accounts receivable. At
December 29, 2001 and December 30, 2000, allowances for doubtful
accounts were $9.2 million and $4.8 million, respectively.
F-6
(E) INVENTORIES
The Company values inventory at the lower of cost or market using both
the first-in, first-out and last-in, first-out ("LIFO") methods.
Approximately 6% of the Company's inventories are accounted for using
the LIFO method. Inventories consist primarily of food and non-food
products.
(F) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of
property, plant and equipment is calculated primarily using the
straight-line method over the estimated useful lives of the assets,
which range from three to 39 years.
When assets are retired or otherwise disposed of, the costs and related
accumulated depreciation are removed from the accounts. The difference
between the net book value of the asset and proceeds from disposition
is recognized as a gain or loss. Routine maintenance and repairs are
charged to expense as incurred, while costs of betterments and renewals
are capitalized.
(G) INCOME TAXES
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes, which requires the use
of the asset and liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the
tax basis of assets and liabilities and their reported amounts. Future
tax benefits, including net operating loss carryforwards, are
recognized to the extent that realization of such benefits is more
likely than not.
(H) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price of an acquired
business over the fair value of the underlying net tangible and
intangible assets. Other intangible assets consist of trade names,
non-compete agreements, customer lists, patents and debt issuance
costs. In June 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 142, Goodwill and Other Intangible Assets. In
accordance with SFAS No. 142, goodwill and other intangible assets with
indefinite lives resulting from business combinations completed
subsequent to June 30, 2001 have not been amortized. Goodwill and other
intangible assets of the Company existing prior to June 30, 2001 are
carried at cost less accumulated amortization. Amortization on those
assets was computed using the straight-line method over the economic
lives of the respective assets, generally five to 40 years. In 2002,
SFAS No. 142 requires goodwill and other intangible assets with
indefinite lives to be tested for impairment at least annually, and
written off, if impaired, rather than being amortized as previous
accounting standards required. The impact of the adoption of SFAS No.
142 is discussed in more detail in Note 16.
(I) NET EARNINGS PER COMMON SHARE
Basic net earnings per common share ("EPS") is computed by dividing net
income available to common shareholders (numerator) by the
weighted-average number of common shares outstanding (denominator)
during the year. Diluted EPS is calculated using the weighted-average
number of common shares and dilutive potential common shares
outstanding during the year. In computing diluted EPS, the average
stock price for the year is used in determining the number of shares
assumed to be repurchased upon the exercise of stock options. These
stock options were issued under the stock option plans described in
Note 14. Options to purchase approximately 898,000 shares were
outstanding at December 29, 2001, but were not included in the
computation of diluted shares for 2001, because the exercise prices of
these options were greater than the average market price of common
shares for 2001. The exercise price of these options ranged from $28.08
to $34.38. In October 2001, the Company issued $201.3 million aggregate
principal amount of 5 1/2% convertible subordinated notes due in 2008
(the "Convertible Notes"). See Note 9 for further details on the
Convertible Notes. For 2001, approximately 1.3 million common share
equivalents, weighted for the portion of the year for which they were
outstanding, and interest expense of approximately $1.6 million, net of
taxes, associated with the Convertible Notes, were excluded from the
calculation of diluted shares because of their antidilutive effect on
EPS.
F-7
(J) STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but
does not require, companies to record compensation costs for
stock-based compensation plans using a fair-value based method of
accounting for employee stock options and similar equity instruments.
The Company has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of grant over the
amount an employee must pay to acquire the stock (see Note 14). The
Company has adopted the disclosure requirements of SFAS No. 123.
(K) ACCOUNTING ESTIMATES
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the amounts reported. The most significant estimates used by
management are related to the accounting for the allowance for doubtful
accounts, the retained interest in securitized receivables, inventory
valuation allowances, goodwill and other intangible assets,
depreciation and amortization, and tax liabilities. Actual results may
differ from these estimates.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade accounts and
notes receivable, outstanding checks in excess of deposits, trade
accounts payable and accrued expenses approximate their fair values due
to the relatively short maturities of those instruments. The carrying
value of the Company's floating-rate, long-term debt approximates fair
value due to the variable nature of the interest rates charged on such
borrowings. The Company's fixed-rate, long-term debt consists primarily
of $201.3 million of Convertible Notes and $50.0 million of 6.77%
Senior Notes (the "Senior Notes"). The fair value of the Convertible
Notes is estimated at approximately $259.8 million at December 29,
2001, based on available market information. The Company estimates the
fair value of its Senior Notes using a discounted cash flow analysis
based on borrowing rates as of December 29, 2001 and December 30, 2000.
At December 29, 2001 and December 30, 2000, the fair value of the
Senior Notes is estimated to be approximately $51.4 million and $51.0
million, respectively.
(M) IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability
test is performed using undiscounted net cash flows generated by the
individual operating location.
3. CORRECTIONS OF ACCOUNTING ERRORS
In March 2002, the Company announced that it had identified certain
accounting errors at one of its operating subsidiaries in its broadline
segment. The errors resulted primarily from the failure of the
accounting staff at this subsidiary to properly reconcile its
accounting records to supporting detail and their failure to
appropriately account for intercompany transactions with a division of
this subsidiary, which resulted in an understatement of cost of goods
sold for the subsidiary. The effect of the correction of the errors was
to reduce previously reported net income by $693,000 for 2000. The
consolidated financial statements as of and for the year ended December
30, 2000 and notes thereto included in this annual report on Form 10-K
have been restated to include the effects of the corrections of these
errors, as follows:
F-8
2000 2000
------------- --------
As previously
(In thousands, except per share amounts) reported Restated
--------------------------------------------- ----------------- ------------------
Net sales $ 2,605,468 $ 2,605,468
Cost of goods sold 2,253,277 2,254,394
Gross profit 352,191 351,074
Operating profit 50,015 48,898
Earnings before income taxes 43,356 42,239
Income tax expense 16,475 16,051
Net earnings 26,881 26,188
Basic earnings per common share 0.95 0.92
Diluted earnings per common share 0.91 0.89
In light of the Company's identification of the accounting errors and
its restatement of its financial condition, results of operations and
cash flows for the year ended December 30, 2000 included in this annual
report on Form 10-K and the restatement of previously reported results
of operations for the first three quarters of 2001, the Company
believed it was appropriate to obtain waivers of certain possible
breaches of representations or warranties or failures to comply with
covenants contained in the Receivables Facility, the revolving credit
facility and the master operating lease facilities. The Company has
obtained those waivers.
