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 January 1, 2005
[ ] 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 February 28, 2005 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 larger independent wholesale food distributors in the New York 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 2004 (the fiscal year ended January 1, 2005) we had revenue of $1,296.6
million, net income of $8.1 million and EBITDA of $32.3 million- see the
"Management's Discussion & Analysis" section of this Form 10-K.
Products and Customer Support Services
General Products. We have four primary product categories: grocery, frozen,
refrigerated and specialty products. Across these four product categories, we
currently supply over 24,000 food and non-food items, comprised predominantly of
brand name items. We also market our well-recognized White Rose(R) label
consistently across three of our primary categories of products (grocery, frozen
and refrigerated), 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 categories.
Products are sold at prices which reflect the manufacturer's stated price
plus a profit margin and are adjusted continuously based on manufacturer's
pricing.
Customer Support Services. We offer a broad spectrum of retail support
services, including advertising, promotional and merchandising assistance,
retail operations counseling, computerized ordering services, technology
support, loyalty card program support services, category management services and
store layout and equipment planning. Our technology division distributes and
supports supermarket scanning and cash register equipment which is compatible
with our information systems. We have a staff of retail counselors who visit
stores on a regular basis to both represent us and to advise store management on
various operational topics. Our larger independent and chain customers generally
provide their own retail support. Most of our customers utilize our computerized
order entry system, which allows them to place and confirm orders 24 hours a
day, 7 days a week.
We periodically extend financial assistance in the form of loans to
independent retailers by providing financing for (i) the purchase of new
locations, (ii) the purchase of initial inventories and/or store renovations,
and (ii) working capital requirements. The primary purpose of such loans is to
provide a means for our continued growth through development of 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 in the form of a secured, interest-bearing
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obligation that is repayable over a period of one to three years. At January 1,
2005, our customer loan portfolio had an aggregate balance of approximately
$22.4 million. The portfolio consisted of 57 loans ranging in size from
approximately $1,000 to approximately $5.4 million. In connection with extending
such loans, we evaluate our relationship with and the creditworthiness of the
customer and seek to obtain adequate security. Over the last three years, we
have sold a portion of these loans to commercial banks. In addition, we have
provided other financial assistance to our customers in the form of performance
guarantees. As of January 1, 2005, we had two performance guarantees in the
aggregate amount of approximately $1.0 million.
Markets and Customers
Our principal markets encompass the 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 are evaluating further expansion into those
markets.
Our customers consist of grocery retailers, including independent retailers
and chains, which generally do not maintain their own internal distribution
operations for one or more of our product categories. Our customers who are
independent food retailers or members of voluntary cooperatives seek to achieve
the operating efficiencies enjoyed by supermarket chains through common
purchasing and advertising.
The characteristics of New York City, our largest market, which accounted
for 45.6% of our net sales for the year ended January 1, 2005, result in unique
retail food market dynamics and distribution challenges. These characteristics
include high population density, ethnic diversity, premium rent costs,
relatively small customer locations, limited available retail floor space and
heavy traffic congestion. Consequently there are a disproportionately large
number of independent retailers and small chains in this market. These factors
make it more difficult for new entrants to penetrate our key market territory in
a cost-effective manner.
The following are trade names under which some of our customers operate:
Gristedes and Sloans Supermarkets, King Kullen, Kings Super Markets,
Thriftway, Shop `n Bag, C-Town, Bravo, Scaturros, Grande (in Puerto
Rico) Western Beef and Supremo, as well as the Associated Food Stores
("Associated"), Met(R), Pioneer(R), Food Village(R),and Foodtown
cooperatives.
We own the Met(R), Pioneer(R) and Food Village(R) trade names, which we
license 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 22% of our net sales for the year
ended January 1, 2005.
During the year ended January 1, 2005, our largest customer, Associated
Food Stores, a voluntary coop consisting of approximately 175 stores, accounted
for approximately 19%, of net sales, and our five largest customers accounted
for approximately 42% of net sales.
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Warehousing and Distribution
Because our grocery, frozen and refrigerated categories have different
storage and distribution requirements, we handle each of these product
categories from a separate distribution center. Each of our three distribution
facilities is equipped with modern equipment for receiving, storing and shipping
large quantities of merchandise. In addition, each facility is integrated
through our computer, accounting, and management information systems to promote
operating efficiency and coordinated quality customer service. A warehouse and
inventory management system directs all aspects of the material handling process
from receiving through shipping, generating detailed cost information from which
warehouse personnel manage the workforce and flow of product, thus minimizing
cost while maintaining high service levels. Management believes that the
efficiency of our distribution centers enables us to compete effectively.
Our transportation fleet consists of approximately 119 leased tractors and
345 trailers (of which approximately 241 are leased). In addition, we rent
trailers on a monthly basis to meet seasonal demand. These vehicles are leased
on a full service basis, which includes maintenance expenses. 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 currently make approximately 4,050 deliveries per week.
Purchasing
We purchase products for resale to our customers from approximately 1,600
suppliers in the United States and abroad. 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. Management believes 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 therefore 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 each 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 level of inventory
to be purchased. The procurement system also permits our buying departments to
take advantage of situations when the manufacturer or supplier is selling an
item at a discount pursuant to a special promotion, an industry practice known
as "forward buying." This system, which operates in concert with the warehouse
management system, features full electronic data interchange capabilities and
accounting interfaces.
Competition and Trademarks
The wholesale food distribution industry is highly competitive. We are one
of the larger independent wholesale food distributors to grocery retailers in
the New York metropolitan area. Our principal competitors in our primary product
categories (grocery, frozen and refrigerated) are C&S Wholesale Grocers, Inc.,
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Bozzuto's, Inc. and Supervalu. In addition, Krasdale Foods, Inc., General
Trading Co., Millbrook Distribution Services and Haddon House Food Products are
competitors with respect to the distribution of one or two of our product lines.
As we expand into other geographic markets, we expect to face new competitors.
We also compete with cooperatives, such as Key Food Stores Co-operative
Inc., which provide merchandise and support services to their affiliated
independent retailers doing business under trade names licensed to them by the
cooperatives. Unlike some of our competitors, we do not require payment of
capital contributions to us by retailers desiring to use our Met(R), Pioneer(R)
and Food Village(R) names.
Management believes 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), Pioneer(R), and Food Village(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.
Seasonality
Historically, the fiscal fourth quarter is our strongest quarter in terms
of sales and profitability with the fiscal third quarter the weakest. The
historic comparative weakness of the third quarter has been mitigated 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 in areas that are more resistant to seasonal fluctuations.
Employees
We employed 1,201 persons on February 10, 2005, including 771 persons
covered by collective bargaining agreements with four separate local unions
associated with the International Brotherhood of Teamsters.
We are a party to certain collective bargaining agreements with our
warehouse and trucking employees at our refrigerated operation (expiring
November 2005), our grocery operation (warehouse expiring October 2007 and
trucking expiring April 2007) and our frozen operation (expiring January 2007).
Management believes that our present relations with our work force are
satisfactory.
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ITEM 2. PROPERTIES.
We lease the following warehouse and distribution facilities and computer
center:
Square Lease
Location Use Footage Expiration
-------- --- ------- ----------
Carteret, New Jersey Groceries, Non-Perishables, 805,000 2025 (plus one 5-year
and executive offices renewal option)
Woodbridge, New Jersey Refrigerated Products 200,000 2006 (plus three 5-year
renewal options)
Carteret, New Jersey Frozen Products 279,000 2018 (plus two 5-year
renewal options)
Westbury, New York Computer Center 11,800 2007
In addition to the properties listed above, we rented warehouse space in
Carteret, New Jersey, on a short term basis for DGI Specialty Foods, our
specialty food division, and for storage. During the year ended January 1, 2005,
rent for this space cost us approximately $1.1 million.
