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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 27, 2003
[ ] 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)
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes__ No X
As of March 5, 2004, 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 and non-voting stock held by non-affiliates of the registrant is $0
because all voting and non-voting stock is held by affiliates of the registrant.
PART I
ITEM 1. BUSINESS.
Overview
Di Giorgio Corporation ("Di Giorgio", 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 the greater Philadelphia area.
During 2003 we had revenue of $1,544.1 million, net income of $14.3 million and
EBITDA (as more fully described in the Management's Discussion & Analysis
section of this 10-K) of $44.2 million as compared to revenue of $1,559.5
million, net income of $13.2 million and EBITDA of $43.2 million in the prior
year. The lower sales in 2003 are attributable to the loss of The Atlantic and
Pacific Tea Company ("A&P") as a customer in October 2003. The rise in net
income and EBITDA primarily reflects a reduction in transaction related expenses
as more fully described in the "Management's Discussion & Analysis" section of
this 10-K.
Products and Customer Support Services
General Products We sell three primary product categories: grocery (including
non-food products normally carried in a supermarket), frozen and refrigerated
food products. In the fourth quarter of 2003, we started a specialty food
division, a fourth product category, which offers a complete line of specialty
food products including ethnic, gourmet, imported, and organic food items.
Across these four product categories, we will supply over 21,000 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(R) label consistently across our three primary categories of products, as
well as private label products for certain of our customers. While some
customers purchase items from all four product categories, others purchase items
from only one, two, or three product categories.
Generally 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
to our customers, 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 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
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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 to independent retailers in the form
of loans for the purpose of (i) financing the purchase of new locations, (ii)
financing the purchase of initial inventories and/or store renovations, and
(iii) financing working capital requirements. The primary purpose of those loans
is to provide a means of continued growth for us by both developing new customer
store locations and strengthening our existing customers through the improvement
of their operations and physical locations. 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 27,
2003, our customer loan portfolio had an aggregate balance of approximately
$25.9 million. The portfolio consisted of 71 loans ranging in size from
approximately $4,000 to approximately $5.8 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,
from time to time, we have provided other financial assistance to our customers
in the form of performance guarantees. Currently we have two performance
guarantees in the aggregate amount of approximately $1.6 million which decreases
by approximately $.6 million per year and expire in 2005 and 2006. Additional
information regarding the performance guarantees is discussed under Management's
Discussion & Analysis Off-balance sheet arrangements and contractual
obligations.
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, Maryland, Connecticut, Massachusetts
and Rhode Island and we are evaluating further expansion into these and other
markets.
Our customers primarily consist of three types of grocery retailers: independent
retailers (including members of voluntary cooperatives), chains and convenience
stores. These retailers 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. New York City, our principal market, is
characterized by 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, while slowly
increasing its presence in the New York metropolitan area 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 in a cost-effective manner.
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The following are trade names used by some of our customers:
Gristede's and Sloans Supermarkets, King Kullen, Kings Super Markets, C-Town,
Bravo, Scaturro's, Thriftway, Shop `N Bag, 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 16.7% of our net sales for the fiscal year ended
December 27, 2003, and 16.5% of our net sales for the fiscal year ended December
28, 2002.
In 2003, as part of a global settlement of numerous issues between the Company,
Fleming Companies Inc., C&S Wholesale Grocers, Inc., several former Fleming
storeowner customers and related other parties, we acquired an exclusive license
to utilize and sub-license the Shop `n Bag and Thriftway trade names within a
designated territory. The Company has granted, and will in the future grant,
sub-licenses of these trade names to its customers desiring to utilize such
names.
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 27, 2003, our largest current customer,
Associated, accounted for approximately 15.0%, of net sales, and our five
largest customers accounted for 53.5% of net sales. Excluding A&P (which ceased
to be a customer in October 2003), our top five largest customers accounted for
42.0% of net sales in 2003 down from 43.4% in 2002.
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 four 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.
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Our transportation fleet consists of 121 tractors (all of which are leased), 360
trailers (of which 242 are leased) and one straight truck which is leased. In
addition, we rent trailers on a monthly basis to meet seasonal demand. We
regularly use independent owner/operators to make deliveries on an "as needed"
basis to supplement the use of our own employees and equipment and arrange
backhauls where practical. We make approximately 4,000 deliveries per week to
our customers with a combination of our own transportation fleet and those of
third parties.
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 their representatives 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, that are generally only available from
single suppliers. 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."
The procurement 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 larger independent wholesale food distributors to supermarkets in the New
York City metropolitan area. Our principal competitors in our primary product
categories (grocery, frozen, and refrigerated) are C&S Wholesale Grocers, Inc.,
Bozzuto's, Inc. and Supervalu, Inc. Our main competitors with respect to the
distribution of only one or two of our product categories are Krasdale Foods,
Inc. and General Trading Co.
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 our competitive strengths
include our full product lines (including our White Rose(R) label), our intimate
knowledge of an ethnically-fragmented core market, our flexibility to meet
customer requirements, our Met(R) and Pioneer(R) voluntary cooperative
tradenames, competitive prices and competitive levels of customer services, and
the breadth of our product and service offerings. Certain of our competitors
have one or more similar strengths, offer more product categories than we do,
and have greater financial strength than we have.
5
Seasonality
Historically, our sales and profitability are strongest in our fiscal fourth
quarter, with the fiscal third quarter the weakest. Third quarter performance
has been improved somewhat by an increased customer concentration outside of New
York City, especially in areas that experience higher summer sales (such as
along the New Jersey shore) and other areas more resistant to seasonal
fluctuations.
Employees
We employed 1,238 persons on March 4, 2004, including 779 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 food operation (expired January 2004).The Company is
currently in discussions with the union local representing workers at our frozen
food operation. The discussions are on-going, and management expects to execute
an agreement in the near future.
Management believes that our present relations with our work force are
satisfactory.
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
In addition to those properties listed above, we rent space in Carteret, NJ, on
a short term basis for our specialty food division and off-site storage. In 2003
this cost us approximately $.6 million. Total operating lease rent paid in
connection with our facilities was approximately $6.9 million in fiscal 2003.
Management expects our operating lease rent paid for our facilities in 2004 to
be $6.6 million. In 2004, the Company expects to expand its dry grocery
warehouse in Carteret by 160,000 square feet at an expected increased annual
cost of approximately $1.2 million. The expansion is expected to be completed
late in 2004 and should be partially offset by a reduction in our short term
rent expense.
6
The Carteret grocery division distribution facility operates at approximately
95% of its current capacity (before the expansion mentioned above) on a three
shift basis. The refrigerated division distribution facility operates at 70% of
its current capacity and the frozen food division distribution facility, which
was expanded in 2002, operates at approximately 60% of its current capacity
(both on a five day, two shift basis). Each distribution facility has additional
capacity to expand its output through expansion of the work week and additional
shifts although the type of new business introduced (e.g. product that is
already slotted in inventory) will impact how much additional capacity each
facility has.
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 with respect to 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.
We are not a party to any 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 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 of 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.
Environmental contamination of soil and groundwater by petroleum and
pentachlorophenol has been identified at a site previously owned and operated by
us (in connection with a divested business) located in Ste. Genevieve, Missouri.
