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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 33-36374-01
DEL MONTE FOODS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3542950
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE MARKET, SAN FRANCISCO, CALIFORNIA 94105
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 247-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 NEW YORK STOCK EXCHANGE
PACIFIC EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of July 31, 2000, based upon the closing price of the Common
Stock as reported by the New York Stock Exchange on such date, was approximately
$378,619,766.
The number of shares outstanding of Common Stock, par value $0.01, as of
close of business on July 31, 2000 was 52,223,416.
The Registrant's definitive proxy statement for the Annual Meeting of
Stockholders to be held on November 15, 2000 is incorporated by reference in
Part III of this Form 10-K to the extent stated herein.
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As used throughout this Annual Report, unless the context otherwise
requires, "DMFC" means Del Monte Foods Company, and "Del Monte" or "the Company"
means DMFC and its consolidated subsidiaries. "DMC" means Del Monte Corporation,
a wholly owned subsidiary of Del Monte. The "Contadina Acquisition" means Del
Monte's acquisition of assets comprising Nestle USA, Inc.'s ("Nestle") U.S.
business of manufacturing and marketing certain canned tomato products
("Contadina"). The "South America Acquisition" means Del Monte's reacquisition
of the rights to the Del Monte brand in South America from Nabisco, Inc. and the
purchase of Nabisco's canned vegetable and tomato business in Venezuela. Del
Monte's fiscal year ends on June 30, and its fiscal quarters typically end on
the last Sunday of September, December and March. Unless otherwise indicated,
references herein to U.S. market share data are to case volume sold through
retail grocery stores (excluding warehouse clubs) with at least $2.0 million in
sales and are based upon data provided to Del Monte by A.C. Nielsen & Co
("ACNielsen"), an independent market research firm. Market share data for canned
vegetables and solid tomato products include only those categories in which Del
Monte competes. Such data for canned fruit include those categories in which Del
Monte competes other than the "specialty" category, which is an insignificant
portion of Del Monte's operations and the pineapple category. See
"Business -- General." With respect to market share data used herein, the term
fiscal 2000 refers to the 52-week period ended July 1, 2000.
PART I
ITEM 1. BUSINESS
GENERAL
The predecessor of Del Monte was originally incorporated in 1916 and
remained a publicly-traded company until its acquisition in 1979 by the
predecessor of RJR Nabisco, Inc. ("RJR Nabisco"). In December 1989, RJR Nabisco
sold Del Monte's fresh produce operations ("Fresh Del Monte") to Polly Peck
International PLC. In January 1990, an investor group led by Merrill Lynch & Co.
purchased Del Monte and certain of its subsidiaries from RJR Nabisco for $1.5
billion ("RJR Nabisco Sale"). Following this sale, Del Monte divested several of
its non-core businesses and all of its foreign operations. In April 1997, Del
Monte was recapitalized with an equity infusion from TPG Partners, L.P. ("TPG"),
its affiliates and other investors. In February 1999, Del Monte again became a
publicly-traded company.
Del Monte manufactures and distributes premium quality, nutritious food
products under Del Monte, Contadina and other brand names. Del Monte operates in
one industry segment: processed foods. Del Monte is the largest producer and
distributor of canned vegetables and canned fruit in the United States, with net
sales of $1.5 billion in fiscal 2000. The Del Monte brand was introduced in
1892, and management believes it is the best known brand among canned food
products in the United States. Del Monte brand products are found in most
national grocery chains and independent grocery stores throughout the United
States. As the brand leader in three major processed food categories (canned
vegetables, fruit and solid tomato products), Del Monte has a full-line
multi-category presence that management believes provides it with a substantial
competitive advantage in selling to the retail grocery industry. The Contadina
Acquisition contributed another established brand and has positioned Del Monte
as the branded market leader in the high margin canned solid tomato products
category and has established a strong presence for Del Monte in the branded
paste-based tomato products category. See "-- Company Products."
Del Monte's primary domestic channel of distribution is retail outlets,
which accounted for approximately $1.2 billion (or 80.7%) of Del Monte's fiscal
2000 sales. In fiscal 2000, Del Monte had market shares of 23.7% of all canned
vegetable products, 44.2% of all canned major fruit products and 17.5% of all
canned solid tomato products in the United States. Del Monte's market share in
each of the categories of vegetables, fruit and solid tomato products in which
it competes is larger than the market share of any other branded competitor.
Del Monte sells its products primarily through national grocery chains and
independent grocery stores nationwide. Although Del Monte's product is currently
sold primarily through grocery stores, Del Monte also sells its products through
the fastest growing channel of distribution. This channel includes warehouse
club
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stores and mass merchandisers, such as Wal-Mart and Costco, and larger
merchandising outlets that include full grocery sections, such as Wal-Mart
Supercenters and Kmart's Super Ks. In addition, Del Monte sells its products to
the foodservice industry, food processors, the U.S. military and in certain
export markets. See "-- Sales, Marketing and Distribution."
Del Monte operates 14 production facilities in California, the Midwest,
Washington and Texas, as well as six strategically located distribution centers.
Del Monte has over 2,500 contracts to purchase vegetables and fruit from
individual growers and cooperatives located in various geographic regions of the
United States, principally California, the Midwest, the Northwest and Texas.
This diversity of sourcing helps insulate Del Monte from localized disruptions
during the growing season, such as weather conditions, that can affect the price
and supply of vegetables, fruit and tomatoes. See "-- Supply and Production."
Del Monte owns a number of registered and unregistered trademarks that it
uses in conjunction with its business, including the trademarks Del Monte,
Contadina, Fruit Cup, Snack Cups, Fruit Naturals, Orchard Select, FruitRageous,
Fruit Pleasures, Can Do and Del Monte Lite. In connection with and subsequent to
the RJR Nabisco Sale, Del Monte granted various perpetual, exclusive
royalty-free licenses for the use of the Del Monte name and trademark, as well
as the use of certain copyrights, patents and trade secrets, generally outside
of the United States. The licensees of the Del Monte name and trademark include
Fresh Del Monte Produce N.V. (which succeeded to Polly Peck as the owner of Del
Monte's former fresh produce operations), Del Monte Royal Foods, Kikkoman
Corporation, Nabisco Canada, and Premier Valley Foods with respect to which Del
Monte owns 20% of the common stock. See "-- Intellectual Property."
Del Monte was recapitalized in April 1997. In that transaction Texas
Pacific Group, a private investment group, obtained a controlling interest in
Del Monte. Under a new senior management team introduced in connection with the
recapitalization, Del Monte began implementing a new strategy to increase its
sales and margins. This strategy includes: (1) increasing market share and
household penetration of Del Monte's existing high margin products; (2)
introducing new products and new forms of packaging such as glass and plastic;
(3) increasing penetration of high growth distribution channels, such as
supercenters, mass merchandisers and warehouse clubs; (4) achieving cost savings
through operating efficiencies, plant consolidations and investments in new and
upgraded equipment; and (5) completing strategic acquisitions.
DMC was incorporated under the laws of the State of New York in 1978. Del
Monte, then known as DMPF Holdings Corp., was incorporated under the laws of the
State of Maryland in 1989 and was reincorporated under the laws of the State of
Delaware in 1998. Each of DMC and Del Monte maintains its principal executive
office at One Market, San Francisco, California 94105, and their telephone
number is (415) 247-3000.
RECENT DEVELOPMENTS
Credit Agreement Amendment and Debt Repayment. On January 14, 2000, the
Company amended its senior credit agreement with respect to its revolving credit
facility (the "Revolver") and term loan facility (Term A Loan and Term B Loan,
collectively the "Term Loan"). The amendment provided for additional borrowing
capacity (up to $100.0 million) under either the Revolver or Term B Loan. Under
this provision, the Company increased its Term B borrowings by $100.0 million in
August 2000. The proceeds of this borrowing were used to reduce the Revolver
balance. The amendment also adjusted certain financial covenants to reflect
changes in the Company's recent financial performance. The amendment did not
change the Revolver's expiration date, the Term Loan maturity dates or the terms
of the pricing schedule.
The amendment allowed the prepayment of up to $35.0 million of senior
subordinated notes. During February 2000, the Company repurchased $31.0 million
of 12 1/4% notes through the use of funds that carry a lower interest rate. In
conjunction with this early debt prepayment, an extraordinary loss of $5.2
million ($4.3 million net of tax benefit of $0.9 million) was recorded,
consisting of prepayment premiums and a write-off of capitalized deferred debt
issue costs and original issue discount.
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THE INDUSTRY
Del Monte believes that the domestic canned food industry is relatively
stable. Within the industry, however, Del Monte believes that certain categories
have been experiencing substantial growth by responding to changing consumer
needs. Over the last ten years, the industry has experienced rationalization as
competitors have disposed of non-core business lines and made strategic
acquisitions to complement category positions, maximize economies of scale in
raw material sourcing and production and expand retail distribution. Del Monte
also believes that sustaining strong relationships with retailers has become a
critical success factor for food companies and is driving initiatives such as
category management and the continuous replenishment program. Food companies
with category leadership positions and strong retail relationships appear to
have increasingly benefited from these initiatives as a way to maintain shelf
space and maximize distribution efficiencies.
Branded food manufacturers typically lead pricing and innovation in the
canned food categories in which Del Monte competes. Based on statistical
information compiled by ACNielsen, however, private label products generally
have the largest market shares in the vegetable and solid tomato categories. The
aggregate market share of the private label segment has remained relatively
stable over the past several years in each of Del Monte's principal product
categories. Del Monte believes that the private label segment has historically
been fragmented among regional vegetable and tomato producers seeking to compete
principally based on price. For the 52 weeks ended July 1, 2000, private label
products as a group represented 42.8%, 38.8% and 32.0% of canned vegetable,
major fruit and solid tomato product sales, respectively.
COMPANY PRODUCTS
Del Monte has a full-line, multi-category presence with products in three
major processed food categories: canned vegetables, canned fruit and canned
tomato products.
Vegetables
Based on internal estimates using data compiled by ACNielsen from various
industry and other sources, Del Monte believes that the canned vegetable
industry in the United States generated more than $3.3 billion in sales in
fiscal 2000. Del Monte believes that the domestic canned vegetable industry is a
mature category characterized by high household penetration.
Del Monte views the canned retail vegetable market as consisting of two
distinct categories: core vegetables and specialty products. The Company
competes in each of these categories. Del Monte believes that these categories
generated industry sales of more than $1.5 billion in fiscal 2000. The core
category represents the largest volume category, accounting for $1.1 billion or
approximately 72% of fiscal 2000 canned vegetable supermarket case sales
(excluding pickles and tomato products). Del Monte's entries in the core
category include cut green beans and French-style green beans, as well as whole
kernel and cream-style corn, peas, mixed vegetables, spinach, carrots and
potatoes. The specialty category, which includes asparagus, lima beans, wax
beans, zucchini and a variety of corn offerings, represented $307 million or
approximately 21% of fiscal 2000 canned vegetable supermarket case sales. Many
of Del Monte's specialty vegetable products are enhanced with flavors and
seasonings, such as Del Monte's zucchini in tomato sauce and its Fiesta corn,
which is made with red and green peppers. Del Monte's specialty vegetables are
priced at a premium to its other vegetable products and carry higher margins.
Del Monte offers a no-salt product line across most of its core varieties. All
of Del Monte's vegetable products are offered to the retail market principally
in 14 - 15 oz. sizes, as well as in smaller can sizes known as buffet products.
Del Monte produces six or eight can multi-packs, primarily for its club store
customers.
Within the core and specialty product lines (including buffet), the Del
Monte brand accounted for $420 million in retail sales in fiscal 2000. During
the 52 weeks ended July 1, 2000, Del Monte brand vegetable products enjoyed an
average premium of 16c (34.3%) per item over private label products and Del
Monte held a 23.7% share of the canned vegetable market for that period.
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Competitors in canned vegetables includes a small number of branded
manufacturers and private label competitors. In the core vegetable category, Del
Monte is the branded market share leader and for the 52 weeks ended July 1,
2000, held a 27.1% market share in green beans, a 23.1% market share in corn and
a 20.1% market share in peas. Del Monte's core vegetable products are
distributed in substantially all grocery outlets. Del Monte also is the branded
market share leader in the specialty category and is the overall market share
leader in the buffet category. Private label products taken as a whole command
the largest share of the canned vegetable market, but their market share has
remained relatively stable over the past decade. Del Monte's primary branded
competitors in the market include Green Giant nationally, and regional brands
such as Freshlike, Stokely and Libby's, in addition to private label producers.
Del Monte has relationships with approximately 900 vegetable growers
located primarily in Wisconsin, Illinois, Minnesota, Washington, and Texas.
Fruit
Based on internal estimates using data compiled by ACNielsen from various
industry and other sources, Del Monte believes that the canned fruit industry in
the United States in which it competes generated more than $2.6 billion in sales
in fiscal 2000. Del Monte believes the domestic canned fruit industry is a
mature category characterized by high household penetration.
Del Monte is the largest processor of branded canned fruit in the United
States. Del Monte competes in four distinct categories of the canned fruit
industry: major, specialty, single-serve and pineapple products. Del Monte
believes that these categories generated industry sales of more than $1.4
billion in fiscal 2000. The major category consists of cling peaches, pears and
fruit cocktail/mixed fruit with products offered across package sizes from 15 to
30 ounces. The specialty category includes apricots, freestone and spiced
peaches, mandarin oranges, cherries and tropical mixed fruit. Del Monte believes
that the major fruit and specialty fruit categories of the canned fruit market
together accounted for more than $938 million of total canned fruit industry
sales in fiscal 2000.
Major fruit accounted for sales by retailers of $748 million in fiscal
2000. Sales by retailers of Del Monte brand major fruit products totaled $386
million in fiscal 2000. For the 52 weeks ended July 1, 2000, Del Monte was the
branded share leader with a 44.2% market share based on case volume sold. Del
Monte is also the share leader in every major sub-category of the major fruit
category. In single-serve fruit cup, Del Monte has a 64.7% market share. Del
Monte's major fruit products are distributed in substantially all grocery
outlets, club stores and mass merchandiser outlets.
Del Monte is a key brand in the specialty category as a whole and the
market leader in apricots and freestone and spiced peaches. Specialty fruits are
higher margin, lower volume "niche" items, which benefit from Del Monte's brand
recognition. Del Monte apricots and freestone peaches are distributed in over
93% and 70% of grocery outlets, respectively. Tropical fruits and mandarin
oranges are distributed in 80% and 55% of grocery outlets, respectively.
Del Monte believes that it has substantial opportunities to leverage the
Del Monte brand name to increase sales of its existing high margin products,
such as its single-serve line. Single-serve fruit has been a substantial growth
area for Del Monte. The newest product line, Del Monte Fruit-To-Go plastic cups,
achieved 89% distribution in grocery outlets in fiscal 2000, its year of
introduction. Del Monte has also been developing new high margin products
designed to leverage Del Monte's presence in existing categories, to capitalize
on its existing manufacturing capabilities and to expand Del Monte's presence in
the market beyond the canned food aisle. For example, following initial success
in test markets, Del Monte completed national distribution in fiscal 1999 of its
Orchard Select, a premium fruit product packaged in glass sold in the produce
section. In fiscal 2000, the Orchard Select product line was successfully
expanded with a new apricot entry. Based on the success of Orchard Select to
date, the first tropical product, tropical mixed fruit, will be introduced in
fiscal 2001 under Tropical Select, an extension of the Orchard Select product
line. An important focus of Del Monte's new fruit product development efforts is
the production of high quality, convenient and nutritious products, particularly
snack-type products.
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Del Monte competes in the canned fruit business on the basis of product
quality and category support to both the trade and consumers. On the industry's
highest volume can size (15-16 oz.), the Del Monte brand commanded an average
14c (15.2%) per item premium, during the 52 weeks ended July 1, 2000. Del Monte
faces competition in the branded canned fruit category from Tri-Valley Growers,
which packs branded fruit under the Libby's and S&W brands. Del Monte also faces
competition from private label products in the canned fruit category from
Tri-Valley Growers and Pacific Coast Producers, both of which are grower
co-operatives that produce primarily private label products.
Individual pineapple items are differentiated by cut style, with varieties
including sliced, chunk, tidbits and crushed. Currently, approximately 84% of
pineapple product sold is packed in juice. The remaining 16% is packed in heavy
syrup. Size offerings include the 20 oz. size, which accounts for 78% of
category sales. Other sizes offered by Del Monte include the 8 oz. and 15 oz.
varieties.
Del Monte's retail pineapple line consists of sliced, chunk, tidbits,
crushed and juice products in a variety of container sizes. In addition to
industry-wide sales by retailers, which totaled $264 million in fiscal 2000, Del
Monte sells a significant amount of juice concentrate and crushed pineapple
through the food ingredients channel. Del Monte also sells pineapple solids and
juice products to foodservice customers.
Del Monte is the second leading brand of canned pineapple with a 15.5%
market share for the 52 weeks ended July 1, 2000. Dole is the industry leader
with a market share of 46.4%. Private label and foreign pack brands comprise the
low-price category of this category and hold market shares of 27.9% and 9.4%,
respectively. The five major foreign pack brands, Geisha, Libby's, Liberty Gold,
Empress, and 3-Diamond, have regional distribution and are supplied by Thai and
Indonesian packers.
Del Monte has relationships with approximately 800 fruit growers located in
California, Oregon and Washington. Del Monte sources virtually 100% of its
pineapple requirements from its former subsidiary, Del Monte Philippines, under
a long-term supply agreement. The agreement provides pricing based on fixed
retail and foodservice margins.
Tomato Products
Based on internal estimates using data compiled by ACNielsen from various
industry and other sources, Del Monte believes that processed tomato products
generated fiscal 2000 industry-wide sales of more than $5.4 billion. While total
sales of canned tomato products have grown steadily in recent years, Del Monte
believes that the diced category of the retail canned solid tomato category
(which also includes chunky tomatoes and tomato wedges) has been growing at a
substantially greater rate than the category as a whole, as consumer preferences
have trended toward more convenient cut and seasoned tomato products.
The processed tomato category can be separated into more than ten distinct
product categories, which differ widely in terms of profitability, price
sensitivity and growth potential. Consumers use tomato products for a variety of
purposes ranging from ingredients to condiments, beverages and main dishes.
Del Monte's tomato product offerings consist of two major categories: solid
tomato products, which are differentiated primarily by cut style, with varieties
including stewed, crushed, diced, chunky, wedges, and puree and paste-based
tomato products, such as ketchup, tomato sauce, tomato paste, spaghetti and
pizza sauces. Del Monte believes that industry sales in the solid tomato
products categories in which it competes were $539 million in fiscal 2000.
Del Monte is the leading producer of canned solid tomato products, which
generally have higher margins than paste-based tomato products. Solid tomato
products is the fastest growing category of Del Monte's tomato business. As a
result of the Contadina Acquisition, Del Monte extended its presence in this
category through the addition of Contadina's share of the market for crushed,
stewed and puree tomato products. The canned solid tomato category has evolved
to include additional value-added items, such as flavored diced tomato products.
Del Monte believes that there is opportunity to increase sales of solid tomato
products through line extensions that capitalize on Del Monte's manufacturing
and marketing expertise.
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Del Monte markets its spaghetti and sloppy joe sauces, as well as its
ketchup products, under the Del Monte brand name using a "niche" marketing
strategy targeted toward value-conscious consumers seeking a branded, high
quality product. Del Monte's tomato paste products are marketed under the
Contadina brand name, which is an established national brand for Italian-style
tomato products. Contadina also targets the branded food service tomato market,
including small restaurants that use Contadina brand products such as finished
spaghetti and pasta sauces.
Del Monte faces competition in the tomato product market from brand name
competitors including Tri-Valley Growers' S&W and ConAgra's Hunt's in the solid
tomato, paste and sauce categories; Heinz and Hunt's in the ketchup category;
and Hunt's, Campbell Soup's Prego and Unilever's Ragu in the spaghetti sauce
category. In addition, Del Monte faces competition from private label products
in all major categories. While Del Monte has a small share of the overall tomato
product market, it is the largest branded competitor in the solid tomato
category with a market share of 17.5% for the 52 weeks ended July 1, 2000.
Hunt's, the next largest branded processor, possessed a 10.0% share of the solid
tomato category for this period. In other key categories, for the 52 weeks ended
July 1, 2000, Heinz was the market leader in ketchup with a 47.2% market share,
and Hunt's was the leader in tomato sauce with a 34.1% market share.
Del Monte has relationships with approximately 40 tomato growers located
primarily in California, where approximately 95% of domestic tomatoes are
produced.
SUPPLY AND PRODUCTION
Del Monte owns virtually no agricultural land. Each year, Del Monte buys
over one million tons of fresh vegetables, fruit and tomatoes under more than
2,500 contracts with individual growers and cooperatives located primarily in
the United States. Many of these are long-term relationships. No supplier
accounts for more than 5% of Del Monte's raw product requirements, and Del Monte
does not consider its relationship with any particular supplier to be material
to its operations. Del Monte is exploring ways in which to extend its growing
season. For example, it has been planting green bean crops in Texas, which has a
longer growing season than Del Monte's other bean growing locations in the
Midwest region. Like other processed vegetable, fruit and tomato product
manufacturers, Del Monte is subject to market-wide raw product price
fluctuations resulting from seasonal or other factors. Del Monte has maintained
long-term relationships with growers to help ensure a consistent supply of raw
product.
Del Monte's vegetable growers are primarily located in Wisconsin, Illinois,
Minnesota, Washington and Texas. Del Monte provides the growers with planting
schedules, seeds, insecticide management and hauling capabilities and actively
participates in agricultural management and quality control with respect to all
sources of supply. Del Monte's vegetable supply contracts are generally for a
one-year term and require delivery of a specified quantity. Prices are
renegotiated each year. Del Monte believes that one of its competitive
advantages in the canned vegetable category derives from its proprietary seed
varieties. For example, Del Monte believes that its "Del Monte Blue Lake Green
Bean" variety delivers higher yields than green bean varieties used by Del
Monte's competitors. In addition, Del Monte's green bean production is primarily
on irrigated fields, which facilitates production of high quality,
uniformly-sized beans.
