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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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
[NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the fiscal year ended June 30, 1999
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
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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, 1999, based upon the closing price of the Common
Stock as reported by the New York Stock Exchange on such date, was approximately
$449,647,000.
The number of shares outstanding of Common Stock, par value $.01, as of
close of business on July 31, 1999 was 52,172,819.
The Registrant's definitive proxy statement for the Annual Meeting of
Stockholders to be held on November 11, 1999 is incorporated by reference in
Part III of this Form 10-K to the extent stated herein.
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TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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As used throughout this Annual Report, unless the context otherwise
requires, "Del Monte" means Del Monte Foods Company, and the "Company" means Del
Monte and its consolidated subsidiaries. "DMC" means Del Monte Corporation, a
wholly owned subsidiary of Del Monte. The "Contadina Acquisition" means the
Company'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 the Company'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. The
Company'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 and supercenters) with at least
$2 million in sales and are based upon data provided to the Company 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 the Company competes. Such data for canned fruit include
those categories in which the Company competes other than the "specialty"
category, which is an insignificant portion of the Company's operations. See
"Business--General." With respect to market share data used herein, the term
fiscal 1999 refers to the 52-week period ended June 26, 1999.
PART I
ITEM 1. BUSINESS
GENERAL
The predecessor of the Company 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 the Company's fresh produce operations ("Fresh Del Monte") to Polly Peck
International PLC. In January 1990, an investor group led by Merrill Lynch & Co.
purchased the Company and certain of its subsidiaries from RJR Nabisco for $1.5
billion ("RJR Nabisco Sale"). Following this sale, the Company divested several
of its non-core businesses and all of its foreign operations. In April 1997, the
Company was recapitalized with an equity infusion from TPG Partners, L.P.
("TPG"), its affiliates and other investors. In February 1999, the Company again
became a publicly-traded company.
The Company manufactures and distributes premium quality, nutritious
food products under Del Monte, Contadina and other brand names. The Company
operates in one industry segment: processed foods. The Company is the largest
producer and distributor of canned vegetables and canned fruit in the United
States, with net sales to its customers in excess of $1.5 billion in fiscal
1999. 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),
the Company 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 the Company as the branded market leader in the high
margin canned solid tomato products category and has established a strong
presence for the Company in the branded paste-based tomato products category.
See "-- Company Products."
The Company's primary domestic channel of distribution is retail
outlets, which accounted for approximately $1.2 billion (or 78%) of the
Company's fiscal 1999 sales. In fiscal 1999, the Company had market shares of
20.8% of all canned vegetable products and 42.4% of all canned major fruit
products in the United States. The Company's market share in vegetables is
larger than the market share of the Company's two largest branded competitors
combined and its market share of canned fruit is larger than the
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fruit market share of all other branded competitors combined. In addition, the
Company enjoys strong market shares in various solid tomato product categories.
The Company sells its products primarily through national grocery chains
and independent grocery stores nationwide. Although the Company's product is
currently sold primarily through grocery stores, the Company also sells its
products through the fastest growing channel of distribution. This channel
includes warehouse club 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, the Company
sells its products to the foodservice industry, food processors and the U.S.
military and in certain export markets. See "-- Sales, Marketing and
Distribution."
The Company operates 14 production facilities in California, the
Midwest, Washington and Texas, as well as six strategically located distribution
centers. The Company 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 the Company 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."
The Company owns a number of registered and unregistered trademarks that
it uses in conjunction with its business, including the trademarks Del Monte,
Contadina, Fruit Cup, FreshCut, 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, the Company 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 the Company's former fresh produce operations), Del Monte Royal Foods,
Kikkoman Corporation, Nabisco Canada, and Premier Valley Foods with respect to
which the Company owns 20% of the common stock. See "-- Intellectual Property."
The Company was recapitalized in April 1997. In that transaction Texas
Pacific Group, a private investment group, obtained a controlling interest in
the Company. Under a new senior management team introduced in connection with
the recapitalization, the Company began implementing a new strategy to increase
its sales and margins. This strategy includes: (i) increasing market share and
household penetration of the Company's existing high margin products; (ii)
introducing new products and new forms of packaging such as glass and plastic;
(iii) increasing penetration of high growth distribution channels, such as
supercenters, mass merchandisers and warehouse clubs; (iv) achieving cost
savings through operating efficiencies, plant consolidations and investments in
new and upgraded equipment; and (v) 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
Public Offering. On February 10, 1999, the Company received proceeds
from a public equity offering, consisting of 16,667,000 shares of common stock
sold by the Company and 3,333,000 shares of common stock sold by certain
stockholders of the Company at an initial offering price of $15.00 per share.
