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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 1997
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)
Registrant's telephone number including area code: (732) 541-5555
------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 2, 1998, there were outstanding 101.62 shares of Class A Common
Stock and 100 shares of Class B Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the registrant is $0 because all voting
stock is held by affiliates of the registrant.
PART I
ITEM 1. BUSINESS.
Overview
Di Giorgio Corporation (the "Company") is one of the largest independent
wholesale food distributors in the New York City metropolitan area, which is one
of the largest food retail markets in the United States. Across its grocery,
frozen and dairy product categories, the Company supplies approximately 18,000
food and non-food items, predominantly national brand name items, to more than
1,600 customer locations. The Company also markets products using its
well-recognized White Rose(TM) label, which has been established in the New York
City metropolitan area for over 110 years. The Company serves supermarkets,
including independent retailers (including members of voluntary cooperatives)
and chains principally in the five boroughs of New York City, Long Island,
Northern New Jersey and, to a lesser extent, the Philadelphia area.
Approximately 850 grocery, frozen and dairy items are offered with the White
Rose(TM) label. For the year ended December 27, 1997, the Company had total
revenue of $1,071.8 million and EBITDA (as defined herein) of $36.2 million.
Formed in 1920, the Company was acquired in 1990 by a corporation controlled by
Arthur M. Goldberg, the Company's current Chairman, President and Chief
Executive Officer (the "1990 Acquisition"). Since the 1990 Acquisition, Mr.
Goldberg and his management team have implemented a strategy focused on
enhancing productivity, growing through the acquisition of complementary
businesses, identifying and developing new revenue opportunities and promoting
brand name recognition through the Company's White Rose(TM) label.
On June 20, 1997, the Company completed a refinancing (the "Refinancing") of
itself and its former parent, White Rose Foods, Inc. ("White Rose"), intended to
extend debt maturities, reduce interest expense and improve financial
flexibility. The components of the Refinancing were (i) the offering of $155
million 10% senior notes (the "10% Notes") due 2007 (the "Offering"), (ii) the
modification of the Company's bank credit facility (the "Bank Credit Facility"),
(iii) the receipt of $8.9 million from the repayment of a note held by the
Company from Rose Partners, LP ("Rose Partners"), which owns 98.5% of the
Company, (iv) the consummation of the tender offers and consent solicitations
commenced by the Company (the "Company Tender Offer") and White Rose (the "White
Rose Tender Offer," and together with the Company Tender Offer, the "Tender
Offers") on May 16, 1997 in respect of the Company's 12% Senior Notes due 2003
(the "12% Notes") and White Rose's 12-3/4% Senior Discount Notes due 1998 (the
"12-3/4% Notes"), respectively, (v) the $4.2 million dividend by the Company to
White Rose of certain non-cash assets which were unrelated to the Company's
primary business and the subsequent dividend of those assets to White Rose's
stockholders and (vi) the merger ("Merger") of White Rose with and into the
Company with the Company surviving the merger.
Products
General. Management believes that the distribution of multiple product
categories gives the Company an advantage over its competitors by affording
customers the ability to purchase grocery, frozen and dairy products from a
1
single supplier. In addition, the Company is able to merchandise its
well-recognized White Rose(TM) label consistently across all three categories of
products. While some customers purchase items from all three product lines,
others purchase items from only one or two product lines.
Products are sold at prices which reflect the manufacturer's stated price plus a
profit margin. Prices are automatically adjusted on a regular basis based on
vendor pricing.
White Rose(TM) Label. The White Rose(TM) label is a well-recognized regional
brand for quality merchandise across approximately 850 grocery, frozen and dairy
products, and has been marketed in the New York metropolitan area for over 110
years. Products under the White Rose(TM) brand are formulated to the Company's
specifications, often by national brand manufacturers, and are subject to random
testing to ensure quality. The White Rose(TM) brand allows independent retail
customers to carry a regionally-recognized label across numerous products
similar to chain stores while providing consumers with an attractive alternative
to national brands. The Company believes that White Rose(TM) labeled products
generally produce higher margins for its customers than national brands, and
help the Company to attract and retain customers.
Customer Support Services. Certain of the Company's customers require varying
levels of retail support services in order to compete effectively in the
marketplace. The Company provides a broad spectrum of retail support services,
including advertising, promotional and merchandising assistance; retail
operations counseling; computerized ordering services; and store layout and
equipment planning. The Company has a staff of customer representatives who
visit stores on a regular basis to advise store management regarding their
operations. Most of the Company's customers utilize computerized order entry,
which allows them to place and confirm orders 24 hours a day, 7 days a week. The
Company's largest customers generally provide their own retail support.
The Company periodically provides financial assistance to independent retailers
by providing (i) financing for the purchase of new grocery store locations; (ii)
financing for the purchase of inventories and store fixtures, equipment and
leasehold improvements; (iii) extended payment terms for initial inventories
and/or (iv) extended payment terms for existing receivable balances. The primary
purpose of such assistance is to provide a means of continued growth for the
Company through development of new customer store locations and the enlargement
and remodeling of existing stores. Stores receiving financing purchase the
majority of their grocery, frozen and dairy inventory requirements from the
Company. Financial assistance is usually in the form of a secured,
interest-bearing loan, generally repayable over a period of one to three years.
As of December 27, 1997, the Company's customer financing portfolio had an
aggregate balance of approximately $16.1 million. The portfolio consisted of
approximately 85 loans with a range of $4,000 to $650,000.
To further serve the needs of its customers, the Company has recently expanded
its customer support services. Under the Company's insurance program, the
Company offers customers the ability to purchase liability, property and crime
insurance through a master policy purchased by the Company. The Company's coupon
redemption service facilitates the redemption of vendor coupons by the Company's
customers. Finally, through its technologies division, the Company distributes
and supports supermarket scanning equipment which is compatible with the
Company's information systems.
2
Markets and Customers
As of December 27, 1997, the Company's principal markets encompass the five
boroughs of New York City, Long Island, northern New Jersey and, to a lesser
extent, the Philadelphia area. The Company also has customers in upstate New
York, Connecticut, Pennsylvania and Delaware, and is pursuing expansion into
markets adjacent to the New York City metropolitan area.
The Company's customers include single and multiple store owners consisting of
chains and independent retailers which generally do not maintain their own
internal distribution operations for one or more of the Company's product lines.
Some of the Company's customers are independent food retailers or members of
voluntary cooperatives which seek to achieve the operating efficiencies enjoyed
by supermarket chains through common purchasing and advertising. Unlike larger
retail chains which predominate in suburban areas, the independent retailers
served by the Company tend to be located in urban areas. The Company's customers
include food markets operating under some of the following trade names: the
Superfresh, Waldbaums, Food Emporium and A & P Metro operations of the Great
Atlantic & Pacific Tea Co., Inc. ("A&P"), Associated Food Stores ("Associated"),
Gristedes and Sloans Supermarkets, King Kullen, Kings Super Markets, Quick Chek,
Royal Farms, Scaturros, and Western Beef, as well as the Met(TM), Pioneer(TM)
and Super Food cooperatives.
The Met(TM) and Pioneer(TM) trade names are owned by the Company, however, the
customers using the trade names are independently owned stores. The Company and
the customer stores operate as voluntary cooperatives allowing a customer 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 the Company. In order to use the trade names as part of the
cooperative arrangement, customers who use these names purchase the majority of
their grocery, frozen food and dairy inventory requirements from the Company,
thereby enhancing the stability of this portion of the Company's customer base.
These customers represented approximately 19% and 18% of net sales for the years
ended December 28, 1996 and December 27, 1997, respectively.
During the fifty-two weeks ended December 27, 1997, the Company's largest
customers, A&P and Associated, accounted for approximately 27% and 19%,
respectively, of net sales, and the Company's five largest customers accounted
for approximately 64% of net sales. The Company or certain of its principal
executive officers have long-standing relationships with most of the principal
customers of the Company. The loss of certain of these principal customers or a
substantial decrease in the amount of their purchases could be disruptive to the
Company's business.
Warehousing and Distribution
The Company presently supplies its customers from three warehouse and
distribution centers. All of these facilities are equipped with modern equipment
for receiving, storing and shipping large quantities of merchandise. Management
believes that the efficiency of its warehouse and distribution centers enables
the Company to compete effectively. A warehouse and inventory management system
directs all aspects of the material handling process from receiving through
shipping, thus minimizing cost while maintaining the highest service level
possible.
3
The Company normally has in-stock approximately 95% of its grocery product line,
approximately 97% of its dairy product line and approximately 96% of its frozen
food product line. Immediate product availability, efficient warehousing
techniques and flexible delivery schedules generally make it possible for the
Company to ship to customers within 24 to 48 hours of receipt of their orders.
The Company's trucking system consists of 119 tractors (all of which are
leased), 300 trailers (of which 273 are leased) and 11 trucks (all of which are
leased). On approximately 35% of its deliveries, the Company is able to arrange
"backhauls" of products from manufacturers' or other suppliers' distribution
facilities located in the markets served by the Company, thereby enabling the
Company to reduce its procurement costs. The Company regularly uses independent
owner/operators to make deliveries on an "as needed" basis to supplement the use
of its own employees and equipment. The Company makes on average approximately
1,000 deliveries per day each weekday to its customers through a combination of
its own transportation fleet and that of third parties.
Due to the different storage and distribution requirements of each of the
Company's product lines, the Company handles each product line in a separate
facility. All of the Company's warehouse and distribution facilities are fully
integrated through the Company's computer, accounting, and management
information systems to promote operating efficiency and coordinated quality
customer service.
Purchasing
The Company purchases products for resale to its customers from approximately
1,400 suppliers in the United States and abroad. Brand name products are
purchased directly from the manufacturer, through the manufacturer's
representatives or through food brokers by buyers in each operating division.
White Rose(TM) label and customers' private label products are purchased from
producers, manufacturers or packers who are licensed by the Company, in the case
of the White Rose(TM) label, or by the owners of the respective private labels .
The Company purchases products in large volume and resells them in the smaller
quantities required by its customers. Management believes that the Company has
the purchasing power to obtain competitive volume discounts from its suppliers.
Substantially all categories of products distributed by the Company are
available from a variety of manufacturers and suppliers, and the Company is not
dependent on any single source of supply for any specific category, however,
market conditions dictate that certain nationally prominent brands, available
from single suppliers, be available for distribution. Order size and frequency
are determined by management based upon historical sales experience, sales
projections and computer forecasting. A modern procurement system provides the
buying department with extensive data to measure the movement and profitability
of each inventory item, forecast seasonal trends, and recommend the terms of
purchases. This system, which operates in concert with the warehouse management
system, features full electronic data interchange capabilities and accounting
interfaces.
The Company from time to time buys increased quantities of inventory items when
the manufacturer is selling the item at a discount pursuant to a special
promotion, an industry practice known as "forward buying." These special
promotions are run by various manufacturers at their sole discretion. The
Company earns income from additional margins realized in connection with these
promotional purchasing arrangements, although there are currently less of these
deals then there used to be.
4
Competition and Trademarks
The wholesale food distribution industry is highly competitive. The Company is
one of the largest independent wholesale food distributors to supermarkets in
the New York City metropolitan area. The Company's principal competitors are C &
S Wholesale Grocers, Inc.; Krasdale Foods, Inc., and General Trading Co.
("General Trading") with respect to grocery distribution, General Trading with
respect to dairy distribution, and Nassau Suffolk Frozen Food Company, Inc. with
respect to frozen food distribution. Many of the Company's smaller competitors
generally do not provide retail support services and financing services to
independent retailers in the Company's market.
The Company also competes with cooperatives such as Key Food Stores Co-operative
Inc. and Twin County Grocers Inc., which provide distribution and support
services to their affiliated independent retailers doing business under trade
names licensed to them by the cooperatives. Unlike these competitors, the
Company does not require payment of capital contributions to the Company by
retailers desiring to use the Met(TM) and Pioneer(TM) name.
Management believes that the principal competitive factors in the Company's
business include price, service, scope of products and services offered,
strength of private label brand offered, strength of store trademarks offered
and store financing support. Management believes that the Company competes
effectively by offering a full product line, including its well-recognized,
regional White Rose(TM) label, the retail support and financing services
associated with its Met(TM) and Pioneer(TM) voluntary cooperative trademarks,
flexible delivery schedules, competitive prices, competitive levels of customer
service including newly introduced insurance, coupon-redemption and scanner
distribution services, including computerized order entry, and its
well-positioned and efficient distribution networks.
The Company believes there is significant competitive value in its trademark
White Rose(TM) brand, as well as its trademark Met(TM) and Pioneer(TM) names.
Employees
As of February 13, 1998, the Company employed approximately 1,156 persons, of
whom approximately 717 were covered by collective bargaining agreements with
various International Brotherhood of Teamsters locals.
The Company is a party to certain collective bargaining agreements with its
warehouse and trucking employees at its dairy operation (expiring November
2000), its grocery operation (warehouse expiring October 2002 and trucking
expiring May 2000) and its frozen operation (expiring January 2000).
Management believes that the Company's present relations with its work force are
satisfactory.
