Sysco
Annual Report 2001

Plain-text annual report

S Y S C O 2 0 0 2 A N N U A L R E P O R T H E L P I N G O U R C U S T O M E R S S U C C E E D Philosophy SYSCO operates in one of the most basic of industries – the their businesses is the art that adds value to our products distribution of food and related products and services to and services. restaurants, nursing homes, hospitals, hotels, motels, Serving an overall market of approximately $200 bil- schools, colleges, cruise ships, sports parks and summer lion, SYSCO operates from 142 locations across North camps – wherever a meal is prepared away from home. The America, supplying 415,000 customers with not only the company’s success is deeply intertwined with its customers, basic canned, dry and frozen foods, but also products like for we are only successful if we help them be successful. exotic fresh produce and custom-cut steaks. SYSCO also Providing the basic ingredients for meal preparation provides supplies to hotels and healthcare providers. is the core of our business. The extra time, effort and Supported by 46,800 employees, SYSCO is the leader in attention focused on ensuring quality and offering innova- its industry, a team of responsive professionals helping our tive means and methods to assist customers in managing customers succeed. SYSCO Historical Daily Stock Price Summary Fiscal Years 2000–2002 27.15 27.22 21.07 15.38 30 25 20 15 10 5 0 Fiscal 2000 Fiscal 2001 Fiscal 2002 Contents 2 5 Letter to Shareholders Review of Operations 20 Community Activities 21 Financial Section 55 Location of Principal Operations 60 Glossary 61 Board of Directors 62 Distinguished Tenure Directors 62 Directors’ Council 63 Corporate Officers 65 General Information S Y S C O C O R P O R A T I O N Sales in billions of dollars Net Earnings in millions of dollars 15.3 17.4 19.3 21.8 23.4 296.8 362.3 445.6 596.9 679.8 98 99 00 01 02 98 99 00 01 02 Financial Highlights (In thousands, except for share data, employees and shareholders) June 29, 2002 June 30, 2001 July 1, 2000 2002-01 2001-00 Sales $ 23,350,504 $ 21,784,497 $ 19,303,268 7% 13% Fiscal Year Ended Percent Change Earnings before income taxes Net earnings before accounting change Net earnings (1) Diluted earnings per share before accounting change Diluted earnings per share after accounting change Cash dividends per share Shareholders’ equity per share 1,100,870 679,787 679,787 966,655 596,909 596,909 737,608 453,629 445,588 1.01 1.01 0.32 3.26 0.88 0.88 0.26 3.16 0.68 0.67 0.22 2.60 Capital expenditures $ 416,393 $ 341,138 $ 266,413 Return on average shareholders’ equity before accounting change 31% 31% 30% 14 14 14 15 15 23 3 22 – Diluted average shares outstanding 673,445,783 677,949,351 669,555,856 (1) Number of employees Number of shareholders of record 46,800 15,510 43,000 15,493 40,400 15,207 9 – (1) Fiscal 2000 net earnings ref lect a one-time non-cash charge of $8,041,000 for change in accounting principles. All share information has been adjusted for the 2-for-1 stock split of December 15, 2000. 31 32 34 29 31 18 22 28 1 1 6 2 Diluted Earnings Per Share (before accounting change) in dollars Return on Average Total Capital (before accounting change) Return on Average Shareholders’ Equity (before accounting change) 0.47 0.54 0.68 0.88 1.01 15% 16% 18% 21% 21% 22% 27% 30% 31% 31% 98 99 00 01 02 98 99 00 01 02 98 99 00 01 02 2 0 0 2 A N N U A L R E P O R T 1 We are more than trucks and warehouses, or canned and institutional foods. Much, much more. We’re innovative developers of products and services, market trend watchers, merchandisers who search the world for just the right products. We’re specialty marketers of fresh-cut steaks, exotic produce and hotel amenities. We’re 180 quality assurance professionals, enforcing our standards in the fields and plants. We’re restaurant menu designers and consultants helping customers market their menu ideas more effectively. We’re developers of technology that allows us to buy products more easily, store them more efficiently, deliver them more productively. We are the leading marketer and distributor of products and services to the food-prepared-away-from-home industry. To Our Shareholders When our customers succeed, SYSCO succeeds. This simple philosophy has served us well over the years, and fiscal 2002 marked the 26th consecutive year of record sales and earnings for your company. At the beginning of the fiscal year, the United States economy was challenged by a noticeable slowing of economic growth that was exacerbated by the September 11 disasters. Our associates responded to these conditions and continued to provide the outstanding service our customers expect, thus laying the groundwork to suc- cessfully maintain valued customer relationships. Business trends began strengthening during the third quarter and gathered momentum through a strong fourth quarter, boosting fiscal year-end sales to $23.4 billion, 7.2 percent higher than last year’s $21.8 billion in sales. After eliminating 3.4 percent for acquisitions and 1.1 percent for food cost inf lation, real sales growth was 2.7 percent. SYSCO’s real growth typically outpaces the industry and, on a calendar year 2001 basis, SYSCO’s real sales growth was 2.2 percent, while the industry overall posted a 0.5 percent real growth rate, according to Technomic, Inc. Diluted earnings per share increased 14.8 percent, rising to $1.01 from the $0.88 achieved last year. Net earnings were $680 million, 13.9 percent greater than the $597 million earned last year. We continue to focus on building the right mix of customers and brand. Higher sales to marketing asso- ciate-served customers, as well as increased SYSCO Brand sales, were strong contributors to the year’s per- formance. Focusing on our customer relationship initiatives, Customers Are Really Everything to SYSCO (C.A.R.E.S.), we increased sales to MA-served customers to 56 percent of broadline sales from 55 per- cent last year. In addition, the SYSCO Brand is 2 S Y S C O C O R P O R A T I O N gaining increasing recognition for the quality, consis- tency and value it offers customers. As a result, SYSCO Brand sales were 56 percent of MA-served sales of the broadline companies, compared to 53 percent last year, and grew to 42 percent of total sales, compared to 41 percent last year. In addition, our operating companies increased productivity and efficiency, while maintaining a tight control on expenses, particularly in the warehouse and delivery areas. Some of the progress resulted from the better utilization of the capabilities of the SYSCO Uniform System (SUS) and the continuing develop- ment and rollout of additional modules that increase accuracy in selecting orders and loading vehicles. Overall, operating expenses remained f lat as a percent of sales. SYSCO’s chain restaurant distribution arm, The SYGMA Network, Inc., serves customers from 13 facili- ties strategically located across the United States. SYGMA enjoyed a successful year as sales increased to $2.7 billion, 10.6 percent more than the $2.4 billion achieved last year. This performance resulted from business expansions of existing customers as well as the addition of new business. Our specialty companies, which include six meat- cutting companies, a fresh produce distributor and a hotel operating supplies company, reported a 23.9 per- cent sales increase to $1.7 billion from $1.4 billion last year. The increase was attributable primarily to increased sales of specialty meat company products by our broadline companies, as well as the inclusion of Guest Supply’s sales for the full year. The March acquisition of SERCA Foodservice, Inc., a division of Sobeys, Inc., significantly expanded our presence coast-to-coast in the $9 billion Canadian food- service distribution market, complementing our strat- egy of broadening geographic reach. SYSCO SERCA Foodservices, Inc. now operates from 17 locations in 8 provinces across Canada, providing products and serv- ices to 65,000 customers. Two additional acquisitions were completed dur- ing fiscal 2002. Fulton Provision Company of Portland, Oregon, a custom-cut beef distributor with annual sales approximating $25 million in calendar 2000, joined our specialty meat company family. Also, Guest Supply acquired Franklin Supply Company located in Louisburg, North Carolina. This specialty distributor to the lodging industry generated $19 mil- lion in sales for its fiscal year ended February 28, 2001. The acquisition allows Guest Supply to expand prod- uct depth and increase offerings to customers in the southeastern United States hospitality market. Fold-outs continue to be successful with new com- panies in Sacramento, California and Columbia, South Carolina beginning operations during the year. A third facility opened in Las Vegas in September 2002 and a site search is in progress to build a fold-out north of Los Angeles. Capital expenditures for these projects, as well as other expansion and modification activities, totaled $416.4 million. We intend to invest prudently in the growth of the company and anticipate capital invest- ments in the range of $450 million to $500 million for fiscal year 2003. A portion of these funds will be allocated to build- ing a redistribution warehouse in Virginia that will receive and redistribute products to SYSCO distribu- tion centers in the Northeast and Mid-Atlantic for subsequent redistribution to customers. The facility is the first of several in a long-term project that is expected to eventually result in the construction of similar warehouses throughout North America. The use of larger, strategically located warehouses should allow more efficient supply chain delivery, improve storage and handling methods and increase trans- portation savings. During the past 10 years, SYSCO has invested more than $2.4 billion to repurchase more than 200 million shares of the company’s stock. We continue to repurchase shares strategically and, in September 2001, the Board of Directors authorized an additional Left: Charles H. Cotros, Chairman and Chief Executive Officer Right: Richard J. Schnieders, President and Chief Operating Officer 2 0 0 2 A N N U A L R E P O R T 3 16-million-share buyback. At fiscal year-end 2002, approximately 5.6 million shares remained available for repurchase under that authorization. In July 2002, the Board approved the repurchase of an additional 20 million shares, increasing the total available for repur- chase to 25.6 million as of August 1, 2002. The new authorization recognizes the company’s strong balance sheet and favorable cash f low position and signifies the Board’s belief in SYSCO’s future growth prospects. SYSCO has increased its quarterly cash dividend 33 times in its 32 years as a public company. The November 2001 increase to $0.09 per share represented a 28.6 percent increase over the previous $0.07 rate. To continue to support the success of its customers SYSCO must have a workforce committed to this vision and managers who can successfully produce the results required. One of the key factors in SYSCO’s suc- cess has been a well-developed long-term management succession plan. In accordance with that plan, upon the December 2002 retirement of Chairman and Chief Executive Officer Charles H. Cotros, Richard J. Schnieders will assume that role. Mr. Cotros has enjoyed a 42-year career in the foodservice industry, commencing with his family’s business, Tri-State General Food Supply in Memphis, Tennessee in 1960. After his company joined the SYSCO family in 1974, he held positions as president and chairman of five SYSCO operating companies before relocating to the corporate office as Executive Vice President and Chief Operating Officer in 1995. He advanced to President and Chief Executive Officer in January 2000 and became Chairman and Chief Executive Officer in July 2000. Mr. Cotros has served on SYSCO’s Board of Directors since 1986 and also will retire from that position in December. Other executive management changes include Thomas E. Lankford, who was appointed Executive Vice President and President of Foodservice Operations, North America in January 2002. He will succeed Mr. Schnieders as President and Chief Operating Officer in January 2003. Also, Larry J. Accardi expanded his role as Executive Vice President, Merchandising Services and President, Specialty Distribution and Kenneth F. Spitler was appointed Executive Vice President, Redistribution and Northeast Region. 4 S Y S C O C O R P O R A T I O N SYSCO’s long-term growth objectives continue to be clear-cut and attainable. These include: • high single-digit real sales growth. • growth in earnings per share a minimum of five percentage points higher than real sales growth. • 33 percent return on equity. • 35 to 40 percent long term debt to total capitalization ratio. Although SYSCO has averaged approximately 6.8 percent real sales growth over the past four years, our long-term goal of high single-digit real sales growth was not achieved in fiscal 2002. However, real sales were leveraged 12.1 percentage points, producing a 14.8 percent diluted earnings per share increase. We believe that one of the key roles of management is to employ shareholders’ funds efficiently and our long- time goal of 20 percent return on average share- holders’ equity was achieved in 1996. Since then, it has been steadily improving, reaching 31 percent in fiscal year 2002. Return on average total capital also has con- tinued to increase, rising to its current 21 percent from 14 percent in 1996. The long-term debt to total capital- ization ratio at year-end was 35.6 percent. We are committed to our customers’ success and to helping them achieve their goals. The creativity and ingenuity of our customers and the $200 billion indus- try we serve was not diminished during the turbulent year just ended. In fact, maintaining outstanding serv- ice has become even more important as consumers embrace quality dining experiences, surrounded by family and friends, as they enjoy meals away from home. Our responsibility is not taken lightly – our customers’ success is vital to our success. Charles H. Cotros Chairman and Chief Executive Officer Richard J. Schnieders President and Chief Operating Officer September 27, 2002 At SYSCO we’re more than canned foods or warehouses stocked with giant-sized products, more than a f leet of delivery trucks. We’re a finger on the pulse of foodservice, an army of relationship managers supporting our customers’ success through a host of activities. Our marketing associates may help with developing menus and training wait staff, or assisting with inventory control, all the while providing a family of approximately 300,000 high quality products that keep diners returning again and again. 2 0 0 2 A N N U A L R E P O R T 5 The original SYSCO brands include Supreme (absolute top quality items that are unique within the industry), Imperial (the best available quality, produced in prime growing regions), Classic (our lead quality level, whose quality is often on par with competitors’ high- est levels) and Reliance (economy-positioned). The brand family has expanded with brands like Buckhead Beef and Newport Pride custom-cut meats, Butcher’s Block boxed beef and House Recipe tabletop items and condiments. Other branded products are tar- geted to specific markets like the Arrezzio Italian line, Casa Solana Mexican foods and Block & Barrel Deli products. Each product packed under the SYSCO Brand name has detailed specifications. These specifications are not only for finished products, but also include criteria for raw materials; they set the standards for food safety, quality and consistency for such factors as color, cut size and shelf life. Customers using SYSCO Brand products for their menu needs can save on overall food costs, while being assured that we enforce SYSCO’s specifications, which meet or exceed government standards. For example, SYSCO has been a leader in requiring ground beef manufacturers to pre-test raw materials. Quality CONSISTENCY, VARIETY AND CUSTOMER VALUE The hallmarks of SYSCO Brand products – quality, con- sistency, variety and customer value – are an integral part of SYSCO’s mission of “Helping Our Customers Succeed.” Outstanding products and service excellence go hand in hand to ensure customer satisfaction. 6 S Y S C O C O R P O R A T I O N SYSCO’s 180 Quality Assurance associates develop specifications for nearly 40,000 products. These professionals are responsible for identifying and establishing supply sources and auditing those suppliers for such factors as facility conditions and sanitary measures in order to enforce SYSCO’s strict standards. The SYSCO Quality Assurance program is unmatched within the industry. The number of people and the amount of resources committed to sup- port the integrity of the products are far superior to other industry competitors. Also, the brand has wide recognition and has appeal across a broad variety of menus. To ensure that customers receive only the highest quality fresh produce, inten- sive daily inspections in the fields are routine prior to harvest. Inspectors then fol- low the produce from field to cooler to assure proper holding temperatures and product integrity. As food safety issues have become more prominent, SYSCO is in the forefront with a Food Safety First Mission Statement: to pro- mote and provide food safety education to foodser- vice operators, including the marketing of systems and products designed to effec- tively meet specific food safety applications. A founding member of the International Food Safety Council, SYSCO supports the National Restaurant Association Educational Foundation’s ServSafe program, having trained 33,000-plus restaurant managers, who then may train their employees in this important area. Committed to meeting or exceeding USDA/FDA guide- lines for consumer product safety processes and pro- cedures, SYSCO has implemented required pro- grams and our facilities undergo unannounced inspections twice yearly to assure warehouse sanitation and regulatory compliance. Facilities are secured 24 hours per day and we use procedures to assure vehicle and product safety when vehicles are unattended at customer locations. Our recently enhanced customer product return policy reduces the risk of tampered products being returned. 2 0 0 2 A N N U A L R E P O R T 7 MARKETING ASSOCIATES ARE INVOLVED IN EVERY ASPECT OF A CUSTOMER’S BUSINESS– ASSISTING WITH DESIGNING MENUS AND CUSTOMERS’ MARKETING MATERIALS, INSTALLING INVENTORY CONTROL PROGRAMS, TRAINING WAIT STAFF AND MORE BJ’s Place is a family affair where Brian creates gourmet menus while Gladys greets customers and handles administrative duties. SYSCO MA Jeff Jackson helps their ideas become reality. “SYSCO goes beyond the call of duty to help us be successful. It may be a small thing to others, but to us it means a lot because we’re small.” Gladys Hoard, BJ’s Place Owners: Brian and Gladys Hoard Weston, West Virginia Marketing Associate (MA) Jeff Jackson, of SYSCO Food Services of Pittsburgh, consulted with the Hoards in every aspect of their business, from select- ing a location to designing and costing the menu and finally to the restaurant’s grand opening. He also helped them train employees, set standards for profitability and improve customer traffic by pro- viding templates for customer comment cards. “SYSCO’s broad spectrum of products is great,” says Gladys Hoard. “We have customers who like out-of- the-ordinary items like braised buffalo short ribs and fresh seafood that you usually can’t get living in an area like this.” SYSCO believes its mission —“Helping Our Customers Succeed”—is critical. An integral part of fulfilling it is the C.A.R.E.S. program, created in response to customer surveys. These surveys indi- cated the basic functions that customers expect — receiving all products ordered, on time, and in undamaged condition; receiving accurate invoices; helpful and knowledgeable sales and delivery associ- ates; and the quality assurance inherent in SYSCO Brand products. 8 S Y S C O C O R P O R A T I O N SYSCO’s mission is critical. C.A.R.E.S. (Customers Are Really Everything to SYSCO) was created to assure that customers’ basic needs are met. “When we remodeled our restau- rant, we switched to SYSCO 100 percent. Our business increased 40 percent and our food costs went down 5 percent.” A. Hamid Andalib Owner/The Loft & VIPGift.com Chattanooga, TN The Loft restaurant in Chattanooga is truly a success story. Opened in 1974, it is a 625-seat, 20,000 square-foot restaurant with 80 employees, and one of the largest independently owned restaurants in Tennessee. In 1985, after waiting tables for four years, Hamid Andalib bought the restaurant. “My philosophy in life is that God has given us a spoon longer than our arms and the purpose is not to feed yourself. When you feed others they feed you and SYSCO was there to help me long before they knew what kind of pur- chases they would get from me. “When we remodeled, our previous supplier could not take care of us, but SYSCO jumped in. More than a dozen people were on hand — from merchandisers for appetizers, fresh meat and pro- duce to computer experts and delivery people. We see SYSCO as not just our supplier, but as a partner in our success. They have a legacy of loyalty, quality and integrity.” The second phase of the C.A.R.E.S. customer rela- tionship management is the iCare program. Through this initiative, MA’s are trained to be more effective business consultants for their customers by understanding a foodservice operation’s profitability model, enabling them to analyze and develop menus, help control inventories, and provide food safety training. Through SYSCO’s Internet web site, customers may access a variety of services that help them drive and increase their customer traffic and knowl- edge. These include potential lenders to fund expansions or restaurant upgrades; assistance in cre- ating guest birthday cards, table tents, banners, posters and many other features. Because of the success with SYSCO after their remodeling, The Loft ultimately expanded its purchases to include fresh-cut steaks, coffee and beverages, operating supplies, janitorials and fresh produce. 