The Company received net proceeds of $230 million. Total common shares
outstanding after the offering were 52,163,943. The Company used a portion of
the net proceeds from the offering to redeem $46 million of its redeemable
preferred stock, including $2 million of unamortized discount, $10 million of
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accreted dividends and $1 million of redemption premium. In connection with the
offering, the Company paid Texas Pacific Group, which owns a controlling
interest in the Company, and its designee approximately $4 million for financial
advisory services.
The Company used $57 million of the net proceeds of the public equity
offering to redeem a portion of its senior discount notes, including $1 million
of accrued interest and $6 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 million of its indebtedness under its bank term
loans, to redeem $62 million of its senior subordinated notes, including $1
million of accelerated amortization of original issue discount, $3 million of
accrued interest and $7 million of redemption premium, and to repay $2 million
of indebtedness under the revolving credit facility. In connection with the
repayment of debt, $5 million of previously capitalized debt issue costs were
charged to income during the third quarter and accounted for as an extraordinary
item, as well as a total of $14 million of premiums, as discussed above,
resulting in total extraordinary item charges of $19 million.
South America Acquisition. On August 28, 1998, the Company 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, for a cash purchase price of $32 million. In
connection with the South America Acquisition, approximately $1 million of
acquisition-related expenses were incurred. RJR Nabisco had retained ownership
of the Del Monte brand in South America and the Venezuela Del Monte business
when it sold other Del Monte businesses in 1990. The South America Acquisition
was accounted for using the purchase method of accounting. The total purchase
price was allocated as $3 million to inventory, $1 million to property, plant
and equipment and $28 million representing intangible assets.
Stock Split. On July 22, 1998, the Company declared, by way of a stock
dividend effective July 24, 1998, a 191.542-for-one stock split of all of the
Company's outstanding shares of Common Stock. Accordingly, all share and per
share amounts for all periods presented herein have been retroactively adjusted
to give effect to this stock split.
THE INDUSTRY
The Company believes that the domestic canned food industry is
characterized by relatively stable growth based on modest price and population
increases. Within the industry, however, the Company 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.
The Company 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. 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 segments in which the Company competes. Based on statistical
information compiled by ACNielsen, however, private label products generally
have the largest market shares in these categories. The aggregate market share
of the private label segment has remained relatively stable over the past
several years in each of the Company's principal product categories. For the 52
weeks ended June 26, 1999, private label products as a group represented 42.6%,
40.7% and 31.4% of canned vegetable, major fruit and solid tomato product sales,
respectively. The Company believes that the private label segment has
historically been highly fragmented among regional vegetable producers seeking
to compete principally based on price. Recently, some consolidation has occurred
among private label manufacturers in the canned vegetable category. The Company
believes that this consolidation may result in increasing rationalization of
production capacity in the industry, which may in turn result in higher price
positioning of private label canned vegetable products.
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COMPANY PRODUCTS
The Company 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, the Company believes that the canned
vegetable industry in the United States generated more than $3.2 billion in
sales in calendar 1998. The Company believes that the domestic canned vegetable
industry is a mature segment characterized by high household penetration.
The Company views the canned retail vegetable market as consisting of
two distinct segments: core vegetables and specialty products. The Company
competes in each of these segments. The core segment represents the largest
volume segment, accounting for $955 million or approximately 67% of fiscal 1999
canned vegetable supermarket case sales (excluding pickles and tomato products).
The Company's entries in the core segment include cut green beans and
French-style green beans, as well as whole kernel and cream-style corn, mixed
vegetables, spinach, carrots and potatoes. The specialty segment which includes
asparagus, lima beans, wax beans, zucchini and a variety of corn offerings
represented $355 million or approximately 25% of fiscal 1999 canned vegetable
supermarket case sales. Many of the Company's specialty vegetable products are
enhanced with flavors and seasonings, such as the Company's zucchini in tomato
sauce and its Fiesta corn, which is made with red and green peppers. The
Company's specialty vegetables are priced at a premium to its other vegetable
products and carry higher margins. The Company offers a no-salt product line
across most of its core varieties. All of the Company's vegetable products are
offered to the retail market principally in 14-15 oz. sizes, as well as in
smaller can sizes representing buffet products. In addition, substantially all
of the above varieties are offered to the foodservice market primarily in a
larger commercial size can. The Company produces six or eight can multi-packs
primarily for its club store customers.
