| PERFORMANCE FOOD GROUP CO described under “Item 1A 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 to persons acting on our behalf 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 statement to reflect future events or developments |
| The Company and its Business Strategy Performance Food Group, a Tennessee corporation, was founded in 1987 through the combination of various foodservice businesses and has grown internally through increased sales to existing and new customers and through acquisitions of existing businesses |
| Further discussion of acquisitions is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Combinations |
| ” Performance Food Group is the nation’s third largest Broadline foodservice distributor based on 2005 net sales |
| We market and distribute over 66cmam000 national and proprietary brand food and non-food products to approximately 44cmam000 customers |
| Our extensive product line and distribution system allow us to service both of the major customer types in the foodservice or “food-away-from-home” 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 casual and family dining, quick-service restaurants and other institutional customers |
| On June 28, 2005, we completed the sale of all our stock in the subsidiaries that formerly comprised our fresh-cut segment to Chiquita Brands International, Inc |
| ; accordingly, all amounts pertaining to our former fresh-cut segment are accounted for as a discontinued operation |
| Prior year amounts have been reclassified to conform with current year presentation for continuing operations |
| All amounts included within this Form 10-K, unless otherwise noted, refer only to our continuing operations |
| We service our customers through two operating segments |
| Note 19 to the consolidated financial statements in this Form 10-K presents financial information for these segments |
| Broadline Our Broadline distribution segment markets and distributes more than 63cmam000 national and proprietary brand food and non-food products to more than 43cmam000 customers, including street customers, such as independent restaurants, and certain corporate-owned and franchisee locations of chains such as Burger King, Church’s, Compass, Popeye’s 3 _________________________________________________________________ [46]Table of Contents and Subway |
| 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 within 250 miles from one of our 19 Broadline distribution facilities, which serve customers in the Eastern, Midwestern, Northeastern, Southern and Southeastern United States |
| Customized Our Customized distribution segment focuses on serving casual and family dining chain restaurants such as Cracker Barrel Old Country Store, Inc, Outback Steakhouse, Inc, Ruby Tuesday, Inc |
| 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 because we warehouse only those stock keeping units, or SKUs, specific to our Customized customers, and we make larger, more consistent deliveries |
| We have eight Customized distribution facilities located nationwide |
| Customized services 14 restaurant chains nationwide and three restaurant chains internationally |
| Growth Strategies Our business strategy is to grow our foodservice distribution businesses 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 that we are well positioned to take advantage of any future 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 providing consistent, high-quality, center-of-the-plate items to our customers helps us gain a greater share of our customers’ business |
| We believe that a higher penetration of our existing Broadline customers and markets will allow us to strengthen our relationships with these 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 customer base through focused sales efforts that leverage our distribution infrastructure, quality products and value-added services |
| Value-added services include assisting foodservice customers to control costs through, among other means, increased computer communications, more efficient deliveries and consolidation of suppliers |
| We believe that the typical Broadline customer in our markets uses one or two principal suppliers 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 which we are not the principal supplier represent an additional market opportunity for us |
| Increase sales to street customers |
| Within our Broadline segment, we are focusing on increasing sales to street customers, such as independent restaurants, which typically utilize more of our proprietary brands and value-added services |
| We are focusing on increasing 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 program and sales compensation systems are designed to encourage our sales force to grow sales to new and existing street customers |
| We are focused on hiring more outside sales representatives to service independent restaurants and remain vigilant in our hiring, training and retention practices |
| We have implemented a common assessment tool to evaluate prospective sales candidates and a training program staffed by regional sales associates and training managers at each location |
| Improve category management |
| In an effort to enhance our category management, we have completed a transfer to a common item platform and have begun utilizing our data warehouse to analyze item and vendor movement, which will allow us to enhance coordination of our buying and marketing activities |
| In addition, we are continuing to invest in other technologies to provide our sales force with better information to assist our Broadline customers and to grow sales |