2 0 0 2 A N N U A L R E P O R T 9 VALUE-ADDED SERVICES OFFER CUSTOMERS CREATIVE SOLUTIONS FROM REDESIGNING A UNIVERSITY DINING HALL TO IMPROVING HEALTHCARE SYSTEMS When State University of New York at Fredonia wanted to create a dynamic new look, SYSCO’s experts joined the team effort to revamp the dining hall serving area. Using SYSCO’s Brandables concepts Arrezzio Italian Café, Casa Solana, Mein Street Wok and Block & Barrel Deli also increased meal traffic. “Our menus were up-to-date but we wanted to feed students more efficiently in a personalized ambience. We had SYSCO-partnered before the project, but the renovation process brought the cream to the top.” Michael W. Proffer, Director of Dining Services FSA SUNY Fredonia, Fredonia, NY The Marketplace at Erie Dining Center, one of several self-operated food- service units on campus, wanted to introduce unique menus and abolish the cafeteria look. They wanted to redesign the dining hall into a scramble con- cept with various food-theme stations, each complementing the menu it served. SYSCO Brandables filled the bill. Tim Murphy, SYSCO Brands Director, and the team at Sysco Food Services of Jamestown contacted an Amish carpenter who built the wood cabinetry for the foodstations, which was stained and then tiled to match each color concept. Mike Proffer says student meal counts rose 29 percent, a trend that is continuing, and staff has been added to keep service levels high. Best of all, they accomplished their goals—improved customer service, menu variety and plate presentation. 10 S Y S C O C O R P O R A T I O N SYSCO –The leading foodservice supplier to healthcare – delivering food, beverages, equipment and medical supplies. SYSCO’s healthcare sales continued to increase in fiscal year 2002 through penetration of existing accounts as well as the addition of new business. A recognized power in distributing products and services to the foodservice industry, SYSCO also supplies certain items specific to healthcare providers, including both acute and long-term care facilities. These include convenience entrees, food thickeners, fortified juices and pureed products, as well as sugar-free, fat-free, low-fat and low-sodium alternatives and shelf-stable beverages. They are designed to be compatible with traditional hot food preparation and service, as well as cook-chill pro- duction and patient delivery systems. In addition to ongoing training of sales associ- ates, the company continues to expand its market share by offering value-added programs designed to help customers improve their profitability. One innovative offering, “IMPAC, ” is a long-term care menu system that is now available to customers via the Internet. It includes seasonally-adjusted menus tailored to residents’ diet requirements as well as Education Interface, a web-enabled training and support solution that allows customers to create an interactive learning center within their own facilities, has been well received. nutritional analysis, cost analysis and other features that combine to create a total management system. This system and other similar ones contributed to the increase in sales of SYSCO Brand products in fiscal 2002. Another program now being offered allows customers to enhance foodservice quality, to train healthcare employees on improving perform- ance and to increase patient satisfaction. 2 0 0 2 A N N U A L R E P O R T 11 In FY2002 SYSCO extended its distribution reach from coast to coast throughout North America with the acquisition of SERCA Foodservice, Inc. SYSCO SERCA supplies 65,000 customers from 17 distribution facilities located in 8 provinces across Canada and broadens SYSCO’s presence in that $9 billion foodservice distribution market. Fold-outs are new facilities built to develop established markets that are being serviced from distant locations. The benefits of experienced management, tapped from other SYSCO companies, and proven systems allow markets to be developed while delivery mileage is reduced.To date, 11 fold-out facilities have been built in the United States including the three most recent in Sacramento, CA, Columbia, SC (pictured above), and Las Vegas, NV. SYSCO’s objective is to make acquisitions of leading companies that are accretive or non-dilutive to earnings, that have a product or geographic niche and management who will remain. The SERCA Foodservice acquisition expanded the sales force and created distribution efficiencies, new supplier rela- tionships and the opportunity to increase SYSCO Brand sales. 12 S Y S C O C O R P O R A T I O N The addition of several companies with niches in particular markets has broadened SYSCO’s product capabilities. One company, FreshPoint, supplies produce that appeals to chefs who desire more exotic specialty items for their menus and require multiple deliveries per week. Its distribution structure concentrates smaller vehicles in the more populous metroplex areas, allowing for more effcient service. SYSCO Natural produce contin- ues to be the core of SYSCO’s successful produce programs, which generated sales of $2.0 billion in FY2002. It continues to be the anchor in a growing family of offerings, which include both fruit and vegetable staples, as well as a variety of pre- washed and pre-cut ready-to-eat salads and other items that are chopped, diced or sliced. 2 0 0 2 A N N U A L R E P O R T 13 SPECIALTY COMPANIES PROVIDE EXPERTISE IN NICHE MARKETS CUSTOMERS RECEIVE MORE CONSISTENT-QUALITY PRODUCTS; SYSCO GAINS SYNERGISTIC OPPORTUNITIES For more than 10 years, Guest Supply has been providing a complete hotel room operating supply program, including textiles, paper, cleaning supplies and room accessories for more than 800 Accor North America and 300 Red Roof Inn locations. “I was in a pinch and Guest Supply spent extra time and effort to research my needs and meet our quality concerns. They were almost like one of our purchasing arms.” Kris Richardson Vice President, Procurement Accor North America Dallas, TX Guest Supply is one of the largest suppliers for Accor North America. David O’Shaughnessy, Group Executive Vice President of Accor North America, says, “We have a very strict quality process and Guest Supply consistently rates in the top percentile in terms of quality of service, product, price and delivery. We consider our relationship a true partnership.” A market leader in hospitality supplies, Guest Supply had a 16 percent share of that $2.5 billion industry at fiscal year-end 2002. It develops in-room personal care amenity packages and provides other products, including textiles; furniture, fixtures and appliances; in-room foods and beverages; chemical and janitorial items; paper products and room accessories. With a strong 40 percent share of the $250 million personal care amenities market in fiscal 2002, it is also a pre- mier supplier for consumer products companies and retail outlets. Numerous synergies exist to integrate with SYSCO’s distribution networks, creating one- stop shopping solutions. 14 S Y S C O C O R P O R A T I O N “SYSCO LA and Newport Meat are like our neighborhood gro- cer and butcher – they treat us as if we’re their only customer.” Bob Spivak Chief Executive Officer Grill Concepts Los Angeles, CA SYSCO can beef up a menu with aged, mouth-watering steaks and chops, cut to any customer’s specifications. All USDA Quality grades are available to meet the specific needs of customers. The Grill on the Alley is one of the best-known places to get a great steak in Los Angeles. This restaurant, which began in 1984 with the promise of “Quality Without Compromise,” is the f lagship of Grill Concepts. Bob Spivak understands customer service. He says, “SYSCO Los Angeles is our largest supplier and Newport Meat has always been our meat purveyor – both deliver our restaurants quality without compromise.” When supplies of quality fresh-cut steaks were not available consistently, SYSCO acquired three specialty meat-cutting companies, including Newport Meat, in 1999. Since then, it has acquired three additional meat companies, and all six are distributing high quality products from 10 locations. To further leverage the expertise of the meat companies, 50 of the broadline companies now distribute fresh, portion-cut steaks from these operations. Trained meat specialists and marketing associates have helped grow sales of SYSCO’s own beef brands–Buckhead Beef east of the Rocky Mountains and Newport Pride in the West, as well as Butcher’s Block. Certified Angus Beef ® (CAB) products also have been significant to SYSCO’s suc- cess. In fact, half of the top 20 CAB® distributors in calendar year 2001 were SYSCO companies. To enhance the network of meat companies, other acquisition opportunities are possible and fold-outs are planned for Chicago and New Jersey. This will allow more SYSCO broadline companies to distribute fresh, custom-cut meats–benefiting customers by saving on labor costs, eliminating trim and waste, and reducing exposure to food safety issues. “Our experience with Buckhead Beef has been excellent. The product is great and customers love it.” Jeff Gehris Chief Executive Officer PJ‘s Sea Shack New Smyrna Beach, FL Jeff Gehris, Chief Executive Officer of PJ’s Sea Shack in New Smyrna Beach, FL, met Cory Check, Marketing Director of Buckhead Beef, at a SYSCO food show in Ocoee, FL. Jeff was so impressed with Cory’s knowledge and expertise about Buckhead Beef’s custom-cut steaks that he transferred his business from a competitor. Cory teamed up with Jeff Zigelstein, Marketing Associate at SYSCO Central Florida to design PJ’s program. The products were such a success in Gehris’ Florida restaurants that he is now working with SYSCO-Albany (New York) to supply custom-cut steaks for his five ski-area restaurants in Vermont. 2 0 0 2 A N N U A L R E P O R T 15 “Our business is in a strong growth mode and sometimes we go into a new area that SYGMA previously has not supported. It’s impressive how they make it work.” Peggy Cherng, Ph.D. President and Chief Executive Officer Panda Restaurant Group, Inc. Pasadena, CA Peggy Cherng, Ph.D., President and Chief Executive Officer of Panda Restaurant Group, Inc., oversees more than 500 restaurants in 35 states under the Panda Express, Panda Inn and Hibachi-San concepts. Dr. Cherng is pic- tured above at a Panda Express location. Panda Restaurant Group, Inc., the world’s largest Chinese foodservice provider, has been operating a successful chain of restaurants for nearly 30 years and SYGMA has been sup- plying their products for the past seven years. Before selecting SYGMA as their supplier, individual locations of Panda Restaurant Group were purchasing independently from numerous local distributors. Panda Restaurant Group worked with SYGMA to increase their purchasing power, particularly in the produce area. They believe that SYGMA’s nationwide infrastructure has allowed them to expand rapidly. “They are very support- ive of the growth and expansion we would like to do,” says Dr. Cherng. SYGMA operates from 13 locations across the United States, each of which supplies multiple locations for two to 10 chain restaurant “concepts,” or customers. Typically, SYGMA warehouses are more compact than a broadline warehouse. Since chain restaurant customers usually offer more limited menus, a SYGMA warehouse may inventory 300 to 500 items per con- cept. SYSCO continues to be committed to serving growing segments of this market and SYGMA strives to maximize service at all levels. During the year, the company intro- duced an on-line reporting and information system at www.sygmanetwork.com that allows chain restaurant customers to man- age and operate their businesses more productively and efficiently. Restaurant management now has the ability to access reports customized for their particular restaurant, monitor call and delivery infor- mation, receive newsletters regarding industry and company information and access links to industry news and trends, as well as food safety tips. 16 S Y S C O C O R P O R A T I O N HARVESTING THE BENEFITS OF TECHNOLOGY E-INITIATIVES ARE ENHANCING ALL FACETS OF SYSCO’S BUSINESS, INCREASING EFFICIENCY, PRODUCTIVITY AND PROFITABILITY Customers have access to a variety of value-added Internet services and resources, from training materials to funding packages offered by financial lenders. Superior commitment to service is critical in a customer-driven culture. SYSCO’s commitment to error-free service has been enhanced by the SYSCO Uniform System, an enterprise- wide information technology system. The SYSCO Uniform System, a total redesign of management information systems, encompasses all business aspects on a real-time basis. This proprietary system was developed over several years and installation was completed at calendar year- end 1999. It provides in-depth information regarding customer ordering and purchasing patterns and continues to produce efficiencies in the ordering, warehousing, selection, loading and delivery of products, increasing asset efficiency. In the broadline segment during the past five years, accounts receivable days of sales outstanding have been reduced from 24.26 in fiscal year 1997 to 21.65 in fiscal year 2002 and inven- tory days of sales outstanding have declined from 18.47 to 16.02 for the same period. This is noteworthy since one day’s reduction approximates $64 million in cash f low. iCare, the second phase of C.A.R.E.S. (Customers Are Really Everything to SYSCO), is a collection of value-added resources offered exclusively by SYSCO in an Internet format. Through SYSCO’s web site, customers may access promotional items and training materials or potential financial lenders who can bid on a customer’s loan request for a restaurant expansion or upgrade. Future offerings may include a portal to additional services like insurance products or labor scheduling systems. 2 0 0 2 A N N U A L R E P O R T 17 Anthony Prejean demonstrates the SYSCO Order Selector (SOS), a finger-mounted bar code scanner that confirms that the appropriate product has been selected. In the 21 broadline companies that are on the system, selection errors have been dra- matically reduced, significantly improving efficiency and reducing restocking costs. Miguel Castillo checks an order with the SYSCO Loader System (SLS). It confirms that products selected are what was ordered, then generates a map of product placement in the delivery vehicle. SYSCO Online Advanced Reporting (SOLAR) is a system that reports trends and performance statistics, allowing broadline companies to benchmark with each other. The SYSCO Warehouse Management System (SWMS) is a system that tracks inventory from the time of receipt throughout stor- age, selection and delivery. More efficient storage may often delay the need for facility expansions for two to three years. SWMS also manages employee time, which improves accuracy and efficiency and increases safety and productivity levels. 18 S Y S C O C O R P O R A T I O N Activity-Based Compensation (ABC), a performance-based pay system initiative for driver associ- ates like Robert Burton, has been implemented in 47 companies. It has proven to increase their com- pensation, job satisfaction and quality of life, while enhancing productivity and reducing costs for SYSCO and providing better service for our customers. From sea to sea, on city highways and countryside byways, approximately 8,400 SYSCO vehicles are a familiar sight as they log more than 5.6 million miles per week, delivering products to be featured on the next day’s customer menus. A site has been selected in Virginia for construction of an approximately 800,000 square-foot facility to receive and redistribute products to SYSCO locations in the Mid-Atlantic and Northeast. The first step in a long-term project to build similar warehouses in each geographical region, this project should increase transportation savings and improve storage and handling methods. 2 0 0 2 A N N U A L R E P O R T 19 Community Activities Educational Programs On an individual company basis, SYSCO’s operating com- panies assist charities, volunteer organizations and homeless shelters. They also donate to food banks and other programs within their communities. At the corporate level, SYSCO has supported such organizations as United Way, March of Dimes and Second Harvest / Kids’ Café. In 1988 SYSCO joined forces with Second Harvest, the largest charitable hunger-relief organi- zation in the United States. During its most recent program, SYSCO raised $150,000 through product promo- tions to provide meals for hungry children through Second Harvest’s Kids’ Café program. In a further effort to participate in diminishing hunger in the United States, as well as the rest of the world, SYSCO recently formed a significant partnership with the Share Our Strength organization. For a mini- mum of three years, the corporation will adopt a multi-fold approach that includes a financial gift, in-kind gifts and volunteer services throughout the year. A key sponsorship event will be “Taste of the Nation” dinners that occur in 90 to 100 North American markets during the spring of each year. These events raise millions of dol- lars that are used entirely for the support of reducing hunger in both large metropolitan areas as well as adjoin- ing smaller communities. Al Gaylor, Assistant Vice President, Marketing Services for SYSCO (right), is pictured with Bill Shore, (left), founder of “Share Our Strength” at the Share Our Strength National Leadership Conference in August 2002. 20 S Y S C O C O R P O R A T I O N SYSCO also is strongly committed to higher education through the annual funding of scholarships through The Educational Foundation of the National Restaurant Association, Johnson & Wales University and other foundations. Each year, the company also recognizes its associates by assisting their children who are pursuing undergradu- ate education at an accredited four-year college or university within the United States and Canada. More than $1.0 million has been awarded to students through John F. and Eula Mae Baugh SYSCO scholarships since the program’s inception in 1996. For the 2002-2003 aca- demic year, 24 returning scholarship winners qualified for renewed funding and $60,000 in new grants was awarded to the seven recipients selected for the upcoming year. Listed below are this year’s scholarship winners, their aca- demic institutions and the distribution location at which their family member is employed. Christopher E. Burke University of Louisville Louisville, KY Sysco/Louisville Food Services Co. Jason M. Downs Northwestern University Evanston, IL SYSCO Corporation Ryan J. Haase Iowa State University Ames, IA Pegler – Sysco Food Services Company Emily K. Howard Colorado State University Fort Collins, CO Nobel / Sysco Food Services Company Amanda K. Matulle Drake University Des Moines, IA Sysco Food Services of Eastern Wisconsin Kendra L. Starwalt Southern Illinois University Carbondale, IL Sysco Food Services of Indianapolis, LLC Elizabeth A. Weberpal University of Wisconsin - Stevens Point Stevens Point, WI Sysco Food Services of Baraboo Financial Section 22 Eleven-Year Summary of Operations and Related Information 24 Consolidated Results of Operations 25 Consolidated Balance Sheets 26 Consolidated Shareholders’ Equity 27 Consolidated Cash Flows 28 Summary of Accounting Policies 30 Additional Financial Information 45 Report of Management on Internal Accounting Controls 46 Report of Independent Auditors 47 Selected Financial Data 48 Management’s Discussion and Analysis of Financial Condition and Results of Operations 2 0 0 2 A N N U A L R E P O R T 21 Eleven-Year Summary of Operations and Related Information (Dollars in thousands except for per share data, employees and shareholders) 2002 2001 2000 1999 1998 Results of Operations Sales Costs and expenses Cost of sales Operating expenses Interest expense Other, net Total costs and expenses Earnings before income taxes Income taxes Earnings before cumulative effect of accounting change Cumulative effect of accounting change Net earnings Cash dividends paid Earnings reinvested Effective income tax rate Per Common Share Data (1) Diluted earnings per share: Earnings before accounting change Cumulative effect of accounting change Net earnings Cash dividends Shareholders’ equity Diluted average shares outstanding Performance Measurements Pretax return on sales Return on average shareholders’ equity before accounting change Return on average total capital before accounting change (equity plus long-term debt) Financial Position Current ratio Working capital Capital expenditures Other assets Plant and equipment (net) Total assets Long-term debt Other liabilities Shareholders’ equity Shareholder Data Closing price of common share at year end (1) Price/earnings ratio at year end - diluted (1), (2) Market price per common share-high/low (1) Number of employees Number of shareholders of record at year end $ 23,350,504 $ 21,784,497 $ 19,303,268 $ 17,422,815 $ 15,327,536 18,722,163 3,467,379 62,897 (2,805) 17,513,138 3,232,827 71,776 101 15,649,551 2,843,755 70,832 1,522 14,207,860 2,547,266 72,839 963 12,499,636 2,236,932 58,422 53 22,249,634 20,817,842 18,565,660 16,828,928 14,795,043 1,100,870 421,083 679,787 — 679,787 213,275 966,655 369,746 596,909 — 596,909 173,701 737,608 283,979 453,629 (8,041) 445,588 145,418 593,887 231,616 362,271 — 362,271 126,691 532,493 207,672 324,821 (28,053) 296,768 110,928 $ 466,512 $ 423,208 $ 300,170 $ 235,580 $ 185,840 38.25% 38.25% 38.5% 39% 39% $ $ 1.01 — 1.01 0.32 3.26 673,445,783 $ 0.88 — 0.88 0.26 $ 3.16 677,949,351 $ 0.68 (0.01) 0.67 0.22 $ 2.60 669,555,856 $ 0.54 — 0.54 0.19 $ 2.11 673,593,338 $ 0.47 (0.04) 0.43 0.17 $ 1.98 686,880,362 4.71% 4.44% 3.82% 3.41% 3.47% 31% 21% 31% 21% 30% 18% 27% 16% 22% 15% $ $ $ 1.42 945,932 416,393 1,106,682 1,697,782 5,989,753 1,176,307 441,570 2,132,519 27.22 27 30-22 46,800 15,510 $ $ $ 1.37 772,770 341,138 960,475 1,516,778 5,352,987 961,421 188,067 2,100,535 27.15 31 30-19 43,000 15,493 $ $ $ 1.47 840,608 266,413 747,463 1,340,226 4,730,145 1,023,642 183,071 1,721,584 21.07 31 22-13 40,400 15,207 $ $ $ 1.66 948,252 286,687 460,146 1,227,669 4,081,205 997,717 244,129 1,394,221 15.38 28 16-10 35,100 15,485 $ $ $ 1.61 825,727 259,353 449,068 1,151,054 3,780,189 867,017 232,193 1,326,639 12.75 27 14-9 33,400 16,142 (1) The data presented reflects the 2-for-1 stock splits of December 15, 2000, March 20, 1998 and June 19, 1992. (2) Ratios for 2000 and 1998 are before the effects of accounting changes. 