We have completed cleanup of the soils at the site and no further action is
currently required by the relevant regulatory authorities with respect to the
soil contamination. We may be subject to future cleanup requirements or other
liability with respect to this site.
7
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.
We have recorded an estimate of our total environmental liability arising from
specifically identified environmental liabilities (including those discussed
above) in the amount of approximately $658,000 as of December 27, 2003. We
believe the reserves are adequate and that known and potential environmental
liabilities (including those discussed above) will not have a material adverse
effect on our financial condition. However, there can be no assurance that the
identification of contamination at our current or former sites or changes in
cleanup requirements would not result in significant costs to us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
8
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. As of
March 5, 2004, there are three holders of class A common stock and three holders
of class B common stock. The majority (98.54%) of our outstanding common stock
is owned by Rose Partners, L.P. ("Rose").
We paid a dividend of $$6.0 million in April 2002 and a dividend of $10.0
million in June 2003. 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 results for the year ended
December 27, 2003, we are currently permitted to pay dividends up to $10.0
million which we intend to pay on March 31, 2004.
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 1, December 30, December 29, December 28, December 27,
2000 2000 2001 2002 2003
--------------------------------------------------------------------------
Income Statement Data:
Total revenue $ 1,413,827 $ 1,495,398 $ 1,538,824 $ 1,559,513 $ 1,544,128
Gross profit(a) 138,971 144,996 151,313 156,752 161,445
Warehouse expense 51,865 52,233 54,123 57,844 62,042
Transportation expense 26,607 28,387 29,570 29,284 30,132
Selling, general and 25,834 29,443 29,526 30,197 31,327
administration expenses
Transaction related expenses -- -- -- 3,239 547
Amortization--goodwill 2,425 2,425 2,245 -- --
Operating income 32,240 32,508 35,669 36,188 37,397
Interest expense 16,679 16,028 15,917 15,559 14,950
Amortization--deferred financing 764 730 651 758 628
costs
Other (income), net (2,744) (3,517) (3,775) (2,736) (3,240)
Income before income taxes 17,541 19,267 22,876 22,607 25,059
Income taxes 7,872 8,528 10,781 9,436 10,710
Net income 9,669 10,739 12,095 13,171 14,349
Year Ended Year Ended Year Ended Year Ended Year Ended
January 1, December 30, December 29, December 28, December 27,
2000 2000 2001 2002 2003
--------------------------------------------------------------------------
Balance Sheet Data:
Total assets $ 273,406 $ 289,801 $ 290,936 $ 298,464 $ 294,855
Working capital 56,397 56,238 73,612 74,774 75,628
Total debt including capital leases 164,069 167,531 157,058 152,994 163,121
Total stockholder's equity 5,968 14,207 21,002 28,173 32,522
- ----------
(a) Gross profit excludes warehouse expense shown separately.
9
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 achievements 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.
Allowance for doubtful accounts
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 was $.5 million in
each of fiscal 2003, fiscal 2002, and fiscal 2001. At December 27, 2003, the
total notes and accounts receivable (including the long-term portion) were
$120.8 million and at December 28, 2002 were $117.5 million, net of an allowance
10
of doubtful accounts of $4.1 million at December 27, 2003 and $5.0 million at
December 28, 2002. We evaluate the creditworthiness of specific accounts for
reserve consideration 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.
Goodwill and 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, 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 2003 net pension expense were a 6.75 % discount rate, an 8.25% 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 expense in fiscal 2003 increased
$1.2 million to $1.0 million. Our net pension expense is expected to increase
approximately $.5 million during fiscal 2004, primarily as a result of a
reduction in the discount rate from 6.75% to 6.25% and an additional year of
benefit accrual. Holding all other assumptions constant, a one-quarter percent
increase or decrease in the discount rate would have increased or decreased
annual fiscal 2003 pre-tax income by approximately $ .2 million. Likewise, a
one-quarter percent increase or decrease in the expected return on plan assets
would have increased or decreased annual fiscal 2003 pre-tax income by $ .1
million.
Assets on the balance sheet at December 27, 2003 included a deferred pension
asset of $21.3 million from our qualified defined benefit pension plan included
in other assets (inclusive of a $3.5 million cash contribution in December
2003), as well as a liability for our non qualified supplemental plan of $1.0
million. This liability was offset by $1.2 million in a Rabbi Trust which was
also included in other assets on the balance sheet. If the estimated accumulated
11
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. Management closely monitors the accumulated
benefit obligation and the fair market value of the assets and has made and may
continue to make contributions to the plan to avoid such charges to equity.
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
27, 2003. Any projections 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 periodically (at least
annually) review our workers compensation accrual which was found to be
adequate. If a greater amount of claims is incurred compared to estimates, or if
health care costs increase more than anticipated, recorded reserves may be
insufficient and additional costs would be recorded at that time 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.
12
Results of Operations
General overview As previously reported, the Company ceased doing business with
A&P at the end of October 2003. Sales to A&P were $305.6 million or 20% of the
Company's net sales during 2003 and $388.5 million or 25% of net sales during
2002. These lost sales were somewhat offset by the addition during the year of a
new group of customers in the Philadelphia area with 2003 sales of $72.4
million. The Company currently expects these customers to generate 2004 sales in
excess of $100.0 million.
Statement of Income as a % of Net Sales
Fifty-two weeks ended
---------------------
Dec 29, Dec 28, Dec 27,
2001 2002 2003
Revenue:
Net sales 100.0% 100.0% 100.0%
Other revenue 0.5% 0.5% 0.6%
----- ----- -----
Total revenue 100.5% 100.5% 100.6%
Cost of products sold 90.6% 90.4% 90.1%
----- ----- -----
Gross profit-exclusive of warehouse 9.9% 10.1% 10.5%
expense shown below
Warehouse expense 3.5% 3.7% 4.0%
Transportation expense 1.9% 1.9% 2.0%
Selling, general and administrative expense 1.9% 1.9% 2.0%
Transaction related expenses 0.0% 0.2% 0.0%
Amortization-goodwill 0.2% 0.0% 0.0%
----- ----- -----
Operating income 2.4% 2.4% 2.5%
Interest expense 1.0% 1.0% 1.0%
Amortization-deferred financing costs 0.0% 0.0% 0.0%
Other (income)-net -0.2% -0.2% -0.2%
----- ----- -----
Income before income taxes 1.6% 1.6% 1.7%
Income tax expense 0.7% 0.6% 0.7%
----- ----- -----
Net income 0.9% 1.0% 1.0%
===== ===== =====
13
Fifty-two weeks ended December 27, 2003 and December 28, 2002
Net sales for the fifty-two weeks ended December 27, 2003 were $1,534.2 million
as compared to $1,551.8 million for the fifty-two weeks ended December 28, 2002.
This 1.1% decrease in net sales reflects the loss of A&P as a customer.
Excluding sales to A&P, net sales in 2003 rose 5.4% as compared to 2002. In
addition to the large new group of customers mentioned above, the change in net
sales is a result of individual purchasing decisions of our customers. Other
revenue, consisting of recurring customer related services, increased to $9.9
million for the fifty-two weeks ended December 27, 2003 as compared to $7.7
million in the prior period. The increase was a result of providing a
warehousing service for a national manufacturer and incremental storage revenue.