5
ITEM 2. PROPERTIES
The Company's three principal warehouse and distribution facilities are set
forth below along with its former dairy distribution center (currently being
used as an auxiliary facility) and its new frozen food facility.
In November 1997, the Company amended its lease for its grocery facility, adding
additional leased property, extending the term and increasing the annual lease
obligations ("the Amended Grocery Facility Lease"). These changes in the
provisions of the lease resulted in the Amended Grocery Facility Lease being
treated as a new lease and accounted for as an operating lease.
In November 1997, the Company acquired the building and leasehold improvements,
formerly the subject of a capital lease for its Garden City frozen facility for
a purchase price of $9 million, consisting of cash and a $7.2 million note
payable. The Company is currently under contract to buy the underlying land at
its frozen facility for $1.6 million. In February 1998, the Company entered into
a contract to sell the Garden City frozen facility and underlying land for
approximately $14.5 million. The terms of the agreement require the Company to
lease back the facility for a period of two years at an annual rent of
approximately $1.5 million.
In November 1997, the Company signed an agreement to lease a new frozen food
facility in Carteret, New Jersey, a property adjacent to its current grocery
facility. The facility is expected to be fully operational and distributing
product to the majority of its customers in the second fiscal quarter of 1998.
The lease term is expected to commence March 15, 1998.
Location Use Square Footage Lease Expiration
- -------- --- -------------- ----------------
Carteret, New Groceries and other Non- 645,000 2018 (plus two 5-year
Jersey Perishables renewal options)
Garden City, New Frozen 325,000 2000 (plus one 5-year
York renewal option)
Woodbridge, New Dairy 200,000 2001 (plus four 5-year
Jersey renewal options)
Kearny, New Auxilliary 98,000 1999
Jersey
Carteret, New Frozen 181,000 2018 (plus two 5-year
Jersey options)
The aggregate operating lease rent paid in connection with the Company's
facilities was approximately $1.2 million in fiscal 1997.
Currently, the Carteret grocery division distribution facility operates at
approximately 70% of capacity and the dairy division distribution facility
operates at 80% of capacity (both on a three shift basis), while the frozen
foods division distribution facility operates at approximately 60%of capacity
(on a two shift basis).
6
Depending on the type of new business introduced ( e.g. high turn product that
is already slotted in inventory), each warehouse has greater capacity to grow
then stated above. The frozen foods division distribution facility has the
flexibility of further increasing capacity because the Company uses some of the
space leased by it for public storage.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in claims, litigation and administrative proceedings of
various types in various jurisdictions. In addition, the Company has agreed to
indemnify various transferees of its divested operations with regard to certain
known and potential liabilities which may arise out of such operations. The
Company also has incurred and may in the future incur liability arising under
environmental laws and regulations in connection with these divested properties
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
the Company.
Environmental. The Company has 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 such 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 thereon. Persons who arranged for
the disposal of hazardous substances found on a disposal site may also be liable
for cleanup costs. In certain cases, the Company has agreed to indemnify the
purchaser of its former properties for liabilities arising thereon or has agreed
to remain liable for certain potential liabilities that were not assumed by the
transferee.
The Company has recorded an estimate of its total potential environmental
liability arising from specifically identified environmental problems (including
those discussed below) in the amount of approximately $1.8 million as of
December 27, 1997. The Company believes such reserves are adequate and that
known and potential environmental liabilities will not have a material adverse
effect on the Company's financial condition. However, there can be no assurance
that the identification of contamination at its current or former sites or
changes in cleanup requirements would not result in significant costs to the
Company.
The Company is responsible for the cleanup and/or monitoring of various sites
previously owned or operated by the Company, the most significant of which are
located in St. Genevieve, Missouri and Three Rivers, Michigan.
In addition, the Company has been identified as a potentially responsible party
("PRP") under CERCLA for clean-up costs at the Seaboard waste disposal site in
North Carolina. The Company is a member of the de minimus group comprised of
parties who allegedly contributed less than 1% of the total waste at the site.
The other two sites in which the Company had previously been named as a PRP have
been settled with nominal contributions from the Company.
7
The Company is not a party to any material litigation, other than routine
litigation incidental to the business of the Company, which is individually or
in the aggregate material to the business of the Company. 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 the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
There is no established public offering market for the outstanding common equity
of the Company and the majority of its outstanding common equity is owned by
Rose Partners, LP.
The ability of the Company to pay dividends is governed by restrictive covenants
contained in the indenture governing its publicly held debt as well as
restrictive covenants contained in the Company's senior bank lending arrangement
and the indenture governing its publicly held debt. As a result of these
restrictive covenants, the Company was not permitted to pay dividends on
December 27, 1997.
9
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical data of the Company
for the periods indicated and has been prepared by adjusting the consolidated
financial statements of the Company as if the merger between White Rose and the
Company, with the Company as the survivor, had taken place as of January 3,
1993. Since the stockholders of the Company, upon consummation of the Merger are
identical to the stockholders of White Rose, the exchange of shares was a
transfer of interest among entities under common control, and is being accounted
for at historical cost in a manner similar to pooling of interests accounting.
The results of operations include the expansion of the dairy division since
April 1994 (initial date of the purchase of substantially all of the assets of
the Royal Food Division of Fleming Foods East, Inc., a subsidiary of Fleming
Companies, Inc. (the "Royal Acquisition"). Such data should be read in
conjunction with the consolidated financial statements and related notes
included herein.
Year Ended Year Ended Year Ended Year Ended Year Ended
January 1, December 31, December 30, December 28, December 27,
1994 1994 1995 1996 1997
----------- ------------ ------------- ----------- -------------
(In thousands)
Income Statement Data:
Total revenue ....................... $ 774,105 $ 936,847 $ 1,023,041 $ 1,050,206 $ 1,071,800
Gross profit(a) ..................... 91,131 101,321 107,505 114,487 112,633
Warehouse expense ................. 32,980 37,945 39,676 41,038 42,453
Transportation expense ............ 17,916 21,354 22,759 21,624 22,042
Selling, general and
administration expenses ......... 18,740 19,835 21,877 22,694 21,598
Facility integration exp .......... -- 3,986 -- -- --
Amortization--excess of cost over
net assets acquired ............. 2,616 2,766 2,892 2,892 2,459
Operating income .................... 18,879 15,435 20,301 26,239 24,081
Interest expense .................. 18,232 20,370 24,887 23,955 21,890
Amortization--deferred financing
costs ........................... 1,600 1,479 1,457 1,138 944
Other (income) , net .............. (1,888) (2,939) (3,842) (3,758) (3,242)
Income (loss) from continuing
operations before income taxes and
extraordinary items ............... 935 (3,475) (2,201) 4,904 4,489
Income taxes ........................ 109 63 105 3,053 (1,241)
Income (loss) from continuing
operations and extraordinary items 826 (3,538) (2,306) 1,851 5,730
(Loss) from discontinued
operations ....................... (1,178) -- -- -- --
Extraordinary (loss)/gain on
extinguishment of debt, net of tax (3,976) -- 510 219 (8,693)
Net (loss) income ................... $ (4,328) $ (3,538) $ (1,796) $ 2,070 $ (2,963)
January 1, December 31, December 30, December 28, December 27,
1994 1994 1995 1996 1997
----------- ------------ ------------- ----------- -------------
(In thousands)
Balance Sheet Data:
Total assets ........................ $ 274,988 $ 304,147 $ 318,430 $ 301,069 $ 279,961
Working capital ..................... 6,012 2,746 7,344 12,342 23,365
Total debt incl capital leases ...... 184,421 197,339 223,543 215,308 196,966
Total Stockholder's equity (deficiency) 8,588 5,050 2,035 4,105 (3,081)(b)
- -----------
(a) Gross profit excludes warehouse expense shown separately.
(b) The decrease in stockholders' equity was the result of the $8.7 million
extraordinary charge, net of tax, on the extinguishment of debt
relating to premiums paid as a result of the Tender Offers and the
write-off of the deferred financing fees associated with the 12% Notes,
the 12-3/4% Notes and the Farmingdale mortgage. In addition, the
Company dividended non-cash, non-core assets consisting of land in
Colorado and notes receivable with a book value of approximately $4.2
million and $61,400 in cash to its stockholders on June 20, 1997.
10
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 forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or achievement
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. These
factors include, among others, the following: general economic and business
conditions and those in particular in the New York City metropolitan area;
restrictions imposed by the documents governing the Company's indebtedness;
competition; the Company's reliance on several significant customers; potential
losses from loans to its retailers; potential environmental liabilities which
the Company may have; the Company's labor relations; dependence on key
personnel; changes in business regulation; business abilities and judgment of
personnel; and changes in, or failure to comply with government regulations.
General
On June 20, 1997, the Company consummated the Refinancing. The following
discussion assumes that the Merger between White Rose and the Company had taken
place as of January 1, 1995. Since the stockholders of the Company are identical
to the stockholders of White Rose, the exchange of shares was a transfer of
interest among entities under common control, and is being accounted for at
historical cost in a manner similar to pooling-of-interests accounting.
Accordingly, the discussion presented herein reflects the assets and liabilities
and related results of operations for the combined entity for all periods.
Results of Operations
Fifty-two weeks ended December 27, 1997 and December 28, 1996
Net sales for the fifty-two weeks ended December 27, 1997 were $1,065.4 million
as compared to $1,045.2 for the fifty-two weeks ended December 28, 1996. This
1.9% increase primarily reflects increased frozen food sales to a division of
A&P and temporary supplemental supply arrangements offset by a $60 million
decrease in sales to a customer which terminated its contract for dairy division
products in the fourth quarter of 1996.
Other revenue, consisting of reclamation service fees, storage income, label
income, and other customer related services, increased to $6.4 million for the
fifty-two weeks ended December 27, 1997 as compared to $5.0 million in the prior
period primarily due to providing a produce distribution service for a
particular customer which ended in June 1997. Excluding this produce service,
other revenue would have been $5.8 million for the fifty-two weeks ended
December 27, 1997 as a result of new services being offered by the Company, as
well as, increased services based on additional 1997 revenues.
Gross margin (excluding warehouse expense) decreased to 10.6% of net sales or
$112.6 million for the fifty-two weeks ended December 27, 1997 as compared to
11.0% of net sales or $114.5 million for the
11
prior period as a result of a change in mix of both customers and product sold.
The Company has, and will continue to, take steps intended to maintain and
improve its margins; however, factors such as the decrease in promotional
activities, changes in product mix, additions of high volume, low margin
customers, or competitive pricing pressures will have an effect on gross margin.
Warehouse expense increased to 4.0% of net sales or $42.5 million for the
fifty-two weeks ended December 27, 1997 as compared to 3.9% of net sales or
$41.0 million for the prior period.
Transportation expense remained constant at 2.1% of net sales or $22.0 million
for the fifty-two weeks ended December 27, 1997 as compared to 2.1% of net sales
or $21.6 million in the prior period.
Selling, general and administrative expense decreased to 2.0% of net sales or
$21.6 million for the fifty-two weeks ended December 27, 1997 as compared to
2.2% of net sales or $22.7 million in the prior period.
Other income, net of other expenses, decreased to $3.2 million for the fifty-two
weeks ended December 27, 1997 from $3.8 million in the prior period due to
$476,000 less interest income on the Rose Partners note receivable which was
repaid in June 1997. In addition, as a result of the Farmingdale option sale in
August 1997, net rental income from that property decreased $828,000 in 1997.
These decreases were offset to some degree by income from a program run for the
benefit of a group of customers.
Interest expense decreased to $21.9 million for the fifty-two weeks ended
December 27, 1997 from $24.0 million for the prior period. The comparative
decrease from the 1996 period represents a decline in both the average
outstanding level of the Company's funded debt and the average interest rate as
a result of the Company's Refinancing on June 20, 1997.
During the third quarter of fiscal 1997, the Company reversed the valuation
allowance related to its deferred tax assets. In the opinion of management,
sufficient evidence now exists, such as the positive trend in operating
performance and the favorable effects of the recently completed refinancing,
which indicates that it is more likely than not that the Company will be able to
realize its deferred income tax assets. The reversal of the valuation allowance
resulted in an income tax benefit of $3.9 million and a reduction in goodwill of
$11.5 million. The reduction in goodwill reflects benefits which were
attributable to the pre-acquisition period.
For the year ended December 27, 1997, the Company recorded an income tax benefit
from continuing operations of $1.2 million (including the $3.9 million benefit)
compared to an income tax expense of $3.1 million for the year ended December
28, 1996. The Company's recorded income tax (benefit) provision is higher than
the statutory rate primarily because of the nondeductibility of certain of the
Company's amortization of the excess of cost over net asset acquired; however,
due to net operating loss carryforwards for tax purposes, the Company does not
expect to pay federal income tax for the current year, with the possible
exception of some alternative minimum tax.
The Company recorded a net loss for the fifty-two weeks ended December 27, 1997
of $3.0 million, including an extraordinary loss on the extinguishment of debt,
net of tax, of $8.7 million as compared to net income of $2.1 million for the
prior period which included a $219,000 extraordinary gain on the extinguishment
of debt.