Del Monte's fruit and tomato growers are located primarily in California.
Pear growers are also located in Oregon and Washington. Del Monte's fruit supply
contracts range from one to ten years. See Note 10 to Del Monte's consolidated
financial statements for the year ended June 30, 2000. Prices are generally
negotiated with grower associations and are reset each year. Contracts to
purchase yellow cling peaches generally require Del Monte to purchase all of the
fruit produced by a particular orchard or block of trees. Contracts for other
fruits require delivery of specified quantities each year. Del Monte actively
participates in agricultural management, cultural practices, quality control and
ensures compliance with all pesticide/herbicide regulations and provides hauling
capabilities.
In connection with the sale of Del Monte's 50.1% interest in Del Monte
Philippines, a joint venture operating primarily in the Philippines, on March
29, 1996, Del Monte signed an eight-year supply agreement whereby Del Monte must
source substantially all of its pineapple requirements from Del Monte
Philippines.
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Fourteen Company-owned plants, located throughout the United States,
process Del Monte's products. Del Monte produces the majority of its products
between June and October. Most of Del Monte's seasonal plants operate at close
to full capacity during the packing season. See "Properties" for a listing of
production facilities.
In the third quarter of fiscal 1998, Del Monte committed to a three-year
plan to consolidate its California production facilities in order to enhance the
efficiency of its fruit and tomato processing operations and to better meet the
competitive challenges of the market. The plan resulted in Del Monte
transferring its tomato processing operations from its Modesto facility to Del
Monte's state-of-the-art Hanford facility following the summer 1998 pack.
Operations at the Modesto plant were suspended for approximately one year while
Del Monte reconfigured that facility to accommodate fruit processing that had
taken place at the San Jose facility and that currently takes place at the
Stockton facility. Del Monte closed its San Jose plant in December 1999 and will
close its Stockton facility after the production season in 2000. In addition in
August 1998, Del Monte's vegetable processing plant located in Arlington,
Wisconsin was closed after the summer 1998 pack. Del Monte plans an aggregate of
approximately $5.5 million of capital spending in fiscal 2001 to consolidate
processing operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General" and "-- Liquidity and Capital
Resources -- Investing Activities."
Co-packers are used for pineapple, mandarin oranges, pickles and certain
other products and to supplement supplies of certain canned vegetables, fruit
and tomato products.
Prior to December 1993, Del Monte produced almost all of the cans used to
package its products in the United States at its nine can manufacturing
facilities located throughout the United States. In December 1993, Del Monte
sold substantially all the assets (and certain related liabilities) of Del
Monte's can manufacturing business to Silgan Container Corporation ("Silgan").
The transaction included the sale or lease of Del Monte's nine can manufacturing
facilities. In connection with this agreement, Silgan and Del Monte entered into
a ten-year supply agreement, with optional successive five-year extensions by
either party. The base term of the supply agreement has since been extended to
December 21, 2006. Under the agreement and subject to certain exceptions, Del
Monte must purchase all of its requirements for metal food and beverage
containers in the United States from Silgan. However, Del Monte is entitled to
consider competitive bids for up to 50% of its requirements. Silgan has the
right to match any competitive offer. In addition, if Silgan is unable to supply
all of such requirements for any reason, Del Monte is entitled to purchase the
excess from another supplier. Price levels were originally set based on Del
Monte's costs of self-manufactured containers. Price changes under the contract
reflect changes in the manufacturer's costs. The agreement may be terminated by
either party, without penalty, on notice given 12 months prior to the end of the
term of the agreement. Del Monte's total annual can usage is approximately two
billion cans.
SALES, MARKETING AND DISTRIBUTION
Sales and Marketing
Del Monte sells its retail products through: (1) a retail broker network
(which consists of 100% independent broker representation at the market level,
managed by Company sales managers); and (2) an in-house, or direct, sales force
with responsibility for warehouse stores, mass merchandisers and supercenters.
Retail brokers are independent, commissioned sales organizations which represent
multiple manufacturers and, during fiscal 2000, accounted for 65% of Del Monte's
total net sales. Del Monte retains its brokers through a standardized retail
grocery brokerage agreement. Brokers are typically paid at a percentage of
sales, generally 2.5%, which percentage may be increased up to 3.0% based on the
broker's accomplishment of specified sales objectives. Either party may
terminate such agreements on 30 days' prior notice. Del Monte's broker network
represents Del Monte to a broad range of grocery retailers. Del Monte's
warehouse club, mass merchandiser and supercenter group calls on these customers
directly (non-brokered) and is responsible for the development and
implementation of sales programs for non-grocery channels of distribution that
include Wal-Mart, Costco, BJ's, Kmart and Target. During fiscal 2000, this
channel accounted for 17% of Del Monte's total net sales. Del Monte makes
foodservice, food ingredients, private label and military and other
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sales through both direct sales and brokers. During fiscal 2000, these sales
accounted for 13% of Del Monte's total net sales.
Del Monte's marketing function includes product development, pricing
strategy, consumer promotion, advertising, publicity and package design. Del
Monte uses consumer advertising and promotion support, together with trade
spending, to support awareness of new items and initial trial by consumers and
to build recognition of the Del Monte and Contadina brand names.
Del Monte has been enhancing its sales and marketing efforts with
proprietary software applications which assist Del Monte in implementing and
managing the timing and scope of its trade and consumer promotions and category
management system applications designed to assist customers in managing product
categories. Customers using Del Monte's category management software tools are
able to more rapidly identify sales levels for various product categories so as
to achieve an optimal product mix. Use of these category management tools have
resulted in increased shelf presence for Del Monte's products, particularly
fruit products, relative to those of Del Monte's competitors. Del Monte also has
proprietary tools that allow it to manage its customers' inventory requirements
for its products, thereby reducing customers' inventory levels while enhancing
Del Monte's opportunities to sell its products.
Distribution
Del Monte's distribution organization is responsible for the distribution
of finished goods to over 2,400 customer destinations. See "Properties" for a
listing of distribution centers. Customers can order products to be delivered
via third party trucking, rail or on a customer pickup basis. Del Monte's
distribution centers provide, among other services, casing, labeling, special
packaging, cold storage and fleet trucking services. Other services Del Monte
provides to customers include One Purchase Order/One Shipment, in which Del
Monte's most popular products are listed on a consolidated invoicing service;
the UCS Electronic Data Interchange, a paperless system of purchase orders and
invoices; and the Store Order Load Option (SOLO), in which products are shipped
directly to stores.
FOREIGN OPERATIONS
On August 28, 1998, Del Monte reacquired rights to the Del Monte brand in
South America from Nabisco, Inc. and purchased Nabisco's canned vegetable and
tomato business in Venezuela, including a food processing plant in Venezuela. In
addition, Del Monte established subsidiaries in Columbia and Ecuador during
fiscal 2000. Sales for its Colombian and Venezuelan subsidiaries for the year
ended June 30, 2000 were $12.9 million. The plant in Venezuela is located in
Turmero, approximately 70 miles from Caracas. All purchases of raw materials,
primarily vegetables, are made from approximately 15 growers in Venezuela with
whom Del Monte has contracts. Any remaining requirements are fulfilled through
the open market. The Company's products in Venezuela are sold through five local
distributors.
CUSTOMERS
Del Monte's customer base is broad and diverse. Del Monte's 15 largest
customers during fiscal 2000 represented approximately 57% of Del Monte's sales,
with sales to one customer, Sam's/Wal-Mart, representing approximately 13% of
sales. These top 15 customers have all been Del Monte customers for at least ten
years and, in some cases, for 20 years or more. In recent years, there has been
significant consolidation in the grocery industry through acquisitions. Del
Monte believes that this consolidation will not have a negative impact on Del
Monte since many of the acquiring companies have been long-standing customers of
Del Monte. Del Monte has sought to establish and strengthen its alliances with
key customers by offering sophisticated proprietary software applications to
assist customers in managing inventories. Del Monte plans to continue to expand
the use of these applications with its customers.
COMPETITION
Del Monte faces substantial competition throughout its product lines from
numerous well-established businesses operating nationally or regionally with
single or multiple branded product lines, as well as with
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private label manufacturers. In general, Del Monte competes on the basis of
quality, breadth of product line and price. See "-- The Industry" and
"-- Company Products."
INFORMATION SERVICES
In November 1992, Del Monte entered into an agreement with Electronic Data
Systems Corporation to provide services and administration to Del Monte in
support of its information services functions. Payments under the terms of the
agreement are based on scheduled monthly base charges subject to an inflation
adjustment. The agreement expires in November 2002 with optional successive
one-year extensions. Del Monte periodically reviews its general information
system needs.
RESEARCH AND DEVELOPMENT
Del Monte's research and development organization provides product,
packaging and process development and analytical and microbiological services,
as well as agricultural research and seed production. In fiscal 2000, 1999 and
1998, R&D expenditures (net of revenue for services to third parties) were $6.6
million, $6.2 million and $5.3 million, respectively. Del Monte maintains an R&D
facility in Walnut Creek, California where it develops product line extensions
and conducts research in a number of areas related to its business including
seed production, packaging, pest management, food science and plant breeding.
EMPLOYEES
At June 30, 2000, Del Monte had approximately 2,600 full-time employees. In
addition, approximately 11,400 individuals are hired on a temporary basis during
the pack season. Del Monte considers its relations with its employees to be
good. In the past several years, Del Monte has not experienced any work
stoppages or strikes.
Del Monte has ten collective bargaining agreements with nine union locals
covering approximately 10,600 of its hourly and seasonal employees. Of these
employees, none are under agreements that will expire in the remainder of
calendar 2000. Four collective bargaining agreements expire in calendar 2001,
and three expire in calendar 2002.
INTELLECTUAL PROPERTY
Del Monte owns a number of registered and unregistered trademarks for use
in connection with various food products, including the marks Del Monte,
Contadina, Snack Cups, Fruit Cup, Fruit Naturals, Orchard Select, FruitRageous,
Fruit Pleasures, Can Do and Del Monte Lite. These trademarks are important to
Del Monte because brand name recognition is a key factor in the success of Del
Monte's products. The current registrations of these trademarks in the United
States and foreign countries are effective for varying periods of time, and may
be renewed periodically, provided that Del Monte, as the registered owner, or
its licensees, where applicable, comply with all applicable renewal requirements
including, where necessary, the continued use of the marks in connection with
similar goods. Del Monte is not aware of any material challenge to Del Monte's
ownership of its major trademarks.
DMC owns approximately 12 issued U.S. patents covering machines used in
filling, cleaning and sealing cans, food preservation methods, extracts and
colors, and peeling and coring devices. The patents expire between 2005 and 2014
and cannot be renewed. Patents are generally not material to Del Monte's
business.
Del Monte claims copyright protection in its proprietary category
management software and vendor-managed inventory software. Del Monte's customers
receive reports generated by these software programs and provide data to Del
Monte for use in connection with the programs. The software itself, however, is
not licensed to Del Monte's customers. In addition, Del Monte claims copyright
protection in its proprietary trade promotion software. These copyrights are not
registered.
Del Monte has developed a number of proprietary vegetable seed varieties,
which it protects by restricting access and/or by the use of non-disclosure
agreements. There is no guarantee that these means will be sufficient to protect
the secrecy of its seed varieties. In addition, other companies may
independently develop
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similar seed varieties. Del Monte has obtained U.S. plant variety protection
certificates under the Plant Variety Protection Act on some of its proprietary
seed varieties. Under a protection certificate, the breeder has the right, among
other rights, to exclude others from offering or selling the variety or
reproducing it in the United States. The protection afforded by a protection
certificate generally runs for 20 years from the date of its issuance.
In connection with the RJR Nabisco Sale and the divestitures of Del Monte's
non-core and foreign operations subsequent to that sale, Del Monte granted
various perpetual, exclusive, royalty-free licenses for use of the Del Monte
name and trademark along with certain other trademarks, patents, copyrights and
trade secrets to the acquiring companies or their affiliates. In particular,
with respect to all food and beverage products other than fresh fruits,
vegetables and produce, Nabisco Canada holds the rights to use the Del Monte
trademark in Canada; Kikkoman Corporation holds the rights to use Del Monte
trademarks in the Far East and Pacific Rim (excluding the Philippines); Del
Monte Royal Foods and its affiliates hold the rights in Europe, Africa, the
Middle East and the Indian Subcontinent. Fresh Del Monte Produce N.V. holds the
rights to use the Del Monte name and trademark with respect to fresh fruit,
vegetables and certain chilled and frozen products related thereto throughout
the world. With respect to dried fruit, nuts and certain snack products, Premier
Valley Foods holds the rights to use Del Monte trademarks in the United States,
Mexico, Central America and the Caribbean. In connection with 1996 agreements to
sell Del Monte Mexico, International Home Foods acquired the right to use the
Del Monte trademarks with respect to processed food and beverage products in
Mexico and Del Monte Pan American of Panama acquired similar rights in Central
America and the Caribbean. Dewey Limited (an affiliate of Del Monte Royal Foods)
owns the rights in the Philippines to the Del Monte brand name. With the South
America Acquisition, Del Monte reacquired the rights to the Del Monte brand in
South America.
Del Monte retains the right to review the quality of the licensee's
products under each of its license agreements. Del Monte generally may inspect
the licensees' facilities for quality and the licensees must periodically submit
samples to Del Monte for inspection. Licensees may grant sublicenses but all
sublicensees are bound by these quality control standards and other terms of the
license.
Del Monte has also granted various security and tangible interests in its
trademarks and related trade names, copyrights, patents, trade secrets and other
intellectual property to its creditors, in connection with the Bank Financing,
and to its licensees, to secure certain of Del Monte's obligations under the
license agreements.
GOVERNMENTAL REGULATION
As a manufacturer and marketer of food products, Del Monte's operations are
subject to extensive regulation by various federal government agencies,
including the Food and Drug Administration, the United States Department of
Agriculture and the Federal Trade Commission, as well as state and local
agencies, with respect to production processes, product attributes, packaging,
labeling, storage and distribution. Under various statutes and regulations, such
agencies prescribe requirements and establish standards for safety, purity and
labeling. In addition, advertising of Del Monte's products is subject to
regulation by the FTC, and Del Monte's operations are subject to certain health
and safety regulations, including those issued under the Occupational Safety and
Health Act. Del Monte's manufacturing facilities and products are subject to
periodic inspection by federal, state and local authorities. Del Monte seeks to
comply at all times with all such laws and regulations and is not aware of any
instances of material non-compliance. Del Monte maintains all permits and
licenses relating to its operations. Del Monte believes its facilities and
practices are sufficient to maintain compliance with applicable governmental
laws and regulations. Nevertheless, there is no guarantee that Del Monte will be
able to comply with any future laws and regulations. Failure by Del Monte to
comply with applicable laws and regulations could subject Del Monte to civil
remedies including fines, injunctions, recalls or seizures as well as potential
criminal sanctions.
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PENSION CONTRIBUTIONS
In fiscal 1997, Del Monte's defined benefit pension plans were determined
to be underfunded. In connection with Del Monte's recapitalization, Del Monte
entered into an agreement with the Pension Benefit Guaranty Corporation dated
April 7, 1997 whereby Del Monte contributed $15.0 million within 30 days after
the consummation of the recapitalization to its defined benefit pension plans.
Del Monte contributed $15.0 million in calendar 1998 and $9.0 million in
calendar 1999. Del Monte will contribute a minimum of $8.0 million in calendar
2000, of which $4.0 million had been paid by June 30, 2000. Del Monte will also
contribute a minimum of $8.0 million in calendar 2001, for a total of $55.0
million. The contributions required to be made in 2000 and 2001 have been
secured by a $14.0 million letter of credit. This letter of credit is subject to
periodic reduction as contributions are made in accordance with the agreement.
See also Note 8 to the audited consolidated financial statements of Del Monte
for the year ended June 30, 2000.
ENVIRONMENTAL COMPLIANCE
As a result of its agricultural, food processing and canning activities,
Del Monte is subject to numerous environmental laws and regulations. Many of
these laws and regulations are becoming increasingly stringent and compliance
with them is becoming increasingly expensive. Del Monte seeks to comply at all
times with all of these laws and regulations and is not aware of any instances
of material non-compliance. Del Monte cannot predict the extent to which any
environmental law or regulation that may be enacted or enforced in the future
may affect its operations. Del Monte is engaged in a continuing program to
maintain its compliance with existing laws and regulations and to establish
compliance with anticipated future laws and regulations.
In connection with the sale of one of its facilities, Del Monte is
remediating conditions resulting from the release of petroleum-based elements
from underground storage tanks. Del Monte is also conducting a groundwater
investigation at one currently owned property for hydrocarbon contamination that
it believes resulted from the operations of an unaffiliated prior owner of the
property. At the present time, Del Monte is unable to predict the total cost for
the remediation. Further, investigation and remediation of environmental
conditions may in the future be required at other properties currently or
formerly owned or operated by Del Monte. Nonetheless, Del Monte does not expect
that these and other such remediation costs will have a material adverse effect
on Del Monte's financial condition or results of operations.
Governmental authorities and private claimants have notified Del Monte that
it is a PRP or may otherwise be potentially responsible for environmental
investigation and remediation costs at certain contaminated sites under CERCLA
or under similar state laws. With the exception of one previously owned site,
Del Monte has potential liability at each site because it allegedly sent certain
wastes from its operations to these sites for disposal or recycling. These
wastes consisted primarily of vegetative waste, empty metal drums (which
previously held raw materials), used oils and solvents, solder dross and paint
waste. With respect to a majority of the sites at which Del Monte has been
identified as a PRP, Del Monte has settled its liability with the responsible
regulatory agency. Based upon the information currently available, Del Monte
does not expect that its liability for the remaining site will be material. Del
Monte may be identified as a PRP at additional sites in the future.
Del Monte spent approximately $1.8 million on domestic environmental
expenditures from fiscal 1998 through fiscal 2000, primarily related to UST
remediation activities and upgrades to boilers and wastewater treatment systems.
Del Monte projects that it will spend an aggregate of approximately $3.1 million
in fiscal 2001 and 2002 on domestic capital projects and other expenditures in
connection with environmental compliance, primarily for boiler upgrades,
compliance costs related to the consolidation of its fruit and tomato processing
operations and continued UST remediation activities. Del Monte believes that its
CERCLA and other environmental liabilities will not have a material adverse
effect on its financial position or results of operations.
WORKING CAPITAL
Del Monte maintains a revolving line of credit to fund its seasonal working
capital needs. Del Monte's quarterly operating results have varied in the past
and are likely to vary in the future based upon a number of
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factors. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Seasonality.") The working capital requirements of Del
Monte are seasonally affected by the growing cycle of the vegetables, fruits and
tomatoes it processes. The inventory position of Del Monte is seasonally
affected by this growing cycle. Substantially all inventories are produced
during the harvesting and packing months of June through October and depleted
through the remaining seven months. Accordingly, working capital requirements
fluctuate significantly.
BACKLOG
Del Monte does not experience significant backlog.
ITEM 2. PROPERTIES
As of June 30, 2000, Del Monte operated 14 production facilities and six
distribution centers in the United States. See "Business -- Sales, Marketing and
Distribution" and "-- Supply and Production." Del Monte's production facilities
are owned properties, while its distribution centers are owned or leased. Del
Monte has various warehousing and storage facilities, which are primarily leased
facilities. Del Monte's leases are generally long-term. Virtually all of Del
Monte's properties, whether owned or leased, are subject to liens or security
interests.
The following table lists Del Monte's production facilities and
distribution centers:
SQUARE FOOTAGE
-----------------
LOCATION PRIMARY PRODUCT LINE OWNED LEASED
-------- -------------------- ------- -------
PRODUCTION FACILITIES*
Hanford, CA.......................... Solid and Paste-Based Tomato Products 651,000 675,000
Kingsburg, CA........................ Peaches and Zucchini 229,000 270,000
Modesto, CA.......................... Apricots, Peaches, Fruit Cocktail, Fruit 440,000 372,000
Cup, Chunky Fruit and Diced Pears+
Stockton, CA......................... Peaches, Cocktail Cherries, Fruit Cocktail 446,000 --
and Fruit Concentrate
Woodland, CA......................... Bulk Paste and Bulk Diced Tomatoes 465,000 --
Mendota, IL.......................... Peas, Corn, Lima Beans, Mixed Vegetables, 246,000 240,000
Carrots and Peas & Carrots
Plymouth, IN......................... Paste-Based Tomato Products and Pineapple 156,000 133,000
Juice
Sleepy Eye, MN....................... Peas and Corn 230,000 --
Crystal City, TX..................... Green Beans, Spinach, Carrots, Beets, 362,000 --
Potatoes and Tomato Sauce
Toppenish, WA........................ Asparagus, Corn, Lima Beans and Peas 228,000 273,000
Yakima, WA........................... Cherries and Pears 214,000 14,000
Cambria, WI.......................... Green Beans, Italian Beans, Corn and Peas 136,000 --
Markesan, WI......................... Green Beans, Wax Beans and Italian Beans 299,000 --
Plover, WI........................... Beans, Carrots, Beets and Potatoes 298,000 210,000
DISTRIBUTION CENTERS
Birmingham, AL....................... -- 293,000
Clearfield, UT....................... -- 80,000
Dallas, TX........................... -- 175,000
Rochelle, IL......................... 425,000 --
Stockton, CA......................... -- 512,000
Swedesboro, NJ....................... 267,000 --
- ---------------
* Includes owned manufacturing and owned or leased on-site warehouse and storage
capacity.
+ As currently planned upon completion of plant reconfiguration.
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Del Monte's principal administrative headquarters are located in leased
office space in San Francisco, California. Del Monte owns its primary research
and development facility in Walnut Creek, California.
Del Monte holds certain excess properties for sale and periodically
disposes of excess land and facilities through sales.
Management considers its facilities to be suitable and adequate for its
business and to have sufficient production capacity for the purposes for which
they are currently intended.
