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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 28, 2002
[ ] Transition report pursuant to Section 13 or 15(d) Of The Securities Exchange
Act of 1934
For the transition period from ______ to _____
Commission File Number: 1-1790
DI GIORGIO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-0431833
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
380 Middlesex Avenue
Carteret, New Jersey 07008
(Address of principal executive offices) (Zip Code)
(732) 541-5555
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- --------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 3, 2003, there were outstanding 78.1158 shares of Class A Common
Stock and 76.8690 shares of Class B Common Stock. The aggregate market value of
the voting stock held by non-affiliates of the registrant is $0 because all
voting stock is held by affiliates of the registrant.
PART I
ITEM 1. BUSINESS.
Overview
Di Giorgio Corporation (the "Company," "we" or "us") is one of the largest
independent wholesale food distributors in the New York City metropolitan area,
which is one of the larger retail food markets in the United States. We serve
supermarkets, both independent retailers (including members of voluntary
cooperatives) and chains, principally in the five boroughs of New York City,
Long Island, New Jersey and, to a lesser extent, the greater Philadelphia area.
In November 2002, we caused a preliminary prospectus for DG Foods Income Fund to
be filed in Canada (the "Canadian Deal") in connection with a proposed initial
public offering of units in the fund. On December 16, 2002 we announced a delay
in the offering until more favorable market conditions existed. We recorded $3.2
million in transaction related expenses in 2002 of which $2.7 million related to
the Canadian Deal. There can be no assurances that the Canadian Deal will be
completed. If the Canadian Deal is consummated, a portion of the proceeds of the
sale of units in the fund will be used to purchase 98.3536% of our equity and a
portion of the proceeds and other funds will be used to call our outstanding 10%
senior notes due 2007 ("Senior Notes") for redemption.
During 2002 we recorded revenue of $1,559.5 million, net income of $13.2 million
and EBITDA (as more fully described in the Management Discussion & Analysis
section) of $43.2 million as compared to revenue of $1,538.8 million, net income
of $12.1 million and EBITDA of $46.3 million in the prior year.
Products and Customer Support Services
General Products: We sell three primary product categories: grocery, frozen and
refrigerated products. Across these three product categories, we supply over
18,000 food and non-food items, comprised predominantly of brand name items. In
addition to our large selection of brand name products, we market our
well-recognized White Rose label consistently across all three categories of
products, as well as, private label products for certain of our customers. While
some customers purchase items from all three product categories, others purchase
items from only one or two product categories.
Products are sold at prices which reflect the manufacturer's stated price plus a
profit margin. Prices are adjusted continuously based on vendor pricing.
Customer Support Services: We offer a broad spectrum of retail support services,
including advertising, promotional and merchandising assistance, retail
operations counseling, computerized ordering services, technology support, an
insurance program, coupon redemption services and store layout and equipment
planning. Under our insurance program, we assist customers in obtaining
liability, crime, and property insurance. Our technology division distributes
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and supports supermarket scanning and cash register equipment which is
compatible with our information systems. We also offer our customers store
engineering, sanitation and inspection services. We have a staff of retail
counselors who visit stores on a regular basis to advise store management
regarding their operations. Our larger independent and chain customers generally
provide their own retail support. Most of our customers utilize our computerized
order entry system, which allows them to place and confirm orders 24 hours a
day, 7 days a week.
We periodically extend financial assistance in the form of loans to independent
retailers by providing (i) financing for the purchase of new locations, (ii)
financing for the purchase of inventories, store fixtures, equipment, and
leasehold improvements, (iii) extended payment terms for initial inventories,
and/or (iv) financing for working capital requirements. The primary purpose of
those loans is to provide a means of continued growth for us by developing new
customer store locations and enlarging and remodeling existing stores of our
customers. Generally, customers receiving loans purchase the majority of their
grocery, frozen and refrigerated product inventory from us. Loans are usually
secured, interest-bearing obligations that are generally repayable over a period
of one to three years. As of December 28, 2002, our customer loan portfolio had
an aggregate balance of approximately $20.2 million. The portfolio consisted of
57 loans ranging in size up to approximately $6.0 million. In connection with
extending loans, we evaluate our relationship with and the creditworthiness of
the customer and seek to obtain adequate security. During the last three years,
we sold participations in some of these loans to commercial banks. In addition,
we periodically provide other financial assistance to our customers.
Markets and Customers
Our principal markets are all five boroughs of New York City, Long Island, New
Jersey and the greater Philadelphia area. We also have customers in upstate New
York, Puerto Rico, Pennsylvania, Delaware, Connecticut, Massachusetts and Rhode
Island and we are evaluating further expansion into these and other markets.
Our customers consist of three types of grocery retailers: independent retailers
(including members of voluntary cooperatives), chains and convenience stores,
both of which generally do not maintain their own internal distribution
operations for one or more of our product categories. Our customers which are
independent food retailers and/or members of voluntary cooperatives seek to
achieve the operating efficiencies enjoyed by supermarket chains through common
purchasing and advertising. The characteristics of New York City, our principal
market, result in unique retail food market dynamics and distribution
challenges. These characteristics include: high population density, ethnic
diversity, premium rent costs, relatively small customer locations, limited
available retail floor space and heavy traffic volumes. Consequently, in this
market relative to others, there is a disproportionately large number of
independent retailers and small chains, each serving the special needs of their
local communities; the "supercenter" or large supermarket store format is less
practical; and internal or captive distribution arrangements are much less
viable. These factors constitute barriers to entry making it difficult for new
entrants to penetrate our principal geographic market territory in a
cost-effective manner.
The following are trade names used by some of our customers:
Superfresh, Waldbaums, Food Emporium, Food Basics and A & P (each of which are
divisions of The Great Atlantic & Pacific Tea Co., Inc. ("A&P")), Gristedes and
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Sloans Supermarkets, King Kullen, Kings Super Markets, Quick Chek, C-Town,
Bravo, Scaturros, Grande (in Puerto Rico) and Western Beef, as well as the
Associated Food Stores ("Associated"), Met(R), Pioneer(R), Super Food and
Foodtown cooperatives.
We own the Met(R) and Pioneer(R) trade names, and license them to customers who
operate independently-owned stores. This voluntary cooperative format allows
customers to take advantage of the benefits of advertising and merchandising on
a scale usually available only to large chains, as well as certain other retail
support services provided by us. As part of the cooperative arrangement, these
customers are obligated to purchase a substantial portion of their grocery,
frozen and refrigerated product inventory requirements from us, thereby
enhancing the stability of this portion of our customer base. These customers
represented approximately 16.5% of our net sales for the fiscal year ended
December 28, 2002, and 14.5% of our net sales for the fiscal year ended December
29, 2001.
We have significant expertise and experience in serving the ethnic markets in
the areas in which we operate. This knowledge is of value to many manufacturers
and other suppliers. We have developed programs involving customer support
personnel and retail counselors that allow significant penetration to targeted
ethnic groups.
During the fiscal year ended December 28, 2002, our largest customers, A&P and
Associated, accounted for approximately 25.0% and 13.9%, of net sales, and our
five largest customers accounted for 53.5% of net sales. From 1997 to 2002, net
sales to our top five customers have decreased as a percentage of net sales from
64.2% to 53.5%, primarily because we obtained new business. We have
long-standing relationships with many of our customers.
Warehousing and Distribution
Because each of our product categories has different storage and distribution
requirements, we handle each product category from a separate distribution
center. All three facilities are equipped with modern equipment for receiving,
storing and shipping large quantities of merchandise. In addition, all of our
distribution facilities are fully integrated through our computer, accounting,
and management information systems to promote operating efficiency and
coordinated quality customer service. Management believes that the efficiency of
our distribution centers enables us to compete effectively. Our warehouse and
inventory management system directs all aspects of the material handling process
from receiving through shipping, and generates detailed cost information which
warehouse personnel use to manage the workforce and flow of product, which
minimizes cost while maintaining the highest service level possible.
Our transportation fleet consists of 119 tractors (all of which are leased), 344
trailers (of which 291 are leased) and 2 trucks (both of which are leased). In
addition, we rent trailers on a monthly basis to meet seasonal demand. On
approximately 18% of our deliveries, we are able to arrange "backhauls" of
products from manufacturers' or other suppliers' distribution facilities located
in our markets which allow us to reduce costs. We regularly use independent
owner/operators to make deliveries on an "as needed" basis to supplement the use
of our own employees and equipment. We make approximately 5,500 deliveries per
week to our customers with a combination of our own transportation fleet and
that of third parties.
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Purchasing
We purchase our products from approximately 1,300 suppliers in the United States
and abroad and resell them to our customers. Brand name products are generally
purchased directly from the manufacturer, through the manufacturer's
representatives or through food brokers by buyers in each operating division.
White Rose(R) label and several customers' private label products are purchased
from producers, manufacturers or packers who are licensed by us or the specific
customer. We purchase products in large volume and resell them in the smaller
quantities required by our customers. We believe that we have the purchasing
power to obtain competitive volume discounts from our suppliers. Substantially
all categories of products distributed by us are available from a variety of
manufacturers and suppliers, and we are not dependent on any single source of
supply for any specific category, however, market conditions dictate that we
have certain nationally prominent brands, available from single suppliers,
available for distribution. Order size and frequency are determined by our
buyers based upon historical sales experience, sales projections and computer
forecasting. A modern procurement system provides the buying department with
extensive data to measure the movement and profitability of each inventory item,
forecast seasonal trends, and recommend the terms of purchases, including the
practice of taking advantage of situations when the manufacturer is selling an
item at a discount pursuant to a special promotion, an industry practice known
as "forward buying." This system, which operates in concert with the warehouse
management system, features full electronic data interchange capabilities and
accounting interfaces.
Competition and Trademarks
The wholesale food distribution industry is highly competitive. We are one of
the largest independent wholesale food distributors to supermarkets in the New
York City metropolitan area. Our principal competitors in all three product
categories are C&S Wholesale Grocers, Inc., Bozzuto's, Inc. and Supervalu. Our
main competitors with respect to the distribution of certain of our product
categories are Krasdale Foods, Inc. and General Trading Co. As we expand into
other geographic markets, we expect to compete with national and regional
distributors in all product categories.
Management believes that the principal competitive factors in our business
include price, scope of products and services offered, distribution service
levels, strength of private label brand offered, strength of store tradenames
offered and store financing support. We believe that we compete effectively by
offering full product lines, including our White Rose(R) label, retail support
and financing services, our Met(R) and Pioneer(R) voluntary cooperative
trademarks, flexible delivery schedules, competitive prices and competitive
levels of customer services.
Management believes there is significant competitive value in our White Rose(R)
brand, as well as in our Met(R) and Pioneer(R) names.
Seasonality
Typically, our profitability is strongest in our fiscal fourth quarter, with the
fiscal third quarter the weakest. Third quarter performance has been improved
somewhat by our increased sales outside of New York City. The increased sales
4
outside of New York City are either in areas that experience higher summer sales
(such as along the New Jersey shore) or areas more resistant to seasonal
fluctuations.
Employees
We employed 1,288 persons on February 25, 2003, including 824 covered by
collective bargaining agreements with various International Brotherhood of
Teamsters locals.