Our annual lease payments with respect to the leases referred to above were
in the aggregate approximately $6.7 million for our 2004 fiscal year (of which
$6.5 million represented three operating leases for our properties in Carteret,
NJ and Westbury, NY). In early 2005, we completed the expansion of our dry
grocery warehouse in Carteret, New Jersey at an expected increased annual cost
(including rent, real estate taxes, utilities, and racking) of approximately
$1.2 million, which will be substantially offset by a reduction in our rental
cost for the short-term rental of storage and warehouse space discussed above.
Our three warehouse and distribution facilities together with outside
storage facilities, which we use to supplement our internal capabilities as
necessary, are sufficient to accommodate the current and presently anticipated
needs of our business.
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.
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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.
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 January 1, 2005. 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.
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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
February 28, 2005, 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, a dividend of $10.0 million in
June 2003, and a dividend of $10.0 million in March 2004. 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 January 1, 2005, we are currently
permitted to pay dividends of up to approximately $4.1 million.
ITEM 6. SELECTED FINANCIAL DATA.
The following is our selected financial data as of and for the last five fiscal
years. The information presented below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Item 7) and our audited consolidated financial statements and notes
thereto. Amounts are in thousands of dollars.
Year Ended Year Ended Year Ended Year Ended Year Ended
December 30, December 29, December December 27, January 1,
2000 2001 28, 2002 2003 2005 (b)
------------------------------------------------------------------------
Income Statement Data:
Total revenue $ 1,495,398 $ 1,538,824 $ 1,559,513 $ 1,544,128 $ 1,296,576
Gross profit(a) 144,996 151,313 156,752 161,445 150,677
Warehouse expense 52,233 54,123 57,844 62,042 59,750
Transportation expense 28,387 29,570 29,284 30,132 28,819
Selling, general and 29,443 29,526 30,197 31,327 35,324
administration expenses
Transaction related expenses -- -- 3,239 547 --
Amortization--goodwill 2,425 2,425 -- -- --
Operating income 32,508 35,669 36,188 37,397 26,784
Interest expense 16,028 15,917 15,559 14,950 15,558
Amortization--deferred financing 730 651 758 628 693
costs
Other (income), net (3,517) (3,775) (2,736) (3,240) (3,064)
Income before income taxes 19,267 22,876 22,607 25,059 13,597
Income taxes 8,528 10,781 9,436 10,710 5,492
Net income 10,739 12,095 13,171 14,349 8,105
December 30, December 29, December December 27, January 1,
2000 2001 28, 2002 2003 2005
------------------------------------------------------------------------
Balance Sheet Data:
Total assets $295,637 $297,527 $301,655 $301,991 $319,298
Working capital 56,238 73,612 74,774 77,288 72,002
Total debt including capital leases 167,531 157,058 152,994 163,121 179,296
Total stockholder's equity 14,207 21,002 28,173 32,522 30,627
(a) Gross profit excludes warehouse expense shown separately.
(b) 53 week fiscal year
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward- Looking Statements
Forward-looking statements in this Form 10-K include, without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources and are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These statements may be identified by their use of words like "plans",
"expects", "aims", "believes", "projects", "anticipates", "intends",
"estimates", "will", " should", "could", and other expressions that indicate
future events and trends. These forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or 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.
Overview 2004 was the Company's first full year of operations without the Great
Atlantic & Pacific Tea Company ("A&P") as a customer. Sales to A&P in 2003 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 partially offset by the
addition, beginning in the second quarter of 2003 and continuing to date, of
independent customers in the greater Philadelphia area (currently approximately
85 stores). Sales in the greater Philadelphia area were $82.0 million in 2003
and $144.7 million in 2004.
During 2004, we entered the specialty foods business and incurred operating
losses of approximately $2.3 million due to the fact that it is taking longer
than expected to realize our sales and operational goals. In February 2005,we
integrated the specialty food business into our dry grocery warehouse and expect
to significantly reduce such operating loss during 2005.
Beginning late in the fourth quarter of 2004, we took steps to refinance our
existing senior notes due in June 2007 through a private offering of new notes.
In connection with such offering, we launched a tender offer to repurchase all
of our outstanding notes conditioned upon, among other things, our ability to
sell the new notes on terms and conditions acceptable to us, in our sole
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discretion. Market conditions were not favorable for the new notes offering and
we terminated the offering and the tender offer in January 2005. We continue to
explore options for refinancing the senior notes.
Fiscal 2004 was comprised of fifty-three weeks as compared to fifty-two weeks
for most other fiscal years. Net sales in the fifty-third week (week ended
January 1, 2005) were approximately $21.9 million.
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 credit worthiness of each customer and related
aging of the past due balances. The provision for bad debts was $.5 million in
each of fiscal 2004, 2003, and 2002. At January 1, 2005, the total notes and
accounts receivable (including the long-term portion) were $121.7 million and at
December 27, 2003 were $117.6 million, net of an allowance of doubtful accounts
of $3.9 million at January 1, 2005 and $4.1 million at December 27, 2003. We
evaluate the credit worthiness 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 information
available and are re-evaluated and adjusted as additional information is
received.
Goodwill and intangible assets
The intangible assets recorded on our balance sheet 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.
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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 2004 net pension expense were a 6.25 % 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 2004 increased
$.5 million to $1.3 million.
Other assets at January 1, 2005 included a deferred pension asset of $30.2
million from our qualified defined benefit pension plan (inclusive of a $10.0
million cash contribution in December 2004), and $1.5 million in a Rabbi Trust
for our nonqualified supplemental plan. We had a liability for the nonqualified
plan of $1.3 million at January 1, 2005.
If at the year end measurement date, the estimated accumulated benefit
obligation related to the qualified pension plan exceeds 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 $ 6.7 million at January
1, 2005. 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. 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.
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Results of Operations
Statement of Income as a % of Net Sales
Year Ended
Dec 28, Dec 27, Jan. 1,
2002 2003 2005
Revenue:
Net sales 100.0% 100.0% 100.0%
Other revenue 0.5% 0.6% 0.9%
----- ----- -----
Total revenue 100.5% 100.6% 100.9%
Cost of products sold 90.4% 90.1% 89.2%
----- ----- -----
Gross profit-exclusive of warehouse 10.1% 10.5% 11.7%
expense shown below
Warehouse expense 3.7% 4.0% 4.6%
Transportation expense 1.9% 2.0% 2.2%
Selling, general and administrative expense 1.9% 2.0% 2.7%
Transaction related expenses 0.2% 0.0% 0.0%
----- ----- -----
Operating income 2.4% 2.5% 2.2%
Interest expense 1.0% 1.0% 1.2%
Amortization-deferred financing costs 0.0% 0.0% 0.1%
Other (income)-net -0.2% -0.2% -0.2%
----- ----- -----
Income before income taxes 1.6% 1.7% 1.1%
Income tax expense 0.6% 0.7% 0.4%
----- ----- -----
Net income 1.0% 1.0% 0.7%
===== ===== =====
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Fifty-three weeks ended January 1, 2005 and fifty-two weeks ended December 27,
2003
Net sales for the fifty-three weeks ended January 1, 2005 were $1,285.3 million
as compared to $1,534.2 million for the fifty-two weeks ended December 27, 2003.
This $248.9 million decrease in net sales reflects the loss of A&P as a customer
partially offset by the addition of new customers and sales in the fifty-third
week in the amount of approx $21.9 million. Excluding sales to A&P, net sales in
2004 rose 4.6% as compared to 2003. Other revenue, consisting of recurring
customer related services, increased to $11.3 million for the fifty-three weeks
ended January 1, 2005 as compared to $9.9 million in the prior period. The
majority of the increase was the result of providing a frozen warehousing
service for a national manufacturer and incremental storage revenue.