ITEM 3. LEGAL PROCEEDINGS
Del Monte is a defendant in an action brought by PPI Enterprises (U.S.),
Inc. in the U.S. District Court for the Southern District of New York on May 25,
1999. The plaintiff has alleged that Del Monte breached certain purported
contractual and fiduciary duties and made misrepresentations and failed to
disclose material information to the plaintiff about the value of Del Monte and
its prospects for sale. The plaintiff also alleges that it relied on Del Monte's
alleged statements in selling its preferred and common stock interest in Del
Monte to a third party at a price lower than that which the plaintiff asserts it
could have received absent Del Monte's alleged conduct. The complaint seeks
compensatory damages of at least $24 million, plus punitive damages. This case
continues to be in the early stages of procedural motions and Del Monte cannot
at this time reasonably estimate a range of exposure, if any. Del Monte believes
that this proceeding is without merit and plans to defend it vigorously.
Del Monte is also involved from time to time in various legal proceedings
incidental to its business, including claims with respect to product liability,
worker's compensation and other employee claims, tort and other general
liability, for which Del Monte carries insurance or is self-insured, as well as
trademark, copyright and related litigation. While it is not feasible to predict
or determine the ultimate outcome of these matters, Del Monte believes that none
of these legal proceedings will have a material adverse effect on Del Monte's
financial position. See "Business -- Environmental Compliance" for a description
of certain environmental matters in which Del Monte is involved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF DEL MONTE FOODS COMPANY
The following table sets forth the name, age and position of individuals
who hold positions as executive officers of Del Monte. There are no family
relationships between any director or executive officer and any other director
or executive officer of Del Monte. These individuals hold the same positions
with DMC. Executive officers are elected by the Board of Directors and serve at
the discretion of the Board.
NAME AGE POSITIONS
---- --- ---------
Richard G. Wolford................... 55 Chairman, President and Chief Executive Officer
Wesley J. Smith...................... 53 Chief Operating Officer
David L. Meyers...................... 54 Executive Vice President, Administration and Chief
Financial Officer
John Alfieri......................... 51 Senior Vice President, Sales
Richard L. French.................... 43 Senior Vice President and Chief Accounting Officer
Thomas E. Gibbons.................... 52 Senior Vice President and Treasurer
Marc D. Haberman..................... 37 Senior Vice President, Strategic Planning and Business
Development
Irvin R. Holmes...................... 48 Senior Vice President, Marketing
William J. Spain..................... 58 Senior Vice President and Chief Corporate Affairs
Officer
William R. Sawyers................... 38 Vice President, General Counsel and Secretary
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Richard G. Wolford, Chairman, President and Chief Executive Officer. Mr.
Wolford joined Del Monte as Chief Executive Officer and a director in April 1997
and was elected Chairman of the Board in May 2000. From 1967 to 1987, he held a
variety of positions at Dole Foods, including President of Dole Packaged Foods
from 1982 to 1987. From 1988 to 1996, he was Chief Executive Officer of HK
Acquisition Corp. where he developed food industry investments with venture
capital investors.
Wesley J. Smith, Chief Operating Officer. Mr. Smith joined Del Monte as
Chief Operating Officer and a director in April 1997. From 1972 to 1995, he was
employed by Dole Foods in a variety of positions, including senior positions in
finance, marketing, operations and general management in California, Hawaii and
Honduras.
David L. Meyers, Executive Vice President, Administration and Chief
Financial Officer. Mr. Meyers joined Del Monte in 1989. He was elected Chief
Financial Officer of Del Monte in December 1992 and served as a member of the
Board of Directors of Del Monte from January 1994 until consummation of Del
Monte's recapitalization. Prior to joining Del Monte, Mr. Meyers held a variety
of financial and accounting positions with RJR Nabisco (1987 to 1989), Nabisco
Brands USA (1983 to 1987) and Standard Brands, Inc. (1973 to 1983).
John Alfieri, Senior Vice President, Sales. Mr. Alfieri joined Del Monte in
February 1995 and was elected to his current position in March 2000. Prior to
joining Del Monte, he was with Eagle Food Service serving as President from June
1994 until February 1995, and as Vice President, Finance and Operations from May
1993 to June 1994. From 1973 to 1993, Mr. Alfieri held sales positions with The
Clorox Company and Procter & Gamble.
Richard L. French, Senior Vice President and Chief Accounting Officer. Mr.
French joined Del Monte in 1980 and was elected to his current position in May
1998. Mr. French was Vice President and Chief Accounting Officer of Del Monte
from August 1993 through May 1998 and has held a variety of positions within Del
Monte's financial organization.
Thomas E. Gibbons, Senior Vice President and Treasurer. Mr. Gibbons joined
Del Monte in 1969 and was elected to his current position in February 1995. He
was elected Vice President and Treasurer of Del Monte in January 1990. Mr.
Gibbons' prior experience also includes a variety of positions within Del
Monte's and RJR Nabisco's tax and financial organizations.
Marc D. Haberman, Senior Vice President, Strategic Planning and Business
Development. Mr. Haberman joined Del Monte in January 1999 and was elected to
his current position in February 2000. Prior to that he was with Sunbeam
Corporation from 1996 until 1998 where he was Category Leader for Sunbeam's
appliance business. From 1992 to 1996, Mr. Haberman was a consultant with
McKinsey & Co., and from 1987 to 1992, he was in brand management at Procter &
Gamble.
Irvin R. Holmes, Senior Vice President, Marketing. Mr. Holmes joined Del
Monte in November 1990 and was elected to his current position in December 1999.
Prior to that he was with Dole Foods from 1987 until 1990 where he held a
variety of sales and marketing positions. From 1977 to 1987, Mr. Holmes held
marketing positions with James River/Crown Zellerbach, AMF Ben Hogan Company and
Brown & Williamson Tobacco.
William J. Spain, Senior Vice President and Chief Corporate Affairs
Officer. Mr. Spain joined Del Monte in 1966 and was elected to his current
position in January 1999. Previously, he was Del Monte's Senior Vice President,
Technology. Mr. Spain has also held various positions within Del Monte in
corporate affairs, production management, quality assurance, environmental and
energy management, and consumer services.
William R. Sawyers, Vice President, General Counsel and Secretary. Mr.
Sawyers joined Del Monte in November 1993 and was elected to his current
position in 1995. Prior to joining Del Monte, Mr. Sawyers was with the law firm
of Shearman & Sterling from 1987 to 1993.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Not applicable.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth historical consolidated financial
information of Del Monte. The statement of operations data for the fiscal year
ended June 30, 1996 and the balance sheet data as of June 30, 1996 have been
derived from consolidated financial statements of Del Monte audited by Ernst &
Young LLP, independent auditors. The statement of operations data for each of
the fiscal years in the four-year period ended June 30, 2000 and the balance
sheet data as of June 30, 2000, 1999, 1998 and 1997 have been derived from
consolidated financial statements of Del Monte audited by KPMG LLP, independent
auditors. The table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the consolidated
financial statements of Del Monte and related notes and other financial
information included elsewhere in this Annual Report on Form 10-K.
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales..................... $ 1,462.1 $ 1,504.5 $ 1,313.3 $ 1,217.4 $ 1,305.3
Cost of products sold......... 920.5 998.3 898.2 819.3 984.1
Selling, administrative and
general expense(a)......... 384.2 375.3 316.4 326.9 239.0
Special charges related to
plant consolidation........ 10.9 17.2 9.6 -- --
Acquisition expense........... -- 0.9 6.9 -- --
----------- ----------- ----------- ----------- -----------
Operating income.............. 146.5 112.8 82.2 71.2 82.2
Interest expense.............. 67.1 77.6 77.5 52.0 67.2
Loss (gain) on sale of
divested assets(b)......... -- -- -- 5.0 (123.3)
Other (income) expense(a)..... -- 2.0 (1.3) 30.1 2.7
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes, minority interest,
extraordinary item and
cumulative effect of
accounting change.......... 79.4 33.2 6.0 (15.9) 135.6
Provision (benefit) for income
taxes...................... (53.6) 0.5 0.5 0.6 11.4
Minority interest in earnings
of subsidiary.............. -- -- -- -- 3.0
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item and
cumulative effect of
accounting change.......... 133.0 32.7 5.5 (16.5) 121.2
Extraordinary loss, net of tax
benefit(c)................. 4.3 19.2 -- 41.6 10.3
Cumulative effect of
accounting change(d)....... -- -- -- -- 7.1
----------- ----------- ----------- ----------- -----------
Net income (loss)............. $ 128.7 $ 13.5 $ 5.5 $ (58.1) $ 103.8
=========== =========== =========== =========== ===========
Net income (loss) attributable
to common shares........... $ 128.7 $ 9.9 $ 0.2 $ (127.9) $ 21.8
Net income (loss) per common
share(e)................... $ 2.42 $ 0.23 $ 0.01 $ (2.07) $ 0.29
Weighted average number of
diluted shares
outstanding................ 53,097,898 42,968,652 32,355,131 61,703,436 75,047,353
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FISCAL YEAR ENDED JUNE 30,
--------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------- ------ -------
(IN MILLIONS)
OTHER DATA:
Adjusted EBITDA:(f)
EBIT.............................................. $146.5 $110.8 $ 83.5 $ 36.1 $ 202.8
Depreciation and amortization(g).................. 32.3 33.5 28.3 24.4 25.7
EBITDA of Divested Operations(h).................. -- -- -- (0.9) (22.4)
Asset value impairment/(recapture)(i)............. (2.3) -- -- 6.5 --
Loss (gain) on sale of Divested Operations(b)..... -- -- -- 5.0 (123.3)
Terminated transactions(j)........................ -- 2.1 -- -- --
Benefit costs(k).................................. -- -- 2.9 -- --
Headcount reduction and relocation(l)............. -- -- -- -- 9.0
Recapitalization expenses(a)...................... -- -- -- 47.4 --
Special charges related to plant consolidation.... 10.9 17.2 9.6 -- --
Expenses of acquisitions(m)....................... -- 1.4 6.9 -- --
Inventory write-up(m)............................. -- 2.8 3.4 -- --
------ ------ ------- ------ -------
Adjusted EBITDA..................................... $187.4 $167.8 $ 134.6 $118.5 $ 91.8
====== ====== ======= ====== =======
Adjusted EBITDA margin(f)........................... 12.8% 11.2% 10.3% 10.1% 8.6%
Cash flows provided by (used in) operating
activities........................................ $ (7.1) $ 96.1 $ 97.0 $ 25.2 $ 58.4
Cash flows provided by (used in) investing
activities........................................ (65.9) (86.2) (222.0) 37.0 169.9
Cash flows provided by (used in) financing
activities........................................ 71.2 (9.9) 127.0 (63.4) (222.8)
Capital expenditures................................ 67.8 55.0 32.1 20.3 15.8
SELECTED RATIOS:
Ratio of earnings to fixed charges(n).......... 2.0x 1.4x 1.1x -- 2.8x
Deficiency of earnings to cover fixed
charges(n)................................... -- -- -- $ 15.9 --
JUNE 30,
------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
(IN MILLIONS)
BALANCE SHEET DATA:
Working capital................................ $ 149.8 $ 187.3 $ 210.2 $ 118.1 $ 209.2
Total assets................................... 1,040.7 872.0 845.1 666.9 735.9
Total debt..................................... 632.1 543.4 709.7 609.7 372.4
Redeemable preferred stock..................... -- -- 32.5 32.2 213.4
Stockholders' equity (deficit)................. 10.6 (118.4) (349.8) (398.8) (288.1)
- ---------------
(a) In connection with Del Monte's recapitalization, which was consummated on
April 18, 1997, administrative and general expenses of approximately $25.0
million were incurred primarily for management incentive payments and, in
part, for severance payments. In addition, $22.3 million of other expenses
were incurred in conjunction with the recapitalization, primarily for
legal, investment advisory and management fees.
(b) In the fiscal quarter ended December 1996, Del Monte sold Del Monte Latin
America. The combined sales price of $49.5 million, reduced by $1.3
million of related transaction expenses, resulted in a loss of $5.0
million. In November 1995, Del Monte sold its pudding business for $88.8
million, net of $3.9 million of related transaction fees. The sale
resulted in a gain of $71.3 million. In March 1996, Del Monte sold its
50.1% ownership interest in Del Monte Philippines for $100.0 million, net
of $2.2 million of related transaction fees. The sale resulted in a gain
of $52.0 million.
(c) During February 2000, the Company repurchased $31.0 million of senior
subordinated notes. In conjunction with this debt prepayment, an
extraordinary loss of $5.2 million ($4.3 million net of tax benefit of
$0.9 million) was recorded. This extraordinary loss consisted of $3.7
million of prepayment
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premiums and a $1.5 million write-off of capitalized deferred debt issue
costs and original issue discount. In fiscal 1999, Del Monte recorded a
$19.2 million extraordinary loss. In conjunction with the February 1999
public equity offering, Del Monte redeemed all outstanding preferred
stock, a portion of senior subordinated notes and a portion of senior
discount notes, as well as an early retirement of senior debt. In
connection with these payments, $5.5 million of capitalized debt issue
costs were written off and $13.7 million of redemption premiums were paid,
both of which Del Monte recorded as extraordinary items. In fiscal 1997,
$41.6 million of expenses related to the early retirement of debt due to
the exchange of Pay-in-Kind ("PIK") notes and to Del Monte's
recapitalization was charged to net income. In September 1996, Del Monte
repurchased PIK notes and, concurrently, exchanged essentially all
remaining PIK notes for new PIK notes. In conjunction with this repurchase
and exchange, capitalized debt issue costs of $3.6 million, net of a
discount on the PIK notes, were written off and accounted for as an
extraordinary loss. In conjunction with the refinancing of debt that
occurred at the time of the recapitalization in fiscal 1997, Del Monte
recorded a $38.0 million extraordinary loss related to the early
retirement of debt. The $38.0 million consisted of previously capitalized
debt issue costs of $18.8 million and a note premium payment and a term
loan make-whole payment aggregating $19.2 million. In December 1995 and
April 1996, Del Monte prepaid part of its term loan and senior secured
notes. In conjunction with the early debt retirement, Del Monte recorded
an extraordinary loss of $10.3 million. The extraordinary loss consisted
of a $5.0 million prepayment premium and a $5.3 million write-off of
capitalized debt issue costs related to the early retirement of debt.
(d) Effective July 1, 1995, Del Monte adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The cumulative effect of adopting SFAS No. 121 resulted in a
charge to fiscal 1996 net earnings of $7.1 million.
(e) Net income (loss) attributable to the shares of common stock is computed
as net income (loss) reduced by the cash and in-kind dividends for the
period on redeemable preferred stock.
(f) Adjusted EBITDA represents EBITDA (income (loss) before provision
(benefit) for income taxes, minority interest, extraordinary item,
cumulative effect of accounting change and depreciation and amortization
expense, plus interest expense) before special charges and other one-time
and non-cash charges, less gains (losses) on sales of divested assets and
the results of the Divested Operations (as defined below). Adjusted EBITDA
should not be considered in isolation from, and is not presented as an
alternative measure of, operating income or cash flow from operations (as
determined in accordance with GAAP). Adjusted EBITDA as presented may not
be comparable to similarly titled measures reported by other companies.
Since Del Monte has undergone significant structural changes during the
periods presented, management believes that this measure provides a
meaningful measure of operating cash flow (without the effects of working
capital changes) for the core and continuing business of Del Monte by
normalizing the effects of operations that have been divested and one-time
charges or credits. Adjusted EBITDA margin is calculated as Adjusted
EBITDA as a percentage of net sales (excluding net sales of Divested
Operations of $48.1 million and $232.3 million for the years ended June
30, 1997 and 1996).
(g) Depreciation and amortization excluded amortization of $3.0 million, $3.4
million, $3.3 million, $4.7 million and $4.8 million of deferred debt
issuance costs for fiscal 2000, 1999, 1998, 1997 and 1996, which are
included in the caption "Interest expense." In addition, in fiscal 2000,
1999 and 1998, depreciation and amortization excluded $4.3 million, $9.4
million and $3.0 million of accelerated depreciation, which is included in
the caption "Special charges related to plant consolidation."
(h) At the end of fiscal 1997, a distribution agreement expired under which
Del Monte sold certain products for Premier Valley Foods (formerly
Yorkshire Dried Fruits and Nuts, Inc.) at cost. During fiscal 1996 and the
first half of fiscal 1997, Del Monte sold its pudding business, its 50.1%
interest in Del Monte Philippines and all of its interest in Del Monte
Latin America. These events are collectively referred to as the "Divested
Operations."
(i) In the fourth quarter of fiscal 2000, the Company entered into a joint
venture to develop the site of a former dried fruit plant location in San
Jose. This property had previously been written-down in fiscal 1996 upon
initial adoption of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets
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and for Long-Lived Assets to Be Disposed Of". The value assigned to this
property which was contributed in the joint venture was higher than the
carrying cost resulting in a recapture of the previous write-down. In
fiscal 1997, non-cash charges included $6.5 million related to the
recognition of an other than temporary impairment of a long-term equity
investment.
(j) In fiscal 1999, one-time charges included $2.1 million of costs of the
public equity offering that was withdrawn due to conditions in the equity
securities market in July 1998.
(k) In fiscal 1998, one-time and non-cash charges included $2.9 million of
stock compensation and related benefit expense.
(l) In fiscal 1996, other one-time charges included $3.3 million for
relocation costs and $5.7 million of costs associated with a significant
headcount reduction.
(m) In fiscal 1999, one-time charges included $0.9 million of indirect
acquisition-related expenses incurred in connection with the South America
Acquisition, as well as $0.5 million of one-time start-up costs, and $2.8
million of inventory step-up due to the purchase price allocation related
to the Contadina Acquisition and the South America Acquisition. In fiscal
1998, one-time charges included $6.9 million of indirect
acquisition-related expenses incurred in connection with the Contadina
Acquisition and $3.4 million of inventory step-up due to the purchase price
allocation related to the Contadina Acquisition.
(n) For purposes of determining the ratio of earnings to fixed charges and the
deficiency of earnings to cover fixed charges, earnings are defined as
income (loss) before extraordinary item, cumulative effect of accounting
change and provision (benefit) for income taxes plus fixed charges. Fixed
charges consist of interest expense on all indebtedness (including
amortization of deferred debt issue costs) and the interest component of
rent expense.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity of Del Monte
during the three-year period ended June 30, 2000. This discussion should be read
in conjunction with the audited consolidated financial statements of Del Monte
for the three-year period ended June 30, 2000 and notes thereto included
elsewhere in this Annual Report on Form 10-K.
GENERAL
Del Monte reports its financial results on a July 1 to June 30 fiscal year
basis to coincide with its inventory production cycle, which is highly seasonal.
Raw product is harvested and packed primarily in the months of June through
October, during which time inventories rise to their highest levels. At the same
time, consumption of canned products declines, reflecting, in part, lower levels
of promotional activity, the availability of fresh alternatives and other
factors. This situation impacts operating results as sales volumes, revenues and
profitability decline during this period. Results over the remainder of the
fiscal year are affected by many factors including industry supply and Del
Monte's share of that supply. See "-- Seasonality."
In 1997, in connection with Del Monte's recapitalization, Del Monte began
implementing a new business strategy designed to improve sales and operating
margins by: (1) increasing market share and distribution of high margin
value-added products; (2) introducing new products and packaging; (3) increasing
penetration of high growth distribution channels, such as supercenters and
warehouse clubs; (4) achieving cost savings through operating efficiencies,
plant consolidations and investments in new and upgraded equipment; and (5)
completing strategic acquisitions.
Consistent with Del Monte's strategy to generate growth through
acquisitions, Del Monte consummated the Contadina Acquisition in December 1997.
The Contadina Acquisition contributes another established brand and positions
Del Monte as the branded market leader in the high margin canned solid tomato
category. The Contadina Acquisition also establishes a strong presence for Del
Monte in the branded paste-based tomato products category, which includes tomato
paste, tomato sauce and pizza sauce. Del Monte believes that Contadina's strong
brand recognition, particularly in paste-based tomato products, complements Del
Monte's brand leadership in canned solid tomato products and enhances Del
Monte's market share and household penetration. Del Monte also reacquired the
rights to the Del Monte brand in South America in August 1998. That acquisition
has opened a new geographic market for Del Monte.
In addition to diversifying further Del Monte's revenue base, the Contadina
Acquisition expanded Del Monte's processing scale, which has resulted in
production cost efficiencies. Moreover, among the facilities acquired by Del
Monte was a state-of-the-art manufacturing facility at Hanford, California. In
the third quarter of fiscal 1998, Del Monte committed to a plan to consolidate
processing operations over a three-year period. As part of these efforts, Del
Monte transferred tomato production at its Modesto, California facility to
Hanford following the summer 1998 pack. Del Monte converted its Modesto facility
to a fruit processing facility that has assumed the production previously
conducted at Del Monte's San Jose, California facility and will assume the
production currently conducted at the Stockton, California facility. Del Monte
closed its San Jose facility in December 1999 and will close its Stockton
facility after the production season in 2000. In connection with these actions,
Del Monte recorded charges of $6.6 million in the third quarter of fiscal 1998,
principally relating to severance. Del Monte incurred additional charges as a
result of these plant closures. These charges included accelerated depreciation
resulting from the effects of adjusting the tomato and fruit processing assets'
remaining useful lives to match the period of use prior to the closure of these
plants. Accelerated depreciation totaling $4.3 million and $9.4 million was
recorded in fiscal 2000 and 1999, respectively, and $3.0 million of such
depreciation was recorded in the fourth quarter of fiscal 1998. In addition, Del
Monte incurred costs to remove and dispose of those assets, as well as ongoing
fixed costs during the Modesto plant reconfiguration and until the sale of the
San Jose and Stockton properties. These costs totaled $6.6 million in fiscal
2000 and $4.3 million in fiscal 1999. Del Monte's results over the next
three-year period are expected to be affected by related plant consolidation
charges as follows: $2.9 million in fiscal 2001, $0.7 million in fiscal 2002,
and $0.3 million in fiscal 2003. See Note 12 to the consolidated financial
statements for the year ended June 30, 2000. In addition, Del Monte's vegetable
processing plant located in Arlington,
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Wisconsin was closed in August 1998. Total costs incurred in connection with
this closure were $3.5 million primarily relating to asset write-offs. Del Monte
recorded this expense in the first quarter of fiscal 1999.
