UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1998
Commission File No.: 0-22192
PERFORMANCE FOOD GROUP COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Tennessee 54-0402940
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
6800 Paragon Place, Suite 500
Richmond, Virginia 23230
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code (804) 285-7340
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
As of November 6, 1998, 12,581,055 shares of the Registrant's Common Stock were
outstanding.
Independent Accountants' Review Report
The Board of Directors and Shareholders
Performance Food Group Company:
We have reviewed the accompanying condensed consolidated balance sheet of
Performance Food Group Company and subsidiaries (the Company) as of
September 26, 1998, and the related condensed consolidated statements of
earnings for the three-month and nine-month periods ended September 26,
1998 and September 27, 1997, and the condensed consolidated statements of
cash flows for the nine-month periods ended September 26, 1998 and
September 27, 1997. These condensed consolidated financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Performance Food Group
Company and subsidiaries as of December 27, 1997, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
the year then ended (not presented herein); and in our report dated February 9,
1998, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 27, 1997 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
KPMG Peat Marwick LLP
Richmond, Virginia
October 23, 1998
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
September 26, December 27,
1998 1997
(Unaudited)
Assets
Current assets:
Cash $ 3,957 $ 3,653
Trade accounts and notes receivable, net 93,544 80,054
Inventories 84,029 72,951
Other current assets 4,121 2,936
Total current assets 185,651 159,594
Property, plant and equipment, net 86,721 71,810
Intangible assets, net 78,033 55,697
Other assets 2,068 1,782
Total assets 352,473 288,883
Liabilities and Shareholders' Equity
Current liabilities:
Outstanding checks in excess of deposits 20,342 19,859
Current installments of long-term debt 593 689
Accounts payable 83,925 67,455
Other current liabilities 25,253 18,807
Total current liabilities 130,113 106,810
Long-term debt, excluding current installments 71,873 44,577
Deferred income taxes 3,523 3,523
Total liabilities 205,509 154,910
Shareholders' equity 146,964 133,973
Total liabilities and shareholders' equity $ 352,473 $ 288,883
See accompanying notes to unaudited condensed consolidated financial statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (Unaudited)
(In thousands, except per share amounts)
<TABLE>
Three Months Ended Nine Months Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 415,288 $ 336,349 $ 1,157,441 $ 897,651
Cost of goods sold 359,883 294,334 1,007,793 784,641
Gross profit 55,405 42,015 149,648 113,010
Operating expenses 47,168 35,486 128,893 95,951
Operating profit 8,237 6,529 20,755 17,059
Other income (expense):
Interest expense (848) (514) (2,430) (1,385)
Other, net 135 84 192 268
Other expense, net (713) (430) (2,238) (1,117)
Earnings before income taxes 7,524 6,099 18,517 15,942
Income tax expense 2,837 2,353 7,069 6,153
Net earnings $ 4,687 $ 3,746 $ 11,448 $ 9,789
Basic net earnings per common share $ 0.37 $ 0.31 $ 0.91 $ 0.83
Weighted average common shares
outstanding 12,563 12,091 12,532 11,828
Diluted net earnings per common
share $ 0.36 $ 0.30 $ 0.88 $ 0.79
Weighted average common shares and
potential dilutive common shares
outstanding 13,099 12,673 13,048 12,344
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
Nine Months Ended
Sept. 26, Sept. 27,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 11,448 $ 9,789
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 7,690 5,841
ESOP contributions applied to principal of ESOP 369 349
Gain on disposal of property, plant and equipment (87) (46)
Gain on insurance settlement - (1,300)
Loss on write-off of leasehold improvements - 1,287
Changes in assets and liabilities, net of
effects of companies purchased 851 4,287
Net cash provided by operating activities 20,271 20,207
Cash flows from investing activities:
Purchases of property, plant and equipment (19,935) (6,167)
Proceeds from sale of property, plant and equipment 591 133
Net cash paid for acquisitions (23,730) (46,337)
Net proceeds from insurance settlement - 4,200
Increase in intangibles and other assets (272) (155)
Net cash used by investing activities (43,346) (48,326)
Cash flows from financing activities:
Increase (decrease) in outstanding checks in
excess of deposits (109) 3,180
Net borrowings (payments) on note payable to banks (19,786) 23,294
Repayment of promissory notes (7,278) -
Issuance of long-term debt 50,000 -
Principal payments on long-term debt (622) (480)
Stock option, incentive and employee stock purchase plans 1,174 1,464
Net cash provided by financing activities 23,379 27,458
Net increase (decrease) in cash 304 (661)
Cash at beginning of period 3,653 5,557
Cash at end of period $ 3,957 $ 4,896
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 1998 and September 27, 1997
1. Basis of Presentation
The accompanying condensed consolidated financial statements
of Performance Food Group Company and subsidiaries (the "Company")
are unaudited, with the exception of the December 27, 1997 condensed
consolidated balance sheet, which was derived from the audited
consolidated balance sheet in the Company's latest annual report on
Form 10-K. The unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial reporting, and in accordance with Rule
10-01 of Regulation S-X.