4. CONCENTRATION OF SALES AND CREDIT RISK
Two of the Company's customers, Outback Steakhouse, Inc. ("Outback")
and Cracker Barrel Old Country Stores, Inc. ("Cracker Barrel"), account
for a significant portion of the Company's consolidated net sales. Net
sales to Outback accounted for approximately 15%, 16% and 16% of
consolidated net sales for 2001, 2000 and 1999, respectively. Net sales
to Cracker Barrel accounted for approximately 14%, 16% and 17% of
consolidated net sales for 2001, 2000 and 1999, respectively. At
December 29, 2001, amounts receivable from these two customers
represented approximately 10% of accounts receivable.
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The remainder of the Company's customer base includes a
large number of individual restaurants, national and regional chain
restaurants and franchises, and other institutional customers. The
credit risk associated with trade receivables is minimized by the
Company's large customer base and ongoing control procedures that
monitor customers' creditworthiness.
5. BUSINESS COMBINATIONS
On October 16, 2001, the Company acquired all of the outstanding stock
of Fresh International Corp. and its subsidiaries, collectively "Fresh
Express." Based in Salinas, California, Fresh Express sells packaged,
ready-to-eat salads under its "Fresh Express" label. With five
processing facilities located throughout the United States, Fresh
Express processes, packages and distributes its products nationwide to
food retailers such as Albertson's, Kroger, Safeway and Wal-Mart, as
well as to foodservice distributors and operators and quick-service
restaurants such as Taco Bell. The Company believes that the
acquisition of Fresh Express will allow the Company to increase its
sales of fresh-cut produce through continued product innovation,
expanded geographic coverage, expanded customer relationships and
enhanced purchasing leverage. The Company paid approximately $296.4
million, net of cash acquired, for Fresh Express. In addition, in
connection with the acquisition of Fresh Express, the Company entered
into an earnout agreement whereby it will be required to pay the former
shareholders of Fresh Express up to $10.0 million in cash if Fresh
Express achieves certain operating targets during a three-year period
following the acquisition.
On September 10, 2001, the Company acquired all the outstanding common
stock of Springfield Foodservice Corporation ("Springfield"), a
privately owned broadline foodservice distributor based in Springfield,
Massachusetts. Springfield provides products and services to
traditional foodservice accounts in a region
F-9
covering New England and portions of New York State. The Company
believes that its acquisition of Springfield will allow it to develop a
contiguous Northeast market by connecting the regions served by two of
the Company's other subsidiaries with the regions served by
Springfield, and adds a distributor with a history of growth in a
densely populated market. The Company paid approximately $80.7 million
for Springfield consisting of approximately $41.0 million in cash and
issued approximately 1.3 million shares of its common stock valued at
$31.30 per share. The value of the common shares issued was determined
based on the lower of $31.30 or the average of the closing sales price
of the Company's common stock on the Nasdaq stock market for 25
consecutive trading days ending three days prior to the closing date of
the acquisition. In addition, in connection with the acquisition, the
Company entered into an earnout agreement whereby it will be required
to pay a former shareholder of Springfield up to $3.9 million as
additional purchase price over a three-year period if Springfield
achieves certain operating targets, payable in cash and shares of the
Company's common stock.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed in the Fresh Express and Springfield
acquisitions at the dates of acquisition. The allocations of the excess
purchase price of the Fresh Express and Springfield acquisitions are
preliminary and subject to final adjustment.
Fresh Express Springfield
(In thousands) At October 16, 2001 At September 10, 2001
-------------- ------------------- ---------------------
Current assets $ 82,088 $ 31,128
Property and equipment 96,973 3,162
Intangible assets with indefinite lives:
Goodwill 107,130 60,741
Trade name 49,500 -
------------ ------------
Total intangible assets with indefinite 156,630 60,741
------------ ------------
lives
Intangible assets with definite lives:
Customer relationships 59,400 3,716
Non-compete agreements - 685
Trade name 5,700 7,519
------------ ------------
Total intangible assets with definite lives 65,100 11,920
------------ ------------
Other assets 5,201 -
------------ ------------
Total assets acquired 405,992 106,951
------------ ------------
Current liabilities (70,563) (20,005)
Long-term debt (1,087) (1,189)
Deferred income taxes (27,708) (5,021)
Total liabilities assumed (99,358) (26,215)
------------ ------------
Net assets acquired $ 306,634 $ 80,736
============ ============
Fresh Express' intangible assets with definite lives have a
weighted-average useful life of approximately 21 years, composed of the
following intangible assets and their respective weighted-average
useful lives: customer relationships, 20 years and trade name, 30
years. Fresh Express' goodwill of $107.1 million was assigned to the
fresh-cut segment and is not deductible for tax purposes.
In connection with the acquisition of Fresh Express, the Company
adopted a plan for integration of the business that included closure of
certain Fresh Express facilities and consolidation of some
administrative functions and offices. A reserve of $8.9 million was
established to provide for certain costs of this plan. This accrual was
recorded as a part of the allocation of the purchase price of Fresh
Express. The accrual included $4.0 million for employee separation,
$2.6 million for building exit costs, $1.1 million for building
carrying costs and $1.2 million other costs, including professional and
legal fees. In 2001, $739,000 of professional fees had been charged
against the reserve.
Springfield's intangible assets with definite lives have a
weighted-average useful life of approximately 27 years, composed of the
following intangible assets and their respective weighted-average
useful lives: customer relationships, 15 years; non-compete agreements,
five years; and trade name, 30 years. Springfield's goodwill of $60.7
million was assigned to the broadline segment and is not deductible for
tax purposes.
On April 2, 2001, the Company acquired all of the outstanding stock of
Empire Seafood Holding Corp. and Empire Imports, Inc., collectively
"Empire Seafood," a privately owned distributor and processor of
seafood.