12
Fifty-two weeks ended December 28, 1996 and December 30, 1995
Net sales for the fifty-two weeks ended December 28, 1996 increased 2.6% to
$1,045.2 million as compared to $1,018.2 million in the fifty-two weeks ended
December 30, 1995. The increased sales primarily reflects higher same customer
sales, a temporary supplemental third party supply agreement, and higher selling
prices stemming from increased cost of product sold.
Other revenue, consisting of reclamation service fees, storage income, label
income, and other customer related services, increased 4.6% to $5.0 million in
the fifty-two weeks ended December 28, 1996 as compared to $4.8 million in the
prior period.
Gross margin (excluding warehouse expense) increased to 11.0% of net sales or
$114.5 million in the fifty-two weeks ended December 28, 1996 from 10.6% of net
sales or $107.5 million in the prior period as a result of a more favorable mix
of product sold. Although the Company has taken steps and will continue to take
steps to maintain and improve its margins, there can be no assurance the
decrease in promotional activities, that management believes is any industry
wide trend, will not continue.
Warehouse expense remained relatively constant at 3.9% of net sales or $41.0
million in the fifty-two weeks ended December 28, 1996 as compared to 3.9% of
net sales or $39.7 million in the prior period, as cost improvements in the
grocery and frozen divisions were offset by higher temporary costs in the dairy
division as it related to a change in its receiving and warehousing systems.
Transportation expense decreased to 2.1% of net sales or $21.6 million in the
fifty-two weeks ended December 28, 1996 from 2.2% of net sales or $22.8 million
in the prior period as a result of better utilization of the Company's
transportation fleet. This was accomplished by reducing the number of deliveries
through the use of larger trailers acquired in a long-term lease and more
structured delivery schedules. These savings were partly offset by higher wages.
Selling, general and administrative expense increased to 2.2% of net sales or
$22.7 million during the fifty-two weeks ended December 28, 1996 as compared to
2.1% of net sales or $21.9 million in the prior year.
Other income, net of other expenses, remained constant at $3.8 million during
the fifty-two weeks ended December 28, 1996 as compared to the prior period.
Other income in 1996 included a cancellation fee of $376,000 from a customer who
prematurely terminated a supply agreement while other income in 1995 included a
settlement of a lawsuit for approximately $500,000.
Interest expense decreased to $24.0 million in the fifty-two weeks ended
December 28, 1996 from $24.9 million in the prior period. The comparative
decrease in the 1996 period represents a decline in the average outstanding
level of the Company's funded debt partially offset by the inclusion of the
Carteret facility capital lease for the full period and additional accretion of
the senior discount interest.
The Company recorded an income tax provision of $3.1 million resulting in an
effective income tax rate of 62%. The Company's estimated effective tax rate is
higher than its statutory tax rate primarily because of the nondeductibility of
certain of the Company's amortization of the excess of cost over net assets
acquired; however, due to net operating loss carryforwards for tax purposes, the
Company does not expect to pay federal income tax for the current year with the
exception of some alternative minimum tax.
13
The Company recorded net income for the fifty-two weeks ended December 28, 1996
of $2.1 million, which included a $219,000 gain on the extinguishment of debt,
net of tax, as compared to a loss of $1.8 million in the prior period, which
included a $510,000 gain on the extinguishment of debt, net of tax.
Liquidity and Capital Resources
Cash flows from operations and amounts available under the Company's Bank Credit
Facility are the Company's principal sources of liquidity. The Company's Bank
Credit Facility will mature on June 30, 2000 and bears interest at a rate per
annum equal to (at the Company's option): (i) the Euro Dollar Offering Rate plus
2.25% or (ii) Bankers Trust Company's prime rate plus 0.75%. Borrowings under
the Company's revolving Bank Credit Facility were $19.7 million at December 27,
1997 at an average interest of 8.64%. Additional borrowing capacity of $61.2
million was available at that time under the Company's borrowing base formula.
The Company believes that these sources will be adequate to meet its anticipated
working capital needs, capital expenditures, and debt service requirements
during fiscal 1998.
During the fifty-two weeks ended December 27, 1997, cash flows provided by
operating activities was $8,000, consisting primarily of (i) cash generated from
income before extraordinary items and non-cash expenses of $17.9 million and
(ii) an increase in accounts payable of $9.4 million which were primarily offset
by (i) an increase in net receivable levels of $12.3 million, (ii) an increase
in inventory of $6.6 million and (iii) an increase in other assets of $5.1
million.
Cash flow provided by investing activities during the fifty-two weeks ended
December 27, 1997 was approximately $8.6 million, consisting of proceeds of
$12.4 million from the sale of the Farmingdale option offset by $3.9 million
used for capital expenditures. Net cash used in financing activities was
approximately $7.9 million as a result of the Refinancing and the payoff of the
Farmingdale mortgage.
Earnings before interest expense, income taxes, depreciation and amortization,
non-recurring charges such as extraordinary gains or losses ("EBITDA"), was
$36.2 million during the fifty-two weeks ended December 27, 1997 as compared to
$36.9 million in the comparable prior year period. In addition to lower gross
margins, the decrease in EBITDA is a result of $500,000 less in cash
contributions from the Farmingdale facility as a result of the option sale in
August although net income increased due to the reduced interest expense after
the $12.4 million in debt reduction and no further Farmingdale depreciation
expense. In addition, the change in the treatment of the grocery division
facility lease from a capital lease to an operating lease in December 1997 had a
$240,000 negative impact on EBITDA. For 1998, the change in lease treatment will
reduce EBITDA an additional $2.6 million; however pretax income is expected to
increase by approximately $500,000 due to reduced interest and depreciation
charges with respect to the grocery division capital lease.
The consolidated indebtedness of the Company decreased to $197.0 million at
December 27, 1997 as compared to $215.3 million at December 28, 1996. The
Company raised an aggregate of $155.0 million through the issuance of the 10%
Notes and received $8.9 million from the repayment of the Rose Partners note
which aggregate funds were used (i) to fund the purchase of $85.4 million of the
12% Notes leaving $7.5 million outstanding, (ii) to fund the $53.7 million
purchase of 100% of the 12 3/4% Notes, (iii) to pay premiums of $10.8 million
related to such purchases, (iv) to pay accrued interest and the fees and
expenses of the Refinancing, and (v) to reduce the Bank Credit Facility by $4.9
million. As a result of the Amended Grocery Facility Lease, the net book value
of the related capitalized asset of $24.3 million and $27.1 million of lease
obligations were eliminated resulting in a gain of approximately $2.8 million.
The gain was classified in warehouse expense in the accompanying consolidated
statement of operations for the year
14
ended December 27, 1997. In addition, the Company recorded an impairment of
certain previously acquired leasehold improvements related to its frozen
facility. The impairment recognized was measured as the amount by which the
carrying value of the assets exceeded the fair value of the assets.
Stockholders' equity/(deficiency) decreased to a deficiency of $3.1 million on
December 27, 1997 from $4.1 million of equity on December 28, 1996.The decrease
was the result of the $8.7 million extraordinary charge, net of tax, on the
extinguishment of debt relating to premiums paid as a result of the Tender
Offers and the write-off of the deferred financing fees associated with the 12%
Notes, the 12-3/4% Notes and the Farmingdale mortgage. In addition, the Company
dividended non-cash, non-core assets consisting of land in Colorado and notes
receivable with a book value of approximately $4.2 million and $61,400 in cash
to its stockholders on June 20, 1997.
In August 1997, the Company completed the sale of the option it held on its
Farmingdale facility, the site of its former grocery warehouse and headquarters,
which had been under lease to a third party. The Company realized net cash
proceeds of approximately $7.3 million after the repayment of a mortgage in the
amount of approximately $5.2 million. For book purposes the Company recognized a
$40,000 gain (before a noncash writeoff of deferred expenses in the amount of
approximately $400,000) due to the original valuation of the property. For
federal income tax purposes, the Company expects to use its net operating loss
carryforwards to offset an approximate $12.0 million taxable gain on the sale.
In November 1997, the Company purchased the building at its Garden City frozen
food facility for $9.0 million, consisting of $1.8 million in cash, a $ 7.2
million note due in May 1998 with interest payable monthly at an annualized rate
of 6.7% In addition, the Company entered into a contract to purchase the
underlying land for $1.6 million. In February 1998, the Company signed a
contract to sell the facility in the first half of 1998, for $14.5 million. As
part of the deal the Company will lease the facility for a minimum of 2 years.
The Company intends to increase it's cold storage business at that facility, as
well as exploring continued use as a secondary frozen food distribution center.
The Company expects to begin shipping frozen food product from its new frozen
facility in Carteret, NJ in the fiscal second quarter of 1998. The Company
expects future frozen division transportation costs from the new facility to be
approximately the same as from its current location as increased costs to Long
Island will be offset by decreased costs to New Jersey and Philadelphia. The
Company expects the cost of the move to be offset by various new warehouse
vendor incentives.
On February 19, 1998, the Company called for redemption of the remaining
outstanding $7.5 million of its 12% Senior Notes at 104.5% of par. The
transaction is expected to close in March 1998 and result in annual savings for
the Company of approximately $250,000 given the current difference in interest
rates between the 12% Senior Notes and the Bank Credit Facility.
The 10% Notes also provide that the Company may repurchase, and retire into
treasury (i) up to $5 million of its outstanding Common Stock if the Company
converts the capital lease relating to its Carteret, New Jersey distribution
facility into an operating lease on or before December 20, 1998 and (ii)
additional Common stock up to an amount equal to $7.3 million relating to its
sale of the Farmingdale Option on or before June 20, 1998. Currently the Bank
Credit Facility permits (i) but not (ii).
Under the terms of the Company's revolving Bank Credit Facility, the Company is
required to meet certain financial tests, including minimum interest coverage
ratios and minimum net worth. As of December 27, 1997, the Company was in
compliance with its covenants.
15
The indenture governing the Company's 10% Notes, as well as the agreement
governing the Bank Credit Facility, impose various restrictions upon the
Company, including, among other things, limitations on the occurrence of
additional debt and the making of certain payments and investments.
From time to time when the Company considers market conditions attractive, as
the Company has demonstrated in the past, the Company has purchased on the open
market a portion of its 12% Notes and may in the future purchase and retire a
portion of its outstanding 10% Notes. In addition, the Company continuously
reviews its capital structure, including its funded debt and capital leases, to
determine if it can more advantageously finance its operations.
Excluding the Garden City building purchase, the Company spent approximately
$2.1 million on capital expenditures during the fifty-two weeks ended December
27, 1997, and currently does not expect to spend more than $2.5 million during
1998 on capital expenditures.
The Company expended approximately $243,000 in fiscal 1997 and does not expect
to expend more than $1.0 million in fiscal 1998 in conection with the
environmental remediation of certain presently owned or divested properties. At
December 27, 1997, the Company has reserved $1.8 million for those known
environmental liabilities. The Company intends to finance such remediation
through internally generated cash flow or borrowings. Management believes that
should the Company become liable as a result of any material adverse
determination of any legal or governmental proceeding beyond the expected
expenditures, it could have an adverse effect on the Company's liquidity
position.
The Company has begun an assessment as to the existence of any material Year
2000 issues in its computer systems, has identified potential areas of concern
and will begin to undertake remediation of these areas in the fiscal second
quarter of 1998. The Company anticipates the remediation will be complete by the
end of 1998, which will allow adequate time for testing. The cost is expected to
be more of a lost opportunity cost than an increased incremental direct dollar
cost since the remediation is expected to be preformed by the Company's
personnel.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
Financial Statements
Consolidated Financial Statements of Di Giorgio Corporation and Subsidiaries
Index to Consolidated Financial Statements................................. F-1
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets as of December 28, 1996 and December 27, 1997.. F-3
Consolidated Statements of Operations for each of the
three years in the period ended December 27, 1997......................... F-4
Consolidated Statements of of Changes in Stockholder's
Equity (Deficiency) for each of the three years in the period
ended December 27, 1997................................................... F-5
Consolidated Statements of Cash Flows for each of
the three years in the period ended December 27, 1997..................... F-6
Notes to Consolidated Financial Statements................................. F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not Applicable.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
MANAGEMENT
The following table sets forth certain information regarding the directors and
executive officers of Di Giorgio:
Age Position
Arthur M. Goldberg(2)(3) 56 Chairman of Board of Directors, President
and Chief Executive Officer
Richard B. Neff(3) 49 Executive Vice President, Chief Financial
Officer and Director
Stephen R. Bokser 55 Executive Vice President, President of
White Rose Food Division of Di Giorgio
and Director
Jerold E. Glassman(3) 62 Director
Emil W. Solimine(2) 53 Director
Charles C. Carella(1) 64 Director
Jane Scaccetti Fumo(1) 43 Director
Joseph R. DeSimone 58 Senior Vice President Distribution
Robert A. Zorn 43 Senior Vice President and Treasurer
Lawrence S. Grossman 36 Vice President and Corporate Controller
- -----------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Executive Committee
Directors are elected for one year terms and hold office until their successors
are elected and qualified. The executive officers are appointed by and serve at
the discretion of the Board of Directors.