We are a party to collective bargaining agreements with our warehouse and
trucking employees at our refrigerated food operation (expiring November 2005),
our grocery operation (warehouse expiring October 2007 and trucking expiring
April 2007) and our frozen operation (expiring January 2004).
Management believes that our present relations with our work force are
satisfactory.
Relationship with Independent Auditors
We agreed to pay Deloitte & Touche LLP ("D&T") $255,000 plus expenses up to
$12,000 for the audit of the year ended December 28, 2002 and paid $225,000 plus
expenses of $12,000 for the prior year's audit. In fiscal 2002, we paid D&T
$234,500 for additional audit fees and workpaper access fees related to various
transactions we considered. We have incurred approximately $300,000 of fees from
D&T as of December 28, 2002 for our Canadian Deal. In 2001, we paid D&T $17,400
for accounting research and other accounting matters. We did not engage D&T for
any consulting services during 2001 or 2002.
5
ITEM 2. PROPERTIES
Distribution facilities and data center data.
Location Use Square Footage Lease Expiration
-------- --- -------------- ----------------
Carteret, New Jersey Groceries, Non-Perishables, 645,000 2018 (plus two 5-year
and executive offices renewal options)
Woodbridge, New Jersey Refrigerated 200,000 2006 (plus three 5-year
renewal options)
Carteret, New Jersey Frozen 279,000 2018 (plus two 5-year
renewal options)
Westbury, New York Computer center 11,800 2007
Total operating lease rent paid in connection with our facilities was
approximately $5.5 million in fiscal 2002. Management expects our operating
lease rent paid for our facilities in 2003 to be $6.2 million.
The Carteret grocery division distribution facility operates at approximately
90% of its current capacity and the refrigerated division distribution facility
operates at 95% of its current capacity (both on a three shift basis). The
frozen food division distribution facility, which was expanded in 2002, operates
at approximately 75% of its current capacity (on a two shift basis). Depending
on the type of new business introduced (e.g. high turn product that is already
slotted in inventory), each distribution facility has additional capacity to
expand its output.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in claims, litigation and administrative proceedings of various
types in various jurisdictions. In addition, we have agreed to indemnify various
transferees of operations we sold certain known and potential liabilities. We
also have incurred, and may in the future incur, liability arising under
environmental laws and regulations in connection with properties we sold and
properties presently owned or acquired. Although management believes that it has
established adequate reserves for known contingencies, there can be no
assurances that the costs of environmental remediation or an unfavorable outcome
in any litigation or governmental proceeding will not have an adverse effect on
us.
Litigation. On November 18, 2002, the United States Court of Appeals for the
Third Circuit affirmed the District Court's award of summary judgment in favor
of the Company in the action entitled Twin County Grocers Inc. v. Food Circus
Supermarkets, Inc. et al., which effectively ended this litigation against the
Company.
We are not a party to any other litigation, other than routine litigation
incidental to our business, which, in management's judgment, is individually or
in the aggregate material to our business. Management, after consultation with
6
counsel, does not believe that the outcome of any of its current litigation,
either individually or in the aggregate, will have a material adverse effect on
us.
Environmental. We have incurred, and may in the future incur, environmental
liability to clean up potential contamination at a number of properties under
certain federal and state laws, including the Federal Comprehensive
Environmental Response, Compensation, and Liability Act, as amended ("CERCLA").
Under those laws, liability for the cleanup of property contaminated by
hazardous substances may be imposed on both the present owner and operator of a
property and any person who owned or operated the property at the time hazardous
substances were disposed on the property. Persons who arranged for the disposal
of hazardous substances found on a disposal site may also be liable for cleanup
costs. In certain cases, we have agreed to indemnify the purchaser of our former
properties for liabilities arising on that property or have agreed to remain
liable for certain potential liabilities that were not assumed by the
transferee.
We have recorded an estimate of our total potential environmental liability
arising from specifically identified environmental problems (including those
discussed below) in the amount of approximately $658,000 as of December 28,
2002. We believe these reserves are adequate and that known and potential
environmental liabilities will not have a material adverse effect on our
financial condition. However, there can be no assurance that the identification
of contamination at current or former sites or changes in cleanup requirements
would not result in significant additional costs to us.
We are responsible for the monitoring (the cleanup having been completed) of a
site previously owned and operated by us located in St. Genevieve, Missouri.
In addition, we have been identified as a potentially responsible party under
CERCLA for clean-up costs at the Seaboard waste disposal site in North Carolina.
We are a member of the de minimus group comprised of parties who allegedly
contributed less than 1% of the total waste at the site.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public market for our outstanding common equity and the
majority (98.54%) of our outstanding common stock is owned by Rose Partners, LP
("Rose").
We paid a dividend of $6.0 million in April 2002. Our ability to pay dividends
is governed by restrictive covenants contained in the indenture governing our
Senior Notes as well as restrictive covenants contained in our senior bank
lending arrangement. As a result of these restrictive covenants, based on our
7
results for the year ended December 28, 2002, we are currently permitted to pay
dividends up to approximately $ 6.6 million; however, we expect to request an
amendment to our loan agreement to permit the payment of a $10 million dividend
in 2003. We can pay a dividend of up to $16.3 million under the terms of the
Senior Notes.
ITEM 6. SELECTED FINANCIAL DATA.
This table sets forth our selected historical data for the periods
indicated. This data should be read in conjunction with the consolidated
financial statements and related notes included herein. Amounts are in thousands
of dollars.
Year Ended Year Ended Year Ended Year Ended Year Ended
January 2, January 1, December 30, December 29, December 28,
1999 (b) 2000 2000 2001 2002
----------------------------------------------------------------------
Income Statement Data:
Total revenue $1,196,933 $1,413,827 $1,495,398 $1,538,824 $1,559,513
Gross profit(a) 121,939 138,971 144,996 151,313 156,752
Warehouse expense 49,440 51,865 52,233 54,123 57,844
Transportation expense 24,719 26,607 28,387 29,570 29,284
Selling, general and 22,760 25,834 29,443 29,526 30,197
administration expenses
Facility integration and 4,173 -- -- -- --
abandonment expense
Transaction related expenses -- -- -- -- 3,239
Amortization--goodwill 2,460 2,425 2,425 2,425 --
Operating income 18,387 32,240 32,508 35,669 36,188
Interest expense 18,170 16,679 16,028 15,917 15,559
Amortization--deferred financing 721 764 730 651 651
costs
Other (income), net (9,534)(c) (2,744) (3,517) (3,775) (2,736)
Income from continuing operations
before income taxes and
extraordinary items 9,030 17,541 19,267 22,876 22,714
Income taxes 4,449 7,872 8,528 10,781 9,482
Income from continuing
operations before extraordinary
items 4,581 9,669 10,739 12,095 13,232
Extraordinary (loss)/gain on
extinguishment of debt, net of tax (201) -- -- -- (61)
Net income $ 4,380 $ 9,669 $ 10,739 $ 12,095 $ 13,171
January 2, January 1, December 30, December 29, December 28,
1999 (b) 2000 2000 2001 2002
-----------------------------------------------------------------------
Balance Sheet Data:
Total assets $274,828 $273,406 $289,801 $290,936 $298,464
Working capital 41,117 56,397 56,238 73,612 74,774
Total debt including capital leases 178,127 164,069 167,531 157,058 152,994
Total stockholder's equity (3,701)(d) 5,968 14,207 21,002 28,173
(deficiency)
- -----------------------
(a) Gross profit excludes warehouse expense shown separately.
(b) Represents a 53 week fiscal year.
(c) Includes $7.2 million consideration pursuant to an agreement with Fleming
Companies, Inc.
(d) Including a $5 million stock repurchase in May 1998.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward- Looking Statements
Forward-looking statements in this Form 10-K include, without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources and are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These statements may be identified by their use of words like "plans",
"expects", "aims", "believes", "projects", "anticipates", "intends",
"estimates", "will", " should", "could", and other expressions that indicate
future events and trends. These forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievement of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. These factors include, among others, the
following: general economic and business conditions and those in particular in
the New York City metropolitan area; the Company's reliance on several
significant customers; potential losses from loans to its retailers;
restrictions imposed by the agreements governing the Company's indebtedness;
current wholesale competition, as well as future competition from presently
unknown sources; competition in the retail segment of the supermarket business;
the Company's labor relations; potential environmental liabilities which the
Company may have; dependence on key personnel; changes in business regulation;
business abilities and judgment of personnel; changes in, or failure to comply
with government regulations; potential commercial vehicle restrictions;
inflation especially with respect to wages and energy costs; and the results of
terrorism or terrorist acts against the Company.
Application of Critical Accounting Policies
The consolidated financial statements are based on the selection and application
of significant accounting policies, which require management to make significant
estimates and assumptions. We believe that the items discussed below are some of
the more critical judgment areas in the application of our accounting policies
that affect our consolidated financial condition and results of operations.
Receivables and customer financing
We estimate the net realizable value of our trade receivables and notes
receivables, as well as our vendor receivables. A considerable amount of
judgment is required in assessing the realization of these receivables,
including evaluating the current creditworthiness of each customer and related
aging of the past due balances. The provision for bad debts for fiscal 2002 was
$.5 million, for fiscal 2001 was $.5 million, and was $.7 million for fiscal
2000. At December 28, 2002, the total notes and accounts receivable (including
the long-term portion) were $ 117.5 million and at December 29, 2001 were $111.2
million, net of an allowance of doubtful accounts of $5.0 million at December
28, 2002 and $5.3 million at December 29, 2001. We evaluate specific accounts
when we become aware of a situation where a customer may not be able to meet its
financial obligations. The reserve requirements are based on the best facts
available and are re-evaluated and adjusted as additional information is
received.
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Intangible assets
Our intangible assets primarily consist of goodwill of $68.9 million. The
determination of whether these assets are impaired involves significant
judgments based upon short and long-term projections of future performance.
Certain forecasts reflect assumptions regarding our ability to successfully
maintain our customer base. Changes in strategy and/or market conditions may
result in adjustments to recorded asset balances. Forecasts used to support the
valuation of the intangible assets may change in the future, which could result
in additional non-cash charges that would adversely affect the results of our
operations and our financial condition.
Our policy is to annually assess the value of our goodwill on the first day of
our fiscal fourth quarter, and more frequently, as conditions require. We do not
believe our goodwill is impaired now.
Pension benefits
We have significant pension benefit costs and credits, which we develop from
actuarial valuations. Inherent in these valuations are key assumptions,
including discount rates and expected return on plan assets, which are evaluated
on an annual basis at the beginning of each fiscal year. We are required to
consider current market conditions, such as changes in interest rates, in
developing these assumptions. Changes in the related pension benefit costs or
credits may occur in the future due to changes in the assumptions. The key
assumptions used in developing our fiscal 2002 net pension benefit credit were a
7.25 % discount rate, a 9% expected return on plan assets and a 6% rate of
compensation increases. These were consistent with the prior year assumptions
except that the discount rate was reduced by one-half of one percent to reflect
current market conditions. Compared with the prior year, our net pension benefit
credit in fiscal 2002 was reduced by $ .4 million to $.2 million. Our net
pension benefit credit is expected to change to a net pension expense of
approximately $.6 million during fiscal 2003, primarily as a result of a
reduction in the discount rate from 7.25% to 6.75%, and a reduction in the
expected return on plan assets from 9% to 8.25%. Holding all other assumptions
constant, a one-quarter percent increase or decrease in the discount rate would
have increased or decreased annual fiscal 2002 pre-tax income by approximately $
..1 million. Likewise, a one-quarter percent increase or decrease in the expected
return on plan assets would have increased or decreased annual fiscal 2002
pre-tax income by $ .1 million.