The plant consolidation plan is a major component of a capital investment
program of approximately $100.0 million started by Del Monte a little over three
years ago. A total of $94.0 million has been spent on this program as of June
30, 2000. Del Monte's goal for this program is to achieve cumulative cost
savings by the end of the fifth year estimated at approximately $170.0 million.
As of June 30, 2000, Del Monte estimates that approximately $68.0 million in
cumulative cost savings have been generated by this capital investment program.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from Del Monte's consolidated statements of income, expressed as percentages of
Del Monte's net sales for such periods:
FISCAL YEAR ENDED JUNE 30,
---------------------------
2000 1999 1998
----- ----- -----
Net sales............................................... 100.0% 100.0% 100.0%
Cost of products sold................................... 63.0 66.4 68.4
Selling, administrative and general expense............. 26.3 24.9 24.1
Special charges related to plant consolidation.......... 0.7 1.1 0.7
Acquisition expenses.................................... -- 0.1 0.5
----- ----- -----
Operating income................................... 10.0% 7.5% 6.3%
===== ===== =====
Interest expense........................................ 4.6% 5.2% 5.9%
===== ===== =====
The following table sets forth, for the periods indicated, Del Monte's net
sales by product categories, expressed in dollar amounts and as percentages of
Del Monte's total net sales for such periods:
FISCAL YEAR ENDED JUNE 30,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN MILLIONS)
NET SALES:
Canned vegetables(a)............................... $ 507.7 $ 508.0 $ 466.2
Canned fruit(a).................................... 564.6 562.3 526.5
Tomato products(a)................................. 377.4 423.8 320.6
-------- -------- --------
Subtotal domestic............................. 1,449.7 1,494.1 1,313.3
South America(b)................................... 12.9 10.4 --
Intercompany sales................................. (0.5) -- --
-------- -------- --------
Total net sales............................... $1,462.1 $1,504.5 $1,313.3
======== ======== ========
AS A PERCENTAGE OF NET SALES:
Canned vegetables(a)............................... 34.7% 33.7% 35.5%
Canned fruit(a).................................... 38.6 37.4 40.1
Tomato products(a)................................. 25.8 28.2 24.4
-------- -------- --------
Subtotal domestic............................. 99.1 99.3 100.0
South America...................................... 0.9 0.7 --
Intercompany sales................................. -- -- --
-------- -------- --------
Total......................................... 100.0% 100.0% 100.0%
======== ======== ========
- ---------------
(a) Includes sales of the entire product line across each channel of
distribution, including sales to grocery chains, warehouse clubs,
supercenters, mass merchandisers and other grocery retailers, as well as Del
Monte's foodservice, food ingredients, export and vegetable private label
businesses and military sales.
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SEASONALITY
Del Monte's quarterly operating results have varied in the past and are
likely to vary in the future based upon a number of factors. Del Monte's
historical net sales have exhibited seasonality, with the second and third
fiscal quarters having the highest net sales. These two quarters reflect
increased sales of Del Monte's products during the holiday period in the United
States extending from late November through December, as well as sales
associated with the Easter holiday. Lower levels of promotional activity, the
availability of fresh produce and other factors have historically affected net
sales in the first fiscal quarter. Quarterly gross profit primarily reflects
fluctuations in sales volumes and is also affected by the overall product mix.
Del Monte's fruit operations have a greater percentage of annual sales and cost
of products sold in the first fiscal quarter, as compared to its vegetable and
tomato operations, due principally to increased sales of fruit cups during the
"back to school" period. Del Monte's vegetable and fruit operations have a
greater percentage of annual sales and cost of products sold in the second and
third fiscal quarters, principally due to the year-end holiday season, and sales
of ketchup and related cost of products sold typically increase in the fourth
fiscal quarter. Selling, administrative and general expense tends to be greater
in the first half of the fiscal year, reflecting promotional expenses relating
to the "back to school" period and the year-end holiday season, while Easter is
the only major holiday in the second half of the fiscal year.
The annual production volume of vegetable, fruit and tomatoes is driven by
projected demand in the following year. Annual production is also influenced by
general seasonal fluctuations primarily due to weather and overall growing
conditions.
Del Monte ended fiscal 2000 with higher than desired inventory levels. In
order to reduce certain inventory levels, production volumes will be lower
during the 2000 production season. This lower pack will result in higher fixed
costs per case. These higher costs are expected to increase costs of products
sold as expressed as a percentage of net sales, but are not expected to
significantly impact overall profitability.
FISCAL 2000 VS. FISCAL 1999
Net Sales. Consolidated net sales for fiscal 2000 decreased by $42.4
million, or 2.8%, from fiscal 1999. (Approximately 0.9% of consolidated net
sales were generated by Del Monte's South American business in fiscal 2000.) The
decrease in sales in the current year primarily reflects the Company's strategy
to shift emphasis towards sales of higher margin products and to reduce emphasis
on lower margin commodity items. This resulted in a decrease in sales in the
foodservice/food ingredients channel. Excluding the foodservice/food ingredients
channel, net sales for the year increased approximately one percent over last
year, primarily reflecting continued growth in the club and mass merchandisers
channel and growth from new products (Fruit-to-Go and continued expansion of
Orchard Select) offset by lower sales in the retail tomato business. Ketchup
sales declined due to strong competitive activity; additionally, tomato sauce
sales declined due to less aggressive merchandising.
Although net sales were down as compared to prior year, the Company's
market share increased in all three major processed food categories. In fiscal
2000, Del Monte's market share for Del Monte branded vegetables, based on case
volume, was 23.7% versus 21.3% in the previous year, while Del Monte's market
share for Del Monte branded fruit products was 44.2% compared to 42.8% for the
previous year. Del Monte's market share for solid tomato products was 17.5% in
fiscal 2000 compared to 17.0% in the fiscal 1999.
Cost of Products Sold. Costs decreased by $77.8 million in fiscal 2000 as
compared to fiscal 1999, with cost of products sold expressed as a percentage of
net sales of 63.0% in fiscal 2000 and 66.4% in fiscal 1999. The decrease in
costs in fiscal 2000 was primarily due to lower sales. In addition, the decrease
in cost of products sold as a percentage of net sales was due to lower costs as
a result of capital spending initiatives and other favorable cost reductions, as
well as a favorable sales mix of higher margin products.
Selling, Administrative and General Expense. Selling, administrative and
general expense as a percentage of net sales was 26.3% and 24.9% in fiscal 2000
and 1999, respectively. Selling, administrative and general expense for fiscal
2000 was higher due to an investment in new products and in order to support
growth in the retail business.
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Research and development costs of $6.6 million and $6.2 million in fiscal
2000 and 1999, respectively, were included in general and administrative
expenses.
Special Charges Related to Plant Consolidation. Del Monte incurred special
charges of $10.9 million in fiscal 2000 compared to special charges of $17.2
million in the prior year. These charges included accelerated depreciation
expense of $4.3 million and $9.4 million in fiscal 2000 and fiscal 1999,
respectively, resulting from the effects of adjusting the assets' remaining
useful lives to accelerate the depreciation thereof. Special charges for fiscal
2000 and 1999 also included $5.9 million and $2.4 million, respectively, of
on-going fixed costs and other period costs primarily incurred at the Modesto
facility while under reconfiguration. Costs incurred for removal of tomato and
fruit processing equipment to be disposed of totaled $2.7 million and $1.9
million in fiscal 2000 and 1999, respectively. Also included in fiscal 2000 was
a reduction of $1.3 million in the severance accrual established in fiscal 1998,
and a reduction of the accrual related to the Arlington plant closure of $0.7
million as the proceeds of the sale of the plant exceeded original projections.
Interest Expense. Interest expense decreased 13.5% in fiscal 2000 compared
to fiscal 1999. This decrease was due to the lower average outstanding debt
balances.
Other (Income) Expense. Other expense for fiscal 2000 decreased as compared
to fiscal 1999 due to the inclusion in 1999 of expenses related to the withdrawn
July 1998 public equity offering.
Provision (Benefit) for Income Taxes. The income tax benefit of $53.6
million was primarily attributable to the release of the majority of the
valuation allowance. Management evaluated the available evidence and concluded
it is more likely than not that the Company will realize its net deferred tax
assets. In reaching this conclusion, significant weight was given to the
Company's current, as well as recent cumulative profitability.
Net Income before Extraordinary Item. Net income for fiscal 2000 increased
by $100.3 million compared to the same period of prior year. The increase in net
income is primarily due to the recognition of the valuation allowance, a more
profitable mix of products sold and reduced plant consolidation costs.
Extraordinary Item. In conjunction with the repayment of $31.0 million of
senior subordinated notes, Del Monte recorded an extraordinary loss. The
extraordinary item charge consisted of the write-off of $1.5 million of
previously capitalized debt issue costs related to the redeemed notes and
original issue discount and $3.7 million of redemption premiums, net of tax
benefit.
FISCAL 1999 VS. FISCAL 1998
South America Acquisition. On July 10, 1998, Del Monte entered into an
agreement with Nabisco Inc. ("Nabisco") to reacquire rights to the Del Monte
brand in South America from Nabisco, Inc. and to purchase Nabisco's canned
vegetable and tomato business in Venezuela, including a food processing plant in
Venezuela. The transaction closed on August 28, 1998 for a cash purchase price
of $31.8 million. In connection with this acquisition, Del Monte incurred
approximately $0.9 million of indirect acquisition expenses. RJR Nabisco had
retained ownership of the Del Monte brand in South America and the Del Monte
business in Venezuela when it sold other Del Monte businesses in 1990. This
transaction was accounted for using the purchase method of accounting. The
purchase price was allocated as $3.1 million to inventory, $0.5 million to
property, plant and equipment and $28.2 million representing intangible assets.
Net Sales. Consolidated net sales for fiscal 1999 increased by $191.2
million, or 14.6%, compared to fiscal 1998, primarily due to higher volumes in
the vegetable and fruit businesses, sales growth of 38% over prior year in the
club and mass merchandisers channel and Contadina product sales (which accounted
for $95.1 million of the increase in fiscal 2000 primarily due to a full year of
Contadina versus six months in fiscal 1998). Approximately 0.7% of consolidated
net sales were generated by Del Monte's South American business. The following
discusses the increases within Del Monte's major product lines. Vegetable
product sales increased due to the successful implementation of a new vegetable
marketing strategy, which has resulted in merchandising efficiencies, the impact
of improved packaging in club stores and a higher margin product mix. Fruit
product sales increased in fiscal 1999 as compared to the prior year, primarily
due to the introduction of new products (FruitRageous and Fruit Pleasures
single-serve fruit products and the Orchard
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Select fruit-in-glass product), which began national distribution during the
first quarter of fiscal 1999. Fruit product sales also increased due to growth
in the higher margin categories of fruit cups, specialty fruit and buffet fruit.
In fiscal 1999, Del Monte's market share for Del Monte branded vegetables, based
on case volume, was 21.3% versus 20.0% in the previous year, while Del Monte's
market share for Del Monte branded fruit products was 42.8% compared to 42.2%
for the previous year. Del Monte's market share for solid tomato products was
17.0% in fiscal 1999 compared to 16.5% in the previous year.
Cost of Products Sold. Cost of products sold as a percent of net sales was
66.4% for fiscal 1999, compared to 68.4% for fiscal 1998. The decrease in cost
of products sold as a percent of net sales was primarily due to manufacturing
cost decreases, higher product pricing and a favorable product mix.
Manufacturing costs were favorable in the current year period as compared to the
prior year period due to more favorable raw product costs, cost savings from
capital spending initiatives and increased production levels.
Selling, Administrative and General Expense. Selling, administrative and
general expense increased by $58.9 million for fiscal 1999 compared to fiscal
1998. The increase in selling, administrative and general expense was primarily
due to higher marketing costs associated with the introduction of new products,
promotion cost increases resulting from higher volumes of product sold
(including the increase due to the acquisition of Contadina) and increased
spending resulting from higher levels of promotional activity.
Included in general and administrative expenses are research and
development costs of $6.2 million and $5.3 million for fiscal 1999 and 1998.
Research and development spending in fiscal 1999 and 1998 remained focused on
strategic spending to maintain the existing business and to develop product line
extensions.
Special Charges Related to Plant Consolidation. Del Monte incurred special
charges of $17.2 million in fiscal 1999 compared to special charges of $9.6
million ($6.6 million severance accrual and $3.0 million accelerated
depreciation) in fiscal 1998. Special charges for fiscal 1999 included $9.4
million of accelerated depreciation related to buildings and machinery and
equipment that will no longer be needed following the consolidation of the
operations of two fruit processing plants and two tomato processing plants as
compared to $3.0 million in fiscal 1998 related to accelerated depreciation. The
plant consolidation plan was not implemented until the end of fiscal 1998,
therefore, only three months of accelerated depreciation was included in prior
year's special charges as compared to twelve months of accelerated depreciation
in the current year. Special charges for fiscal 1999 also included $2.4 million
of on-going fixed costs and other period costs incurred at the Modesto facility
while under reconfiguration, as well as a $1.9 million charge, recorded during
the second quarter of fiscal 1999, representing costs to be incurred for removal
of tomato processing equipment to be disposed of. In addition, special charges
for 1999 also included $3.5 million, representing primarily the write-down to
fair value of assets held for sale related to the closure of the Arlington,
Wisconsin plant, which was recorded in the first quarter of fiscal 1999.
Interest Expense. Interest expense was relatively flat in fiscal 1999. Debt
balances increased significantly in mid fiscal 1998 due to the Contadina
Acquisition. However, after the February 1999 public equity offering, debt
balances decreased in fiscal 1999 since the proceeds of the offering were used
primarily to repay debt.
Other Expense. Other expense for fiscal 1999 represented expenses of the
public equity offering that was withdrawn due to conditions in the equity
securities market in July 1998. These expenses were charged to earnings during
the first quarter of fiscal 1999 upon the withdrawal of that offering.
Provision (Benefit) for Income Taxes. As of June 30, 1999, Del Monte had
$53.4 million in net operating loss carryforwards for tax purposes, which will
expire between 2009 and 2012.
Net Income before Extraordinary Item. Net income before extraordinary item
for fiscal 1999 was $32.7 million compared to net income of $5.5 million in
fiscal 1998. This increase was primarily due to an increase in operating income
resulting from higher net sales and more favorable manufacturing and product
costs in fiscal 1999 compared to fiscal 1998. The increase was somewhat offset
by higher special charges related to plant consolidation and costs of the
withdrawn July 1998 public equity offering.
Extraordinary Item. Proceeds of the February 1999 public equity offering
were used to redeem preferred stock and a portion of the outstanding
subordinated notes and to repay senior debt. The extraordinary item
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26
charge consisted of the write-off of $5.5 million of previously capitalized debt
issue costs related to the redeemed notes and early debt retirement and $13.7
million of redemption premiums.
RECENTLY ISSUED ACCOUNTING STANDARDS
In fiscal 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133") (as amended by SFAS Nos. 137 and 138). SFAS No. 133 is required to be
adopted for all fiscal quarters and fiscal years beginning after June 15, 2000
and relates to accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. Based on the Company's
current limited use of derivative instruments, Del Monte anticipates that
adoption of SFAS No. 133 will not have a significant effect on its results of
operations or its financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 is to be adopted for fiscal years beginning after December
15, 1999, which for the Company would be fiscal year 2001. SAB 101 addresses
various topics in revenue recognition. The Company is currently analyzing SAB
101, however based on management's current understanding and interpretation, SAB
101 is not expected to have a material impact on the Company's consolidated
financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- An Interpretation of Accounting Principles Board Opinion
("APB") No. 25". FIN 44 clarifies the application of APB 25 and is effective
July 1, 2000. The Company believes that its current accounting policies are in
conformity with this interpretation, and does not believe that FIN 44 will have
a material effect on the Company's consolidated financial statements.
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs". This
issue addresses the income statement classification for shipping and handling
fees and costs by companies. The Company believes that its current accounting
policies are in conformity with this issue, and does not believe that EITF 00-10
will have a material effect on the Company's consolidated financial statements.
In May 2000, the EITF reached a consensus on Issue 00-14, "Accounting for
Certain Sales Incentives". This issue addresses the recognition, measurement,
and income statement classification for sales incentives offered voluntarily by
a vendor without charge to customers that can be used in, or are exercisable by
a customer as a result of, a single exchange transaction. The Company is
currently analyzing EITF 00-14, however based on management's current
understanding and interpretation, EITF 00-14 is not expected to have a material
impact on the Company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Del Monte's primary cash requirements are to fund debt service, finance
seasonal working capital needs and make capital expenditures. Internally
generated funds and amounts available under its revolving credit facility (the
"Revolver") are Del Monte's primary sources of liquidity.
Management believes that cash flow from operations and availability under
the Revolver will provide adequate funds for Del Monte's working capital needs,
planned capital expenditures and debt service obligations for at least the next
12 months.
Del Monte's ability to fund its cash requirements and to remain in
compliance with all of the financial covenants under its debt agreements depends
on its future operating performance and cash flow. These are in turn subject to
prevailing economic conditions and to financial, business and other factors,
some of which are beyond Del Monte's control.
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As part of its business strategy, Del Monte continuously reviews
acquisition opportunities. Del Monte believes that any acquisition would likely
require the incurrence of additional debt, which could exceed amounts available
under the Bank Financing (as defined in "Financing Activities -- 2000
Activity"). As a result, completion of any such acquisition could require the
consent of the lenders under the Bank Financing and the amendment and
restatement of the terms thereof, including to permit Del Monte's compliance
with its covenants. Del Monte cannot predict whether, or the terms on which, the
lenders under the Bank Financing would grant their consent.
Operating Activities
The working capital position of Del Monte is seasonally affected by the
growing cycle of the vegetables, fruit and tomatoes it processes. Substantially
all inventories are produced during the harvesting and packing months of June
through October and depleted through the remaining seven months. Accordingly,
working capital requirements fluctuate significantly. Del Monte uses funds from
its Revolver, which provides for a $350.0 million line of credit, to finance the
seasonal working capital needs of its operations.
In fiscal 2000, cash used in operating activities was $7.1 million
primarily, due to an increase in inventories. In fiscal 1999, cash provided by
operations was $96.1 million, primarily, due to a significant increase in sales.
Investing Activities
In fiscal 2000, cash used in investing decreased by $20.3 million as
compared to fiscal 1999, primarily due to the purchase of the South American
business in fiscal 1999. In fiscal 1999, cash used in investing decreased by
$135.8 million as compared to fiscal 1998 due to the purchase of Contadina in
fiscal 1998.
Capital expenditures for fiscal 2000 were $67.8 million, including $11.0
million for the purchase of the Cambria, Wisconsin plant and approximately $0.6
million for domestic environmental compliance, as Del Monte continued its
implementation of a program which is intended to generate cost savings by
introducing new equipment that would result in general production efficiencies.
Of the remaining $56.2 million of capital expenditures for fiscal 2000, Del
Monte spent approximately $21.5 million in connection with its plans to
consolidate processing operations and $34.7 million for general manufacturing
improvements. Del Monte plans an aggregate of approximately $50.0 million in
capital expenditures for fiscal 2001 with approximately $5.5 million of those
expenditures to be incurred in connection with the Company's continuing program
to consolidate processing operations. Del Monte continually evaluates its
capital expenditure requirements, and such plans are subject to change depending
on market conditions, Del Monte's cash position, the availability of alternate
means of financing and other factors. Del Monte expects to fund capital
expenditures from internally generated cash flows and by borrowing from
available financing sources.
Financing Activities -- 2000 Activity
Credit Agreement Amendment and Repayment of a Portion of 12 1/4% Notes. On
January 14, 2000, the Company amended its senior credit agreement with respect
to its Revolver and term loan facility (Term A Loan and Term B Loan,
collectively the "Term Loan", and together with Revolver, the "Bank Financing").
The amendment provided for additional borrowing capacity (up to $100.0 million)
under either the Revolver or Term B Loan. The proceeds of this borrowing were
used to reduce the Revolver balance. Under this provision, the Company increased
its Term B borrowings by $100.0 million in August 2000. The amendment also
adjusted certain financial covenants to reflect changes in the Company's recent
financial performance. The amendment did not change the Revolver's expiration
date, the Term Loan maturity dates or the terms of the pricing schedule.
The amendment allowed the prepayment of up to $35.0 million of senior
subordinated notes. During February 2000, the Company repurchased $31.0 million
of 12 1/4% notes through the use of funds that carry a lower interest rate. In
conjunction with this early debt prepayment, an extraordinary loss of $5.2
million ($4.3 million net of tax benefit of $0.9 million) was recorded,
consisting of prepayment premiums and a write-off of capitalized deferred debt
issue costs and original issue discount.
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Financing Activities -- 1999 Activity
Public Equity Offering. On February 10, 1999, the public equity offering,
consisting of 16,667,000 shares of common stock sold by Del Monte and 3,333,000
shares of common stock sold by certain stockholders of Del Monte, was
consummated at an initial offering price of $15.00 per share. Del Monte received
net proceeds of $229.7 million. Total common shares outstanding after the
offering were 52,163,943. Del Monte used a portion of the net proceeds from the
public equity offering to redeem $45.6 million of its redeemable preferred
stock, including $2.3 million of unamortized discount, $10.0 million of accreted
dividends and $0.7 million of redemption premium. Del Monte also used $57.4
million of the net proceeds to redeem a portion of its senior discount notes,
including $1.5 million of accrued interest and $6.4 million of redemption
premium. Del Monte contributed the remainder of the net proceeds to DMC, its
principal subsidiary. DMC used the contribution to prepay $63.3 million of its
indebtedness under its bank term loans, to redeem $61.8 million of its senior
subordinated notes, including $0.9 million of accelerated amortization of
original issue discount, $2.7 million of accrued interest and $6.6 million of
redemption premium, and to repay $1.6 million of indebtedness under the
Revolver.