The frozen warehouse expansion, completed in the fourth quarter of 2002 ("the
Frozen Warehouse Expansion"), added the capacity to enable the Company to
provide this service.
Our gross margin (excluding warehouse expense) increased to 10.5% of net sales
or $161.4 million for 2003, compared to 10.1% of net sales or $156.8 million for
the prior period, reflecting increased other revenue from frozen warehousing
services, a change in mix of both customers and products sold, and allowances
related to new products the Company is carrying. The Company has taken, and will
continue to take, steps intended to maintain and improve its margins such as
auditing and scrutinizing its acquisition cost of product, improving its
inventory management (to reduce slow moving products), and taking greater
advantage of forward buy opportunities. Factors such as changes in customer mix,
changes in manufacturers' promotional activities, changes in product mix, or
competitive pricing pressures may have an effect on gross margin. It is
uncertain that the improvement in gross margin realized in this year will
continue. Caution should be taken when comparing the Company's gross margin to
that of other companies because other companies, while still complying with
generally accepted accounting principles ("GAAP"), may characterize income and
expenses differently.
Warehouse expense increased as a percentage of net sales to 4.0% or $62.0
million for 2003, compared to 3.7% of net sales or $57.8 million for the prior
period primarily as a result of increased occupancy costs of $2.3 million (an
additional $1.4 million of rent as a result of the Frozen Warehouse Expansion).
Increases in wages and fringe benefits of $1.1 million and insurance costs of
$.6 million also contributed to the increase from the prior year.
Transportation expense increased to 2.0% of net sales or $30.1 million for 2003
as compared to 1.9% of net sales or $29.3 million in the prior period. Higher
diesel fuel expense of approximately $.5 million was the single largest increase
in expense. Increased wages and fringe benefits offset by lower owner operator
expense in 2003 of $ .3 million and increased equipment rental expense of $.2
million also contributed to the year to year change.
Selling, general and administrative expense increased as a percentage of net
sales to 2.0% of net sales or $31.3 million for 2003 compared to 1.9% of net
sales or $30.2 million for the prior period. 2003 included an increase in
pension expense of approximately $1.1 million from the prior year which was
partially offset by $.6 million as a result of a settlement with an excess
insurance carrier related to legal fees expensed in previous years.
14
Transaction related expenses were $.5 million in 2003 as compared to $3.2
million in the prior year related to proposed securities offerings in Canada.
We recorded an income tax provision of $10.7 million, resulting in an effective
income tax rate of 43% for 2003, compared to a provision of $9.4 million
resulting in an effective rate of 42% in the prior period. The increase in
effective rate is a result of an increase in permanent differences as a result
of certain nondeductible expenses.
We recorded net income for 2003 of $14.3 million as compared to $13.2 million in
the prior period.
EBITDA was $44.2 million during 2003, compared to $43.2 million in the prior
period.
Reconciliation of EBITDA to net income (in thousands):
2003 2002 2001
EBITDA $44,236 $43,206 $46,300
Less: depreciation and
amortization of fixed assets 2,239 2,341 2,332
Less: other amortization 1,988 2,699 5,175
Less: interest expense 14,950 15,559 15,917
Less: income tax provision 10,710 9,436 10,781
------- ------- -------
Net Income $14,349 $13,171 $12,095
======= ======= =======
The Company has presented EBITDA supplementally because management believes this
information enables management, investors, and others readers to evaluate and
compare, from period to period, the Company's results from ongoing operations in
a more meaningful and consistent manner. We believe net income is the most
closely comparable GAAP measure as opposed to cash flow from operations. Similar
to net income, management uses the EBITDA measures as a measure of the
performance of our operations without the vagaries of fluctuations in working
capital as cash flow from operations would. Management also uses the EBITDA
results when making operating decisions that require additional resources and as
a basis for certain calculations for compensation programs. We believe that the
relevant statistic for our business to measure liquidity is our working capital
plus our availability under our existing line of credit, both of which are
disclosed in our liquidity discussion under Liquidity and Capital Resources
below.
15
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,
experienced an immaterial change.
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, changes in
customer mix, 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 primarily as a result of i) increased benefits and insurance costs of $
2.4 million, ii) the one time signing bonus paid to the grocery warehouse union
members upon ratifying the new five year contract extension in September of $.4
million, iii) increased rent as a result of the Frozen Warehouse Expansion of
$.4 million, and iv) increased wages of $.3 million .
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.
Transaction related expenses were $3.2 million in 2002 of which of which $2.7
million related to a proposed securities offering in Canada.
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.
We recorded an income tax provision of $9.4 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. The decrease, had SFAS 142 been in effect, would have been as a result
of the transaction related expenses discussed above.
16
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.
On February 17, 2004, we entered into an amendment to the bank credit facility
which extended its maturity to February 1, 2007. The bank credit facility 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 $12.9 million (excluding $6.0 million of
outstanding letters of credit) at December 27, 2003. Additional borrowing
capacity of $73.7 million was available at that time under our then current
borrowing base certificate. Borrowings under the revolving bank credit facility
were $0 million (excluding $6.0 million of outstanding letters of credit) at
March 5, 2004.
During 2003, cash flows provided by our operating activities were $2.1 million,
consisting primarily of cash generated from income before non-cash expenses of
$21.9 million, and a decrease in inventory of $7.6 million and prepaid expenses
of $1.3 million, offset by a decrease in accounts payable of $18.7 million and
accrued expenses of $.8 million and increases in accounts and notes receivable
of $3.9 million and other assets of $5.4 million.
We used approximately $1.2 million of cash flows for investing activities during
2003, exclusively for capital expenditures. Net cash provided by financing
activities during 2003 was $.1 million consisting of net borrowings under our
bank credit facility of $10.2 million offset by a $10.0 million dividend paid in
June 2003 and approximately $.1 million of capital lease payments.
Our consolidated indebtedness increased to $163.1 million at December 27, 2003
as compared to $153.0 million at December 28, 2002. Stockholders' equity was
$32.5 million on December 27, 2003 as compared to $28.2 million on December 28,
2002. Based on our results for the year ended December 27, 2003, we expect to
pay a $10.0 million dividend on March 31, 2004.
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 $1.5 million during 2004 on
capital expenditures, but we may purchase certain assets used in our business
instead of leasing them due to economic conditions. In addition, we may spend
additional resources on upgrading computer systems.
17
We did not incur any cash expense in fiscal 2003 in connection with the
environmental remediation of presently owned or divested properties and do not
expect to expend more than approximately $.2 million in fiscal 2004. At December
27, 2003, we had reserved $.7 million 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 were
$0, $1.9 million and $10.5 million in 2003, 2002, and 2001 respectively. All
proceeds were used to repay amounts under our bank credit facility or to 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. In January 2004 we sold
approximately $2.0 million of participations. We expect to sell additional
participations in 2004.