| We are also focused on increasing sales of our proprietary brands and believe that our proprietary brands, which include AFFLAB, Bay Winds, Brilliance, Empire’s Treasure, First Mark, Guest House, Heritage Ovens, PFG Custom Meats, Pocahontas, Raffinato, Silver Source, Village Garden and West Creek, offer customers greater value than national brands |
| We believe that as we continue to grow our scale of operations and sales of our proprietary brands, these sales can generate 4 _________________________________________________________________ [47]Table of Contents higher margins than comparable national brands |
| We seek to increase our sales of proprietary brands through our sales force training program and sales compensation systems |
| Grow our Customized segment with existing and selected new customers |
| We seek to strengthen our existing Customized distribution relationships by continuing to provide on-time delivery, complete orders, perishable food-handling expertise, clean, safe facilities and equipment, and electronic data transfers of restaurant orders, inventory information and invoices |
| A key initiative is expanding existing distribution centers and building additional centers to provide capacity for new customers and to reduce the miles driven to service existing customers |
| We seek to selectively add new customers within the Customized distribution segment |
| We believe potential customers include new or growing restaurant chains that have yet to establish a relationship with a customized foodservice distributor, as well as customers that are dissatisfied with their existing distributor relationships and large chains that have traditionally relied on in-house distribution networks |
| Improve operating efficiencies through systems and technology |
| We seek to continually increase our operating efficiencies and competitive advantage by investing in training and technology-related initiatives to provide increased productivity and advanced customer services |
| These initiatives include our Foodstar^® software, which handles order and procurement management throughout our Broadline distribution centers |
| Most of our Customized segment customers use our Internet-based ordering system, PFG-Connection, to place orders, make product inquiries and view purchase histories |
| Additionally, PFG-Connection provides customers with a Web-based e-catalog for viewing pictures of table-top, smallwares and disposables |
| Our other initiatives include an automated warehouse management system that uses radio-frequency barcode scanning for inventory put-away and selection and computerized truck routing systems |
| In addition, we have an on-line ordering system that provides customers real-time access to order placement, product information, inventory levels and their purchasing histories |
| We have implemented standard productivity systems and measurement tools which allow us to improve our selection rates and accuracy while reducing our overall warehouse costs as a percentage of sales |
| We are beginning to implement a GPS based computer system for our truck fleet that will improve productivity and improve our service levels |
| We also have implemented a centralized inbound logistics system that optimizes consolidated deliveries from our suppliers |
| Actively pursue strategic acquisitions |
| Since our founding, 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 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 allow us to leverage fixed costs |
| Customers and Marketing We have two closely related foodservice distribution 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 and family dining chain customers |
| 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 |
| 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 |
| Street Customers Our Broadline segment services our street customers, which 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 that we incur in servicing these customers, street customers typically utilize more of our proprietary brands and value-added services |
| As of December 31, 2005, our Broadline segment supported sales to street customers with over 950 sales and marketing representatives and product specialists |
| Our sales representatives service customers in person, by telephone and through the Internet, 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 salary and commission based on 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 are franchisees and corporate-owned units of casual and family dining and quick-service restaurants |
| Our Broadline 5 _________________________________________________________________ [48]Table of Contents segment customers include numerous locations of Burger King, Church’s, Compass, KFC, Popeye’s, Subway and Zaxby’s quick-service restaurants |
| Our Customized segment customers include casual and family dining restaurant concepts, such as Carrabba’s Italian Grill, Cracker Barrel, Logan’s, Outback Steakhouse, Ruby Tuesday and TGI Friday’s |
| Our sales programs to chain customers are tailored to the individual customer and include a more specialized product offering than the sales programs to our street customers |
| Sales to chain customers are typically higher volume, lower 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 for the lower gross margins |
| Dedicated account representatives are responsible for managing the overall chain customer relationship, including ensuring complete order fulfillment and customer satisfaction |
| Members of senior management assist in identifying potential new chain customers and managing long-term account relationships |
| Two of our chain customers, Outback Steakhouse, Inc |
| (CRBL), account for a significant portion of our consolidated net sales |
| Net sales to OSI accounted for 13prca, 14prca and 13prca of our consolidated net sales for 2005, 2004 and 2003, respectively |