F-10
Based in Miami, Florida, Empire Seafood processes, markets and
distributes a broad array of seafood directly to cruise lines,
independent restaurants and other foodservice operators, primarily in
Florida. The Company paid approximately $75.0 million for Empire
Seafood, consisting of approximately $54.3 million in cash, net of cash
acquired, and issued approximately 803,000 shares of its common stock,
valued at $24.42 per share. In addition, in connection with the
acquisition, the Company entered into an earnout agreement whereby it
will be required to pay certain former shareholders of Empire Seafood
up to $7.5 million as additional purchase price over a three-year
period if Empire Seafood achieves certain operating targets, payable in
cash and shares of the Company's common stock. The acquisition of
Empire Seafood was accounted for using the purchase method. The excess
of the purchase price over the fair value of tangible net assets
acquired was approximately $68.2 million and is being amortized on a
straight-line basis over estimated lives ranging from five to 40 years.
The allocation of the excess purchase price is preliminary and subject
to final adjustment.
Also in 2001, the Company paid a total of approximately $3.8 million in
cash and issued approximately 15,000 shares of its common stock for the
acquisition of other businesses in 2001 and to the former shareholders
of Carroll County Foods, Inc. ("Carroll County"), State Hotel Supply
Company, Inc. and AFFLINK Incorporated (formerly Affiliated Paper
Companies, Inc., "AFFLINK"), which were acquired in 2000, 1999 and 1998
respectively, as a result of certain contractual obligations in the
purchase agreements related to those acquisitions.
On December 13, 2000, the Company acquired the common stock and
membership interests of Redi-Cut Foods, Inc. and its affiliates, Kansas
City Salad, L.L.C. and K.C. Salad Real Estate, L.L.C., collectively,
"Redi-Cut," a privately owned processor of fresh-cut produce with
facilities in Franklin Park, Illinois, a suburb of Chicago, and Kansas
City, Missouri. Redi-Cut provides fresh-cut produce mainly to
third-party distributors for resale primarily to quick-service
restaurants and other sectors of the "food away from home" industry. On
August 4, 2000, the Company acquired the common stock of Carroll
County, a privately owned broadline foodservice distributor based in
New Windsor, Maryland. Carroll County provides products and services to
traditional foodservice accounts in a region that includes Baltimore,
Maryland and Washington, D.C. In 2000, the Company paid a total of
approximately $124.2 million, net of cash acquired, and issued a total
of approximately 1.3 million shares of its common stock for the
acquisitions of Redi-Cut and Carroll County and to the former
shareholders of Dixon Tom-A-Toe Companies, Inc. ("Dixon") and AFFLINK,
which were acquired in 1999 and 1998, respectively, as a result of
certain contractual obligations in the purchase agreements related to
those acquisitions. In connection with the Carroll County acquisition,
the Company entered into an earnout agreement whereby it is required to
pay the former shareholders of Carroll County up to approximately $3.8
million in additional cash or shares of the Company's common stock if
Carroll County achieves certain operating targets during a four-year
period following the acquisition. The acquisitions of Carroll County
and Redi-Cut have been accounted for using the purchase method;
therefore, the acquired assets and liabilities have been recorded at
their estimated fair values at the dates of acquisition. The excess of
the purchase price over the fair value of tangible net assets acquired
in these acquisitions was approximately $132.1 million and is being
amortized on a straight-line basis over estimated lives ranging from
five to 40 years.
The consolidated statements of earnings and cash flows reflect the
results of the Fresh Express, Springfield, Empire Seafood, Redi-Cut and
Carroll County acquisitions from the dates of acquisition through
December 29, 2001. The unaudited consolidated results of operations on
a pro forma basis as though these acquisitions had been consummated as
of the beginning of 2000 are as follows:
(In thousands, except per share amounts) 2001 2000
---------------------------------------- --------------- ---------------
Net sales $ 3,796,873 $ 3,501,011
Gross profit 583,132 518,957
Net earnings 52,878 36,983
Basic net earnings per common share 1.21 0.85
Diluted net earnings per common share 1.14 0.83
The pro forma results are presented for information purposes only and
are not necessarily indicative of the results that would have occurred
had these acquisitions been consummated as of the beginning of 2000.
The above pro forma results include amortization expense of $4.3
million and $4.4 million for 2001 and 2000, respectively, related to
the acquisitions of Empire Seafood, Redi-Cut and Carroll County that
will not continue in future years as a result of the Company's adoption
of SFAS No. 142.
F-11
6. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for 2001, 2000, and
1999 are as follows:
(In thousands) 2001 2000 1999
-------------- ----------- ---------- ---------
Cash paid during the year for:
Interest $ 9,424 $ 6,648 $ 5,323
============ =========== ==========
Income taxes $ 15,169 $ 12,278 $ 7,126
============ =========== ==========
Effects of companies acquired:
Fair value of assets acquired 604,933 $ 172,107 49,097
Fair value of liabilities assumed (149,747) (24,548) (22,521)
Stock issued for acquisitions (59,747) (23,366) (8,510)
------------ ----------- ----------
Net cash paid for acquisitions $ 395,440 $ 124,193 $ 18,066
============ =========== ==========
7. ACCOUNTS RECEIVABLE
In July 2001, the Company entered into a receivables purchase facility
(the "Receivables Facility"), under which PFG Receivables Corporation,
a wholly owned, special-purpose subsidiary of the Company, sold an
undivided interest in certain of the Company's trade receivables. PFG
Receivables Corporation was formed for the sole purpose of buying
receivables generated by certain of the Company's operating units, and
selling an undivided interest in those receivables to a financial
institution. Under the Receivables Facility, the Company's operating
units transfer a portion of their accounts receivable to PFG
Receivables Corporation, which in turn, subject to certain conditions,
may from time to time sell an undivided interest in these receivables
to a financial institution. The Company's operating units continue to
service the receivables on behalf of the financial institution at
estimated market rates. Accordingly, the Company has not recognized a
servicing asset or liability. The amount of the undivided interest in
the receivables owned by the financial institution cannot exceed $90.0
million at any one time.
The Company received approximately $78.0 million of proceeds from the
sale of the undivided interest in receivables sold under the
Receivables Facility in 2001. At December 29, 2001, securitized
accounts receivable totaled approximately $116.0 million, which
includes $78.0 million sold to a financial institution and derecognized
from the consolidated balance sheet and includes the Company's residual
interest in accounts receivable ("Residual Interest") of $38.0 million,
which is included in accounts receivable. The Residual Interest
represents the Company's retained interest in receivables held by PFG
Receivables Corporation, and was measured using the estimated
discounted cash flows of the underlying accounts receivable based on
estimated collections and a discount rate equivalent to the Company's
incremental borrowing rate. The loss on sale of the undivided interest
in receivables of approximately $1.4 million in 2001 is included in
other expense, net, in the consolidated statements of earnings and
represents the Company's cost of securitizing those receivables with
the financial institution.