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 27, 2003, 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 major facilities are leased (three
operating and one capital lease) as is most of our transportation fleet and much
of our material handling equipment. The operating leases are reflected in the
Company's Statement of Income as expenses. We choose to lease these items
instead of purchasing them because we believe it is a more efficient allocation
of the Company's capital in addition to providing more flexibility to the
Company's liquidity. The chart summarizes our contractual obligations:
Payments due by period
----------------------
Contractual Obligations Total Less than 1-3 years 3-5 years More than
- ----------------------- 1 year 5 years
(in thousands)
Long-Term Debt $148,300 $ 0 $ 0 $148,300 $ 0
Capital Lease Obligations 3,196 186 372 372 2,266
Operating Leases Obligations 101,976 10,562 18,601 15,895 56,918
Purchase Obligations (a) 304 304 0 0 0
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP
excluding deferred tax
liabilities (b) 598 200 200 198 0
--- --- --- --- -
Total $254,374 $ 11,252 $19,173 $164,765 $ 59,184
======== ======== ======= ======== ========
- ----------
(a) We have not included i) any obligation that by its terms can be
canceled on thirty days or less notice or ii) purchase orders for
inventory.
(b) Excludes deferred income and minority interest.
18
We have contingent obligations, including performance guarantees in the amount
of approximately $1.6 million, which decrease by $.6 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 and the Company is
unable to put into place a substitute obligor for either the entire term or a
portion of the term of the guarantee period. As of the date of this report,
management has assessed the likelihood of the primary obligor's default as low.
We were also contingently liable for approximately $6.0 million on standby
letters of credit issued in the ordinary course of business under the bank
credit facility at December 27, 2003.
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 2003'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 $7,400. 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. Based on the
Company's current transportation needs, each $0.10 change in the price of diesel
fuel would increase or decrease, as applicable, the Company's annual
transportation costs by approximately $.1 million.
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.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
Financial Statements
Consolidated Financial Statements of Di Giorgio Corporation and Subsidiaries
Index to Consolidated Financial Statements................................. F-1
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets as of December 28, 2002 and December 27, 2003.. F-3
Consolidated Statements of Income for each of the
three years in the period ended December 27, 2003......................... F-4
Consolidated Statements of Changes in Stockholders'
Equity for each of the three years in the period
ended December 27, 2003................................................... F-5
Consolidated Statements of Cash Flows for each of
the three years in the period ended December 27, 2003..................... F-6
Notes to Consolidated Financial Statements................................. F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 9A. 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 Rule 15d-15(e) of the Securities Exchange Act of 1934
("the "Exchange Act") as of December 27, 2003. Based on their review and
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of December 27, 2003, the Company's disclosure controls and
procedures were adequate and effective. No significant change in the Company's
internal control over financial reporting (as defined in Rule 15d-15(f) of the
Exchange Act) occurred during the fourth fiscal quarter covered by this annual
report in Form 10-K that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the directors and
executive officers of Di Giorgio:
Age Position
Richard B. Neff (1) 55 Co-Chairman of the Board of Directors and
Chief Executive Officer
Stephen R. Bokser 61 Co-Chairman of the Board of Directors,
President, and Chief Operating Officer
Jerold E. Glassman (1) 68 Director
Emil W. Solimine (2) 59 Director
Charles C. Carella (3) 70 Director
Jane Scaccetti (3) 49 Director
Michael S. Goldberg (2) 29 Director
Joseph R. DeSimone 64 Senior Vice President Distribution
Robert A. Zorn 49 Executive Vice President-Finance and
Treasurer
Lawrence S. Grossman 42 Senior Vice President and Chief
Financial Officer
Harlan Levine 42 Vice President, General Counsel
and Secretary
George Conklin 43 Vice President of Logistics
Joseph Fantozzi 42 Senior Vice President and General Manager-
White Rose(R)Dairy Division of Di Giorgio
John Annetta 52 Senior Vice President and General Manager-
White Rose(R)Frozen Division of Di Giorgio
John J. Zumba 66 Senior Vice President
- --------------------------------------------------------------------------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
21
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 has been the general partner of Rose or controlled the
general partner of Rose since October 2000. He is also an executor of the Estate
of Arthur Goldberg, a limited partner of Rose and a director of Safety-Kleen
Corp since January 2004.
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(R) Food
division. He has been a Director of Di Giorgio since 1990. Mr. Bokser is also a
director of Foodtown, Inc., a supermarket cooperative, and customer 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 1998
through 2001, Mr. Glassman was managing partner of the law firm Grotta, Glassman
& Hoffman, and since 2002, he has been its chairman. Mr. Glassman is also a
director of Essex Valley Healthcare, Inc.
Mr. Solimine has been a Director of Di Giorgio since 1990. Since prior to 1998,
he has been the Chief Executive Officer of the Emar Group, Inc., an insurance
concern.. He is also a limited partner of Rose.
Mr. Carella became a Director of Di Giorgio in 1995. Since prior to 1998, 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 1998,
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, Temple University Health Systems, and Keystone Health Plan
East. Ms. Scaccetti is a certified public accountant.
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 1998.
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 1998.
22
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 1998. 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 1998.
He is admitted to the New York and New Jersey bar.
Mr. Conklin has been Vice President of Logistics since prior to 1998.
Mr. Fantozzi has been Senior Vice President and General Manager of the White
Rose(R) Dairy division of Di Giorgio since 2001. Previously he held the position
of Vice President and General Manager of the White Rose(R) Dairy division of Di
Giorgio since prior to 1998.
Mr. Annetta has been Senior Vice President and General Manager of the White
Rose(R) Frozen division of Di Giorgio since 2001. Previously he held the
position of Vice President and General Manager of the White Rose(R) Frozen
division of Di Giorgio since prior to 1998.
Mr. Zumba has been Senior Vice President since 2001. Previously he held the
position of Vice President of Sales since prior to 1998.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that Jane Scaccetti, Chairperson is an
audit committee financial expert as defined by Item 401(h) of Regulation S-K of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and is
independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the
Exchange Act.
AUDIT COMMITTEE
We have a separately-designated standing Audit Committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the
audit committee are Charles C. Carella, Esq. and Jane Scaccetti (Chairperson).
CODE OF ETHICS
We have adopted a code of ethics for senior executive officers (including the
principal executive officer, principal financial officer and controller) and
employees, known as the Standards of Business Conduct. The code of ethics for
senior executive officers is available on our website at
http://www.whiterose.com. Within the time period required by the SEC, the
Company will post on its website any modifications to the code of ethics for
senior executive officers and any waivers applicable to its senior executive
officers, as required by the Sarbanes-Oxley Act of 2002.
23
ITEM 11. EXECUTIVE COMPENSATION.
Compensation
The following table sets forth compensation paid or accrued during the year 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 27, 2003.
SUMMARY COMPENSATION TABLE
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation Compensation
(1,2)
Richard B. Neff 2003 $400,000 $440,000 $ 71,823 $ 3,000(3)
Co-Chairman of the Board of Directors 2002 $400,000 $550,000 $ 76,604 $ 3,000(3)
and Chief Executive Officer 2001 $400,000 $550,000 $ 80,525 $ 2,550(3)
Stephen R. Bokser 2003 $400,000 $440,000 $ 97,561 $ 3,000(3)
Co-Chairman of the Board of Directors, 2002 $400,000 $550,000 $ 76,604 $ 3,000(3)
President, and Chief Operating Officer 2001 $400,000 $550,000 $ 80,525 $ 2,550(3)
Robert A. Zorn 2003 $288,100 $ 44,000 -- $ 3,000(3)
Executive Vice President-Finance and 2002 $275,600 $ 55,000 -- $ 3,000(3)
Treasurer 2001 $260,600 $ 55,000 -- $ 2,550(3)
Joseph Fantozzi 2003 $220,000 $ 72,000 -- $ 3,000(3)
Senior Vice President and General 2002 $208,000 $ 90,000 -- $ 3,000(3)
Manager of White Rose Dairy Division 2001 $191,000 $ 90,000 -- $ 2,550(3)
Lawrence S. Grossman 2003 $214,000 $ 72,000 -- $ 3,000(3)
Senior Vice President and 2002 $202,000 $ 90,000 -- $ 3,000(3)
Chief Financial Officer 2001 $186,000 $ 90,000 -- $ 2,550(3)
- ----------
(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 2003 interest rate was 4.25% and it 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 2001, 2002, and 2003 are not described herein because our incremental cost
of the benefits is below the Securities and Exchange Commission disclosure
threshold.