Mr. Goldberg has been Chairman of the Board, President and Chief Executive
Officer of Di Giorgio since 1990. Mr. Goldberg is also a Director and Executive
Vice President and President -- Gaming Operations, Hilton Hotels Corporation,
since December 1996. Prior thereto, he was President, Chairman and Chief
Executive Officer and a director of Bally Entertainment Corporation from October
1990 to December 1996. He is also Managing Partner, Arveron Investments, LP,
since 1986. Mr. Goldberg is also a director of Bally Total Fitness Holding
Corporation, Bally's Grand, Inc., and First
18
Union Corporation. Mr. Goldberg, in his capacity as the sole general partner of
Rose Partners, L.P., controls the voting and investment of 98.5% of the
outstanding common stock of the Company.
Mr. Neff has been Executive Vice President, Chief Financial Officer and Director
of Di Giorgio since 1990. He is also a Director and Chairman of the Board of
Ryan Beck & Co., an investment banking concern.
Mr. Glassman has been a Director of Di Giorgio since 1990. Since prior to 1990,
Mr. Glassman has been a Partner of Grotta, Glassman & Hoffman, a law firm which
has offices in Roseland, New Jersey.
Mr. Bokser has been Executive Vice President of Di Giorgio since February 1990
and a Director of Di Giorgio since 1990. In addition, Mr. Bokser has served as
President of White Rose Foods Division of Di Giorgio since prior to 1991. Mr.
Bokser has also served as a director of Western Beef, Inc. since 1993.
Mr. Solimine has been a Director of Di Giorgio since 1990. He also is the Chief
Executive Officer of the Emar Group, Inc., an insurance concern, since prior to
1991. Mr. Solimine has served as a director of Strober Organization, Inc., a
building material distributor, since prior to 1991.
Mr. Carella became a Director of Di Giorgio in 1995. Since prior to 1991, Mr.
Carella has been a Partner of Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart &
Olstein, a law firm which has offices in Roseland, New Jersey. Since 1991, he
has served as Chairman for the Board of Trustees of the University of Medicine
and Dentistry of New Jersey and since 1983 has served on the Board of
Administrations of Archdiocese of Newark.
Mrs. Fumo became a Director of Di Giorgio in 1996. Mrs. Fumo has been a
shareholder for the past six years of Drucker & Scaccetti, P.C., a firm
specializing in accounting and business advisory services. She is also a
Director for Nutrition Management Services Company and Pennsylvania Savings
Bank.
Mr. DeSimone has been Senior Vice President of Distribution since January 1995.
From 1990 through January 1995, he was Vice President of Warehousing and
Distribution.
Mr. Zorn has been Senior Vice President and Treasurer of Di Giorgio since 1992.
He served as a Vice President of Bankers Trust Company, New York, New York since
prior to 1992.
Mr. Grossman has been employed by Di Giorgio since 1990. He has served as Vice
President of Di Giorgio since January 1994 and Corporate Controller since
February 1992. Mr. Grossman is a certified public accountant.
19
ITEM 11. EXECUTIVE COMPENSATION.
Compensation
The following table sets forth compensation paid or accrued to the Chief
Executive Officer and each of the four most highly compensated executive
officers of Di Giorgio whose cash compensation, including bonuses and deferred
compensation, exceeded $100,000 for the three fiscal years ended December 27,
1997.
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation Compensation
- --------------------------- ---- -------- ------- ------------ ------------
(1)
Arthur M. Goldberg, 1997 $400,000 -- -- --
Chairman of the Board, President 1996 $400,000 -- -- --
and Chief Executive Officer 1995 $400,000 -- -- --
Richard B. Neff, 1997 $275,923 $261,000 -- $2,400(2)
Executive Vice President 1996 $260,900 $145,000 -- $2,250(2)
and Chief Financial Officer 1995 $240,000 $130,000 -- $2,250(2)
Stephen R. Bokser, 1997 $313,000 $250,000 -- $2,400(2)
Executive Vice President 1996 $288,600 $145,000 -- $2,250(2)
and President of White Rose 1995 $272,255 $130,000 -- $2,250(2)
Division
Robert A. Zorn, 1997 $210,600 $32,000 -- $2,400(2)
Senior Vice President and 1996 $200,600 $20,000 -- $2,250(2)
Treasurer 1995 $191,100 $12,500 -- $2,175(2)
Joseph R. DeSimone 1997 $163,300 $25,000 -- $2,400(2)
Senior Vice President 1996 $155,300 $20,000 -- $2,250(2)
Warehousing and Distribution 1995 $147,900 $18,000 -- $1,800(2)
(1) Certain incidental personal benefits to executive officers of the Company
may result from expenses incurred by the Company in the interest of
attracting and retaining qualified personnel. These incidental personal
benefits made available to executive officers during fiscal years 1995,
1996, and 1997 are not described herein because the incremental cost to
the Company of such benefits is below the Securities and Exchange
Commission disclosure threshold.
(2) Represents contributions made by the Company pursuant to the Company's
Retirement Savings Plan. See "Executive Compensation -- Retirement Savings
Plan."
20
Employment Agreements
The Company is a party to an Agreement with Mr. Neff which will terminate on
October 31, 2000. Currently, Mr. Neff is entitled to receive an annual salary of
$325,000 pursuant to the Agreement ("Salary"). In addition, Mr. Neff has been
paid pursuant to the Agreement $100,000 in 1997, and will be paid an additional
$100,000 on or before June 30, 1998, and will receive additional compensation
(the "Additional Compensation") upon the occurrence of certain change of control
type of events or distribution of assets to shareholders, as both are defined in
the Agreement ("Recognition Event") and determined pursuant to a formula. In the
event of death or disability, Mr. Neff or his estate, will be entitled to
continue to receive compensation and employee benefits for one year following
such event and in certain circumstances will receive Additional Compensation. If
Mr. Neff's employment is terminated by the Company other than for cause, Mr.
Neff will be entitled to receive the Salary through the end of the Agreement. If
Mr. Neff's employment is terminated by the Company for cause, Mr. Neff will be
entitled to receive Salary prorated through the end of the week.
The Company is a party to an Agreement with Mr. Bokser which will terminate on
June 30, 2000. Currently, Mr. Bokser is entitled to receive an annual salary of
$325,000 pursuant to the Agreement ("Salary"). In addition, Mr. Bokser has been
paid pursuant to the Agreement $100,000 in 1997, and will be paid an additional
$100,000 on or before June 30, 1998, and will receive additional compensation
(the "Additional Compensation") upon the occurrence of certain change of control
type of events or distribution of assets to shareholders, as both are defined in
the Agreement ("Recognition Event") and determined pursuant to a formula. In the
event of death or disability, Mr. Bokser or his estate, will be entitled to
continue to receive compensation and employee benefits for one year following
such event and in certain circumstances will receive Additional Compensation. If
Mr. Bokser's employment is terminated by the Company other than for cause, Mr.
Bokser will be entitled to receive the Salary through the end of the Agreement.
If Mr. Bokser's employment is terminated by the Company for cause, Mr. Bokser
will be entitled to receive Salary prorated through the end of the week.
The Company is a party to an agreement with Mr. Zorn which provides for
employment through March 10, 1999. The agreement remains in effect pursuant to
its evergreen provisions and will remain in effect subject to six months notice
is given by either party to terminate. Currently, Mr. Zorn is entitled to
receive an annual salary of $220,600, as adjusted by annual cost of living
adjustments, if any, and annual bonuses, at the sole discretion of the Company.
Mr. Zorn may also receive additional incentive compensation upon the occurrence
of (i) the termination of Mr. Zorn's employment with the Company; or (ii)
certain change of control type for events, determined pursuant to a formula.
Under the terms of the agreement, if the employment of Mr. Zorn is terminated
for any reason other than for cause or disability, Mr. Zorn is entitled to
receive compensation and benefits for six months, provided that he uses his best
efforts to secure other executive employment.
Retirement Plan
The Company maintains the Di Giorgio Retirement Plan (the "Retirement Plan")
which is a defined benefit pension plan. Employees of the Company and its
affiliates who are not covered by a collective bargaining agreement (unless a
bargaining agreement expressly provides for participation) are eligible to
participate in the Retirement Plan after completing one year of employment.
21
All benefits under the Retirement Plan are funded by contributions made by the
Company. In general, a participant's retirement benefit consists of the sum of
(a) with respect to employment on or after September 1, 1990, an annual amount
equal to the participant's aggregate compensation (excluding income from the
exercise of certain stock option and stock appreciation rights) while he is
eligible to participate in the Retirement Plan multiplied by 1.5% and (b) with
respect to employment prior to September 1, 1990, an annual amount equal to the
sum of (i) the benefit earned under the Retirement Plan as of December 31, 1987,
the product of the participant's 1988 compensation and 1.5%, and the product of
the participant's 1988 compensation in excess of $45,000 and .5% plus (ii) the
product of the participant's aggregate compensation earned after 1988 and prior
to September 1, 1990 and 1.5%. In certain circumstances, the amount determined
under (b)(i) above may be determined in an alternative manner.
Benefits under the Retirement Plan are payable at a participant's normal
retirement date (i.e., Social Security retirement age) in the form of an annuity
although a limited lump-sum payment is available. In addition, an actuarially
reduced early retirement benefit is available after a participant reaches age
55.
A participant earns a nonforfeitable (i.e., vested) right to a retirement
benefit after reaching age 65, becoming disabled, or completing five years of
employment. The estimated annual retirement income payable in the form of a life
annuity to the individuals named in the Cash Compensation Table commencing at
their respective normal retirement ages under the Retirement Plan is as follows:
Mr. Goldberg, $22,921; Mr. Neff, $20,841; Mr. Bokser $87,896; Mr. Zorn, $10,470;
Mr. De Simone, $14,261.
Retirement Savings Plan
The Company maintains the Di Giorgio Retirement Savings Plan (the "Savings
Plan") which is a defined contribution plan with a cash or deferred arrangement
(as described under Section 401(k) of the Internal Revenue Code of 1986). In
general, employees of the Company and its affiliates who are not covered by a
collective bargaining agreement (unless a bargaining agreement expressly
provides for participation) are eligible to participate in the Savings Plan
after completing one year of employment.
Eligible employees may elect to contribute on a tax deferred basis from 1% to
10% of their total compensation (as defined in the Savings Plan), subject to
statutory limitations. A contribution of up to 5% is considered to be a "basic
contribution" and the Company makes a matching contribution equal to a
designated percentage of a participant's basic contribution (which all may be
subject to certain statutory limitations). This percentage is based on the
Company's consolidated pre-tax rate of return (i.e., the quotient obtained by
dividing the Company's adjusted consolidated pre-tax earnings by its
consolidated net worth) and ranges from 30% to 50%.
Each participant has a fully vested (i.e., nonforfeitable) interest in all
contributions made by them and in the matching contributions made by the Company
on their behalf and has full investment discretion over their contributions.
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.
22
Compensation of Directors
Directors of the Company who are not employees or otherwise affiliated with the
Company receive a quarterly retainer fee of $4,000 plus fees of $1,000 per day
for attendance at Board of Directors and Committee meetings. All directors of
the Company are also reimbursed for out-of-pocket expenses associated with
attendance at Board meetings.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 27, 1997, the Compensation Committee
consisted of Arthur M. Goldberg and Emil W. Solimine. Mr. Goldberg currently
serves as Chairman of the Board of Directors, President and Chief Executive
Officer of the Company. Mr. Solimine currently serves as a Director of the
Company.
See "Certain Transactions".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Mr. Goldberg, through his indirect beneficial ownership of the Company, controls
the affairs of the Company, the majority of the common stock of which is owned
by Rose Partners, LP (98.5%). Mr. Goldberg controls the affairs of Rose Partners
in his capacity as sole general partner.
Mr. Goldberg, through his indirect beneficial ownership of the Company,
effectively has the ability to determine the outcome of most corporate actions
requiring stockholder approval, including the election of the Board of
Directors, adoption of certain amendments to the charter and approval of
mergers, and sales of all or substantially all assets.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
BT Commercial Corporation ("BTCC"), an affiliate of BTNY, acts as agent and
lender under the Di Giorgio Revolving Credit Facility, entered into concurrently
with the Di Giorgio Senior Note Offering, between the Company and a syndicate of
banks. In Fiscal 1997 the Company paid fees in the amount of approximately
$242,000 and interest in the amount of approximately $2.2 million, of which BTCC
received its portion. In addition, the Company paid an annual fee of $100,000 to
BTCC for services as agent.
23
On August 3, 1992, White Rose Frozen Food ("Frozen Food") and WRGFF Associates,
L.P. ("WRGFF"), a New Jersey limited partnership controlled by Mr. Goldberg,
acquired in two simultaneous transactions substantially all of the operating
properties and assets of Global from Sysco Corporation. To facilitate the Global
Acquisition,WRGFF purchased and subsequently leased certain assets of Global to
the Company. In Fiscal 1997, the Company paid approximately $2.4 million to
WRGFF in connection with the lease and buyout of such assets.
Mr. Bokser is a director of Western Beef, Inc. In fiscal 1997, the Company sold
various food products to Western Beef, Inc. in the amount of $37.2 million.