| Net sales to CRBL accounted for 11prca of our consolidated net sales for each of 2005, 2004 and 2003 |
| No other chain customer accounted for more than 7prca of our consolidated net sales in 2005, 2004 or 2003 |
| Products and Services We distribute more than 66cmam000 national and proprietary brand food and non-food products to approximately 44cmam000 customers |
| These products include a broad selection of center-of-the-plate entrees, canned and dry groceries, frozen foods, refrigerated and dairy products, paper products and cleaning supplies, produce, restaurant equipment and other supplies |
| We also provide our customers with value-added services in the normal course of providing full-service distributor services |
| Proprietary brands We offer our customers an extensive line of products under our proprietary brands, including AFFLAB, Bay Winds, Brilliance, Empire’s Treasure, First Mark, Guest House, Heritage Ovens, PFG Custom Meats, Pocahontas, Raffinato, Silver Source, Village Garden and West Creek |
| The Pocahontas brand name has been recognized in the food industry for over 100 years |
| Products offered under our proprietary brands include canned and dry groceries, tabletop sauces, meat, baked goods, shortenings and oils, among others |
| In 2006, we will be introducing PFG-procured and branded fresh produce and we will continue to enhance our branded product offering based on customer preferences and data analysis using our data warehouse |
| 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, while our Empire’s Treasure brand consists of high-quality frozen seafood |
| We seek to increase the sales of our proprietary brands, as they can provide 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 these brands are attractive to chain, street and other customers seeking recognized national brands throughout their operations |
| We believe that distributing national brands has strengthened our relationships with many national suppliers who provide us with important sales and marketing support |
| These sales complement sales of our proprietary brand products |
| Value-added services As part of developing and strengthening our customer relationships, we provide some of our customers with value-added services including assistance in new product introductions, inventory management and improving efficiency |
| As described below, we also provide procurement and merchandising services to approximately 400 independent foodservice distributor facilities and approximately 600 independent paper and janitorial supply distributor facilities, as well as to our own distribution network |
| These procurement and merchandising services include negotiating vendor supply agreements and providing quality assurance services related to our proprietary and national brand products |
| 6 _________________________________________________________________ [49]Table of Contents The following table sets forth the percentage of our consolidated net sales by product and service category in 2005, 2004 and 2003: Percentage of Net Sales^(1) 2005 2004 2003 Center-of-the-plate 42 % 42 % 39 % Canned and dry groceries 18 18 20 Frozen foods 17 17 15 Refrigerated and dairy products 10 10 11 Paper products and cleaning supplies 7 7 8 Produce 3 4 4 Procurement, merchandising and other services 2 1 2 Equipment and supplies 1 1 1 Total 100 % 100 % 100 % ^(1) 2004 and 2003 amounts have been restated to remove discontinued operations to conform with the 2005 presentation |
| Information Systems In our Broadline segment, 16 of our 19 distribution operations currently manage the ordering, receiving, procurement, warehousing and delivery of products through our Foodstar^® software |
| Foodstar^® allows our customers to electronically place orders with us and permits us to record sales, billing and inventory information |
| This software also assists in the timely and accurate financial reporting by our subsidiaries to our corporate headquarters |
| Our Broadline information technology staff performs software development and maintenance on this platform |
| We are continually enhancing this platform by providing standardized product identifiers to leverage our purchasing volume across our distribution network |
| In addition, we continue to enhance our warehouse management system that uses barcode scanning to track products within our distribution centers |
| This technology enhances productivity by reducing errors in inventory put-away and selection |
| Our warehouse management system also tracks employee productivity, driving overall warehouse efficiencies |
| All of our Broadline distribution locations use truck-routing software, and we are in the process of rolling out on-board computers to optimize the distribution routes traveled by our trucks by reducing excess mileage, optimizing fuel consumption, providing point in time tracking of trucks, monitoring and managing service levels, and improving the timeliness of customer deliveries |
| For inbound freight we use a centralized inbound logistics system that optimizes consolidated deliveries from our suppliers |
| We have an on-line ordering system that allows customers to have real-time access to product information, inventory levels and their purchasing histories |
| Additionally, we are focusing heavily on business intelligence through centralized data warehousing, reporting and dash-boarding technologies |
| Our business intelligence initiatives enable us to deliver solutions which support operational excellence and visibility of enterprise key performance indicators, as well as providing standardized metrics and measurements across the enterprise |