Assets on the balance sheet December 28, 2002, included a deferred pension asset
of $18.5 million from our qualified defined benefit pension plan included in
other assets, as well as a liability for our non qualified supplemental plan of
$.9 million. This liability was offset by $.8 million in a Rabbi Trust which was
also included in other assets on the balance sheet. To the extent the estimated
accumulated benefit obligation related to the qualified pension plan exceeded
the fair value of the plan assets, we would be required to reduce the deferred
pension asset to zero and record a charge to equity.
In December 2000, we made our only qualified pension plan contribution in the
last twelve years. We do not expect to have any cash requirements related to the
qualified pension benefit plan during fiscal 2003.
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Reserves for Self-Insurance.
We are primarily self-insured for workers' compensation, medical insurance, and
a portion of our liability claims (together "claims"). It is our policy to
record these liabilities based on claims filed and an estimate of claims
incurred but not yet reported. These reserves totaled $ 7.0 million at December
28, 2002. Any projection of losses are estimates and are subject to many
variables. Among these variables are unpredictable external factors affecting
future inflation rates, litigation trends, legal interpretations, benefit level
changes, health care costs, and claim settlement patterns. Beginning in 2002,
since the workers compensation accrual represents in excess of 50% of the total
claims reserve, we engaged a national actuarial firm to review our workers
compensation accrual which was found to be adequate. We expect this actuarial
review to be performed periodically. If a greater amount of claims is incurred
compared to estimates or health care costs increase more than anticipated,
recorded reserves may be insufficient and additional costs could be recorded in
the consolidated financial statements.
We have discussed the application of these critical accounting policies with our
Audit Committee and our independent auditors, Deloitte & Touche, LLP. See Note 1
to the consolidated financial statements for recent accounting pronouncements.
Results of Operations
Fifty-two weeks ended December 28, 2002 and December 29, 2001
Net sales for the fifty- two weeks ended December 28, 2002 were $1,551.8 million
as compared to $1,530.9 million for the fifty-two weeks ended December 29, 2001.
This 1.4% increase in net sales primarily reflects increased sales to existing
customers. Other revenue, consisting of recurring customer related services,
decreased to $7.7 million for the fifty-two weeks ended December 28, 2002 as
compared to $7.9 million in the prior period.
Our gross margin (excluding warehouse expense) increased to 10.1% of net sales
or $156.8 million for 2002, compared to 9.9% of net sales or $151.3 million for
the prior period, because of a change in mix of both customers and products
sold. We have taken, and will continue to, take steps to maintain and improve
our margins. Factors such as advantageous buying opportunities, the additions of
high volume, lower margin customers, changes in manufacturers' promotional
activities, changes in product mix, or competitive pricing pressures may have an
effect on gross margin. Accordingly, we cannot be certain whether the gross
margins we realized in 2002 will continue.
Warehouse expense increased as a percentage of net sales to 3.7% or $57.8
million for 2002, compared to 3.5% of net sales or $54.1 million for the prior
period as a result of i) the one time signing bonus paid to the grocery
warehouse union members upon ratifying the new five year contract extension in
September, ii) increased rent as a result of the frozen warehouse expansion,
iii) increased benefits and insurance costs, and iv) increased wages.
Transportation expense remained flat at 1.9% of net sales or $29.3 million for
2002 compared to 1.9% of net sales or $29.6 million in the prior period as
better productivity offset higher wages, benefits and other costs.
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Selling, general and administrative expense remained flat as a percentage of net
sales at 1.9% of net sales or $30.2 million for 2002 compared to 1.9% of net
sales or $29.5 million for the prior period.
Transaction related expenses were $3.2 million in 2002 of which of which $2.7
million related to the Canadian Deal.
Other income, net of other expenses and consisting primarily of interest income,
decreased to $2.7 million for 2002 as compared to $3.8 million for the prior
period. The prior period included a $.5 million gain on the sale of securities
and $.5 million of insurance proceeds from a claim.
Interest expense decreased to $15.6 million for 2002 from $15.9 million for the
prior period due to lower average outstanding levels of our debt.
We recorded an income tax provision of $9.5 million, resulting in an effective
income tax rate of 42% for 2002, compared to a provision of $10.8 million
resulting in an effective rate of 47% in the prior period as a result of a the
nondeductibility of certain of our goodwill amortization which stopped in 2002.
We recorded net income for 2002 of $13.2 million as compared to $12.1 million in
the prior period. The increase was primarily the result of no amortization of
goodwill in the current year in accordance to SFAS No. 142. Had SFAS No. 142
been in effect during 2001, net income for that period would have been $14.4
million.
Fifty-two-weeks ended December 29, 2001 and December 30, 2000
Net sales for 2001 were $1,530.9 million compared to $1,488.1 million for 2000.
This 2.9% increase in net sales primarily reflects increased sales to existing
customers. Other revenue, consisting of recurring customer related services,
increased to $7.9 million for 2001 as compared to $7.3 million in the prior
period.
Gross margin (excluding warehouse expense) increased to 9.9% of net sales or
$151.3 million 2001, compared to 9.7% of net sales or $145.0 million for the
prior period, as a result of a change in mix of both customers and products
sold.
After excluding final shutdown expenses relating to our former Garden City
facility (on which the lease terminated on March 31, 2000) in the first quarter
of 2000, warehouse expense remained flat as a percentage of net sales at 3.5% or
$54.1 million for 2001, compared to 3.5% of net sales or $51.8 million for the
prior period.
Transportation expense remained at 1.9% of net sales or $29.6 million for 2001,
compared to 1.9% of net sales or $28.4 million in the prior period due to
greater efficiencies offsetting higher expenses.
Selling, general and administrative expense decreased to 1.9% of net sales or
$29.5 million for 2001, compared to 2.0% of net sales or $29.4 million for the
prior period.
Other income, net of other expenses, increased to $3.8 million for 2001,
compared to $3.5 million for the prior period.
12
Interest expense decreased to $15.9 million for 2001 from $16.0 million for the
prior period due to lower average outstanding levels of our debt.
We recorded an income tax provision of $10.8 million, resulting in an effective
income tax rate of 47% for 2001, compared to a provision of $8.5 million
resulting in an effective rate of 44% in the prior period as a result of our
higher statutory rates. The estimated effective tax rate is higher than the
statutory tax rate primarily because of the nondeductibility of certain of our
amortization of the excess of cost over net assets acquired. We paid
approximately $8.0 million in estimated federal tax in 2001.
We recorded net income for 2001 of $12.1 million, compared to $10.7 million in
the prior period.
Liquidity and Capital Resources
Cash flows from operations and amounts available under our $90 million bank
credit facility are the principal sources of our liquidity. We believe that
these sources will be adequate to meet our currently anticipated working capital
needs, dividend payments, capital expenditures, and debt service requirements
during the next four fiscal quarters, as well as any investments we may make.
Our bank credit facility is scheduled to mature on June 30, 2004, and bears
interest at a rate per annum equal to (at our option): (i) the Euro Dollar
Offering Rate plus 1.625% or (ii) the lead bank's prime rate. Borrowings under
the revolving bank credit facility were $2.7 million (excluding $6.0 million of
outstanding letters of credit) at December 28, 2002. Additional borrowing
capacity of $81.9 million was available at that time under our then current
borrowing base certificate.
During 2002, cash flows provided by our operating activities were $10.3 million,
consisting primarily of cash generated from income before non-cash expenses of
$18.6 million, and an increase in accounts payable, accrued expenses and other
liabilities of $4.1 million, offset by increases in (i) accounts and notes
receivable of $8.7 million, (ii) prepaid expenses of $1.1 million, (iii)
inventory of $2.3 million, and other assets of $.3 million.
We used approximately $3.3 million of cash flows for investing activities during
2002, exclusively for capital expenditures. We used $8.2 million of cash in 2002
for financing activities, primarily for the purchase on the open market and
subsequent retirement of $6.7 million of Senior Notes, and a $6.0 million
dividend paid in April 2002, offset by net borrowings under our revolving credit
facility of $2.7 million and $1.9 million of proceeds from note participations
discussed below.
EBITDA was $43.2 million during 2002, compared to $46.3 million in the prior
period. We have presented EBITDA supplementally because we believe this
information is useful given the significance of our depreciation and
amortization and because of our highly leveraged financial position. This data
should not be used in place of any measure of performance or liquidity
promulgated under generally accepted accounting principles (such as net
income/loss or cash provided by/used in operating, investing and financing
13
activities), nor should it be considered as an indicator of our overall
financial performance. Also, the EBITDA definition we use may not be comparable
to similarly titled measures reported by other companies.
Reconciliation of EBITDA to net income (in thousands):
2002 2001 2000
EBITDA $43,206 $46,300 $42,636
Less: depreciation and
amortization of fixed assets 2,341 2,332 2,186
Less: other amortization 2,592 5,175 5,155
Less: interest expense 15,559 15,917 16,028
Less: income tax provision 9,482 10,781 8,528
Less: extraordinary loss-net of tax 61 0 0
------- ------- -------
Net income $13,171 $12,095 $10,739
======= ======= =======
Our consolidated indebtedness decreased to $153.0 million at December 28, 2002
as compared to $157.1 million at December 29, 2001. Stockholders' equity was
$28.2 million on December 28, 2002 as compared to $21.0 million on December 29,
2001. Based on our results for the year ended December 28, 2002, we are
currently permitted to pay dividends up to approximately $6.6 million; however
we expect to request an amendment to our loan agreement to permit the payment of
a $10 million dividend in 2003.
Since 1997, we reduced our debt by $44.0 million, of which $17.0 million relates
to our bank credit facility, which had a $2.7 million balance at December 28,
2002, $6.7 million relates to the repurchase and retirement of the Senior Notes,
and $20.3 million relates to repayment of other debt. We have also improved our
ratio of debt to EBITDA from 5.45x at December 27, 1997 to 3.54x at December 28,
2002. The ratio of EBITDA to interest in 2002 was 2.78x versus 1.65x in 1997.
Stockholders' equity increased from a deficit of $3.1 million at December 27,
1997 to $28.2 million at December 28, 2002.
During the fiscal fourth quarter of 2002, we purchased $6.7 million of Senior
Notes on the open market at par and retired them. We will continue to assess
market conditions and may in the future purchase and retire additional amounts
of our Senior Notes.
We currently do not expect to spend more than $3.0 million during 2003 on
capital expenditures, but we may purchase certain assets used in our business
instead of leasing them due to economic conditions.
We did not incur any cash expense in fiscal 2002 in connection with the
environmental remediation of presently owned or divested properties and do not
expect to expend more than approximately $200,000 in fiscal 2003. At December
28, 2002, we had reserved $658,000 for known environmental liabilities. We
intend to finance the remediation through internally generated cash flow or
borrowings. We believe that should we become liable as a result of any adverse
determination of any legal or governmental proceeding in a material amount
beyond our reserves, it could have an adverse effect on our liquidity position.