The Company employs Grotta, Glassman & Hoffman, a law firm in which Jerold E.
Glassman, a director of the Company, is a partner, for legal services on an
on-going basis. The Company paid approximately $171,000 to the firm for fiscal
1997.
The Company employs Emar Group, Inc. ("Emar Group"), a risk management and
insurance brokerage company controlled by Emil W. Solimine, a director of the
Company, for risk management and insurance brokerage services. The Company paid
Emar Group approximately $150,000 for fiscal 1997 for such services.
In fiscal 1997, the Company recorded income of $166,000 from Hilton Hotel
Corporation and subsidiaries, a company in which Mr. Goldberg serves as
Executive Vice President - President Gaming Operations, in connection with the
sharing of its office facilities and sundry other expenses.
The Company believes that the transactions set forth above are on terms no less
favorable than those which could reasonably have been obtained from unaffiliated
parties.
In connection with the Refinancing, Rose Partners repaid the Rose Partners Note
in the amount of approximately $8.9 million and received a dividend of certain
non-cash assets (including the indebtedness of Las Plumas to the Company) with a
book value of approximately $4.2 million from White Rose. Management believes
that the market value of such assets approximates their book value.
24
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
a. Documents filed as part of this report.
1. Financial Statements
Independent Auditors' Report ................................ F-2
Consolidated Balance Sheets as of December 28, 1996
and December 27, 1997 ....................................... F-3
Consolidated Statements of Operations for each of the
three years in the period ended December 27, 1997 ........... F-4
Consolidated Statements of Changes in Stockholder's
Equity (Deficiency) for each of the three years in the period
ended December 27, 1997...................................... F-5
Consolidated Statements of Cash Flows for each of
the three years in the period ended December 27, 1997........ 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
1.1(15) - Purchase Agreement among Di Giorgio Corporation,
Merrill Lynch & Co., Merrill Lynch, Pierce & Smith
Incorporated and BT Securities Corporation.
2.1(16) - 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.
25
4.1(15) - Indenture between Di Giorgio Corporation and The
Bank of New York, as Trustee, including the form
of Note, dated as of June 20, 1997.
4.2(15) - Registration Rights Agreement among Di Giorgio
Corporation, Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and BT
Securities Corporation, dated as of June 20, 1997.
4.3(3) - Indenture, dated February 2, 1993 under which Di
Giorgio's Senior Notes due 2003 are issued.
4.4(15) - Supplemental Indenture, dated June 9, 1997 between
Di Giorgio Corporation and The Bank of New York,
as Trustee.
4.5(3) - Di Giorgio 12% Senior Note Certificate Specimen,
dated as of February 1, 1993.
10.1(3) - Credit Agreement dated as of February 10, 1993
among the Di Giorgio Corporation, various
financial institutions, BT Commercial Corporation,
as agent and Bankers Trust Company as Issuing Bank
10.2(5) - Sublease Agreement between MF Corp. (sublandlord)
and PC Richard & Son Long Island Corporation
(subtenant), dated July 27, 1993, relating to
facilities located in Farmingdale, New York
10.3(17)+ - Amended and Restated Employment Agreement
effective as of October 31, 1997 between the
Company and Richard B. Neff.
10.4(1)+ - Employment Agreement dated February 18, 1992
between the Company and Robert A. Zorn
10.5(16)+ - Second Amended and Restated Employment Agreement
dated June 30, 1997 between the Company and
Stephen R. Bokser
10.6(3)+ - Di Giorgio Retirement Plan as Amended and Restated
effective January 1, 1989 (dated January 26, 1996)
10.7(11)+ - Di Giorgio Retirement Savings Plan as Amended and
Restated effective January 1, 1989
10.8(13)+ - Amendment to the Di Giorgio Retirement Savings
Plan effective January 1, 1989 (dated November 28,
1995)
10.9(1) - Lease between The Four B's (landlord) and White
Rose Dairy, a division of Di Giorgio (tenant)
dated November 21, 1988, as amended May 11, 1989,
relating to facilities located in Kearny, New
Jersey
10.11(2) - Sub-Sublease between WRGFF (sublandlord) and
Frozen Food (subtenant), dated August 3, 1992
relating to facilities located in Garden City, New
York
10.12(4) - Consent and Amendment No. 1 dated as of June 25,
1993 to Credit Agreement dated as of February 10,
1993
26
10.13(5) - Consent and Amendment No. 2 dated as of November
3, 1993 to Credit Agreement dated as of February
10, 1993
10.14(3) - Note Pledge Agreement dated as of February 1,
1993, by Di Giorgio Corporation in favor of BT
Commercial Corporation, as agent
10.15(3) - License and Security Agreement dated as of
February 1, 1993, by Di Giorgio Corporation in
favor of BT Commercial Corporation, as agent
10.16(3) - Promissory Note dated as of February 2, 1993 made
by Las Plumas Lumber Corporation in favor of Di
Giorgio
10.18(1) - Settlement Agreement dated July 30, 1992, by and
between White Rose Foods, Inc. and the Furniture,
Flour, Grocery, Teamsters and Chauffeurs Union,
Local No. 138
10.19(3) - Tax Sharing Agreement effective January 1, 1992
among DIG Holding, Di Giorgio and certain other
parties
10.20(6) - Amendment to Tax Sharing Agreement effective
January 1, 1993 among DIG Holding, Di Giorgio and
certain other parties
10.30(7) - 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
10.31(7) - Consent and Amendment No. 3 dated March 30, 1994
to Credit Agreement dated as of February 10, 1993
10.32(8) - Consent and Amendment No. 4 dated April 22, 1994
to Credit Agreement dated as of February 10, 1993.
10.33(9) - Asset Purchase Agreement made as of the 1st day of
April 1994 by and among Di Giorgio Corporation,
Fleming Foods East Inc. and Fleming Companies,
Inc., and First Amendment dated April 7, 1994 and
Second Amendment dated April 20, 1994.
10.34(10) - Third Amendment dated as of June 20, 1994 to Asset
Purchase Agreement of April 1, 1994 between Di
Giorgio Corporation, Fleming Foods East, Inc. and
Fleming Companies, Inc.
10.35(11) - Amendment No. 5 dated November 15, 1994 to Credit
Agreement dated as of February 10, 1993.
10.36(11) - Waiver and Amendment No. 6 dated as of March 3,
1995 to Credit Agreement dated as of February 10,
1993.
27
10.37(11) - 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.
10.38(12) - Amendment No. 7 dated September 30, 1995 to Credit
Agreement dated as of February 10, 1993.
10.39(14) - Amendment No. 8, dated as of September 26, 1996 to
Credit Agreement dated as of February 10, 1993.
10.40(15) - Amendment No. 9, dated as of May 23, 1997 to
Credit Agreement dated as February 10, 1993.
10.41(15) - Amendment No. 10, dated as of June 11, 1997 to
Credit Agreement dated as of February 10, 1993.
10.42(18) - 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.
10.43(18) - Third Amendment, dated as of November 26, 1997, to
Carteret grocery warehouse lease dated as of
February 11, 1994.
10.44(18) - Agreement of Sale between the Company and United
States Steel and Carnegie Pension Fund, Inc. to
acquire the fee interest in the land and its
rights as landlord under the ground lease with
Waldbaum, Inc. at the Company's Garden City, New
York frozen food facility dated as of November 26,
1997.
10.45(18) - Agreement to Assign Ground Lease and Sublease
between the Company and Waldbaum, Inc. at the
Company's Garden City, New York frozen food
facility dated as of November 28, 1997.
10.46(18) - Agreement of Purchase and Sale between the Company
and FR Acquisitions, Inc. of the Company's Garden
City, New York frozen food facility dated as of
February 19, 1998.
10.47(18) - Agreement of Lease between the Company and FR
Acquisitions, Inc. for the Garden City, New York
frozen food facility dated as of February 19,
1998.
12.1(15) - Statement Regarding Computation of Ratio of
Earnings to Fixed Charges.
21(18) - Subsidiaries of the Registrant
28
- ------------------------------------------
+ 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 Quarterly Report on Form 10-Q
(File No. 1-1790) filed with the Commission on August 16, 1993
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
(File No. 1-1790) filed with the Commission on November 12, 1993
(6) Incorporated by reference to the Registration Statement on Form S-4 of
White Rose Foods, Inc. (File No. 33-72284) filed with the Commission on
November 24, 1993.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
year ended January 1,1994 (File 1-1790)
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for quarter ended April 2, 1994 (File 1-1790)
(9) Incorporated by reference to the Company's Current Report on Form 8-K
dated April 25, 1994 (File 1-1790)
(10) Incorporated by reference to the company's Quarterly Report on Form 10-Q
for quarter ended July 2, 1994 (File 1-1790)
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
year ended December 31, 1994 (File 1-1790)
(12) Incorporated by reference to the Quarterly Report on Form 10-Q of White
Rose Foods, Inc. for quarter ended September 30, 1995 (File 33-72284)
(13) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 30, 1995 (File 1-1790)
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for quarter ended September 28, 1996 (File 1-1790).
(15) Incorporated by reference to Registration Statement No. 333-30557 on Form
S-4 filed with the Securities and Exchange Commission on July 1, 1997.
29
(16) 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.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 27, 1997 (File 1-1790).
(18) Filed herewith.
b. Reports on Form 8-K
The Company did not file a Current Report on Form 8-K during the last
quarter of the period covered by this Report.
30
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 3rd day of
March, 1998.
DI GIORGIO CORPORATION
By: /s/ Arthur M. Goldberg
-------------------------------------
Arthur M. Goldberg, Chairman,
President and Chief 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/ Arthur M. Goldberg March 3, 1998
- ----------------------------- Chairman, President and Chief
Arthur M. Goldberg Executive Officer (Principal
Executive Officer)
/s/ Jerold E. Glassman March 3, 1998
- ----------------------------- Director
Jerold E. Glassman
/s/ Emil W. Solimine March 3, 1998
- ----------------------------- Director
Emil W. Solimine
/s/ Charles C. Carella March 3, 1998
- ----------------------------- Director
Charles C. Carella
/s/ Jane Scaccetti Fumo March 3, 1998
- ----------------------------- Director
Jane Scaccetti Fumo
/s/ Richard B. Neff March 3, 1998
- ----------------------------- Executive Vice President and
Richard B. Neff Chief Financial Officer (Principal
Financial and Accounting
Officer); Director
/s/ Stephen R. Bokser March 3, 1998
- ----------------------------- Executive Vice President and
Stephen R. Bokser Director
DI GIORGIO CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENTS F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 28, 1996 and December 27, 1997 F-3
Consolidated Statements of Operations for Each of the Three Years in the Period
Ended December 27, 1997 F-4
Consolidated Statements of Changes in Stockholder's Equity (Deficiency) for Each of the
Three Years in the Period Ended December 27, 1997 F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the Period
Ended December 27, 1997 F-6
Notes to Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Di Giorgio Corporation
Carteret, New Jersey
We have audited the consolidated balance sheets of Di Giorgio Corporation and
subsidiaries (the "Company") as of December 28, 1996 and December 27, 1997, and
the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended
December 27, 1997. Our audits also included the financial statement schedule
listed in the Index at Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 28, 1996
and December 27, 1997, and the results of their operations and their cash flows
for each of the three years in the period ended December 27, 1997 in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 20, 1998
F-2
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996 AND DECEMBER 27, 1997
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
December 28, December 27,
ASSETS 1996 1997
CURRENT ASSETS:
Cash and equivalents $ 1,749 $ 2,426
Accounts and notes receivable - Net 61,550 71,715
Inventories 49,563 56,121
Prepaid expenses 3,706 8,234
----- -----
Total current assets 116,568 138,496
PROPERTY, PLANT AND EQUIPMENT - Net 56,270 22,144
LONG-TERM NOTES RECEIVABLE 19,276 7,428
DEFERRED TAXES - 12,266
DEFERRED FINANCING COSTS 4,172 5,657
OTHER ASSETS 12,216 15,341
EXCESS OF COST OVER NET ASSETS ACQUIRED 92,567 78,629
------ ------
TOTAL $ 301,069 $ 279,961
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Revolving credit facility $ 26,719 $ 19,669
Current installment - long-term debt and capital lease liability 3,677 15,465
Accounts payable - trade 49,468 58,899
Accrued expenses 24,362 21,098
------ ------
Total current liabilities 104,226 115,131
LONG-TERM DEBT 153,389 159,333
CAPITAL LEASE LIABILITY 31,523 2,499
OTHER LONG-TERM LIABILITIES 7,826 6,079
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, Class A, $.01 par value - authorized, 1,000 shares;
issued and outstanding, 101.62 shares - -
Common stock, Class B, $.01 par value - authorized, 1,000 shares;
issued and outstanding, 100 shares - -
Additional paid-in capital 17,225 13,002
Accumulated deficit (13,120) (16,083)
------- -------
Total stockholders' equity (deficiency) 4,105 (3,081)
----- ------
TOTAL $ 301,069 $ 279,961
========= =========
See notes to consolidated financial statements.