Within the core, specialty and buffet product lines, the Del Monte brand
accounted for $364 million in retail sales in fiscal 1999. During the 52 weeks
ended June 26, 1999, Del Monte brand vegetable products enjoyed an average
premium of 18 cents (38%) per item over private label products and the Company
held a 20.8% share of the canned vegetable market for that period.
The canned vegetable market is concentrated among a small number of
branded manufacturers and a large, fragmented pool of private label competitors.
In the core vegetable market, the Company is the branded market share leader and
for the 52 weeks ended June 26, 1999, held a 24.4% market share in green beans,
a 19.9% market share in corn and a 17.3% market share in peas. The Company's
core vegetable products are distributed in substantially all grocery outlets.
The Company also is the branded market share leader in the specialty segment and
is the overall market share leader in the buffet segment. 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. The
Company'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.
The Company has relationships with approximately 900 vegetable growers
located primarily in Wisconsin, Illinois, Minnesota, Washington, and Texas.
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Fruit
Based on internal estimates using data compiled by ACNielsen from
various industry and other sources, the Company believes that the canned fruit
industry in the United States generated more than $2.4 billion in sales in
calendar 1998. The Company believes the domestic canned fruit industry is a
mature segment characterized by high household penetration.
The Company is the largest processor of branded canned fruit in the
United States. The Company competes in three distinct segments of the canned
fruit industry: major, specialty and pineapple products. These segments account
for approximately 59% of the canned fruit industry's total sales. The major
segment consists of cling peaches, pears and fruit cocktail/mixed fruit with
products offered across various package sizes including Fruit Cup. The specialty
segment includes apricots, freestone and spiced peaches, mandarin oranges,
cherries and tropical mixed fruit. The Company believes that the major fruit and
specialty fruit segments of the canned fruit market together accounted for more
than $1.0 billion of total canned fruit industry sales in fiscal 1999.
Major fruit accounted for sales by retailers of $664 million in fiscal
1999. Sales by retailers of Del Monte brand major fruit products totaled $337
million in fiscal 1999. For the 52 weeks ended June 26, 1999, the Company was
the branded share leader with a 42.4% market share based on case volume sold.
The Company is also the share leader in every major sub-segment of the major
fruit category. In single-serve fruit cup, the Company has an 82.2% market
share. The Company's major fruit products are distributed in substantially all
grocery outlets, club stores and mass merchandiser outlets.
The Company 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 the Company's
brand recognition. Del Monte apricots and freestone peaches are distributed in
over 85% and 60% of grocery outlets, respectively. Tropical fruits and mandarin
oranges are distributed in 62% and 49% of grocery outlets, respectively.
The Company 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 Fruit Cup line. The Company has also been developing new high margin
products designed to leverage the Company's presence in existing categories, to
capitalize on its existing manufacturing capabilities and to expand the
Company's presence in the market beyond the canned food aisle. For example,
following initial success in test markets, the Company completed national
distribution in fiscal 1999 of its Orchard Select, a premium fruit product
packaged in glass sold in the produce section. These products are distributed in
64% of grocery outlets. In September 1998, the Company also began national
introduction of Fruit Pleasures and FruitRageous, two new single-serve fruit
product lines. Fruit Pleasures is targeted at the adult snack market and
FruitRageous is a fruit snack for children. An important focus of the Company's
new fruit product development efforts is the production of high quality,
convenient and nutritious products, particularly snack-type products.
The Company 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 12 cents (13%) per item premium. The Company faces competition in the
branded canned fruit segment from Tri-Valley Growers, which packs branded fruit
under the Libby's and S&W brands. The Del Monte brand market share is four times
that of its nearest competitor in the branded category. The Company also faces
competition from private label products in the canned fruit segment from
Tri-Valley Growers and Pacific Coast Producers ("PCP"), 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
83% of pineapple product sold is packed in juice. The remaining 17% is packed in
heavy syrup. Size offerings include the 20 oz. size, which accounts for 77% of
category sales. Other sizes offered by Del Monte include the 8 oz. and 15 oz.
varieties.
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The Company's retail pineapple line consists of sliced, chunk, tidbits,
crushed and juice products in a variety of container sizes. In addition to sales
by retailers, which totaled $229 million in fiscal 1999, the Company sells a
significant amount of juice concentrate and crushed pineapple through the food
ingredients channel. The Company also sells pineapple solids and juice products
to foodservice customers.