24
(2) In the case of Mr. Bokser, other annual compensation in 2003 also includes
$25,738, including the gross up for taxes, for the reimbursement of a life
insurance premium.
(3) Represents contributions made by us pursuant to our Retirement Savings Plan.
See "Executive Compensation -- Retirement Savings Plan."
Employment Agreements
We are a party to an employment 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 employment 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 employment 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 employment 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 employment 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 employment 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 $288,100, 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
the termination of Mr. Zorn's employment or 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 non-union employees (unless a bargaining
agreement expressly provides for participation) are eligible to participate in
the Retirement Plan on the January 1 or July 1 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
25
certain stock option and stock appreciation rights) while the participant 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
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 the January 1 after reaching age 65) 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 Summary Compensation Table commencing at
their respective normal retirement ages under the Retirement Plan and
nonqualified plan is as follows: Mr. Neff, $113,405; Mr. Bokser $190,796; Mr.
Zorn, $40,875; Mr. Fantozzi, $43,110; and Mr. Grossman, $34,313.
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
non-union employees (unless a bargaining agreement expressly provides for
participation) are eligible to participate in the Savings Plan on the first day
of the calendar quarter 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 three 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
26
attainment of age 59 1/2. In general, amounts credited to a participant's
account will be distributed upon termination of employment.
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 $2,000
($1,000 prior to February 20, 2003) for Committee meetings.
Compensation Committee Interlocks and Insider Participation
Mr. Solimine is a member of the Company's Compensation Committee. Mr. Solimine
controls Emar Group, Inc. ("Emar"), a risk management and insurance brokerage
company, which the Company uses for risk management and insurance brokerage
services. We paid Emar approximately $.2 million in fiscal 2003 for such
services and purchased insurance with premiums of approximately $3.6 million
through Emar.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Shares of Common Percentage of
Name Stock Owned Total
Rose Partners, LP (1) 76.9719 sh of class A 98.54%
75.7433 sh of class B
Richard B. Neff (2) 0.57195 sh of class A .73%
0.56285 sh of class B
Stephen R. Bokser (2) 0.57195 sh of class A .73%
0.56285 sh of class B
- ----------
(1) Rose Partner, LP is a limited partnership. The sole general partner is RBN
Investments, Inc., a corporation wholly-owned by Mr. Neff. The business
address for Rose is 380 Middlesex Avenue, Carteret, New Jersey 07008.
(2) Mr. Neff's and Mr. Bokser's business addresses are 380 Middlesex Avenue,
Carteret, New 07008.
27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Bokser serves on the board of directors of Foodtown, Inc., a supermarket
cooperative. Mr. Bokser serves on its board without compensation as a
representative of the Company. The Company, through a wholly-owned subsidiary,
owns a non-voting equity interest in the cooperative. Sales to the Foodtown
cooperative in 2003 were $8.4 million. Most of the decisions to purchase
products from the Company are made by individual members of the Foodtown coop
and total sales to the individual members of the coop were approximately $210.7
million in 2003.
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 $26,000 to the firm in fiscal 2003.
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 $.2 million in fiscal 2003 for such services and purchased
insurance with premiums of approximately $3.6 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 4.25% and matures in 2005. On March 1,
2004, $69,295 was outstanding on each loan.
28
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following fees were paid to Deloitte & Touche, LLP for services rendered
during the years ended December 27, 2003 and December 28, 2002:
2003 2002
---- ----
Audit Fees $282,500 $267,000 (a)
Audit-Related Fees 250,000 (c) 534,500 (b,c)
Tax Fees -- --
All Other Fees -- --
-------- --------
Total Fees $532,500 $801,500
======== ========
- ----------
(a) Includes the audit of the Company's financial statements and the
performance of quarterly reviews.
(b) Includes an audit of the Company's financial statements for the quarter
ended March 30, 2002.
(c) Includes fees associated with re-issuances of the audit opinion, as well as
work on the registration statement for the proposed sale of Canadian
securities.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors
In 2003, the Audit Committee adopted policies and procedures which address,
among other matters, pre-approval of audit and permissible non-audit services
provided by the independent auditor. The policies and procedures require that
all services to be provided by the independent auditors must be approved by the
Audit Committee. All of the audit and audit related services provided by
Deloitte & Touche, LLP in fiscal year 2003 (described in the footnotes to the
table above) and related fees were approved in advance by the Audit Committee.
29
PART IV
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 28, 2002 and December 27, 2003......................... F-3
Consolidated Statements of Income for each of the
three years in the period ended December 27, 2003............... F-4
Consolidated Statements of Changes in Stockholders'
Equity for each of the three years in the period
Ended December 27, 2003......................................... F-5
Consolidated Statements of Cash Flows for each of
the three years in the period ended December 27, 2003........... 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.
30
10.2(1)+ - Employment Agreement dated February 18, 1992 between the
Company and Robert A. Zorn
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.
10.17(14) - First Amendment dated February 3, 2004 executed in
connection with Restated Credit Agreement dated
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.
31
21(14) - Subsidiaries of the Registrant.
31.1(14) - Certification of Chief Executive Officer required by Rule
13a-14(a) or Rule 15-d14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section; 302 of the
Sarbanes-Oxley Act of 2002.
31.2(14) - Certification of Chief Financial Officer required by Rule
13a-14(a) or Rule 15-d14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section; 302 of the
Sarbanes-Oxley Act of 2002.
32.1(14) - Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
- ------------------------------------------
+ Compensation plans and arrangements of executives and others.
(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).
32
(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
We filed a Form 8-K with the Securities and Exchange Commission on October 9,
2003, under "Item 5. Other Events and Required FD Disclosure," announcing the
loss of a large customer.
33
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 9th day of
March, 2004.