F-3
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 27, 1997
(In Thousands)
- --------------------------------------------------------------------------------
Year Ended
December 30, December 28, December 27,
1995 1996 1997
REVENUE:
Net sales $ 1,018,218 $ 1,045,161 $ 1,065,381
Other revenue 4,823 5,045 6,419
----- ----- -----
Total revenue 1,023,041 1,050,206 1,071,800
COST OF PRODUCTS SOLD 915,536 935,719 959,167
------- ------- -------
Gross profit - exclusive of warehouse
expense shown separately below 107,505 114,487 112,633
OPERATING EXPENSES:
Warehouse expense 39,676 41,038 42,453
Transportation expense 22,759 21,624 22,042
Selling, general and administrative expenses 21,877 22,694 21,598
Amortization - excess of cost over net assets
acquired 2,892 2,892 2,459
----- ----- -----
OPERATING INCOME 20,301 26,239 24,081
INTEREST EXPENSE 24,887 23,955 21,890
AMORTIZATION - Deferred financing costs 1,457 1,138 944
OTHER INCOME - Net (3,842) (3,758) (3,242)
------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (2,201) 4,904 4,489
INCOME TAXES 105 3,053 (1,241)
--- ----- ------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM (2,306) 1,851 5,730
EXTRAORDINARY ITEM:
Gain (loss) on extinguishment of debt - net of tax 510 219 (8,693)
--- --- ------
NET INCOME (LOSS) $ (1,796) $ 2,070 $ (2,963)
======== ======= ========
See notes to consolidated financial statements.
F-4
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 27, 1997
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Class A Class B Additional
Common Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
BALANCE,
DECEMBER 31, 1994 101.62 $ - 100.00 $ - $ 18,444 $ (13,394) $ 5,050
Net loss - - - - - (1,796) (1,796)
Dividend to
stockholders - - - - (1,219) - (1,219)
------ ---- ------ ---- -------- --------- --------
BALANCE,
DECEMBER 30, 1995 101.62 - 100.00 - 17,225 (15,190) 2,035
Net income - - - - - 2,070 2,070
------ ---- ------ ---- -------- --------- --------
BALANCE,
DECEMBER 28, 1996 101.62 - 100.00 - 17,225 (13,120) 4,105
Net loss - - - - - (2,963) (2,963)
Dividend to
stockholders - - - - (4,223) - (4,223)
------ ---- ------ ---- -------- --------- --------
BALANCE,
DECEMBER 27, 1997 101.62 $ - 100.00 $ - $ 13,002 $ (16,083) $ (3,081)
====== ==== ====== ==== ======== ========= ========
See notes to consolidated financial statements.
F-5
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 27, 1997
(In Thousands)
- --------------------------------------------------------------------------------
Year Ended
December 30, December 28, December 27,
1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,796) $ 2,070 $ (2,963)
Adjustments to reconcile net (loss) income to
net cash provided by operations:
Extraordinary (gain) loss on extinguishment
of debt - net of tax (510) (219) 8,693
Depreciation and amortization 3,949 4,488 4,544
Amortization of deferred financing costs 1,457 1,138 944
Amortization of excess of cost over net
assets acquired 2,892 2,892 2,459
Other amortization 527 527 1,840
Provision for doubtful accounts 2,100 1,850 1,300
Increase in prepaid pension cost (720) (461) (667)
Non-cash interest expense 5,775 5,890 3,010
Non-cash interest income (846) (981) --
Deferred tax benefit -- -- (1,241)
Income tax benefit offset against excess of cost
over net assets acquired -- 3,008 --
Gain on reclassification of capitalized lease - net -- -- (2,838)
Impairment loss on leasehold improvements -- -- 2,698
Changes in assets and liabilities:
(Increase) decrease in:
Accounts and notes receivable 1,609 7,464 (11,465)
Inventories 1,272 2,768 (6,558)
Prepaid expenses (327) (169) 660
Other assets 595 661 (5,103)
Long-term receivables 1,560 (3,666) (804)
Increase (decrease) in:
Accounts payable (6,304) (8,946) 9,431
Accrued expenses and other liabilities (2,426) (2,250) (3,932)
--------- --------- ---------
Net cash provided by operating activities 8,807 16,064 8
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,920) (1,004) (3,829)
Proceeds from Farmingdale sale -- -- 12,432
Proceeds from contingent reimbursement 1,063 -- --
--------- --------- ---------
Net cash (used in) provided by
investing activities (857) (1,004) 8,603
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) from revolving
credit facility - net (6,529) (5,584) (7,050)
New note offering -- -- 155,000
Premiums on completed tender offers -- -- (10,829)
Finance fees paid (600) -- (6,017)
Repayments of debt (3,529) (5,942) (145,295)
Collection of Rose Partners note receivable -- -- 8,917
Dividend to stockholders (1,219) -- (61)
Repayments of capital lease obligations (3,990) (2,232) (2,547)
Premiums on mortgage payoff -- -- (52)
Refinancing 6,600 -- --
--------- --------- ---------
Net cash used in financing activities (9,267) (13,758) (7,934)
--------- --------- ---------
See notes to consolidated financial statements.
(Continued)
F-6
DI GIORGIO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 27, 1997
(In Thousands)
- -------------------------------------------------------------------------------
Year Ended
December 30, December 28, December 27,
1995 1996 1997
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS $ (1,317) $ 1,302 $ 677
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,764 447 1,749
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 447 $ 1,749 $ 2,426
========= ========= =========
SUPPLEMENTAL SCHEDULE OF
NON-CASH INVESTING ACTIVITIES:
Acquisition of warehouse facility
and machinery in exchange for
capital lease $ 28,391 -- --
Reduction of fixed assets -- -- $ 25,422
Acquisition of building with issuance of
note payable -- -- 7,200
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING ACTIVITIES:
Elimination of capital lease obligations -- -- $ 28,660
Issuance of note payable in connection with
acquisition of building -- -- 7,200
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period:
Interest $ 19,635 $ 18,569 $ 25,285
========= ========= =========
Income taxes $ 125 $ 73 $ 195
========= ========= =========
NON-CASH DIVIDEND OF NOTES
RECEIVABLE AND LAND HELD FOR SALE $ -- $ -- $ 4,162
========= ========= =========
REDUCTION OF GOODWILL FOR REVERSAL
OF VALUATION ALLOWANCE ON
DEFERRED TAX ASSET $ -- $ -- $ 11,479
========= ========= =========
See notes to consolidated financial statements.
(Concluded)
F-7
DI GIORGIO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 27, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Di Giorgio Corporation (the "Company") is a wholesale food
distributor serving both independent retailers and supermarket chains
principally in the New York City metropolitan area including Long Island,
northern New Jersey and to a lesser extent, the Philadelphia area. The
Company distributes three primary supermarket product categories: grocery,
frozen and dairy.
On December 27, 1996, the Company's parent, White Rose Foods, Inc. ("White
Rose") and its parent, DIG Holding Corp. ("DIG Holding"), effected a
merger with White Rose continuing as the surviving corporation. As the
stockholders of White Rose were identical to the stockholders of DIG
Holding, the exchange of shares was a transfer of interest among entities
under common control, and was accounted for at historical cost in a manner
similar to pooling of interests accounting.
On June 20, 1997, the Company and White Rose consummated a merger in which
White Rose was merged with and into the Company, with the Company as the
survivor. Since the stockholders of the Company were identical to the
stockholders of White Rose, the exchange of shares was a transfer of
interest among entities under common control, and is being accounted for
at historical cost in a manner similar to pooling-of-interests accounting.
Accordingly, the consolidated financial statements presented herein
reflect the assets and liabilities and related results of operations for
the combined entity for all periods. Revenue for the years ended December
30, 1995, December 28, 1996 and December 27, 1997 were the same for the
separate entities prior to the combination. Income before extraordinary
items would have been approximately $2.3 million, $3.0 million and $1.5
million higher for the Company than White Rose for the years ended
December 30, 1995, December 28, 1996 and December 27, 1997, respectively,
prior to the combination due to additional White Rose net interest
expense.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
Inventories - Inventories, primarily consisting of finished goods, are
valued at the lower of cost (weighted average cost method) or market.
Property, Plant and Equipment - Owned property, plant and equipment is
stated at cost. Capitalized leases are stated at the lesser of the present
value of future minimum lease payments or the fair value of the leased
property. 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.
F-8
Excess of Cost Over Net Assets Acquired - The excess of cost over net
assets acquired ("goodwill") is being amortized by the straight-line
method over 40 years.
Management assesses the recoverability of goodwill by comparing the
Company's forecasts of cash flows from future operating results, on an
undiscounted basis, to the unamortized balance of goodwill at each
quarterly balance sheet date. If the results of such comparison indicate
that an impairment may be likely, the Company will recognize a charge to
operations at that time based upon the difference of the present value of
the expected cash flows from future operating results (utilizing a
discount rate equal to the Company's average cost of funds at the time),
and the then balance sheet value. The recoverability of goodwill is at
risk to the extent the Company is unable to achieve its forecast
assumptions regarding cash flows from operating results. Management
believes, at this time, that the goodwill carrying value and useful life
continues to be appropriate.
Deferred Financing Costs - Deferred financing costs are being amortized
over the life of the related debt using the straight-line method.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents - Cash equivalents are investments with original
maturities of three months or less from the date of purchase.
Fiscal Year - The Company's fiscal year-end is the Saturday closest to
December 31. The financial statements for each of the three years in the
period ended December 27, 1997 comprised 52 weeks.
Reclassifications - Previously, the Company classified as other income
reclamation service fees, label income and other customer-related
services. Commencing in the year ended December 28, 1996, the Company is
classifying these items as other revenue. Prior year amounts have been
reclassified accordingly. The change in classification has no effect on
previously reported net income.
Certain other reclassifications were made to prior years' financial
statements to conform to the current year presentation.
New Accounting Pronouncement - In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS)
No. 131, Disclosures about Segments of an Enterprise and Related
Information, which will be effective for financial statements beginning
after December 15, 1997. SFAS No. 131 redefines how operating segments are
determined and requires expanded quantitative and qualitative disclosures
relating to a company's operating statements. The Company has not yet
completed its analysis of how it will be effected.
F-9
2. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consists of the following:
December 28, December 27,
1996 1997
(In Thousands)
Accounts receivable $ 52,688 $ 57,263
Notes receivable 7,192 8,627
Other receivables 5,981 10,028
Less allowance for doubtful accounts (4,311) (4,203)
------ ------
$ 61,550 $ 71,715
======== ========
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
Estimated
Useful Life December 28, December 27,
in Years 1996 1997
(In Thousands)
Land - $ 900 $ 900
Buildings and improvements 10 19,492 19,322
Machinery and equipment 3-10 10,495 10,826
Less accumulated depreciation (9,102) (12,674)
------ -------
21,785 18,374
------ ------
Capital leases:
Building and improvements 32,488 4,419
Equipment 8,410 370
Less accumulated amortization (6,413) (1,019)
------ ------
34,485 3,770
------ -----
$ 56,270 $ 22,144
======== ========
Grocery Facility - In November 1997, the Company amended its lease for its
grocery facility, adding additional leased property, extending the term
and increasing the annual lease obligation. These changes in the
provisions of the lease resulted in the amended lease being treated as a
new lease and accounted for as an operating lease. The net book value of
the related capitalized asset of $24.3 million and $27.1 million of lease
obligations were removed resulting in a gain of approximately $2.8
million. The gain was classified in warehouse expense in the accompanying
consolidated statement of operations for the year ended December 27, 1997.
Frozen Facility - In November 1997, the Company acquired the building and
leasehold improvements, formerly the subject of a capital lease for its
frozen facility located in Garden City, New York, for a purchase price of
$9 million, consisting of cash and a $7.2 million note payable (Note 6g).
As a result of this transaction, the building and leasehold improvements
acquired were recorded and the net book value of the related capitalized
asset of $1.7 million and $1.6 million of lease obligation were removed
F-10
resulting in a loss of approximately $0.1 million. In addition, the
Company entered into a contract to purchase the underlying land for $1.6
million.
In February 1998, the Company entered into a contract to sell its Garden
City, New York frozen facility and underlying land for approximately $14.5
million and management anticipates the transaction to close by March 31,
1998. The terms of the agreement require the Company to lease back the
facility for a period of two years with one five year option, at an annual
rent of approximately $1.5 million. The Company anticipates operating a
storage facility at this location. In connection with this transaction,
the Company recorded a pre-tax charge of approximately $2.2 million for an
impairment of certain previously acquired leasehold improvements. The
impairment recognized was measured as the amount by which the carrying
value of the assets exceeded the fair value of the assets. The charge is
included in warehouse expense in the accompanying consolidated statement
of operations for the year ended December 27, 1997.
The Company anticipates moving its existing frozen food distribution
business from its Garden City, New York facility to its Carteret, New
Jersey facility (Note 11).
4. EXCESS OF COST OVER NET ASSETS ACQUIRED
Di Giorgio Acquisition - The Company was acquired by the current
stockholders on February 9, 1990. The acquisition was accounted for as a
purchase and the cost of the Company's stock, together with the related
acquisition fees and expenses was allocated to the assets acquired and
liabilities assumed based on fair values. As of December 28, 1996 and
December 27, 1997, accumulated amortization of excess costs over net
assets acquired was approximately $18,193,000 and $20,376,000,
respectively.