| In our Customized segment, we use a similar software platform managed and located at our Customized headquarters in Lebanon, Tennessee |
| This software has been tailored to manage large national accounts, multiple warehouses and centralized purchasing, payables and receivables |
| The accounts receivable module of this software automatically applies payment details received from customers electronically, enabling the efficient processing of large volumes of transactions |
| Our Customized segment uses a nationally recognized purchasing system for product procurement |
| This segment also has a warehouse management system that utilizes barcode technology to improve inventory receiving, put-away, replenishment and warehouse tracking |
| This software enables rotation of all products, including perishable products, using wireless technology to facilitate computer-directed product retrieval |
| Our Customized segment also uses a truck-routing system that determines the most efficient method of delivery for our nationwide delivery system |
| Most of our Customized segment customers use our internet-based ordering system, PFG-Connection, to place orders, make product inquiries and view purchase histories |
| A real-time, customer order-processing system allows our customers and customer service representatives to review and correct orders online |
| This software has allowed our customers to reduce costs through improved order accuracy |
| In our Corporate segment, we use a financial systems suite that includes general ledger, accounts payable and fixed asset modules |
| In addition, we utilize software for financial consolidations |
| In the human resources area, we use a common human resources suite, including human capital management, benefits and payroll modules in our Broadline, Customized and Corporate segments |
| Additionally, we have built a high-availability, fully redundant application environment to support our most critical systems and to maintain continuous availability for our operations and our customers |
| This is 7 _________________________________________________________________ [50]Table of Contents accomplished through sophisticated application hardware, network, server and telecommunications configurations and fail-over technologies |
| Suppliers and Purchasing Our Broadline and Customized segments obtain products from large national and regional food manufacturers, consumer products companies, meat processors and produce shippers, as well as from local suppliers, food brokers and merchandisers |
| 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 4prca of our total product purchases during 2005 |
| Our wholly owned subsidiary known as Progressive Group Alliance (formerly Pocahontas Foods, USA) selects foodservice products for our Brilliance, Colonial Tradition, Healthy USA, Pocahontas, Premium Recipe and Raffinato brands and markets these brands, as well as nationally branded foodservice products, through our own distribution operations to approximately 400 independent foodservice distributor facilities nationwide |
| For our services, we receive marketing fees paid by suppliers |
| Approximately 6cmam000 of the products sold through Progressive Group Alliance are sold under our proprietary brands |
| Approximately 1cmam500 suppliers, located throughout the United States, supply products through the Progressive Group Alliance distribution network |
| Because Progressive Group Alliance negotiates purchase agreements on behalf of its independent distributors as a group, the distributors that utilize Progressive Group Alliance’s procurement and merchandising group can enhance their purchasing power |
| 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, category management, operations management, sales management, general and financial management, human resources and information systems strategy and development |
| Although individual marketing efforts are undertaken at the subsidiary level, our name recognition in the foodservice business is based on both the trade names of our individual subsidiaries and 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 from 19 Broadline and eight Customized distribution centers |
| Our Broadline distribution centers are located in Arkansas, Florida, Georgia, Illinois, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Jersey, Tennessee, Texas and Virginia |
| Our Broadline customers are generally located no more than 250 miles from one of our Broadline distribution facilities |
| Our eight Customized distribution centers are located in California, Florida, Indiana, Maryland, New Jersey, South Carolina, Tennessee and Texas |
| Our Customized segment distributes to customer locations nationwide and internationally |
| For all of our distribution operations, customer orders are assembled in our distribution facilities and then sorted, placed on pallets, and loaded onto trucks and trailers in delivery sequence |
| Deliveries are generally made in large tractor-trailers that we usually lease |
| We use a computer system to design efficient route sequences for the delivery of our products |
| 8 _________________________________________________________________ [51]Table of Contents The following table summarizes certain information for our principal operating locations: Approx |