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 Executive Officer
and Chief Operating Officer (Principal 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 9, 2004
- ---------------------------
Jerold E. Glassman
/s/ Emil W. Solimine Director March 9, 2004
- ---------------------------
Emil W. Solimine
/s/ Charles C. Carella Director March 9, 2004
- ---------------------------
Charles C. Carella
/s/ Jane Scaccetti Director March 9, 2004
- ---------------------------
Jane Scaccetti
/s/ Michael S. Goldberg Director March 9, 2004
- -----------------------
Michael S. Goldberg
/s/ Lawrence S. Grossman Senior Vice President March 9, 2004
- ------------------------- and Chief Financial
Lawrence S. Grossman Officer (Principal
Financial & Accounting Officer)
34
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
27, 2003:
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
FINANCIAL STATEMENT SCHEDULE FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 27, 2003:
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 27, 2003 and
December 28, 2002, and the related statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 27,
2003. Our audits also include 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 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 27, 2003 and December 28, 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended December 27, 2003 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
February 26, 2004
F-2
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 28, 2002 AND DECEMBER 27, 2003
(In thousands, except share data)
- --------------------------------------------------------------------------------
December 28, December 27,
ASSETS 2002 2003
CURRENT ASSETS:
Cash and cash equivalents $ 629 $ 1,637
Accounts and notes receivable--Net 109,471 109,738
Inventories 68,786 61,204
Deferred income taxes 2,986 2,205
Prepaid expenses 4,928 3,606
------- -------
Total current assets 186,800 178,390
PROPERTY, PLANT AND EQUIPMENT--Net 10,879 9,840
NOTES RECEIVABLE 7,981 11,082
DEFERRED FINANCING COSTS--Net 2,514 1,886
OTHER ASSETS 21,397 24,764
GOODWILL 68,893 68,893
------- -------
TOTAL $298,464 $294,855
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility $ 2,693 $ 12,880
Current installment--capital lease liability 60 64
Accounts payable--trade 77,833 59,166
Accrued expenses 31,440 30,652
------- -------
Total current liabilities 112,026 102,762
LONG-TERM DEBT 148,300 148,300
CAPITAL LEASE LIABILITY 1,941 1,877
OTHER LONG-TERM LIABILITIES 8,024 9,394
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 20,171 24,520
------- -------
Total stockholders' equity 28,173 32,522
------- -------
TOTAL $298,464 $294,855
======= =======
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 27, 2003
(In thousands)
- --------------------------------------------------------------------------------
December 29, December 28, December 27,
2001 2002 2003
REVENUE:
Net sales $ 1,530,901 $ 1,551,849 $ 1,534,236
Other revenue 7,923 7,664 9,892
----------- ----------- -----------
Total revenue 1,538,824 1,559,513 1,544,128
COST OF PRODUCTS SOLD 1,387,511 1,402,761 1,382,683
----------- ----------- -----------
GROSS PROFIT--Exclusive of warehouse
expense shown separately below 151,313 156,752 161,445
OPERATING EXPENSES:
Warehouse expense 54,123 57,844 62,042
Transportation expense 29,570 29,284 30,132
Selling, general and administrative expenses 29,526 30,197 31,327
Transaction related expenses -- 3,239 547
Amortization--goodwill 2,425 -- --
----------- ----------- -----------
OPERATING INCOME 35,669 36,188 37,397
INTEREST EXPENSE 15,917 15,559 14,950
AMORTIZATION--Deferred financing costs 651 758 628
OTHER INCOME--Net (3,775) (2,736) (3,240)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 22,876 22,607 25,059
PROVISION FOR INCOME TAXES 10,781 9,436 10,710
----------- ----------- -----------
NET INCOME $ 12,095 $ 13,171 $ 14,349
=========== =========== ===========
See notes to consolidated financial statements.
F-4
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 27, 2003
(In thousands, except share data)
- --------------------------------------------------------------------------------
Class A Class B Additional
Common Stock Common Stock Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
BALANCES--
January 30, 2000 78.116 $ - 76.869 $ - $ 8,002 $ 6,205 $ 14,207
Net income - - - - - 12,095 12,095
Dividend - - - - - (5,300) (5,300)
-- -- -- -- -- ------ ------
BALANCES--
December 29, 2001 78.116 - 76.869 - 8,002 13,000 21,002
Net income - - - - - 13,171 13,171
Dividend - - - - - (6,000) (6,000)
-- -- -- -- -- ------ ------
BALANCES--
December 28, 2002 78.116 - 76.869 - 8,002 20,171 28,173
Net income - - - - - 14,349 14,349
Dividend - - - - - (10,000) (10,000)
-- -- -- -- -- ------- -------
BALANCES--
December 27, 2003 78.116 $ - 76.869 $ - $ 8,002 $ 24,520 $32,522
====== === ====== === ======= ======== =======
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 27, 2003
(In thousands)
- --------------------------------------------------------------------------------
December 29, December 28, December 27,
2001 2002 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,095 $ 13,171 $ 14,349
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation 2,332 2,341 2,239
Amortization of deferred financing costs 651 758 628
Amortization of goodwill 2,425 -- --
Other amortization 2,099 1,941 1,360
Provision for doubtful accounts 500 500 500
Actuarially calculated pension (income) expense (567) (201) 885
Deferred taxes 1,966 104 1,961
Changes in assets and liabilities:
(Increase) decrease in:
Accounts and notes receivable (19,721) (7,683) (767)
Inventory (1,782) (2,317) 7,582
Prepaid expenses (75) (1,126) 1,322
Other assets (1,905) (320) (5,399)
Long-term notes receivables 5,326 (979) (3,101)
Increase (decrease) in:
Accounts payable 1,265 1,905 (18,667)
Accrued expenses and other liabilities 2,667 2,175 (811)
-------- -------- --------
Net cash provided by operating activities 7,276 10,269 2,081
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES--
Additions to property, plant and equipment (1,949) (3,261) (1,200)
-------- -------- --------
Net cash used in investing activities (1,949) (3,261) (1,200)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings from revolving
credit facility--net (10,410) 2,693 10,187
Proceeds from note participation sales 10,509 1,878 --
Repurchase of 10% senior notes -- (6,700) --
Dividend to stockholders (5,300) (6,000) (10,000)
Repayments of capital lease obligations (63) (57) (60)
-------- -------- --------
Net cash (used in) provided by financing activities (5,264) (8,186) 127
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 63 (1,178) 1,008
CASH AND CASH EQUIVALENTS--
Beginning of year 1,744 1,807 629
-------- -------- --------
CASH AND CASH EQUIVALENTS--End of year $ 1,807 $ 629 $ 1,637
======== ======== ========
(Continued)
F-6
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 27, 2003
(In thousands)
- -------------------------------------------------------------------------------
December 29, December 28, December 27,
2001 2002 2003
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period:
Interest $15,991 $15,617 $14,981
======== ======== =======
Income taxes $ 7,200 $10,645 $ 8,425
======== ======== =======
(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 27, 2003
- --------------------------------------------------------------------------------
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 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. The annual
goodwill impairment test, which we will perform on the first day of each
fiscal fourth quarter, is a two step approach and is based on a comparison
of the implied fair value of recorded goodwill with its carrying value. If
the carrying value is in excess of the implied fair value, an impairment
loss is required to be recognized.
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 which has been included in
amortization of deferred financing costs in the accompanying consolidated
statements of income.
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.
F-8
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 workmens'
compensation, medical and general liability 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 the formation of a Canadian income trust, the Company incurred
professional and other fees of approximately $3.2 million and $.5 million,
which are included in the December 28, 2002 and December 27, 2003
Consolidated Statements of Income under the caption "Transaction related
expenses." Transaction related costs were insignificant in the year ended
December 29, 2001.
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. The Company
receives certain promotional allowances from vendors, such as slotting
allowances and co-operative advertising arrangements. The Company defers
such allowances until such time that they are considered earned. The
period of deferral is usually under 2 months, and amounts deferred in the
consolidated balance sheet are not material.