From time to time, we have sold non-recourse, senior participations in selected
customer notes to various banks at par. Aggregate proceeds from those sales in
2002 were $1.9 million and $10.5 million in 2001. All proceeds were used to
14
repay amounts under our bank credit facility or provide working capital. The
primary reason for these sales was to enhance our ability to lend money to
customers within the confines of our financing agreements. We may sell
additional participations from time to time.
Under the terms of our revolving bank credit facility, we are required to meet
certain financial tests, including minimum interest coverage ratios. As of
December 28, 2002, we were in compliance with our covenants.
Off-balance sheet arrangements and contractual obligations
We use off-balance sheet arrangements such as leases to finance many of our
business activities. All four of our facilities are leased (three operating and
one capital lease) as is most of our transportation fleet and much of our
material handling equipment. The chart summarizes our contractual obligations:
Payments due by period
-------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
- ----------------------- ----- ----------- --------- --------- ----------
(in thousands)
Long-Term Debt $148,300 $ 0 $ 0 $148,300 $ 0
Capital Lease Obligations 3,382 186 372 372 2,452
Operating Leases 106,812 10,417 17,862 15,655 62,878
Purchase Obligations 0 0 0 0 0
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under
GAAP excluding deferred tax
liabilities 658 200 200 200 58
--- --- --- --- --
Total $259,152 $ 10,803 $ 18,434 $164,527 $ 65,388
======== ======== ======== ======== ========
In addition, we have contingent obligations, including a performance guarantee
in the amount of approximately $2.0 million, which decreases by $.5 million per
year through September 2006. We were contingently liable for approximately $6.0
million on standby letters of credit with a bank issued in the ordinary course
of business at December 28, 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in the interest rates on our bank
credit facility. Any outstanding loan balance under our bank credit facility
bears interest at a variable rate based on prevailing short-term interest rates
in the United States and Europe. Based on 2002's average outstanding bank debt
(which averaged less than $1 million), a 100 basis point change in annual
interest rates would change annual interest expense by approximately $4,000. For
fixed rate debt such as the Senior Notes, interest rate changes affect the fair
market value of the Senior Notes but do not impact earnings or cash flows.
We are also exposed to market risk with respect to diesel fuel. While our
transportation fleet generally travels less than 100 miles and returns to the
15
warehouse each night, if the price of diesel fuel remains at the current high
price, we expect to incur an additional expense of approximately $1.1 million in
2003.
We do not presently use financial derivative instruments to manage our interest
costs. Currently, we have no foreign exchange risks and only minimal commodity
risk with respect to commodities such as natural gas and electricity. Although
changes in the marketplace for energy may bring added risk, we cannot quantify
that risk at this time.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
Financial Statements
Consolidated Financial Statements of Di Giorgio Corporation and Subsidiaries
Index to Consolidated Financial Statements..................................
Independent Auditors' Report................................................ F-2
Consolidated Balance Sheets as of December 29, 2001 and December 28, 2002... F-3
Consolidated Statements of Operations for each of the
three years in the period ended December 28, 2002.......................... F-4
Consolidated Statements of Changes in Stockholders'
Equity (Deficiency) for each of the three years in the period
ended December 28, 2002.................................................... F-5
Consolidated Statements of Cash Flows for each of
the three years in the period ended December 28, 2002...................... F-6
Notes to Consolidated Financial Statements.................................. F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
MANAGEMENT
The following table sets forth certain information regarding the directors and
executive officers of Di Giorgio:
Age Position
Richard B. Neff (1) 54 Co-Chairman of the Board of Directors and
Chief ExecutiveOfficer
Stephen R. Bokser 60 Co-Chairman of the Board of Directors,
President, and Chief Operating Officer
Jerold E. Glassman (1) 67 Director
Emil W. Solimine (2) 58 Director
Charles C. Carella (3) 69 Director
Jane Scaccetti (3) 48 Director
Earle I. Mack (1,2) 66 Director
Michael S. Goldberg (2) 28 Director
Joseph R. DeSimone 63 Senior Vice President Distribution
Robert A. Zorn 48 Executive Vice President-Finance
and Treasurer
Lawrence S. Grossman 41 Senior Vice President and Chief
Financial Officer
Harlan Levine 41 Vice President, General Counsel
and Secretary
George Conklin 42 Vice President of Logistics
Joseph Fantozzi 41 Senior Vice President and General Manager-
White Rose Dairy Division of Di Giorgio
John Annetta 51 Senior Vice President and General Manager-
White Rose Frozen Division of Di Giorgio
John J. Zumba 65 Senior Vice President
- -------------------------------------------------------------------------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
18
Directors are elected for one year terms and hold office until their successors
are elected and qualified. The executive officers are appointed by and serve at
the discretion of the Board of Directors.
Mr. Neff has been Co-Chairman and Chief Executive Officer of Di Giorgio since
October 2000. For the five years prior to October 2000, he was Di Giorgio's
Executive Vice President and Chief Financial Officer. He has been a Director of
Di Giorgio since 1990 and the general partner of Rose since October 2000. He is
also an executor of the Estate of Arthur Goldberg, a limited partner of Rose.
Mr. Bokser has been Co-Chairman, President, and Chief Operating Officer of Di
Giorgio since October 2000. For the five years prior to October 2000, he was Di
Giorgio's Executive Vice President and President of the White Rose Food
division. He has been a Director of Di Giorgio since 1990. Mr. Bokser is also a
director of Foodtown, a supermarket cooperative, and Western Beef, Inc., a
supermarket retailer, both customers of the Company. He is also a director of
Maimonides Hospital in Brooklyn, NY.
Mr. Glassman has been a Director of Di Giorgio since 1990. From prior to 1996
through 2001, Mr. Glassman was managing partner of the law firm Grotta, Glassman
& Hoffman,. He is currently the Chairman. Mr. Glassman is also a director of
Essex Valley Healthcare, Inc.
Mr. Solimine has been a Director of Di Giorgio since 1990. He also is the Chief
Executive Officer of the Emar Group, Inc., an insurance concern, since prior to
1996. He is also a limited partner of Rose.
Mr. Carella became a Director of Di Giorgio in 1995. Since prior to 1996, Mr.
Carella has been a partner of the Carella, Byrne, Bain, Gilfillan, Cecchi,
Stewart & Olstein law firm. Mr. Carella is a member of the Board of
Administrations of the Archdiocese of Newark and the Board of Trustees of
Fordham University. He is also a director of the Cancer Institute of New Jersey.
Ms. Scaccetti has been a Director of Di Giorgio since 1996. Since prior to 1996,
she has been a shareholder of Drucker & Scaccetti, P.C., an accounting firm. She
is also a director of Nutrition Management Services Company, The Pep Boys -
Manny, Moe & Jack, and Temple University Health Systems, and Keystone Health
Plan East. Ms. Scaccetti is a certified public accountant.
Mr. Mack is Senior Partner of the Mack Company. In October 2000, Mr. Mack became
a Director of Di Giorgio. He has been a Partner of The Mack Company, a
commercial real estate enterprise, since prior to 1996. He is a member of the
Board of Directors of Mack-Cali Realty Corporation. He is also a limited partner
of Rose.
Mr. Goldberg has been a Director of Di Giorgio since 2001. Mr. Goldberg worked
for Merrill Lynch from 1996 through 1999. He received his MBA from Columbia
University in 2001. He is also an executor of the Estate of Arthur Goldberg, a
limited partner of Rose. Mr. Goldberg is currently a private investor.
Mr. DeSimone has been Senior Vice President of Distribution since prior to 1996.
19
Mr. Zorn has been Executive Vice President-Finance since 2001. Previously, he
held the position of Senior Vice President and Treasurer of Di Giorgio since
prior to 1996.
Mr. Grossman has been Senior Vice President and Chief Financial Officer since
2001. Previously, he held the position of Vice President-Corporate Controller
since prior to 1996. Mr. Grossman is a certified public accountant.
Mr. Levine has been Vice President and General Counsel of Di Giorgio since June
2000. Previously he held the position of Division Counsel since prior to 1996.
Mr. Conklin has been Vice President of Logistics since 1996.
Mr. Fantozzi has been Senior Vice President and General Manager of the White
Rose Dairy division of Di Giorgio since 2001. Previously he held the position of
Vice President and General Manager of the White Rose Dairy division of Di
Giorgio since prior to 1996.
Mr. Annetta has been Senior Vice President and General Manager of the White Rose
Frozen division of Di Giorgio since 2001. Previously he held the position of
Vice President and General Manager of the White Rose Frozen division of Di
Giorgio since prior to 1996.
Mr. Zumba has been Senior Vice President since 2001. Previously he held the
position of Vice President of Sales since prior to 1996.
20
ITEM 11. EXECUTIVE COMPENSATION.
Compensation
The following table sets forth compensation paid or accrued to the Chief
Executive Officer during the year and each of our four most highly compensated
executive officers whose cash compensation, including bonuses and deferred
compensation, exceeded $100,000 for the three fiscal years ended December 28,
2002.
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation Compensation
- --------------------------- ---- ------ ----- ------------ ------------
(1)
Richard B. Neff, 2002 $400,000 $550,000 $ 76,604 $3,000(2)
Co-Chairman of the Board of Directors 2001 $400,000 $550,000 $ 80,525 $2,550(2)
and Chief Executive Officer 2000 $372,500 $470,000 $ 56,411 $2,550(2)
Stephen R. Bokser, 2002 $400,000 $550,000 $ 76,604 $3,000(2)
Co-Chairman of the Board of Directors, 2001 $400,000 $550,000 $ 80,525 $2,550(2)
President, and Chief Operating Officer 2000 $379,808 $450,000 $ 56,411 $2,550(2)
Robert A. Zorn, 2002 $275,600 $55,000 -- $3,000(2)
Executive Vice President-Finance and 2001 $260,600 $55,000 -- $2,550(2)
Treasurer 2000 $245,600 $40,000 -- $2,550(2)
Joseph Fantozzi 2002 $208,000 $90,000 -- $3,000(2)
Senior Vice President and General 2001 $191,000 $90,000 -- $2,550(2)
Manager of White Rose Dairy Division 2000 $174,000 $63,000 -- $2,550(2)
Lawrence S. Grossman 2002 $202,000 $90,000 -- $3,000(2)
Senior Vice President and 2001 $186,000 $90,000 -- $2,550(2)
Chief Financial Officer 2000 $170,000 $60,000 -- $2,550(2)
(1) Other annual compensation consists of interest and principal payments on a
loan payable, grossed up for taxes, which was used to purchase our stock. The
loan's 2002 interest rate was 4.75% and matures in 2005. Certain incidental
personal benefits to our executive officers may result from expenses incurred by
us in the interest of attracting and retaining qualified personnel. These
incidental personal benefits made available to executive officers during fiscal
years 2000, 2001, and 2002 are not described herein because our incremental cost
of the benefits is below the Securities and Exchange Commission disclosure
threshold.
(2) Represents contributions made by us pursuant to our Retirement Savings
Plan. See "Executive Compensation -- Retirement Savings Plan."
21
Employment Agreements
We are a party to an Agreement with Mr. Neff which runs through April 1, 2005.