Our gross margin (excluding warehouse expense) increased to 11.7% of net sales
or $150.7 million for 2004, compared to 10.5% of net sales or $161.4 million for
the prior period, reflecting increased other revenue from frozen warehousing
services discussed above and a change in mix of both customers and products sold
primarily as a result of the loss of A&P as a customer. Factors such as changes
in customer mix, changes in manufacturers' promotional activities, changes in
product mix, availability of "forward buy" product, or competitive pricing
pressures have an effect on gross margin. We are endeavoring to improve gross
margin, but there is no certainty we will achieve this. 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 4.6% or $59.8
million for 2004, compared to 4.0 % of net sales or $62.0 million for the prior
period primarily as a result of fixed costs being compared to lower overall
sales. The Company incurred $1.8 million of warehouse expenses related to its
newest distribution facilities (specialty foods and Puerto Rico) as compared to
$ .3 million in the prior year. In February 2005, we integrated the specialty
food operation into our expanded dry grocery warehouse. On an annual basis the
Company expects its expanded grocery warehouse to cost an incremental $1.2
million as compared to $1.1 million in outside warehouse expense for its
specialty food business and outside storage in 2004. We also expect the
additional warehouse space will enable us to derive efficiencies from the entire
warehouse. In addition, we closed our distribution facility in Puerto Rico as a
result of an arrangement with a local company.
Transportation expense increased to 2.2% of net sales or $28.8 million for 2004
as compared to 2.0% of net sales or $30.1 million in the prior period. Increased
wages and fringe benefits of $.5 million were offset by lower owner operator
expense of $1.1 million in 2004 due to a greater percentage of deliveries
handled by our employees.
Selling, general and administrative expense increased as a percentage of net
sales to 2.7% of net sales or $35.3 million for 2004 compared to 2.0% of net
sales or $31.3 million for the prior period. In 2004, we incurred severance and
retirement costs of $.7 million, $.6 million of which was related to the
retirement of Richard Neff, our former CEO (see our Form 8-K dated January 5,
2005 and the severance agreement filed as an exhibit to this report on Form
10-K), and had an increase in pension expense of approximately $.5 million from
-12-
the prior year. Legal and accounting expense increased $.5 million from 2003
excluding a $.6 million recovery settlement with an excess insurance carrier
related to legal fees expensed in previous years included in 2003. In addition,
the Company incurred $1.7 million in general and administrative expenses related
to its newest distribution operations in 2004 as compared to $.5 million in
2003.
Our effective tax rate decreased to 40% in 2004 from 43% in 2003 as a result of
adjusting immaterial deferred tax liabilities.
We earned net income for 2004 of $8.1 million as compared to $14.3 million in
the prior period.
EBITDA was $32.3 million during 2004, compared to $44.2 million in the prior
period. While the loss of A&P was the primary reason for the decline, the
Company incurred $2.9 million in operating losses relating to its newest
distribution operations, and incurred $.7 million in severance costs mostly
attributable to the retirement of Richard Neff.
Reconciliation of EBITDA to net income (in thousands):
2004 2003 2002
---- ---- ----
EBITDA $32,255 $44,236 $43,206
Less: depreciation and
amortization of fixed assets 2,233 2,239 2,341
Less: other amortization 867 1,988 2,699
Less: interest expense 15,558 14,950 15,559
Less: income tax provision 5,492 10,710 9,436
------- ------- -------
Net Income $ 8,105 $14,349 $13,171
======= ======= =======
The Company has presented EBITDA supplementally because management believes this
additional information enables management, investors, and others readers to
evaluate and compare, from period to period, the Company's results from ongoing
operations in a 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.
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 5.6% as compared to 2002. In
addition to the large new group of customers mentioned above, the change in net
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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
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 $1.2 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.
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.
-14-
We earned 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.
Liquidity and Capital Resources
Cash flows from operations and amounts available under our $90 million bank
credit facility are the principal sources of our liquidity. We believe that
these sources will be adequate to meet our currently anticipated working capital
needs, dividend payments, capital expenditures, and debt service requirements
during the next four fiscal quarters, as well as any investments we may make.
Our bank credit facility matures on February 1, 2007 and bears interest at a
rate per annum equal to (at our option): (i) the Euro Dollar Offering Rate plus
1.625% or (ii) the lead bank's prime rate. Borrowings under the revolving bank
credit facility were $29.1 million (excluding $6.0 million of outstanding
letters of credit) at January 1, 2005. Additional borrowing capacity of $54.9
million was available at that time and as of March 1, 2005, the Company had
$64.6 million of availability.
During 2004, cash flows used by operating activities were $13.1 million,
consisting primarily of cash generated from income before non-cash items of
$16.6 million, offset by i) a $ 10.0 million contribution to the Company's
defined benefit pension plan, ii) increases in a) accounts receivable of $10.6
million, b) inventory of $4.6 million; c) prepaid expenses of $2.3 million, and
d) other assets of $1.7 million; and decreases in accrued expenses and other
liabilities of $.4 million. The increase in accounts receivable includes a $2.2
million receivable for an income tax refund that the Company expects to receive
in April 2005, $1.2 million of receivables from the new specialty food division
that was not in business at the beginning of the year, in addition to the
stretching of payment terms by certain specific customers The primary impetus
behind the increase in inventory is $2.5 million of specialty food inventory at
year end.
Cash flows provided by investing activities were $5.2 million during 2004
consisting primarily of $11.7 million of collections and $5.6 million of
proceeds from the sale of note participations offset by $11.4 million used for
new loans to customers. We used $.8 million for capital expenditures in 2004.
We currently expect to spend approximately $3.3 million during 2005 on capital
expenditures, which includes $1.3 million of leasehold improvements during the
first six months of 2005 related to the expansion of the grocery warehouse,
which was completed in January 2005. 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.
Net cash provided by financing activities during 2004 was $5.7 million
consisting of net borrowings under our bank credit facility of $16.2 million
offset by a $10.0 million dividend paid in April 2004, $.5 million of financing
fees paid in February 2004 for an extension of our bank credit facility through
February 2007, and approximately $.1 million of capital lease payments.
-15-
Our consolidated indebtedness increased to $179.3 million at January 1, 2005 as
compared to $163.1 million at December 27, 2003. Stockholders' equity was $30.6
million on January 1, 2005 as compared to $32.5 million on December 27, 2003.
Based on our results for the year ended January 1, 2005 we have the ability to
pay a dividend of approximately $4.1 million in April 2005.
We did not incur any cash expense in fiscal 2004 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 2005. At January
1, 2005, we had reserved $.7 million for known environmental liabilities, which
we believe is adequate. 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
$ 5.6 million, $0, and $1.9 million in 2004, 2003, and 2002 respectively. All
proceeds were used 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.
Under the terms of our revolving bank credit facility, we are required to meet
certain financial tests, including minimum interest coverage ratios. As of
January 1, 2005, we were in compliance with our covenants.
The Company began the process of refinancing its long-term debt in the late
fourth quarter of 2004 with the expectation of offering new notes bearing a
reasonable rate of interest and covenant package acceptable to the Company. When
it became clear that we could not consummate a deal on that basis, we terminated
our previously announced planned private offering of notes. As a result, the
Company expects to incur a charge for expenses related to the proposed deal in
the first quarter of 2005 in the range of $.8-$1.0 million. The Company
continues to explore refinancing options with regard to its senior notes.
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. The chart summarizes our contractual obligations:
-16-
Payments due by period
-------------------------------------------------------------
Total Less than 1-3 years 3-5 years More than 5
Contractual Obligations 1 year years
-----------------------
(in thousands)
Long-Term Debt $148,300 $ 0 $148,300 $ 0 $ 0
Interest on Long-Term Debt 36,457 14,830 21,627
Capital Lease Obligations 3,010 186 372 372 2,080
Operating Leases Obligations 128,360 10,275 19,180 15,652 83,253
Purchase Obligations (a) 316 316 0 0 0
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP
excluding deferred tax
liabilities (b) 574 100 200 200 74
Total $317,017 $25,707 $189,679 $16,224 $85,407
(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.
We have contingent obligations, including performance guarantees in the amount
of approximately $1.0 million, which decrease by $.6 million in 2005 and $ .4
million 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, as of January 1, 2005, for
approximately $6.0 million on standby letters of credit issued in the ordinary
course of business under the bank credit facility which secure approximately
$3.8 million of liabilities on our balance sheet as well as $1.0 million of rent
obligations.