Financing Activities -- 1998 Activity
Contadina Acquisition. In connection with the $194.9 million Contadina
Acquisition, Del Monte issued the senior discount notes (the "Del Monte Notes")
with an aggregate principal amount at maturity of $230.0 million and received
gross proceeds of $125.5 million. The Del Monte Notes accrue interest at 12.50%
which accretes on each June 15 and December 15 through December 15, 2002, after
which time interest is required to be paid in cash until maturity. The Del Monte
Notes mature on December 15, 2007. A portion of the net proceeds from the
February 1999 public equity offering was used to redeem 35% of the Del Monte
Notes.
In connection with the Contadina Acquisition, Del Monte also amended the
Bank Financing and certain related debt covenants to permit additional funding
under the existing Term B Loan in an amount of $50.0 million, thus increasing
the aggregate amount outstanding at that time under the Term Loan to $430.0
million.
Restrictive Covenants
The DMC Notes, the Del Monte Notes, Term Loan and Revolver agreements
contain restrictive covenants which require Del Monte to meet certain financial
tests, including minimum fixed charge coverage, minimum adjusted net worth and
maximum leverage ratios. These requirements and ratios generally become more
restrictive over time, subject to allowances for seasonal fluctuations. Del
Monte was in compliance with all debt covenants at June 30, 2000. The credit
agreements applicable to DMC generally limit through restricted payment
covenants the ability of DMC to make cash payments to Del Monte, thereby
limiting Del Monte's ability to pay monetary dividends.
Pension Funding
As described more fully in Note 8 of the audited consolidated financial
statements as of and for the year ended June 30, 2000, Del Monte's defined
benefit retirement plans were previously determined to be underfunded under
federal ERISA guidelines. It had been Del Monte's policy to fund Del Monte's
retirement plans in an amount consistent with the funding requirements of
federal law and regulations and not to exceed an amount that would be deductible
for federal income tax purposes. In connection with Del Monte's
recapitalization, Del Monte entered into an agreement with the Pension Benefit
Guaranty Corporation dated April 7, 1997 whereby Del Monte contributed $15.0
million within 30 days after the consummation of the recapitalization. Del Monte
contributed $15.0 million in calendar 1998 and $9.0 million in calendar 1999.
Del Monte will contribute a minimum of $8.0 million in calendar 2000, of which
$4.0 million has been paid by June 30, 2000. Del Monte will also contribute a
minimum of $8.0 million in calendar 2001, for a total of $55.0 million. The
contributions required to be made in 2000 and 2001 have been secured by a $14.0
million letter of
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credit. This letter of credit is subject to periodic reduction as contributions
are made in accordance with the agreement.
Environmental Matters
Del Monte spent approximately $1.8 million on domestic environmental
expenditures from fiscal 1998 through fiscal 2000, primarily related to UST
remediation activities and upgrades to boilers and wastewater treatment systems.
Del Monte projects that it will spend an aggregate of approximately $3.1 million
in fiscal 2001 and 2002 on capital projects and other expenditures in connection
with environmental compliance, primarily for boiler upgrades, compliance costs
related to the consolidation of its fruit and tomato processing operations and
continued UST remediation activities. Del Monte believes that its liabilities
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), and other environmental liabilities will not
have a material adverse effect on Del Monte's financial position or results of
operations. See "Business -- Environmental Compliance".
Tax Net Operating Loss Carryforwards
As of June 30, 2000, Del Monte had $37.5 million in net operating loss
carryforwards for tax purposes, which will expire in 2012. Applicable laws may
limit Del Monte's use of these net operating loss carryforwards in any year.
Inflation
Del Monte's costs are affected by inflation and Del Monte may experience
the effects of inflation in future periods. However, Del Monte has historically
mitigated the inflationary impact of increases in its costs by controlling its
overall cost structure.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT POLICIES
Del Monte's primary market risk exposure is that of interest rate risk. Del
Monte has entered into interest-rate cap agreements limiting Del Monte's
exposure to interest rate increases, thus limiting the impact of interest-rate
increases on future income. Del Monte uses derivatives only for purposes of
managing risk associated with the underlying exposures. Del Monte does not trade
or use instruments with the objective of earning financial gains on interest
rate fluctuations alone, nor does it use instruments where there are not
underlying exposures. Complex instruments involving leverage or multipliers are
not used. Management believes that its use of these instruments to manage risk
is in Del Monte's best interest and that any resulting market risk exposure
would not materially effect Del Monte's operating results. (Market risk exposure
has been defined as the change in fair value of a derivative financial
instrument assuming a hypothetical 10% adverse change in market rates.)
Del Monte also has an insignificant degree of market risk exposure in
regards to currency risk. Except for sales within South America by Del Monte's
subsidiaries in Columbia and Venezuela, Del Monte requires payment in United
States currency. If non-United States domiciled customers' local currency
devalues significantly against the United States dollar, the customers could
potentially encounter difficulty in making the United States dollar-denominated
payments.
Del Monte does not believe it has any material commodity risk since Del
Monte purchases most of its raw product requirements under arrangements whereby
pricing has not fluctuated significantly in recent years. See
"Business -- Supply and Production" and Note 10 to the audited consolidated
financial statements for the year ended June 30, 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The future operating results of Del Monte may be materially affected by a
number of factors, including, among others, those factors discussed below.
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This annual report also contains forward-looking statements, including
those in the sections captioned "Business", "Selected Financial Data",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements and Supplementary Data". Statements that
are not historical facts, including statements about Del Monte's beliefs or
expectations, are forward-looking statements. These statements are based on
plans, estimates and projections at the time Del Monte makes the statements, and
you should not place undue reliance on them. Del Monte does not undertake to
update any of these statements in light of new information or future events.
Forward-looking statements involve inherent risks and uncertainties. Del
Monte cautions you that a number of important factors could cause actual results
to differ materially from those contained in any forward-looking statement.
These factors include, among others: general economic and business conditions;
weather conditions; crop yields; competition; raw material costs and
availability; the loss of significant customers; market acceptance of new
products; successful integration of acquired businesses; consolidation of
processing plants; changes in business strategy or development plans;
availability, terms and deployment of capital; changes in, or the failure or
inability to comply with, governmental regulations, including, without
limitation, environmental regulations; industry trends and capacity and other
factors discussed below.
Our High Leverage Could Adversely Affect Our Business. Del Monte is highly
leveraged. Del Monte can incur additional indebtedness, even though its
principal credit facility imposes some limits on the ability to do so. Because
its business is seasonal, Del Monte's borrowings fluctuate significantly during
the year, generally peaking in September and October. Del Monte's high degree of
leverage can have important adverse consequences, such as:
- Limiting Del Monte's ability to obtain additional financing;
- Limiting Del Monte's ability to invest operating cash flow in its
business;
- Limiting Del Monte's ability to compete with companies that are not as
highly leveraged;
- Increasing Del Monte's vulnerability to economic downturns and changing
market conditions; and
- Increasing Del Monte's vulnerability to fluctuations in market interest
rates.
Del Monte's ability to pay its debt service depends partly on its
performance. Del Monte's financial position could also prevent it from obtaining
necessary financing at favorable rates, including at times when it must
refinance maturing debt. If Del Monte cannot pay its debt service and meet its
other liquidity needs from operating cash flow, it could have substantial
liquidity problems. If Del Monte defaults on any of its debt, the relevant
lenders could accelerate the maturity of the debt and take other actions that
could adversely affect Del Monte. For example, in the event of a default under
Del Monte's Bank Financing, the lenders could foreclose on the security for the
facility, which includes virtually all of the assets of Del Monte.
Our Business is Highly Competitive. Many companies compete in the domestic
canned vegetable, fruit and tomato product categories. However, only a few
well-established companies operate on both a national and a regional basis with
one or several branded product lines. Del Monte faces strong competition from
these and other companies in all its product lines. Important competitive
considerations include the following:
- Some of Del Monte's competitors have greater financial resources and
operating flexibility;
- Several of Del Monte's product lines are sensitive to competition from
regional brands, and many of Del Monte's product lines compete with
imports, private label products and fresh alternatives;
- Del Monte cannot predict the pricing or promotional actions of its
competitors or whether they will have a negative effect on Del Monte.
Also, when Del Monte raises its prices, Del Monte may lose market share
to its competitors; and
- The canned food industry has in the past experienced processing
over-capacity, which could create an imbalance in supply and demand that
depresses sales volumes or prices.
- Tri Valley Growers, a significant competitor in the canned fruit
business, filed for bankruptcy on July 10, 2000. If Tri Valley, chooses
to drop prices or increase discounts materially in order to generate
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cash due to its financial situation, that could negatively impact Del
Monte's fruit and tomato businesses.
Our Business Strategy Poses Special Risks Associated with Our Ability to
Reduce Costs, Reach Targeted Customers and Complete Acquisitions
Successfully. The success of Del Monte's business strategy depends in part on
its ability to reduce costs. Del Monte's performance also depends on its ability
to increase sales of its higher margin products and to increase product
distribution through high volume warehouse clubs. Del Monte also plans to
increase operating results through acquisitions. All of these plans involve
risks, including the following:
- Del Monte is converting its Modesto facility from tomato to fruit
processing. Following its seasonal 2000 pack of fruit, Del Monte will
shut down the Stockton facility for consolidation into Modesto. To assure
production capacity for the 2001 fruit harvest, Del Monte must complete
the conversion of the Modesto facility by June 2001. If Del Monte does
not meet this timetable to any significant degree, fruit production could
be materially reduced;
- Del Monte may not complete capital projects on time or within budget;
- Cost saving measures can sometimes impair a company's ability to respond
rapidly to changes in the industry;
- Warehouse clubs and mass merchandisers do not enter into long-term
contracts and purchase products based on their inventory levels. They can
stop purchasing Del Monte's products at any time;
- Acquisitions could require the consent of Del Monte's main bank lenders;
- Del Monte may not be able to integrate successfully acquired businesses,
including personnel, operating facilities and information systems, into
its existing operations; and
- In pursuing acquisitions, Del Monte could incur substantial additional
debt and contingent liabilities.
Severe Weather Conditions and Natural Disasters Can Affect Crop Supplies
and Reduce Our Operating Results. Severe weather conditions and natural
disasters, such as floods, droughts, frosts, earthquakes or pestilence, may
affect the supply of Del Monte's products. These events can result in reduced
supplies of raw materials, lower recoveries of usable raw materials, higher
costs of cold storage if harvests are accelerated and processing capacity is
unavailable or interruptions in Del Monte's production schedules if harvests are
delayed.
Our Operating Results Are Highly Seasonal. Del Monte does not manufacture
the majority of its products continuously, but instead has a production period
that is limited to approximately three to four months during the summer each
year. Del Monte's working capital requirements are also seasonal and are most
significant in the first and second fiscal quarters. Del Monte's sales tend to
peak in the second and third fiscal quarters each year, mainly as a result of
the holiday period in November and December and the Easter holiday. By contrast,
in the first fiscal quarter of each year, sales generally decline, mainly due to
less promotional activity and the availability of fresh produce.
Our Business is Subject to the Risk of Environmental Liability. As a result
of its agricultural, food processing and canning activities, Del Monte is
subject to various environmental laws and regulations. Del Monte has been named
as a potentially responsible party ("PRP") and may be liable for environmental
investigation and remediation costs at certain designated "Superfund Sites"
under CERCLA or under similar state laws. Del Monte may in the future be named
as a PRP at other currently or previously owned or operated sites, and
additional remediation requirements could be imposed. Also, under the federal
Food, Drug and Cosmetic Act and the Food Quality Protection Act of 1996, the
U.S. Environmental Protection Agency is involved in a series of regulatory
actions relating to the evaluation and use of pesticides in the food industry.
The effect of such actions and future actions on the availability and use of
pesticides could have a material adverse impact on Del Monte's financial
position or results of operations.
TPG Continues to Control Del Monte. TPG Partners, L.P. and some of its
affiliates (collectively, "TPG") own 46.6% of the common stock. TPG's large
interest may also discourage, delay, deter or prevent a change in control of Del
Monte or discourage bids for the common stock at a premium price. Del Monte also
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has contractual relationships with TPG, under which TPG provides it with
financial advisory and other services. These arrangements could give rise to
conflicts of interest.
Our Debt Covenants Can Restrict Our Operating Flexibility. Del Monte is
subject to various financial and operating covenants under its principal credit
facility, including limitations on asset sales, the amount of debt it can incur
or repay and the amount and kind of distributions that it and its subsidiaries
may make. Del Monte must also meet specified financial ratios and tests,
including minimum net worth, minimum fixed charge coverage and maximum leverage
ratios. Del Monte has pledged substantially all of its assets to secure its bank
and other debt.
Our Brand Name Could Be Confused with Names of Other Companies. Del Monte
has licensed the Del Monte brand name to various unaffiliated companies
internationally and, for some of its products, in the United States. Acts or
omissions by these unaffiliated companies may adversely affect the value of the
Del Monte brand name, the trading prices for the common stock and demand for Del
Monte's products.
Fluctuation in Market Price of the Common Stock. The common stock has a
limited trading history. Although the common stock is listed on the New York
Stock Exchange and the Pacific Exchange, an active trading market may not be
sustained. The market price could also fluctuate substantially in response to
various factors and events, including the liquidity of the market for the common
stock, differences between Del Monte's actual performance and that expected by
investors and analysts, changes in analysts' recommendations or projections,
pricing and competition in Del Monte's industry, new statutes or regulations and
changes in general market conditions.
Our Anti-Takeover Defenses May Depress Our Stock Price or Discourage
Premium-Generating Transactions. Anti-takeover provisions under state law and in
Del Monte's certificate of incorporation and bylaws may deter, delay or prevent
hostile takeovers and other attempts to make changes in Del Monte's Board of
Directors or management. The fact that we have these provisions may depress our
stock price and could discourage transactions in which stockholders might
otherwise receive a premium over the market value of their shares. Under these
provisions:
- Members of Del Monte's Board have staggered terms;
- Stockholders are not entitled to cumulative voting rights;
- Only a majority of the Board, and not stockholders, may call a meeting of
stockholders;
- Certain matters must be approved by a supermajority vote of stockholders;
- Del Monte can issue preferred stock on any terms it decides without the
approval of common stockholders; and
- Del Monte can implement, without stockholder approval, a "rights" or
"poison pill" plan without the approval of common stockholders.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
PAGE
----
Report of Independent Auditors.............................. 33
Consolidated Balance Sheets -- June 30, 2000 and 1999....... 34
Consolidated Statements of Income -- Years ended June 30,
2000, 1999 and 1998....................................... 35
Consolidated Statements of Stockholders' Equity
(Deficit) -- Years ended June 30, 2000, 1999 and 1998..... 36
Consolidated Statements of Cash Flows -- Years ended June
30, 2000, 1999 and 1998................................... 37
Notes to Consolidated Financial Statements.................. 38
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Del Monte Foods Company
We have audited the accompanying consolidated balance sheets of Del Monte
Foods Company and subsidiaries as of June 30, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity (deficit) and cash flows
for each of the years in the three-year period ended June 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Del Monte Foods Company and subsidiaries as of June 30, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended June 30, 2000, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
July 21, 2000
San Francisco, California
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DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
ASSETS
JUNE 30,
-------------------
2000 1999
-------- -------
Current assets:
Cash and cash equivalents................................. $ 5.1 $ 6.9
Trade accounts receivable, net of allowance............... 109.2 139.0
Inventories............................................... 425.3 343.0
Deferred tax asset........................................ 12.3 --
Prepaid expenses and other current assets................. 25.9 12.6
-------- -------
TOTAL CURRENT ASSETS.............................. 577.8 501.5
Property, plant and equipment, net.......................... 341.8 312.5
Deferred tax assets......................................... 61.9 --
Intangibles, net............................................ 41.6 43.3
Other assets, net........................................... 17.6 14.7
-------- -------
TOTAL ASSETS...................................... $1,040.7 $ 872.0
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses..................... $ 238.9 $ 267.1
Short-term borrowings..................................... 153.5 15.7
Current portion of long-term debt......................... 35.6 31.4
-------- -------
TOTAL CURRENT LIABILITIES......................... 428.0 314.2
Long-term debt.............................................. 443.0 496.3
Other noncurrent liabilities................................ 159.1 179.9
-------- -------
TOTAL LIABILITIES................................. 1,030.1 990.4
-------- -------
Stockholders' equity (deficit):
Common stock ($0.01 par value per share, shares
authorized: 500,000,000; issued and outstanding:
52,219,792 in 2000 and 52,171,537 in 1999)............. 0.5 0.5
Notes receivable from stockholders........................ (0.4) (0.4)
Additional paid-in capital................................ 400.1 399.8
Retained earnings (deficit)............................... (389.6) (518.3)
-------- -------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT).............. 10.6 (118.4)
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)........................................ $1,040.7 $ 872.0
======== =======
See Accompanying Notes to Consolidated Financial Statements.
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36
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT SHARE DATA)
YEAR ENDED JUNE 30,
--------------------------------
2000 1999 1998
-------- -------- --------
Net sales................................................... $1,462.1 $1,504.5 $1,313.3
Cost of products sold....................................... 920.5 998.3 898.2
Selling, administrative and general expense................. 384.2 375.3 316.4
Special charges related to plant consolidation.............. 10.9 17.2 9.6
Acquisition expense......................................... -- 0.9 6.9
-------- -------- --------
OPERATING INCOME.................................. 146.5 112.8 82.2
Interest expense............................................ 67.1 77.6 77.5
Other expense (income)...................................... -- 2.0 (1.3)
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM............................................ 79.4 33.2 6.0
Provision (benefit) for income taxes........................ (53.6) 0.5 0.5
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM.................. 133.0 32.7 5.5
Extraordinary loss from early debt retirement, net of tax
benefit................................................... 4.3 19.2 --
-------- -------- --------
NET INCOME........................................ $ 128.7 $ 13.5 $ 5.5
======== ======== ========
Basic net income per common share:
Income before extraordinary item.......................... $ 2.55 $ 0.69 $ 0.01
Net income................................................ 2.47 0.23 0.01
Diluted net income per common share:
Income before extraordinary item.......................... $ 2.50 $ 0.68 $ 0.01
Net income................................................ 2.42 0.23 0.01
See Accompanying Notes to Consolidated Financial Statements.
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DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN MILLIONS, EXCEPT SHARE DATA)
NOTES TOTAL
COMMON STOCK RECEIVABLE ADDITIONAL RETAINED STOCKHOLDERS'
------------------- FROM PAID-IN EARNINGS EQUITY
SHARES AMOUNT STOCKHOLDERS CAPITAL (DEFICIT) (DEFICIT)
---------- ------ ------------ ---------- --------- -------------
Balance at June 30, 1997.... 26,815,880 $ -- $ -- $128.5 $(527.3) $(398.8)
Amortization of redeemable
preferred stock
discount.................. (0.3) (0.3)
Notes issued to
stockholders.............. (0.4) (0.4)
Issuance of shares.......... 8,679,178 44.2 44.2
Net income.................. 5.5 5.5
---------- ---- ----- ------ ------- -------
Balance at June 30, 1998.... 35,495,058 -- (0.4) 172.4 (521.8) (349.8)
Amortization of redeemable
preferred stock
discount.................. (2.3) (2.3)
Payment of preferred stock
dividends................. (10.0) (10.0)
Issuance of shares.......... 16,676,479 0.5 250.0 250.5
Costs of public equity
offering.................. (20.3) (20.3)
Net income.................. 13.5 13.5
---------- ---- ----- ------ ------- -------
Balance at June 30, 1999.... 52,171,537 0.5 (0.4) 399.8 (518.3) (118.4)
Issuance of shares.......... 48,255 0.3 0.3
Net income.................. 128.7 128.7
---------- ---- ----- ------ ------- -------
Balance at June 30, 2000.... 52,219,792 $0.5 $(0.4) $400.1 $(389.6) $ 10.6
========== ==== ===== ====== ======= =======
See Accompanying Notes to Consolidated Financial Statements.
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38
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED JUNE 30,
-----------------------------
2000 1999 1998
------- ------- -------
OPERATING ACTIVITIES:
Net income................................................ $ 128.7 $ 13.5 $ 5.5
Adjustments to reconcile net income to net cash flows:
Extraordinary loss from early debt retirement, net of
tax benefit.......................................... 4.3 19.2 --
Net loss (gain) on disposal/revaluation of assets...... (2.2) 4.7 1.3
Noncash interest expense............................... 12.6 14.0 8.5
Depreciation and amortization.......................... 39.6 46.3 34.6
Deferred taxes......................................... (74.2) -- --
Stock option compensation expense...................... -- -- 1.8
Changes in operating assets and liabilities net of
effects of acquisition:
Accounts receivable.................................. 29.8 (31.5) (40.3)
Inventories.......................................... (82.3) 26.4 73.7
Prepaid expenses and other current assets............ (13.3) 7.8 (5.0)
Other assets......................................... (2.0) 0.4 0.2
Accounts payable and accrued expenses................ (35.5) 8.5 27.6
Other non-current liabilities........................ (12.6) (13.2) (10.9)
------- ------- -------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES...................................... (7.1) 96.1 97.0
------- ------- -------
INVESTING ACTIVITIES:
Capital expenditures...................................... (56.8) (55.0) (32.1)
Proceeds from sales of assets............................. 1.9 0.6 5.0
Acquisition of plant...................................... (11.0) -- --
Acquisition of business................................... -- (31.8) (194.9)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES............. (65.9) (86.2) (222.0)
------- ------- -------
FINANCING ACTIVITIES:
Short-term borrowings..................................... 492.2 494.3 300.2
Payment on short-term borrowings.......................... (354.4) (478.6) (382.0)
Proceeds from long-term borrowings........................ -- -- 175.6
Principal payments on long-term debt...................... (62.4) (197.3) (1.9)
Deferred debt issuance costs.............................. (0.8) -- (6.9)
Prepayment penalty........................................ (3.7) (13.7) --
Preferred stock dividends................................. -- (10.0) --
Preferred stock redemption................................ -- (35.0) --
Proceeds from issuance of common and preferred stock...... -- 250.0 42.4
Equity offering costs..................................... -- (20.3) --
Other..................................................... 0.3 0.7 (0.4)
------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... 71.2 (9.9) 127.0
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (1.8) -- 2.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 6.9 6.9 4.9
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 5.1 $ 6.9 $ 6.9
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
37
39
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(IN MILLIONS, EXCEPT SHARE DATA)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Business and Segment Information: Del Monte Foods Company ("Del Monte") and
its wholly-owned subsidiary, Del Monte Corporation ("DMC"), (Del Monte together
with DMC, "the Company") operate in one business segment: the manufacturing and
marketing of processed foods, primarily canned vegetable, fruit and tomato
products. Del Monte primarily sells its products under the Del Monte brand to a
variety of food retailers, supermarkets and mass merchandising stores. Del Monte
holds the rights to the Del Monte brand for processed foods in the United States
and in South America and to the Contadina brand world-wide.