Currently, Mr. Neff is entitled to receive an annual salary of $400,000 pursuant
to the Agreement. In addition, Mr. Neff will receive additional compensation
(the "Additional Compensation") upon the occurrence of certain change of control
type of events or distribution of assets to shareholders, as both are defined in
the Agreement and determined pursuant to a formula. In the event of his death or
disability, Mr. Neff or his estate will be entitled to continue to receive
compensation and employee benefits for one year following such event and in
certain circumstances will receive Additional Compensation.
We are a party to an Agreement with Mr. Bokser which runs through April 1, 2005.
Currently, Mr. Bokser is entitled to receive an annual salary of $400,000
pursuant to the Agreement. In addition, Mr. Bokser will receive additional
compensation (the "Additional Compensation") upon the occurrence of certain
change of control type of events or distribution of assets to shareholders, as
both are defined in the Agreement and determined pursuant to a formula. In the
event of his death or disability, Mr. Bokser or his estate will be entitled to
continue to receive compensation and employee benefits for one year following
such event and in certain circumstances will receive Additional Compensation.
We are a party to an agreement with Mr. Zorn which provides that six months
notice be given by either party to terminate his employment. Currently, Mr. Zorn
is entitled to receive an annual salary of $275,600, as adjusted by annual cost
of living adjustments, if any, and annual bonuses, at our sole discretion. Mr.
Zorn may also receive additional incentive compensation upon the occurrence of
(i) the termination of Mr. Zorn's employment; or (ii) certain change of control
type of events, determined pursuant to a formula. Under the terms of the
agreement, if the employment of Mr. Zorn is terminated for any reason other than
for cause or disability, Mr. Zorn is entitled to receive compensation and
benefits for six months, provided that he uses his best efforts to secure other
executive employment.
Retirement Plan
We maintain the Di Giorgio Retirement Plan (the "Retirement Plan") which is a
defined benefit pension plan. Our employees and our affiliates who are not
covered by a collective bargaining agreement (unless a bargaining agreement
expressly provides for participation) are eligible to participate in the
Retirement Plan after completing one year of employment.
All benefits under the Retirement Plan are funded by contributions made by us.
In general, a participant's retirement benefit consists of the sum of (a) with
respect to employment on or after September 1, 1990, an annual amount equal to
the participant's aggregate compensation (excluding income from the exercise of
certain stock option and stock appreciation rights) while he is eligible to
participate in the Retirement Plan multiplied by 1.5% and (b) with respect to
employment prior to September 1, 1990, an annual amount equal to the sum of (i)
the benefit earned under the Retirement Plan as of December 31, 1987, the
product of the participant's 1988 compensation and 1.5%, and the product of the
participant's 1988 compensation in excess of $45,000 and .5% plus (ii) the
product of the participant's aggregate compensation earned after 1988 and prior
22
to September 1, 1990 and 1.5%. In certain circumstances, the amount determined
under (b)(i) above may be determined in an alternative manner.
Benefits under the Retirement Plan are payable at a participant's normal
retirement date (i.e., Social Security retirement age) in the form of an annuity
although a limited lump-sum payment is available. In addition, an actuarially
reduced early retirement benefit is available after a participant reaches age
55.
In addition, we maintain a nonqualified supplemental pension plan that provides
for the same pension benefit calculated on income in excess of prescribed IRS
limitations. A participant earns a nonforfeitable right to a retirement benefit
after reaching age 65, becoming disabled, or completing five years of
employment. The estimated annual retirement income payable in the form of a life
annuity to the individuals named in the Cash Compensation Table commencing at
their respective normal retirement ages under the Retirement Plan and
nonqualified plan is as follows: Mr. Neff, $97,847; Mr. Bokser $174,852; Mr.
Zorn, $35,645; Mr. Fantozzi, $38,333; Mr. Grossman, $29,765.
Retirement Savings Plan
We maintain the Di Giorgio Retirement Savings Plan (the "Savings Plan") which is
a defined contribution plan with a cash or deferred arrangement (as described
under Section 401(k) of the Internal Revenue Code of 1986). In general, our
employees and our affiliates who are not covered by a collective bargaining
agreement (unless a bargaining agreement expressly provides for participation)
are eligible to participate in the Savings Plan after completing one year of
employment.
Eligible employees may elect to contribute on a tax deferred basis from 1% to
60% of their total compensation (as defined in the Savings Plan), subject to
statutory limitations. A contribution of up to 5% is considered to be a "basic
contribution" and we make a matching contribution of 30% of the basic
contribution.
Each participant has a fully vested interest in all contributions made by them.
There is a 3 year vesting period for matching contributions made by us. The
employee has full investment discretion over all contributions in funds
designated by us.
Loans are generally available up to 50% of a participant's balance and repayable
over five years, with the exception of a primary house purchase which is
repayable over ten years. Interest is set at prime plus 1%.
A participant may withdraw certain amounts credited to his account prior to
termination of employment. Certain withdrawals require financial hardship or
attainment of age 59 1/2. In general, amounts credited to a participant's
account will be distributed upon termination of employment.
23
Compensation of Directors
Our Directors who are not employees receive a quarterly retainer of $6,250 plus
fees of $2,000 for attendance at meetings of the Board of Directors and $1,000
($2,000 as of February 20, 2003) for Committee meetings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Rose Partners, LP owns a majority (98.54%) of our common stock. Rose has
informed us that Mr. Neff is the sole general partner of Rose. In addition, Mr.
Neff owns .73% of our common stock and Mr. Bokser owns .73% of our common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Bokser is a director of Western Beef, Inc. In fiscal 2002, we sold various
products to Western Beef, Inc. in the amount of $49.0 million.
We employ Grotta, Glassman & Hoffman, a law firm in which Jerold E. Glassman,
one of our directors, is Chairman, for legal services on an on-going basis. We
paid approximately $110,000 to the firm in fiscal 2002.
We utilize Emar Group, Inc. ("Emar"), a risk management and insurance brokerage
company controlled by Emil W. Solimine, one of our directors and a limited
partner of Rose, for risk management and insurance brokerage services. We paid
Emar approximately $200,000 in fiscal 2002 for such services and purchased
insurance with premiums of $3.0 million through Emar.
We believe that the transactions set forth above are on terms no less favorable
than those which could reasonably have been obtained from unaffiliated parties.
In April 2000, we loaned each of Messrs. Neff and Bokser $185,000 to be used by
each of them to purchase .57195 shares of our Class A common stock and .56285
shares of our Class B common stock from one of our minority shareholders. The
loans' interest rate for the year was 4.75% and matures in 2005. On January 31,
2003, $94,625 was outstanding on each loan.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
reviewed and evaluated the effectiveness of the Company's disclosure controls
and procedures as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15d-14(c) as of a date within 90 days of the filing date of this annual
report on Form 10-K the "Evaluation Date"). Based on their review and
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of the Evaluation Date, the Company's disclosure controls and
24
procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
them by others within those entities in a timely manner, particularly during the
period in which this annual report on Form 10-K was being prepared, and that no
changes are required at this time.
(b) Change in Internal Controls
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the Evaluation Date, or any significant deficiencies or material
weaknesses in such internal controls requiring corrective actions. As a result,
no corrective actions were taken.
25
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a. Documents filed as part of this report.
1. Financial Statements
Independent Auditors' Report...................................... F-2
Consolidated Balance Sheets as of
December 29, 2001 and December 28, 2002........................... F-3
Consolidated Statements of Operations for each of the
three years in the period ended December 28, 2002................. F-4
Consolidated Statements of Changes in Stockholders'
Equity for each of the three years in the period
Ended December 28, 2002........................................... F-5
Consolidated Statements of Cash Flows for each of
the three years in the period ended December 28, 2002............. F-6
Notes to Consolidated Financial Statements........................ F-8
2. Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts.................... S-1
3. Exhibits
A. Exhibits
Exhibit No. Exhibit
2.1(8) - Certificate of Ownership and Merger merging White Rose
Foods, Inc. with and into Di Giorgio Corporation.
3.1(2) - Restated Certificate of Incorporation.
3.2(2) - Bylaws.
4.1(7) - Indenture between Di Giorgio Corporation and The Bank
of New York, as Trustee, including the form of Note,
dated as of June 20, 1997.
10.1(11)+ - Second Amended and Restated Employment Agreement
effective as of April 1, 2000 between the Company and
Richard B. Neff.
10.2(1)+ - Employment Agreement dated February 18, 1992 between
the Company and Robert A. Zorn
26
10.3(11)+ - Third Amended and Restated Employment Agreement
effective as of April 1, 2000 between the Company and
Stephen R. Bokser
10.4(3)+ - Di Giorgio Retirement Plan as Amended and Restated
effective January 1, 1989 (dated January 26, 1996)
10.5(5)+ - Di Giorgio Retirement Savings Plan as Amended and
Restated effective January 1, 1989
10.6(6)+ - Amendment to the Di Giorgio Retirement Savings Plan
effective January 1, 1989 (dated November 28, 1995)
10.7(3) - License and Security Agreement dated as of February 1,
1993, by Di Giorgio Corporation in favor of BT
Commercial Corporation, as agent
10.8(4) - Lease between AMAX Realty Development, Inc. and V.
Paulius and Associates and the Company dated February
11, 1994 relating to warehouse facility at Carteret,
New Jersey
10.9(5) - Sublease Agreement dated June 20, 1994 between Fleming
Foods East Inc. (landlord) and Di Giorgio Corporation
(tenant) relating to facilities located in Woodbridge,
New Jersey.
10.10(9) - Lease between AMAX Realty Development, Inc. and V.
Paulius and Associates and the Company dated November
26, 1997 for a frozen food warehouse facility at
Carteret, New Jersey.
10.11(9) - Third Amendment, dated as of November 26, 1997, to
Carteret grocery warehouse lease dated as of February
11, 1994.
10.13(10) - Restated Credit Agreement dated as of November 15, 1999
among Di Giorgio Corporation as Borrower, the financial
institutions thereto, as Lenders, BT Commercial
Corporation, as Agent for the Lenders, and Deutsche
Bank AG New York, as Issuing Bank.
10.14(12) - First Amendment, dated August 31, 2001, to Carteret
frozen food warehouse lease dated November 26, 1997.
10.15(12) - Fourth Amendment, dated August 31, 2001, to Carteret
grocery warehouse lease dated as of February 11, 1994.
10.16(13) - Second Amendment, dated January 10, 2002, to Carteret
frozen food warehouse lease dated as of November 26,
1997.
21(14) - Subsidiaries of the Registrant
99.1(14) - Statement for SEC solely for purposes of Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1349).
- ------------------------------------------
+ Compensation plans and arrangements of executives and others.
27
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-53886) filed with the Commission on October 28, 1992
(2) Incorporated by reference to Amendment No. 2 to the Company's Registration
Statement on Form S-1 of Di Giorgio (File No. 33-53886) filed with the
Commission on January 11, 1993
(3) Incorporated by reference to Amendment No. 3 to the Company's Registration
Statement on Form S-1 (File No. 33-53886) filed with the Commission on
February 1, 1993
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
year ended January 1, 1994 (File 1-1790)
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
year ended December 31, 1994 (File 1-1790)
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 30, 1995 (File 1-1790)
(7) Incorporated by reference to Registration Statement No. 333 30557 on Form
S-4 filed with the Securities and Exchange Commission on July 1, 1997.