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 2004's average outstanding bank debt
of $8.9 million, a 100 basis point change in annual interest rates would change
annual interest expense by approximately $.1 million. 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 per
gallon of diesel fuel would increase or decrease, as applicable, the Company's
annual transportation costs by approximately $.1 million.
-17-
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.
-18-
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
Report of Independent Registered Public Accounting Firm ................... F-2
Consolidated Balance Sheets as of December 27, 2003 and January 1, 2005.... F-3
Consolidated Statements of Income for each of the
three years in the period ended January 1, 2005........................... F-4
Consolidated Statements of Changes in Stockholders'
Equity for each of the three years in the period
ended January 1, 2005..................................................... F-5
Consolidated Statements of Cash Flows for each of
the three years in the period ended January 1, 2005....................... F-6
Notes to Consolidated Financial Statements................................. F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
-19-
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed
with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(c) and
15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that
evaluation, the Company's management, including the Chief Executive Officer and
Chief Financial Officer, concluded that the Company's disclosure controls and
procedures were effective as of January 1, 2005. There have not been any changes
in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, the Company's internal control.
ITEM 9B. Other Information
None
-20-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets out, for each of our directors, executive officers and
key employees, the person's name, age and position(s) with our company.
Name Age Position(s)
Stephen R. Bokser (1)........... 62 Co-Chairman of the Board, Chief
Executive Officer, President and
Chief Operating Officer
Richard B. Neff (1)............. 56 Co-Chairman of the Board
Joseph R. De Simone............. 65 Senior Vice President, Distribution
Robert A. Zorn.................. 50 Executive Vice President, Finance
and Treasurer
Lawrence S. Grossman............ 43 Senior Vice President and
Chief Financial Officer
Harlan Levine................... 43 Vice President, General Counsel
and Secretary
George Conklin.................. 44 Vice President, Logistics
Joseph Fantozzi................. 43 Senior Vice President and General
Manager, White Rose Dairy Division
John Annetta.................... 53 Senior Vice President and General
Manager, White Rose Frozen Division
John J. Zumba................... 67 Senior Vice President
Jerold E. Glassman.............. 69 Director
Emil W. Solimine(1) (3)......... 60 Director
Charles C. Carella.............. 71 Director
Jane Scaccetti (1)(2)........... 50 Director
Michael S. Goldberg (3)......... 30 Director
Robert L. Reiner(2)............. 49 Director
- ----------
(1) Member of the Governance Committee
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
-21-
Stephen R. Bokser became our Chief Executive Officer on January 1, 2005 and has
been Co-Chairman of the Board, and our President and Chief Operating Officer
since October 2000. For the five years prior to October 2000, he was the
Executive Vice President and President of the White Rose Food division. He has
served as one of our directors since 1990. Mr. Bokser is also a director of
Foodtown, a supermarket cooperative and one of our customers.
Richard B. Neff has been a Co-Chairman of the Board since October 2000. Mr. Neff
was our Chief Executive Officer from October 2000 through December 2004. For the
five years prior to October 2000, he was our Executive Vice President and Chief
Financial Officer. He has served as one of our directors since 1990. In
addition, Mr. Neff has served as director of Safety-Kleen since January 2004.
Mr. Neff is the Chief Executive Officer and Managing Member of Las Plumas Lumber
and Truss Company LLC, an affiliate of ours. Mr. Neff is also the Chairman and
Chief Executive Officer of RBN Investments, Inc., which is the general partner
of Rose Partners, L.P., our majority shareholder, and General Partner of Las
Plumas Partners, L.P., the majority owner of Las Plumas Lumber & Truss Co., LLC
and also is an executor of the Estate of Arthur Goldberg, a limited partner of
Rose Partners, L.P. Mr. Neff is a certified public accountant (inactive).
Joseph R. DeSimone has been our Senior Vice President, Distribution since prior
to 1999.
Robert A. Zorn has been our Executive Vice President, Finance and Treasurer
since 2001. Previously, he held the position of Senior Vice President and
Treasurer since prior to 1999.
Lawrence S. Grossman has been our Senior Vice President and Chief Financial
Officer since 2001. Previously, he held the position of Vice President,
Corporate Controller since prior to 1999. Mr. Grossman is a certified public
accountant.
Harlan Levine has been our Vice President, General Counsel and Secretary since
June 2000. Previously, he held the position of Division Counsel since prior to
1999.
George Conklin has been our Vice President, Logistics since prior to 1999.
Joseph Fantozzi has been our Senior Vice President and General Manager of our
White Rose Dairy division since 2001. Previously, he held the position of Vice
President and General Manager of the White Rose Dairy division since prior to
1999.
John Annetta has been our Senior Vice President and General Manager of our White
Rose Frozen division since 2001. Previously, he held the position of Vice
President and General Manager of the White Rose Frozen division since prior to
1999.
John J. Zumba has been our Senior Vice President since 2001. Previously, he held
the position of Vice President, Sales since prior to 1999.
Jerold E. Glassman has served as one of our directors since 1990. From prior to
1999 through 2001, Mr. Glassman was managing partner of Grotta, Glassman &
Hoffman, a law firm which has its primary office in Roseland, New Jersey, and
since 2002, he has been its Chairman. Mr. Glassman has been Special Labor
Counsel to a number of New Jersey government agencies and to former governor of
New Jersey, Christine Todd Whitman, during the period of 1995 to 2002.
-22-
Emil Solimine has served as one of our directors since 1990. He has been the
Chief Executive Officer of the Emar Group, Inc., an insurance concern, since
prior to 1999. He is also a limited partner of Rose Partners, L.P.
Charles C. Carella has served as one of our directors since 1995. Since prior to
1999, 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
Administrators of the Archdiocese of Newark and the Board of Trustees of Fordham
University.
Jane Scaccetti has served as one of our directors since 1996. Since prior to
1999, she has been a shareholder of Drucker & Scaccetti, P.C., an accounting
firm. She is also a director of The Pep Boys, Nutrition Management Services
Company, Temple University Health Systems and Keystone Health Plans East. Ms.
Scaccetti is a certified public accountant.
Michael Goldberg has served as one of our directors 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 Partners, L.P. Mr. Goldberg is currently a
private investor.
Robert L. Reiner became one of our directors in April 2004. Mr. Reiner was a
Managing Director with Deutsche Asset Management from 1999 to 2002 and was a
Global Portfolio Manager with Deutsche Asset Management from 1994 to 1999. Mr.
Reiner is currently a private investor.
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 under 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 Robert L. Reiner 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 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 January 1,
2005.
SUMMARY COMPENSATION TABLE
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation Compensation
- --------------------------- ---- -- ------ -- ------ ------------ ------------
Stephen R. Bokser 2004 $400,000 $440,000 $99,955(1) $3,075(3)
Co-Chairman of the Board of Directors, 2003 $400,000 $440,000 $97,561(1),(2) $3,000(3)
Chief Executive Officer, President, and 2002 $400,000 $550,000 $76,604(1) $3,000(3)
Chief Operating Officer
Richard B. Neff (4) 2004 $400,000 $260,000 $99,955 (1) $2,769(3)
Co-Chairman of the Board of 2003 $400,000 $440,000 $71,823 (1) $3,000(3)
Directors 2002 $400,000 $550,000 $76,604 (1) $3,000(3)
Robert A. Zorn 2004 $288,100 $44,000 -- $3,075(3)
Executive Vice President-Finance and 2003 $288,100 $44,000 -- $3,000(3)
Treasurer 2002 $275,600 $55,000 -- $3,000(3)
Joseph Fantozzi 2004 $220,000 $72,000 -- $3,075(3)
Senior Vice President and General 2003 $220,000 $72,000 -- $3,000(3)
Manager of White Rose Dairy Division 2002 $208,000 $90,000 -- $3,000(3)
Lawrence S. Grossman 2004 $214,000 $72,000 -- $3,075(3)
Senior Vice President and 2003 $214,000 $72,000 -- $3,000(3)
Chief Financial Officer 2002 $202,000 $90,000 -- $3,000(3)
John Annetta 2004 $213,500 $72,000 -- $3,075(3)
Senior Vice President and General 2003 $213,500 $72,000 -- $3,000(3)
Manager of White Rose Frozen Division 2002 $201,500 $90,000 -- $3,000(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 2004 interest rate was 4.5% and it was paid off in December 2004. Certain
incidental personal benefits to our executive officers may result from expenses
incurred by us in the interest of attracting and retaining qualified personnel.