| Number of Customer Locations Location of Currently Name of Subsidiary/Division Principal Region(s) Facilities Served Major Customers Broadline: AFFLINK Nationwide Tuscaloosa, AL 600 Independent paper distributors PFG — AFI Foodservice New Jersey and New York City metropolitan area Elizabeth, NJ 3cmam300 Restaurants, healthcare facilities and schools PFG — Batesville Mississippi Batesville, MS 1cmam500 Subway and other restaurants, healthcare facilities and schools PFG — Caro Foods South Houma, LA 1cmam800 Church’s, Copeland’s, Popeye’s and other restaurants, healthcare facilities and schools PFG — Carroll County Foods Baltimore, MD and Washington, DC area New Windsor, MD 2cmam000 Restaurants, healthcare facilities and schools PFG — Empire Seafood Florida Miami, FL 5cmam200 Cruise lines and restaurants PFG — Florida Florida Tampa, FL 1cmam800 Restaurants, healthcare facilities and schools PFG — Hale Kentucky, Tennessee and Virginia Morristown, TN 1cmam600 Restaurants, healthcare facilities and schools PFG — Lester South Lebanon, TN 2cmam500 Restaurants, healthcare facilities and schools PFG — Little Rock Arkansas, Missouri, Oklahoma, Tennessee and Texas Little Rock, AR 6cmam100 Subway and other restaurants, healthcare facilities and schools PFG — Magee Louisiana and Mississippi Magee, MS 1cmam900 Subway and other restaurants, healthcare facilities and schools PFG — Middendorf St |
| Louis, Missouri and surrounding areas St |
| Louis, MO 2cmam200 Restaurants, clubs, hotels and other foodservice facilities PFG — Milton’s South and Southeast Atlanta, GA 5cmam900 Copeland’s, Subway, Zaxby’s and other restaurants, healthcare facilities and schools PFG — NorthCenter Maine, Massachusetts and New Hampshire Augusta, ME 5cmam900 Restaurants, healthcare facilities and schools PFG — Powell Alabama, Florida and Georgia Thomasville, GA 800 Restaurants, healthcare facilities and schools PFG — Progressive Group Alliance Nationwide Boise, ID Richmond, VA 400 Independent foodservice distributors and vendors PFG — Springfield New England and portions of New York State Springfield, MA 3cmam300 Restaurants, healthcare facilities and schools PFG — Temple, TX South and Southwest Temple, TX 4cmam300 Church’s, Dairy Queen, KFC, Popeye’s, Subway and other restaurants, healthcare facilities and schools PFG — Thoms-Proestler Company Chicago Metropolitan area and other portions of Illinois, Indiana, Iowa and Wisconsin Rock Island, IL 5cmam900 Restaurants, healthcare facilities and schools 9 _________________________________________________________________ [52]Table of Contents Approx |
| Number of Customer Locations Location of Currently Name of Subsidiary/Division Principal Region(s) Facilities Served Major Customers PFG — Victoria South and Southwest Victoria, TX 2cmam500 Subway and other restaurants, healthcare facilities and schools PFG — Virginia Foodservice Virginia Richmond, VA 1cmam900 Copeland’s, Texas Steakhouse and other restaurants and healthcare facilities Customized Nationwide Bakersfield, CA Elkton, MD Rock Hill, SC 3cmam300 Cracker Barrel, Outback Steakhouse, Ruby Tuesday, TGI Friday’s, and other casual-dining restaurants Gainesville, FL Kendallville, IN Lebanon, TN McKinney, TX Westampton, NJ 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 |
| Certain of these distributors have 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 |
| 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 and the quality and price of the product |
| Regulation Our operations are subject to regulation by state and local health departments, the US Department of Agriculture and the Food and Drug Administration, which generally impose standards for product quality and sanitation and are responsible for the administration of recent bioterrorism legislation |
| Our seafood operations are also specifically regulated by federal and state laws, including those administered by the National Marine Fisheries Service, established for the preservation of certain species of marine life, including fish and shellfish |
| 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 Perishable Agricultural Commodities Act, which specifies standards for the 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 the 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 |
| 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 US 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 |
| We believe that we are in substantial compliance with applicable regulatory requirements relating to our motor carrier operations |
| 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 Pocahontas^® trade name, 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 |
| 10 _________________________________________________________________ [53]Table of Contents Employees As of December 31, 2005, we had approximately 7cmam000 full-time employees, including approximately 3cmam000 in management, administration, marketing and sales and the remainder in operations |
| As of December 3l, 2005, union and collective bargaining units represented about 500 of our employees |
| We have entered into seven collective bargaining and similar agreements with respect to our unionized employees |
| Our agreements with our union employees expire at various times from June 2006 to December 2008 |
| Executive Officers The following table sets forth certain information concerning our executive officers: Name Age Position Robert C Sledd 53 Chairman and Chief Executive Officer Steven Spinner 46 President and Chief Operating Officer Thomas Hoffman 66 Senior Vice President, Chief Executive Officer — Customized Division John D Austin 44 Senior Vice President and Chief Financial Officer Joseph J Traficanti 54 Senior Vice President, General Counsel, Chief Compliance Officer, Corporate Secretary Charlotte L Perkins 47 Chief Human Resources Officer J Keith Middleton 39 Senior Vice President and Controller 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 |
| Since March 2004, Mr |
| Sledd has served as Chief Executive Officer of Performance Food Group |
| Sledd also served as Chief Executive Officer of Performance Food Group from 1987 to August 2001 and as President from 1987 to February 1995 and March 2004 through May 2005 |