(8) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form S-4 (Registration No. 333-30557) filed with the
Commission on July 16, 1997.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 27, 1997 (File 1-1790).
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended January 1, 2000 (File 1-1790).
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 1, 2000 (File 1-1790).
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 29, 2001 (File 1-1790).
(13) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 29, 2001 (File 1-1790)
(14) Filed herewith.
b. Reports on Form 8-K
The Company did not file a Current Report on Form 8-K during the last
quarter of the period covered by this Report.
28
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 12th day of
March, 2003.
DI GIORGIO CORPORATION DI GIORGIO CORPORATION
By: /s/ Stephen R. Bokser By: /s/ Richard B. Neff
-------------------------------- -----------------------
Stephen R. Bokser Richard B. Neff
Co-Chairman, President, Co-Chairman and Chief
and Chief Operating Officer Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Jerold E. Glassman Director March 12, 2003
- ---------------------------
Jerold E. Glassman
/s/ Emil W. Solimine Director March 12, 2003
- ---------------------------
Emil W. Solimine
/s/ Charles C. Carella Director March 12, 2003
- ---------------------------
Charles C. Carella
/s/ Jane Scaccetti Director March 12, 2003
- ---------------------------
Jane Scaccetti
/s/ Earle I. Mack Director March 12, 2003
- ---------------------------
Earle I. Mack
/s/ Michael S. Goldberg Director March 12, 2003
- -----------------------
Michael S. Goldberg
/s/ Lawrence S. Grossman Senior Vice President March 12, 2003
- ------------------------- and Chief Financial
Lawrence S. Grossman Officer (Principal
Financial & Accounting Officer)
29
CERTIFICATION OF CHIEF EXECUTIVE OFFICER, RICHARD B. NEFF
I, Richard B. Neff, Chief Executive Officer, Di Giorgio Corporation, certify
that:
1. I have reviewed this annual report on Form 10-K of Di Giorgio Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and;
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DI GIORGIO CORPORATION
(Registrant)
Date: March 12, 2003 /s/ Richard B. Neff
----------------------------------------
Richard B. Neff
Chief Executive Officer
30
CERTIFICATION OF CHIEF FINANCIAL OFFICER, LAWRENCE S. GROSSMAN
I, Lawrence S. Grossman, Chief Financial Officer, Di Giorgio Corporation,
certify that:
1. I have reviewed this annual report on Form 10-K of Di Giorgio Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and;
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DI GIORGIO CORPORATION
(Registrant)
Date: March 12, 2003 /s/ Lawrence S. Grossman
-----------------------------------
Lawrence S. Grossman
Chief Financial Officer
31
DI GIORGIO CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 28, 2002:
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity (Deficiency) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
The following consolidated financial statement schedule of
DiGiorgio Corporation and subsidiaries is included in Item 15(a)(2):
Schedule II-- Valuation and Qualifying Accounts. S-1
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Di Giorgio Corporation and Subsidiaries
Carteret, New Jersey:
We have audited the accompanying consolidated balance sheets of Di Giorgio
Corporation and Subsidiaries (the "Company") as of December 28, 2002 and
December 29, 2001, and the related consolidated statements of
income,stockholders' equity (deficiency) and cash flows for each of the three
years in the period ended December 28, 2002. Our audits also included the
consolidated financial statement schedule listed in the Index at Item 15(a)(2).
These consolidated financial statements and consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Di Giorgio Corporation
and Subsidiaries at December 28, 2002 and December 29, 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 28, 2002 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
2002.
/s/ Deloitte & Touche LLP
New York, New York
March 11, 2003
F-2
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 29, 2001 AND DECEMBER 28, 2002
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
December 29, December 28,
2001 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,807 $ 629
Accounts and notes receivable - net 103,704 109,471
Inventories 66,469 68,786
Deferred income taxes 2,888 2,986
Prepaid expenses 3,802 4,928
----- -----
Total current assets 178,670 186,800
PROPERTY, PLANT AND EQUIPMENT - Net 9,956 10,879
NOTES RECEIVABLE 7,464 7,981
DEFERRED FINANCING COSTS - Net 3,272 2,514
OTHER ASSETS 22,681 21,397
GOODWILL 68,893 68,893
------ ------
TOTAL ASSETS $290,936 $298,464
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility $ -- $ 2,693
Current installment - capital lease liability 57 60
Accounts payable - trade 75,928 77,833
Accrued expenses 29,073 31,440
------ ------
Total current liabilities 105,058 112,026
LONG-TERM DEBT 155,000 148,300
CAPITAL LEASE LIABILITY 2,001 1,941
OTHER LONG-TERM LIABILITIES 7,875 8,024
STOCKHOLDERS' EQUITY:
Common stock, Class A, $.01 par value - authorized, 1,000 shares;
issued and outstanding, 78.116 shares -- --
Common stock, Class B, $.01 par value, nonvoting - authorized,
1,000 shares; issued and outstanding, 76.869 shares -- --
Additional paid-in capital 8,002 8,002
Retained earnings 13,000 20,171
------ ------
Total stockholders' equity 21,002 28,173
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $290,936 $298,464
======== ========
See notes to consolidated financial statements.
F-3
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 28, 2002
(In Thousands)
- --------------------------------------------------------------------------------
December 30, December 29, December 28,
2000 2001 2002
REVENUE:
Net sales $ 1,488,062 $ 1,530,901 $ 1,551,849
Other revenue 7,336 7,923 7,664
----- ----- -----
Total revenue 1,495,398 1,538,824 1,559,513
COST OF PRODUCTS SOLD 1,350,402 1,387,511 1,402,761
--------- --------- ---------
GROSS PROFIT - Exclusive of warehouse
expense shown separately below 144,996 151,313 156,752
OPERATING EXPENSES:
Warehouse expense 52,233 54,123 57,844
Transportation expense 28,387 29,570 29,284
Selling, general and administrative expenses 29,443 29,526 30,197
Transaction related expenses -- -- 3,239
Amortization - goodwill 2,425 2,425 --
----- ----- -----
OPERATING INCOME 32,508 35,669 36,188
INTEREST EXPENSE 16,028 15,917 15,559
AMORTIZATION - Deferred financing costs 730 651 651
OTHER INCOME - Net (3,517) (3,775) (2,736)
------ ------ ------
INCOME BEFORE INCOME TAXES 19,267 22,876 22,714
PROVISION FOR INCOME TAXES 8,528 10,781 9,482
----- ------ -----
INCOME FROM CONTINUING OPERATIONS 10,739 12,095 13,232
EXTRAORDINARY LOSS -- -- (61)
----- ------ ---
NET INCOME $ 10,739 $ 12,095 $ 13,171
=========== =========== ===========
See notes to consolidated financial statements.
F-4
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 28, 2002
(In Thousands)
- --------------------------------------------------------------------------------
Class A Class B Additional Retained
Common Stock Common Stock Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit)
BALANCES,
JANUARY 1, 2000 78.116 $ - 76.869 $ - $ 8,002 $ (2,034)
Net income - - - - - 10,739
Dividend - - - - - (2,500)
----- --- ------ --- ------ ------
BALANCES,
DECEMBER 30, 2000 78.116 - 76.869 - 8,002 6,205
Net income - - - - - 12,095
Dividend - - - - - (5,300)
----- --- ------ --- ------ ------
BALANCES,
DECEMBER 29, 2001 78.116 - 76.869 - 8,002 13,000
Net income - - - - - 13,171
Dividend - - - - - (6,000)
----- --- ------ --- ------ ------
BALANCES,
DECEMBER 28, 2002 78.116 $ - 76.869 $ - $ 8,002 $ 20,171
====== == ====== == ======= ========
See notes to consolidated financial statements.
F-5
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 28, 2002
(In Thousands)
- --------------------------------------------------------------------------------
December 30, December 29,December 28,
2000 2001 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,739 $ 12,095 $ 13,171
Adjustments to reconcile net income to net
cash provided by operations:
Extraordinary loss on early extinguishment of debt -- -- 61
Depreciation 2,186 2,332 2,341
Amortization of deferred financing costs 730 651 651
Amortization of goodwill 2,425 2,425 --
Other amortization 2,000 2,099 1,941
Provision for doubtful accounts 700 500 500
Non-cash increase in prepaid pension cost (331) (567) (201)
Deferred taxes 8,236 1,966 104
Changes in assets and liabilities:
(Increase) decrease in:
Accounts and notes receivable (4,603) (19,721) (7,683)
Inventory (3,141) (1,782) (2,317)
Prepaid expenses (1,094) (75) (1,126)
Other assets (12,258) (1,905) (274)
Long-term notes receivables (3,648) 5,326 (979)
Increase (decrease) in:
Accounts payable 2,253 1,265 1,905
Accrued expenses and other liabilities (2,112) 2,667 2,175
------ ----- -----
Net cash provided by operating activities 2,082 7,276 10,269
----- ----- ------
CASH FLOWS FROM INVESTING ACTIVITIES -
Additions to property, plant and equipment (2,287) (1,949) (3,261)
------ ------ ------
Net cash used in investing activities (2,287) (1,949) (3,261)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings from revolving
credit facility - net 3,628 (10,410) 2,693
Proceeds from note participation sales -- 10,509 1,878
Repurchase of 10% senior notes -- -- (6,700)
Dividend to stockholders (2,500) (5,300) (6,000)
Repayments of capital lease obligations (167) (63) (57)
---- --- ---
Net cash (used in) provided by financing activities 961 (5,264) (8,186)
--- ------ ------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 756 63 (1,178)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 988 1,744 1,807
--- ----- -----
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,744 $ 1,807 $ 629
======== ======== ========
(Continued)
F-6
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 28, 2002
(In Thousands)
- --------------------------------------------------------------------------------
December 30, December 29, December 28,
2000 2001 2002
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period:
Interest $ 16,079 $ 15,991 $ 15,617
======== ======== ========
Income taxes $ 1,158 $ 7,200 $ 10,645
======== ======== ========
(Concluded)
See notes to consolidated financial statements.
F-7
DI GIORGIO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 28, 2002
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Di Giorgio Corporation (the "Company") is one of the largest
independent wholesale food distributors in the New York City metropolitan
area, which is one of the larger retail food markets in the United States.
The Company serves supermarkets, both independent retailers (including
members of voluntary cooperatives) and chains, principally in the five
boroughs of New York City, Long Island, New Jersey and, to a lesser extent,
the greater Philadelphia area. The Company distributes three primary
supermarket product categories: grocery, frozen and refrigerated.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly and majority owned subsidiaries.
All intercompany accounts and transactions have been eliminated.
Accounts Receivable and Customer Financing - The accounts and notes
receivable from customers are recorded at net realizable value.
Inventories - Inventories, primarily consisting of finished goods, are
valued at the lower of cost (weighted average cost method) or market.
Property, Plant and Equipment - Owned property, plant and equipment is
stated at cost. Capitalized leases are stated at the lesser of the present
value of future minimum lease payments or the fair value of the leased
property at lease inception. Depreciation and amortization are computed
using the straight-line method over the lesser of the estimated life of the
asset or the lease.
In the event that facts and circumstances indicate that the cost of
long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's
carrying amount to determine if a write-down to market value or discounted
cash flow value is required.