The Company records the sale of the undivided interest in accounts
receivable to the financial institution in accordance with SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Accordingly, at the time the undivided
interest in receivables is sold, the receivables are removed from the
Company's balance sheet. The Company records a loss on the sale of the
undivided interest in these receivables, which includes a discount,
based upon the receivables' credit quality and a financing cost for the
financial institution, based upon a 30-day commercial-paper rate. At
December 29, 2001, the rate under the Receivables Facility was
approximately 2.55%.
The key economic assumptions used to measure the Residual Interest at
the date of securitization and at December 29, 2001, were a discount
rate of 4.48% and 3.00%, respectively, and an estimated life of
approximately 1.5 months. At December 29, 2001, an immediate adverse
change in the discount rate or estimated life of 10% and 20%, with
other factors remaining constant, would result in a reduction in the
fair value of the Residual Interest and corresponding increase in the
loss on sale of receivables of approximately $20,000 and $41,000,
respectively.
F-12
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 29, 2001 and December 30,
2000 consist of the following:
(In thousands) 2001 2000
-------------- ------------- ---------------
Land $ 26,761 $ 6,240
Buildings and building improvements 123,550 102,197
Transportation equipment 20,879 20,123
Warehouse and plant equipment 103,225 58,434
Office equipment, furniture and fixtures 40,731 30,575
Leasehold improvements 18,439 2,932
Construction-in-process 7,401 3,233
-------------- -----------------
340,986 223,734
Less accumulated depreciation and amortization 93,789 80,592
-------------- -----------------
Property plant and equipment, net $ 247,197 $ 143,142
=============== =================
9. LONG-TERM DEBT
Long-term debt as of December 29, 2001 and December 30, 2000 consists
of the following:
(In thousands) 2001 2000
-------------- -------------- ---------------
Convertible notes $ 201,250 $ -
Revolving credit facility - 46,998
Senior notes 50,000 50,000
Industrial Revenue Bonds 15,765 15,094
ESOP loan 1,188 1,784
Other notes payable 4,270 2,582
-------------- ---------------
Total long-term debt 272,473 116,458
Less current installments 1,879 1,966
-------------- ---------------
Long-term debt, excluding current installments $ 270,594 $ 114,492
============== ===============
Convertible Notes
In October 2001, the Company issued approximately $201.3 million
aggregate principal amount of 5 1/2% convertible subordinated notes due
in 2008. The net proceeds from the issuance of the Convertible Notes
and proceeds from the Company's concurrent offering of common stock,
discussed in Note 10, were used to repay the Company's borrowings
outstanding under its existing revolving credit facility and to fund
the acquisition of Fresh Express, described in Note 5. The Convertible
Notes are subordinated to all existing and future senior debt and are
convertible at any time until maturity into shares of the Company's
common stock at a conversion price of $32.95 per share, subject to
adjustment. The Convertible Notes are redeemable at the Company's
option, in whole or in part, at any time on or after October 16, 2004.
Each holder of the Convertible Notes has the right to cause the Company
to repurchase all of such holder's Convertible Notes at 100% of their
principal amount plus accrued interest upon a change of control of the
Company, as defined in the indenture governing the Convertible Notes,
and upon the occurrence of certain other events. Interest is payable
semiannually. The Company paid approximately $6.7 million for debt
issuance costs related to the Convertible Notes. The debt issuance
costs are being amortized to interest expense using the straight-line
method.
Revolving Credit Facility
In October 2001, the Company entered into a $200.0 million revolving
credit facility (the "New Credit Facility") with several financial
institutions, which replaced the Company's existing $85.0 million
credit facility and $5.0 million working capital line of credit. The
New Credit Facility expires in 2006 and bears interest at a floating
rate equal to, at the Company's election, the agent bank's prime rate
or a spread over LIBOR, which varies based upon the Company's leverage
ratio, as defined in the credit agreement. The New Credit Facility has
a commitment fee, ranging from 0.20% to 0.25% of the average daily
unused portion of the total facility, based on the Company's leverage
ratio, as defined in the credit agreement. The New Credit Facility also
requires the maintenance of certain financial ratios as defined in the
credit agreement and contains customary events of default. The New
Credit Facility allows for the issuance of up to $40.0 million of
standby letters of credit, which reduce borrowings available under the
New Credit Facility. At December 29, 2001, the Company had
approximately $14.1 million of outstanding letters of credit under the
New Credit Facility. The New Credit
F-13
Facility also requires that the Company's existing subsidiaries and,
subject to limited exceptions, future subsidiaries, guarantee all of
the Company's borrowings, letters of credit and other obligations under
the New Credit Facility. At December 29, 2001, the Company had no
borrowings outstanding under the New Credit Facility.
Senior Notes
In May 1998, the Company issued $50.0 million of unsecured 6.77% Senior
Notes due May 8, 2010 in a private placement. Interest is payable
semi-annually. The Senior Notes require the maintenance of certain
financial ratios, as defined, regarding debt to capital, fixed charge
coverage and minimum net worth. Proceeds of the issuance were used to
repay amounts outstanding under the Company's credit facilities and for
general corporate purposes.
Industrial Revenue Bonds
In November 1999, prior to its acquisition by the Company, Redi-Cut
issued Tax Exempt Multi-Modal Industrial Development Revenue Bonds. The
proceeds from the sale of these bonds, totaling $7.0 million, were used
to finance the acquisition, construction, installation and equipment of
Redi-Cut's fresh-cut produce processing facility in Kansas City,
Missouri. Interest on these bonds is payable monthly. The bonds are
subject to annual mandatory redemptions from June 2001 and continuing
through 2020. Interest on the bonds adjusts weekly and was
approximately 1.80% per annum at December 29, 2001. The bonds are
secured by a letter of credit issued by a commercial bank.