Basis of Presentation: In the second quarter of fiscal 2000, the financial
statements were reformatted to extend dollars in millions out to one decimal
place. All prior periods have been conformed to the current presentation. Minor
rounding differences may result in prior periods due to this change in
presentation.
Principles of Consolidation: The consolidated financial statements include
the accounts of Del Monte and its majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company accounts for its investments in joint ventures under the equity
method of accounting, whereby the investment in joint venture is adjusted for
the Company's share of the profit or loss of the joint venture.
Use of Estimates: Certain amounts reported in the consolidated financial
statements are based on management estimates. The ultimate resolution of these
items may differ from those estimates.
Cash Equivalents: Del Monte considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. The
carrying amount reported in the balance sheet for cash and cash equivalents
approximates its fair value.
Inventories: Inventories are stated at the lower of cost or market. The
cost of substantially all inventories is determined using the LIFO method. Del
Monte has established various LIFO pools that have measurement dates coinciding
with the natural business cycles of Del Monte's major inventory items. Inflation
has had a minimal impact on production costs since Del Monte adopted the LIFO
method as of July 1, 1991. As of June 30, 2000 and 1999, the LIFO reserve was a
debit balance of $12.8 and $5.7, respectively.
Property, Plant and Equipment and Depreciation: Property, plant and
equipment are stated at cost and are depreciated over their estimated useful
lives, principally by the straight-line method. Maintenance and repairs are
expensed as incurred. Significant expenditures that increase useful lives are
capitalized. The principal estimated useful lives are: land improvements -- 10
to 30 years; buildings and leasehold improvements -- 10 to 30 years; machinery
and equipment -- 7 to 15 years; computer software -- 2 to 10 years. Depreciation
of plant and equipment and leasehold amortization was $34.8, $41.3 and $31.5 for
the years ended June 30, 2000, 1999 and 1998.
Intangibles: Intangibles consist of goodwill, trade names and trademarks,
and are carried at cost less accumulated amortization. Amortization expense is
calculated on a straight-line basis over the estimated useful lives of the
assets, which range from 20 to 40 years. Amortization expense was $1.8, $1.6 and
$0.2 for the years ended June 30, 2000, 1999 and 1998, respectively.
Environmental Remediation: Del Monte accrues for losses associated with
environmental remediation obligations when such losses are probable, and the
amounts of such losses are reasonably estimable. Accruals for estimated losses
from environmental remediation obligations generally are recognized no later
than completion of the remedial feasibility study. Such accruals are adjusted as
further information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are not discounted to
their present value.
38
40
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
Revenue Recognition: Revenue from sales of product, and related cost of
products sold, is recognized upon shipment of product at which time title passes
to the customer. Customers generally do not have the right to return product
unless damaged or defective. In the year ended June 30, 2000, one customer
accounted for approximately 13% of net sales.
Cost of Products Sold: Cost of products sold includes raw material, labor
and overhead.
Advertising Expenses: Del Monte expenses all costs associated with
advertising as incurred or when the advertising first takes place. Advertising
expense was $3.6, $4.3 and $1.6 for the years ended June 30, 2000, 1999 and
1998, respectively.
Research and Development: Research and development costs are included as a
component of "Selling, administrative and general expense." Research and
development costs charged to operations were $6.6, $6.2 and $5.3 for the years
ended June 30, 2000, 1999 and 1998, respectively.
Interest Rate Contracts: To manage interest rate exposure, Del Monte uses
interest-rate cap agreements, and has used interest-rate swap agreements. These
agreements involve the payment of fixed rate amounts in exchange for the receipt
of floating rate interest over the life of the agreement without an exchange of
the underlying principal amount. The differential to be paid or received is
accrued as interest rates change and recognized as an adjustment to interest
expense related to the debt. The related amount payable to or receivable from
counterparties is included in other liabilities or assets.
Foreign Currency Translation: For Del Monte's operations in countries where
the functional currency is other than the U.S. dollar, revenue and expense
accounts are translated at the average rates during the period, and balance
sheet items are translated at year-end rates.
Fair Value of Financial Instruments: The carrying amount of certain of Del
Monte's financial instruments, including accounts receivable, accounts payable,
and accrued expenses, approximates fair value due to the relatively short
maturity of such instruments.
The carrying amounts of Del Monte's borrowings under its short-term
revolving credit agreement and long-term debt instruments, excluding the senior
subordinated notes and the senior discount notes, approximate their fair value.
At June 30, 2000, the fair value of the senior subordinated notes with a
carrying amount of $65.6 was $69.5 and of the senior discount notes with a
carrying value of $110.4 was $111.5, as estimated based on quoted market prices
from dealers.
The fair value of the interest rate cap agreements is the estimated amount
that Del Monte would receive to terminate the agreements at the reporting date,
taking into account current interest rates and the current credit worthiness of
the counterparties. The fair value of the interest rate cap agreements at June
30, 2000 was insignificant.
Impairment of Long-Lived Assets: SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of "
requires that Del Monte review assets held and used, including intangibles, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If an evaluation of
recoverability is required, the estimated undiscounted future cash flows
associated with the asset would be compared to the asset's carrying amount to
determine if a write-down is required. The statement also requires that all
long-lived assets, for which management has committed to a plan to dispose, be
reported at the lower of carrying amount or fair value.
Stock Option Plan: Del Monte accounts for its stock-based employee
compensation for stock options using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, as allowed under SFAS No. 123.
Accordingly,
39
41
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
compensation cost is measured as the excess, if any, of the fair value of Del
Monte's stock at the date of the grant over the price the employee must pay to
acquire the stock.
Net Income per Common Share: Net income per common share is computed by
dividing net income attributable to common shares by the weighted average number
of common shares outstanding during the period (Note 6). Net income attributable
to common shares is computed as net income reduced by the cash and in-kind
dividends for the period in which redeemable preferred stock was outstanding.
Comprehensive Income: Del Monte has no significant items of other
comprehensive income in any period presented. Therefore, net income as presented
in the Consolidated Statements of Income equals comprehensive income.
Reclassifications: Certain prior year balances have been reclassified to
conform with current year presentation.
NOTE 2 -- ACQUISITIONS
South America Acquisition. On August 28, 1998, Del Monte reacquired rights
to the Del Monte brand in South America from Nabisco Inc. and purchased
Nabisco's canned vegetable and tomato business in Venezuela, including a food
processing plant, for a cash purchase price of $31.8 (the "South America
Acquisition"). The South America Acquisition was accounted for using the
purchase method of accounting. In connection with this acquisition,
approximately $0.9 of indirect acquisition-related expenses were incurred.
Nabisco had retained ownership of the Del Monte brand in South America and the
Del Monte business in Venezuela when it sold other Del Monte businesses in 1990.
Intangible assets recorded in this acquisition totaled $28.4.
Contadina Acquisition. On December 19, 1997, Del Monte acquired the
Contadina canned tomato business, including the Contadina trademark worldwide,
capital assets and inventory (the "Contadina Acquisition") from Nestle USA, Inc.
and Contadina Services, Inc. for a total purchase price of $194.9, comprised of
a base price of $176.5 and an estimated net working capital adjustment of $18.4.
The consideration was paid solely in cash. The Contadina Acquisition was
accounted for using the purchase method of accounting. In connection with the
Contadina Acquisition, approximately $6.9 of indirect acquisition-related
expenses were incurred. Intangible assets recorded in this acquisition totaled
$16.9.
40
42
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
NOTE 3 -- SUPPLEMENTAL BALANCE SHEET INFORMATION
JUNE 30,
-----------------
2000 1999
------- -------
Trade accounts receivable:
Trade..................................................... $ 110.1 $ 140.4
Allowance for doubtful accounts........................... (0.9) (1.4)
------- -------
TRADE ACCOUNTS RECEIVABLE, NET......................... $ 109.2 $ 139.0
======= =======
Inventories:
Finished product.......................................... $ 295.2 $ 219.1
Raw materials and supplies................................ 19.0 17.7
Other, principally packaging material..................... 111.1 106.2
------- -------
TOTAL INVENTORIES...................................... $ 425.3 $ 343.0
======= =======
Property, plant and equipment:
Land and land improvements................................ $ 41.8 $ 41.9
Buildings and leasehold improvements...................... 109.7 107.0
Machinery and equipment................................... 356.5 321.8
Construction in progress.................................. 50.6 39.1
------- -------
558.6 509.8
Accumulated depreciation.................................. (216.8) (197.3)
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET..................... $ 341.8 $ 312.5
======= =======
Intangible assets:
Trademark................................................. $ 16.5 $ 16.5
Other intangibles......................................... 28.7 28.6
------- -------
45.2 45.1
Accumulated amortization.................................. (3.6) (1.8)
------- -------
INTANGIBLE ASSETS, NET................................. $ 41.6 $ 43.3
======= =======
Other assets:
Deferred debt issue costs................................. $ 21.1 $ 21.3
Investments in joint ventures............................. 5.1 --
Other..................................................... 0.8 --
Accumulated amortization.................................. (9.4) (6.6)
------- -------
OTHER ASSETS, NET...................................... $ 17.6 $ 14.7
======= =======
Accounts payable and accrued expenses:
Accounts payable -- trade................................. $ 96.9 $ 104.1
Marketing and advertising................................. 71.0 95.8
Payroll and employee benefits............................. 19.4 19.4
Current portion of accrued pension liability.............. -- 8.8
Current portion of other noncurrent liabilities........... 9.5 9.0
Other..................................................... 42.1 30.0
------- -------
TOTAL ACCOUNTS PAYABLE AND ACCRUED EXPENSES............ $ 238.9 $ 267.1
======= =======
Other noncurrent liabilities:
Accrued postretirement benefits........................... $ 136.0 $ 142.8
Accrued pension liability................................. -- 2.3
Self-insurance liabilities................................ 5.1 9.7
Other..................................................... 18.0 25.1
------- -------
TOTAL OTHER NONCURRENT LIABILITIES..................... $ 159.1 $ 179.9
======= =======
41
43
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
NOTE 4 -- SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings consisted of a note payable to banks outside the
United States of $0.2 at June 30, 2000 and a revolving credit agreement with
$153.3 outstanding at June 30, 2000 and $15.7 at June 30, 1999. Unused amounts
under the revolving credit agreement at June 30, 2000 and 1999 totaled $169.6
and $308.1, respectively. Unused lines of credit outside the United States at
June 30, 2000 totaled $0.2.
On January 14, 2000, the Company amended its senior credit agreement with
respect to its revolving credit facility (the "Revolver") and term loan facility
(Term A Loan and Term B Loan, collectively the "Term Loan"). The amendment
provided for additional borrowing capacity (up to $100.0) under either the
Revolver or Term B Loan. Under this provision, the Company increased its Term B
borrowings by $100.0 in August 2000. The proceeds of this borrowing were used to
reduce the Revolver balance. The amendment also adjusted certain financial
covenants to reflect changes in the Company's recent financial performance. The
amendment did not change the Revolver's expiration date, the Term Loan maturity
dates or the terms of the pricing schedule.
The amendment allowed the prepayment of up to $35.0 of senior subordinated
notes. During February 2000, the Company repurchased $31.0 of these notes. In
conjunction with this early debt prepayment, an extraordinary loss of $5.2 ($4.3
net of tax benefit of $0.9) was recorded. This extraordinary loss consisted of
$3.7 of prepayment premiums and a $1.5 write-off of capitalized deferred debt
issue costs and original issue discount.
In February 1999, Del Monte used $57.4 of the net proceeds of the public
equity offering to redeem a portion of its senior discount notes, including $1.5
of accrued interest and $6.4 of redemption premium and to redeem all preferred
stock outstanding (see Note 5). Del Monte contributed the remainder of the net
proceeds to DMC, its principal subsidiary. DMC used the contribution to prepay
$63.3 of its indebtedness under its bank term loans, to redeem $61.8 of its
senior subordinated notes, including $0.9 of accelerated amortization of
original issue discount, $2.7 of accrued interest and $6.6 of redemption
premium, and to repay $1.6 of indebtedness under the revolving credit facility.
In connection with the repayment of debt, $5.5 of previously capitalized debt
issue costs were charged to income and accounted for as an extraordinary item,
as well as a total of $13.7 of premiums on debt and stock redemption resulting
in total extraordinary item charges of $19.2.
In December 1997 in conjunction with the Contadina Acquisition, Del Monte
issued $230.0 of 12 1/2% senior discount notes ("Del Monte Notes") and received
proceeds of $125.5. The Del Monte Notes accrue interest on each June 15 and
December 15, which accretes through December 15, 2002, after which time interest
is to be paid in cash until maturity. The Del Monte Notes mature on December 15,
2007. The Del Monte Notes are redeemable in whole or in part at the option of
Del Monte on or after December 15, 2002 at a price that initially is 106.250% of
par and that decreases to par, if redeemed on December 15, 2006 or thereafter.
In connection with the financing related to the Contadina Acquisition, $6.9 of
deferred debt issuance costs were capitalized. Deferred debt issuance costs are
amortized on a straight-line basis over the life of the related debt issuance.
On April 18, 1997, Del Monte entered into a credit agreement with respect
to the Term Loan and the Revolver. The Revolver provides for revolving loans in
an aggregate amount of up to $350.0, including a $70.0 letter of credit
subfacility. The Revolver will expire in fiscal 2003. The Term Loan has two
separate facilities, Term Loan A which matures in fiscal 2003, and Term Loan B
which matures in fiscal 2005. In connection with the Contadina Acquisition, Del
Monte amended its bank financing agreements and related debt covenants to permit
additional funding under the existing Term Loan B which was drawn in an amount
of $50.0.
42
44
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
The interest rates currently applicable to amounts outstanding under Term
Loan A and the Revolver are, at Del Monte's option, either the base rate (the
higher of 0.50% above the Federal Funds Rate or the bank's reference rate) plus
0.25% or the reserve adjusted offshore rate plus 1.25% (8.30% at June 30, 2000).
Interest rates on Term Loan B are, at Del Monte's option, either the base rate
plus 2.00% or the offshore rate plus 3.00% (9.78% at June 30, 2000).
Del Monte is required to pay the lenders under the Revolver a commitment
fee of 0.35% on the unused portion of such facility. Del Monte is also required
to pay the lenders under the Revolver letter of credit fees of 0.75% per year
for commercial letters of credit and 1.25% per year for all other letters of
credit, as well as an additional fee of 0.25% per year to the bank issuing such
letters of credit. At June 30, 2000, a balance of $34.5 was outstanding on these
letters of credit.
In April 1997, DMC issued senior subordinated notes (the "DMC Notes") with
an aggregate principal amount of $150.0 and received gross proceeds of $146.9.
The DMC Notes accrue interest at 12 1/4% per year, payable semiannually in cash
on each April 15 and October 15. The DMC Notes are guaranteed by Del Monte and
mature on April 15, 2007. The DMC Notes are redeemable at the option of Del
Monte on or after April 15, 2002 at a premium to par that initially is 106.313%
and that decreases to par on April 15, 2006 and thereafter.
Long-term debt consisted of the following:
JUNE 30,
----------------
2000 1999
------ ------
Term Loan.................................................. $302.6 $334.0
DMC Notes.................................................. 65.6 95.9
Del Monte Notes............................................ 110.4 97.8
------ ------
478.6 527.7
Less current portion....................................... 35.6 31.4
------ ------
$443.0 $496.3
====== ======
At June 30, 2000, scheduled maturities of long-term debt in each of the
next five fiscal years and thereafter were as follows:
2001........................................................ $ 35.6
2002........................................................ 39.8
2003........................................................ 43.9
2004........................................................ 47.0
2005........................................................ 136.3
Thereafter.................................................. 216.0
------
518.6
Less discount on notes...................................... 40.0
------
$478.6
======
The Term Loan and Revolver, with a combined balance of $455.9 at June 30,
2000, are collateralized by security interests in substantially all of Del
Monte's assets.
The DMC Notes, the Del Monte Notes, Term Loan and Revolver (collectively
"the Debt") agreements contain restrictive covenants with which Del Monte must
comply. These restrictive covenants, in some circumstances, limit the incurrence
of additional indebtedness, payment of dividends, transactions with affiliates,
asset sales, mergers, acquisitions, prepayment of other indebtedness, liens and
encumbrances. In
43
45
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
addition, Del Monte is required to meet certain financial tests, including
minimum fixed charge coverage, minimum adjusted net worth and maximum leverage
ratios. Del Monte was in compliance with all of the Debt covenants at June 30,
2000.
Del Monte made cash interest payments of $52.7, $63.0 and $70.6 for the
years ended June 30, 2000, 1999 and 1998.
Del Monte has entered into interest-rate cap agreements, with a combined
cost of $0.3, limiting Del Monte's exposure on its floating rate debt to
interest rate increases, thus reducing the impact of interest-rate increases on
future income. Del Monte currently has interest rate caps on both the Term Loan
and the Revolver. The notional amount of the Term Loan interest rate cap
represents the full unamortized debt balance, excluding the $100.0 August 2000
Term B borrowing, during the term of the cap agreement. The notional amount of
the Revolver interest rate cap represents approximately 60% of the expected
monthly outstanding balance. The notional principal amount of floating rate debt
covered by the interest rate cap agreements effectively converts this floating
rate debt to a fixed-rate basis when the LIBOR rate sets above 8.0%. Both
agreements are for a twelve-month period and will terminate June 30, 2001. The
agreements involve the payment of fixed rate amounts in exchange for receipt of
floating rate interest payments if the three-month LIBOR rate for the Term Loan
or the one-month LIBOR rate for the Revolver set above 8.0% over the life of the
agreements without an exchange of the underlying principal amount. The
differential to be received is accrued as interest rates increase above 8.0% and
is recognized as an adjustment to interest expense related to the debt. Del
Monte is exposed to credit loss in the event of nonperformance by the other
parties to the interest rate cap agreements. However, Del Monte does not
anticipate nonperformance by the counterparties. Previous to entering into these
interest rate cap agreements, the Company had two swap agreements both of which
were no longer in effect by June 30, 2000. These agreements effectively
converted $260.0 of notional principal amount of floating rate debt to a
fixed-rate basis. The incremental effect of all interest rate hedges on interest
expense for the year ended June 30, 2000 was $l.3.
NOTE 5 -- STOCKHOLDERS' EQUITY
On February 10, 1999, Del Monte's public equity offering, consisting of
16,667,000 shares of common stock sold by Del Monte and 3,333,000 shares of
common stock sold by certain stockholders of Del Monte, was consummated at an
initial offering price of $15.00 per share. Del Monte received net proceeds of
$229.7. Total common shares outstanding after the offering were 52,163,943. Del
Monte used a portion of the net proceeds from the offering to redeem $45.6
(100%) of its preferred stock, including $2.3 of unamortized discount, $10.0 of
accreted dividends and $0.7 of redemption premium. The remainder of the net
proceeds of the offering was used to redeem notes and repay debt (see Note 4).
The terms of Del Monte's debt limit the ability of Del Monte's subsidiaries
to distribute cash or other assets, which could affect Del Monte's ability to
pay dividends or make other distributions on the common stock.
44
46
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
NOTE 6 -- EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share:
JUNE 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
BASIC EARNINGS PER SHARE
Numerator:
Income per common share before extraordinary item... $ 133.0 $ 32.7 $ 5.5
Preferred stock dividends........................... -- (3.6) (5.3)
----------- ----------- -----------
Numerator for basic earnings per share -- income
attributable to common shares before
extraordinary item............................. 133.0 29.1 0.2
Extraordinary loss, net of tax benefit.............. (4.3) (19.2) --
----------- ----------- -----------
Numerator for basic earnings per share -- income
attributable to common shares.................. $ 128.7 $ 9.9 $ 0.2
=========== =========== ===========
Denominator:
Denominator for basic earnings per
share -- weighted average shares............... 52,192,676 41,979,665 31,619,642
=========== =========== ===========
Basic income per common share before extraordinary
item.............................................. $ 2.55 $ 0.69 $ 0.01
Extraordinary loss per common share, net of tax
benefit........................................... (0.08) (0.46) --
----------- ----------- -----------
Basic income per common share....................... $ 2.47 $ 0.23 $ 0.01
=========== =========== ===========
DILUTED EARNINGS PER SHARE
Numerator:
Income per common share before extraordinary item... $ 133.0 $ 32.7 $ 5.5
Preferred stock dividends........................... -- (3.6) (5.3)
----------- ----------- -----------
Numerator for diluted earnings per share -- income
attributable to common shares before
extraordinary item............................. 133.0 29.1 0.2
Extraordinary loss, net of tax benefit.............. (4.3) (19.2) --
----------- ----------- -----------
Numerator for diluted earnings per share -- income
attributable to common shares.................. $ 128.7 $ 9.9 $ 0.2
=========== =========== ===========
Denominator:
Weighted average shares........................... 52,192,676 41,979,665 31,619,642
Effect of dilutive securities -- stock options.... 905,222 988,987 735,489
----------- ----------- -----------
Denominator for diluted earnings per share --
weighted average shares........................ 53,097,898 42,968,652 32,355,131
=========== =========== ===========
Diluted income per common share before extraordinary
item.............................................. $ 2.50 $ 0.68 $ 0.01
Extraordinary loss per common share, net of tax
benefit........................................... (0.08) (0.45) --
----------- ----------- -----------
Diluted income per common share..................... $ 2.42 $ 0.23 $ 0.01
=========== =========== ===========
NOTE 7 -- EMPLOYEE STOCK PLANS
AIAP DEFERRED COMPENSATION PLAN
On October 14, 1999, the Del Monte Corporation Annual Incentive Award Plan
Deferred Compensation Plan was established under which certain employees are
eligible to participate. Beginning in fiscal 2001, eligible employees may elect
to defer from 5% to 100% of their annual incentive award. The Company
45
47
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
provides a matching contribution of 25% of the employee's deferral amount. The
employee deferral and the Company match are converted to deferred stock units at
the fair market value of Del Monte common stock on the day the incentive awards
are paid. The participant is 100% vested in the employee deferral portion of
their account. The Company's matching contribution vests on a proportionate
basis over three years. At the time of distribution, the employee's deferral
amount and any vested Company matching contribution will be paid out in whole
shares of Del Monte common stock.