Goodwill - The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets, which addresses the
financial accounting and reporting standards for the acquisition of
intangible assets outside of a business combination and for goodwill and
other intangible assets subsequent to their acquisition. This accounting
standard requires that goodwill be separately disclosed from other
intangible assets in the statement of financial position, and no longer be
amortized but tested for impairment on a periodic basis.
Deferred Financing Costs - Deferred financing costs are being amortized
over the life of the related debt. During 2002, the Company repurchased
$6.7 million of its 10% senior notes on the open market at par. The portion
of the deferred financing costs related to the repurchased notes were
written off, resulting in a loss on early extinguishment of debt reported
as an extraordinary item, net of taxes in the accompanying Statements of
Income.
F-8
Environmental Remediation Costs - The Company accrues for losses associated
with environmental remediation obligations when such losses are probable
and reasonably estimable. Accruals for estimated losses from environmental
remediation obligations generally are recognized no later than completion
of the remedial feasibility study.
Such accruals are adjusted as further information develops or circumstances
change. Costs of future expenditures for environmental remediation
obligations are not discounted to their present value.
Use of Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant
estimates embodied in these consolidated financial statements include the
reserve for bad debts and the self insurance accruals for workmans'
compensation, medical and general claims.
Cash Equivalents - Cash equivalents are investments with original
maturities of three months or less from the date of purchase.
Transaction Related Costs - In connection with proposed transactions,
including one involving the formation of a Canadian income trust, the
Company incurred professional and other fees of approximately $3.2 million,
which are included in the December 28, 2002 Consolidated Statements of
Income under the caption "Transaction related expenses." Transaction
related costs were insignificant in the years ended December 29, 2001 and
December 30, 2000.
Revenue Recognition - The Company recognizes sales revenue upon delivery of
goods to the customer. For retail support services, including coupon
redemption, technology support, store layout and equipment planning, and
engineering, sanitation and inspection services, revenue is recognized when
the services are provided. The Company provides reserves for returns and
allowances which are deducted in determining net revenues. Certain
promotional allowances are deferred and recognized as they are earned.
Sale of Notes Receivable - From time to time, the Company has sold
non-recourse, senior participations in selected customer notes receivable
to various banks at par. During the years ended December 28, 2002 and
December 29, 2001, the Company sold approximately $1.9 million and $10.5
million, respectively, in customer notes receivable. Fees for servicing
were not material and there were no gains or losses on the sales as the
sales price was equal to the carrying value of the customer notes
receivable.
Comprehensive Income - There are no components of other comprehensive,
income for the Company except for reported net income.
Segment Reporting - Given the similar economic characteristics and the
similarities as to the nature of products and services, types of customers,
and methods used to distribute products, the Company qualifies for the
aggregation rules of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information and therefore operates in one reportable
segment.
Fiscal Year - The Company's fiscal year-end is the Saturday closest to
December 31. The consolidated financial statements are comprised of 52
weeks for each of the three years ended December 28, 2002.
F-9
New Accounting Pronouncements- In April 2002, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No.145. In addition to amending and rescinding other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions, SFAS
No. 145 precludes companies from recording gains and losses from the
extinguishment of debt as an extraordinary item. SFAS No. 145 is effective
for the first quarter in the fiscal year ending January 3, 2004. Upon
adoption of this pronouncement, the Company will reclassify these items in
its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the standard include lease termination
costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other exit or
disposal activity. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company does not
expect the adoption of this pronouncement to have a material effect on its
consolidated results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure - an amendment of FASB Statement No.
123. SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value-based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of Statement 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The non-disclosure amendments to Statement
No. 123 contained in SFAS No. 148 are effective for financial statements
for fiscal years ending after December 15, 2002. The Company does not
expect the adoption of this pronouncement to have a material effect on its
consolidated results of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also requires that at the
time a company issues a guarantee, the company must recognize an initial
liability for the fair market value of the obligations it assumes under
that guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of
FIN 45 apply on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosures included herein are reflective of this
Interpretation.
In January 2003, the FASB issued Interpretation No. 46 ("FIN No. 46"),
Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51. In general, a variable interest entity
is a corporation, partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity investors with
voting rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN No. 46
requires a variable interest entity to be consolidated if a company is
subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements of FIN No. 46 may
apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply to all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The Company does not expect the adoption of this
interpretation to have an effect on its consolidated results of operations
or financial position.
F-10
In November 2002 the Emerging Issues Task Force of the FASB issued
Consensus No. 02-16 ("EITF 02-16") - Accounting by a Reseller for Cash
Consideration Received from a Vendor. EITF 02-16 will require that certain
allowances and other amounts received by resellers from vendors be treated
as a reduction of the cost of inventory acquired from the vendor. EITF
02-16 also provides that amounts received from vendors that are contingent
on certain target purchase levels being achieved should be recorded when it
becomes apparent that the target will be achieved. EITF 02-16 is effective
for fiscal years commencing after December 15, 2002 and with respect to
agreements entered into after December 15, 2002. The Company does not
expect the adoption of this pronouncement to have a material effect on its
consolidated results of operations or financial position.
2. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
December 29, December 28,
2001 2002
(in thousands)
Accounts receivable $ 82,393 $ 82,252
Notes receivable 11,075 12,337
Other receivables 15,492 19,907
Less allowance for doubtful accounts (5,256) (5,025)
------ ------
$ 103,704 $ 109,471
========= =========
The Company periodically provides financial assistance in the form of loans
to independent retailers. Loans are usually in the form of a secured,
interest-bearing obligation that is generally repayable over a period of
one to three years. As of December 28, 2002, the Company's customer loan
portfolio had an aggregate balance of approximately $20.3 million of which
$8.0 million is long term. The portfolio consisted of 57 loans ranging in
size up to approximately $6.0 million.
F-11
3. PROPERTY, PLANT AND EQUIPMENT
Property and equipment consist of the following:
Estimated
Useful Life December 29, December 28,
in Years 2001 2002
(in thousands)
Land -- $ 900 $ 900
Buildings and improvements 10 3,550 4,897
Machinery and equipment 3-10 17,567 19,454
Less accumulated depreciation (14,305) (16,495)
------- -------
7,712 8,756
----- -----
Capital leases:
Building and improvements 3,117 3,117
Equipment 370 370
Less accumulated amortization (1,243) (1,364)
------ ------
2,244 2,123
----- -----
$ 9,956 $ 10,879
======== ========
Depreciation expense was approximately $2.2 million, $2.3 million and $2.3
million for the years ended 2000, 2001 and 2002, respectively. Included in
that amount are approximately $.2 million, $.1 million and $.1 million of
depreciation of assets under capital leases.
4. GOODWILL
In accordance with SFAS No. 142, the Company discontinued the amortization
of goodwill effective December 30, 2001. A reconciliation of previously
reported net income to the amounts adjusted for the exclusion of goodwill
amortization net of the related income tax effect follows:
Fifty-two Weeks Ended
December 30, December 29, December 28,
2000 2001 2002
(in thousands)
Reported net income $10,739 $12,095 $13,171
Goodwill amortization, net of tax 2,321 2,321 --
----- ----- -----
Adjusted net income $13,060 $14,416 $13,171
======= ======= =======
The provisions of SFAS No. 142 also require the completion of a
transitional impairment test within six months of adoption, with any
impairments treated as a cumulative effect of a change in accounting
principle. During the quarter ended March 30, 2002, the Company completed
the transitional impairment test and did not record any impairments of
goodwill. Also, during the year ended December 28, 2002, the Company
completed an impairment test and did not record any impairments of
goodwill.
F-12
5. FINANCING
Debt consists of the following:
Interest Rate
at December 28, December 29, December 28,
2002 2001 2002
(in thousands)
Revolving credit facility (a) 4.25 % $ -- $ 2,693
===== ========
Long-term debt:
10% senior notes (b) 10.00 % $155,000 $148,300
======== ========
(a) Revolving Credit Facility - The Company's bank credit facility is
scheduled to mature on June 30, 2004, and bears interest at a rate per
annum equal to (at the Company's option): (i) the Euro Dollar Offering
Rate plus 1.625% or (ii) the lead bank's prime rate. The interest rate
shown is the bank prime rate. Given the low amount of borrowing, the
Company elected not to use the Eurodollar option. During 2002 the
average interest rate for the outstanding borrowing was 4.61%.
Availability for direct borrowings and letter of credit obligations
under the revolving credit facility is limited, in the aggregate to
the lesser of i) $90 million or ii) a borrowing base of 80% of
eligible receivables and 60% of eligible inventory. Borrowings under
the Company's revolving bank credit facility were approximately $2.7
million (excluding $6.0 million of outstanding letters of credit) at
December 28, 2002. Additional borrowing capacity of $81.9 million was
available at that time under the Company's then current borrowing base
certificate.
The borrowings under the revolving credit facility are secured by the
Company's inventories and accounts receivable. Among other matters,
the revolving credit facility contains certain restrictive covenants
relating to interest coverage and capital expenditures. The Company
was in compliance with the covenants as of December 28, 2002.
(b) 10% Senior Notes - The senior notes were issued under an Indenture
Agreement (the "Indenture") dated as of June 20, 1997 between the
Company and The Bank of New York, as Trustee. The senior notes are
general unsecured obligations of the Company initially issued in $155
million principal amount, maturing on June 15, 2007. The senior notes
bear interest at the rate of 10% payable semi-annually, in arrears, on
June 15 and December 15 of each year, having commenced December 15,
1997.
The senior notes are redeemable at the Company's option, in whole or
in part, at any time on or after June 15, 2002, at redemption prices
set forth in the Indenture. Upon the occurrence of a change of
control, holders of the senior notes have the right to require the
Company to repurchase all or a portion of the senior notes at a
purchase price equal to 101% of the principal amount, plus accrued
interest.
The Indenture limits the ability of the Company and its restricted
subsidiaries to create, incur, assume, issue, guarantee or become
liable for any indebtedness, pay dividends, redeem capital stock of
the Company or a restricted subsidiary, and make certain investments.
The Indenture further restricts the Company's and its restricted
subsidiaries' ability to sell or issue a restricted subsidiaries'
capital stock, create liens, issue subordinated indebtedness, sell
assets, and undertake transactions with affiliates. No consolidation,
merger or other sale of all or substantially all of its assets in one
transaction or series of related transactions is permitted, except in
limited instances.
F-13
During 2002, the Company purchased $6.7 million of its senior notes on
the open market at par and retired them.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
are as follows:
December 29, 2001 December 28, 2002
Carrying Fair Carrying Fair
Amount Value Amount Value
(in thousands)
Debt:
Revolving credit facility $ -- $ -- $ 2,693 $ 2,693
10% senior notes 155,000 149,188 148,300 146,076
Notes receivable - current 11,075 11,075 12,337 12,337
Notes receivable - long-term 7,464 7,464 7,981 7,981
The fair value of the 10% senior notes as of December 29, 2001 and December
28, 2002 is based on trade prices of 96.25 and 98.50, respectively,
representing yields of 10.9% (as of December 29, 2001) and 10.5% (as of
December 28, 2002), respectively. Based on the borrowing rate currently
available to the Company, the book or carrying value of the revolving
credit facility is considered to be equivalent to its fair value.