22 S Y S C O C O R P O R A T I O N 1997 1996 1995 1994 1993 1992 2002 1998-2002 1993-2002 1983-2002 $ 14,454,589 $ 13,395,130 $ 12,118,047 $ 10,942,499 $ 10,021,513 $ 8,892,785 7% 10% 10% 14% 1-Year Growth Rates 5-Year Compound Growth Rates 10-Year Compound Growth Rates 20-Year Compound Growth Rates 11,835,959 2,076,335 46,502 (162) 10,983,796 1,917,376 41,019 (1,004) 9,927,448 1,736,625 38,579 (2,223) 8,971,628 1,568,773 36,272 (1,756) 8,225,275 1,427,394 39,004 (2,137) 7,303,886 1,270,397 43,275 (6,429) 13,958,634 12,941,187 11,700,429 10,574,917 9,689,536 8,611,129 495,955 193,422 453,943 177,038 417,618 165,794 367,582 150,830 331,977 130,170 281,656 109,427 302,533 — 302,533 99,574 276,905 — 276,905 87,721 251,824 — 251,824 73,154 216,752 — 216,752 59,074 201,807 — 201,807 48,815 172,229 — 172,229 31,637 $ 202,959 $ 189,184 $ 178,670 $ 157,678 $ 152,992 $ 140,592 39% 39% 40% 41% 39% 39% $ 0.43 $ — 0.43 0.14 1.99 $ $ 712,167,188 0.37 $ — 0.37 0.12 2.01 $ 0.34 $ — 0.34 0.10 1.89 $ 0.29 $ — 0.29 0.08 1.67 $ 739,430,592 749,526,192 757,855,924 775,069,704 0.26 $ — 0.26 0.07 1.52 $ 0.22 — 0.22 0.05 1.41 784,910,472 3.43% 3.39% 3.45% 3.36% 3.31% 3.17% 21% 15% 20% 14% 19% 14% 18% 13% 19% 13% 18% 12% $ $ $ 1.72 821,955 210,868 413,762 1,058,432 3,433,823 685,620 233,917 1,374,612 $ 1.81 855,887 235,891 412,436 990,642 3,319,943 581,734 226,007 1,451,224 $ 1.88 836,603 201,577 411,712 896,079 3,097,161 541,556 219,366 1,383,472 $ 1.85 736,593 161,485 394,860 817,221 2,811,729 538,711 185,548 1,224,415 $ 1.87 660,338 127,879 350,450 759,857 2,530,043 494,062 152,292 1,124,291 $ 1.92 607,087 134,290 326,737 734,423 2,325,206 488,828 133,730 1,045,689 9.25 $ 22 10-7 32,000 17,890 $ 8.57 $ 23 9-7 30,600 19,160 $ 7.38 $ 22 8-6 28,100 21,112 $ 5.82 $ 20 8-6 26,200 19,860 $ 6.16 $ 24 7-6 24,200 17,798 $ 5.97 27 7-5 22,500 14,864 14 14 14 15 15 23 3 17 15 16 18 18 19 19 18 10 15 15 16 16 20 9 16 16 16 16 21 12 2 9 7 12 2 0 0 2 A N N U A L R E P O R T 23 Consolidated Results of Operations (In thousands except for share data) June 29, 2002 June 30, 2001 July 1, 2000 Year Ended Sales Costs and expenses Cost of sales Operating expenses Interest expense Other, net Total costs and expenses Earnings before income taxes Income taxes Earnings before cumulative effect of accounting change Cumulative effect of accounting change Net earnings Earnings before accounting change: Basic earnings per share Diluted earnings per share Cumulative effect of accounting change: Basic earnings per share Diluted earnings per share Net earnings: Basic earnings per share Diluted earnings per share See Summary of Accounting Policies and Additional Financial Information $ 23,350,504 $21,784,497 $ 19,303,268 18,722,163 3,467,379 62,897 (2,805) 22,249,634 1,100,870 421,083 679,787 — 679,787 1.03 1.01 — — 1.03 1.01 $ $ 17,513,138 3,232,827 71,776 101 20,817,842 966,655 369,746 596,909 — 596,909 0.90 0.88 — — 0.90 0.88 $ $ 15,649,551 2,843,755 70,832 1,522 18,565,660 737,608 283,979 453,629 (8,041) 445,588 0.69 0.68 (0.01) (0.01) 0.68 0.67 $ $ 24 S Y S C O C O R P O R A T I O N Consolidated Balance Sheets (In thousands except for share data) June 29, 2002 June 30, 2001 Current assets Cash Receivables Inventories Deferred taxes Prepaid expenses Total current assets Plant and equipment at cost, less depreciation Other assets Goodwill and intangibles, less amortization Other Total other assets Total assets Current liabilities Notes payable Accounts payable Accrued expenses Income taxes Current maturities of long-term debt Total current liabilities Long-term debt Deferred taxes Contingencies Shareholders’ equity Preferred stock, par value $1 per share Authorized 1,500,000 shares, issued none Common stock, par value $1 per share Authorized 1,000,000,000 shares, issued 765,174,900 shares Paid-in capital Retained earnings Other comprehensive loss Less cost of treasury stock, 111,634,603 and 100,037,236 shares Total shareholders’ equity Total liabilities and shareholders’ equity See Summary of Accounting Policies and Additional Financial Information $ 230,439 1,760,827 1,117,869 34,188 41,966 3,185,289 1,697,782 922,222 184,460 1,106,682 $5,989,753 $ 66,360 1,349,330 768,317 41,596 13,754 2,239,357 1,176,307 441,570 $ 135,743 1,650,130 1,042,277 7,128 40,456 2,875,734 1,516,778 768,837 191,638 960,475 $5,352,987 $ 30,640 1,271,817 653,908 123,332 23,267 2,102,964 961,421 188,067 — — 765,175 217,891 2,869,417 (65,435) 3,787,048 1,654,529 2,132,519 765,175 186,818 2,415,160 (5,624) 3,361,529 1,260,994 2,100,535 $5,989,753 $5,352,987 2 0 0 2 A N N U A L R E P O R T 25 Consolidated Shareholders’ Equity (In thousands except for share data) Common Stock Shares Amount Paid-in Capital Retained Earnings Other Comprehensive Loss Treasury Stock Shares Amount Balance at July 3, 1999 382,587,450 $382,587 $ 872 $1,999,093 $ — 52,915,065 $ 988,331 Net earnings for year ended July 1, 2000 Dividends declared Treasury stock purchases Treasury stock issued for acquisitions Stock options exercised Employees’ Stock Purchase Plan Management Incentive Plan 445,588 (152,427) 69,794 (7,526) 9,446 4,381 5,660,400 (4,984,497) (1,163,222) (943,530) (381,553) 186,296 (98,362) (20,104) (18,585) (7,352) Balance at July 1, 2000 382,587,450 $382,587 $ 76,967 $2,292,254 $ — 51,102,663 $1,030,224 Net earnings for year ended June 30, 2001 Dividends declared Treasury stock purchases Treasury stock issued for acquisitions Stock options exercised Employees’ Stock Purchase Plan Management Incentive Plan Minimum pension liability adjustment, net of tax of $3,484 2-for-1 stock split Balance at June 30, 2001 Net earnings for year ended June 29, 2002 Dividends declared Treasury stock purchases Treasury stock issued for acquisitions Stock options exercised Employees’ Stock Purchase Plan Management Incentive Plan Minimum pension liability adjustment, net of tax of $37,049 596,909 (180,702) 184,357 (11,099) 16,713 9,167 16,000,000 (12,025,208) (3,677,972) (1,630,208) (834,702) 428,196 (136,696) (34,529) (17,770) (8,431) 382,587,450 382,588 (89,287) (293,301) 51,102,663 765,174,900 $765,175 $186,818 $2,415,160 $ (5,624) 100,037,236 $1,260,994 (5,624) 679,787 (225,530) 12,517 (10,750) 17,030 12,276 18,000,000 (1,116,303) (2,650,714) (1,784,529) (851,087) 473,558 (12,251) (32,837) (24,104) (10,831) (59,811) Balance at June 29, 2002 765,174,900 $ 765,175 $217,891 $2,869,417 $(65,435) 111,634,603 $1,654,529 See Summary of Accounting Policies and Additional Financial Information 26 S Y S C O C O R P O R A T I O N Consolidated Cash Flows (In thousands) Cash flows from operating activities: Net earnings Add non-cash items: Cumulative effect of accounting change Depreciation and amortization Deferred tax provision (benefit) Provision for losses on receivables Additional investment in certain assets and liabilities, net of effect of businesses acquired: (Increase) in receivables (Increase) in inventories (Increase) decrease in prepaid expenses (Decrease) increase in accounts payable (Decrease) increase in accrued expenses (Decrease) increase in income taxes (Increase) decrease in other assets Net cash provided by operating activities Cash flows from investing activities: Additions to plant and equipment Proceeds from sales of plant and equipment Acquisition of businesses, net of cash acquired Net cash used for investing activities Cash flows from financing activities: Bank and commercial paper (repayments) borrowings Other debt borrowings (repayments) Common stock reissued from treasury Treasury stock purchases Dividends paid Net cash used for financing activities Net increase (decrease) in cash Cash at beginning of year Cash at end of year Supplemental disclosures of cash flow information: Cash paid during the year for: Interest Income taxes See Summary of Accounting Policies and Additional Financial Information Year Ended June 29, 2002 June 30, 2001 July 1, 2000 $ 679,787 $ 596,909 $ 445,588 — 278,251 263,492 25,904 (32,360) (17,804) (680) (357) (23,403) (81,736) (6,114) 1,084,980 (416,393) 20,711 (234,618) (630,300) (143,593) 384,114 86,328 (473,558) (213,275) (359,984) 94,696 135,743 — 248,240 6,199 21,740 (87,616) (50,938) 6,547 33,377 73,737 106,047 982 955,224 (341,138) 12,750 (10,363) (338,751) (72,055) (41,417) 75,511 (428,196) (173,701) (639,858) (23,385) 159,128 8,041 220,661 (25,528) 27,082 (105,935) (56,943) 3,378 105,790 122,480 16,254 (52,142) 708,726 (266,413) 18,922 (211,901) (459,392) 51,810 (11,947) 52,342 (186,296) (145,418) (239,509) 9,825 149,303 $ 230,439 $ 135,743 $ 159,128 $ 61,354 239,792 $ 71,791 251,567 $ 70,977 272,022 2 0 0 2 A N N U A L R E P O R T 27 Summary of Accounting Policies Business and Consolidation SYSCO Corporation (SYSCO) is engaged in the marketing and distribution of a wide range of food and related products to the foodservice or “food-prepared-away-from-home” industry. These services are performed for about 415,000 customers from 142 distribution facilities located throughout the United States and Canada. The accompanying financial statements include the accounts of SYSCO and its subsidiaries. All significant intercompany transactions and account balances have been eliminated. Certain amounts in the prior years have been reclas- sified to conform to the fiscal 2002 presentation including the reflection of dividends on a declared versus paid basis. The preparation of financial statements in conformity with generally accepted accounting principles requires manage- ment to make estimates that affect the reported amounts of assets, liabilities, sales and expenses. Actual results could differ from the estimates used. Earnings of acquisitions recorded as purchases are included in SYSCO’s results of operations from the date of acquisition. Inventories consist of food and related products held for resale and are valued at the lower of cost (first-in, Inventories first-out method) or market. Plant and Equipment Capital additions, improvements and major renewals are classified as plant and equipment and are carried at cost. Depreciation is recorded using the straight-line method, which reduces the book value of each asset in equal amounts over its estimated useful life. Maintenance, repairs and minor renewals are charged to earnings when they are incurred. Upon the disposition of an asset, its accumulated depreciation is deducted from the original cost, and any gain or loss is reflected in current earnings. Applicable interest charges incurred during the construction of new facilities are capitalized as one of the elements of cost and are amortized over the assets’ estimated useful lives. Interest capitalized during construction periods for the past three years was $3,746,000 in 2002, $2,995,000 in 2001, and $964,000 in 2000. A summary of plant and equipment, including the related accumulated depreciation, appears below: Plant and equipment, at cost Land Buildings and improvements Equipment Accumulated depreciation Net plant and equipment June 29, 2002 June 30, 2001 $ 131,188,000 1,390,712,000 1,695,043,000 $ 119,021,000 1,202,701,000 1,572,161,000 3,216,943,000 (1,519,161,000) 2,893,883,000 (1,377,105,000) $ 1,697,782,000 $ 1,516,778,000 Estimated Useful Lives 10-40 years 3-20 years Goodwill and Intangibles Goodwill and intangibles represent the excess of cost over the fair value of tangible net assets acquired. Goodwill and intangibles arising from acquisitions initiated on or prior to June 30, 2001 are amortized over 25 to 40 years using the straight-line method. Goodwill and intangibles arising from acquisitions initiated after June 30, 2001 are not amortized. See New Accounting Standards for further discussion. The company reviews goodwill and intan- gibles to evaluate whether events or changes have occurred that would suggest an impairment of carrying value. SYSCO assesses the recoverability of these intangibles by determining whether the amortization of these intangibles over their remaining lives can be recovered through undiscounted future net cash flows of the acquired operations. The amount of impairment, if any, is measured by the amount in which the carrying amounts exceed the projected discounted future operating cash flows. Accumulated amortization at June 29, 2002, June 30, 2001 and July 1, 2000 was $139,977,000, $116,439,000 and $96,862,000, respectively. In the first quarter of fiscal 2000, SYSCO recorded a one-time, after-tax, non-cash charge of Costs of Start-up Activities $8,041,000 to comply with the required adoption of AICPA Statement of Position 98-5 (SOP 98-5), “Reporting on the Costs of Start-up Activities.” SOP 98-5 requires the write-off of any unamortized costs of start-up activities and organiza- tion costs. Such costs are now expensed as incurred. Insurance Program SYSCO maintains a self-insurance program covering portions of workers’ compensation, group med- ical, general and vehicle liability costs. The amounts in excess of the self-insured levels are fully insured. Self-insurance accruals are based on claims filed and an estimate for significant claims incurred but not reported. Revenue Recognition The company recognizes revenue from the sale of a product at the time the product is delivered to the customer. 28 S Y S C O C O R P O R A T I O N Income Taxes SYSCO follows the liability method of accounting for income taxes as required by the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” Cash Flow Information For cash flow purposes, cash includes cash equivalents such as time deposits, certificates of deposit, short-term investments and all highly liquid instruments with original maturities of three months or less. Shipping and Handling Costs Shipping and handling costs include costs associated with the selection of products and delivery to customers. Included in operating expenses are shipping and handling costs of approximately $1,328,428,000 in fiscal 2002, $1,297,944,000 in fiscal 2001 and $1,140,116,000 in fiscal 2000. Acquisitions During fiscal 2002, SYSCO acquired for cash and/or stock, a custom meat-cutting operation, a company that supplies products to the lodging industry and acquired substantially all of the assets and certain liabilities of a Canadian broadline foodservice operation. In the aggregate, SYSCO paid cash of $233,618,000 and issued 343,468 shares to the former owners of the acquired companies. During fiscal 2001, SYSCO acquired for cash and/or stock, two custom meat-cutting operations, two broadline foodser- vice companies and one company that supplies products to the lodging industry. In the aggregate, SYSCO paid cash of $8,848,000 and issued 12,399,957 shares to the former owners of the acquired companies. During fiscal 2002, SYSCO issued an additional 119,245 shares to the former owners of the acquired companies. During fiscal 2000, SYSCO acquired for cash and/or stock, three custom meat-cutting operations, two broadline foodser- vice companies and one specialty produce company. In the aggregate, SYSCO paid cash of $211,901,000 and issued 9,968,994 shares to the former owners of the acquired companies. During fiscal 2001, SYSCO paid additional cash of $1,515,000 related to these acquisitions and issued an additional 152,002 shares to former owners of the acquired companies. During fiscal 2002, SYSCO paid additional cash of $1,000,000 related to these acquisitions and issued an additional 703,311 shares to the former owners of the acquired companies. Certain acquisitions involve contingent consideration typically payable only in the event that certain operating results are attained or certain outstanding contingencies are resolved. Aggregate contingent consideration amounts outstanding as of June 29, 2002 included approximately 4,135,000 shares and $1,857,000 with a total aggregate value of $87,586,000. The transactions were accounted for using the purchase method of accounting and the financial statements include the results of the acquired companies from the respective dates they joined SYSCO. The acquisitions were immaterial, individually and in the aggregate, to the consolidated financial statements. The purchase price was allocated to the net assets acquired based on the estimated fair value at the date of acquisition. The balances included in the Consolidated Balance Sheets related to the current year acquisitions are based upon prelimi- nary information and are subject to change when final asset and liability valuations are obtained. Material changes to the preliminary allocations are not anticipated by management. Derivative Financial Instruments SYSCO manages its debt portfolio by targeting an overall desired position of fixed and floating rates and may employ interest rate swaps from time to time to achieve this goal. The company does not use derivative financial instruments for trading or speculative purposes. In March 2002, SYSCO entered into an interest rate swap agreement with a notional amount of $200,000,000 related to the $200,000,000 aggregate principal amount of 4.75% notes due July 30, 2005. The objective of such transaction is to protect the debt against changes in fair value due to changes in the benchmark interest rate, which has been designated as six-month LIBOR in arrears less 84.5 basis points. Under the interest rate swap agreement, SYSCO receives the fixed rate equal to 4.75% per annum and pays the benchmark interest rate. SYSCO has designated its interest rate swap agree- ment as a fair value hedge of the underlying debt. Interest expense on the debt is adjusted to include payments made or received under the hedge agreement. The recorded value of the swap agreement (not material in amount) and the related debt are carried on the Consolidated Balance Sheets at fair value. New Accounting Standards In fiscal 2000, SYSCO adopted the AICPA Statement of Position 98-1 (SOP 98-1), “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” SOP 98-1 provides guidance with respect to accounting for the various types of costs incurred for computer software developed or obtained for SYSCO’s use. The adoption of SOP 98-1 did not have a significant effect on SYSCO’s consolidated results of operations or financial position. In fiscal 2001, SYSCO adopted the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standard (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133,” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS No. 133.” These statements outline the accounting treatment for all derivative activity and their adoption did not have a significant effect on SYSCO’s consolidated results of operations or financial position. 