The Company is the second leading brand of canned pineapple with a 13.7%
market share for the 52 weeks ended June 26, 1999. Dole is the industry leader
with a market share of 43.1%. Private label and foreign pack brands comprise the
low-price segment of this category and hold market shares of 32.4% and 9.9%,
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.
The Company has relationships with approximately 600 fruit growers
located in California, Oregon and Washington. The Company 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, the Company believes that processed tomato
products generated calendar 1998 industry-wide sales of more than $5.2 billion.
While total sales of canned tomato products have grown steadily in recent years,
the Company believes that the diced segment of the retail canned solid tomato
segment (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 segments, 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.
The Company's tomato product offerings consist of two major segments:
solid tomato products, which are differentiated primarily by cut style, with
varieties including stewed, crushed, diced, chunky, wedges, puree and
paste-based tomato products, such as ketchup, tomato sauce, tomato paste,
spaghetti and pizza sauces.
The Company 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 segment of the Company's tomato business.
As a result of the Contadina Acquisition, the Company extended its presence in
this segment through the addition of Contadina's share of the market for
crushed, stewed and puree tomato products. The canned solid tomato segment has
evolved to include additional value-added items, such as flavored diced tomato
products. The Company believes that there is substantial opportunity to increase
sales of solid tomato products through line extensions that capitalize on the
Company's manufacturing and marketing expertise.
With the Contadina Acquisition, the Company has also strengthened its
position in the branded paste-based tomato products categories in which it
competes. The Company 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. The Company'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. The Company plans to use this presence as a platform
to expand its branded foodservice business, including sales of Del Monte brand
products to new and existing Contadina foodservice customers.
The Company faces competition in the tomato product market from brand name
competitors including S&W and Hunt's in the solid tomato, paste and sauce
categories; Heinz and Hunt's in the ketchup
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category; and Hunt's, Campbell Soup's Prego and Unilever's Ragu in the spaghetti
sauce category. In addition, the Company faces competition from private label
products in all major categories. While the Company has a small share of the
overall tomato product market, it is the largest branded competitor in the solid
tomato segment with a market share of 17.1% for the 52 weeks ended June 26,
1999. Hunt's, the next largest branded processor, possessed a 9.9% share of the
solid tomato segment for this period. In other key categories, for the 52 weeks
ended June 26, 1999, Heinz was the market leader in ketchup with a 48.1% market
share, and Hunt's was the leader in tomato sauce with a 34.1% market share.
The Company has relationships with approximately 40 tomato growers
located primarily in California, where approximately 95% of domestic tomatoes
are produced.
SUPPLY AND PRODUCTION
The Company owns virtually no agricultural land. Each year, the Company
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 the Company's raw product requirements, and the
Company does not consider its relationship with any particular supplier to be
material to its operations. The Company 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 the Company's other bean growing
locations in the Midwest region. Like other processed vegetable, fruit and
tomato product manufacturers, the Company is subject to market-wide raw product
price fluctuations resulting from seasonal or other factors. The Company's
long-term relationships with growers help to ensure a consistent supply of raw
product.
The Company's vegetable growers are primarily located in Wisconsin,
Illinois, Minnesota, Washington and Texas. The Company 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. The Company's vegetable supply contracts are
generally for a one-year term and require delivery of a specified quantity.
Prices are renegotiated each year. The Company believes that one of its
competitive advantages in the canned vegetable category derives from its
proprietary seed varieties. For example, the Company believes that its "Del
Monte Blue Lake Green Bean" variety is higher yielding than green bean varieties
used by the Company's competitors. In addition, the Company's green bean
production is primarily on irrigated fields, which facilitates production of
high quality, uniformly-sized beans.
The Company's fruit and tomato growers are located primarily in
California. Pear growers are also located in Oregon and Washington. The
Company's fruit supply contracts range from one to ten years. See Note 11 to the
Company's consolidated financial statements for the year ended June 30, 1999.
Prices are generally negotiated with grower associations and are reset each
year. Contracts to purchase yellow cling peaches generally require the Company
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.
The Company actively participates in agricultural management and quality control
and provides insecticide management and hauling capabilities. Where appropriate,
the Company manages the growers' agricultural practices.