In the opinion of management, the unaudited condensed
consolidated financial statements contained in this report reflect all
adjustments, consisting of only normal recurring accruals, which are
necessary for a fair presentation of the financial position and the results
of operations for the interim periods presented. The results of operations
for any interim period are not necessarily indicative of results for the full
year.
These unaudited condensed consolidated financial statements,
note disclosures and other information should be read in conjunction
with the consolidated financial statements and notes thereto included in
the Company's latest annual report on Form 10-K.
2. Business Combinations
In early 1997, the Company acquired certain net assets of
McLane Foodservice-Temple, Inc. ("McLane Foodservice"), a wholly-
owned subsidiary of McLane Company, Inc., based in Temple, Texas.
McLane Foodservice had 1996 net sales of approximately $180 million.
The Company operates the former business of McLane Foodservice as
Performance Food Group of Texas, LP ("PFG of Texas") through
distribution centers in Temple and Victoria, Texas that provide food and
food-related products to traditional foodservice customers as well as
multi-unit chain restaurants and vending customers. The purchase price
of approximately $30.5 million was financed with proceeds from an
existing credit facility. Simultaneous with the closing, the Company also
purchased the distribution center located in Victoria, Texas from an
independent third party for approximately $1.5 million.
During 1997, the Company completed the acquisitions of a
number of foodservice distributors, including the acquisition of Tenneva
Foodservice, Inc. ("Tenneva") on April 11, 1997, Central Florida Finer
Foods, Inc. ("CFFF") on May 12, 1997, W.J. Powell Company
("Powell") on June 28, 1997 and AFI Food Service Distributors, Inc.
("AFI") on October 31, 1997. The operations of Tenneva and CFFF
have been combined with the operations of certain of the Company's
existing subsidiaries. Collectively, the four companies had 1996 net
sales of approximately $130 million. The aggregate purchase price of
the acquisitions was approximately $39 million, plus the assumption of
approximately $12 million of debt. The aggregate purchase price for the
acquisitions was financed by issuing 660,827 shares of the Company's
common stock, $7 million of promissory notes due January 2, 1998 and
the remainder with proceeds from an existing credit facility. The
aggregate consideration payable to the former shareholders of Powell and
AFI is subject to increase in certain circumstances.
On June 1, 1998, the Company acquired certain assets related to
the group and chemicals business of Affiliated Paper Companies, Inc.
("APC Group"), a privately owned marketing organization based in
Tuscaloosa, Alabama. APC Group provides procurement and
merchandising services for a variety of paper, disposable and sanitation
supplies to more than 300 independent distributors. On July 27, 1998,
the Company acquired the Virginia Foodservice Group ("VFG") based in
Richmond, Virginia, a division of a privately owned foodservice
distributor in which a member of the Company's management has a
minor ownership interest. VFG is a foodservice distributor primarily
serving traditional foodservice customers in the central Virginia market.
Collectively, these companies had 1997 net sales of approximately $60
million. The aggregate purchase price of these acquisitions was
approximately $24 million and was financed with proceeds from an
existing credit facility. The aggregate consideration payable to the
former shareholders of APC Group and VFG is subject to increase in
certain circumstances.
All of these acquisitions have been accounted for using the
purchase method and, accordingly, the acquired assets and liabilities
have been recorded at their estimated fair values at the dates of
acquisition. The excess of the purchase price over the fair value of
tangible net assets acquired in these acquisitions was approximately
$68.0 million and is being amortized on a straight-line basis over
estimated lives ranging from 5 to 40 years. The consolidated statements
of earnings and cash flows reflect the results of these acquired companies
from the dates of acquisition through September 26, 1998.