In March 1999, one of the Company's subsidiaries issued $9.0 million of
Industrial Revenue Bonds to finance the construction of a
produce-processing facility. In January 2001, these bonds were
refinanced with the proceeds of $9.0 million taxable revenue bonds in
order to free the Company from certain restrictive covenants applicable
to the subsidiary that issued the tax-exempt bonds. Like the tax-exempt
bonds, these taxable bonds bear interest at a rate determined weekly by
the remarketing agent for the bonds, are secured by a letter of credit
issued by a commercial bank and mature in March 2019. The interest rate
for these bonds was approximately 2.05% per annum at December 29, 2001.
ESOP Loan
The Company sponsors a leveraged employee stock ownership plan that was
financed with proceeds of a note payable to a commercial bank (the
"ESOP loan"). The ESOP loan is secured by the common stock of the
Company acquired by the employee stock ownership plan and is guaranteed
by the Company. The loan is payable in quarterly installments of
$170,000, which includes interest based on LIBOR plus a spread over
LIBOR (3.21% per annum at December 29, 2001). The loan matures in 2003.
Maturities of long-term debt are as follows:
(In thousands)
--------------
2002 $ 1,879
2003 2,610
2004 901
2005 448
2006 340
Thereafter 266,295
----------------
Total long-term debt $ 272,473
================
F-14
10. SHAREHOLDERS' EQUITY
Shares Authorized
On May 2, 2001 the shareholders of the Company approved an increase to
the number of authorized shares of common stock from 50,000,000 shares
to 100,000,000 shares.
Stock Split
On April 11, 2001, the Company's Board of Directors declared a
two-for-one stock split effected as a 100% stock dividend. The record
date of the stock dividend was April 23, 2001, and the stock dividend
was distributed to shareholders on April 30, 2001. All references to
the number of common shares, per common share amounts, stock option
data and market prices of the Company's common stock in this annual
report on Form 10-K have been restated to give retroactive effect to
the stock split for all periods presented.
Stock Offerings
On October 16, 2001, the Company completed the offering of 5,750,000
shares of its common stock at an offering price of $26.36 per share.
The proceeds from this offering of approximately $143.4 million, after
deducting underwriting discounts and estimated offering expenses, and
from the concurrent offering of Convertible Notes, described in Note 9,
were used to repay the Company's borrowings outstanding under its
existing revolving credit facility and to fund the acquisition of Fresh
Express (see Note 5).
In December 2000, the Company completed its offering of 6,440,000
shares of its common stock at an offering price of $20.50 per share.
The proceeds from this offering of approximately $124.4 million, after
deducting underwriting discounts and estimated offering expenses, were
used to fund the cash portion of the purchase price of Redi-Cut and
repay amounts outstanding under our existing credit facility. (See Note
5.)
Shareholders' Rights Plan
In May 1997, the Company's board of directors approved a shareholders'
rights plan. A dividend of one stock purchase right (a "Right") per
common share was distributed to shareholders of record on May 30, 1997.
Common shares issued subsequent to the adoption of the rights plan
automatically have Rights attached to them. Under certain
circumstances, each Right entitles the shareholders to one-hundredth of
one share of preferred stock, par value $.01 per share, at an initial
exercise price of $50 per Right. The Rights will be exercisable only if
a person or group acquires 15% or more of the Company's outstanding
common stock. Until the Rights become exercisable, they have no
dilutive effect on the Company's net earnings per common share. The
Company can redeem the Rights, which are non-voting, at any time prior
to them becoming exercisable at a redemption price of $.001 per Right.
The Rights will expire in May 2007, unless redeemed earlier by the
Company.
11. LEASES
The Company leases various warehouse and office facilities and certain
equipment under long-term operating lease agreements that expire at
various dates. At December 29, 2001, the Company is obligated under
operating lease agreements to make future minimum lease payments as
follows:
(In thousands)
--------------
2002 $ 33,011
2003 26,032
2004 19,067
2005 14,364
2006 9,728
Thereafter 28,690
----------
Total minimum lease payments $ 130,892
==========
Total rental expense for operating leases in 2001, 2000 and 1999 was
approximately $31.4 million, $24.5 million and $16.3 million,
respectively.
F-15
In September 1997, the Company entered into its first master operating
lease facility. In February 2001, the Company increased this master
operating lease facility from $47.0 million to $55.0 million. This
facility was used to construct four distribution centers. Two of these
distribution centers became operational in early 1999, one became
operational in the second quarter of 2000, and the remaining property
became operational in the second quarter of 2001. Under this facility,
the lessor owns the distribution centers, incurs the related debt to
construct the properties, and thereafter leases each property to the
Company. The Company has entered into leases for each of the
properties. All of these leases end on September 12, 2002, including
extensions. Upon the expiration of the leases, the Company may seek to
renew the leases. If the Company is unable to or chooses not to renew
the leases, it has the option of facilitating the sale of the
properties to third parties or purchasing the properties at their
original cost. If the properties are sold to third parties for less
than 88% of their aggregate original cost, the Company is obligated,
under a residual value guarantee, to pay the lessor an amount equal to
the shortfall. These residual value guarantees are not included in the
above table of future minimum lease payments. There can be no assurance
that the Company will be able to renew the leases or sell the
properties to third parties, and the Company may require substantial
additional financing if it is required to purchase these properties
upon the expiration of the master operating lease facility. Because of
the location and condition of each of the four properties referred to
above, the Company believes that the anticipated fair value of these
properties could eliminate or substantially reduce the exposure under
the residual value guarantee, although there can be no assurance that
the Company will not be required to make payments to satisfy this
guarantee. Through December 29, 2001, construction expenditures by the
lessor under this facility were approximately $50.1 million.
In June 2000, the Company entered into a $60.0 million master operating
lease facility to construct or purchase various office buildings and
distribution centers. As of December 29, 2001, two distribution centers
had been purchased, one office building had been completed and one
distribution center had become operational under this facility. Under
this facility, the lessor owns the properties, incurs the related debt
to construct or purchase the properties and thereafter leases each
property to the Company. The Company has entered into leases for each
of these properties. The leases relating to the four properties
referred to above, as well as any other leases that the Company may
enter into under this facility in the future, end on June 9, 2005. Upon
the expiration of the leases, the Company may seek to renew the leases.