-24-
These incidental personal benefits made available to executive officers during
fiscal years 2002, 2003, and 2004 are not described herein because our
incremental cost of the benefits is below the Securities and Exchange Commission
disclosure threshold.
(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."
(4) Effective December 31, 2004, Mr. Neff retired as Chief Executive Officer of
the Company. He remains Co-Chairman of the Board of Directors.
Employment Agreements
We are a party to an employment agreement with Mr. Bokser which runs through
December 31, 2009. Pursuant to the terms of the Employment Agreement, Mr. Bokser
will receive an annual salary of $400,000 in 2005 and an annual salary of either
$400,000 or $500,000, at his election, in subsequent years, through December 31,
2009. During the term of the Employment Agreement, Mr. Bokser will be entitled
to receive a discretionary bonus based on the Company's earnings, provided that
such bonus shall be no less than $300,000 for any fiscal year in which the
Company's EBITDA is at least $30 million. In addition, upon the occurrence of
certain change of control type events or certain distributions involving the
Company and Rose Partners L.P. or Las Plumas Partners, L.P., Mr. Bokser will be
entitled to receive additional compensation as set forth in the Employment
Agreement. 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
two years following such event and in certain circumstances will receive
additional compensation.
We are a party to an evergreen employment 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.
On December 30, 2004, we entered into a severance agreement with Mr. Neff in
connection with his retirement from the Chief Executive Officer position. Under
the terms of the severance agreement, Mr. Neff is entitled to a $250,000
severance payment, to be paid quarterly over five years beginning on January 1,
2005. In addition, Mr. Neff will continue to receive the use of an office and
secretary for the five year term of the agreement and family medical benefits
until his 65th birthday. Mr. Neff received a bonus payment of $99,955, the after
tax proceeds of which were used to satisfy a loan due to the Company. In
addition, Mr. Neff also received a retirement bonus of $260,000.
-25-
Retirement Plan
Effective April 1, 2005, we will discontinue the earning of future benefits
under 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) were eligible to participate in the
Retirement Plan on the January 1 or July 1 after completing one year of
employment and 1,000 hours of service.
All benefits under the Retirement Plan are funded by contributions made by us.
In general, a participant's retirement benefit consists of the sum of (a) with
respect to employment on or after September 1, 1990, an annual amount equal to
the participant's aggregate compensation (excluding income from the exercise of
certain stock option and stock appreciation rights) while 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. Bokser $204,895; Mr. Neff $131,337; Mr.
Zorn, $45,857; Mr. Fantozzi, $47,490; Mr. Grossman, $38,603; and Mr. Annetta
$48,901.
Retirement Savings Plan
We maintain the Di Giorgio Retirement Savings Plan (the "401(k) 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 401(k) Plan on the first day
of the calendar quarter after completing one year of employment and 1,000 hours
of service.
-26-
In conjunction with the change to the Di Giorgio Retirement Plan mentioned
above, we also intend to make changes to the 401(k) Plan. Effective April 1,
2005, we will replace the current match with an annual employer contribution of
5% (4.125% for the period April 1, 2005 through December 31, 2005,) of
"Compensation" as defined in the 401(k) Plan. The employer contribution will be
paid regardless of whether an employee makes a 401(k) contribution, and
regardless of the amount of that contribution. Eligible employees may elect to
contribute on a tax deferred basis from 1% to 60% of their total compensation
(as defined in the 401(k) Plan), subject to statutory limitations.
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
through March 31, 2005 and immediate vesting on contributions thereafter. 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 except for
the new employer contribution beginning after April 1, 2005 and repayable over
five years, with the exception of a primary house purchase which is repayable
over ten years. Interest is set at prime plus 1%.
A participant may withdraw certain amounts credited to his account prior to
termination of employment. Certain withdrawals require financial hardship or
attainment of age 59 1/2. In general, amounts credited to a participant's
account will be distributed upon termination of employment.
Compensation of Directors
Our Directors who are not employees, other than Richard Neff, receive a
quarterly retainer of $6,250 plus fees of $2,000 for attendance at meetings of
the Board of Directors and $2,000 for attendance at Committee meetings. Mr. Neff
receives a quarterly retainer of $12,500 but does not receive a fee for
attending 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 2004 for such
services and purchased insurance with premiums of approximately $3.8 million
through Emar.
-27-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding the beneficial
ownership of shares of the Company's common stock as of March 1, 2005.
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 Partners, 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 Partners, LP is 380 Middlesex Avenue, Carteret, New Jersey
07008.
(2) Mr. Bokser's business addresses is 380 Middlesex Avenue, Carteret, New
Jersey 07008. Mr. Neff's business address is 757 SE 17th St #331 Ft.
Lauderdale, FL 33316.
-28-
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 2004 were $7.3 million. Most of the decisions to purchase
products from the Company are made by individual members of the Foodtown
cooperative and total sales to the individual members of the cooperative were
approximately $203.4 million in 2004.
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 2004.
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 2004 for such services and purchased insurance
with premiums of approximately $3.8 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 4.5% and both loans were paid off in
December 2004.
-29-
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following fees were or will be paid to Deloitte & Touche, LLP for services
rendered during the years ended January 1, 2005 and December 27, 2003:
2004 2003
---- ----
Audit Fees $427,750 (a) $282,500 (a)
Audit-Related Fees 33,000 (c) 250,000 (b)
Tax Fees -- --
All Other Fees -- --
------- --------
Total Fees $460,750 $532,500
======== ========
(a) Includes the audit of the Company's financial statements and the
performance of quarterly reviews.
(b) Includes fees associated with re-issuances of the audit opinion, as well as
work on the registration statement for a proposed sale of Canadian
securities.
(c) Represents fees associated with providing access to prior years' workpapers
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 years 2003 and 2004 (described in the footnotes
to the table above) and related fees were approved in advance by the Audit
Committee.
-30-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Documents filed as part of this report.
1. Financial Statements
Report of Independent Registered Public Accounting Firm........... F-2
Consolidated Balance Sheets as of
December 27, 2003 and January 1, 2005............................. F-3
Consolidated Statements of Income for each of the
three years in the period ended January 1, 2005................... F-4
Consolidated Statements of Changes in Stockholders'
Equity for each of the three years in the period
Ended January 1, 2005............................................. F-5
Consolidated Statements of Cash Flows for each of
the three years in the period ended January 1, 2005 .............. 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.
10.2(1)+ - Employment Agreement dated February 18, 1992 between the
Company and Robert A. Zorn
-31-
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.
-32-
10.18(15) - Fifth Amendment, dated June 15, 2004 to Carteret grocery
warehouse lease dated as of February 11, 1994.
10.19(15) - Severance Agreement with Richard B. Neff effective
December 31, 2004.
10.20(15)-Fourth Amended and Restated Employment Agreement effective
as of January 1, 2000 between the Company and Stephen R.
Bokser
21(15) - Subsidiaries of the Registrant.
31.1(15) - 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(15) - 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(15) - 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).
-33-
(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) Incorporated by reference to the Company's Annual Report on Form 10-K/A for
the year ended December 27, 2003 (File 1-1790)
(15) Filed herewith.
-34-
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 17th day of
March, 2005.