3. Long-term Debt
On May 8, 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 Notes require the maintenance of certain
financial ratios, as defined, in the note purchase agreement. Proceeds of
the issue were used to repay amounts outstanding under an existing
credit facility and for general corporate purposes.
4. Stockholders' Equity
On August 27, 1998, the Company's Board of Directors
authorized the repurchase of up to $10 million of the Company's
common stock for a one-year period. At September 26, 1998, no shares
had been repurchased under the plan.
5. Supplemental Cash Flow Information
Nine Months Ended
(amounts in thousands)
Sept. 26, Sept. 27,
1998 1997
Cash paid during the period for:
Interest $ 1,201 $ 1,233
Income taxes $ 7,181 $ 4,351
Effects of purchase of companies:
Fair value of assets acquired,
inclusive of intangibles
of $23,709 and $29,354 $ 33,290 $ 68,962
Liabilities assumed (9,560) (14,625)
Stock issued for acquisitions - (8,000)
Net cash paid for acquisitions $ 23,730 $ 46,337
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
The Company derives its revenue primarily from the sale of food
and food-related products to the foodservice, or "away-from-home
eating," industry. The foodservice industry consists of two major
customer types: "traditional" foodservice customers, consisting of
independent restaurants, hotels, cafeterias, schools, healthcare facilities
and other institutional customers, and "multi-unit chain" customers,
consisting of regional and national quick-service restaurants and casual
dining restaurants. Products and services provided to the Company's
traditional and multi-unit chain customers are supported by identical
physical facilities, vehicles, equipment, systems and personnel. The
principal components of the Company's expenses include cost of goods
sold, which represents the amount paid to manufacturers and growers for
products sold, and operating expenses, which include primarily labor-
related expenses, delivery costs and occupancy expenses.
Results of Operations
The following table sets forth, for the periods indicated,the components
of the condensed consolidated statements of earnings expressed as a
percentage of net sales:
Three Months Ended Nine Months Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 86.7 87.5 87.1 87.4
Gross profit 13.3 12.5 12.9 12.6
Operating expenses 11.3 10.6 11.1 10.7
Operating profit 2.0 1.9 1.8 1.9
Other expense, net 0.2 0.1 0.2 0.1
Earnings before income taxes 1.8 1.8 1.6 1.8
Income tax expense 0.7 0.7 0.6 0.7
Net earnings 1.1% 1.1% 1.0% 1.1%
Comparison of Periods Ended September 26, 1998 to September 27, 1997.
Net sales increased 23.5% to $415.3 million for the three months
ended September 26, 1998 (the "1998 quarter") from $336.3 million for
the three months ended September 27, 1997 (the "1997 quarter"). Net
sales increased 28.9% to $1.2 billion for the nine months ended
September 26, 1998 (the "1998 period") from $897.7 million for the nine
months ended September 27, 1997 (the "1997 period"). Net sales in the
Company's existing operations increased 17% over the 1997 quarter and
18% over the 1997 period, while acquisitions contributed the remaining
6% and 11% of the Company's total sales growth for the quarter and
period, respectively. Inflation amounted to approximately 2% for the
1998 quarter and 1% for the 1998 period.
Gross profit increased 31.9% to $55.4 million in the 1998 quarter
from $42.0 million in the 1997 quarter. Gross profit increased 32.4% to
$149.6 million in the 1998 period from $113.0 million in the 1997
period. Gross profit margin increased to 13.3% in the 1998 quarter
compared to 12.5% in the 1997 quarter and 12.9% in the 1998 period
compared to 12.6% in the 1997 period. The increase in gross profit
margin was due to a number of factors. During the second half of 1997
and 1998, the Company acquired a number of distribution and
merchandising companies that have higher gross margins than certain of
the Company's other subsidiaries. The improvement in gross profit
margin as a result of these acquisitions was offset by internal sales
growth during 1998 of certain of the Company's large multi-unit chain
customers, which grew at approximately 24% and 25% for the 1998
quarter and period, respectively. These large multi-unit chain customers
are generally higher-volume, lower gross margin accounts. Gross
margins were also negatively impacted by the Company's renegotiation
of its distribution agreement with its largest multi-unit customer in early
1997. Sales also grew internally in the Company's produce processing
operations approximately 44% and 52% during 1998 quarter and period,
respectively, which operations currently have slightly higher margins
than the Company's foodservice distribution subsidiaries.