In connection with the sale of the Company's 50.1% interest in Del Monte
Philippines, a joint venture operating primarily in the Philippines, on March
29, 1996, the Company signed an eight-year supply agreement whereby the Company
must source substantially all of its pineapple requirements from Del Monte
Philippines over the agreement term.
Fourteen Company-owned plants, located throughout the United States,
process the Company's products. The Company produces the majority of its
products between June and October. Most of the Company's seasonal plants operate
at close to full capacity during the packing season. See "Properties" for a
listing of production facilities.
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In the third quarter of fiscal 1998, the Company 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
suspension of operations at the Modesto plant for approximately one year while
the Company reconfigured that facility to accommodate fruit processing that now
takes places at the San Jose and Stockton facilities. The Company has
transferred its tomato processing operations from its Modesto facility to the
Company's state-of-the-art Hanford facility. The Company expects to begin some
fruit processing at the reconfigured Modesto facility during the summer of 1999.
The Company expects to close its San Jose plant after the production season in
1999 and its Stockton facility after the production season in 2000.
Considerations of plant age and location were primary factors in the decision to
close the 80-year-old San Jose plant and the 70-year-old Stockton plant and
transfer production closer to growing areas. In addition in August 1998, the
Company's vegetable processing plant located in Arlington, Wisconsin was closed
after the summer 1998 pack. The Company plans an aggregate of approximately $27
million of capital spending in fiscal 2000 and 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, pickles and certain other products
and to supplement supplies of certain canned vegetables, fruit and tomato
products.
Prior to December 1993, the Company 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, the Company
sold substantially all the assets (and certain related liabilities) of the
Company's can manufacturing business to Silgan Container Corporation ("Silgan").
The transaction included the sale or lease of the Company's nine can
manufacturing facilities. In connection with this agreement, Silgan and the
Company 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, the Company must purchase all of its requirements for metal
food and beverage containers in the United States from Silgan. However, the
Company 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, the
Company is entitled to purchase the excess from another supplier. Price levels
were originally set based on the Company'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. The Company's total annual can usage is approximately two billion
cans.
SALES, MARKETING AND DISTRIBUTION
Sales and Marketing
The Company 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 1999, accounted for
64% of the Company's total net sales. The Company retains its brokers through a
standardized retail grocery brokerage agreement. Brokers are typically paid at a
percentage of collected sales, generally 2.5%, which percentage may be increased
up to 3.0% based on the broker's accomplishment of specified sales objectives.
Such agreements may be terminated on 30 days' prior notice by either party. The
Company's broker network represents the Company to a broad range of grocery
retailers. The Company'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, Kmart and Target. During fiscal
1999, this channel accounted for 14% of the Company's total net sales. The
Company makes
10
<PAGE> 11
foodservice, food ingredients, private label and military and other sales
through both direct sales and brokers. During fiscal 1999, these sales accounted
for 21% of the Company's total net sales.
The Company's marketing function includes product development, pricing
strategy, consumer promotion, advertising, publicity and package design. The
Company 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. The Company is
planning to test market an integrated advertising program including print,
television, radio, outdoor and in-store media beginning in the fall of 1999.
This program is intended to communicate to the public a more contemporary and
dynamic Del Monte.
The Company has been enhancing its sales and marketing efforts with
proprietary software applications, principally its Trade Wizard application and
category management system applications designed to assist customers in managing
product categories. The Trade Wizard application assists the Company in
implementing and managing the timing and scope of its trade and consumer
promotions. Customers using the Company'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 the Company's products, particularly
fruit products, relative to those of the Company's competitors. The Company also
has proprietary tools that allow it to manage its customers' inventory
requirements for its products, thereby reducing customers' inventory levels
while enhancing the Company's opportunities to sell its products.
Distribution
The Company'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.
The Company's distribution centers provide, among other services, casing,
labeling, special packaging, cold storage and fleet trucking services. Other
services the Company provides to customers include One Purchase Order/One
Shipment, in which the Company'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, the Company 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.
Sales for the ten months of fiscal 1999 that this business was owned by the
Company were $10 million. The plant is located in Turmero, approximately 70
miles from Caracas. All purchases of raw materials, primarily vegetables, are
made from growers in Venezuela, with approximately 80% of annual requirements
from approximately 40 growers with whom the Company has contracts. The remaining
annual requirements are fulfilled through the open market. See "--Recent
Developments."