DI GIORGIO CORPORATION DI GIORGIO CORPORATION
By: /s/ Stephen R. Bokser By: /s/ Richard B. Neff
-------------------------------- -----------------------
Stephen R. Bokser Richard B. Neff
Co-Chairman, Chief Executive Officer, Co-Chairman
President, 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 17, 2005
- ---------------------------
Jerold E. Glassman
/s/ Emil W. Solimine Director March 17, 2005
- ---------------------------
Emil W. Solimine
/s/ Charles C. Carella Director March 17, 2005
- ---------------------------
Charles C. Carella
/s/ Jane Scaccetti Director March 17, 2005
- ---------------------------
Jane Scaccetti
/s/ Michael S. Goldberg Director March 17, 2005
- -----------------------
Michael S. Goldberg
/s/ Robert L. Reiner Director March 17, 2005
- --------------------
Robert L. Reiner
/s/ Lawrence S. Grossman Senior Vice President March 17, 2005
- ------------------------- and Chief Financial
Lawrence S. Grossman Officer (Principal
Financial & Accounting Officer)
-35-
DI GIORGIO CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
- -------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
CONSOLIDATED FINANCIAL STATEMENTS:
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
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED JANUARY 1, 2005:
Schedule II - Valuation and Qualifying Accounts S-1
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 January 1, 2005 and December
27, 2003, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended January
1, 2005. Our audits also included the consolidated financial statement schedule
listed in the Index at Item 15. 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 standards of the Public Company
Accounting Oversight Board (United States). 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. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, 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 January 1, 2005 and December 27, 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended January 1, 2005 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.
/s/ Deloitte & Touche LLP
New York, New York
March 17, 2005
F-2
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
- --------------------------------------------------------------------------------
December 27,January 1,
ASSETS 2003 2005
CURRENT ASSETS:
Cash and cash equivalents $ 10,367 $ 8,181
Accounts and notes receivable--Net 106,484 112,902
Inventories 61,204 65,838
Deferred income taxes 3,865 3,590
Prepaid expenses 3,606 5,904
-------- --------
Total current assets 185,526 196,415
PROPERTY, PLANT AND EQUIPMENT--Net 9,840 8,361
NOTES RECEIVABLE 11,082 8,826
DEFERRED FINANCING COSTS--Net 1,886 1,655
OTHER ASSETS 24,764 35,148
GOODWILL 68,893 68,893
-------- --------
TOTAL $301,991 $319,298
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility $ 12,880 $ 29,119
Current installment--capital lease liability 64 69
Accounts payable--trade 67,896 67,806
Accrued expenses 27,398 27,419
-------- --------
Total current liabilities 108,238 124,413
LONG-TERM DEBT 148,300 148,300
CAPITAL LEASE LIABILITY 1,877 1,808
OTHER LONG-TERM LIABILITIES 11,054 14,150
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 24,520 22,625
-------- --------
Total stockholders' equity 32,522 30,627
-------- --------
TOTAL $301,991 $319,298
======== ========
See notes to consolidated financial statements.
F-3
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED
(In thousands)
- --------------------------------------------------------------------------------
December 28, December 27, January 1,
2002 2003 2005
REVENUE:
Net sales $ 1,551,849 $ 1,534,236 $ 1,285,251
Other revenue 7,664 9,892 11,325
----------- ----------- -----------
Total revenue 1,559,513 1,544,128 1,296,576
COST OF PRODUCTS SOLD 1,402,761 1,382,683 1,145,899
----------- ----------- -----------
GROSS PROFIT--Exclusive of warehouse
expense shown separately below 156,752 161,445 150,677
OPERATING EXPENSES:
Warehouse expense 57,844 62,042 59,750
Transportation expense 29,284 30,132 28,819
Selling, general and administrative expenses 30,197 31,327 35,324
Transaction related expenses 3,239 547 --
----------- ----------- -----------
OPERATING INCOME 36,188 37,397 26,784
INTEREST EXPENSE 15,559 14,950 15,558
AMORTIZATION--Deferred financing costs 758 628 693
OTHER INCOME--Net (2,736) (3,240) (3,064)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 22,607 25,059 13,597
PROVISION FOR INCOME TAXES 9,436 10,710 5,492
----------- ----------- -----------
NET INCOME $ 13,171 $ 14,349 $ 8,105
=========== =========== ===========
See notes to consolidated financial statements.
F-4
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(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--
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
Net income - - - - - 8,105 8,105
Dividend - - - - - (10,000) (10,000)
-- -- -- -- -- -------- --------
BALANCES--
January 1, 2005 78.116 $ - 76.869 $ - $ 8,002 $ 22,625 $ 30,627
======= ==== ======= ==== ======== ========= ========
See notes to consolidated financial statements.
F-5
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED
(In thousands)
- --------------------------------------------------------------------------------
December 28, December 27, January 1,
2002 2003 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,171 $ 14,349 $ 8,105
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation 2,341 2,239 2,233
Amortization of deferred financing costs 758 628 693
Other amortization 1,941 1,360 174
Provision for doubtful accounts 500 500 500
Gain on sale of equipment -- -- (48)
Actuarially calculated pension (income) expense (201) 885 1,347
Deferred taxes 104 1,959 3,568
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (7,760) 2,430 (10,614)
Inventory (2,317) 7,582 (4,634)
Prepaid expenses (1,126) 1,322 (2,298)
Other assets:
Contribution to defined benefit pension plan -- (3,500) (10,000)
Other (320) (1,899) (1,657)
Increase (decrease) in:
Accounts payable (501) (15,737) (90)
Accrued expenses and other liabilities 1,181 (1,385) (424)
-------- -------- --------
Net cash provided by (used in) operating activities 7,771 10,733 (13,145)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to notes receivable (8,312) (19,944) (11,401)
Collections of notes receivable 8,404 14,222 11,731
Proceeds from note participation sales 1,878 -- 5,622
Proceeds from sale of equipment -- -- 120
Additions to property, plant and equipment (3,261) (1,200) (826)
-------- -------- --------
Net cash (used in) provided by investing activities (1,291) (6,922) 5,246
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from revolving credit facility, net 2,693 10,187 16,239
Repurchase of 10% senior notes (6,700) -- --
Dividend to stockholders (6,000) (10,000) (10,000)
Financing fees paid -- -- (462)
Repayments of capital lease obligations (57) (60) (64)
-------- -------- --------
Net cash (used in) provided by financing activities (10,064) 127 5,713
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,584) 3,938 (2,186)
CASH AND CASH EQUIVALENTS--
Beginning of year 10,013 6,429 10,367
-------- -------- --------
CASH AND CASH EQUIVALENTS--End of year $ 6,429 $ 10,367 $ 8,181
======== ======== ========
(Continued)
F-6
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED
(In thousands)
- --------------------------------------------------------------------------------
December 28, December 27, January 1,
2002 2003 2005
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period:
Interest $ 15,617 $ 14,981 $ 15,281
======== ======== ========
Income taxes $ 10,645 $ 8,425 $ 4,971
======== ======== ========
(Concluded)
See notes to consolidated financial statements.
F-7
DI GIORGIO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 four primary supermarket product
categories: grocery, frozen, refrigerated and specialty products.
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. 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 credit
worthiness of specific accounts are evaluated for reserve consideration
when a customer may not be able to meet its financial obligations. The
reserve requirements are based on the information available and are
re-evaluated and adjusted as additional information is received.
Inventories--Inventories, primarily consisting of finished goods, are
valued at the lower of cost (weighted average cost method) or market.
Certain overhead costs associated with have been capitalized.
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--Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible Assets, 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
the Company performs 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.
F-8
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 was 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.
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 $.5 million and $3.2 million,
which are included in the December 27, 2003 and December 27, 2002
Consolidated Statements of Income under the caption "Transaction related
expenses." Transaction related costs were insignificant in the year ended
January 1, 2005.
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
non-recourse participations in selected customer notes receivable to
various banks at par. During the years ended January 1, 2005, December 27,
2003 and December 28, 2002, the Company sold approximately $5.6 million, $0
and $1.9 million, respectively, of 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.
F-9
Deferred Rent--Rent expense under operating leases providing for rent
abatements and fixed non-contingent escalations is recognized on a
straight-line basis over the term of each individual underlying lease. The
cumulative net excess of recorded rent expense over lease payments made is
reflected on the balance sheet as deferred rent and is included within
accrued expenses and other long-term liabilities.
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 reports 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 53
weeks for fiscal 2004 and 52 weeks for fiscal 2003 and 2002.