Operating expenses increased 32.9% to $47.2 million in the 1998
quarter compared with $35.5 million in the 1997 quarter. Operating
expenses increased 34.3% to $128.9 million in the 1998 period from
$96.0 million in the 1997 period. As a percentage of net sales, operating
expenses increased to 11.3% in the 1998 quarter from 10.6% in the 1997
quarter and to 11.1% in the 1998 period from 10.7% in the 1997 period.
The increase in operating expenses as a percent of net sales primarily
reflects increased labor costs including recruiting and training additional
personnel, primarily in the transportation and warehouse areas which are
an integral part of the Company's distribution service. These increased
labor costs may continue depending upon economic and labor conditions
in the Company's various markets in which it operates. Operating
expenses as a percentage of net sales were also impacted by the
acquisition of APC Group which has a higher expense ratio than many of
the Company's other subsidiaries. The Company leased a 75,000 square
foot distribution center in Belcamp, Maryland to service the continued
growth of certain of the Company's multi-unit chain customers, which
became operational in February 1997. The Company incurred certain
start-up expenses for this facility in the 1997 period. Additionally, the
Company has expanded certain of its distribution centers during the 1998
period and is nearing completion of two new distribution centers which
are replacing older, less efficient facilities. The Company expects these
new facilities to become operational in the fourth quarter of 1998 and
first quarter of 1999.
Operating profit increased 26.1% to $8.2 million in the 1998
quarter from $6.5 million in the 1997 quarter. Additionally, operating
profit increased 21.7% to $20.8 million in the 1998 period from $17.1
million in the 1997 period. Operating profit margin increased to 2.0%
for the 1998 quarter from 1.9% for the 1997 quarter and decreased to
1.8% for the 1998 period from 1.9% for the 1997 period.
Other expense increased to $713,000 in the 1998 quarter from
$430,000 in the 1997 quarter and to $2.2 million for the 1998 period
from $1.1 million for the 1997 period. Other expense includes interest
expense, which increased to $848,000 in the 1998 quarter from $514,000
in the 1997 quarter. Interest expense increased to $2.4 million for the
1998 period from $1.4 million for the 1997 period. The increase in
interest expense is due to higher debt levels during the 1998 quarter and
period as a result of the Company's various acquisitions. Other expense
during the 1997 period also includes a $1.3 million gain from insurance
proceeds related to covered assets at one of the Company's processing
and distribution facilities which offset a $1.3 million writedown of
certain leasehold improvements associated with the termination of the
lease on one of the Company's distribution facilities.
Income tax expense increased to $2.8 million in the 1998 quarter
from $2.4 million in the 1997 quarter and to $7.1 million in the 1998
period from $6.2 million for the 1997 period, as a result of higher pre-tax
earnings. As a percentage of earnings before income taxes, the provision
for income taxes was 37.7% for the 1998 quarter and 38.2% for the 1998
period and 38.6% for both the 1997 quarter and period.
Net earnings increased 25.1% to $4.7 million in the 1998 quarter
compared to $3.7 million in the 1997 quarter. Net earnings increased
17.0% to $11.4 million in the 1998 period from $9.8 million in the 1997
period. As a percentage of net sales, net earnings remained at 1.1% in
the 1998 and 1997 quarter and decreased to 1.0% in the 1998 period
from 1.1% in the 1997 period.
Liquidity and Capital Resources
The Company has historically financed its operations and growth
primarily with cash flow from operations, borrowings under its credit
facility, operating leases, normal trade credit terms and the sale of the
Company's common stock. Despite the Company's large sales volume,
working capital needs are minimized because the Company's investment
in inventory is financed principally with accounts payable.
Cash provided by operating activities was $20.3 million and
$20.2 million for the 1998 and 1997 periods, respectively. The increase
in cash provided by operating activities resulted primarily from higher
net earnings and increased levels of trade payables and accrued expenses
offset by increased levels of accounts receivables and inventories.