2 0 0 2 A N N U A L R E P O R T 29 In fiscal 2001, SYSCO adopted the Securities and Exchange Commission Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition.” SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The adoption of SAB 101 had no effect on SYSCO’s consolidated results of operations or financial position. In June 2001, SYSCO adopted SFAS No. 141, “Accounting for Business Combinations.” SFAS No 141 requires that all business combinations be accounted for using the purchase method of accounting and prohibits the pooling-of-interests method for business combinations initiated after June 30, 2001. SYSCO is adopting the provisions of SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets” effective with the beginning of fiscal year 2003. As a result, the amortization of goodwill and indefinite life intangibles will be discontinued. Goodwill and indefinite life intangibles aris- ing from business combinations after June 30, 2001 are also not amortized. The recoverability of goodwill and intangibles will be assessed annually or as needed by determining whether the fair value of the applicable reporting units exceed their carrying values. SYSCO has six months from the date it adopts SFAS No. 142 to test for impairment and any impair- ment charge resulting from the initial application of the new rule must be classified as the cumulative effect of a change in accounting principle. Thereafter, any impairment losses will be included, net of tax, within the results of continuing operations. Management has completed its preliminary assessment of the impact that the adoption of SFAS No. 142 will have on the company’s consolidated financial statements and believes that its goodwill is not impaired. Goodwill amorti- zation, after tax, recognized by SYSCO was $14,533,000 in 2002, $12,089,000 in 2001 and $7,812,000 in 2000. In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 supersedes SFAS 121 and the portion of the Accounting Principle Board Opinion No. 30 that deals with disposal of a business segment. Management does not expect SFAS 144, which is effective for fiscal 2003, to have a material effect on the results of operations. Additional Financial Information Income Taxes The income tax provisions consist of the following: Federal income taxes State and local income taxes Total 2002 2001 2000 $372,498,000 48,585,000 $322,837,000 46,909,000 $262,333,000 21,646,000 $421,083,000 $369,746,000 $283,979,000 Included in the income taxes charged to earnings are net deferred tax provisions of $263,492,000, and $6,199,000 in fiscal 2002 and 2001, respectively, and a deferred tax benefit of $25,528,000 in fiscal 2000. The deferred tax provisions (benefits) result from the effects of net changes during the year in deferred tax assets and liabilities arising from tempo- rary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of SYSCO’s deferred tax assets and liabilities are as follows: Net long-term deferred tax liabilities: Deferred cooperative distributions Excess tax depreciation and basis differences of assets Casualty insurance Deferred compensation Other Total deferred tax liabilities Net current deferred tax assets: Receivables Inventory Other Total deferred tax assets Net deferred tax liabilities 30 S Y S C O C O R P O R A T I O N June 29, 2002 June 30, 2001 $ 266,673,000 264,696,000 (27,759,000) (20,423,000) (41,617,000) $ — 248,461,000 (21,523,000) (17,364,000) (21,507,000) 441,570,000 188,067,000 19,681,000 18,706,000 (4,199,000) 34,188,000 7,533,000 (7,906,000) 7,501,000 7,128,000 $ 407,382,000 $180,939,000 The company has had taxable earnings during each year of its 33-year existence and knows of no reason such prof- itability should not continue. Consequently, SYSCO believes that it is more likely than not that the entire benefit of existing differences will be realized and therefore no valuation allowance has been established for deferred tax assets. Reconciliations of the statutory Federal income tax rate to the effective income tax rates are as follows: Statutory Federal income tax rate State and local income taxes, net of Federal income tax benefit Other 2002 35.00% 2.42 0.83 38.25% 2001 35.00% 2.63 0.62 38.25% 2000 35.00% 3.00 0.50 38.50% Allowance for Doubtful Accounts Receivable The allowance for doubtful accounts receivable was $30,338,000 as of June 29, 2002 and $43,112,000 as of June 30, 2001. Customer accounts written off, net of recoveries, were $26,068,000 or 0.11% of sales, $23,045,000 or 0.11% of sales and $24,881,000 or 0.13% of sales for fiscal 2002, 2001 and 2000, respectively. Shareholders’ Equity On November 3, 2000 the Board of Directors declared a 2-for-1 stock split effected by a 100% stock dividend paid on December 15, 2000 to shareholders of record on November 15, 2000. All share and per share data in these financial statements have been restated to reflect the stock split. Basic earnings per share have been computed by dividing net earnings by 661,808,432 in 2002, 665,551,228 in 2001 and 659,164,948 in 2000, which represents the weighted average number of shares of common stock outstanding during those respective years. Diluted earnings per share have been computed by dividing net earnings by 673,445,783 in 2002, 677,949,351 in 2001 and 669,555,856 in 2000, which represents the weighted average number of shares of common stock outstanding during those respective years adjusted for the diluted effect of stock options outstanding using the treasury stock method. Comprehensive income is net earnings, plus certain other items that are recorded directly to shareholders’ equity. The only such item currently applicable to the company relates to minimum pension liability. Comprehensive income was $619,976,000, $591,285,000 and $445,588,000 at June 29, 2002, June 30, 2001 and July 1, 2000, respectively. Debt SYSCO has uncommitted bank lines of credit, which provide for unsecured borrowings for working capital of up to $125,000,000 of which none was outstanding at June 29, 2002 and $30,640,000 was outstanding at June 30, 2001. SYSCO’s debt consists of the following: Commercial paper, interest averaging 2.6% in 2002 and 4.2% in 2001 Senior notes, interest at 6.5%, maturing in 2005 Senior notes, interest at 7.0%, maturing in 2006 Senior notes, interest at 4.75% maturing in 2006 Senior notes, interest at 7.25%, maturing in 2007 Senior notes, interest at 6.1%, maturing in 2012 Debentures, interest at 7.16%, maturing in 2027 Debentures, interest at 6.5%, maturing in 2029 Industrial Revenue Bonds, mortgages and other debt, interest averaging 5.1% in 2002 and 6.2% in 2001, maturing at various dates to 2026 Total debt Less current maturities and short-term debt Net long-term debt June 29, 2002 June 30, 2001 $ 63,293,000 149,733,000 200,000,000 199,569,000 99,813,000 199,366,000 50,000,000 224,381,000 $ 179,313,000 149,643,000 200,000,000 — 99,774,000 — 50,000,000 224,359,000 70,266,000 112,239,000 1,256,421,000 (80,114,000) 1,015,328,000 (53,907,000) $ 1,176,307,000 $ 961,421,000 2 0 0 2 A N N U A L R E P O R T 31 The principal payments required to be made on debt during the next five years are shown below: Fiscal Year 2003 2004 2005 2006 2007 Amount $ 80,114,000 21,840,000 153,006,000 402,505,000 102,769,000 SYSCO had a revolving loan agreement in the amount of $300,000,000 as of June 29, 2002 maturing in fiscal 2004 which supported the company’s U.S. commercial paper program. There were no U.S. commercial paper borrowings out- standing at June 29, 2002. In September 2002, the company entered into a new revolving loan agreement in the amount of $450,000,000 maturing in fiscal 2008. SYSCO also has a revolving loan agreement in the amount of $100,000,000 in Canadian dollars (CAD) maturing in fiscal 2003 which supports the company’s Canadian commercial paper program. The Canadian commercial paper borrowings outstanding at June 29, 2002 were CAD $99,252,000 ($63,293,000 in U.S. dollars). In June 1995, SYSCO issued 6.5% senior notes totaling $150,000,000 due June 12, 2005, under a $500,000,000 shelf reg- istration filed with the Securities and Exchange Commission. These notes, which which were priced at 99.4% of par, are unsecured, not redeemable prior to maturity and are not subject to any sinking fund requirement. In May 1996, SYSCO issued 7.0% senior notes totaling $200,000,000 due May 1, 2006, under this shelf registration. These notes, which were priced at par, are unsecured, not redeemable prior to maturity and are not subject to any sinking fund requirement. In April 1997, in two separate offerings, SYSCO drew down the remaining $150,000,000 of the $500,000,000 shelf registra- tion. SYSCO issued 7.16% debentures totaling $50,000,000 due April 15, 2027. These debentures were priced at par, are unsecured, are not subject to any sinking fund requirement and are redeemable at the option of the holder on April 15, 2007, but otherwise are not redeemable prior to maturity. At that time, SYSCO also issued 7.25% senior notes totaling $100,000,000 due April 15, 2007. These notes were priced at 99.611% of par and are unsecured, not redeemable prior to maturity and not subject to any sinking fund requirement. In June 1998, SYSCO filed with the Securities and Exchange Commission another $500,000,000 shelf registration of debt securities. In July 1998, SYSCO issued 6.5% debentures totaling $225,000,000 under the shelf registration, due on August 1, 2028. These debentures were priced at 99.685% of par, are unsecured, are not subject to any sinking fund requirement and include a redemption provision which allows SYSCO to retire the debentures at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the debenture holders are not penalized by the early redemption. Proceeds from the debentures were used to retire commercial paper borrowings. In April 2002, SYSCO issued 4.75% notes totaling $200,000,000 under this shelf registration, due on July 30, 2005. These notes, which were priced at 99.8% of par, are unsecured, are not subject to any sinking fund requirement and include a redemption provision which allows SYSCO to retire the notes at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the note holders are not penalized by the early redemption. Proceeds from the notes were utilized to retire commercial paper borrowings. Concurrent with the issuance of these notes, SYSCO entered into an interest rate swap agreement with a notional amount of $200,000,000 whereby SYSCO receives a fixed rate equal to 4.75% per annum and pays a benchmark interest rate of six-month LIBOR in arrears less 84.5 basis points. In May 2002, SYSCO International, Co., a wholly-owned subsidiary of SYSCO, issued 6.10% notes totaling $200,000,000 due June 1, 2012 in a private offering. These notes, which were priced at 99.7% of par, are fully and uncondi- tionally guaranteed by SYSCO Corporation, are not subject to any sinking fund requirement, include registration rights for the note holders, and include a redemption provision which allows SYSCO International, Co. to retire the notes at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the note holders are not penalized by the early redemption. SYSCO International, Co. and SYSCO have filed a registration state- ment with the Securities and Exchange Commission covering an identical series of notes to be issued in exchange for the unregistered notes outstanding. The proceeds from these notes were utilized to repay commercial paper issued by SYSCO International, Co. to fund the acquisition of a Canadian broadline foodservice business. The Industrial Revenue Bonds have varying structures. Final maturities range from one to 24 years and certain of the bonds provide SYSCO the right to redeem (or call) the bonds at various dates. These call provisions generally provide the bondholder a premium in the early call years, declining to par value as the bonds approach maturity. 32 S Y S C O C O R P O R A T I O N Net long-term debt at June 29, 2002 was $1,176,307,000. After adjusting for the effect of the interest rate swap, 82% of the long-term debt is fixed at rates averaging 6.61% with an average life of 12 years, while the remainder is financed at floating rates averaging 1.3%. Certain loan agreements contain typical debt covenants to protect noteholders including provisions to maintain tangible net worth in excess of a specified level. SYSCO was in compliance with all debt covenants at June 29, 2002. The fair value of SYSCO’s total long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the company for debt of the same remaining maturities. The fair value of total long-term debt approximates $1,241,246,000 at June 29, 2002 and $990,390,000 at June 30, 2001. As part of normal business activities, SYSCO issues letters of credit through major banking institutions as required by certain vendor and insurance agreements. As of June 29, 2002 and June 30, 2001, letters of credit outstanding were $15,619,000 and $42,129,000, respectively. Leases Although SYSCO normally purchases assets, it has obligations under capital and operating leases for certain distribution facilities, vehicles and computers. Total rental expense under operating leases was $64,130,000, $59,833,000 and $44,015,000 in fiscal 2002, 2001 and 2000, respectively. Contingent rentals, subleases and assets and obligations under capital leases are not significant. Aggregate minimum lease payments under existing non-capitalized long-term leases are as follows: Fiscal Year 2003 2004 2005 2006 2007 Later years Stock Compensation Plans Employee Incentive Stock Option Plan Amount $51,680,000 44,353,000 36,315,000 30,296,000 22,712,000 92,357,000 The Employee Incentive Stock Option Plan adopted in fiscal 1982 provided for the issuance of options to purchase SYSCO common stock to officers and key personnel of the company and its subsidiaries at the market price at the date of grant, as adjusted for stock splits. No further grants will be made under this plan which expired in November 1991 and was replaced by the 1991 Stock Option Plan. The following summary presents information with regard to options under this plan: Options Exercisable Options Outstanding Balance at July 3, 1999 Exercised Balance at July 1, 2000 Cancelled Exercised Maximum Shares Exercisable 715,056 393,578 Weighted Average Exercise Price Per Share $ 4.97 5.04 Balance at June 30, 2001 108,378 5.56 Cancelled Exercised Balance at June 29, 2002 Shares Under Option 715,056 (321,478) 393,578 (4,000) (281,200) 108,378 — (108,378) — Weighted Average Exercise Price Per Share $ 4.97 4.89 5.04 5.56 4.83 5.56 5.56 2 0 0 2 A N N U A L R E P O R T 33 1991 Stock Option Plan The 1991 Stock Option Plan (1991 Plan) was adopted in fiscal 1992 and originally reserved 12,000,000 shares of SYSCO common stock for options to directors, officers and key personnel of the company and its subsidiaries at the market price at the date of grant. The 1991 Plan provided for the issuance of options qualified as incentive stock options under the Internal Revenue Code of 1986, options which are not so qualified and stock appreciation rights. During fiscal 1996, the shareholders approved an amendment to the 1991 Plan for an additional 32,000,000 shares to be made available for future grants of options. No stock appreciation rights were issued under this plan. No further grants will be made under this plan which expired in November 2000 and was replaced by the 2000 Stock Incentive Plan. The following summary presents information with regard to options under the 1991 Plan: Options Exercisable Options Outstanding Maximum Shares Exercisable Weighted Average Exercise Price Per Share Shares Under Option Weighted Average Exercise Price Per Share Balance at July 3, 1999 5,726,188 $ 7.16 Granted Cancelled Exercised Balance at July 1, 2000 6,175,254 7.56 Granted Cancelled Exercised Balance at June 30, 2001 9,095,187 9.02 Granted Cancelled Exercised 17,539,498 4,950,784 (946,688) (2,312,126) 19,231,468 5,674,910 (459,626) (3,651,651) 20,795,101 — (307,362) (2,548,393) $ 8.20 16.33 8.78 7.36 10.36 20.98 16.74 8.57 13.43 — 17.28 10.52 Balance at June 29, 2002 11, 251, 541 $ 11.38 17, 939, 346 $ 13.78 The following table summarizes information about options outstanding under the 1991 Plan as of June 29, 2002: Options Exercisable Shares 6,198,541 5,053,000 11, 251, 541 Weighted Average Exercise Price Per Share $ 7.74 15.85 $ 11.38 Options Outstanding Weighted Average Remaining Contractual Life (yrs) Weighted Average Exercise Price Per Share 3.65 7.29 5.89 $ 7.78 17.53 $ 13.78 Shares 6,894,627 11,044,719 17,939,34 6 Range of Exercise Price $6.31 to $8.75 $10.94 to $20.97 Balance at June 29, 2002 2000 Stock Incentive Plan The 2000 Stock Incentive Plan (2000 Plan) was adopted in fiscal 2001 and provides for option grants and other stock based awards to directors, officers and other employees of the company and its subsidiaries at the market price at the date of grant. The 2000 Plan reserves 40,000,000 shares of SYSCO common stock, plus any shares of common stock which were available for grants under the 1991 Plan but which were not utilized prior to its expiration and any shares issued under the 1991 Plan that are forfeited, expire or are canceled (approximately 4,220,000 shares at June 29, 2002) and, to the extent authorized by the Board of Directors, up to 10,000,000 shares of common stock which are reacquired by the company in the open market or in private transactions after November 3, 2000. The 2000 Plan provides for the issuance of options qualified as incentive stock options under the Internal Revenue Code of 1986, options which are not so qualified, stock appreciation rights and other stock based awards. To date, the company has issued stock options but no stock appreciation rights under the 2000 Plan. 34 S Y S C O C O R P O R A T I O N The following summary presents information with regard to options under the 2000 Plan: Granted Balance at June 30, 2001 Granted Cancelled Balance at June 29, 2002 Options Exercisable Options Outstanding Maximum Shares Exercisable Weighted Average Exercise Price Per Share — — $ 26.16 26.16 Shares Under Option Weighted Average Exercise Price Per Share 150,000 $26.16 150,000 30,514,910 (445,805) 26.16 27.81 27.79 18,448,383 $ 27.79 30,219,105 $ 27.80 The options outstanding at June 29, 2002 under the 2000 Plan have exercise prices ranging from $26.16 to $29.82 and have a weighted average remaining contractual life of eight years. 1993 and 1996 Guest Supply Stock Incentive Plans Prior to March 2001, Guest Supply, Inc. maintained the 1993 Stock Option Plan and the 1996 Long-Term Incentive Plan (Guest Supply Plans). In connection with SYSCO’s acquisition of Guest Supply in March 2001, all outstanding options exercisable to purchase Guest Supply common stock were converted into options to purchase shares of SYSCO common stock. The number of shares underlying such options, as well as the exercise price, were adjusted pursuant to the terms of the Merger Agreement and Plan of Reorganization dated January 22, 2001. These options are fully vested and expire in ten years from the original grant date. No new options will be issued under any of the Guest Supply Plans. The following summary presents information with regard to options under the Guest Supply Plans: Granted Exercised Balance at June 30, 2001 Exercised Balance at June 29, 2002 Options Exercisable Options Outstanding Maximum Shares Exercisable 571,920 Weighted Average Exercise Price Per Share $11.04 562,356 11.00 466,719 $10.82 Shares Under Option 571,920 (9,564) 562,356 (95,637) 466,719 Weighted Average Exercise Price Per Share $11.04 13.50 11.00 11.89 $ 10.82 The following table summarizes information about options outstanding under the Guest Supply Plans as of June 29, 2002: Range of Exercise Price $4.88 to $12.03 $14.84 to $18.43 Balance at June 29, 2002 Options Exercisable Weighted Average Exercise Price Per Share $ 8.69 16.38 $ 10.82 Shares 337,609 129,110 466,719 Options Outstanding Weighted Average Remaining Contractual Life (yrs) 2.36 5.14 3.13 Weighted Average Exercise Price Per Share $ 8.69 16.38 $ 10.82 Shares 337,609 129,110 466,719 2 0 0 2 A N N U A L R E P O R T 35 Non-Employee Directors Stock Option Plan The Non-Employee Directors Stock Option Plan adopted in fiscal 1996 permitted the issuance of up to 800,000 shares of common stock to non-employee directors. As of June 29, 2002, options for 272,000 shares, net of cancellations, had been granted to nine non-employee directors under this plan, 72,000 shares had been exercised and 200,000 shares were avail- able for exercise. No further grants will be made under this plan, which was replaced by the Non-Employee Directors Stock Plan. Non-Employee Directors Stock Plan The Non-Employee Directors Stock Plan adopted in fiscal 1999 permits the issuance of up to 800,000 shares of common stock to non-employee directors. Under this plan, non-employee directors receive a one time retainer stock award of 4,000 shares when first elected as a non-employee director and an annual grant of options to purchase shares of common stock provided certain earnings goals are met. As of June 29, 2002, options for 296,000 shares had been granted to twelve non- employee directors under this plan, 18,664 shares have been exercised and 151,450 shares are available for exercise. Employees’ Stock Purchase Plan SYSCO has an Employees’ Stock Purchase Plan which permits employees (other than directors) to invest by means of peri- odic payroll deductions in SYSCO common stock at 85% of the closing price on the last business day of each calendar quarter. During fiscal 2002, 1,821,946 shares of SYSCO common stock were purchased by the participants as compared to 1,619,001 purchased in fiscal 2001 and 1,820,752 purchased in fiscal 2000. The total number of shares which may be sold pursuant to the plan may not exceed 68,000,000 shares, of which 11,486,705 remained available at June 29, 2002. Accounting Issues Relating to all Plans Options issued before September 2001 may vest over a five-year period beginning on the date of grant if certain operating performance measures are attained, or will vest fully nine and one-half years from the date of grant to the extent not pre- viously vested. Options issued in September 2001 and after generally vest ratably over a specified five-year period. SYSCO accounts for these plans under APB Opinion No. 25 and related interpretations under which no compensation cost has been recognized. Had compensation cost for these plans been determined using the fair value method of SFAS No. 123, SYSCO’s pro forma net earnings and diluted earnings per share would have been $642,443,000 and $0.96 in fiscal 2002, $585,503,000 and $0.86 in fiscal 2001 and $437,773,000 and $0.65 in fiscal 2000. The disclosure requirements of SFAS No. 123 are applicable to options granted after 1995. The pro forma effects for fiscal 2002, 2001 and 2000 are not necessarily indicative of the pro forma effects in future years. The weighted average fair value of options granted was $8.81 and $7.98 during fiscal 2002 and 2001, respectively. The fair value was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in fiscal 2002 and 2001, respectively: dividend yield of 1.26% and 1.33%; expected volatility of 22% and 24%; risk-free interest rates of 4.8% and 6.0%; and expected lives of eight years. The weighted average fair value of employee stock purchase rights issued was $3.96 and $3.73 during fiscal 2002 and 2001, respectively. The fair value of the stock purchase rights was calculated as the difference between the stock price at date of issuance and the employee purchase price. Employee Benefit Plans SYSCO has defined benefit and defined contribution retirement plans for its employees. Also, the company contributes to various multi-employer plans under collective bargaining agreements. The defined contribution 401(k) plan provides that under certain circumstances the company may make matching contributions of up to 50% of the first 6% of a participant’s compensation. SYSCO’s contribution to this plan was $23,421,000 in 2002, $9,561,000 in 2001 and $15,899,000 in 2000. The defined benefit pension plans pay benefits to employees at retirement using formulas based on a participant’s years of service and compensation. SYSCO also has a Management Incentive Plan that compensates key management personnel for specific performance achievements. The awards under this plan were $51,981,000 in 2002, $52,540,000 in 2001 and $40,977,000 in 2000 and were paid in both cash and stock. In addition to receiving benefits upon retirement under the company’s defined benefit plan, participants in the Management Incentive Plan will receive benefits under a Supplemental Executive Retirement Plan (SERP). This plan is a nonqualified, unfunded supplementary retirement plan. In order to meet its obligations under the SERP, SYSCO maintains life insurance policies on the lives of the participants with carrying values of $71,418,000 at June 29, 2002 and $79,083,000 at June 30, 2001. SYSCO is the sole owner and beneficiary of such policies. Projected bene- fit obligations and accumulated benefit obligations for the SERP were $145,884,000 and $92,220,000, respectively, as of June 29, 2002 and $111,412,000 and $70,648,000, respectively, as of June 30, 2001. In addition to providing pension benefits, SYSCO provides certain health care benefits to eligible retirees and their dependents in the United States. 