Reclassifications--Certain 2002 and 2003 amounts have been reclassified to
conform to the 2004 consolidated financial statement presentation.
New Accounting Pronouncements
On December 15, 2004, the FASB issued Statement of Financial Accounting
Standard No. 123 (Revised 2004), Share-Based Payment ("SFAS No 123"), which
is revision of SFAS No. 123. Statement No. 123R supersedes APB No. 25 and
amends Statement No. 95, Statement of Cash Flows. Under SFAS No. 123R,
companies must calculate and record in the income statement the cost of
equity instruments, such as stock options, awarded to employees for
services received; pro forma disclosure is no longer permitted. The cost of
the equity instruments is to be measured based on fair value of the
instruments on the date they are granted (with certain exceptions) and is
required to be recognized over the period during which the employees are
required to provide services in exchange for the equity instruments. The
statement is effective in the first interim or annual reporting period
beginning after June 15, 2005. The Company has not historically had any
stock based compensation and therefore the adoption of this statement is
not expected to impact the consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs- An
Amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in
Accounting Research Bulletin (ARB) No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Among other
provisions, the new rule requires that items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal" as stated in ARB No. 43. Additionally, SFAS No. 151 requires that
the allocation of fixed overheads to inventory be based on the normal
capacity of the production facilities. SFAS No. 151 is effective for fiscal
years beginning after June 15, 2005, and is required to be adopted by the
Company effective January 2006. The Company does not expect SFAS No. 151 to
have a material impact on the consolidated results of operations, financial
condition or cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary
Assets--An Amendment of APB Opinion No. 29. SFAS No. 153 eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for
Nonmonetary Transactions, and replaces it with an exception for exchanges
that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if
F-10
the future cash flows of the entity are expected to change significantly as
a result of the exchange. SFAS No. 153 is effective for the fiscal period
beginning after June 15, 2005, and is required to be adopted by the Company
effective January 2006. The Company does not expect SFAS No. 153 to have a
material impact on the consolidated results of operations, financial
condition or cash flows.
2. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
December 27, January 1,
2003 2005
(in thousands)
Accounts receivable $ 81,822 $ 86,478
Notes receivable 14,892 13,530
Other receivables 13,878 16,794
Less allowance for doubtful accounts (4,108) (3,900)
--------- ---------
$ 106,484 $ 112,902
========= =========
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 January 1, 2005, the Company's customer loan
portfolio had an aggregate balance of approximately $22.4 million of which
$8.8 million is long term. The portfolio consisted of 57 loans ranging in
size up to approximately $5.4 million. During fiscal 2002, 2003 and 2004,
the Company had net transfers between accounts receivable and notes
receivable of approximately $3.8 million, $0 and $2.4 million,
respectively.
3. PROPERTY, PLANT AND EQUIPMENT
Property and equipment consist of the following:
Estimated
Useful Life December 27, January 1,
in Years 2003 2005
(In thousands)
Land -- $ 900 $ 900
Buildings and improvements 10 5,095 5,181
Machinery and equipment 3-10 19,798 20,116
Less accumulated depreciation (17,967) (19,730)
-------- -------
7,826 6,467
-------- -------
Capital leases:
Building and improvements 3,117 3,117
Equipment 380 380
Less accumulated amortization (1,483) (1,603)
-------- -------
2,014 1,894
-------- -------
$ 9,840 $ 8,361
======== =======
F-11
Depreciation and amortization expense was approximately $2.3 million, $2.2
million and $2.2 million for fiscal 2002, 2003 and 2004, respectively.
Included in that amount is approximately $.1 million for each year of
depreciation of assets under capital leases.
4. GOODWILL
During each of the three years in the period ended January 1, 2005 the
Company completed its annual impairment test and did not record any
impairments of goodwill.
5. FINANCING
Debt consists of the following:
Interest Rate
at January 1, December 27, January 1,
2005 2003 2005
(In thousands)
Revolving credit facility (a) 5.25 % $ 12,880 $ 29,119
========= =========
Long-term debt:
Senior notes (b) 10.0 % $ 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. During 2004, the average
interest rate for the outstanding borrowing was 4.5%.
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 $29.1
million (excluding $6.0 million of outstanding letters of credit) at
January 1, 2005. Additional borrowing capacity of $54.9 million was
available at that time.
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 January 1, 2005.
(b) 10% Senior Notes--The senior notes were issued under an Indenture
Agreement (the "Indenture") dated 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
F-12
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 period beginning
June 15 of years indicated:
Year Redemption Price
2004 101.67%
2005 100.00%
Thereafter, redemption rates will be at 100% of the principal amount,
together with accrued and unpaid interest, if any, to the redemption
date.
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.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
are as follows:
December 27, 2003 January 1, 2005
Carrying Fair Carrying Fair
Amount Value Amount Value
(In thousands)
Debt:
Revolving credit facility $ 12,880 $ 12,880 $ 29,119 $ 29,119
10% senior notes 148,300 140,144 148,300 147,559
Notes receivable--current 14,892 14,892 13,530 13,530
Notes receivable--long-term 11,082 11,082 8,826 8,826
The fair value of the 10% senior notes as of December 27, 2003 and January
1, 2005 is based on trade prices of $ 98.50 and $99.50, respectively,
representing yields of 11.99% (as of December 27, 2003) and 10.23% (as of
January 1, 2005), 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.
F-13
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 27, January 1,
2003 2005
(In thousands)
Employee benefits $10,221 $10,422
Due to vendors/customers 9,460 7,756
Other 5,199 6,806
Legal and environmental (Note 10) 2,042 1,695
Interest 476 740
------- -------
$27,398 $27,419
======= =======
8. RETIREMENT PLANS
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 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 27, January 1,
2003 2005
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 53,176 $ 57,059
Service cost 937 1,058
Plan change -- (12)
Interest cost 3,500 3,496
Actuarial loss 3,454 7,099
Benefits paid (4,008) (4,135)
-------- --------
Benefit obligation at end of year $ 57,059 $ 64,565
======== ========
F-14
December 27, January 1,
2003 2005
(In thousands)
Change in plan assets:
Fair value of plan assets at beginning of year $ 53,859 $ 55,008
Actual return on plan assets 1,657 1,049
Benefit payments (4,008) (4,135)
Employer contribution 3,500 10,000
-------- --------
Fair value of plan assets at end of year $ 55,008 $ 61,922
======== ========
Reconciliation of funded status:
Funded status (fair value of plan assets less
benefit obligation) $ (2,050) $ (2,643)
Unrecognized net actuarial loss 23,262 32,786
Unrecognized prior service cost 93 62
-------- --------
Prepaid benefit cost $ 21,305 $ 30,205
======== ========
Net pension cost includes the following components:
Year Ended
December 28, December 27, January 1,
2002 2003 2005
(In thousands)
Service cost $ 816 $ 937 $ 1,058
Interest cost 3,498 3,500 3,496
Expected return on plan assets (5,069) (4,580) (4,721)
Amortization of prior service cost 18 20 18
Amortization of net loss from earlier periods 355 795 1,247
------- ------- -------
$ (382) $ 672 $ 1,098
======= ======= =======
Net periodic benefit cost for the current year is based on assumptions for
the prior year. The following actuarial assumptions were used:
Year Ended
December 28, December 27, January 1,
2002 2003 2005
Weighted average discount rate 6.75 % 6.25 % 6.00 %
Rate of increase in future
compensation levels 6.00 6.00 6.00
Expected long-term rate of
return on plan assets 8.25 8.25 8.25
F-15
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 is 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:
Year Pension Benefits
(In thousands)
2005 $ 4,038
2006 4,160
2007 4,261
2008 4,408
2009 4,524
2010-2014 24,048
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 reasonably estimated until the fourth quarter annually.
The pension plan weighted average asset allocations by asset category are
as follows:
December 27, January 1,
2003 2005
Cash 14.3 % 16.6 %
Fixed income 80.5 78.0
Equities 0.6 0.4
Other 4.6 5.0
---- ---
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
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.