CUSTOMERS
The Company's customer base is broad and diverse. The Company's 15
largest customers during fiscal 1999 represented approximately 53% of the
Company's sales with sales to one customer, Sam's/Wal-Mart, representing 11% 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. There has been significant
consolidation in the grocery industry through acquisitions. The Company believes
that this consolidation will not have a negative impact on the Company since
many of the acquiring companies have been long-standing customers of the
Company. The Company has sought to establish and strengthen its alliances with
key customers by offering
11
<PAGE> 12
sophisticated proprietary software applications to assist customers in managing
inventories. The Company plans to expand its promotion of these applications
with its customers.
COMPETITION
The Company 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 private label
manufacturers. In general, the Company competes on the basis of quality, breadth
of product line and price. See "-- The Industry" and "-- Company Products."
INFORMATION SERVICES
In November 1992, the Company entered into an agreement with Electronic
Data Systems Corporation ("EDS") to provide services and administration to the
Company 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. The Company periodically reviews its general
information system needs, including Year 2000 compliance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000."
RESEARCH AND DEVELOPMENT
The Company'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 1999, 1998 and
1997, R&D expenditures (net of revenue for services to third parties) were $6
million, $5 million and $5 million, respectively. The Company 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, 1999, the Company had approximately 2,600 full-time
employees. In addition, approximately 12,000 individuals are hired on a
temporary basis during the pack season. The Company considers its relations with
its employees to be good. In the past several years, the Company has not
experienced any work stoppages or strikes.
The Company has ten collective bargaining agreements with nine union
locals covering approximately 10,600 of its hourly and seasonal employees. Four
collective bargaining agreements expire in calendar 2000. The remaining
agreements expire in calendar 2001 and 2002.
INTELLECTUAL PROPERTY
The Company 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, FreshCut, Fruit Naturals, Orchard Select,
FruitRageous, Fruit Pleasures, Can Do and Del Monte Lite. These trademarks are
important to the Company because brand name recognition is a key factor in the
success of the Company'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 the Company, 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. The Company is not aware of any material
challenge to the Company's ownership of its major trademarks.
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<PAGE> 13
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 the Company's
business.
The Company claims copyright protection in its proprietary category
management software and vendor-managed inventory software. The Company's
customers receive reports generated by these software programs and provide data
to the Company for use in connection with the programs. The software itself,
however, is not licensed to the Company's customers. In addition, the Company
claims copyright protection in its proprietary trade promotion software. These
copyrights are not registered.
The Company 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 similar seed varieties. The Company 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 the
Company's non-core and foreign operations subsequent to that sale, the Company
granted various perpetual, exclusive, royalty-free licenses for use of the Del
Monte name and mark along with certain other trademarks, patents, copyrights and
trade secrets to the acquiring companies or their affiliates. Under these
licenses, the Company is generally entitled to reimbursement from the licensees
of certain of its expenses in maintaining trademark registrations. 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 agreements to sell
Del Monte Mexico, an affiliate of Hicks, Muse, Tate & Furst acquired the right
to use the Del Monte trademarks with respect to processed food and beverage
products in Mexico and Capital Universal Ltd. (an affiliate of Donald W.
Dickerson, Inc.) 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, the
Company reacquired the rights to the Del Monte brand in South America.
The Company retains the right to review the quality of the licensee's
products under each of its license agreements. The Company generally may inspect
the licensees' facilities for quality and the licensees must periodically submit
samples to the Company for inspection. Licensees may grant sublicenses but all
sublicensees are bound by these quality control standards and other terms of the
license.
The Company 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 the Company's obligations
under the license agreements.
GOVERNMENTAL REGULATION
As a manufacturer and marketer of food products, the Company's
operations are subject to extensive regulation by various federal government
agencies, including the Food and Drug Administration,
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<PAGE> 14
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 the
Company's products is subject to regulation by the FTC, and the Company's
operations are subject to certain health and safety regulations, including those
issued under the Occupational Safety and Health Act. The Company's manufacturing
facilities and products are subject to periodic inspection by federal, state and
local authorities. The Company seeks to comply at all times with all such laws
and regulations and is not aware of any instances of material non-compliance.
The Company maintains all permits and licenses relating to its operations. The
Company believes its facilities and practices are sufficient to maintain
compliance with applicable governmental laws and regulations. Nevertheless,
there is no guarantee that the Company will be able to comply with any future
laws and regulations. Failure by the Company to comply with applicable laws and
regulations could subject the Company to civil remedies including fines,
injunctions, recalls or seizures as well as potential criminal sanctions.