STOCK OPTION INCENTIVE PLANS
On August 4, 1997, Del Monte adopted the 1997 Stock Incentive Plan (amended
November 4, 1997) which allowed the granting of options to certain key
employees. The plan allowed the granting of options for up to 1,821,181 shares
of Del Monte's common stock. Options could be granted as incentive stock options
or as non-qualified options for purposes of the Internal Revenue Code. Options
terminate ten years from the date of grant. Under the plan, 1,736,520 options
were granted. As of June 30, 1999, eligible employees held options for 1,685,565
shares of common stock under the 1997 Plan. As of June 30, 2000, eligible
employees held options for 1,524,670 shares of common stock under the 1997 Plan.
The 1997 Stock Incentive Plan provides for different vesting schedules. The
first provides for annual vesting on a proportionate basis over five years and
the second provides for monthly vesting on a proportionate basis over four
years. No additional options will be granted pursuant to this plan. Del Monte
also adopted the Del Monte Foods Company Non-Employee Director and Independent
Contractor 1997 Stock Incentive Plan. Under this plan, 151,701 shares were
reserved of which 148,828 options were granted. These options terminate 10 years
from the date of grant and vest monthly on a proportionate basis over four
years. Del Monte does not anticipate granting any additional options under this
plan.
The Del Monte Foods Company 1998 Stock Incentive Plan (the "1998 Plan") was
adopted initially by the Board of Directors on April 24, 1998, was modified by
the Board on September 23, 1998, and was approved by the stockholders on October
28, 1998. Under the 1998 Plan, grants of incentive and nonqualified stock
options ("Options"), stock appreciation rights ("SARs") and stock bonuses
(together with Options and SARs, "Awards") representing 3,317,047 shares of
common stock may be made to certain employees of Del Monte. These shares
represent 3,195,687 shares of common stock initially reserved under the 1998
Plan and any shares of common stock represented by awards granted under any
prior plan which are forfeited, expired or canceled. The term of any Option or
SAR may not be more than ten years from the date of its grant. Subject to
certain limitations, the Compensation Committee of the Board has authority to
grant Awards under the 1998 Plan and to set the terms of any Awards. The Chief
Executive Officer also has limited authority to grant Awards. On December 4,
1998, Options for 1,824,433 shares were granted under the 1998 Stock Incentive
Plan at an exercise price of $13.00 per share, which was determined to be fair
value at that time. As of June 30, 1999, eligible employees held options for
1,842,344 shares of common stock under the 1998 Plan, and 1,356,216 additional
shares were available for grant. As of June 30, 2000, eligible employees held
options for 1,724,380 shares of common stock under the 1998 Plan, and 1,592,667
additional shares were available for grant. For each of these grants, 50% of the
option shares vest annually on a proportionate basis over a four-year period and
50% of the option shares vest annually on a proportionate basis over a five-year
period.
46
48
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
Stock option activity and related information during the periods indicated
was as follows:
OUTSTANDING EXERCISABLE
SHARES UNDER WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
OPTION EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------ ---------------- ----------- ----------------
Balance at June 30, 1997............ -- $ -- -- $ --
Granted............................. 1,885,348 5.22
Forfeited........................... 46,353 5.22
Exercised........................... -- --
---------
Balance at June 30, 1998............ 1,838,995 5.22 452,422 5.22
Granted............................. 1,877,858 13.03
Forfeited........................... 35,519 13.00
Exercised........................... 4,597 5.22
---------
Balance at June 30, 1999............ 3,676,737 9.13 868,453 5.22
Granted............................. 69,375 13.33
Forfeited........................... 308,699 9.96
Exercised........................... 39,535 5.22
---------
Balance at June 30, 2000............ 3,397,878 $ 9.19 1,596,691 $7.05
=========
At June 30, 2000, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICE PER SHARE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- ----------- ---------------- -------------- ----------- --------------
$ 5.22 1,673,498 6.81 $ 5.22 1,222,295 $ 5.22
10.57 - 15.85 1,724,380 8.47 13.04 374,396 13.03
-------------- --------- ---- ------ --------- ------
$ 5.22 - 15.85 3,397,878 7.65 $ 9.19 1,596,691 $ 7.05
============== ========= ==== ====== ========= ======
Del Monte accounts for its stock option plans using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations, under which no
compensation cost for stock options is recognized for stock option awards
granted at or above fair market value.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, "Accounting for Stock Issued to Employees",
and has been determined as if Del Monte had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option-pricing
model with the following weighted average assumptions for the years ended June
30, 2000, 1999 and 1998: dividend yield of 0% for all years; expected volatility
of 0.43, 0.23 and 0.00 respectively; risk-free interest rates of 5.99%, 4.623%
and 5.74%, respectively, and expected lives of 7 years for all years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Del Monte's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair
47
49
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
value of its employee stock options. The weighted average fair value per share
of options granted during the year was $6.72, $4.43 and $2.78, for the years
ended June 30, 2000, 1999 and 1998, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Del Monte's
pro forma information as calculated in accordance with SFAS No. 123 is as
follows:
YEAR ENDED JUNE 30,
-------------------------
2000 1999 1998
------ ----- ------
Pro forma net income...................................... $126.2 $11.4 $ 4.9
Pro forma earnings (loss) per share:
Basic................................................... $ 2.42 $0.19 $(0.01)
Fully Diluted........................................... $ 2.38 $0.18 $(0.01)
STOCK PURCHASE PLAN
Effective August 4, 1997, the Del Monte Foods Company Employee Stock
Purchase Plan was established under which certain key employees are eligible to
participate. A total of 957,710 shares of common stock of Del Monte were
reserved for issuance under the Employee Stock Purchase Plan. At June 30, 2000,
454,137 shares of Del Monte's common stock have been purchased by and issued to
eligible employees. It is anticipated that no future shares will be issued
pursuant to this plan.
Total compensation expense recognized in connection with stock-based awards
for the years ended June 30, 2000, 1999 and 1998 was $0.2, $0.5 and $1.8.
48
50
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
NOTE 8 -- RETIREMENT BENEFITS
Del Monte sponsors three non-contributory defined benefit pension plans and
several unfunded defined benefit postretirement plans providing certain medical,
dental and life insurance benefits to eligible retired, salaried, non-union
hourly and union employees.
PENSION BENEFITS OTHER BENEFITS
JUNE 30, JUNE 30,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
Change in benefit obligation:
Benefit obligation at beginning of year................ $279.0 $291.4 $ 75.0 $ 107.7
Service cost........................................... 3.5 3.5 1.0 1.3
Interest cost.......................................... 19.9 19.5 5.4 7.3
Amendments............................................. -- -- -- (23.5)
Acquisitions........................................... -- -- 0.4 --
Plan participants' contributions....................... -- -- 3.5 2.7
Contadina acquisition.................................. -- -- -- --
Actuarial (gains) losses............................... (7.5) (9.4) 1.8 (11.4)
Benefits paid.......................................... (25.9) (26.0) (9.7) (9.1)
------ ------ ------- -------
Benefit obligation at end of year...................... $269.0 $279.0 $ 77.4 $ 75.0
====== ====== ======= =======
Change in plan assets:
Fair value of plan assets at beginning of year......... $297.4 $298.8 $ -- $ --
Actual return on plan assets........................... 47.7 14.6 -- --
Employer contributions................................. 8.5 10.0 6.2 6.4
Plan participants' contributions....................... -- -- 3.5 2.7
Benefits paid.......................................... (25.9) (26.0) (9.7) (9.1)
------ ------ ------- -------
Fair value of plan assets at end of year............... $327.7 $297.4 $ -- $ --
====== ====== ======= =======
Funded status.......................................... $ 58.7 $ 18.4 $ (77.4) $ (75.0)
Unrecognized net actuarial gain........................ (57.1) (28.1) (37.7) (43.2)
Unrecognized prior service cost........................ (0.7) (1.0) (27.9) (31.1)
------ ------ ------- -------
Net amount recognized.................................. $ 0.9 $(10.7) $(143.0) $(149.3)
====== ====== ======= =======
WEIGHTED AVERAGE ASSUMPTIONS AS OF JUNE 30
Discount rate used in determining projected benefit
obligation.......................................... 8.00% 7.50% 8.00% 7.50%
Rate of increase in compensation levels................ 5.00 5.00 -- --
Long-term rate of return on assets..................... 9.00 9.00 -- --
49
51
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
The components of net periodic pension cost for all defined benefit plans
and other benefit plans are as follows:
PENSION BENEFITS OTHER BENEFITS
JUNE 30, JUNE 30,
-------------------------- -----------------------
2000 1999 1998 2000 1999 1998
------ ------ ------ ----- ----- -----
Components of net periodic benefit cost
Service cost for benefits earned
during period...................... $ 3.5 $ 3.4 $ 3.1 $ 1.0 $ 1.3 $ 1.2
Interest cost on projected benefit
obligation......................... 19.9 19.5 20.5 5.4 7.3 7.8
Expected return on plan assets........ (26.0) (26.2) (23.9) -- -- --
Amortization of prior service cost.... -- -- -- (3.2) (1.0) (1.0)
Recognized net actuarial (gain)
loss............................... (0.5) (0.8) (1.1) (3.6) (2.8) (3.1)
------ ------ ------ ----- ----- -----
Benefit cost (credit)................... $ (3.1) $ (4.1) $ (1.4) $(0.4) $ 4.8 $ 4.9
====== ====== ====== ===== ===== =====
For measurement purposes, an 8.00% annual rate of increase in the per
capita cost of covered health care benefits was assumed for fiscal 2000. The
rate was assumed to decrease gradually to 5.00% in the year 2005 and remain at
that level thereafter.
It has been Del Monte's policy to fund Del Monte's retirement plans in an
amount consistent with the funding requirements of federal law and regulations
and not to exceed an amount that would be deductible for federal income tax
purposes. Contributions are intended to provide not only for benefits attributed
to service to date but also for those benefits expected to be earned in the
future. Del Monte's defined benefit retirement plans were previously determined
to be underfunded under federal ERISA guidelines. Del Monte entered into an
agreement with the Pension Benefit Guaranty Corporation, dated April 7, 1997,
whereby Del Monte will contribute a total of $55.0 to its defined benefit
pension plans through calendar 2001, of which $43.5 had been contributed by June
30, 2000. The contributions remaining to be made in calendar 2000 and 2001 are
secured by a $14.0 letter of credit. This letter of credit is subject to
periodic reduction as contributions are made in accordance with the agreement.
The health care cost trend rate assumption has a significant effect on the
amounts reported. An increase in the assumed health care cost trend by 1% in
each year would increase the postretirement benefit obligation as of June 30,
2000 by $7.7 and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for the period then ended by $0.8. A
decrease in the assumed health care cost trend by 1% in each year would decrease
the postretirement benefit obligation as of June 30, 2000 by $(5.3) and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the period then ended by $(0.6).
In addition, Del Monte participates in several multi-employer pension
plans, which provide defined benefits to certain of its union employees. The
contributions to multi-employer plans for the years ended June 30, 2000, 1999
and 1998 were $7.7, $7.2 and $6.3, respectively. Del Monte also sponsors defined
contribution plans covering substantially all employees. Company contributions
to the plans are based on employee contributions or compensation. Contributions
under such plans totaled $1.7, $1.6 and $1.5 for the years ended June 30, 2000,
1999 and 1998.
50
52
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
NOTE 9 -- PROVISION (BENEFIT) FOR INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEAR ENDED JUNE 30,
-----------------------
2000 1999 1998
------ ----- ----
Income (loss) before taxes and extraordinary items:
Domestic.................................................. $ 79.9 $33.0 $6.0
Foreign................................................... (0.5) 0.2 --
------ ----- ----
$ 79.4 $33.2 $6.0
====== ===== ====
Income tax provision (benefit)
Current:
Federal................................................ $ 20.6 $ 0.2 $0.5
State and foreign...................................... -- 0.3 --
------ ----- ----
Total current............................................. 20.6 0.5 0.5
------ ----- ----
Deferred:
Federal................................................ (66.6) -- --
State and foreign...................................... (7.6) -- --
------ ----- ----
Total deferred............................................ (74.2) -- --
------ ----- ----
$(53.6) $ 0.5 $0.5
====== ===== ====
Significant components of Del Monte's deferred tax assets and liabilities
are as follows:
YEAR ENDED JUNE 30,
--------------------
2000 1999
-------- --------
Deferred tax assets:
Post employment benefits.................................. $ 50.0 $ 52.4
Pension liability......................................... 1.7 5.8
Purchase accounting....................................... 6.7 6.9
Workers' compensation..................................... 2.5 4.1
Leases and patents........................................ 1.8 2.5
Interest.................................................. 10.2 5.8
State income taxes........................................ 7.6 8.9
Other..................................................... 23.2 23.3
Net operating loss and tax credit carry forward........... 16.0 22.7
------ ------
Gross deferred tax assets.............................. 119.7 132.4
Valuation allowance.................................... (9.7) (91.3)
------ ------
Net deferred tax assets................................ 110.0 41.1
------ ------
Deferred tax liabilities:
Depreciation.............................................. 24.1 23.6
Intangible................................................ 3.8 3.6
LIFO reserve.............................................. 7.6 13.9
Other..................................................... 0.3 --
------ ------
Gross deferred liabilities............................. 35.8 41.1
------ ------
Net deferred tax asset................................. $ 74.2 $ --
====== ======
51
53
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
The Company released the majority of its valuation allowance in the fourth
quarter of fiscal 2000. Management evaluated the available evidence and
concluded it is more likely than not that the Company will realize its net
deferred assets. In reaching this conclusion, significant weight was given to
the Company's current, as well as cumulative, profitability. A valuation
allowance of $9.7 was maintained for NOL carryforwards subject to limitations
under Section 382 of the Internal Revenue Code. The net change in the valuation
allowance for the years ended June 30, 2000 and 1999 was a decrease of $81.6 and
$5.8, respectively.
The differences between the provision (benefit) for income taxes and income
taxes computed at the statutory U.S. federal income tax rates are explained as
follows:
YEAR ENDED JUNE 30,
-------------------------
2000 1999 1998
------ ------ -----
Income taxes computed at the statutory U.S. federal income
tax rates............................................... $ 27.8 $ 11.6 $ 2.1
Taxes on foreign income at rates different than U.S.
federal income tax rates................................ 0.2 0.3 --
Reversal of valuation allowance, net of tax adjustments... (67.7) -- --
Realization of prior years' net operating losses, tax
credits and other adjustments........................... (12.2) (11.4) (1.6)
Other..................................................... (1.7) -- --
------ ------ -----
Provision (benefit) for income taxes...................... $(53.6) $ 0.5 $ 0.5
====== ====== =====
As of June 30, 2000, Del Monte had operating loss carryforwards for U.S.
tax purposes totaling $37.5, which will expire in 2012.
Del Monte made income tax payments of $9.0 and $2.6 for the years ended
June 30, 2000 and 1999. Del Monte made no income tax payments for the year ended
June 30, 1998.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
Lease Commitments. Del Monte leases certain property and equipment and
office and plant facilities. At June 30, 2000, the aggregate minimum rental
payments required under operating leases that have initial or remaining terms in
excess of one year were as follows:
2001........................................................ $ 28.3
2002........................................................ 26.5
2003........................................................ 24.6
2004........................................................ 22.9
2005........................................................ 21.4
Thereafter.................................................. 218.0
------
$341.7
======
Minimum payments have not been reduced by minimum sublease rentals of $0.4
due through 2002 under noncancelable subleases. Rent expense was $33.7, $29.6
and $28.3 for the fiscal years ended June 30, 2000, 1999 and 1998, respectively.
Rent expense includes contingent rentals on certain equipment based on usage.
Grower Commitments. Del Monte has entered into noncancelable agreements
with growers, with terms ranging from two to ten years, to purchase certain
quantities of raw products. Total purchases under these agreements were $69.1,
$68.2 and $66.5 for the years ended June 30, 2000, 1999 and 1998.
52
54
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
At June 30, 2000, aggregate future payments under such purchase commitments
(priced at the June 30, 2000 estimated cost) are estimated as follows:
2001........................................................ $ 54.3
2002........................................................ 46.1
2003........................................................ 40.7
2004........................................................ 37.3
2005........................................................ 34.4
Thereafter.................................................. 65.1
------
$277.9
======
In connection with the sale of Del Monte's 50.1% interest in Del Monte
Philippines, a joint venture operating primarily in the Philippines, on March
29, 1996, Del Monte signed an eight-year supply agreement whereby Del Monte must
source substantially all of its pineapple requirements from Del Monte
Philippines over the agreement term. Del Monte expects to purchase $42.9 in
fiscal 2001 under this supply agreement for pineapple products. During the year
ended June 30, 2000, Del Monte purchased $40.8 under the supply agreement.
Supply Agreement. Effective December 21, 1993, Del Monte sold substantially
all of the assets and certain related liabilities of its can manufacturing
operations in the United States to Silgan Containers Corporation ("Silgan"). In
connection with the sale to Silgan, Del Monte entered into a ten-year supply
agreement under which Silgan, effective immediately after the sale, began
supplying substantially all of Del Monte's metal container requirements for
foods and beverages in the United States. Purchases under the agreement during
the year ended June 30, 2000 amounted to $172.9. Del Monte believes the supply
agreement provides it with a long-term supply of cans at competitive prices that
adjust over time for normal manufacturing cost increases or decreases.
Information Systems Agreement. On November 1, 1992, Del Monte entered into
an agreement with Electronic Data Systems Corporation to provide services and
administration to Del Monte in support of its information services functions for
all domestic operations. Payments under the terms of the agreement are based on
scheduled monthly base charges subject to various adjustments such as system
usage and inflation. Total payments for the years ended June 30, 2000, 1999 and
1998 were $17.0, $17.9 and $16.3, respectively. The agreement expires in
November 2002 with optional successive one-year extensions. At June 30, 2000,
base payments under the agreement are as follows:
2001........................................................ $13.7
2002........................................................ 13.7
2003........................................................ 4.6
-----
$32.0
=====
Union Contracts. Del Monte has a concentration of labor supply in employees
working under union collective bargaining agreements, which represent
approximately 83% of its hourly and seasonal work force. Of these represented
employees, 9% of employees are under agreements that will expire in calendar
2001.
Legal Proceedings. Del Monte is a defendant in an action brought by PPI
Enterprises (U.S.), Inc. in the U.S. District Court for the Southern District of
New York on May 25, 1999. The plaintiff has alleged that Del Monte breached
certain purported contractual and fiduciary duties and made misrepresentations
and failed to disclose material information to the plaintiff about the value of
Del Monte and its prospects for sale. The plaintiff also alleges that it relied
on Del Monte's alleged statements in selling its preferred and common stock
interest in Del Monte to a third party at a price lower than that which the
plaintiff asserts it could have
53
55
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
received absent Del Monte's alleged conduct. The complaint seeks compensatory
damages of at least $24 million, plus punitive damages. This case continues to
be in the early stages of procedural motions and Del Monte cannot at this time
reasonably estimate a range of exposure, if any. Del Monte believes that this
proceeding is without merit and plans to defend it vigorously.
Del Monte is also defending various other claims and legal actions that
arise from its normal course of business, including certain environmental
actions. While it is not feasible to predict or determine the ultimate outcome
of these matters, in the opinion of management none of these claims and actions,
individually or in the aggregate, will have a material effect on Del Monte's
financial position.
NOTE 11 -- RELATED PARTY TRANSACTIONS
DMC is directly-owned and wholly-owned by Del Monte. For the year ended
June 30, 2000, DMC and DMC's subsidiaries accounted for 100% of the consolidated
revenues and net earnings of Del Monte, except for those expenses incidental to
the Del Monte Notes. As of June 30, 2000, Del Monte's sole asset was the stock
of DMC. Del Monte had no subsidiaries other than DMC and DMC's subsidiaries, and
had no direct liabilities other than the Del Monte Notes. Del Monte is
separately liable under various guarantees of indebtedness of DMC, which
guarantees of indebtedness are full and unconditional.
Del Monte entered into a ten-year agreement dated April 18, 1997 (the
"Management Advisory Agreement") with TPG, a majority shareholder. Under this
agreement, TPG is entitled to receive an annual fee from Del Monte for
management advisory services equal to the greater of $0.5 and 0.05% of the
budgeted consolidated net sales of Del Monte. For the years ended June 30, 2000,
1999 and 1998, TPG received fees of $0.8, $0.8 and $0.7 under this agreement. In
addition, Del Monte has agreed to indemnify TPG, its affiliates and
shareholders, and their respective directors, officers, controlling persons,
agents, employees and affiliates from and against all claims, actions,
proceedings, demands, liabilities, damages, judgments, assessments, losses and
costs, including fees and expenses, arising out of or in connection with the
services rendered by TPG thereunder. This indemnification may not extend to
actions arising under the U.S. federal securities laws. This agreement makes
available the resources of TPG concerning a variety of financial and operational
matters, including advice and assistance in reviewing Del Monte's business plans
and its results of operations and in evaluating possible strategic acquisitions,
as well as providing investment banking services in identifying and arranging
sources of financing. This agreement does not specify a minimum number of TPG
personnel who must provide such services or the individuals who must provide
them. It also does not require that a minimum amount of time be spent by such
personnel on Company matters. Del Monte cannot otherwise obtain the services
that TPG will provide without the addition of personnel or the engagement of
outside professional advisors.