Sale of Notes Receivable--From time to time, the Company has sold
nonrecourse, 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 27, 2003.
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 was effective for the first quarter in the fiscal year ended
December 27, 2003. Upon adoption of this pronouncement, the Company has
reclassified these items in its consolidated financial statements.
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The revised standard
requires new disclosures in addition to those required by the original
standard about the assets, obligations, cash flows and net periodic
benefit cost of defined benefits pension plans and other defined benefit
postretirement plans. As revised, SFAS No. 132 is effective for financial
statements with fiscal years ending after December 15, 2003. The
interim-period disclosures required by this standard are effective for
interim periods beginning after December 15, 2003 and are included in Note
8.
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 same 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.
2. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
December 28, December 27,
2002 2003
(In thousands)
Accounts receivable $ 82,252 $ 85,007
Notes receivable 12,337 14,892
Other receivables 19,907 13,947
Less allowance for doubtful accounts (5,025) (4,108)
--------- ---------
$ 109,471 $ 109,738
========= =========
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 27, 2003, the Company's
customer loan portfolio had an aggregate balance of approximately $25.9
million of which $11.1 million is long term. The portfolio consisted of 71
loans ranging in size up to approximately $5.8 million.
F-10
3. PROPERTY, PLANT AND EQUIPMENT
Property and equipment consist of the following:
Estimated
Useful Life December 28, December 27,
in Years 2002 2003
(In thousands)
Land -- $ 900 $ 900
Buildings and improvements 10 4,897 5,095
Machinery and equipment 3-10 19,454 19,798
Less accumulated depreciation (16,495) (17,967)
-------- --------
8,756 7,826
-------- --------
Capital leases:
Building and improvements 3,117 3,117
Equipment 370 380
Less accumulated amortization (1,364) (1,483)
-------- --------
2,123 2,014
-------- --------
$ 10,879 $ 9,840
======== ========
Depreciation and amortization expense was approximately $2.3 million, $2.3
million and $2.2 million for the years ended 2001, 2002 and 2003,
respectively. Included in that amount is approximately $.1 million for
each year 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 29, December 28, December 27,
2001 2002 2003
(In thousands)
Reported net income $12,095 $13,171 $14,349
Goodwill amortization--net of tax 2,321 -- --
------- ------- -------
Adjusted net income $14,416 $13,171 $14,349
======= ======= =======
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 27, 2003, the Company
completed an impairment test and did not record any impairments of
goodwill.
F-11
5. FINANCING
Debt consists of the following:
Interest Rate
at December 27, December 28, December 27,
2003 2002 2003
(In thousands)
Revolving credit facility (a) 4.00 % $ 2,693 $ 12,880
======== ========
Long-term debt:
senior notes (b) 10.00 % $148,300 $148,300
======== ========
(a) Revolving Credit Facility--The Company's bank credit facility is
scheduled to mature on February 1, 2007, 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 2003 the average interest rate for the outstanding borrowing
was 4.11%.
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 $12.9
million (excluding $6.0 million of outstanding letters of credit) at
December 27, 2003. Additional borrowing capacity of $73.7 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 27, 2003.
(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 following are redemption prices if redeemed during the
12-month beginning June 15 of years indicated:
Year Redemption Price
2003 103.33%
2004 101.67%
Thereafter, redemption rates will be at 100% of the principal amount,
together with accrued and unpaid interest, if any, to the redemption
date.
F-12
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.
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 28, 2002 December 27, 2003
Carrying Fair Carrying Fair
Amount Value Amount Value
(In thousands)
Debt:
Revolving credit facility $ 2,693 $ 2,693 $ 12,880 $ 12,880
10% senior notes 148,300 146,076 148,300 140,144
Notes receivable--current 12,337 12,337 14,892 14,892
Notes receivable--long-term 7,981 7,981 11,082 11,082
The fair value of the 10% senior notes as of December 28, 2002 and
December 27, 2003 is based on trade prices of $98.50 and $94.50,
respectively, representing yields of 10.50% (as of December 28, 2002) and
11.99% (as of December 27, 2003), 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 28, December 27,
2002 2003
(In thousands)
Employee benefits $ 9,822 $10,221
Due to vendors/customers 9,848 12,714
Other 7,475 5,199
Legal and environmental (Note 10) 3,764 2,042
Interest 531 476
------- -------
$31,440 $30,652
======= =======
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 by the plan in accordance with the funding requirements
of the Employee Retirement Income Security Act of 1974. Assets of
F-13
the Company's pension plan are invested in Treasury notes, U.S.
Government agency bonds, corporate bonds, money market funds, and
other investments.
The following table provides information for the pension plan:
December 28, December 27,
2002 2003
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 49,533 $ 53,176
Service cost 816 937
Plan change 37 --
Interest cost 3,498 3,500
Actuarial loss 3,129 3,454
Benefits paid (3,837) (4,008)
-------- --------
Benefit obligation at end of year $ 53,176 $ 57,059
======== ========
December 28, December 27,
2002 2003
(In thousands)
Change in plan assets:
Fair value of plan assets at beginning of year $ 53,946 $ 53,859
Actual return on plan assets 3,750 1,657
Benefit payments (3,837) (4,008)
Employer contribution -- 3,500
-------- --------
Fair value of plan assets at end of year $ 53,859 $ 55,008
======== ========
Reconciliation of funded status:
Funded status (fair value of plan assets less
benefit obligation) $ 683 $ (2,050)
Unrecognized net actuarial loss 17,681 23,262
Unrecognized prior service cost 112 93
-------- --------
Prepaid benefit cost $ 18,476 $ 21,305
======== ========
The Company has included, as a prepaid benefit cost, approximately $18.5
million and $21.3 million in other assets for the years ended December 28,
2002 and December 27, 2003, respectively.
Net pension cost includes the following components:
December 29, December 28, December 27,
2001 2002 2003
(In thousands)
Service cost $ 705 $ 816 $ 937
Interest cost 3,482 3,498 3,500
Expected return on plan assets (5,104) (5,069) (4,580)
Amortization of prior service cost 14 18 20
Amortization of net loss from earlier periods -- 355 796
------- ------- -------
$ (903) $ (382) $ 673
======= ======= =======
F-14
Net periodic benefit cost for the current year is based on assumptions for
the prior year. For the fiscal years ended December 30, 2000, December 29,
2001 and December 28, 2002, the following actuarial assumptions were used:
December 29, December 28, December 27,
2001 2002 2003
Weighted average discount rate 7.25 % 6.75 % 6.25 %
Rate of increase in future
compensation levels 6.00 6.00 6.00
Expected long-term rate of
return on plan assets 9.00 8.25 8.25
Management's determination of the above assumptions for compensation
increases and long term rate of return on plan assets is based upon a
combination of historical actual results as well as expectations of the
future. Determination of the weighted average discount rate was based upon
an assumed portfolio of high quality debt instruments matched against the
Company's projected cash out flows for future benefit payments.