If the Company is unable to or chooses not to renew the leases, it has
the option of facilitating the sale of the properties to third parties
or purchasing the properties at their original cost. If the properties
are sold to third parties for less than 85% of their aggregate original
cost, the Company is obligated, under a residual value guarantee, to
pay the lessor an amount equal to the shortfall. These residual value
guarantees are not included in the above table of future minimum lease
payments. There can be no assurance that the Company will be able to
renew the leases or sell the properties to third parties, and the
Company may require substantial additional financing if it is required
to purchase these properties upon the expiration of the master
operating lease facility. Because of the location and condition of each
of the four properties referred to above, the Company believes that the
anticipated fair value of these properties could eliminate or
substantially reduce the exposure under the residual value guarantee
with respect to these four properties, although there can be no
assurance that the Company will not be required to make payments to
satisfy this guarantee either with respect to these four properties or
any other properties which may be constructed or purchased in the
future under this facility. Through December 29, 2001, construction
expenditures by the lessor under this facility were approximately $32.6
million.
F-16
12. INCOME TAXES
Income tax expense consists of the following:
(In thousands) 2001 2000 1999
-------------- ----------- ----------- ----------
(Restated)
Current:
Federal $ 16,173 $ 13,953 $ 11,677
State 274 692 747
----------- ----------- ----------
16,447 14,645 12,424
----------- ----------- ----------
Deferred:
Federal 7,546 1,331 (608)
State 819 75 184
----------- ----------- ----------
8,365 1,406 (424)
----------- ----------- ----------
Total income tax expense $ 24,812 $ 16,051 $ 12,000
=========== =========== ==========
During the year ended December 29, 2001, the Company recorded
approximately $28.0 million of net deferred tax liabilities resulting
from the allocations of the purchase prices of the Fresh Express,
Springfield and Empire Seafood acquisitions.
The effective income tax rates for 2001, 2000 and 1999 were 38.0%,
38.0% and 38.4%, respectively. Actual income tax expense differs from
the amount computed by applying the applicable U.S. Federal corporate
income tax rate of 35% to earnings before income taxes as follows:
(In thousands) 2001 2000 1999
-------------- ---------- ---------- ---------
(Restated)
Federal incomes taxes computed at statutory rate $ 22,853 $ 14,783 $ 10,938
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income tax 742 617 211
benefit
Non-deductible expenses 362 145 306
Tax credits (280) (281) (353)
Losses attributable to S-corporation periods - - 283
Amortization of goodwill 1,063 548 340
Other, net 72 239 275
----------- ---------- ---------
Total income tax expense $ 24,812 $ 16,051 $ 12,000
=========== ========== =========
Deferred income taxes are recorded based upon the tax effects of
differences between the financial statement and tax bases of assets and
liabilities and available tax loss and credit carryforwards. Temporary
differences and carryforwards that created significant deferred tax
assets and liabilities at December 29, 2001 and December 30, 2000 were
as follows:
F-17
(In thousands) 2001 2000
-------------- ---------- -----------
Deferred tax assets:
Allowance for doubtful accounts $ 1,990 $ 2,430
Inventories 643 661
Accrued employee benefits 4,540 2,701
Self-insurance reserves 2,007 1,836
Deferred income 620 1,221
Net operating loss carryforwards 3,107 586
Tax credit carryforwards 584 555
Other accrued expenses 63 1,246
----------- ------------
Total deferred tax assets 13,554 11,236
Deferred tax liabilities:
Property, plant and equipment 18,436 8,048
Basis difference in intangible assets 34,209 2,543
Other 3,043 14
----------- ------------
Total deferred tax liabilities 55,688 10,605
----------- ------------
Net deferred tax asset (liability) $ (42,134) $ 631
=========== ============
The net deferred tax asset (liability) is presented in the December 29,
2001 and December 30, 2000 consolidated balance sheets as follows:
(In thousands) 2001 2000
-------------- ----------- ------------
Current deferred tax asset $ 8,832 $ 10,332
Noncurrent deferred tax liability (50,966) (9,701)
----------- ------------
Net deferred tax asset (liability) $ (42,134) $ 631
=========== ============
The net operating loss carryforwards expire in years 2010 through 2021.
The Company has a state income tax credit carryforward of approximately
$584,000 that expires in 2005. The Company believes the deferred tax
assets will more likely than not be realized.
13. EMPLOYEE BENEFITS
Employee Savings and Stock Ownership Plan
The Company sponsors the Performance Food Group Company Employee
Savings and Stock Ownership Plan (the "ESOP"). The ESOP consists of two
components: a leveraged employee stock ownership plan and a defined
contribution plan covering substantially all full-time employees.
In 1988, the ESOP acquired 1,821,398 shares of the Company's common
stock from existing shareholders, financed with assets transferred from
predecessor plans and the proceeds of the ESOP loan, discussed in Note
9. The Company is required to make contributions to the ESOP equal to
the principal and interest amounts due on the ESOP loan. Accordingly,
the outstanding balance of the ESOP loan is included in the Company's
consolidated balance sheets as a liability with an offsetting amount
included as a reduction of shareholders' equity.
The ESOP expense recognized by the Company is equal to the principal
portion of the required payments. Interest on the ESOP loan is recorded
as interest expense. The Company contributed approximately $680,000 to
the ESOP per year in 2001, 2000 and 1999. These amounts included
interest expense on the ESOP loan of approximately $75,000, $129,000
and $146,000 in 2001, 2000 and 1999, respectively. The release of ESOP
shares is based upon debt-service payments. Upon release, the shares
are allocated to participating employees' accounts. At December 29,
2001, 1,720,295 shares had been allocated to participant accounts and
363,038 shares were held as collateral for the ESOP loan. All ESOP
shares are considered outstanding for earnings-per-share calculations.
F-18
Employees participating in the defined contribution component of the
ESOP may elect to contribute between 1% and 15% of their qualified
compensation under the provisions of Internal Revenue Code Section
401(k). In 2001, the Company matched 100% of the first 2% of employee
contributions, and 50% of the next 2% of employee contributions, for a
total match of 3%. In 2000, the Company matched 100% of the first 1% of
employee contributions, and 50% of the next 3% of employee
contributions, for a total match of 2.5%. In 1999, the Company matched
100% of the first 1% of employee contributions, and 50% of the next 2%
of employee contributions, for a total match of 2%. Total matching
contributions were approximately $3.4 million, $2.1 million, and $1.3
million for 2001, 2000 and 1999, respectively. The Company, at the
discretion of the board of directors, may make additional contributions
to the ESOP. The Company made no discretionary contributions under the
defined contribution portion of the ESOP in 2001, 2000 or 1999.