Cash used by investing activities was $43.3 million for the 1998
period and $48.3 million for the 1997 period, respectively. Investing
activities consist primarily of additions to and disposals of property,
plant and equipment and the acquisition of businesses. The Company's
total capital expenditures for the 1998 period were $19.9 million,
including approximately $12.0 million for expansion of the customized
distribution centers in Lebanon, Tennessee, Dallas, Texas and
Gainesville, Florida. The Company anticipates that its total capital
expenditures, other than for acquisitions, for fiscal 1998 will be
approximately $23 million. Investing activities during the 1998 period
included $23.7 million expended for the acquisition of APC Group and
VFG. Investing activities during the 1997 period also included $46.3
million expended for the acquisition of PFG of Texas and Powell, net of
cash on hand, and $4.2 million of insurance proceeds received to cover
losses associated with one of the Company's processing and distribution
facilities.
Cash flows provided by financing activities was $23.4 million in
the 1998 period and $27.5 million for the 1997 period. Cash flows
during the 1998 period included $50.0 million of proceeds from the
issuance of 6.77% Senior Notes issued in May 1998. Cash flows in the
1998 period also included net repayments on a revolving credit facility
("Credit Facility") of $19.8 million, net of the repayment of $7.3 million
of promissory notes used to finance the acquisition of AFI. Cash flows
in the 1997 period included net borrowings on the Credit Facility of
$23.3 million which included $46.3 million for the Company's various
acquisitions, net of $23.0 million of repayments as a result of the reduced
working capital needs.
The Company has $30.0 million of borrowing capacity under its
Credit Facility with a commercial bank that expires in February 2001.
Approximately $19.2 million was outstanding under the Credit Facility
at September 26, 1998. The Credit Facility also supports up to $5.0
million of letters of credit. At September 26, 1998, the Company was
contingently liable for $4.8 million of outstanding letters of credit that
reduce amounts available under the Credit Facility. At September 26,
1998, the Company had $6.0 million available under the Credit Facility.
The Credit Facility bears interest at LIBOR plus a spread over LIBOR,
which varies based on the ratio of funded debt to total capital. At
September 26, 1998, the Credit Facility bore interest at 5.76%.
Additionally, the Credit Facility requires the maintenance of certain
financial ratios, as defined, regarding debt to tangible net worth, cash
flow coverage and current assets to current liabilities.
In September 1997, the Company completed a $42.0 million
master operating lease agreement to construct or purchase four
distribution centers planned to become operational in 1998. Under this
agreement, the lessor owns the distribution centers, incurs the related
debt to construct the facilities and thereafter leases each facility to the
Company. The Company has entered into a commitment to lease each
facility for a period beginning upon the completion of each facility and
ending on September 12, 2002, including extensions. Upon the
expiration of each lease, the Company has the option to renegotiate the
lease, sell the facility to a third party or to purchase the facility at its
original cost. If the Company does not exercise its purchase options, the
Company has significant residual value guarantees of each property. The
Company expects the fair value of the properties included in this
agreement to eliminate or substantially reduce the Company's exposure
under the residual value guarantees. At September 26, 1998,
construction has commenced on two facilities with expenditures to date
of approximately $13.2 million.
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 issue were used to
repay amounts outstanding under the Credit Facility and for general
corporate purposes.
Business Combinations
In early 1997, the Company acquired certain net assets of
McLane Foodservice, a wholly-owned subsidiary of McLane Company,
Inc., based in Temple, Texas. McLane Foodservice had 1996 net sales of
approximately $180 million. The Company operates the former business
of McLane Foodservice as PFG of Texas through distribution centers in
Temple and Victoria, Texas that provide food and food-related products
to traditional foodservice customers as well as multi-unit chain
restaurants and vending customers. The purchase price of approximately
$30.5 million was financed with proceeds from an existing credit facility.
Simultaneous with the closing, the Company also purchased the
distribution center located in Victoria, Texas from an independent third
party for approximately $1.5 million.
During 1997, the Company completed the acquisitions of a
number of foodservice distributors, including the acquisition of Tenneva
on April 11, 1997, CFFF on May 12, 1997, Powell on June 28, 1997 and
AFI on October 31, 1997. The operations of Tenneva and CFFF have
been combined with the operations of certain of the Company's existing
subsidiaries. Collectively, the four companies had 1996 net sales of
approximately $130 million. The aggregate purchase price of the
acquisitions was approximately $39 million, plus the assumption of
approximately $12 million of debt. The aggregate purchase price for the
acquisitions was financed by issuing 660,827 shares of the Company's
common stock, $7 million of promissory notes due January 2, 1998 and
the remainder with proceeds from an existing credit facility. The
aggregate consideration payable to the former shareholders of Powell and
AFI is subject to increase in certain circumstances.