The following undiscounted benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:
Pension Benefits
(In thousands)
2004 $ 3,887
2005 3,963
2006 4,059
2007 4,140
2008 4,259
Thereafter $ 163,765
The Company's funding policy is to contribute an amount that both
satisfies the minimum funding requirements of the Employee Retirement
Income Security Act of 1974 and does not exceed the full funding
limitations of the U.S. Internal Revenue Code. Management closely monitors
the accumulated benefit obligation and the fair market value of the assets
and has made and may continue to make contributions to avoid the
requirements of recognizing a minimum pension liability. Such
contributions vary each period and cannot be reasonable estimated until
the fourth quarter annually.
The pension plan weighted average asset allocations at December 27, 2003
and December 28, 2002, by asset category are as follows:
2002 2003
Cash 7.4% 14.3%
Fixed Income 88.2% 80.5%
Equities 0.1% 0.6%
Other 4.3% 4.6%
----- -----
Total 100.0% 100.0%
====== ======
Most of the plan assets are professionally managed with the directive from
management to preserve capital. This is accomplished through investment in
fixed income securities ranging from 1 to 10 years in maturity. Our
investments primarily include Treasuries, Agencies, Corporates (rated A or
better), and mortgage-backed securities. With interest rates near
historical lows, the portfolios are positioned defensively against the
possibility of an increase in interest rates. Strategically, the Company
F-15
shortens the portfolio slightly, reducing risk and taking profits when
bonds interest rates fall. When interest rates rise, the Company lengthens
again, taking on exposure and increasing yield. This puts the portfolio in
a more defensive position when interest rates have fallen sharply and in a
more aggressive one when interest rates have risen.
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 the statements of income
operations was as follows:
Year Ended (In thousands)
December 29, 2001 $1,266
December 28, 2002 1,460
December 27, 2003 1,503
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 (all of which contributions may be
subject to certain statutory limitations). Company contributions to
the plan are summarized below:
Year Ended (In thousands)
December 29, 2001 $217
December 28, 2002 229
December 27, 2003 231
9. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
December 28, December 27,
2002 2003
(In thousands)
Deferred income tax liability--net (Note 13) $7,361 $8,541
Environmental (Note 10) 433 433
Employee benefits 224 165
Other 6 255
------ ------
$8,024 $9,394
====== ======
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.
F-16
The Company has been named in various claims and litigation relating to
potential environmental problems. In the opinion of management, 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 27, 2003:
Capital Operating
Fiscal Year Ending Leases Leases
(In thousands)
2004 $ 186 $10,562
2005 186 9,463
2006 186 9,138
2007 186 8,133
2008 186 7,762
Thereafter 2,266 56,918
------ -------
Net minimum lease payments $ 101,976
=========
Less interest (1,255)
-------
Present value of net minimum lease payments
(including current installments of $60) $1,941
======
Total rent expense included in operations was as follows:
Year Ended (In thousands)
December 29, 2001 $11,365
December 28, 2002 11,595
December 27, 2003 12,666
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 $6.0 million and $6.0 million on standby letters
of credit with a bank as of December 28, 2002 and December 27, 2003,
respectively.
Guarantees--The Company has issued certain performance guarantees in an
aggregate amount of approximately $1.6 million which decrease by
approximately $.6 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 and the Company is unable to put into
place a substitute obligor for either the entire term or a portion of the
term of the guarantee period. 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
F-17
to terminate. Under these agreements, combined annual salaries of
approximately $1.1 million were paid in fiscal 2003. 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
27, 2003, the Company is permitted to pay dividends up to $10 million.
12. OTHER INCOME--NET
Other income consists of the following:
December 29, December 28, December 27,
2001 2002 2003
(In thousands)
Interest income $2,512 $1,933 $1,836
Net gain on disposal of assets 528 -- --
Other--net 735 803 1,404
------ ------ ------
$3,775 $2,736 $3,240
====== ====== ======
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 28, December 27,
2002 2003
(In thousands)
Deferred tax assets:
Allowance for doubtful accounts $ 2,235 $ 1,712
Accrued expenses not deductible until paid 751 493
Difference between book and tax basis of property 3 8
------- -------
Deferred tax assets 2,989 2,213
Deferred tax liabilities:
Pension asset valuation (7,364) (8,549)
------- -------
Net deferred tax liabilities $(4,375) $(6,336)
======= =======
As of December 27, 2003, the Company had a receivable for current taxes of
approximately $.8 million.
F-18
The income tax provision consists of the following:
December 29, December 28, December 27,
2001 2002 2003
(In thousands)
Current income tax $ 8,815 $ 9,332 $ 8,751
Deferred income tax 1,966 104 1,959
------- ------- -------
$10,781 $9,436 $10,710
======= ======= =======
A reconciliation of the Company's effective tax rate with the statutory
Federal tax rate is as follows:
December 29, December 28, December 27,
2001 2002 2003
(In thousands)
Tax at statutory rate $ 8,007 $ 7,912 $ 8,772
State and local taxes--net of Federal benefit 2,010 1,524 1,791
Permanent differences--goodwill and other 764 -- 147
------- ------- -------
$10,781 $ 9,436 $10,710
======= ======= =======
14. RELATED PARTY TRANSACTIONS
Mr. Bokser is co-chairman, president, and chief operating officer. Mr.
Bokser serves on the board of Foodtown, a food cooperative. Mr. Bokser
serves on its board without compensation as a representative of the
Company. The Company, through a wholly-owned subsidiary, owns a non-voting
equity interest in the cooperative. Sales to the Foodtown cooperative in
2003 were $8.4 million. Most of the decisions to purchase products from
the Company are made by individual members of the Foodtown co-op and total
sales to the individual members were approximately $210.7 million in 2003.
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 $26,000 to the firm in fiscal 2003.
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 Partners, for risk management and insurance
brokerage services. We paid Emar approximately $200,000 in fiscal 2003 for
such services and purchased insurance with premiums of approximately $3.6
million through Emar.
We believe that the transactions set forth above are on terms no less
favorable that those which could reasonably have been obtained from
unaffiliated parties.
In April 2000, we loaned each of Messrs. Neff, co-chairman and chief
executive officer, and Bosker $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 loan
interest rates for the year were 4.25% and mature in 2005. On December 27,
2003, approximately $69,000 was outstanding on each loan.
F-19
15. MAJOR CUSTOMERS
During the year ended December 29, 2001, sales to The Great Atlantic &
Pacific Tea Company ("A&P") and Associated Food Stores ("Associated")
represented 24.9% and 14.0% of net sales, respectively, and additionally
sales to the Foodtown Group represented 14.7%.
During the year ended December 28, 2002, sales to A&P and Associated
represented 25.0% and 13.9% of net sales, respectively, and additionally
sales to the Foodtown Group represented 14.9%.
During the year ended December 27, 2003, sales to A&P and Associated
represented 19.9% and 14.9% of net sales, respectively, and additionally
sales to the Foodtown Group represented 14.3%.
In October 2003, the Company ceased doing business with A&P.
******
Schedule II
DI GIORGIO CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
- --------------------------------------------------------------------------------
Balance at Charged to Balance at
Beginning of Cost and End of
Description Period Expenses Deductions Period
Allowance for doubtful accounts for the period ended:
December 29, 2001 5,038 500 (282)(1) 5,256
December 28, 2002 5,256 500 (731)(1) 5,025
December 27, 2003 5,025 500 (1,417)(1) 4,108
(1) Accounts written off during the year, net of recoveries.
S-1