Employee Health Benefit Plans
The Company sponsors a self-insured, comprehensive health benefit plan
designed to provide insurance coverage to all full-time employees and
their dependents. The Company accrues its estimated liability for these
self-insured benefits, including an estimate for incurred but not
reported claims. This accrual is included in accrued expenses in the
consolidated balance sheets. The Company provides no post-retirement
benefits to former employees.
14. STOCK COMPENSATION PLANS
At December 29, 2001, the Company had four stock-based compensation
plans, which are described in the following paragraphs. In accordance
with APB No. 25, no compensation expense has been recognized for the
Company's stock option plans and stock purchase plan. Had compensation
expense for those plans been determined based on the fair value at the
grant date, consistent with the method in SFAS No. 123, the Company's
net earnings and net earnings per common share would have been reduced
to the following pro forma amounts:
(In thousands except per share amounts) 2001 2000 1999
--------------------------------------- ----------- ------------- -----------
(Restated)
Net earnings As reported $ 40,483 $ 26,188 $ 19,251
Pro forma 34,962 23,325 17,311
Basic net earnings per common share As reported $ 1.07 $ 0.92 $ 0.70
Pro forma 0.92 0.82 0.63
Diluted net earnings per common share As reported $ 1.03 $ 0.89 $ 0.68
Pro forma 0.89 0.79 0.61
The fair value of each option was estimated at the grant date using the
Black-Scholes option-pricing model. The following weighted-average
assumptions were used for all stock option plan grants in 2001, 2000
and 1999, respectively: risk-free interest rates of 4.70%, 5.28% and
5.28%; expected volatilities of 43.1%, 43.1% and 44.3%; expected option
lives of 6.7 years, 6.3 years and 7.2 years; and expected dividend
yields of 0% in each year.
Stock Option and Incentive Plans
The Company sponsors the 1989 Nonqualified Stock Option Plan (the "1989
Plan"). The options granted under this plan vest ratably over a
four-year period from date of grant. At December 29, 2001, 105,920
options were outstanding under the 1989 Plan, all of which were
exercisable. The options have terms of 10 years from the date of grant.
No grants have been made under the 1989 Plan since July 21, 1993.
The Company also sponsors the 1993 Outside Directors Stock Option Plan
(the "Directors' Plan"). A total of 210,000 shares have been authorized
in the Directors Plan. The Directors Plan provides for an initial grant
to each non-employee member of the board of directors of 10,500 options
and an annual grant of 5,000 options at the then current market price.
Options granted under the Directors' Plan totaled 25,000 in 2001,
30,500 in 2000
F-19
and 20,000 in 1999. These options have an exercise price equal to the
market price of the Company's common stock on the grant date, vest one
year from the date of grant and have terms of 10 years from the grant
date. At December 29, 2001, 174,500 options were outstanding under the
Directors' Plan, of which 149,500 were exercisable.
The 1993 Employee Stock Incentive Plan (the "1993 Plan") provides for
the award of up to 5,650,000 shares of common stock to officers, key
employees and consultants of the Company. Awards under the 1993 Plan
may be in the form of stock options, stock appreciation rights,
restricted stock, deferred stock, stock purchase rights or other
stock-based awards. No grants of common stock or related rights were
made in 2001, 2000 or 1999. Stock options granted under the 1993 Plan
have an exercise price equal to the market price of the Company's
common stock at the grant date. With the exception of the special
options granted in 2001 discussed below, the stock options granted
under the 1993 Plan have terms of 10 years and the grants for 2001,
2000 and 1999 vest four years from the date of grant. In 2001, special
stock options were granted to some executives and key employees under
the 1993 Plan. These options have vesting schedules dependent upon the
Company's stock price and earnings. If the Company fails to achieve all
vesting milestones, the unvested options become vested and exercisable
approximately 10 years from the date of grant. These options have an
exercise price equal to the market price of the Company's common stock
at the grant date. Stock options granted under the 1993 Plan totaled
1,114,566; 1,215,202; and 518,280 for 2001, 2000 and 1999,
respectively. At December 29, 2001, 3,829,328 options were outstanding
under the 1993 Plan, of which 502,015 were exercisable.
A summary of the Company's stock option activity and related
information for all stock option plans for 2001, 2000 and 1999 is as
follows:
2001 2000 1999
--------------------- ----------------------- ------------------------
Weighted Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- ------- --------- --------
Outstanding at
beginning of year 3,324,150 $ 10.34 2,560,080 $ 8.50 2,676,094 $ 6.33
Granted 1,139,566 27.85 1,245,702 13.10 538,280 12.76
Exercised (264,615) 5.61 (306,522) 5.80 (568,578) 2.40
Canceled (89,353) 14.59 (175,110) 10.98 (85,716) 8.63
--------- -------- --------- ------- --------- --------
Outstanding at
end of year 4,109,748 $ 15.40 3,324,150 $ 10.34 2,560,080 $ 8.50
========= ======== ========= ======= ========= ========
Options
exercisable at
year-end 757,435 $ 7.29 812,326 $ 6.09 569,470 $ 4.33
========= ======== ========= ======= ========= ========
Weighted-average fair
value of options
granted during
the year $ 14.21 $ 6.50 $ 6.92
======== ======= ========
F-20
The following table summarizes information about stock options outstanding at
December 29, 2001:
Options Outstanding Options Exercisable
------------------------------------------------------------------------- -------------------------
Weighted-
Average Weighted- Exercisable Weighted-
Number Remaining Average at Average
Range of Exercise Outstanding at Contractual Exercise Dec. 29, Exercise
Prices Dec. 29, 2001 Life Price 2001 Price
------------------------------------------------------------------------- -------------------------
$ 3.03 - $ 6.34 233,488 2.07 years $ 4.12 233,488 $ 4.12
$ 7.09 - $ 10.62 1,818,672 6.49 years 9.17 465,447 8.15
$ 11.44 - $ 16.00 692,088 7.65 years 13.21 58,500 13.12
$ 17.19 - $ 25.77 417,500 8.95 years 21.26 - -
$ 25.90 - $ 34.38 948,000 9.51 years 29.16 - -
---------- -------- --------- ---------- ------- --------
$ 3.03 - $ 34.38 4,109,748 $ 15.40 757,435 $ 7.29
========== ======== ========= ========== ======= ========
Employee Stock Purchase Plan
The Company maintains the Performance Food Group Employee Stock
Purchase Plan (the "Stock Purchase Plan"), which permits eligible
employees to invest through periodic payroll deductions, in the
Company's common stock at 85% of the lesser of the market price or the
average market price as defined in the plan document. The Company is
authorized to issue 1,225,000 shares under the Stock Purchase Plan.