On June 1, 1998, the Company acquired certain assets related to
the group and chemicals business of APC Group, a privately owned
marketing organization based in Tuscaloosa, Alabama. APC Group
provides procurement and merchandising services for a variety of paper,
disposable and sanitation supplies to more than 300 independent
distributors. On July 27, 1998, acquired VFG based in Richmond,
Virginia, a division of a privately owned foodservice distributor in which
a member of the Company's management has a minor ownership
interest. VFG is a foodservice distributor primarily servicing traditional
foodservice customers in the central Virginia market. Collectively, these
companies had 1997 net sales of approximately $60 million. The
aggregate purchase price of approximately $24 million was financed
with proceeds from an existing credit facility. The aggregate
consideration payable to the former shareholders of APC Group and
VFG is subject to increase in certain circumstances.
These acquisitions have been accounted for using the purchase
method and, accordingly, the acquired assets and liabilities have been
recorded at their estimated fair values at the date of acquisition. The
excess of the purchase price over the fair value of tangible net assets
acquired was approximately $68.0 million and is being amortized on a
straight-line basis over estimated lives ranging from 5 to 40 years.
Year 2000
State of Readiness
In mid 1997, the Company initiated a project to address any
business disruption related to data processing problems as a result of the
year 2000 issue. Initially, the project focused primarily on the
Company's information technology ("IT") systems. However the project
was subsequently expanded to include non-IT systems including
transportation and warehouse refrigeration systems, telecommunications,
utilities, etc. The project consists of a number of phases: awareness,
assessment, programming/testing and implementation. With respect to
IT systems, the Company has completed the first three phases and is
approximately 30% complete with the implementation phase. The
Company expects to complete the implementation phase for IT systems
during the third quarter of 1999. With respect to non-IT systems, the
Company is in the assessment phase to identify all critical systems
requiring remediation and upon completion of this assessment, will
develop a timetable for completion based upon that assessment. As part
of the year 2000 project, the Company has initiated communications with
its significant merchandise suppliers and major customers to assess their
state of readiness for the year 2000. A significant percentage of suppliers
and customers have provided the Company with written responses
regarding their state of year 2000 readiness. The Company is continuing
to evaluate key business processes to identify any additional non-IT
systems requiring remediation and to work with key suppliers and
customers in preparing for the year 2000. Despite this continuing effort,
the Company can provide no assurance that the IT and non-IT systems of
third party business partners with whom the Company relies upon will be
year 2000 compliant.
Costs
In addition to the year 2000 project, the Company has underway a
project to standardize the computer systems at nine of its distribution
subsidiaries, which operate in a distributed computing environment. The
decision to standardize the computer system used in these subsidiaries
was based on the Company's continued growth and need to capture
information to improve operating efficiencies and capitalize on the
Company's combined purchasing power. The plan to standardize these
systems was not accelerated by the year 2000 issue. Additionally, one of
the Company's distribution subsidiaries, which operates four distribution
facilities, processes information in a centralized computing environment.
Therefore, the Company's year 2000 remediation efforts have been
minimized by focusing its year 2000 programming on two primary
operating systems. The Company anticipates incurring approximately
$600,000 related to remediating its IT systems for year 2000 compliance,
of which the Company has incurred approximately $300,000 to date.
The Company has not completed quantifying the remediation costs
regarding non-IT systems. Year 2000 remediation costs are being
expensed as incurred over the life of the project and are not expected to
have a material effect on the Company's results of operations.
Risks and Contingency Plans
The Company is currently assessing the consequences of its IT
and non-IT remediation efforts not being completed timely or its efforts
not being successful. As part of this assessment process, the Company is
developing contingency plans including plans to address interruption of
merchandise and services supplied to customers and supplied by third
party business partners. The Company believes the most reasonably
likely worst case scenario related to the readiness of IT systems is that
the implementation of the year 2000 compliant system in all nine
subsidiaries may not be completed timely. The Company's contingency
plans in this case include backup plans to process transactions for non-
compliant subsidiaries through one of the Company's year 2000
compliant systems. The Company is still formulating these contingency
plans. With respect to risks associated with third party merchandise
suppliers, the Company believes the most reasonably likely worst case
scenario is that some of the Company's merchandise suppliers may have
difficulty filling orders and shipping products. The Company believes
the risk associated with merchandise suppliers' year 2000 readiness is
mitigated by the significant number of Company relationships with
alternative suppliers within various product categories, which could be
substituted in the event of non-compliance. The Company also believes
the number of non-compliant merchandise suppliers will be minimized
through its program of communicating with key suppliers and assessing
their state of year 2000 readiness. The Company has not yet completed
its identification and assessment of all non-IT systems requiring
remediation, including various service providers. As the Company's
year 2000 project continues, the Company will develop contingency
plans and identify alternative business processes and sources of supply
for goods and services.