The book value of the current and long-term notes receivable is equivalent
to fair value which is estimated by management by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 29, December 28,
2001 2002
(in thousands)
Employee benefits $ 9,848 $ 9,822
Due to vendors/customers 9,523 9,848
Other 6,831 7,475
Legal and environmental 2,266 3,764
Interest 605 531
------- -------
$29,073 $31,440
======= =======
8. RETIREMENT
a. Pension Plans - The Company maintains a noncontributory defined
benefit pension plan covering substantially all of its noncollective
bargaining employees. The Company would make annual contributions if
required to the plan in accordance with the funding requirements of
the Employee Retirement Income Security Act of 1974. Assets of the
Company's pension plan are invested in Treasury notes, U.S. Government
agency bonds, corporate bonds, money market funds, and other
investments.
F-14
The following table provides information for the pension plan:
December 29, December 28,
2001 2002
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 46,312 $ 49,533
Service cost 705 816
Plan change -- 37
Interest cost 3,482 3,498
Actuarial loss 2,817 3,129
Benefits paid (3,783) (3,837)
------ ------
Benefit obligation at end of year $ 49,533 $ 53,176
======== ========
December 29, December 28,
2001 2002
(in thousands)
Change in plan assets:
Fair value of plan assets at beginning of year $ 54,312 $ 53,946
Actual return on plan assets 3,417 3,750
Benefit payments (3,783) (3,837)
------ ------
Fair value of plan assets at end of year $ 53,946 $ 53,859
======== ========
Reconciliation of funded status:
Funded status (fair value of plan assets
less benefit obligation) $ 4,413 $ 683
Unrecognized net actuarial loss 13,587 17,681
Unrecognized prior service cost 94 112
-- ---
Prepaid benefit cost $ 18,094 $ 18,476
======== ========
The Company has included the prepaid benefit cost of approximately $18.1
million and $18.5 million in other assets for the years ended December 29,
2001 and December 28, 2002, respectively.
Net pension cost includes the following components:
December 30, December 29, December 28,
2000 2001 2002
(in thousands)
Service cost $ 644 $ 705 $ 816
Interest cost 3,427 3,482 3,498
Expected return on plan assets (4,526) (5,104) (5,069)
Amortization of prior service cost 14 14 18
Amortization of net loss from earlier periods -- -- 355
---- ---- ---
$ (441) $ (903) $ (382)
======= ======= =======
F-15
For the fiscal years ended December 30, 2000, December 29, 2001 and
December 28, 2002, the following actuarial assumptions were used:
December 30, December 29, December 28,
2000 2001 2002
Weighted average discount rate 7.75 % 7.25 % 6.75 %
Rate of increase in future
compensation levels 6.00 6.00 6.00
Expected long-term rate of
return on plan assets 9.00 9.00 8.25
The Company also contributes to pension plans under collective bargaining
agreements. These contributions generally are based on hours worked.
Pension expense for these plans included in operations was as follows:
Year Ended (in thousands)
December 30, 2000 $1,109
December 29, 2001 1,266
December 28, 2002 1,460
b. Savings Plan - The Company maintains a defined contribution 401(k)
savings plan. Employees of the Company who are not covered by a
collective bargaining agreement (unless a bargaining agreement
expressly provides for participation) are eligible to participate in
the plan after completing one year of employment.
Eligible employees may elect to contribute on a tax-deferred basis
from 1% to 60% of their total compensation (as defined in the savings
plan), subject to statutory limitations. A contribution of up to 5% is
considered to be a "basic contribution" and the Company makes a
matching contribution equal to a designated percentage of a
participant's basic contribution (which all may be subject to certain
statutory limitations). Company contributions to the plan are
summarized below:
Year Ended (in thousands)
December 30, 2000 $ 215
December 29, 2001 217
December 28, 2002 230
9. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
December 29, December 28,
2001 2002
(in thousands)
Deferred income tax liability, net $ 7,159 $ 7,361
Environmental and other 436 439
Employee benefits 280 224
----- ------
$ 7,875 $ 8,024
======= =======
F-16
10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings - Various suits and claims arising in the ordinary course
of business are pending against the Company. In the opinion of management,
dispositions of these matters are appropriately provided for and are not
expected to materially affect the Company's consolidated financial
position, cash flows or results of operations.
The Company has been named in various claims and litigation relating to
potential environmental problems. In the opinion of management after
consultation with counsel, these claims are either without merit, covered
by insurance, adequately provided for, or not expected to result in any
material loss to the Company.
Leases - The Company conducts certain of its operations from leased
distribution facilities and leases transportation and warehouse equipment.
In addition to rent, the Company pays property taxes, insurance and certain
other expenses relating to leased facilities and equipment.
The Company entered into a lease agreement to lease a dry distribution
facility, which the Company is using for its grocery division as well as
for its administrative headquarters. The lease commitment commenced on
February 1, 1995. The lease was amended during 1997. The term of the lease,
as amended expires in 2018 with two five-year renewal options. Rental
payments under the lease are approximately $3.1 million per year (through
the expiration date).
In November 1997, the Company entered into an agreement to lease a new
frozen distribution facility in Carteret, New Jersey. The lease is
accounted for as an operating lease. The lease expires in 2018 with two
five-year renewal options. Rental payments under the lease are
approximately $2.9 million for the first ten years and approximately $3.2
million for the last ten years.
The following is a schedule of net minimum lease payments required under
capital and operating leases in effect as of December 28, 2002:
Capital Operating
Fiscal Year Ending Leases Leases
(in thousands)
2003 $ 186 $10,417
2004 186 9,439
2005 186 8,423
2006 186 8,260
2007 186 7,395
Thereafter 2,452 62,878
----- ------
Net minimum lease payments 3,382 $106,812
========
Less interest 1,381
-----
Present value of net minimum lease payments
(including current installments of $60) $ 2,001
=======
Total rent expense included in operations was as follows:
Year Ended (in thousands)
December 30, 2000 $12,064
December 29, 2001 11,365
December 28, 2002 11,595
F-17
Letters of Credit - In the ordinary course of business, the Company is at
times required to issue letters of credit. The Company was contingently
liable for approximately $4.7 million and $6.0 million on standby letters
of credit with a bank as of December 29, 2001 and December 28, 2002,
respectively.
Guaranty - The Company has issued certain performance guarantees in an
aggregate amount of approximately $2.0 million which decreases by
approximately $.5 million per year through September 2006. The Company
would be obligated to perform under the guarantees if the primary obligor
defaulted on its payment obligations. As of the opinion date, management
has assessed the likelihood of the primary obligor's default as low.
Employment Agreements - The Company has employment agreements with two key
executives, which are scheduled to expire in April 2005. In addition, one
employee has a termination agreement that provides for a six-month notice
to terminate. Under these agreements, combined annual salaries of
approximately $1.1 million were paid in fiscal 2002. In addition, the
executives are entitled to additional compensation upon occurrence of
certain events.
11. EQUITY
As a result of restrictive covenants contained in the Indenture governing
the Company's publicly held debt, as well as those contained in the
revolving credit facility, based on its results for year ended December 28,
2002, the Company is permitted to pay dividends up to approximately $6.6
million; however, the Company expects to request an amendment to its loan
agreement to permit the payment of a $10 million dividend in 2003.
12. OTHER INCOME - NET
Other income consists of the following:
December 30, December 29, December 28,
2000 2001 2002
(in thousands)
Interest income $2,532 $2,512 $1,933
Net gain on disposal of assets 33 528 --
Other - net 952 735 803
--- --- ---
$3,517 $3,775 $2,736
====== ====== ======
F-18
13. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The tax effects of significant items comprising the Company's deferred tax
assets and deferred tax liabilities are as follows:
December 29,December 28,
2001 2002
(in thousands)
Deferred tax assets:
Allowance for doubtful accounts $ 2,191 $ 2,235
Accrued expenses not deductible until paid 697 751
Difference between book and tax basis of property 121 3
--- -
Deferred tax assets 3,009 2,989
Deferred tax liabilities:
Pension asset valuation (7,280) (7,364)
------ ------
Net deferred tax liabilities $(4,271) $(4,375)
======= =======
As of December 28, 2002, the Company had a liability for current taxes of
approximately $.7 million. The deferred tax liabilities of approximately
$7.3 million and $7.4 million were netted against long term deferred tax
assets of $.1 million and $0 and included in other long term liabilities
for the years ended December 29, 2001 and December 28, 2002, respectively.
The income tax provision consists of the following:
December 30, December 29, December 28,
2000 2001 2002
(in thousands)
Current income tax $ 292 $ 8,815 $ 9,378
Deferred income tax 8,236 1,966 104
----- ----- ---
$ 8,528 $10,781 $ 9,482
======= ======= =======
A reconciliation of the Company's effective tax rate with the statutory
Federal tax rate is as follows:
December 30, December 29, December 28,
2000 2001 2002
(in thousands)
Tax at statutory rate $ 6,551 $ 8,007 $ 7,950
State and local taxes - net of Federal benefit 1,234 2,010 1,532
Permanent differences - goodwill 743 764 --
--- ---
$ 8,528 $10,781 $ 9,482
======= ======= =======
F-19
14. RELATED PARTY TRANSACTIONS
A director/senior officer of the Company is a director of a customer.
During each of the three years in the period ended December 28, 2002, the
Company sold various products in the amounts of approximately $ 45.9
million, $ 47.1 million and $49.0 million, respectively, to this customer.
A director of the Company is a partner in a firm that provides legal
services to the Company on an on-going basis. The Company paid
approximately $.1 million during each of the three years in the period
ended December 28, 2002, to the law firm for legal services.
The Company employs the services of a risk management and insurance
brokerage firm that is controlled by a director of the Company. Included in
the statement of income are fees paid to the related party of approximately
$.2 million during each of the three years in the period ended December 28,
2002. The Company purchased insurance with premiums of approximately $3.0
million from this insurance brokerage firm in fiscal 2002.
The Company recorded income of approximately $.07 million, $0 and $0 for
each of the three years in the period ended December 28, 2002,
respectively, from an affiliated entity of the former President of the
Company in connection with the sharing of office facilities and
administrative expenses.
In April 2000, the Company loaned two directors/senior officers of the
Company approximately $.2 million each. The loans bear interest at 4.75%
per annum and are due in April 2005. As of December 28, 2002, approximately
$.1 million was outstanding on each loan which is included in current and
long term notes receivable.
15. MAJOR CUSTOMERS
During the year ended December 30, 2000, sales to two individual customers
represented 24.6% and 14.4% of net sales, respectively, and additionally
sales to a group of customers represented 15.8%.
During the year ended December 29, 2001, sales to two individual customers
represented 24.9% and 14.0% of net sales, respectively, and additionally
sales to a group of customers represented 14.7%.
During the year ended December 28, 2002, sales to two individual customers
represented 25.0% and 13.9% of net sales, respectively, and additionally
sales to a group of customers represented 14.9%.
F-20
Schedule II
DI GIORGIO CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Balance at Charged to Balance at
Beginning Cost and End of
Description of Period Expenses Deductions Period
Allowance for doubtful accounts for the period ended:
December 30, 2000 4,729 700 (39)(1) 5,038
December 29, 2001 5,038 500 (28)(1) 5,256
December 28, 2002 5,256 500 (731)(1) 5,025
(1) Accounts written off during the year, net of recoveries.
S-1