Purchases under the Stock Purchase Plan are made twice a year, on
January 15th and on July 15th. At January 14, 2002, subscriptions under
the Stock Purchase Plan were outstanding for approximately 87,000
shares at $26.76 per share.
15. RELATED PARTY TRANSACTIONS
The Company leases land and buildings from certain shareholders and
members of their families. The Company made lease payments under these
leases of approximately $32,000, $1.2 million and $908,000 in 2001,
2000 and 1999, respectively. In January 2001, the unaffiliated owner
trust under one of the Company's master operating lease facilities
acquired the property from the shareholders and members of their
families, and the Company now leases that property from the owner
trust.
16. NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS
No. 141 requires that all business combinations initiated after June
30, 2001 be accounted for using the purchase method and specifies
criteria that intangible assets acquired in a business combination must
meet to be recognized and reported apart from goodwill. The Company
adopted SFAS No. 141 in the third quarter of 2001 with its acquisitions
of Fresh Express and Springfield.
Also in June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. The provisions of SFAS No. 142 require that goodwill
no longer be amortized, and that goodwill and other intangible assets
be tested for impairment upon adoption of the standard and at least
annually thereafter. The Company will be required to adopt the
provisions of SFAS No. 142 at the beginning of 2002, except for
goodwill and other intangible assets acquired in the Fresh Express and
Springfield acquisitions, for which the provisions of this standard
were effective at the acquisition dates. After full adoption of the
provisions of this standard at the beginning of 2002, the Company will
no longer record amortization expense for goodwill and any other
intangible assets with indefinite lives. The Company is also required
to perform an assessment of whether there is an indication that
goodwill and other intangible assets are impaired as of the beginning
of 2002. If applicable, any transitional impairment loss would be
recognized as a cumulative effect of a change in accounting principle
in the Company's consolidated statement of earnings in 2002. The
Company does not expect to record any transitional impairment loss as a
result of the adoption of SFAS No. 142. The provisions of SFAS No. 142
also require the Company to evaluate its existing goodwill and other
intangible assets that were acquired in purchase business combinations,
and to make any necessary reclassifications, in order to conform with
the new classification criteria in SFAS No. 141 for recognition apart
from goodwill. As of December 29, 2001, the Company's unamortized
goodwill was approximately $425.2 million. Amortization expense related
to goodwill was approximately $6.6 million and $3.1 million for 2001
and 2000, respectively.
F-21
17. INDUSTRY SEGMENT INFORMATION
The Company has three reportable segments: Broadline, Customized and
Fresh-cut. The accounting policies of the reportable segments are the
same as those described in Note 2.
Corporate &
(In thousands) Broadline Customized Fresh-cut Intersegment Consolidated
-------------- ----------- ------------- ----------- ------------- ------------
2001
Net external sales $ 1,641,052 $ 1,235,630 $ 360,566 $ - $ 3,237,248
Intersegment sales 12,496 - 42,110 (54,606) -
Operating profit 41,523 12,795 30,028 (8,361) 75,985
Total assets 477,474 101,681 596,967 101,669 1,277,791
Interest expense (income) 7,624 2,707 12,465 (13,989) 8,807
Loss (gain) on sale of 3,146 820 - (2,521) 1,445
receivables
Depreciation 10,301 2,474 8,320 621 21,716
Amortization 5,061 - 4,864 340 10,265
Capital expenditures 16,250 2,828 7,991 3,067 30,136
2000 (RESTATED)
Net external sales 1,367,454 $ 1,105,365 $ 132,649 $ - 2,605,468
Intersegment sales 4,062 - 25,802 (29,864) -
Operating profit 35,147 10,553 9,500 (6,302) 48,898
Total assets 345,064 122,601 218,390 24,216 710,271
Interest expense (income) 8,176 3,603 2,172 (7,358) 6,593
Depreciation 8,458 2,046 3,131 244 13,879
Amortization 3,271 - 633 94 3,998
Capital expenditures 16,372 1,601 11,363 1,656 30,992
1999
Net external sales $ 1,145,536 $ 823,742 $ 86,320 $ - $ 2,055,598
Intersegment sales 3,575 - 13,186 (16,761) -
Operating profit 30,167 9,333 5,009 (5,168) 39,341
Total assets 308,531 96,067 48,259 9,188 462,045
Interest expense (income) 6,953 2,447 260 (4,272) 5,388
Depreciation 7,054 1,934 1,947 146 11,081
Amortization 2,851 1 86 118 3,056
Capital expenditures 13,831 2,131 9,292 752 26,006
18. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is also involved in legal proceedings
and litigation arising in the ordinary course of business. In the
opinion of management, the outcome of such other proceedings and
litigation currently pending will not have a material adverse effect on
the Company's results of operations.
F-22
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Performance Food Group Company:
Under date of March 26, 2002, we reported on the consolidated balance sheets of
Performance Food Group Company and subsidiaries (the "Company") as of December
29, 2001 and December 30, 2000, and the related consolidated statements of
earnings, shareholders' equity and cash flows for each of the fiscal years in
the three-year period ended December 29, 2001, as contained in the 2001 annual
report to shareholders. These consolidated financial statements and our report
thereon are included in the 2001 annual report on Form 10-K. In connection with
our audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedule as listed in the accompanying
index. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material aspects, the information set forth therein.
/ s / KPMG LLP
Richmond, Virginia
March 26, 2002
S-1
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Beginning Ending
(In thousands) Balance Additions Deductions Balance
-------------- ------- ------------------------ ---------- -------
Charged Charged to
to Other
Expense Accounts
-----------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
January 1, 2000 $ 3,891 $ 2,702 $ 250 $ 2,366 $ 4,477
December 30, 2000 4,477 2,650 460 2,755 4,832
December 29, 2001 4,832 3,364 4,298 3,247 9,247
S-2