The Company's project and related assessment of costs and risks
are based on current estimates and assumptions, including the outcome
of future events regarding the continued availability of certain resources,
the timing and effectiveness of third party remediation efforts and other
factors. There can be no assurance that the Company's contingency
plans or its efforts with respect to third party business partners will be
successful, which could have a material adverse effect on the Company's
financial position or results of operations.
Recently Issued Accounting Pronouncements
During 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information, which are
effective for periods beginning after December 15, 1997. The impact of
these accounting pronouncements is not expected to have a material
impact on the Company's financial position or results of operations.
Forward-Looking Statements
The Company has made certain forward-looking statements in
this quarterly report and in other contexts that are based on estimates and
assumptions and involve risks and uncertainties, including, but not
limited to, general economic conditions, the reliance on major customers,
the Company's anticipated growth, year 2000 compliance and other
financial issues. Whether such forward-looking statements, which
depend on these uncertainties and future developments, ultimately prove
to be accurate cannot be predicted.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders
during the quarter ended September 26, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits:
10.38 Fifth Amendment to Revolving Credit
Agreement dated as of July 8, 1996 by and among
Performance Food Group Company and First
Union National Bank.
15 Letter regarding unaudited financial
information from KPMG Peat Marwick LLP.
27 Financial Data Schedule (SEC only)
27.1 Financial Data Schedule (SEC only)
(b.) No reports on Form 8-K were filed during the
quarter ended September 26, 1998.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERFORMANCE FOOD GROUP COMPANY
(Registrant)
By: /s/ Roger L. Boeve
Roger L. Boeve
Executive Vice President &
Chief Financial Officer
Date: November 9, 1998
FIFTH AMENDMENT TO REVOLVING CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO REVOLVING CREDIT AGREEMENT is made as of this 31st
day of July, 1998 by and between PERFORMANCE FOOD GROUP COMPANY
(the "Borrower"), a Tennessee corporation whose mailing address is 6800
Paragon Place, Suite 500, Richmond, Virginia 23230, and FIRST UNION
NATIONAL BANK ("First Union"), formerly First Union National Bank of
Virginia, a national
banking association, as Administrative Agent and as the Lender. The
Borrower and First Union are parties to a Revolving Credit Agreement dated as
of July 8, 1996, as amended by an Amendment No. I to Revolving Credit
Agreement dated as of August 28, 1997, as amended by a Second Amendment
to Revolving Credit Agreement dated as of December 15, 1997, as amended by
a Third Amendment to Revolving Credit Agreement dated as of February 28,
1998 and as amended by a Fourth Amendment to Revolving Credit Agreement
dated as of May 7, 1998 (the Revolving Credit Agreement as so amended, the
"Agreement"). The Borrower has requested that First Union amend the
Agreement further as herein provided, and First Union is willing to do so upon
the terms and conditions set forth herein.
ACCORDINGLY, the Borrower and First Union covenant and agree
as follows:
1. Defined Terms. Capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to such terms in the
Agreement.
2. Representations and Warranties. Section 3.17 of the
Agreement is deleted in its entirety.
3. Negative Covenants. Section 5.1 of the Agreement is amended by
the addition of a new subparagraph (g) to read as follows:
(g) any Lien on or any sale or other disposition of any
"margin stock" as such term is defined in Regulation U of
the Board of Governors of the Federal Reserve System, 12
C.F.R. code sec.221.