36 S Y S C O C O R P O R A T I O N The funded status of the defined benefit plans is as follows (including the SERP benefit obligations but excluding the cash surrender values of life insurance policies from plan assets): Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Amendments Actuarial loss Actual expenses Settlements Total disbursements Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contribution Actual expenses Total disbursements Fair value of plan assets at end of year Funded status Unrecognized net actuarial loss (gain) Unrecognized net (asset) obligation due to initial application of SFAS No. 87 Unrecognized prior service cost Net amount recognized Pension Benefits Other Postretirement Plans June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001 $ 576,759,000 46,085,000 42,679,000 1,901,000 58,933,000 (3,280,000) (1,128,000) (13,120,000) $ 433,323,000 36,365,000 34,194,000 5,320,000 83,231,000 (3,201,000) — (12,472,000) $ 4,391,000 263,000 321,000 — 295,000 — — — $ 3,615,000 218,000 283,000 — 342,000 — — (67,000) 708,829,000 576,760,000 5,270,000 4,391,000 416,372,000 (26,877,000) 83,136,000 (3,280,000) (13,120,000) 391,631,000 (2,327,000) 42,743,000 (3,201,000) (12,472,000) 456,231,000 416,374,000 — — — — — — — — 67,000 — (67,000) — (252,598,000) 236,852,000 (160,386,000) 113,348,000 (5,270,000) (2,394,000) (4,391,000) (2,830,000) (273,000) 17,082,000 (1,120,000) 17,422,000 1,687,000 1,599,000 1,840,000 1,801,000 $ 1,063,000 $ (30,736,000) $ (4,378,000) $(3,580,000) Additional information related to SYSCO’s defined benefit plans is as follows: Net amount recognized consists of: Prepaid pension cost Accrued benefit liability Accrued benefit cost Intangible asset Accumulated other comprehensive loss Net amount recognized Plans with accumulated benefit obligation in excess of fair value of plan assets: Projected benefit obligation Accumulated benefit obligation Fair value of plan assets at end of year Plans with fair value of plan assets in excess of accumulated benefit obligation: Projected benefit obligation Accumulated benefit obligation Fair value of plan assets at end of year June 29, 2002 June 30, 2001 $ — (122,597,000) (122,597,000) 17,693,000 105,967,000 $ 12,557,000 (70,648,000) (58,091,000) 18,247,000 9,108,000 $ 1,063,000 $ (30,736,000) $ 708,829,000 578,828,000 456,231,000 $111,412,000 70,648,000 — $ — — — $465,348,000 401,192,000 416,374,000 2 0 0 2 A N N U A L R E P O R T 37 The performance of the stock market in 2002 and 2001 resulted in a decline in the value of the assets held by the com- pany’s pension plans. As a result, the company was required to reflect a minimum pension liability of $65,435,000, net of tax, as of June 29, 2002 and $5,624,000, net of tax, as of June 30, 2001. Minimum pension liability adjustments are non- cash adjustments that are reflected as an increase in the pension liability and an offsetting charge to shareholders’ equity, net of tax, through comprehensive loss rather than net income. The assumptions used to value obligations at year end were: Weighted-average assumptions as of year end: Discount rate Expected rate of return Rate of compensation increase Pension Benefits Other Postretirement Plans June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001 7.25% 9.50 5.89 7.50% 10.50 4.50 7.25% — — 7.50% — — A healthcare cost trend rate is not used in the calculations because SYSCO subsidizes the cost of postretirement medical coverage by a fixed dollar amount with the retiree responsible for the cost of coverage in excess of the subsidy, including all future cost increases. The components of net pension costs are as follows: Service cost Interest cost Expected return on plan assets Amortization of prior service cost Recognized net actuarial loss Amortization of net transition obligation Net pension costs Pension Benefits June 29, 2002 June 30, 2001 July 1, 2000 $ 46,085,000 42,679,000 (42,039,000) 800,000 4,658,000 (847,000) $ 36,365,000 34,194,000 (40,504,000) 479,000 672,000 (847,000) $ 35,451,000 29,109,000 (34,168,000) (625,000) 628,000 (847,000) $ 51,336,000 $ 30,359,000 $ 29,548,000 The components of other postretirement benefit costs are as follows: Service cost Interest cost Expected return on plan assets Amortization of prior service cost Recognized net actuarial gain Amortization of net transition obligation Net other postretirement benefit costs Other Postretirement Plans June 29, 2002 June 30, 2001 July 1, 2000 $ 263,000 321,000 — 202,000 (141,000) 153,000 $ 798,000 $ 218,000 283,000 — 202,000 (173,000) 153,000 $ 683,000 $ 145,000 150,000 — 72,000 (194,000) 153,000 $ 326,000 Multi-employer pension costs were $27,511,000, $26,246,000 and $23,540,000 in 2002, 2001 and 2000, respectively. Contingencies SYSCO is engaged in various legal proceedings which have arisen but have not been fully adjudicated. These proceedings, in the opinion of management, will not have a material adverse effect upon the consolidated financial position or results of operations of the company when ultimately concluded. 38 S Y S C O C O R P O R A T I O N Supplemental Guarantor Information SYSCO International, Co. is an unlimited liability company organized under the laws of the Province of Nova Scotia, Canada and is a wholly owned subsidiary of SYSCO. In May 2002, SYSCO International, Co. issued, in a private offering, $200,000,000 of 6.10% notes due in 2012 (See “Debt”). SYSCO International, Co. and SYSCO have filed a registration statement with the Securities and Exchange Commission covering an identical series of notes to be issued in exchange for the unregistered notes outstanding. These notes are fully and unconditionally guaranteed by SYSCO. SYSCO International, Co. is a holding company with no significant sources of income or assets, other than its equity interests in its subsidiaries and interest income from loans made to its subsidiaries. The proceeds from the issuance of the 6.10% notes were used to repay commercial paper issued to fund the fiscal 2002 acquisition of a Canadian broadline foodservice operation. The following condensed consolidating financial statements present separately the financial position, results of opera- tions and cash flows of the parent guarantor (SYSCO), the subsidiary issuer (SYSCO International), all other non-guaran- tor subsidiaries of SYSCO (Other Non-Guarantor Subsidiaries) on a combined basis and eliminating entries. The financial information for SYSCO includes corporate activities as well as certain operating companies which are operated as divi- sions of SYSCO. The accompanying financial information includes the balances and results of SYSCO International, Co. from the date of its inception in February, 2002. (In thousands) Current assets Investment in subsidiaries Plant and equipment, net Other assets SYSCO $ 558,259 5,279,299 271,971 196,320 Condensed Consolidating Balance Sheet - June 29, 2002 SYSCO International Other Non-Guarantor Subsidiaries $ 10,010 204,064 — 1,418 $ 2,617,020 194,854 1,425,811 908,944 Eliminations $ — (5,678,217) — — Consolidated Totals $ 3,185,289 — 1,697,782 1,106,682 Total assets $ 6,305,849 $ 215,492 $ 5,146,629 $(5,678,217) $ 5,989,753 Current liabilities Intercompany payables (receivables) Long-term debt Other liabilities Shareholders’ equity $ 790,631 2,353,921 933,028 95,750 2,132,519 $ 64,554 (47,508) 199,366 — (920) $ 1,384,172 (2,306,413) 43,913 345,820 5,679,137 $ — — — — (5,678,217) $ 2,239,357 — 1,176,307 441,570 2,132,519 Total liabilities and shareholders’ equity $ 6,305,849 $ 215,492 $ 5,146,629 $(5,678,217) $ 5,989,753 (In thousands) Current assets Investment in subsidiaries Plant and equipment, net Other assets Total assets Current liabilities Intercompany payables (receivables) Long-term debt Other liabilities Shareholders’ equity Total liabilities SYSCO $ 512,884 4,505,917 249,656 203,228 $5,471,685 $ 749,103 1,678,252 909,679 34,116 2,100,535 Condensed Consolidating Balance Sheet - June 30, 2001 SYSCO International Other Non-Guarantor Subsidiaries $ — — — — $ — $ — — — — — $ 2,362,850 — 1,267,122 757,247 $ 4,387,219 $ 1,353,861 (1,678,252) 51,742 153,951 4,505,917 Eliminations $ — (4,505,917) — — Consolidated Totals $ 2,875,734 — 1,516,778 960,475 $(4,505,917) $ 5,352,987 $ — — — — (4,505,917) $ 2,102,964 — 961,421 188,067 2,100,535 and shareholders’ equity $5,471,685 $ — $ 4,387,219 $(4,505,917) $ 5,352,987 2 0 0 2 A N N U A L R E P O R T 39 (In thousands) Sales Cost of sales Operating expenses Interest expense (income) Other, net Total costs and expenses Earnings before income taxes Income tax (benefit) provision Equity in earnings of subsidiaries SYSCO $ 3,120,292 2,430,815 554,731 271,616 83 3,257,245 (136,953) (52,385) 764,355 Condensed Consolidating Results of Operations For the Year Ended June 29, 2002 SYSCO International Other Non-Guarantor Subsidiaries Eliminations $ — — 103 1,386 — 1,489 (1,489) (569) — $ 20,230,212 16,291,348 2,912,545 (210,105) (2,888) 18,990,900 1,239,312 474,037 — $ — — — — — — — — (764,355) Consolidated Totals $ 23,350,504 18,722,163 3,467,379 62,897 (2,805) 22,249,634 1,100,870 421,083 — Net earnings $ 679,787 $ (920) $ 765,275 $ (764,355) $ 679,787 (In thousands) Sales Cost of sales Operating expenses Interest expense (income) Other, net Total costs and expenses Earnings before income taxes Income tax (benefit) provision Equity in earnings of subsidiaries SYSCO $2,987,807 2,339,835 536,595 233,603 1,285 3,111,318 (123,511) (47,243) 673,177 Condensed Consolidating Results of Operations For the Year Ended June 30, 2001 SYSCO International Other Non-Guarantor Subsidiaries Eliminations $ — — — — — — — — — $ 18,796,690 15,173,303 2,696,232 (161,827) (1,184) 17,706,524 1,090,166 416,989 — $ — — — — — — — — (673,177) Consolidated Totals $21,784,497 17,513,138 3,232,827 71,776 101 20,817,842 966,655 369,746 — Net earnings $ 596,909 $ — $ 673,177 $ (673,177) $ 596,909 (In thousands) Sales Cost of sales Operating expenses Interest expense (income) Other, net Total costs and expenses Earnings before income taxes Income tax (benefit) provision Equity in earnings of subsidiaries Cumulative effect of accounting change SYSCO $2,789,342 2,203,919 491,874 178,318 835 2,874,946 (85,604) (32,958) 506,275 (8,041) $ — — — — — — — — — — Condensed Consolidating Results of Operations For the Year Ended July 1, 2000 SYSCO International Other Non-Guarantor Subsidiaries Eliminations $16,513,926 13,445,632 2,351,881 (107,486) 687 15,690,714 823,212 316,937 — $ — — — — — — — — (506,275) Consolidated Totals $19,303,268 15,649,551 2,843,755 70,832 1,522 18,565,660 737,608 283,979 — Net earnings $ 445,588 $ — $ 506,275 $ (506,275) $ 445,588 40 S Y S C O C O R P O R A T I O N — — (8,041) (In thousands) SYSCO Net cash provided by (used for): Condensed Consolidating Cash Flows For the Year Ended June 29, 2002 SYSCO International Other Non-Guarantor Subsidiaries Eliminations Consolidated Totals Operating activities Investing activities Financing activities Intercompany activity Net increase in cash Cash at the beginning of the period $ 90,129 (70,038) (584,151) 648,675 84,615 39,832 $ (1,081) $ 995,932 $ — $ 1,084,980 (222,420) 262,586 (29,079) 10,006 — (337,842) (38,419) (619,596) 75 95,911 — — — — — (630,300) (359,984) — 94,696 135,743 Cash at the end of the period $124,447 $ 10,006 $ 95,986 $ — $ 230,439 (In thousands) SYSCO Net cash provided by (used for): Operating activities Investing activities Financing activities Intercompany activity Net decrease in cash Cash at the beginning of the period $ 27,693 (96,319) (601,623) 649,609 (20,640) 60,472 Cash at the end of the period $ 39,832 (In thousands) SYSCO Net cash provided by (used for): Operating activities Investing activities Financing activities Intercompany activity Net increase in cash Cash at the beginning of the period $ 12,697 (243,316) (228,972) 462,302 2,711 57,761 Cash at the end of the period $ 60,472 Condensed Consolidating Cash Flows For the Year Ended June 30, 2001 SYSCO International Other Non-Guarantor Subsidiaries Eliminations Consolidated Totals $ — — — — — — $ — $ 927,531 (242,432) (38,235) (649,609) (2,745) 98,656 $ 95,911 $ — — — — — — $ — $ 955,224 (338,751) (639,858) — (23,385) 159,128 $ 135,743 Condensed Consolidating Cash Flows For the Year Ended July 1, 2000 SYSCO International Other Non-Guarantor Subsidiaries Eliminations Consolidated Totals $ — — — — — — $ — $ 696,029 (216,076) (10,537) (462,302) 7,114 91,542 $ 98,656 $ — — — — — — $ — $ 708,726 (459,392) (239,509) — 9,825 149,303 $ 159,128 Business Segment Information SYSCO provides food and other products to the foodservice or “food-prepared-away-from- home” industry. SYSCO’s operating segments are comprised of separate operating companies or a group of operating com- panies which are managed as one by the company’s chief operating decision maker. Under the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS No. 131), the company has aggregated its operating companies into five segments based upon the economic characteristics of each operating company, of which Broadline and SYGMA are reportable segments. Broadline operating companies distribute a full line of food products and a wide variety of non-food products to both SYSCO’s traditional and chain restaurant customers. SYGMA operating 2 0 0 2 A N N U A L R E P O R T 41 companies distribute a full line of food products and a wide variety of non-food products to some of our chain restaurant customer locations. “Other” financial information is attributable to SYSCO’s three other segments, including the compa- ny’s specialty produce, lodging industry and meat segments. SYSCO’s Canadian operations are insignificant for geographi- cal disclosure purposes. The accounting policies for the segments are the same as those disclosed by SYSCO. Intersegment sales represent spe- cialty produce and meat company products distributed by the Broadline and SYGMA operating companies. The segment results include allocation of centrally incurred costs for shared services that eliminate upon consolidation. Centrally incurred costs are allocated based upon the relative level of service used by each operating company. The following table sets forth the financial information for SYSCO’s business segments: Year Ended June 29, 2002 June 30, 2001 July 1, 2000 $ 19,163,449 2,671,110 1,707,229 (191,284) $18,106,842 2,415,840 1,377,987 (116,172) $16,643,578 2,154,043 534,750 (29,103) $ 23,350,504 $21,784,497 $19,303,268 $ 1,131,234 23,045 48,840 1,203,119 (102,249) $ 1,100,870 $ 200,881 $ $ 16,237 19,181 236,299 41,952 278,251 361,284 20,941 13,634 395,859 20,534 $ 1,006,213 16,319 42,288 $ $ $ $ 1,064,820 (98,165) 966,655 189,058 14,492 13,150 216,700 31,540 248,240 288,934 16,996 14,327 320,257 20,881 $ $ $ $ $ 800,932 5,208 21,283 827,423 (89,815) 737,608 180,256 13,987 2,577 196,820 23,841 220,661 227,834 21,061 7,583 256,478 9,935 $ 416,393 $ 341,138 $ 266,413 $ 3,983,216 176,093 424,982 4,584,291 1,405,462 $ 3,550,584 172,899 425,376 4,148,859 1,204,128 $ 3,302,796 180,811 238,761 3,722,368 1,007,777 $ 5,989,753 $ 5,352,987 $ 4,730,145 (In thousands) Sales: Broadline SYGMA Other Intersegment sales Total Earnings before income taxes Broadline SYGMA Other Total segments Unallocated corporate expenses Total Depreciation and amortization: Broadline SYGMA Other Total segments Corporate Total Capital expenditures: Broadline SYGMA Other Total segments Corporate Total Assets: Broadline SYGMA Other Total segments Corporate Total 42 S Y S C O C O R P O R A T I O N The sales mix for the principal product categories during the three years ended June 29, 2002 is as follows: (In thousands) June 29, 2002 June 30, 2001 July 1, 2000 Year Ended Canned and dry products Fresh and frozen meats Frozen fruits, vegetables, bakery and other Poultry Dairy products Fresh produce Paper and disposables Seafood Beverage products Equipment and smallwares Janitorial products Medical supplies Total $ 4,382,840 4,169,232 3,104,442 2,346,308 2,139,739 1,990,071 1,840,534 1,332,539 728,624 593,741 543,168 179,266 $ 23,350,504 $ 4,212,677 3,848,523 2,925,615 2,156,847 1,905,596 1,939,222 1,708,697 1,330,880 666,320 534,217 405,662 150,241 $ 21,784,497 $ 3,998,358 3,311,323 2,686,012 1,968,632 1,734,472 1,341,613 1,473,905 1,216,421 616,454 469,419 325,513 161,146 $ 19,303,268 2 0 0 2 A N N U A L R E P O R T 43 18,722,163 3,467,379 62,897 (2,805) 1,100,870 421,083 679,787 1.01 0.32 30-22 $ $ Quarterly Results (unaudited) Financial information for each quarter in the years ended June 29, 2002 and June 30, 2001: 2002 Quarter Ended (In thousands except for share data) September 29 December 29 March 30 June 29 Fiscal Year $ 5,828,678 $ 5,590,966 $ 5,620,324 $ 6,310,536 $ 23,350,504 Sales Cost of sales Operating expenses Interest expense Other, net Earnings before income taxes Income taxes Net earnings Per share: 4,683,617 4,481,655 4,510,059 5,046,832 864,456 15,864 (769) 265,510 101,558 836,355 16,513 (290) 256,733 98,200 851,668 14,318 (877) 245,156 93,772 914,900 16,202 (869) 333,471 127,553 $ 163,952 $ 158,533 $ 151,384 $ 205,918 Diluted net earnings Cash dividends Market price - high/low $ 0.24 0.07 30-22 $ 0.24 0.07 27-24 $ 0.23 0.09 30-25 $ 0.31 0.09 30-26 2001 Quarter Ended (In thousands except for share data) September 30 December 30 March 31 June 30 Fiscal Year Sales Cost of sales Operating expenses Interest expense Other, net Earnings before income taxes Income taxes Net earnings Per share: $5,360,174 4,322,784 787,497 17,401 (633) 233,125 89,170 $5,290,530 4,250,987 795,674 18,034 46 225,789 86,365 $5,344,496 4,301,029 800,156 18,498 (879) 225,692 86,327 $5,789,297 4,638,338 849,500 17,843 1,567 282,049 107,884 $ 143,955 $ 139,424 $ 139,365 $ 174,165 Diluted net earnings Cash dividends Market price - high/low $ 0.21 0.06 24-19 $ 0.21 0.06 30-22 $ 0.21 0.07 30-20 $ 0.26 0.07 30-22 $21,784,497 17,513,138 3,232,827 71,776 101 $ $ 966,655 369,746 596,909 0.88 0.26 30-19 Percentage increases - 2002 vs. 2001: Sales Earnings before income taxes Net earnings Diluted net earnings per share 9% 14 14 14 6% 14 14 14 5% 9 9 10 9% 18 18 19 7% 14 14 15 44 S Y S C O C O R P O R A T I O N Report of Management on Internal Accounting Controls July 31, 2002 The management of SYSCO is responsible for the preparation and integrity of the consolidated financial statements of the company. The accompanying consolidated financial statements have been prepared by the management of the company, in accordance with generally accepted accounting principles, using management’s best estimates and judgment where necessary. Financial information appearing throughout this Annual Report is consistent with that in the consolidated financial statements. To help fulfill its responsibility, management maintains a system of internal controls designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that transactions are executed in accordance with management’s authorizations and are reflected accurately in the company’s records. The concept of reasonable assurance is based on the recognition that the cost of maintaining a system of internal accounting controls should not exceed benefits expected to be derived from the system. SYSCO believes that its long-standing emphasis on the highest standards of conduct and ethics, embodied in comprehensive written policies, serves to reinforce its system of internal controls. The company’s operations review function monitors the operation of the internal control system and reports findings and recommendations to management and the Board of Directors. It also oversees actions taken to address control deficiencies and seeks opportunities for improving the effectiveness of the system. Ernst & Young, LLP, independent auditors, has been engaged to express an opinion regarding the fair presentation of the company’s financial condition and operating results. As part of their audit of the company’s financial statements, Ernst & Young, LLP considered the company’s system of internal controls to the extent they deemed necessary to determine the nature, timing and extent of their audit tests. The Board of Directors oversees the company’s financial reporting through its Audit Committee which consists entirely of outside directors. The Audit Committee selects and engages the independent auditors annually. The Audit Committee reviews both the scope of the accountants’ audit and recommendations from both the independent auditors and the internal operations review function for improvements in internal controls. The independent auditors have unlimited access to the Audit Committee and from time to time confer with them without management representation. SYSCO recognizes its responsibility to conduct business in accordance with high ethical standards. This responsibility is reflected in a comprehensive code of business conduct that, among other things, addresses potentially conflicting outside business interests of company employees and provides guidance as to the proper conduct of business activities. Ongoing communications and review programs are designed to help ensure compliance with this code. The company believes that its system of internal controls is effective and adequate to accomplish the objectives discussed above. Charles H. Cotros Chairman and Chief Executive Officer John K. Stubblefield, Jr. Executive Vice President, Finance and Administration 2 0 0 2 A N N U A L R E P O R T 45 Report of Independent Auditors Board of Directors and Shareholders SYSCO Corporation We have audited the accompanying consolidated balance sheets of SYSCO Corporation (a Delaware corporation) and subsidiaries as of June 29, 2002 and June 30, 2001, and the related statements of consolidated results of operations, shareholders’ equity and cash flows for each of the three years in the period ended June 29, 2002. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SYSCO Corporation and subsidiaries as of June 29, 2002 and June 30, 2001, and the results of their operations and their cash flows for each of the three years in the period ended June 29, 2002 in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Houston, Texas July 31, 2002 46 S Y S C O C O R P O R A T I O N Selected Financial Data (In thousands except for share data) 2002 2001 2000 1999 (53 Weeks) 1998 Sales $ 23,350,504 $21,784,497 $19,303,268 $17,422,815 $15,327,536 Earnings before income taxes 1,100,870 966,655 737,608 593,887 532,493 Fiscal Year Ended Income taxes Earnings before cumulative 421,083 369,746 283,979 231,616 207,672 effect of accounting change 679,787 596,909 453,629 362,271 324,821 Cumulative effect of accounting change — — (8,041) — (28,053) Net earnings $ 679,787 $ 596,909 $ 445,588 $ 362,271 $ 296,768 Earnings before accounting change: Basic earnings per share Diluted earnings per share Cumulative effect of accounting change: $ Basic earnings per share Diluted earnings per share Net earnings: Basic earnings per share Diluted earnings per share Cash dividends per share Total assets Capital expenditures Long-term debt Shareholders’ equity Total capitalization 1.03 1.01 — — 1.03 1.01 0.32 $ 0.90 $ 0.69 $ 0.54 $ 0.88 0.68 0.54 — — 0.90 0.88 0.26 (0.01) (0.01) 0.68 0.67 0.22 — — 0.54 0.54 0.19 0.48 0.47 (0.04) (0.04) 0.44 0.43 0.17 5,989,753 5,352,987 4,730,145 4,081,205 3,780,189 416,393 341,138 266,413 1,176,307 961,421 1,023,642 286,687 997,717 259,353 867,017 2,132,519 2,100,535 1,721,584 1,394,221 1,326,639 $ 3,308,826 $ 3,061,956 $ 2,745,226 $ 2,391,938 $ 2,193,656 Ratio of long-term debt to capitalization 35.6% 31.4% 37.3% 41.7% 39.5% 2 0 0 2 A N N U A L R E P O R T 47 Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources SYSCO provides marketing and distribution services to foodservice customers throughout the United States and Canada. The company intends to continue to expand its market share through profitable sales growth, foldouts, acquisitions, and constant emphasis on the development of its consolidated buying programs. The company also strives to increase the effectiveness of its marketing associates and the productivity of its warehousing and distribution activities. These objectives require continuing investment. SYSCO’s resources include cash provided by operations and access to capital from financial markets. SYSCO’s operations historically have produced significant cash flow. Cash generated from operations is first allocated to working capital requirements; investments in facilities, fleet and other equipment required to meet customers’ needs; cash dividends; and acquisitions fitting within the company’s overall growth strategy. Any remaining cash generated from operations may, at the discretion of management, be applied toward a portion of the cost of the share repurchase program, while the remainder of the cost may be financed with additional long-term debt. SYSCO’s share repurchase program is used primarily to offset shares issued under various employee benefit and compensation plans, for acquisi- tions and to reduce shares outstanding, all of which may have the net effect of increasing earnings per share. Management targets a long-term debt to total capitalization ratio between 35% to 40%. The ratio may exceed the target range from time to time due to borrowings incurred in order to fund acquisitions and internal growth opportunities and due to fluctuations in the timing and amount of share repurchases. The ratio may also fall below the target range due to strong cash flow from operations and fluctuations in the timing and amount of share repurchases. This ratio was 35.6% and 31.4% at June 29, 2002 and June 30, 2001, respectively. The company generated net cash from operations of $1,084,980,000 in fiscal 2002, $955,224,000 in fiscal 2001 and $708,726,000 in fiscal 2000. The overall increases in operating results contributed to the annual increases in cash flows from operations. In addition, during the second quarter of fiscal 2002, the company began reorganizing its supply chain to maximize consolidated efficiencies and increase the effectiveness of the merchandising and procurement functions performed for the benefit of our customers. The new structure resulted in the deferral of certain federal and state income tax payments which amounted to $266,673,000 for fiscal 2002 and was reflected in the increase in the deferred tax provi- sion. The company expects the positive cash flow effect of the deferral in fiscal 2003 to increase from fiscal 2002 levels. The company expects the cash flow impact of deferrals in fiscal 2004 and beyond to be less than fiscal 2003 levels, as it expects to begin making payments related to these deferrals in fiscal 2004. The company expects the cash flow impact of deferrals in fiscal 2004 and beyond to be incrementally positive when compared to what would have been paid on an annual basis without the deferral. In addition, a federal tax payment of $75,000,000 normally due in the fourth quarter of 2001 was deferred until the first quarter of 2002 as allowed by the Internal Revenue Service due to the Texas tropical storm Allison disaster and is reflected in the decrease of accrued income taxes in fiscal 2002. Cash used for investing activities was $630,300,000 in fiscal 2002, $338,751,000 in fiscal 2001 and $459,392,000 in fiscal 2000. Expenditures for facilities, fleet and other equipment were $416,393,000 in fiscal 2002, $341,138,000 in fiscal 2001 and $266,413,000 in fiscal 2000. The increase in fiscal 2002 over prior years is primarily due to the construction and completion of new fold-out facilities located in Sacramento, California and Columbia, South Carolina and the ongoing construction of the fold-out facility in Las Vegas, Nevada. Fiscal 2002 expenditures also included costs incurred on the construction or expansion of facilities in Lewisville, Texas; Norman, Oklahoma; Baraboo, Wisconsin and Jersey City, New Jersey. Total expenditures in fiscal 2003 are expected to increase to the range of $450,000,000 to $500,000,000 due to the continuation of the fold-out program; facility, fleet and other equipment replacements and expansions; and the company’s supply chain initiatives. Expenditures for acquisitions of businesses were $234,618,000 in fiscal 2002, $10,363,000 in fiscal 2001, and $211,901,000 in fiscal 2000. In February 2000, the company filed with the Securities and Exchange Commission a shelf registration statement covering 5,700,000 shares of common stock to be offered from time to time in connection with acquisitions. This registration statement was amended in January 2001 to include an additional 1,100,000 shares. No additional shares may be issued under this registration statement. In November 2000, the company filed with the Securities and Exchange Commission a shelf registration statement covering 30,000,000 shares of common stock to be offered from time to time in connection with acquisitions. As of June 29, 2002, 29,477,835 shares remained available for issuance under this registration statement. Cash used for financing activities was $359,984,000 in fiscal 2002, $639,858,000 in fiscal 2001 and $239,509,000 in fiscal 2000. In September 2001, the Board authorized the repurchase of an additional 16,000,000 shares. Under this authorization, 5,563,200 shares remained available for repurchase at June 29, 2002. In July 2002, the Board authorized the 48 S Y S C O C O R P O R A T I O N repurchase of an additional 20,000,000 shares. The number of shares acquired and their cost for the past three years were 18,000,000 shares for $473,558,000 in fiscal 2002, 16,000,000 shares for $428,196,000 in fiscal 2001 and 11,320,800 shares for $186,296,000 in fiscal 2000. Dividends paid were $213,275,000 in fiscal 2002, $173,701,000 in fiscal 2001 and $145,418,000 in fiscal 2000. SYSCO began paying the current quarterly dividend rate of $0.09 per share in January 2002, an increase from the $0.07 per share that became effective in February 2001. The summary on pages 22 and 23 shows the rate in effect for each of the past 11 years. In April 2002, SYSCO issued $200,000,000 principal amount of 4.75% notes due July 30, 2005 under a shelf registration statement filed in June 1998. These notes, which were priced at 99.8% of par, are unsecured and are not subject to any sinking fund requirement. They include a redemption provision which allows SYSCO to retire the notes at any time prior to maturity at the greater of par plus accrued interest or an amount designed to insure that the note holders are not penalized by early redemption. Proceeds from the notes were used to pay down borrowings under the company’s com- mercial paper program. As of August 24, 2002, there was $425,000,000 in principal amount outstanding under the previ- ously filed registration statement, leaving $75,000,000 available for issuance. Concurrent with the issuance of these notes, SYSCO entered into an interest rate swap agreement with a notional amount of $200,000,000 whereby SYSCO receives a fixed rate equal to 4.75% per anum and pays a benchmark interest rate of six-month LIBOR in arrears less 84.5 basis points. In May 2002, SYSCO International, Co., a wholly-owned subsidiary of SYSCO, issued $200,000,000 principal amount of 6.10% notes due June 1, 2012 in a private offering. These notes, which were priced at 99.7% of par, are fully and uncon- ditionally guaranteed by SYSCO Corporation and are not subject to any sinking fund requirement. They include registra- tion rights and a redemption provision which allows SYSCO International, Co. to retire the notes at any time prior to maturity at the greater of par plus accrued interest or an amount designed to insure that the note holders are not penal- ized by the early redemption. SYSCO International, Co. and SYSCO have filed a registration statement with the Securities and Exchange Commission covering an identical series of notes to be issued in exchange for the unregistered notes out- standing. The proceeds from the 6.10% notes were utilized to repay commercial paper borrowings issued by SYSCO International, Co. to fund the acquisition of a Canadian broadline foodservice business. SYSCO has uncommitted bank lines of credit, which provide for unsecured borrowings for working capital up to $125,000,000, of which none was outstanding at June 29, 2002 and $30,640,000 was outstanding at June 30, 2001. SYSCO has a commercial paper program in the United States which was supported by a bank credit facility in the amount of $300,000,000 as of June 29, 2002 maturing in fiscal 2004. In September, the company entered into a new revolving loan agreement in the amount of $450,000,000 maturing in fiscal 2008. SYSCO also has a commercial paper program in Canada which is supported by a bank credit facility in the amount of $100,000,000 in Canadian dollars maturing in fiscal 2003. During fiscal 2002, 2001 and 2000, commercial paper and short-term bank borrowings ranged from approximately $51,472,000 to $538,362,000, $157,631,000 to $411,790,000, and $199,028,000 to $469,094,000, respec- tively. Commercial paper borrowings were $63,293,000 as of June 29, 2002 and $54,040,000 as of August 24, 2002. The company intends to settle outstanding commercial paper borrowings when they come due by issuing additional com- mercial paper or retiring them utilizing cash generated from operations. The net cash provided by operations less cash utilized for capital expenditures, the stock repurchase program, cash dividends and other uses resulted in net long-term debt of $1,176,307,000 at June 29, 2002. After adjusting for the interest rate swap, approximately 82% of the long-term debt is at fixed rates averaging 6.61% and the remainder is at floating rates averaging 1.3%. SYSCO continues to have borrowing capacity available and alternative financing arrangements are evaluated as appropriate. In summary, SYSCO believes that through continual monitoring and management of assets together with the availability of additional capital in the financial markets, it will meet its cash requirements while maintaining proper liqiuidity for normal operating purposes. Contractual Obligations and Commercial Commitments The following tables set forth certain information concerning SYSCO’s obligations and commitments to make future payments under contracts, such as debt and lease agreements, and under contingent commitments. 2 0 0 2 A N N U A L R E P O R T 49 Payments Due by Period (In thousands) Short-term debt and commercial paper Long-term debt Capital lease obligations Long-term non-capitalized leases Total Obligations $ 66,360 1,179,351 10,710 277,713 0-1 year 1-2 years 2-3 years 3-4 years 4-5 years $ 66,360 7,743 6,011 51,680 $ — $ — $ — $ — $ 18,694 3,146 44,353 152,587 419 36,315 402,409 96 30,296 102,667 102 22,712 Over 5 years — 495,251 936 92,357 Total contractual cash obligations $1,534,134 $131,794 $66,193 $189,321 $432,801 $125,481 $588,544 Outstanding letters of credit $ 15,619 $ 15,619 $ — $ — $ — $ — $ — Market Risk SYSCO does not utilize financial instruments for trading purposes. SYSCO’s use of debt directly exposes the company to interest rate risk. Floating rate debt, where the interest rate fluctuates periodically, exposes the company to short-term changes in market interest rates. Fixed rate debt, where the interest rate is fixed over the life of the instru- ment, exposes the company to changes in the market interest rates reflected in the fair value of the debt and to the risk that the company may need to refinance maturing debt with new debt. SYSCO manages its debt portfolio to achieve an overall desired position of fixed and floating rates and may employ interest rate swaps as a tool to achieve that goal. The major risks from interest rate derivatives include changes in the interest rates affecting the fair value of such instruments, potential increases in interest expense due to market increases in floating interest rates and the creditworthiness of the counterparties in such transactions. At June 29, 2002, the company had outstanding one interest rate swap agreement whereby SYSCO exchanged the fixed interest payments on the $200,000,000 principal amount of 4.75% notes for floating interest payments. At June 29, 2002 the company had out- standing $63,293,000 of commercial paper at variable rates of interest with maturities through September 3, 2002. The company’s long-term debt obligations of $1,190,061,000 were primarily at fixed rates of interest except for $200,000,000 in fixed rate debt swapped to a floating rate of interest as discussed above. Sales Sales increased 7.2% in fiscal 2002, 12.8% in fiscal 2001 and 10.8% in fiscal 2000. The annual sales increases were attributable to a variety of factors, including the progress of our Customers Are Really Everything to SYSCO (C.A.R.E.S.) customer relationship initiatives, a persistent focus on increasing sales to marketing associate-served customers, the con- tinuing recognition by customers of the quality and value of SYSCO Brand products, the overall growth in the foodservice industry and acquisitions. After adjusting for food cost increases and acquisitions, real sales growth was approximately 2.7% in 2002. Acquisitions represented 3.4% of sales increases for fiscal 2002 and food cost inflation was 1.1%. After adjusting for food cost increases and acquisitions, real sales growth was approximately 5.8% in fiscal 2001. Acquisitions represented 4.5% of total sales in fiscal 2001 and food cost inflation was approximately 2.5%. After adjusting for food cost increases, acquisitions and adjusting for the extra week in fiscal 1999, real sales growth was approximately 9% in fiscal 2000. Acquisitions represented 3.5% of sales increases in fiscal 2000 and food cost inflation was approximately 0.4% for fiscal 2000. The lower sales growth in 2002 was attributable to the overall softness in the economy and comparisons to sales increases in fiscal 2001 which were among the highest in SYSCO’s history. The quarterly real sales growth trends experi- enced by the company were 1.7%, 0.7%, 2.7% and 5.2% for the first, second, third and fourth quarter of fiscal 2002, respec- tively, over comparable quarters in fiscal 2001. Industry sources estimate the total foodservice market experienced real growth of approximately 0.5% in calendar year 2001 and 2.9% in calendar year 2000. Sales for fiscal 2000 through 2002 were as follows: Fiscal Year 2002 2001 2000 50 S Y S C O C O R P O R A T I O N Sales % Increase $23,350,504,000 21,784,497,000 19,303,268,000 7 . 2 % 12.8 10.8 A comparison of the sales mix in the principal product categories during the last three years is presented below: 2002 2001 2000 Canned and dry products Fresh and frozen meats Frozen fruits, vegetables, bakery and other Poultry Dairy products Fresh produce Paper and disposables Seafoods Beverage products Janitorial products Equipment and smallwares Medical supplies 19% 18 13 10 9 9 8 6 3 2 2 1 19% 18 13 10 9 9 8 6 3 2 2 1 21% 17 14 10 9 7 8 6 3 2 2 1 100% 100% 100% A comparison of sales by type of customer during the last three years is presented below: Restaurants Hospitals and nursing homes Schools and colleges Hotels and motels All other 2002 63% 10 6 6 15 100% 2001 64% 11 6 5 14 100% 2000 65% 10 6 5 14 100% Cost of Sales Cost of sales increased approximately 6.9% in fiscal 2002, 11.9% in fiscal 2001 and 10.1% in fiscal 2000. The rate of increases were less than the rate of sales increases leading to improved gross margins. The rate of increase is influenced by SYSCO’s overall customer and product mix, economies realized in purchasing and higher sales of SYSCO Brand products. Operating Expenses Operating expenses include the costs of warehousing and delivering products as well as selling and administrative expenses. These expenses as a percent of sales were 14.8% for fiscal 2002 and 2001 and 14.7% for fiscal 2000. Changes in the percentage relationship of operating expenses to sales result from an interplay of several economic influences, including customer mix. Inflationary increases in operating costs generally have been offset through improved productivity. Operating expenses in fiscal 2002 were negatively impacted by increased costs realized during the initial operating periods of fold-outs in Sacramento, California; Columbia, South Carolina and Las Vegas, Nevada. In addition, the increase in marketing associate-served sales is accompanied by higher expenses to serve these customers. In fiscal 2000, expenses were incurred in connection with the closing of a facility and one-time non-recurring costs associated with the completion of the SYSCO Uniform Systems implementation. The sum of the costs related to fiscal 2000 were approximately $13,000,000. Interest Expense Interest expense for the year decreased $8,879,000 or approximately 12.4% below fiscal 2001, which had increased $944,000 or approximately 1.3% over fiscal 2000. The decrease in interest expense in fiscal 2002 was primarily due to decreases in interest rates for short-term and commercial paper borrowings. Interest expense in fiscal 2000 included interest income in the amount of $3,000,000 related to a Federal income tax refund on an amended return. After adjusting for the refund, interest expense in the fiscal 2001 period decreased $2,056,000 or approximately 2.8%. This decrease was due primarily to decreased borrowings. Interest capitalized during construction periods for the past three years was $3,746,000 in fiscal 2002, $2,995,000 in fiscal 2001 and $964,000 in fiscal 2000. Other, Net Other, net was $2,805,000 income in fiscal 2002, an increase of $2,906,000 from the $101,000 expense in fiscal 2001. Fiscal 2001’s expense of $101,000 decreased $1,421,000 from the $1,522,000 expense in fiscal 2000. Changes between the years result from fluctuations in miscellaneous activities, primarily gains and losses on the sale of surplus facilities. 