Del Monte also entered into a ten-year agreement dated April 18, 1997 (the
"Transaction Advisory Agreement") with TPG. TPG is entitled to receive a fee of
1.5% of the "transaction value" for each transaction in which Del Monte is
involved, which may include acquisitions, refinancings and recapitalizations.
The term "transaction value" means the total value of any subsequent
transaction, including, without limitation, the aggregate amount of the funds
required to complete the subsequent transaction (excluding any fees payable
pursuant to this agreement and fees, if any paid to any other person or entity
for financial advisory, investment banking, brokerage or any other similar
services rendered in connection with such transaction) including the amount of
indebtedness, preferred stock or similar items assumed (or remaining
outstanding). The advisory agreement includes indemnification provisions similar
to those described above. These provisions may not extend to actions arising
under the U.S. federal securities laws. In fiscal 2000, TPG did not receive any
payments under this agreement. In fiscal 1999 TPG or its designee received $0.5
in connection with the South America Acquisition and $3.7 in connection with the
public equity offering as
54
56
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
compensation for its services as financial advisor for these transactions. In
fiscal 1998, TPG or its designee received from Del Monte a fee of $3.0 upon the
closing of the Contadina Acquisition.
NOTE 12 -- PLANT CONSOLIDATION
In the third quarter of fiscal 1998, management committed to a plan to
consolidate processing operations. In connection with this plan, Del Monte
established an accrual of $6.6 in fiscal 1998 relating to severance and benefit
costs for 433 employees to be terminated. At June 30, 2000, a balance of $2.9
remained in this accrual. Cash expenditures of $0.1 were recorded against this
accrual as of June 30, 1999. For the year ended June 30, 2000, cash expenditures
charged to this accrual totaled $2.3. In the fourth quarter of fiscal 2000, this
accrual was reduced by $1.3 due primarily to changes in severance and related
benefit estimates. Implementation of the plant consolidation was planned to
occur in a specific sequence over a three-year period. Operations were suspended
at the Modesto facility for approximately a year while that facility underwent
reconfiguration to accommodate fruit processing which has previously taken place
at the San Jose facility and is currently taking place at the Stockton facility.
Del Monte closed the San Jose facility in December 1999, and the sale of this
property is expected to close in fiscal 2001. The Stockton facility will close
after the 2000 production season. The tomato processing formerly performed at
the Modesto facility has been moved to the Hanford facility.
In August 1998, management announced its intention to close Del Monte's
vegetable processing plant located in Arlington, Wisconsin after the summer 1998
pack. Upon completion of this pack, a charge of $3.5 was taken during the first
quarter of fiscal 1999 representing primarily the write-down to fair value of
the assets held for sale. These assets included building, building improvements,
and machinery and equipment with a carrying value of $4.1. Fair value was based
on current market values of land and buildings in the area and estimates of
market values of equipment to be disposed of. As of June 30, 1999, non-cash
charges of $0.5 and cash expenditures of $0.4 were charged against this accrual.
For the year ended June 30, 2000, non-cash charges of $1.8 and $0.1 of cash
expenditures were charged against this accrual. In addition, upon the sale of
this plant in fiscal 2000, the sale proceeds exceeded original estimates
resulting in a reduction of the accrual of $0.7. No balance remained in this
accrual at year-end June 30, 2000.
Del Monte incurred charges representing accelerated depreciation of $4.3
during fiscal 2000, $9.4 during fiscal 1999 and $3.0 during fiscal 1998. This
acceleration results from the effects of adjusting the tomato and fruit
processing assets' remaining useful lives to match the period of use prior to
the closures of these plants. Assets that are subject to accelerated
depreciation consist primarily of buildings and of machinery and equipment,
which will no longer be needed due to the consolidation of the operations of the
two fruit processing plants and the consolidation of the operations of two
tomato processing plants. The remaining useful lives of the buildings at the San
Jose facility were decreased by approximately 20 years due to this acceleration.
Del Monte anticipates that it will incur additional charges relating to
plant closures of approximately $2.9 in fiscal 2001, $0.7 in fiscal 2002 and
$0.3 in fiscal 2003. These expenses include costs to remove and dispose of
assets and ongoing fixed costs to be incurred until the sale of the San Jose and
Stockton properties. Costs incurred due to plant consolidation in fiscal 2000
were $10.9, including $4.3 of accelerated depreciation, $2.7 for equipment
removal, $5.9 of ongoing fixed costs and other period costs, and a $2.0 reversal
of prior accruals, as discussed above. Total charges relating to plant closures
were $17.2 in fiscal 1999, including depreciation expense of $9.4, $1.9
representing direct costs incurred to remove and dispose of tomato processing
equipment at Modesto that would not be transferred to Del Monte's tomato
processing operations at the Hanford facility, as well as $3.5 for the Arlington
closure and $2.4 of ongoing fixed costs and other period costs. Costs relating
to plant closures recorded in fiscal 1998 totaled $9.6 (including depreciation
expense of $3.0).
55
57
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
NOTE 13 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH
------ ------ ------ ------
2000(2)
Net Sales............................................... $333.7 $455.4 $353.3 $319.7
Operating income........................................ 25.0 48.9 34.0 38.6
Income before extraordinary item........................ 6.9 22.8 13.2 90.1(4)
Net income.............................................. 6.9 22.8 9.3 89.7(4)
Per share data:(3)
Basic income per share before extraordinary item...... 0.13 0.44 0.18 1.72(4)
Diluted income per share before extraordinary item.... 0.13 0.43 0.18 1.70(4)
1999(1)(2)
Net Sales............................................... $317.6 $427.5 $389.5 $369.9
Operating income........................................ 12.0 32.7 31.6 36.5
Income (loss) before extraordinary item................. (10.8) 10.2 12.1 21.2
Net income (loss)....................................... (10.8) 10.2 (7.1) 21.2
Per share data:(3)
Basic income (loss) per share before extraordinary
item............................................... (0.34) 0.24 0.25 0.41
Diluted income (loss) per share before extraordinary
item............................................... (0.34) 0.24 0.25 0.40
- ---------------
(1) The first and second quarters of fiscal 1999 included $2.5 and $0.3,
respectively, of inventory step-up related to inventory purchased in the
Contadina Acquisition and the South America Acquisition.
(2) Quarterly plant consolidation charges for the first, second, third and
fourth quarters of fiscal 2000 were $3.0, $4.4, $2.4 and $1.1, respectively.
Quarterly plant consolidation charges for the first, second, third and
fourth quarters of fiscal 1999 were $7.0, $5.3, $2.5 and $2.4, respectively.
(3) Earnings per share were computed independently for each of the periods
presented; therefore, the sum of the earnings per share amounts for the
quarters may not equal the total for the year.
(4) The fourth quarter of fiscal 2000 included the release of the majority of
the Company's valuation allowance, net of tax adjustments, resulting in a
credit to income tax expense of $67.7.
NOTE 14 -- SUBSEQUENT EVENT (UNAUDITED)
On September 1, 2000, Del Monte acquired the world-wide rights to the
Sunfresh brand fruit product line of UniMark Group, Inc. ("UniMark"), as well as
certain finished goods inventory and UniMark's McAllen, Texas distribution
center. The total purchase price for those assets was $14.5 paid solely in cash.
The purchase price is subject to adjustment based on the inventory value at
closing. Concurrently, the Company executed a five-year supply agreement under
which a UniMark affiliate will produce certain chilled and canned citrus
products at their existing facility in Mexico.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K with respect to
identification of directors is incorporated by reference from the information
contained in the section captioned "Nominees and Other Members of the Board of
Directors" in Del Monte's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held November 15, 2000 (the "Proxy Statement"), a copy of
which will be filed with the Securities and Exchange Commission before the
mailing date. For information with respect to the executive officers of Del
Monte, see "Executive Officers of Del Monte Foods Company" at the end of Part I
of this report.
The information required by Item 10 of Form 10-K with respect to compliance
with Section 16(a) of the Securities Exchange Act, as amended, is incorporated
by reference from the information contained in the section captioned "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference from the information contained in the sections captioned "Directors'
Compensation", "Summary Compensation Table", "Option Grants in Fiscal Year
2000", "Aggregated Option Exercises in Fiscal Year 2000 and Fiscal Year-End
Option Values", "Employment and Other Arrangements", "Compensation Committee
Interlocks and Insider Participation", "Report of the Compensation Committee on
Executive Compensation" and "Stock Performance Graph" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Ownership of
Del Monte Foods Company Stock" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
(i) The following financial statements of Del Monte Foods Company and
subsidiaries are included in Item 8:
Report of KPMG LLP, Independent Auditors
Consolidated Balance Sheets -- June 30, 2000 and 1999
Consolidated Statements of Income -- Years ended June 30, 2000, 1999
and 1998
Consolidated Statements of Stockholders' Equity (Deficit) -- Years
ended June 30, 2000, 1999
and 1998
Consolidated Statements of Cash Flows -- Years ended June 30, 2000,
1999 and 1998
Notes to consolidated financial statements
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59
2. Financial Statements Schedules:
Schedules have been omitted because they are inapplicable, not required,
or the information is included elsewhere in the financial statements or
notes thereto.
3. Exhibits
The exhibits listed on the accompanying Exhibit Index are incorporated by
reference herein and filed as part of this report.
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the last quarter of the
period covered by this report.
(c) See Item 14(a)3 above.
(d) See Item 14(a)1 and 14(a)2 above.
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60
SIGNATURES
Pursuant to the requirements of 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.
DEL MONTE FOODS COMPANY
By: /s/ RICHARD G. WOLFORD
------------------------------------
Richard G. Wolford
Chief Executive Officer
Date: September 7, 2000
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard G. Wolford, David L. Meyers and
William R. Sawyers, each of whom may act without joinder of the other, as their
true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments to the
Annual Report on Form 10-K, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
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/ RICHARD G. WOLFORD President and Chief Executive September 7, 2000
- ----------------------------------------------------- Officer; Director; Chairman
Richard G. Wolford of the Board
/s/ DAVID L. MEYERS Executive Vice President, September 7, 2000
- ----------------------------------------------------- Administration and Chief
David L. Meyers Financial Officer
/s/ RICHARD L. FRENCH Senior Vice President and September 7, 2000
- ----------------------------------------------------- Chief Accounting Officer
Richard L. French
/s/ RICHARD W. BOYCE Director September 7, 2000
- -----------------------------------------------------
Richard W. Boyce
/s/ TIMOTHY G. BRUER Director September 7, 2000
- -----------------------------------------------------
Timothy G. Bruer
59
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SIGNATURE TITLE DATE
--------- ----- ----
/s/ AL CAREY Director September 7, 2000
- -----------------------------------------------------
Al Carey
/s/ PATRICK FOLEY Director September 7, 2000
- -----------------------------------------------------
Patrick Foley
/s/ BRIAN E. HAYCOX Director September 7, 2000
- -----------------------------------------------------
Brian E. Haycox
/s/ DENISE O'LEARY Director September 7, 2000
- -----------------------------------------------------
Denise O'Leary
Director September 7, 2000
- -----------------------------------------------------
William S. Price, III
/s/ JEFFREY A. SHAW Director September 7, 2000
- -----------------------------------------------------
Jeffrey A. Shaw
/s/ WESLEY J. SMITH Director; Chief Operating September 7, 2000
- ----------------------------------------------------- Officer
Wesley J. Smith
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of Del Monte Foods Company
(incorporated by reference to Exhibit 3.1 to Amendment No. 1
to the Registration Statement on Form S-1 No. 333-48235,
filed May 18, 1998 ("Amendment No. 1 to the Registration
Statement on Form S-l"))
3.2 Amended and Restated Bylaws of Del Monte Foods Company,
adopted on April 22, 1999 (incorporated by reference to
Exhibit (3)(ii) to the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999)
3.3 Certificate of Designations filed May 4, 1998 (incorporated
by reference to Exhibit 3.3 to Amendment No. 1 to the
Registration Statement on Form S-1)
3.4 Certificate of Merger between Del Monte Foods Company, a
Maryland corporation, and Del Monte Foods Company, a
Delaware corporation, filed May 1, 1998 (incorporated by
reference to Exhibit 3.4 to Amendment No. 1 to the
Registration Statement on Form S-1)
3.5 Articles of Merger between Del Monte Foods Company, a
Maryland corporation, and Del Monte Foods Company, a
Delaware corporation, filed May 1, 1998 (incorporated by
reference to Exhibit 3.5 to Amendment No. 1 to the
Registration Statement on Form S-1)
4.1 Stockholders' Agreement, dated as of April 18, 1997, among
Del Monte Foods Company and its Stockholders (incorporated
by reference to Exhibit 3.6 to Registration Statement on
Form S-4 No. 333-29079, filed June 12, 1997 (the "DMC
Registration Statement"))
4.2 Form of Stockholders' Agreement among Del Monte Foods
Company and its employee stockholders (incorporated by
reference to Exhibit 4.1 to Registration Statement on Form
S-8 filed November 24, 1997 File No. 333-40867 (the
"Registration Statement on Form S-8"))
4.3 Form of Stockholders' Agreement between Del Monte Foods
Company and its Non-Employee Directors (incorporated by
reference to Exhibit 4.4 to Amendment No. 1 to the
Registration Statement on Form S-1)
4.4 Form of Stockholders' Agreement between Del Monte Foods
Company and its Non-Employee Directors -- Directors' Fee
Arrangement (incorporated by reference to Exhibit 4.5 to
Amendment No. 1 to the Registration Statement on Form S-1)
4.5 Form of Registration Rights Agreement by and between TPG
Partners, L.P., TPG Parallel I, L.P. and Del Monte Foods
Company (incorporated by reference to Exhibit 4.6 to
Amendment No. 3 to the Registration Statement on Form S-1
No. 333-48235, filed June 30, 1998)
10.1 Indenture, dated as of December 17, 1997, among Del Monte
Foods Company, as issuer, and Marine Midland Bank, as
trustee, relating to the Notes (the "Indenture")
(incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-4 No. 333-47289, filed
March 4, 1998 (the "Exchange Offer Registration Statement"))
NOTE: Pursuant to the provisions of paragraph (b)(2) of Item
601 of Regulation S-K, the Registrant hereby undertakes to
furnish to the Commission upon request copies of any
schedule to the Indenture
10.2 Form of Series B 12 1/2% Senior Discount Note due 2007 of
Del Monte Foods Company (the "Exchange Notes") (included as
Exhibit B to the Indenture) (incorporated by reference to
Exhibit 4.2 to the Exchange Offer Registration Statement)
10.3 Registration Rights Agreement, dated as of December 17,
1997, by and among Del Monte Foods Company and the Initial
Purchasers listed therein, relating to the Notes (the
"Registration Rights Agreement") (incorporated by reference
to Exhibit 4.3 to the Exchange Offer Registration Statement)
NOTE: Pursuant to the provisions of paragraph (b)(2) of Item
601 of Regulation S-K, the Registrant hereby undertakes to
furnish to the Commission upon request copies of any
schedule to the Registration Rights Agreement.
61
63
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.4 Second Amended and Restated Credit Agreement, dated as of
January 14, 2000, among Del Monte Corporation, Bank of
America, N.A., as Administrative Agent, and the other
financial institutions parties thereto (the "Second Amended
Credit Agreement") (confidential treatment has been
requested as to portions of the Exhibit) (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q for the period ended December 31, 1999 (the "December
1999 10-Q)) NOTE: Pursuant to the provisions of paragraph
(b)(2) of Item 601 of Regulation S-K, the Registrant hereby
undertakes to furnish to the Commission upon request copies
of any schedule to the Amended Credit Agreement.
10.5 Amended and Restated Parent Guaranty, dated December 17,
1997, executed by Del Monte Foods Company, with respect to
the obligations under the Amended Credit Agreement (the
"Restated Parent Guaranty") (incorporated by reference to
Exhibit 4.5 to the Exchange Offer Registration Statement)
10.6 Security Agreement, dated April 18, 1997, between Del Monte
Corporation and Del Monte Foods Company and Bank of America
National Trust and Savings Association (incorporated by
reference to Exhibit 4.6 to the DMC Registration Statement)
10.7 Pledge Agreement, dated April 18, 1997, between Del Monte
Corporation and Bank of America National Trust and Savings
Association (incorporated by reference to Exhibit 4.7 to DMC
Registration Statement)
10.8 Parent Pledge Agreement, dated April 18, 1997, between Del
Monte Foods Company and Bank of America National Trust and
Savings Association (incorporated by reference to Exhibit
4.8 to the DMC Registration Statement)
10.9 Indenture, dated as of April 18, 1997, among Del Monte
Corporation, as issuer, Del Monte Foods Company, as
guarantor, and Marine Midland Bank, as trustee, relating to
the 12 1/4% Senior Subordinated Notes Due 2007 (incorporated
by reference to Exhibit 4.2 to the DMC Registration
Statement)
10.10 Asset Purchase Agreement, dated as of November 12, 1997,
among Nestle USA, Inc., Contadina Services, Inc., Del Monte
Corporation and Del Monte Foods Company (the "Asset Purchase
Agreement") (incorporated by reference to Exhibit 10.1 to
Report on Form 8-K No. 33-36374-01 filed January 5, 1998)
10.11 Transaction Advisory Agreement, dated as of April 18, 1997,
between Del Monte Corporation and TPG Partners, L.P.
(incorporated by reference to Exhibit 10.1 to the DMC
Registration Statement)
10.12 Management Advisory Agreement, dated as of April 18, 1997,
between Del Monte Corporation and TPG Partners, L.P.
(incorporated by reference to Exhibit 10.2 to the DMC
Registration Statement)
10.13 Retention Agreement between Del Monte Corporation and David
L. Meyers, dated November 1, 1991 (incorporated by reference
to Exhibit 10.3 to the DMC Registration Statement)**
*10.14 Retention Agreement between Del Monte Corporation and Irvin
R. Holmes, dated January 1, 1992**
10.15 Del Monte Foods Annual Incentive Award Plan, as amended
(incorporated by reference to Exhibit 10.8 to the DMC
Registration Statement)**
10.16 Additional Benefits Plan of Del Monte Corporation, as
amended and restated effective January 1, 1996 (incorporated
by reference to Exhibit 10.9 to the DMC Registration
Statement)
10.17 Supplemental Benefits Plan of Del Monte Corporation,
effective as of January 1, 1990, as amended as of January 1,
1992 and May 30, 1996 (incorporated by reference to Exhibit
10.10 to the DMC Registration Statement)
10.18 Del Monte Foods Company Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-8)
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.19 Del Monte Foods Company 1997 Stock Incentive Plan, as
amended (incorporated by reference to Exhibit 10.2 to the
December 1999 10-Q)
10.20 Agreement for Information Technology Services between Del
Monte Corporation and Electronic Data Systems Corporation,
dated November 1, 1992, as amended (incorporated by
reference to Exhibit 10.11 to the DMC Registration
Statement)
10.21 Supply Agreement between Del Monte Corporation and Silgan
Containers Corporation, dated as of September 3, 1993, as
amended (incorporated by reference to Exhibit 10.12 to the
DMC Registration Statement)**
10.22 Del Monte Foods Company Non-Employee Directors and
Independent Contractors 1997 Stock Incentive Plan, as
amended (incorporated by reference to Exhibit 10.4 to the
December 1999 10-Q)
10.23 Del Monte Foods Company 1998 Stock Incentive Plan, as
amended (incorporated by reference to Exhibit 10.3 to the
December 1999 10-Q)**
10.24 Employment Agreement and Promissory Note of Richard Wolford
(incorporated by reference to Exhibit 10.25 to Form 10-K for
the year ended June 30, 1998, filed September 22, 1998, File
No. 001-14335 (the "1998 Form 10-K"))**
10.25 Employment Agreement and Promissory Note of Wesley Smith
(incorporated by reference to Exhibit 10.26 to the 1998 Form
10-K)**
10.26 Supplemental Indenture, dated as of April 24, 1998, among
Del Monte Corporation, as Issuer, Del Monte Foods Company,
as Guarantor, and Marine Midland Bank, as Trustee
(incorporated by reference to Exhibit 10.25 to the
Registration Statement on Form S-1 No. 333-48235)
10.27 Supplemental Indenture, dated as of April 24, 1998, between
Del Monte Foods Company, as Guarantor, and Marine Midland
Bank, as Trustee (incorporated by reference to Exhibit 10.26
to the Registration Statement on Form S-1 No. 333-48235)
10.28 Amendment and Waiver, dated as of April 16, 1998, to the
Amended Credit Agreement and the Restated Parent Guaranty,
by Del Monte Corporation and the financial institutions
party thereto (incorporated by reference to Exhibit 10.27 to
the Registration Statement on Form S-1 No. 333-48235)
10.29 Supplemental Indenture, dated as of December 19, 1997, among
Del Monte Corporation, as Issuer, Del Monte Foods Company,
as Guarantor, and Marine Midland Bank, as Trustee
*10.30 Del Monte Corporation AIAP Deferred Compensation Plan dated
October 14, 1999, effective July 1, 2000**
10.31 Office Lease, dated October 7, 1999 between TMG/One Market,
L.P. and Crossmarket, LLC (Landlord) and Del Monte
Corporation (Tenant) (confidential treatment has been
requested as to portions of the Exhibit) (incorporated by
reference to Exhibit 10.5 to the December 1999 10-Q)
11.1 Statement re Computation of Earnings Per Share (incorporated
by reference to Item 8. Financial Statements and
Supplementary Date, Footnote 7, to the Annual Report on Form
10-K for the year ended June 30, 1999 contained herein)
*12.1 Statement re Computation of Ratio of Earnings to Fixed
Charges
21.1 Subsidiaries of Del Monte Foods Company (incorporated by
reference to Exhibit 21.1 to the 1999 Form 10-K)
*23.1 Consent of KPMG LLP, Independent Accountants
*27.1 Financial Data Schedule
- ---------------
* filed herewith
** indicates a management contract or compensatory plan or arrangement
63