F-16
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 was as
follows:
Year Ended (In thousands)
December 28, 2002 $1,460
December 27, 2003 1,503
January 1, 2005 1,350
Approximately 64% of the Company's workforce is covered by collective
bargaining agreements with 4 separate local unions associated with the
International Brotherhood of Teamsters. Approximately 17% of the Company's
workforce is a party to an agreement that expires in November 2005. The
other agreements expire throughout 2007.
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 28, 2002 $229
December 27, 2003 231
January 1, 2005 237
Effective April 1, 2005, the Company will discontinue the earning of
future benefits under the Di Giorgio Retirement Plan which is a
defined benefit pension plan. In conjunction with the change to the Di
Giorgio Retirement Plan mentioned above, the Company also intends to
make changes to the 401(k) Plan. Effective April 1, 2005, the Company
will replace the current match with an annual employer contribution
(paid quarterly) which will be paid regardless of whether an employee
makes a 401(k) contribution, and regardless of the amount of that
contribution.
9. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
December 27, January 1,
2003 2005
(In thousands)
Deferred income tax liability--net (Note 13) $10,200 $13,493
Environmental (Note 10) 433 433
Employee benefits 165 141
Other 256 83
------- -------
$11,054 $14,150
======= =======
F-17
10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings--Various suits and claims arising in the ordinary course
of business are pending against the Company. In the opinion of management,
dispositions of these matters are appropriately provided for and are not
expected to materially affect the Company's consolidated financial
position, cash flows or results of operations.
The Company has been named in various claims and litigation relating to
potential environmental problems. In the opinion of management, 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 following is a schedule of net minimum lease payments required under
capital and operating leases in effect as of January 1, 2005:
Fiscal Year Ending Capital Operating
Leases Leases
(In thousands)
2005 $ 186 $10,275
2006 186 10,087
2007 186 9,093
2008 186 8,464
2009 186 7,188
Thereafter 2,080 83,253
------- -------
Net minimum lease payments 3,010 $ 128,360
=========
Less interest (1,133)
-------
Present value of net minimum lease
payments (including current
installments of $69) $1,877
======
Total rent expense included in operations was as follows:
Year Ended (In thousands)
December 28, 2002 $11,595
December 27, 2003 12,666
January 1, 2005 13,362
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 on standby letters of credit with a
bank as of both December 27, 2003 and January 1, 2005.
F-18
Guarantees--The Company has issued certain performance guarantees in an
aggregate amount of approximately $1.0 million which decrease by
approximately $.6 million in 2005 and $.4 million 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 an employment agreement with its
Chief Executive Officer, which is scheduled to expire in December 2009. In
addition, one employee has a termination agreement that provides for a
six-month notice to terminate. Under these agreements, combined annual
salaries of approximately $.7 million were paid in fiscal 2004. 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 10% senior notes, as well as those contained in the revolving
credit facility, based on its results for year ended January 1, 2005, the
Company is permitted to pay dividends up to approximately $4.1 million.
12. OTHER INCOME--NET
Other income consists of the following:
Year Ended
December 28, December 27, January 1,
2002 2003 2005
(In thousands)
Interest income $1,933 $1,836 $1,978
Other--net 803 1,404 1,086
------ ------ ------
$2,736 $3,240 $3,064
====== ====== ======
13. INCOME TAXES
At January 1, 2005, the Company had a receivable for current taxes of
approximately $2.2 million and prepaid current income taxes of
approximately $1.6 million.
The income tax provision consists of the following:
Year Ended
December 28, December 27, January 1,
2002 2003 2005
(In thousands)
Current income tax:
Federal $6,869 $ 6,446 $1,319
State 2,463 2,305 605
------ ------- ------
Total current income tax 9,332 8,751 1,924
------ ------- ------
Deferred income tax:
Federal 78 1,473 2,704
State 26 486 864
------ ------- ------
Total deferred income tax 104 1,959 3,568
------ ------- ------
Total tax provision $9,436 $10,710 $5,492
====== ======= ======
F-19
A reconciliation of the Company's effective tax rate with the statutory of
Federal tax rate is as follows:
Year Ended
December 28, December 27, January 1,
2002 2003 2005
(In thousands)
Tax statutury rate $7,912 $ 8,772 $ 4,659
State and local taxes - net of Federal benefit 1,435 1,791 975
Permanent differences and other 89 147 (142)
------ ------- -------
Total $9,436 $10,710 $ 5,492
====== ======= =======
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 27, January 1,
2003 2005
(In thousands)
Allowance for doubtful accounts $ 1,712 $ 1,617
Accrued workmen's compensation insurance and employee
fringe benefit expenses not deducted until paid 1,504 1,160
Other accrued expenses not deducted until paid 711 685
Difference between book and tax basis of property 234 645
-------- --------
Deferred tax assets 4,161 4,107
-------- --------
Deferred tax liabilities:
Pension asset valuation (8,549) (12,132)
Difference between book and tax basis of goodwill and other
Intangible assets (1,635) (1,878)
Other (312) --
-------- --------
Deferred tax liabilities (10,496) (14,010)
-------- --------
Net deferred tax liabilities $ (6,335) $ (9,903)
======== ========
The Balance Sheet classification of the deferred income tax assets and
liabilities is as follows (in thousands)
December 27, 2003 January 1, 2005
---------------------------------- ------------------------------------
Current Noncurrent Total Current Noncurrent Total
------- ---------- ------- ------- ---------- ---------
Assets $3,865 $ 296 $ 4,161 $3,590 $ 517 $ 4,107
Liabilities -- (10,496) (10,496) -- (14,010) (14,010)
------ -------- -------- ------ -------- --------
Total $3,865 $(10,200) $ (6,335) $3,590 $(13,493) $ (9,903)
====== ======== ======== ====== ======== ========
F-20
14. RELATED PARTY TRANSACTIONS
Mr. Stephen Bokser is co-chairman, chief executive officer, president and
chief operating officer. Mr. Bokser serves on the board of Foodtown, Inc.,
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 2004 were $7.3 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
$ 203.4 million in 2004.
The Company employs Grotta, Glassman, & Hoffman, a law firm in which Jerold
E. Glassman, one of the Company's directors, is Chairman, for legal
services on an on-going basis. The Company paid approximately $26,000 to
the firm in fiscal 2004 and 2003 and approximately $.1 million during the
year ended December 28, 2002.
The Company utilizes Emar Group, Inc. ("Emar"), a risk management and
insurance brokerage company controlled by Emil W. Solimine, one of the
Company's directors and a limited partner of Rose Partners, for risk
management and insurance brokerage services. The Company paid Emar
approximately $.2 million during each of the three years in the period
ended January 1, 2005 for such services and purchased insurance with
premiums of approximately $3.8 million during the year ended January 1,
2005 and $3.6 million during the years ended December 27, 2003 and December
28, 2002 respectively, through Emar.
The Company believes 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, the Company loaned each of Messrs. Neff, co-chairman and
former 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 4.5% and these loans were paid
off in December 2004.
15. MAJOR CUSTOMERS
During the year ended January 1, 2005 sales to Associated Food Stores
("Associated") represented 18.8%, and sales to the Foodtown group
represented 16.4%.of net sales.
During the year ended December 27, 2003, sales to The Great Atlantic And
Pacific Tea Company ("A&P"), Associated and the Foodtown group represented
19.9%, 14.9% and 14.3%.of net sales, respectively.
In October 2003, the Company ceased doing business with A&P.
During the year ended December 28, 2002, sales to A&P, Associated and the
Foodtown group represented 25.0%, 13.9% and 14.9% of net sales,
respectively.
******
F-21
Schedule II
DI GIORGIO CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
- --------------------------------------------------------------------------------
Balance at Balance at
Beginning End of
Description of Period Expenses Deductions Period
Allowance for doubtful accounts for the period ended:
December 28, 2002 5,256 500 (731) (1) 5,025
December 27, 2003 5,025 500 (1,417) (1) 4,108
January 1, 2005 4,108 500 (708) (1) 3,900
(1) Accounts written off during the year, net of recoveries.
S-1