| Sledd served as a director of Taylor & Sledd Industries, Inc, a predecessor of Performance Food Group, from 1974 to 1987 and served as President and Chief Executive Officer of that company from 1984 to 1987 |
| Sledd also serves as a director of SCP Pool Corporation, a supplier of swimming pool supplies and related products |
| Steven Spinner has served as President and Chief Operating Officer since May 2005 |
| Spinner served as Senior Vice President of Performance Food Group and Chief Executive Officer — Broadline Division from February 2002 to May 2005 and served as Broadline Division President of Performance Food Group from August 2001 to February 2002 |
| Spinner also 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 |
| Thomas Hoffman has served as Senior Vice President of Performance Food Group and Chief Executive Officer — Customized Division since February 1995 |
| Hoffman served as President of Kenneth O Lester Company, Inc, a wholly owned subsidiary of Performance Food Group, from December 1989 until September 2002 |
| Prior to joining Performance Food Group, Mr |
| Hoffman served in executive capacities at Booth Fisheries Corporation, a subsidiary of Sara Lee Corporation, as well as CFS Continental, Miami and International Foodservice, Miami, two foodservice distributors |
| John D Austin has served as Senior Vice President and Chief Financial Officer since April 2003 |
| Austin served as Corporate Treasurer from 1998 to January 2001 |
| Austin served as Corporate Controller of Performance Food Group from 1995 to 1998 |
| Austin was Assistant Controller for General Medical Corporation, a distributor of medical supplies |
| Austin was an accountant with Deloitte & Touche LLP Mr |
| Austin is a certified public accountant |
| Traficanti was the Vice President and Associate General Counsel of Owens & Minor, Inc, a distributor of medical supplies |
| Traficanti was a trial lawyer with the law firm of McGuire Woods, LLP, after retiring from the United States Air Force |
| Charlotte L Perkins has served as Chief Human Resources Officer since July 2005 and as Vice President of Risk Management since October 2004 |
| From 2000 through October 2004, Ms |
| Perkins held senior management positions with Richfood Holdings, Inc |
| and Jerrico, Inc |
| 11 _________________________________________________________________ [54]Table of Contents J Keith Middleton has served as Controller of Performance Food Group since June 2002 and Senior Vice President since June 2005 |
| From March 2000 to May 2002, Mr |
| Middleton was General Ledger Manager with Perdue Farms Incorporated |
| Middleton was employed as an accountant with Trice Geary & Myers LLC from July 1998 through February 2000 |
| Middleton was an accountant at Arthur Andersen LLP from May 1988 to June 1998 |
| Middleton is a certified public accountant |
| Please note that our website address is provided as an inactive textual reference only |
| We make available free of charge through our website our Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with the Securities and Exchange Commission |
| In addition, our earnings conference calls and presentations to securities analysts are web cast live via our website |
| Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Form 10-K Item 1A 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 |
| 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 |
| Therefore, in an inflationary environment, our gross profit margins may be negatively affected |
| In addition, our results of operations may be negatively impacted by product cost increases that we may not be able to pass on to our customers |
| 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 |
| One or more of these events could 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, increases in fuel prices may 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 OSI accounted for 13prca, 14prca and 13prca of our consolidated net sales in 2005, 2004 and 2003, respectively |
| Net sales to CRBL accounted for 11prca of our consolidated net sales in each of 2005, 2004 and 2003 |
| Sales to these customers by our Customized segment generally have lower operating margins than sales to customers in other areas of our business |
| We have agreements with certain of our customers to purchase specified amounts of goods from us and the prices paid by them may depend on the actual level of their purchases |
| Some of these agreements may be terminated by the customer with an agreed-upon notice to us; however, certain of these agreements may not be terminated by either party except for a material breach by the other party |
| We cannot always guarantee the level of future purchases by our customers |
| 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 |
| 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 businesses, and our growth strategy includes additional acquisitions |
| We may not be able to make acquisitions in the future and any acquisitions we do make may not be successful |
| Furthermore, future acquisitions may 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 businesses are being integrated into our operations |
| Achieving the benefits of acquisitions 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 |
| We may not be able to successfully integrate the acquired company’s operations or personnel, or realize the anticipated benefits of the acquisition |
| Our ability to integrate 12 _________________________________________________________________ [55]Table of Contents 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 depend upon obtaining additional financing |
| We may not 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 may not be able to successfully integrate the operations of acquired businesses with our existing operations, which could have a material adverse effect on our business |