Royal Acquisition - In June 1994, the Company acquired substantially all
of the operating properties, assets and business of the dairy and deli
distribution business. The acquisition was accounted for as a purchase and
the cost was allocated to the assets acquired and liabilities assumed
based on fair values. As of December 28, 1996 and December 27, 1997,
accumulated amortization of excess costs over net assets acquired was
approximately $702,000 and $978,000, respectively.
5. FARMINGDALE WAREHOUSE FACILITY
On July 27, 1993, the Company, through its wholly-owned subsidiary, MF
Corp., entered into an agreement for the sublease of Farmingdale, the
Company's old grocery facility. The initial term of the sublease was five
years. The sublessee was also granted an option, which was exercisable
under certain circumstances, to purchase the property. The Company and the
fee owner would share the economic benefits, if any, of the resulting
income stream, and any excess proceeds of financing related thereto with
80% to the Company and 20% to the fee owner.
On March 9, 1995, the Company, through MF Corp. and in conjunction with
the fee owner, completed a $6.6 million mortgage financing of Farmingdale.
The Company realized proceeds in the amount of $3.4 million after
deducting a $2.2 million capital lease liability payment and $1 million
representing associated fees, escrow deposits and a payment to the fee
owner.
In August 1997, the Company completed the sale of the option it held on
its Farmingdale facility. The Company realized net cash proceeds of
approximately $7.3 million after the repayment of the mortgage in the
amount of approximately $5.2 million. The Company recognized a $40,000
F-11
gain (before a noncash write off of deferred expenses in the amount of
approximately $400,000) in the statement of operations for the year ended
December 31, 1997 on the transaction.
Included in other income for the three years ended December 27, 1997 is
net rental income of approximately $954,000, $1 million and $192,000,
respectively, related to the facility.
6. FINANCING
On June 20, 1997, the Company completed a refinancing (the "Refinancing")
intended to extend debt maturities, reduce interest expense and improve
financial flexibility. The components of the Refinancing were (i) the
offering of $155 million 10% senior notes due 2007, (ii) the modification
of the Company's bank credit facility, (iii) the receipt of an $8.9
million payment for the extinguishment of a note held by the Company from
Rose Partners, LP ("Rose Partners"), which owns 98.53% of the Company,
(Note 16) (iv) the consummation of the tender offers and consent
solicitations commenced by the Company and White Rose, and together with
the "Tender Offers" on May 16, 1997 in respect of the Company's 12% senior
notes due 2003 and White Rose's 12-3/4% senior discount notes due 1998,
respectively, (v) the $4.2 million dividend by the Company to White Rose
of certain assets which were unrelated to the Company's primary business
and the subsequent dividend of those assets to White Rose's stockholders
(Note 12) and (vi) the merger (Note 1).
As a result of the Refinancing, the Company recorded an $8.5 million
extraordinary charge, net of a tax benefit of $5.7 million, on the
extinguishment of debt relating to premiums paid in the aggregate of
approximately $10.8 million as a result of the Tender Offers and the
write-off of approximately $3.2 million of deferred financing fees
associated with the 12% senior notes and 12-3/4% senior discount notes.
Debt consists of the following:
Interest Rate
at December 27, December 28, December 27,
1997 1996 1997
(In Thousands)
Revolving credit facility (b) 8.64 % $ 26,719 $ 19,669
======== ========
Current portion of long-term debt:
12% senior notes (c) 12.00 $ - $ 7,450
Mortgage payable (e) 9.00 685 -
Fleming note payable (f) 6.97 614 620
Note payable (g) 6.67 - 7,200
------- -----
$ 1,299 $ 15,270
======= ========
Long-term debt:
10% senior notes (a) 10.00 $ - $ 155,000
12% senior notes (c) 12.00 92,890 -
12 3/4% senior discount notes (d) 12.75 50,646 -
Mortgage payable (e) 9.00 4,901 -
Fleming note payable (f) 6.97 4,952 4,333
----- -----
$ 153,389 $ 159,333
========= =========
F-12
(a) 10% Senior Notes - The senior notes were issued under an Indenture
dated as of June 20, 1997 between the Company and The Bank of New
York, as Trustee. The senior notes are general unsecured obligations
of the Company initially issued in $155,000,000 principal amount
maturing on June 15, 2007. The notes bear interest at the rate of
10% payable semi-annually, in arrears, on June 15 and December 15 of
each year, commencing December 15, 1997.
The notes will be redeemable at the Company's option, in whole or in
part, at any time on or after June 15, 2002, at redemption prices
defined in the Indenture agreement. In addition, on or prior to June
15, 2000, the Company may redeem up to 35% of the originally issued
notes, at a price of 110% of the principal amount together with
accrued and unpaid interest with the net proceeds of public equity
offerings as defined by the Indenture. Upon the occurrence of a
change of control, holders of the notes will have the right to
require the Company to repurchase all or a portion of the notes at a
purchase price equal to 101% of the principal amount, plus accrued
interest.
Payments of principal and interest on the notes are subordinate to
the Company's secured obligations, including borrowings under the
revolving credit facility, capital lease obligations (Note 6b and
Note 11) and other existing and future senior indebtedness of the
Company.
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.
(b) Revolving Credit Facility - As of December 28, 1996, borrowings
under the $90 million credit facility bore interest at the Company's
option, at the rate of bank prime plus 1.0% or the adjusted
Eurodollar rate plus 2.5%. Prior to September 1995, borrowings bore
interest, at Di Giorgio's option, at the rate of bank prime plus
1.5% or the adjusted Eurodollar rate plus 3%. On February 1, 1997,
the interest rate was lowered by .25% to prime plus .75% or the
adjusted Eurodollar rate plus 2.25% because of the Company's ability
to meet certain financial tests.
In May and June 1997, the bank credit facility was modified to,
among other things, extend the expiration date of the facility to
June 30, 2000, reset certain financial covenants, permit the
Refinancing and increase the rate under the borrowing base formula.
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 amount of receivable and 60% of eligible inventory. After
the Refinancing, the allowable advance against eligible inventory
increased to 70% and subsequently declines to 60% at the rate of 1%
each quarter commencing on October 1, 1997. As of December 27, 1997,
the Company had an additional $61.2 million of borrowing base
availability.
The borrowings under the revolving credit facility are secured by
the Company's inventory and accounts receivable. Among other
matters, the revolving credit facility contains certain restrictive
covenants relating to net worth, interest coverage and capital
expenditures. The facility also prohibits the payment of dividends.
The Company was in compliance with the covenants as of December 27,
1997.
F-13
(c) 12% Senior Notes - The senior notes which were issued in
$100,000,000 principal amount in 1993, were due in February 2003,
and bear interest at the rate of 12%.
During the years ended December 30, 1995 and December 28, 1996 prior
to the Tender Offers, the Company retired $2,345,000 and $4,765,000,
respectively, of the senior notes that it purchased on the open
market and recorded an extraordinary gain of $510,000 (net of $-0-
taxes) and $219,000 (net of taxes of $146,000), respectively.
In June 1997, the notes were redeemed pursuant to the Tender Offers
at $85,440,000 principal and a premium of approximately $6,586,000.
As of December 27, 1997, $7,450,000 aggregate principal amount of
the notes remain outstanding. During February 1998, pursuant to the
Indenture, the Company has elected to redeem, and will redeem on
March 26, 1998 all the notes outstanding at December 27, 1997, at a
redemption price equal to 104.5% of the principal amount with
accrued interest through the redemption date.
(d) 12 3/4% Senior Discount Notes - In November 1993 $63.5 million
principal amount at maturity of Series A senior discount notes due
1998 were issued by White Rose. The notes were issued net of an
original issue discount of $29.2 million. The yield to maturity was
12.75% per annum and the notes did not pay any periodic cash
interest. In June 1997, the notes were redeemed in full pursuant to
the Tender Offers at approximately $53,656,000 principal, which
included accreted interest and a premium of approximately
$4,243,000.
(e) Mortgage Payable - The terms of the eight-year, nonrecourse mortgage
payable of the Company's wholly-owned subsidiary, MF Corp., were
payments of $96,691 a month, including interest at 9% through 2004.
The mortgage was paid off in full in conjunction with the sale of
the Farmingdale facility (Note 5) and the Company recorded a
$200,000 extraordinary charge, net of a tax benefit of $124,000, on
the write-off of deferred financing fees associated with the
mortgage.
(f) Fleming Note Payable - The terms of the note require quarterly
principal payments of $200,000 plus interest at a rate equal to the
prime rate (as stated in the Wall Street Journal) minus 2%, divided
by two. Currently, cash interest is 3.25% and is to be reset every
eighteen months. The note matures on June 20, 1999. The note has
been discounted at a rate of 6.97% for financial statement purposes
which resulted in an amount outstanding at December 27, 1997 of $5.0
million. As of December 27, 1997, the remaining principal amount on
the note is $5.2 million. The note is secured by a $1.5 million
letter of credit.
(g) Note Payable - The note payable was issued in connection with the
purchase of the building for its frozen facility (Note 3) and
matures on May 27, 1998.
F-14
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial
instruments are as follows:
December 28, 1996 December 27, 1997
Carrying Fair Carrying Fair
Value Amount Value Amount
(In Thousands)
Debt (Note 6):
Revolving credit facility $ 26,719 $ 26,719 $ 19,669 $ 19,669
Note payable -- -- 7,200 7,200
10% senior notes -- -- 155,000 152,288
12% senior notes 92,890 99,968 7,450 7,897
12-3/4% senior discount notes 50,646 50,406 -- --
Other notes payable 11,152 11,152 4,953 4,953
Accounts and notes receivable -
current (Note 2) 61,550 61,550 71,715 71,715
Notes receivable - long-term 19,276 19,276 7,428 7,428
The fair value of the 10% senior notes as of December 27, 1997 is based on
a yield of 10.29% (as of December 26, 1997). The fair value of the 12%
senior notes as of December 28, 1996 and December 27, 1997 are based on
yields of 10.28% (as of December 30, 1996) and 10.45% (as of December 26,
1997), respectively. The fair value of the 12-3/4% senior discount notes
as of December 28, 1996 is based on the trade price representing a yield
of 13.0% (as of December 30, 1996). Based on the borrowing rate currently
available to the Company, the revolving credit facility is considered to
be equivalent to its fair value. The fair value of the note payable is
assumed to reasonably approximate its carrying amount since it was
recently issued and is short-term in nature. The fair values of other
notes payable were assumed to reasonably approximate their carrying
amounts since they have variable interest rates.
The book value of the current and long-term accounts and 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.
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 28, December 27,
1996 1997
(In Thousands)
Legal and environmental $ 1,831 $ 1,176
Interest 4,412 1,018
Employee benefits 5,957 6,354
Due to vendors/customers 3,219 4,286
Other 8,943 8,264
----- -----
$ 24,362 $ 21,098
======== ========
F-15
9. RETIREMENT
a. Pension Plans - The Company maintains a noncontributory defined
benefit pension plan covering substantially all of its
non-collective bargaining employees. Pension costs for these plans
and related disclosures are determined under the provisions of
Statement of Financial Accounting Standards No. 87, "Employers'
Accounting for Pensions." The Company makes annual contributions to
the plans 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, and temporary investments.
Plan Changes - Effective January 1, 1995, the method for determining
market and related value of assets was changed from the market value
to a five-year moving market value with asset gains/losses
recognized over five years.
The pension credit included in operations for the years ended
December 30, 1995, December 28, 1996 and December 27, 1997 includes
the following components:
Year Ended
--------------------------------------------
December 30, December 28, December 27,
1995 1996 1997
(In Thousands)
Service cost-benefits earned
during the period $ 345 $ 585 $ 598
Interest cost on projected
benefit obligation 3,350 3,350 3,334
Return on assets - actual (7,138) (4,302) (4,357)
Net amortization and deferral 2,746 (117) (67)
----- ---- ---
Net periodic pension credit $ (697) $ (484) $ (492)
====== ====== ======
The following sets forth the status of the plan as of the most recent actuarial
report:
December 28, December 27,
1996 1997
(In Thousands)
Actuarial present value of benefit obligations:
Vested benefit obligation $ 45,179 $ 45,534
======== ========
Accumulated benefit obligation $ 46,187 $ 46,752
======== ========
Projected benefit obligation $ 46,976 $ 47,906
Plan assets at fair value 50,213 51,189
------ ------
Plan assets in excess of projected
benefit obligation 3,237 3,283
Unrecognized prior service cost 165 151
Unrecognized net loss 5,017 5,477
----- -----
Prepaid pension cost $ 8,419 $ 8,911
======= =======
The prepaid pension cost is included in other assets on the consolidated balance
sheets.