PENSION CONTRIBUTIONS
In fiscal 1997, the Company's defined benefit pension plans were
determined to be underfunded. In connection with the Company's recapitalization,
the Company entered into an agreement with the Pension Benefit Guaranty
Corporation dated April 7, 1997 whereby the Company contributed $15 million
within 30 days after the consummation of the recapitalization to its defined
benefit pension plans. The Company contributed $15 million in calendar 1998 and
will contribute a minimum of $9 million in calendar 1999, of which approximately
$5 million had been paid by June 30, 1999. The Company will also contribute a
minimum of $8 million in calendar 2000 and $8 million in calendar 2001, for a
total of $55 million. The contributions required to be made in 1999, 2000 and
2001 have been secured by a $20 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 9 to the audited consolidated financial statements
of the Company for the year ended June 30, 1999.
ENVIRONMENTAL COMPLIANCE
As a result of its agricultural, food processing and canning activities,
the Company 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. The Company seeks to comply at all
times with all of these laws and regulations and is not aware of any instances
of material non-compliance. The Company cannot predict the extent to which any
environmental law or regulation that may be enacted or enforced in the future
may affect its operations. The Company 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, the Company is
remediating conditions resulting from the release of petroleum-based elements
from underground storage tanks. The Company 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, the Company is unable to predict the total cost
for the remediation or the extent to which it may obtain contribution from the
prior owner. Further, investigation and remediation of environmental conditions
may in the future be required at other properties currently or formerly owned or
operated by the Company. Nonetheless, the Company does not expect that these and
other such remediation costs will have a material adverse effect on the
Company's financial condition or results of operations.
Governmental authorities and private claimants have notified the Company
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,
the Company has potential liability at each site because it allegedly sent
certain wastes from its
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<PAGE> 15
operations to these sites for disposal or recycling. These wastes consisted
primarily of empty metal drums (which previously held raw materials), used oils
and solvents, solder dross and paint waste.
The Company is indemnified for any liability at two of these sites,
including the previously owned site. With respect to a majority of the sites at
which the Company has been identified as a PRP and is not indemnified by another
party, the Company has settled its liability with the responsible regulatory
agency. The Company believes that it has no liability for the remaining sites,
except with respect to one site at which it is a member of the PRP group. The
PRP group is conducting a Remedial Investigation and Feasibility Study to
analyze the nature and extent of the contamination and to evaluate remedial
alternatives for the site. Based upon the information currently available, the
Company does not expect that its liability for this site will be material. The
Company may be identified as a PRP at additional sites in the future.
The Company spent approximately $4 million on environmental expenditures
from fiscal 1997 through fiscal 1999, primarily related to UST remediation
activities and upgrades to boilers and wastewater treatment systems. The Company
projects that it will spend an aggregate of approximately $2 million in fiscal
2000 and 2001 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. The Company 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
The Company maintains a revolving line of credit to fund its seasonal
working capital needs. The Company's quarterly operating results have varied in
the past and are likely to vary in the future based upon a number of factors.
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality.") The working capital requirements of the Company are
seasonally affected by the growing cycle of the vegetables, fruits and tomatoes
it processes. The inventory position of the Company 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
The Company does not experience significant backlog.
ITEM 2. PROPERTIES
As of June 30, 1999, the Company operated 14 production facilities and
six distribution centers. See "Business -- Sales, Marketing and Distribution"
and "-- Supply and Production." The Company's production facilities are owned
properties, while its distribution centers are owned or leased. The Company has
various warehousing and storage facilities, which are primarily leased
facilities. The Company's leases are generally long-term. Virtually all of the
Company's properties, whether owned or leased, are subject to liens or security
interests.
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The following table lists the Company's production facilities and
distribution centers:
<TABLE>
<CAPTION>
LOCATION PRIMARY PRODUCT LINE SQUARE FOOTAGE
-------- -------------------- --------------
PRODUCTION FACILITIES* OWNED LEASED
----- ------
<S> <C> <C> <C>
Hanford, CA Solid and Paste-Based Tomato Products 651,000 675,000
Kingsburg, CA Peaches and Zucchini 229,000 270,000
Modesto, CA Peaches, Fruit Cocktail and Fruit Cup + 440,000 372,000
San Jose, CA Apricots, Fruit Cups, Fruit Cocktail, 458,000 --
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
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 -- 292,000
Clearfield, UT -- 80,000
Dallas, TX -- 175,000
Rochelle, IL 425,000 --
Stockton, CA -- 512,000
Swedesboro, NJ 267,000 --
</TABLE>
* Includes owned manufacturing and owned or leased on-site warehouse and storage
capacity.