2 0 0 2 A N N U A L R E P O R T 51 Earnings Before Income Taxes Earnings before income taxes rose $134,215,000, or approximately 13.9% above fiscal 2001 which had increased $229,047,000, or approximately 31.1%, over fiscal 2000. Fiscal 2000 increased $143,721,000, or approximately 24.2% over fiscal 1999. Additional sales and realization of operating efficiencies contributed to the increases as well as the company’s success in its continued efforts to increase sales to the company’s higher margin territorial street customers and increasingly higher sales of SYSCO Brand products, both of which generally yield higher margins. Provision for Income Taxes The effective tax rate was 38.25% in fiscal 2002 and 2001 and 38.5% in fiscal 2000. Earnings before Cumulative Effect of Accounting Change Fiscal 2002 represents the twenty-sixth consecutive year of increased earnings before the cumulative effect of an accounting change. Earnings before cumulative effect of an accounting change rose $82,878,000 or approximately 13.9% above fiscal 2001, which had increased $143,280,000 or approximately 31.6% over fiscal 2000. Fiscal 2000 increased $91,358,000 or approximately 25.2% over fiscal 1999. The increases were caused by additional sales, operating efficiencies and other factors discussed above. Cumulative Effect of Accounting Change In the first quarter of fiscal 2000, SYSCO recorded a one-time, after-tax, non-cash charge of $8,041,000 to comply with the required adoption of AICPA Statement of Position 98-5 (SOP 98-5), “Reporting on the Costs of Start-up Activities.” SOP 98-5 required the writeoff of any unamortized costs of start-up activities and organization costs. Net earnings Net earnings for the year increased $82,878,000 or approximately 13.9% above fiscal 2001, which had increased $151,321,000 or approximately 34.0% over fiscal 2000. Fiscal 2000 increased $83,317,000 or approximately 23.0% over fiscal 1999. Return on Shareholders’ Equity The return on average shareholders’ equity was approximately 31% in fiscal 2002 and fiscal 2001 and 30% in fiscal 2000. Since its inception SYSCO has averaged in excess of an 18% return on shareholders’ equity before the cumulative effect of accounting changes. Broadline Segment Broadline segment sales increased by 5.8% in fiscal 2002 as compared to fiscal 2001 and by 8.8% in fiscal 2001 as compared to fiscal 2000. The fiscal 2002 and 2001 sales growth was due primarily to increased sales to mar- keting associate-served customers as well as increased sales of SYSCO Brand products. Broadline segment sales as a per- centage of total SYSCO sales decreased from 83.1% in fiscal 2001 to 82.1% in fiscal 2002 and from 86.2% in fiscal 2000 to 83.1% in fiscal 2001. The decreases in fiscal 2002 and fiscal 2001 were due primarily to acquisitions of specialty meat, lodging industry product and produce companies in the Other segments and greater percentage growth of specialty meat, lodging industry companies and SYGMA segment as a percentage of overall SYSCO sales. Earnings before income taxes from the Broadline segment increased by 12.4% in fiscal 2002 as compared to fiscal 2001 and by 25.6% in fiscal 2001 as compared to fiscal 2000. The increases in earnings before income taxes for fiscal 2002 and fiscal 2001 were driven by increased sales to marketing associate-served customers as well as increases in sales of SYSCO Brand products, both of which generally yield higher margins. Completion of the installation of SYSCO Uniform Systems in the second quarter of fiscal 2000 also impacted pretax earnings with increased efficiencies and productivity. SYGMA Segment SYGMA segment sales increased by 10.6% in fiscal 2002 as compared to fiscal 2001 and 12.2% in fiscal 2001 as compared to fiscal 2000. The fiscal 2002 and 2001 sales growth was due primarily to sales growth in SYGMA’s existing customer base. SYGMA segment sales as a percentage of total SYSCO sales increased from 11.1% in fiscal 2001 to 11.4% in fiscal 2002 and decreased from 11.2% in fiscal 2000 to 11.1% in fiscal 2001. The decrease in fiscal 2001 was due to the acquisition of specialty meat, lodging industry product and produce companies in the Other segments. Earnings before income taxes for the segment increased by 41.2% in fiscal 2002 as compared to fiscal 2001 and 213.3% in fiscal 2001 as compared to fiscal 2000. The increases in fiscal 2002 and fiscal 2001 were due to operating efficiencies and improved labor costs realized during the current fiscal year. Other Segments The Other segment sales increased by 23.9% in fiscal 2002 as compared to fiscal 2001 and 157.7% in fiscal 2001 as compared to fiscal 2000. Other Segment sales as a percentage of total SYSCO sales increased from 6.3% in fiscal 2001 to 7.3% in fiscal 2002 and from 2.8% in fiscal 2000 to 6.3% in fiscal 2001. The increases were due primarily to the timing of acquisitions made during the periods presented. Earnings before income taxes increased by 15.5% in fiscal 2002 as compared to fiscal 2001 and 98.7% in fiscal 2001 as compared to fiscal 2000. The increases were due primarily to the timing of acquisitions made during the periods presented. In fiscal 2002, earnings were negatively impacted by the downturn in demand in travel and resort destination cities which are serviced by certain of the specialty companies. 52 S Y S C O C O R P O R A T I O N Critical Accounting Policies The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses in the accompanying financial statements. Significant accounting polices employed by SYSCO are presented in the notes to the financial statements. Critical accounting policies are those that are most important to the portrayal of the company’s financial condition and results of operations. These policies require management’s most difficult, subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. SYSCO’s most critical accounting policies pertain to the allowance for doubtful accounts receivable, self-insurance programs, pension plans and accounting for business combinations. Allowance for Doubtful Accounts Receivable SYSCO evaluates the collectibility of accounts receivable and determines the appropriate reserve for doubtful accounts based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligation to us, we record a specific reserve for bad debts to reduce the net recognized receivable to the amount we reasonably expect to collect and write-off such amounts at the end of each fiscal year. In addition, we recognize reserves for all other receivables based on analysis of historical trends of write-offs and recoveries. If the financial condi- tion of our customers were to deteriorate, additional reserves may be required. Self-Insurance Program SYSCO maintains a self-insurance program covering portions of workers’ compensation, group medical, general liability and vehicle liability costs. The amounts in excess of the self-insured levels are fully insured. Self-insurance accruals are based on claims filed and include an estimate for significant claims incurred but not reported. Projections of future loss expenses are inherently uncertain because of the random nature of insurance claims occurrences and could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. In an attempt to mitigate our risks of workers’ compensation, vehicle and general liability claims, we have implemented safety procedures and awareness programs. Pension Plans SYSCO maintains defined benefit and defined contribution retirement plans for its employees. The company also con- tributes to various multi-employer plans under collective bargaining agreements. The defined benefit pension plans pay benefits to employees at retirement using formulas based on a participant’s years of service and compensation. SYSCO also maintains a non-qualified, unfunded Supplementary Executive Retirement Plan (SERP) for key employees. In order to meet its obligations under the SERP, the company maintains life insurance policies on the lives of participants. SYSCO is the sole owner and beneficiary of such policies, which are excluded from plan assets in arriving at prepaid (accrued) benefit cost. Cash surrender values of such policies were $71,418,000 at June 29, 2002 and $79,083,000 at June 30, 2001. SYSCO accounts for its defined benefit pension plans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” as amended by SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and 106.” These statements require that the amounts recognized in the finan- cial statements be determined on an actuarial basis which include assumptions regarding the expected rate of return on plan assets, a discount rate for determining the current value of plan benefits, and the assumption for the rate of increase in future compensation levels, as well as other assumptions. For guidance in determining the discount rate, SYSCO looks at rates of return on high-quality fixed-income invest- ments. This rate was 7.25% and 7.50% as of June 29, 2002 and June 30, 2001, respectively. SYSCO looks to actual plan experience in determining the rates of increase in compensation levels. SYSCO used a plan specific age-related set of rates (equivalent to a single rate of 5.89%), as of June 29, 2002 and June 30, 2001. The expected long-term rate of return on plan assets was 9.50% and 10.50% as of June 29, 2002 and June 30, 2001, respectively. Management believes that this assump- tion is reasonable based on the investment policy and expectations of future returns for the various asset classes in which trust assets are invested. Although not determinative of future returns, the effective annual rate of return on plan assets was 9.9%, 9.3% and a negative 2.2% over the ten-year, five-year and one-year periods ended December 31, 2001, respectively. The rate of return assumption is reviewed annually and revised as deemed appropriate. The performance of the stock market in 2002 and 2001 resulted in a decline in the value of the assets held by the pension plans. As a result, the company was required to reflect a minimum pension liability of $65,435,000, net of tax, as of June 29, 2002 and $5,624,000, net of tax, as of June 30, 2001. Minimum pension liability adjustments are non-cash adjustments that are reflected as an increase in the pension liability and on offsetting charge to shareholders’ equity, net of tax, through comprehensive loss rather than net income. 2 0 0 2 A N N U A L R E P O R T 53 The company’s prepaid benefit cost prior to the recognition of the additional minimum pension liability was $1,063,000 at June 29, 2002 and its accrued benefit cost prior to the recognition of the additional minimum pension lia- bility was $30,736,000 at June 30, 2001. Included in arriving at accrued benefit cost are $236,852,000 in deferred net actu- arial losses resulting from the variance of actual experience from that projected by actuarial assumptions. A portion of this unrecognized loss is amortized and recognized in accordance with SFAS No. 87 in pension expense over time. The company recognized net pension costs of $51,336,000 and $30,359,000 for fiscal years 2002 and 2001, respectively. Accounting for Business Combinations Goodwill and intangible assets represent the excess of consideration over the fair value of tangible net assets aquired. Certain assumptions and estimates are employed in determining the fair value of assets acquired including goodwill and other intangible assets as well as determining the allocation of goodwill to the appropriate reporting unit. In addition, SYSCO assesses the recoverability of these intangibles by determining whether the amortization of these intangibles over their remaining lives can be recovered through undiscounted future net cash flows of the acquired operations. The amount of impairment, if any, is measured by the amount in which the carrying amounts exceed the projected discount- ed future operating cash flows. SYSCO will adopt SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets” in fiscal year 2003 which discontinues the amortization of goodwill and indefinite life intangibles and requires an annual test of impairment based on a comparison of fair value to carrying values. The evaluation of impairment under both the existing rules and SFAS No. 142 requires the use of projections, estimates and assumptions as to the future performance of the operations. Actual results could differ from projections resulting in the company revising its assumptions and, if required, recognizing an impairment loss. Based on a preliminary assessment, SYSCO does not believe its goodwill is impaired and does not expect to record a charge from the adoption of SFAS No. 142. New Accounting Standards In fiscal 2000, SYSCO adopted the AICPA Statement of Position 98-1 (SOP 98-1), “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” SOP 98-1 provides guidance with respect to accounting for the various types of costs incurred for computer software developed or obtained for SYSCO’s use. The adoption of SOP 98-1 did not have a significant effect on SYSCO’s consolidated results of operations or financial position. In fiscal 2001, SYSCO adopted the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133,” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS No. 133.” These statements outline the accounting treatment for all derivative activity and their adoption did not have a significant effect on SYSCO’s consolidated results of operations or financial position. In fiscal 2001, SYSCO adopted the Securities and Exchange Commission Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition.” SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The adoption of SAB 101 had no effect on SYSCO’s consolidated results of operations or financial position. In June 2001, SYSCO adopted SFAS No. 141, “Accounting for Business Combinations.” SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting and prohibits the pooling-of-interests method for business combinations initiated after June 20, 2001. SYSCO is adopting the provisions of SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets” effective with the beginning of fiscal year 2003. As a result, the amortization of goodwill and indefinite life intangibles will be discontinued. Goodwill and indefinite life intangibles aris- ing from business combinations after June 30, 2001 are also not amortized. The recoverability of goodwill and intangibles will be assessed annually or as needed by determining whether the fair value of the applicable reporting units exceed their carrying values. SYSCO has six months from the date it adopts SFAS No. 142 to test for cumulative effect of a change in accounting principle. Thereafter, any impairment losses will be included, net of tax, within the results of contin- uing operations. Management has completed its preliminary assessment of the impact that the adoption of SFAS No. 142 will have on the company’s consolidated financial statements and believes that goodwill is not impaired. Goodwill amor- tization, after tax, recognized by SYSCO was $14,533,000 in 2002, $12,089,000 in 2001 and $7,812,000 in 2000. In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long - Lived Assets.” SFAS 144 supersedes SFAS 121 and the portion of the Accounting Principle Board Opinion No. 30 that deals with disposal of a business segment. Management does not expect SFAS 144, which is effective for fiscal 2003, to have a material effect on the results of operations. 54 S Y S C O C O R P O R A T I O N Location of Principal Operations Broadline Operations Hallsmith - Sysco Food Services Norton (Boston), Massachusetts William Holden, President Thaire B. Bryant, Executive Vice President Hardin’s - Sysco Food Services, LLC Memphis, Tennessee Bill R. Bowden, President Nicholas J. Zouboukos, Executive Vice President Lankford - Sysco Food Services, LLC Pocomoke, Maryland C. Frederick Lankford, President Joseph R. Barton, Executive Vice President Nobel / Sysco Food Services Company Albuquerque, New Mexico Timothy K. Hogan, President Nobel / Sysco Food Services Company Denver, Colorado Christopher S. DeWitt, President Christopher K. Davis, Executive Vice President North Douglas Sysco Food Services, Inc. Victoria, BC, Canada Armando A. Barbon, Chairman Nino E. Barbon, President Robert Orr - Sysco Food Services, LLC Nashville, Tennessee Nick K. Taras, President David L. Snyder, Executive Vice President Sysco Food Services of Arizona, Inc. Phoenix, Arizona J. Michael Dickson, President Sysco Food Services of Arkansas, LLC Little Rock, Arkansas Walter S. Nunnelly III, President Sysco Food Services of Atlanta, LLC College Park, Georgia Gordon L. Graham, President Sysco Food Services of Austin, LP Round Rock, Texas Gary L. Ross, Chairman William L. Loftin, President Pegler - Sysco Food Services Company Lincoln, Nebraska Gary L. Rezac, President Brad H. Foerster, Executive Vice President Sysco Food Services of Baltimore Jessup, Maryland G. Kent Humphries, President Keith D. Shapiro, Executive Vice President Sysco Food Services - Albany Albany, New York Gail E. Allen, President Raymond A. Schiffer, Executive Vice President Sysco Food Services of Baraboo Baraboo, Wisconsin Eugene M. Bohlmeyer, President Robert A. Jauch, Executive Vice President 2 0 0 2 A N N U A L R E P O R T 55 Sysco Food Services of Detroit, LLC Canton, Michigan Michael W. Green, President Thomas C. Barnes, Executive Vice President Sysco Food Services - Jacksonville, Inc. Jacksonville, Florida Walter R. Rudisiler, President Roy S. Hockenbrocht, Executive Vice President Sysco Food Services of Eastern Wisconsin Jackson (Milwaukee), Wisconsin Joseph J. Marone, President Randall J. Plekker, Executive Vice President Sysco Food Services of Grand Rapids, LLC Grand Rapids, Michigan David L. DeKock, Chairman Richard A. Johnston, President Sysco Food Services of Hampton Roads, Inc. Suffolk, Virginia C. Frederick Lankford, Chairman John A. Hall, President Sysco Food Services of Houston, LP Houston, Texas W. Keith Miller, President Harry C. Cotros, Executive Vice President Sysco Food Services - Jamestown Falconer, New York Vernon E. Wetmore, Jr., President Sysco Food Services of Kansas City, Inc. Olathe, Kansas James D. Hope, President Henry P. Jolly, Executive Vice President Sysco Food Services of Las Vegas, Inc. Las Vegas, Nevada David B. DeVane, President Sysco Food Services of Los Angeles, Inc. Walnut, California Bruce J. Schwartz, Chairman Daniel S. Haag, President Sysco Food Services of Metro New York, LLC Jersey City, New Jersey Thomas H. Russell, President Philip C. Lahm, Executive Vice President Sysco Food Services of Idaho, Inc. Boise, Idaho Reneé A. Lovejoy, President Sysco Food Services of Minnesota, Inc. Mounds View (St. Paul), Minnesota Philip J. Seipp, President Sysco Food Services of Indianapolis, LLC Indianapolis, Indiana Walter C. Mills, President Jay I. Milligan, Executive Vice President Sysco Food Services of Iowa, Inc. West Des Moines, Iowa Steven R. Gress, President Sysco Food Services of Jackson Jackson, Mississippi Michael S. Headrick, President Sysco Food Services of Modesto, Inc. Modesto, California John A. Torza, President Sysco Food Services of Montana, Inc. Billings, Montana Patrick H. Burton, President Sysco Food Services of New Orleans, LLC Harahan, Louisiana Edwin W. Solomon, President Sysco Food Services of Central Alabama, Inc. Calera (Birmingham), Alabama David R. Dickson, President Wallace D. Ralph, Jr., Executive Vice President Sysco Food Services of Central Florida, Inc. Ocoee (Orlando), Florida Henry D. Varnell III, President Marlin Turner, Executive Vice President Sysco Food Services of Central Pennsylvania, LLC Harrisburg, Pennsylvania Donald K. Hunt, President Sysco Food Services of Charlotte, LLC Concord, North Carolina Robert J. Davis, President Sysco Food Services - Chicago, Inc. Des Plaines, Illinois Charles W. Staes, President Greg D. Bertrand, Executive Vice President Sysco Food Services / Cincinnati Cincinnati, Ohio Joseph P. Calabrese, President Michael D. Wiedower, Executive Vice President Sysco Food Services of Cleveland, Inc. Bedford Heights, Ohio Chris J. Reasoner, President Sysco Food Services of Columbia, LLC Columbia, South Carolina Bruce H. Matthews, President Sysco Food Services of Connecticut Rocky Hill (Hartford), Connecticut James M. Danahy, President Robert J. McMakin, Executive Vice President Sysco Food Services of Dallas, LP Dallas, Texas Thomas D. Huffhines, President Brett Lindig, Executive Vice President 56 S Y S C O C O R P O R A T I O N Sysco Food Services of Northern New England, Inc. Westbrook (Portland), Maine Richard A. Giles, President Gregory E. Otterbein, Executive Vice President Sysco Food Services of Oklahoma, Inc. Norman, Oklahoma Ivan R. Moore, Jr., President Sysco Food Services of Ontario, Inc. Peterborough, Ontario, Canada Paul V. Strano, Jr., President Sysco Food Services of Philadelphia, LLC Philadelphia, Pennsylvania Edward C. Merry, President Sysco Food Services of Pittsburgh, Inc. Harmony, Pennsylvania Joel R. TePastte, President Sysco Food Services of Portland, Inc. Wilsonville, Oregon Michael J. McLoughlin, Chairman Scott A. Sonnemaker, President Sysco Food Services of Sacramento, Inc. Pleasant Grove, California Paul A. Winterhalder, President Sysco Food Services of St. Louis, LLC St. Charles, Missouri Jerry L. Barash, President Sysco Food Services of San Antonio, LP San Antonio, Texas William D. Fisher, President Michael J. Barr, Executive Vice President Sysco Food Services of San Diego, Inc. Poway, California Richard L. Friedlen, President Sysco Food Services of San Francisco, Inc. Fremont, California Michael J. McLoughlin, President James W. Ehlers, Executive Vice President Sysco Food Services of Seattle, Inc. Kent, Washington Robert M. Jenson, President Catherine Kayser, Executive Vice President Alaska Division: Sysco Food Services of Alaska Anchorage, Alaska James Rudd, General Manager Sysco Food Services of South Florida, Inc. Miami, Florida Tim K. Brown, President Julie O. Swan, Executive Vice President Sysco Food Services of Southeast Florida, LLC Riviera Beach, Florida Walter S. Deck, President Peter G. Carantza, Executive Vice President Sysco Food Services - Syracuse Warners, New York Joseph H. Wood, President William J. DeLaney, Executive Vice President Sysco Food Services of Vancouver, Inc. Port Coquitlam, British Columbia, Canada Terry J. Early, President Sysco Food Services of Virginia, LLC Harrisonburg, Virginia Alan E. Hasty, President Sysco Food Services - West Coast Florida, Inc. Bradenton (Tampa), Florida Carl S. Cannova, President Sysco HRI Supply, Ltd. British Columbia, Canada William A. Redmond, President Sysco I&S Foodservices, Inc. Edmonton, Alberta, Canada Richard D. Pidwerbeski, President Sysco Intermountain Food Services, Inc. Salt Lake City, Utah Thomas M. Kesteloot, President James A. Silbaugh, Executive Vice President Sysco / Louisville Food Services Co. Louisville, Kentucky Peter J. Scatamacchia, President Steven D. Hocker, Executive Vice President SYSCO SERCA Food Services, Inc. Toronto, Ontario, Canada SYSCO SERCA Food Services, Atlantic Inc. Gregory S. Davis Vice President and General Manager Grand Falls and St. John’s, Newfoundland, Canada James F. McGuire, Area Manager Lakeside (Halifax), Nova Scotia, Canada Philip G. Brison, Area Manager Moncton, New Brunswick, Canada Ronald E. Kennedy, Area Manager Montreal, Quebec, Canada Stephane Fortin, General Manager NASYS, Dieppe (Moncton), New Brunswick, Canada Maurice C. Maillet, General Manager SYSCO Ready Fresh Produce, Inc. Halifax, Nova Scotia, Canada Stephen S. Clarke, General Manager 2 0 0 2 A N N U A L R E P O R T 57 Royal Foods Company, Inc. San Jose, California George W. Gummow, President R. Kent Shoemaker, Jr. Executive Vice President, East Coast Region Carnival Fruit Company, Inc. North Miami, Florida Alan H. Spritz, President FreshPoint of Atlanta, Inc. Forest Park, Georgia Terry A. Owen, Executive