4. Events of Default, Remedies and Waiver of Notice.
Paragraph (j) of Section
8.1 of the Agreement is amended to read as follows:
(j) The acquisition or purchase by it for investment
purposes of any equity or interest in any other Person,
including shares of stock or indebtedness of corporations,
except (i) investments in direct obligations of the United
States Government and certificates of deposit of United
States commercial banks having a tier I capital ratio of not
less than 6%, and then only in an amount not exceeding
10% of the issuing bank's unimpaired capital and surplus;
(ii) corporate repurchase agreements with respect to which
the obligors are (Y) United States commercial banks each
having combined capital, surplus and undivided profits of
not less than $500,000,000.00 or (Z) broker-dealers
having a rating of "A" or better by a nationally-recognized
rating agency; provided, that at any date the aggregate
amount invested by the Borrower in such repurchase
agreements shall not exceed $10,000,000.00 for any one
such agreement or $2,000,000.00 for any one such bank
or broker-dealer; and (iii) other investments in equity or
other securities, provided, the aggregate amount of such
investments does not exceed $5,000,000.00 at any time
outstanding.
5. Representations and Warranties. To induce First Union
to enter into this Agreement, the Borrower represents and warrants to
First Union as follows:
(a) The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of Tennessee
and has the corporate power and authority to conduct its business as now
conducted and as proposed to be conducted.
(b) The Borrower has full corporate power and authority to
enter into this Amendment and to incur the obligations provided for
herein, all of which have been duly authorized by all proper and
necessary corporate action.
(c) This Amendment, the Agreement as amended hereby, and
the Revolving Line of Credit Note constitute the valid and binding
obligations of the Borrower enforceable in accordance with their terms.
(d) There is no charter, bylaw or preference stock provision
of the Borrower and no provision of any existing mortgage, indenture,
contract or agreement binding on the Borrower or affecting its property
that would conflict with or in any way prevent the execution-, delivery
or carrying out of the terms of this Amendment, the Agreement as
amended hereby or the Revolving Line of Credit Note.
(e) The consolidated balance sheet of the Borrower as of
December 31, 1997 and the related consolidated statements of earnings,
shareholders' equity and cashflows for the period then ended certified
by KPMG Peat Marwick, LLP, heretofore delivered to First Union, are
complete and correct and fairly present the financial condition of the
Borrower and its Subsidiaries and the results of their operations and
cashflows as of the date and for the period referred to therein and have
been prepared in accordance with GAAP. There has been no material
adverse change in the financial condition or operations of the Borrower
and its Subsidiaries since the date of said balance sheet and there has
been no other material adverse change in the Borrower and its
Subsidiaries.
(f) No Event of Default has occurred and no event has
occurred and no condition exists which with the giving of notice or the
lapse of time or both would constitute such an Event of Default. No
consent of any other person not previously received and no consent or
authorization of, filing with or other act by or with respect to any
governmental authority is required in connection with the execution,
delivery or performance by the Borrower of, or the validity or
enforceability of this Fifth Amendment, the validity or enforceability of
the Agreement as amended hereby or the validity or enforceability of the
Revolving Line of Credit Note.
(g) Each of the representations and warranties contained in
Sections 3.7 through 3.21 of the Agreement is true and correct with the
same effect as though such representation was made as 'of the date of this
Amendment.
6. Prior Agreement. Except as otherwise expressly
amended by this Amendment, the Agreement is and
shall continue to be in full force and effect in
accordance with its terms. The Borrower and First
Union further covenant and agree that each reference
in any note, agreement or
other document to the Agreement shall be deemed to refer
to the Agreement as
amended by this Fifth Amendment and as it may be amended from time
to time hereafter.
7. Governing Law. This Amendment shall be governed by,
and construed and interpreted in accordance with, the laws of the
Commonwealth of Virginia.
IN WITNESS WHEREOF, Performance Food Group Company and
First Union National Bank have caused this Amendment to be executed
by their duly authorized officers, all as of the date first above written.
PERFORMANCE FOOD GROUP COMPANY
By /s/ Roger L. Boeve
Its Executive Vice President
FIRST UNION NATIONAL BANK
By /s/ Joyce Barry
Its Senior Vice President
Performance Food Group Company
Richmond, Virginia
Gentlemen:
Re: Registration Statements Nos. 333-12223 and 33-72400
With respect to the subject registration statements, we acknowledge
our awareness of the use therein of our report dated October 23, 1998
related to our review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report
is not considered a part of a registration statement prepared or
certified by an accountant or a report prepared or certified by an
accountant within the meaning of sections 7 and 11 of the Act.
Very truly yours,
KPMG Peat Marwick LLP
Richmond, Virginia
November 5, 1998
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