F-16
The following table provides the assumption used in determining the actuarial
present value of the projected benefit obligation at December 28, 1996 and
December 27, 1997:
December 28, December 27,
1996 1997
Weighted average discount rate 7.50 % 7.25 %
Rate of increase in future compensation levels 6.00 6.00
Expected long-term rates of return on plan assets 9.00 9.00
The Company also contributes to pension plans under collective bargaining
agreements. These contributions generally are based on hours worked. Pension
expense included in operations was as follows:
Year Ended (In Thousands)
December 30, 1995 $ 836
December 28, 1996 1,082
December 27, 1997 1,030
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 10% of their total compensation (as defined in the
savings plan), subject to statutory limitations. A contribution of
up to 5% is considered to be a "basic contribution" and the Company
makes a matching contribution equal to a designated percentage of a
participant's basic contribution (which all may be subject to
certain statutory limitations). Company contributions to the plan
are summarized below:
Year Ended (In Thousands)
December 30, 1995 $ 144
December 28, 1996 171
December 27, 1997 193
10. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
December 28, December 27,
1996 1997
(In Thousands)
Employee benefits $ 3,520 $ 2,269
Legal 2,733 2,575
Environmental 1,337 1,235
Other 236 -
------- -------
$ 7,826 $ 6,079
======= =======
F-17
11. COMMITMENTS AND CONTINGENCIES
Leases - The Company conducts certain of its operations from leased
warehouse facilities and leases transportation and warehouse equipment. In
addition to rent, the Company pays property taxes, insurance and certain
other expenses relating to leased facilities and equipment.
The Company subleased a frozen warehouse facility through November 1997
and certain equipment through April 1997 from WRGFF Associates, L.P.
("WRGFF"), an affiliate of the Company. For each of the years in the
three-year period ended December 27, 1997, rental expense under these
leases with WRGFF amounted to approximately $1.2 million, $1.4 million and
$0.5 million, respectively (Note 3). In May 1997 the Company acquired
tangible property formerly the subject of a capital lease at its frozen
facility from WRGFF for approximately $2 million.
The Company had entered into a lease agreement to lease a dry warehouse
facility which the Company is using for its grocery division as well as
for its administrative headquarters. The lease commitment commenced on
February 1, 1995. The lease was amended during 1997 (Note 3). The term of
the new lease expires in 2018 with two five-year renewal options. Rental
payments under the lease are approximately $2.9 million per year (through
the expiration date).
In November 1997, the Company entered into an agreement to lease a new
frozen warehouse facility in Carteret, New Jersey. The lease will be
accounted for as an operating lease. The lease expires in 2018 with two
five year renewal options. Rental payments under the lease are
approximately $1.8 million for the first ten years and approximately $2.0
million for the last ten years.
Although the Company continues to investigate subleasing its Kearny
facility (formerly its dairy facility), the facility was placed back into
operations in the second quarter of fiscal 1996. During fiscal 1997, the
Company operated a storage facility, a juice depot and a produce
distribution business at the location. The Company currently operates a
storage facility at the location. Also, during the fourth quarter of
fiscal 1997, the Company recorded a pretax charge of approximately
$480,000 to write down certain leasehold improvements to estimated fair
value. The charge is included in operating expense in the accompanying
consolidated statement of operations.
The following is a schedule of net minimum lease payments required under capital
and operating leases in effect as of December 27, 1997:
Capital Operating
Fiscal Year Ending Leases Leases
(In Thousands)
1998 $ 366 $ 11,453
1999 366 11,075
2000 308 8,103
2001 196 6,434
2002 186 5,677
Thereafter 3,382 74,164
----- ------
Net minimum lease payments 4,804 $ 116,906
=========
Less interest 2,110
-----
Present value of net minimum lease
payments (including current
installments of $195) $ 2,694
=======
F-18
Total rent expense included in operations was as follows:
Year Ended (In Thousands)
December 30, 1995 $ 6,337
December 28, 1996 6,622
December 27, 1997 7,240
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 $11,979,000 and $7,185,851 on open letters of credit with a
bank as of December 28, 1996 and December 27, 1997, respectively.
Employment Agreements - The Company has employment agreements with three
key executives which will expire in June 2000, October 2000 and February
1999. Under these agreements, combined annual salaries of approximately
$871,000 are expected to be paid in fiscal 1998. In addition, the
executives are entitled to additional compensation upon occurrence of
certain events.
12. EQUITY
In November 1993 in connection with the senior discount note offering
(Note 6(d)), the Company entered into a warrant agreement with a bank. The
bank currently owns 1.47% of the outstanding shares of common stock of the
Company. The bank holds warrants to purchase approximately 2.6% of the
outstanding Di Giorgio Corporation common stock. A warrant entitles a
holder to purchase one share of Di Giorgio Corporation Class B common
stock for $.10 per share. The warrants are exercisable on the earlier of
January 1, 1996, or the date of an initial public offering of the Company
or its subsidiaries or the occurrence of other events as defined in the
agreement. The warrants expire in February 2003.
In May 1995, DIG Holding purchased the Company's senior discount notes
with a face value of $3 million on the open market. The purchase price was
$960,000 with an accreted value of $1,967,000. DIG Holding distributed the
bonds to the stockholders in December of 1995 when the bonds had a fair
value of approximately $1.2 million. The accreted value at the time of the
dividend was approximately $2,114,000. Interest income of $125,000 and
bond amortization of $115,000 was recorded in 1995.
In connection with the Refinancing (Note 6), certain assets consisting of
the Las Plumas note (Note 16), land and other assets, with an aggregate
book value of approximately $4.2 million were distributed to the
stockholders of the Company in the form of a dividend.
F-19
13. OTHER INCOME - NET
Other income consists of the following:
Year Ended
---------------------------------------------
December 30, December 28, December 27,
1995 1996 1997
(In Thousands)
Interest income $ 2,301 $ 2,390 $ 2,380
Net rental income 954 1,020 192
Net gain on disposal of assets - 63 157
Other - net 374 285 513
Non-compete 213 - -
------- ------- -------
$ 3,842 $ 3,758 $ 3,242
======= ======= =======
14. INCOME TAXES
The Company files a consolidated Federal tax return. The consolidated
group has adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant items comprising the Company's deferred tax assets
and deferred tax liabilities are as follows:
December 28, December 27,
1996 1997
(In Thousands)
Deferred tax assets:
Allowance for doubtful accounts $ 1,814 $ 1,817
Accrued expenses not deductible until paid 5,494 3,313
Net tax operating loss carryforwards 15,400 16,160
------ ------
Deferred tax asset 22,708 21,290
====== ======
Deferred tax liabilities:
Difference between book and tax basis
of property (4,038) (483)
Pension asset valuation (3,296) (3,441)
------ ------
Deferred tax liabilities (7,334) (3,924)
------ ------
Net deferred tax assets 15,374 17,366
Less valuation allowance (15,374) -
------- ------
$ - $ 17,366
====== ========
The valuation allowance as of December 31, 1996 related to net deferred tax
assets relating to preacquisition temporary differences and operating loss
carryforwards as well as postacquisition temporary differences and
F-20
loss carryforwards. The elimination of the valuation allowance relating to
(i) preacquisition amount is credited to the excess of cost over net
assets of business acquired and (ii) postacquisition amount is credited to
the income tax provision.
There was no Federal provision for the year ended December 30, 1995 as a
result of operating losses for financial statement and tax purposes. For
the year ended December 30, 1995, the tax provision has been reduced by
approximately $319,000 for the corresponding elimination of the valuation
allowance. For the year ended December 28, 1996, the excess of cost over
the net assets of business acquired has been reduced by approximately $2.8
million because of the utilization of preacquisition amounts. As of
December 28, 1996, the Company's deferred tax assets were fully reserved
based on the then current evidence indicating that is was more likely than
not that the future benefits of the deferred tax assets would not be
realized.
During the third quarter of fiscal 1997, the Company reversed the
valuation allowance related to its deferred income tax assets. In the
opinion of management, sufficient evidence now exists, such as the
positive trend in operating performance and the favorable effects of the
recently completed refinancing, which indicates that it is more likely
than not that the Company will be able to realize its deferred income tax
assets. The reversal of the valuation allowance resulted in an income tax
benefit of $3.9 million and a reduction in goodwill of $11.5 million. The
reduction in goodwill reflects benefits which were attributable to the
pre-acquisition period.
At December 27, 1997, the net deferred tax assets of $17.4 million consist
principally of operating loss carryforwards which expire from 2006 to
2010. The deferred tax assets are classified for balance sheet purposes as
$12.3 million noncurrent and $5.1 million included in prepaid expenses.
As of December 27, 1997, approximately $40 million of net tax operating
loss carryforwards (which expire between the years 2006 and 2010) and
approximately $28.7 million of New Jersey state tax operating loss
carryforward (which expire between the years 1998 and 2002) are available.
As of December 27, 1997, there were no taxes currently payable.
The income tax benefit consist of the following (in thousands):
Year Ended
December 27,
1997
Deferred income tax $ 2,659
Reduction in valuation allowance (3,900)
------
$ (1,241)
========
F-21
A reconciliation of the Company's effective tax rate with the statutory Federal
tax rate is as follows:
Years Ended
-----------------------------------------
December 30, December 28, December 27,
1995 1996 1997
(In Thousands)
Tax at statutory rate $ (846) $ 1,667 $ 1,526
State and local taxes -
net of federal benefit 287 497 391
Permanent differences -
amortization of excess cost
over net assets acquired 983 889 742
Reduction in valuation reserve (319) - (3,900)
---- ------- ------
$ 105 $ 3,053 $ (1,241)
===== ======= ========
15. LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES
Various suits and claims arising in the course of business are pending
against the Company and its subsidiaries. In the opinion of management,
dispositions of these matters are appropriately provided for and are not
expected to materially affect the Company's financial position, cash flows
or results from 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.
16. RELATED PARTY TRANSACTIONS
In November 1993 approximately $11 million face value discount note was
loaned to Rose Partners, the current holder of 98.53% of the common stock
of the Company. The note was issued at an original discount of
approximately $5.3 million. The note evidencing this indebtedness was
scheduled to mature in April 1999 and was secured by an amount of shares
of common stock owned by Rose Partners representing approximately 20% of
the class outstanding. The note bore interest at a rate equal to the
Series B senior discount notes yield to maturity of 12 3/4% per annum. As
of December 28, 1996, the $8.4 million note was classified as long-term in
the consolidated balance sheet. In connection with the Refinancing (Note
6) the Company received an $8.9 million payment for the extinguishment of
the note. For the years ended December 30, 1995, December 28, 1996 and
December 27, 1997, other income includes approximately $846,000, $981,000
and $502,000, respectively, of interest income related to the note.
F-22
At December 28, 1996, Las Plumas, an affiliate of the Company, owed the
Company approximately $3.5 million, evidenced by a subordinated note. The
entire note receivable was classified as long-term in the consolidated
balance sheet as of December 28, 1996. The note was secured by deeds of
trust relating to parcels of property of Las Plumas. The loan was
scheduled to mature in June 1998 and bore interest at a fluctuating rate
equal to the weighted average of the interest rates paid by the Company.
In connection with the Refinancing, the note was distributed to the
stockholders of the Company in the form of a dividend (Note 12).
A director of the Company is a director of a customer. During the
three-year period ended December 27, 1997, the Company sold various foods
products in the amounts of $22.6 million, $27.5 million and $37.2 million,
respectively, to this customer.
A director of the Company is a partner in a firm which provides legal
services to the Company on an on-going basis. The Company paid
approximately $98,000, $111,000 and $171,000, during each of the three
years in the period ended December 27, 1997, respectively, to the law firm
for legal services.
The Company employs the services of a risk management and insurance
brokerage firm which is controlled by a director of the Company. Included
in the statement of operations are fees paid to the related party of
$150,000 for each of the three years in the period ended December 27,
1997.
The Company recorded income of $154,000, $245,000 and $166,000 for each of
the three years in the period ended December 27, 1997, respectively, from
an affiliated entity of the President of the Company in connection with
the sharing of office facilities and administrative expenses.
Included in the consolidated statement of operations for the year ended
December 30, 1995 was $119,000 of expenses related to services provided by
a consulting and investment banking firm whose general partner is a former
officer of the Company.
17. MAJOR CUSTOMERS
During the year ended December 30, 1995, sales to two individual customers
represented 22.2% and 19.7% of net sales, respectively, and sales to a
group of customers represented 13.1%.
During the year ended December 28, 1996, sales to two individual customers
represented 22.4% and 20.1% of net sales, respectively, and sales to a
group of customers represented 12.4%.
During the year ended December 27, 1997, sales to two individual customers
represented 27.4% and 19.5% of net sales, respectively, and sales to a
group of customers represented 10.9%.
******
F-23
DI GIORGIO CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
- --------------------------------------------------------------------------------
Column A Column B Column C Additions Column D Column E
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description Of Period Expenses Accounts Deductions of Period
Allowance for doubtful accounts
for the period ended:
December 30, 1995 $ 3,844 $ 2,100 $ - $(2,003)(1) $ 3,941
December 28, 1996 3,941 1,850 63 (2) (1,543)(1) 4,311
December 27, 1997 4,311 1,300 - (1,277)(1) 4,203
(131)(3)
(1) Accounts written off during the year.
(2) Transfers from other accounts.
(3) Transfers to other accounts
S-1