| This growth may not continue |
| To the extent that our customer base and our services continue to grow, this growth is also 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 and processing capacity from time to time |
| As we near maximum utilization of a given facility or maximize our processing capacity, operations may be constrained and inefficiencies have been and may be created, which could adversely affect our operating results unless the facility is expanded, volume is shifted to another facility, or additional processing capacity is added |
| Conversely, as we add additional facilities or expand existing operations or 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, or may require, substantial future payments |
| At December 31, 2005, we had dlra3dtta8 million of outstanding indebtedness |
| In addition, at December 31, 2005, we were a party to operating leases requiring dlra253dtta7 million in future minimum lease payments |
| Accordingly, the total amount of our obligations with respect to indebtedness and leases is substantial |
| In addition, we could currently borrow up to dlra400 million under our Senior Revolving Credit Facility (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: • increasing our vulnerability to general adverse economic and industry conditions; • limiting our ability to obtain additional financing; • limiting our flexibility in planning for or reacting to changes in our business and the industry in which we compete; and • 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 any future borrowings under our Credit Facility, are, and will continue to be, at variable rates based upon prevailing interest rates, which expose us to risk of increased interest rates |
| Our Credit Facility requires 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 |
| 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 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, including products sold by companies before we acquired them |
| We have, and the companies we have acquired have had, liability insurance with respect to product liability claims |
| This insurance may not continue to be available at a reasonable cost or at all, and may not be adequate to cover product liability claims against us or against companies we have acquired |
| We 13 _________________________________________________________________ [56]Table of Contents 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 our 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 |
| 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, and the quality and price of the product |
| Our success depends on our senior management |
| 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 |
| We do not have any employment agreements with or maintain key man life insurance on any of these employees |
| Additionally, 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 of 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: • our quarterly operating results or the operating results of other distributors of food and non-food products; • changes in general conditions in the economy, the financial markets or the food distribution or foodservice industries; • the results of the informal inquiry of the Securities and Exchange Commission, or SEC, into certain alleged accounting improprieties at one of our Broadline operating subsidiaries and the alleged improper transfer of inventory within the Broadline segment; • changes in financial estimates or recommendations by stock market analysts regarding us or our competitors; • announcements by us or our competitors of significant acquisitions; • increases in labor, energy, fuel costs or the costs of food products; and • natural disasters, severe weather conditions or other developments affecting our competitors or us |
| 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 |
| An adverse outcome of the SEC’s informal inquiry into anonymous allegations questioning certain accounting practices at one of our Broadline operating subsidiaries and the alleged improper transfer of inventory within the Broadline segment, and any claims made with respect thereto could have a material adverse effect on us |
| In February 2005, we announced that we had received anonymous allegations questioning certain accounting practices at one of our Broadline operating subsidiaries |
| Our Audit Committee immediately began investigating these allegations and retained independent counsel, who also retained an independent accounting firm, to assist the Audit Committee in reviewing these allegations |
| Subsequently, the staff of the SEC informed us that it had opened an informal inquiry into these allegations, as well as an allegation that our Broadline operating subsidiaries may have made improper inter-company transfers of inventory to avoid internally established reserve requirements for aged inventory |
| The Audit Committee conducted a thorough investigation and found no basis for any change to our previously reported financial results |
| The costs associated with the SEC inquiry or any enforcement action could be significant and an adverse outcome of any inquiry or enforcement action could have a material adverse effect on our financial condition or results of operations |
| In addition, in the event of an adverse outcome of the SEC’s inquiry, it is possible that claims may be brought against us by our shareholders, and the costs related to the claims, including defense costs, could also have an adverse effect on our financial condition or results of operations |
| We have cooperated with the SEC in its investigation of these allegations |