Vice President FreshPoint of Washington, D.C., Inc. Washington, D.C. Dennis A. Clifford, President Movsovitz & Sons of Florida, Inc. Jacksonville, Florida Brett L. Gardner, President Movsovitz of Georgia Savannah, Georgia Aubrey V. Sutton, Vice President and General Manager Red’s Market, Inc. Orlando, Florida Robert J. Gordon, President Tampa, Florida Sheila K. Menendez, President Specialty Produce Locations FreshPoint, Inc. Brian M. Sturgeon, President and Chief Operating Officer Richard J. Dachman Executive Vice President, West Coast Region American Produce & Vegetable Company, Inc. Dallas, Texas Lucian M. LaBarba, President FreshPoint of Denver, Inc. Denver, Colorado Daniel V. Locricchio, President FreshPoint of Las Vegas, Inc. Las Vegas, Nevada Gregory L. Bird, General Manager FreshPoint of Southern California, Inc. Los Angeles, California Verne L. Lusby, Jr., President Golden State Produce San Francisco, California Kevin M. Alves, President Lee Ray-Tarantino Company, Inc. San Francisco, California Paul G. Tarantino, President Pacific Produce Company Ltd. Vancouver, B.C. Canada Randolph M. Sung, President Pacific Allied Vancouver, B.C. Canada Leigh S. Seto, General Manager Pacific Nanaimo Nanaimo, B.C. Canada Bruce A. Ashcraft, General Manager SYSCO SERCA Food Services of Ontario, Inc. John M. Gardner Regional Vice President Kingston, Ontario, Canada Rodney S. Stroud, Director, Branch Operations London, Ontario, Canada Robert D. Chapman, Director, Branch Operations Mississauga, Ontario, Canada John M. Gardner, Regional Vice President Sturgeon Falls, Ontario, Canada Clifford S. Sinclair, Director, Branch Operations Thunder Bay, Ontario, Canada Karen L. Goose, Director, Branch Operations SYSCO SERCA Food Services- West, Inc. Vaughn S. Thompson Vice President and General Manager Calgary, Alberta, Canada Dale E. Moldenhauer, Regional General Manager Calgary, Alberta, Canada Western Canada Produce Dariel D. Trottier, General Manager Edmonton, Alberta, Canada Richard J. Boyce, Regional General Manager Regina, Saskatchewan, Canada Douglas L. Wood, Regional General Manager Winnipeg, Manitoba, Canada Robert B. Schlingerman, Regional General Manager Watson Sysco Food Services, Inc. Lubbock, Texas Michael A. Davis, President 58 S Y S C O C O R P O R A T I O N Custom Meat-Cutting Operations Systems Distribution Facilities Chet L. Miner, Senior Vice President Midwest Region A.M. Briggs, Inc. Washington, D.C. Charles W. Harris, Jr., President Hendrikus P. Wisker, Executive Vice President Buckhead Beef Company Atlanta, Georgia Howard I. Halpern, Chairman Kirk W. Halpern, Executive Vice President Freedman Meats, Inc. Houston, Texas Donald J. Freedman, President Ronald G. Boatwright, Executive Vice President Freedman Food Service of Austin, L.P. (Texas Meat Purveyors) Austin, Texas Freedman Food Service of Dallas, Inc. Dallas, Texas Freedman Food Service, Inc. Houston, Texas Freedman Food Service of San Antonio, L.P. (Texas Meat Purveyors) San Antonio, Texas Harlingen, Texas Fulton Provision Company Portland, Oregon John H. Walther, President Carl F. Walther, Executive Vice President Malcolm Meats Company Northwood (Toledo) Ohio Andrew L. Malcolm, President Jeffrey J. Savage, Executive Vice President Sysco Newport Meat Company Irvine, California Timothy K. Hussman, President THE SYGMA NETWORK, INC. Gregory K. Marshall, Chairman and Chief Executive Officer Stephen M. Deasey, President and Chief Operating Officer Jerry J. Eggebrecht, President Denver Division Arlington (Dallas), Texas David A. Hanson, Vice President and General Manager Clackamas (Portland), Oregon Stephen F. Bohrer, Vice President and General Manager Pryor, Oklahoma Joseph Vanderhoof, Vice President and General Manager Rancho Cucamonga (Los Angeles), California Robert E. Cagle, Vice President and General Manager Stockton, California John M. Rivers, Jr., Vice President and General Manager David M. Cleck, Senior Vice President Eastern Region Charlotte, North Carolina John W. Jarosz, Vice President and General Manager Harrisburg, Pennsylvania Jeffrey A. Coppenger, Vice President and General Manager Orlando, Florida Gregory A. Ross, Vice President and General Manager Westborough (Boston), Massachusetts Andrew J. Mahler, Vice President and General Manager Columbus, Ohio Kirk Krajewski, Vice President and General Manager Danville, Illinois David E. Myers, Vice President and General Manager Monroe (Detroit), Michigan Robert G. Johnson, Vice President and General Manager San Antonio, Texas John J. Pecora, Vice President and General Manager Hotel Operating Supplies Locations GUEST SUPPLY, INC. Monmouth Junction, New Jersey Clifford W. Stanley, President Paul T. Xenis, Executive Vice President Atlanta, Georgia Carol Stream (Chicago), Illinois Cincinnati, Ohio Concord (Charlotte), North Carolina Corona (Los Angeles), California Garland (Dallas), Texas Grove City (Columbus), Ohio Hanover (Baltimore), Maryland Hayward (San Francisco), California Indianapolis, Indiana Lorain (Cleveland), Ohio Louisburg, North Carolina Mississauga, Ontario, Canada Orlando, Florida Pearl City (Honolulu), Hawaii Sayreville (Newark), New Jersey Taylor (Detroit), Michigan 2 0 0 2 A N N U A L R E P O R T 59 Glossary of Terms Foodservice Distribution Market The total dollar purchasing volume of food and related nonfood products by every type of operation that prepares food in the North American “away from home” market. This includes restau- rants, delis, hospitals, retirement homes, schools, colleges, hotels, cruise lines, entertainment facilities and other locations. SYSCO’s available market also includes the hotel operating supplies market. Distributor categories are defined as follows: • Broadline Distributors supply a wide variety of food and related items to all types of foodservice operators. These opera- tors generally require a broad spectrum of products and their menu offerings may change frequently. SYSCO’s 85 “tradi- tional” operating facilities are broadline distributors. • Customized or Systems Distributors, also known as chain restaurant or quick-service restaurant distributors, supply chain restaurant operations. This customer type generally serves a rel- atively fixed menu and requires a more limited product line. The SYGMA Network, Inc. (SYGMA) is a systems distributor. • Specialty or Niche Distributors specialize in supplying a spe- cific product category or a specific customer market. FreshPoint, Guest Supply and SYSCO’s custom-cutting meat companies are specialty distributors. SYSCO’S Broadline Customer Types • Marketing Associate-Served Customers include independently- operated foodservice locations serviced by a SYSCO Marketing Associate (salesperson). • Multi-Unit Customers include local, regional or national food- service operations that have multiple locations. Due to their more centralized purchasing operations, they generally do not require the same degree of personalized, value-added services that Marketing Associates offer, but are supported by other sales personnel within the SYSCO companies. Marketing Associate This is SYSCO’s term for its team of approximately 8,000 commissioned sales professionals, or relationship managers, who provide customers with services tailored to support their operations and profitability. They assure that orders are submit- ted timely and completely, present new products that will enhance the customer’s menu or reduce the labor required for 60 S Y S C O C O R P O R A T I O N preparation, and assist with inventory control and menu costing and pricing. In addition, they provide other value-added services that help customers build restaurant traffic and operate their businesses more cost effectively. SYSCO Brand Products More than 40,000 products, distinctively identified as being available only from SYSCO, carry the SYSCO Brand. Supported by stringent quality control specifications, these products are designed and developed to meet or exceed customer require- ments, and are monitored throughout the manufacturing and production process by a staff of more than 180 SYSCO Quality Assurance professionals. • Supreme, Imperial, Classic and Reliance quality levels were developed for products across all of SYSCO’s broad categories of product offerings. • Specialty Market Brands are designed for specific customer or market types and generally include various products in one category, such as ethnic foods, delicatessen items, tabletop condiments or specially formulated healthcare products. Examples include such products as the Arrezzio line of Italian foods, the Casa Solana family of Mexican items, Block & Barrel delicatessen products and House Recipe tabletop sauces and condiments. Other examples are Buckhead Beef and Newport Pride custom-cut specialty center-of-the-plate products, FreshPoint specialty produce and Guest Supply hotel operating supplies. Real Sales Growth Real sales growth is total SYSCO sales growth less the effect of acquisitions, plus or minus internally calculated year-over-year product cost deflation or inflation. Fold-Out Strategy This strategy involves building distribution centers in estab- lished markets that previously were being served by another SYSCO company from a distance and may be serviced with even better response time from the new location. Sales, delivery and warehouse personnel, as well as new staff and a manage- ment team, many of whom are from other SYSCO operating companies, are hired to operate the new company. Board of Directors Left to right, standing: Colin G. Campbell, Phyllis S. Sewell, Thomas E. Lankford, Frank H. Richardson, Judith B. Craven, Richard J. Schnieders. Left to right, seated: Jackie M. Ward, John W. Anderson, Jonathan Golden, Richard G. Merrill, Charles H. Cotros. John W. Anderson (70) 1, 2 Elected: 1981 Retired Vice President, Southwestern Bell Communications, Inc. Colin G. Campbell (66) 1*, 2, 4, 6 Elected: 1989 Chairman and President, Colonial Williamsburg Foundation Charles H. Cotros (65) 3, 4*, 5 Elected: 1985 Chairman and Chief Executive Officer, SYSCO Corporation Judith B. Craven, M.D., M.P.H. (56) 1, 2, 5 Elected: 1996 Retired President, United Way of the Texas Gulf Coast Jonathan Golden (65) 4, 5, 6* Elected: 1984 Chairman, Arnall Golden Gregory LLP Thomas E. Lankford (55) 3, 4, 5 Elected: 2000 Executive Vice President, President, Foodservice Operations, North America, SYSCO Corporation Richard G. Merrill (71) 1, 2*, 4, 6 Elected: 1983 Retired Executive Vice President, The Prudential Insurance Company of America Frank H. Richardson (69) 1, 2, 5*, 6 Elected: 1993 Retired President and Chief Executive Officer, Shell Oil Company Richard J. Schnieders (54) 3*, 4, 5 Elected: 1997 President and Chief Operating Officer, SYSCO Corporation Phyllis S. Sewell (71) 1, 2, 4, 6 Elected: 1991 Retired Senior Vice President, Federated Department Stores, Inc. Jackie M. Ward (64) 1, 5, 6 Elected: 2001 Outside Managing Director, Intec Telecom Systems Board Committees 1 Audit 2 Compensation and Stock Option 3 Employee Benefits 4 Executive 5 Finance 6 Nominating and Corporate Governance * Denotes Committee Chairman 2 0 0 2 A N N U A L R E P O R T 61 Distinguished Tenure Directors John F. Baugh Founder and Retired Senior Chairman, SYSCO Corporation Frank A. Godchaux III Chairman, Riviana Foods, Inc. Jabie S. Hardin Retired Chairman, Hardin's-Sysco Food Services, Inc. Herbert Irving Retired Vice Chairman of the Board, SYSCO Corporation Directors’ Council Paul F. Kalat Retired Chairman, Hallsmith-Sysco Food Services Fritz C. Knoebel Retired Chairman, Nobel/Sysco Food Services Company Bill M. Lindig Retired Chairman and CEO, SYSCO Corporation E. James Lowrey Retired Executive Vice President - Finance & Administration, SYSCO Corporation Donald H. Pegler, Jr. Retired Chairman, Pegler-Sysco Food Services Company James A. Schlindwein Retired Executive Vice President - Merchandising Services, SYSCO Corporation Arthur J. Swenka Retired Senior Vice President, Foodservice Operations, SYSCO Corporation Thomas B. Walker, Jr. Retired Limited Partner, The Goldman Sachs Group, Inc. John F. Woodhouse Retired Chairman and CEO, SYSCO Corporation Eugene M. Bohlmeyer, President Sysco Food Services of Baraboo (Term Expires 2003) Carl S. Cannova, President Sysco Food Services - West Coast Florida, Inc. (Term Expires 2002) Daniel S. Haag, President Sysco Food Services of Los Angeles, Inc. (Term Expires 2002) Howard I. Halpern, Chairman Buckhead Beef Company (Term Expires 2002) G. Kent Humphries, President Sysco Food Services of Baltimore (Term Expires 2003) W. Keith Miller, President Sysco Food Services of Houston, LP (Term Expires 2003) Clifford W. Stanley, President Guest Supply, Inc. (Term Expires 2003) Left to right, standing: W. Keith Miller, Eugene M. Bohlmeyer, Clifford W. Stanley, Carl S. Cannova. Left to right, seated: Howard I. Halpern, G. Kent Humphries, Daniel S. Haag. The Directors’ Council, established in 1981, includes seven oper- ating company presidents, each of whom has responsibility for one of SYSCO’s most successful operations. Members meet twice annually and provide guidance and insight to assist the Board of Directors in formulating management strategies and policies regarding SYSCO’s opportunities. 62 S Y S C O C O R P O R A T I O N Corporate Officers Left to right, standing: Senior Vice Presidents James E. Lankford, Stephen F. Smith, Kenneth J. Carrig, Gregory K. Marshall, James D. Wickus, Larry G. Pulliam and Executive Vice Presidents Thomas E. Lankford and Kenneth F. Spitler. Left to right, seated: Senior Vice Presidents Bruce L. Soltis, James C. Graham, O. Wayne Duncan and Executive Vice Presidents Larry J. Accardi and John K. Stubblefield, Jr. Twila M. Day Assistant Vice President, Technology and Applications William B. Day Assistant Controller Kirk G. Drummond Vice President and Chief Information Officer O. Wayne Duncan ** Senior Vice President, Foodservice Operations (Southeast Region) G. Mitchell Elmer Vice President and Controller Albert L. Gaylor Assistant Vice President, Marketing Services James C. Graham Senior Vice President, Foodservice Operations (Southwest Region) Charles A. Hastreiter, Assistant Vice President, Merchandising Services Alan W. Kelso, Assistant Vice President, Safety and Labor Relations James E. Lankford Senior Vice President, Foodservice Operations (Western Region) Thomas E. Lankford * Executive Vice President and President of Foodservice Operations, North America John Locke Vice President, Merchandising Services Gregory K. Marshall Senior Vice President, SYSCO, Chairman and Chief Executive Officer, The SYGMA Network, Inc. John T. McIntyre Assistant Vice President, Manufactured and Dry Groceries Mary Beth Moehring Vice President, Training and Organizational Development Michael C. Nichols Vice President, General Counsel and Corporate Secretary Kathy Oates Assistant Treasurer Larry J. Accardi * Executive Vice President, Merchandising Services & Multi-Unit Sales; President, Specialty Distribution K. Susan Billiot Assistant Vice President, Human Resources Cameron L. Blakely Assistant Vice President, eBusiness Jack D. Carlson Vice President, Real Estate and Construction John S. Carlson Vice President, Marketing Kenneth J. Carrig Senior Vice President, Administration Charles H. Cotros Chairman and Chief Executive Officer Robert G. Culak Vice President, Financial Reporting and Compliance Gary W. Cullen * Vice President, Distribution Services *Newly appointed or promoted. **Retired fiscal year-end 2002. John M. Palizza * Assistant Treasurer Larry G. Pulliam * Senior Vice President, Merchandising Services Timothy R. Reed * Assistant Controller Dale K. Robertson Vice President, Multi-Unit Sales - Customer Development Barry Robinson Assistant Vice President, Healthcare Sales and Marketing Diane Day Sanders Vice President and Treasurer Richard J. Schnieders President and Chief Operating Officer David B. Smallwood Vice President, Multi-Unit Sales Stephen F. Smith * Senior Vice President, Foodservice Operations (Southeast Region) Bruce L. Soltis * Senior Vice President, Canadian Foodservice Operations Kenneth F. Spitler * Executive Vice President, Redistribution and Northeast Region John K. Stubblefield, Jr. Executive Vice President, Finance and Administration Brian M. Sturgeon Vice President, SYSCO and President & Chief Operating Officer, FreshPoint, Inc. Robert C. Thurber Vice President, Merchandising Services Thomas G. Wason Vice President, Perishables Craig G. Watson Assistant Vice President, Quality Assurance James D. Wickus Senior Vice President, Foodservice Operations (Midwest Region) Mark Wisnoski * Assistant Vice President, Employee Benefits 2 0 0 2 A N N U A L R E P O R T 63 Corporate Officers (continued) Left to right: Timothy R. Reed, Robert C. Thurber, Diane Day Sanders, John T. McIntyre, Barry Robinson, William B. Day, Kathy Oates, Robert G. Culak, Charles A. Hastreiter, Thomas G. Wason. Left to right: Mark Wisnoski, David B. Smallwood, Michael C. Nichols, Brian M. Sturgeon, Alan W. Kelso, John M. Palizza, Twila M. Day, G. Mitchell Elmer, Cameron L. Blakely. Left to right: Dale K. Robertson, Craig G. Watson, John Locke, John S. Carlson, Gary W. Cullen, Mary Beth Moehring, Kirk G. Drummond, Jack D. Carlson, K. Susan Billiot, Albert L. Gaylor. 64 S Y S C O C O R P O R A T I O N General Information Corporate Offices SYSCO Corporation 1390 Enclave Parkway Houston, Texas 77077-2099 (281) 584-1390 Internet: http://www.sysco.com Annual Shareholders’ Meeting Omni Houston Hotel Four Riverway Houston, Texas 77056 November 8, 2002 at 10:00 a.m. Independent Auditors Ernst & Young LLP Houston, Texas Counsel Arnall Golden Gregory LLP Atlanta, Georgia Common Stock and Dividend Information SYSCO’s common stock is traded on the New York Stock Exchange under the symbol “SYY.” The company has consistently paid quarterly cash dividends on its common stock and has increased the dividend 33 times in its 32 years as a public company. The current quarter- ly cash dividend is $0.09 per share. Forward-Looking Statements Dividend Reinvestment Plan with Optional Cash Purchase Feature SYSCO’s Dividend Reinvestment Plan provides a convenient way for share- holders of record to reinvest quarterly cash dividends in SYSCO shares auto- matically, with no service charge or brokerage commissions. Shareholder Information For information or assistance regard- ing individual stock records, Dividend Reinvestment Plan with Optional Cash Purchase Feature, dividend or tax information, replacement of stock certificates and transfer instructions, please contact the following: The Plan also permits registered Transfer Agent and Registrar shareholders to invest additional money to purchase shares. In addi- tion, certificates may be deposited directly into a Plan account for safe- keeping and may be sold directly through the Plan for a modest fee. Shareholders desiring informa- tion about the Dividend Reinvest- ment Plan with Optional Cash Purchase Feature may obtain a brochure and enrollment form by contacting the Transfer Agent, EquiServe Trust Co., N.A., at 1-800- 730-4001. Investor Contact Financial analysts, other investment professionals and shareholders should direct inquiries to: John M. Palizza, Assistant Treasurer (281) 584-1308 Toni R. Spigelmyer, Director, Investor/Media Relations (281) 584-1458 EquiServe Trust Company, N.A. P. O. Box 43010 Providence, RI 02940-3010 1-800-730-4001 Internet: http://www.equiserve.com Form 10-K and Financial Information A copy of the fiscal 2002 Form 10-K Annual Report filed with the Securities and Exchange Commission, as well as copies of financial reports and other company literature, may be found on our web site at http://www.sysco.com, or may be obtained without charge upon writ- ten request to the Investor Relations Department, SYSCO Corporation, at the corporate offices, or by calling 1-800-337-9726. Certain statements made herein are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They include state- ments about anticipated sales volumes, industry growth and increased market share, SYSCO’s long-term growth objectives with respect to sales, earnings, return on equity, long-term debt and capitalization, anticipated capital expenditures, ability to meet future cash requirements and remain profitable, implementation and benefits of redistribution cen- ters, and implementation, timing and anticipated benefits of “fold-outs” and acquisitions. These statements are based on management’s current expectations and estimates; actual results may differ materially. Decisions to pursue fold-outs and acquisitions or to construct redistribution facilities and expenditures for such could vary depending upon construction sched- ules and the timing of other purchases, such as f leet and equipment, while redistribution facility, fold-out and acquisition timing and results could be impacted by competitive conditions, labor issues and other matters. The ability to pursue acquisitions also depends upon the availability and suitability of potential candidates and management’s allocation of capital. Industry growth may be affected by general economic conditions. SYSCO’s ability to achieve anticipated sales volumes and its long-term growth objectives, increase market share, meet future cash requirements and remain profitable could be affected by competitive price pressures, availability of supplies, work stoppages, success or failure of consolidated buying plan initiatives, successful inte- gration of acquired companies, conditions in the economy and the industry and internal factors such as the ability to control expenses. For a discussion of additional risks and uncertainties that could cause actual results to differ from those contained in the forward-look- ing statements, see the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2002. Designed & Produced by Pegasus Design, Inc. Printed on recycled paper containing recovered, post-consumer waste paper. SYSCO Corporation 1390 Enclave Parkway Houston, Texas 77077-2099 (281) 584-1390 www.sysco.com SYSCO-AR-02 

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