+ As currently planned upon completion of plant reconfiguration.
In April 1999, the Company completed a $38 million lease financing that
is being used to finance construction of four warehouse facilities adjacent to
the Company's Hanford, Kingsburg and Modesto, California, and Plymouth, Indiana
production plants. Construction of the new facilities (totaling approximately
1.4 million square feet) has begun and is expected to be completed at all four
sites during calendar 1999. The lease has an initial term of five years. Under
certain circumstances, the lease can be renewed for up to five additional years.
At the expiration of the lease, the Company has the option to purchase the
leased facilities for specified amounts, or to sell them on behalf of the
lessor.
The Company's principal administrative headquarters are located in
leased office space in San Francisco, California. The Company owns its primary
research and development facility in Walnut Creek, California.
The Company 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.
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<PAGE> 17
ITEM 3. LEGAL PROCEEDINGS
The Company 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 the Company breached certain
purported contractual and fiduciary duties and made misrepresentations and
failed to disclose material information to the plaintiff about the value of the
Company and its prospects for sale. The plaintiff also alleges that it relied on
the Company's alleged statements in selling its preferred and common stock
interest in the Company to a third party at a price lower than that which the
plaintiff asserts it could have received absent the Company's alleged conduct.
The complaint seeks compensatory damages of at least $24 million, plus punitive
damages. This case is in the early stages of procedural motions and the Company
cannot at this time reasonably estimate a range of exposure, if any. The Company
believes that this proceeding is without merit and plans to defend it
vigorously.
The Company 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 the Company 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, the Company
believes that none of these legal proceedings will have a material adverse
effect on the Company's financial position. See "Business -- Environmental
Compliance" for a description of certain environmental matters in which the
Company 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.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Richard G. Wolford.............................. 54 President and Chief Executive Officer
Wesley J. Smith................................. 52 Chief Operating Officer
Brent D. Bailey................................. 47 Executive Vice President, Marketing
David L. Meyers................................. 53 Executive Vice President,
Administration and Chief Financial Officer
Glynn M. Phillips............................... 62 Executive Vice President, Sales
John Alfieri.................................... 50 Senior Vice President, National Sales
Manager
Richard L. French............................... 42 Senior Vice President and Chief
Accounting Officer
Thomas E. Gibbons............................... 51 Senior Vice President and Treasurer
Irvin R. Holmes................................. 47 Senior Vice President, Marketing
William J. Spain................................ 57 Senior Vice President and Chief
Corporate Affairs Officer
William R. Sawyers.............................. 37 Vice President, General Counsel and
Secretary
</TABLE>
Richard G. Wolford, President and Chief Executive Officer. Mr. Wolford
joined Del Monte as Chief Executive Officer and a director in April 1997 upon
consummation of the Company`s recapitalization. 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.
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<PAGE> 18
Wesley J. Smith, Chief Operating Officer. Mr. Smith joined Del Monte as
Chief Operating Officer and a director in April 1997 upon consummation of the
Company's recapitalization. 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.
Brent D. Bailey, Executive Vice President, Marketing. Mr. Bailey joined
Del Monte in his current position in January 1998. Prior to that he was with The
Dial Corporation since 1992 as Senior Vice President and General Manager --
Household Division, and Senior Vice President -- Portfolio Group. From 1974 to
1992, Mr. Bailey held marketing management positions with Procter & Gamble,
Frito-Lay and The Pillsbury Company.
David L. Meyers, Executive Vice President, Administration and Chief
Financial Officer. Mr. Meyers joined the Company 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 the
Company's recapitalization. Prior to joining the Company, 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).
Glynn M. Phillips, Executive Vice President, Sales. Mr. Phillips joined
Del Monte in October 1994. Prior to joining the Company, Mr. Phillips was Vice
President, Sales of The Clorox Company where he also held various sales and
marketing positions from 1973 to 1994.
John Alfieri, Senior Vice President, National Sales Manager. Mr. Alfieri
joined Del Monte in February 1995 and was elected to his current position in
June 1997. Prior to joining the Company, he was President of Eagle Food Service
from 1994 until February 1995, and was with Correy, Ahrens & Raynsford as Vice
President, Finance and Operations from 1993 to 1994. From 1973 to 1993, Mr.
Alfieri held sales positions with The Clorox Company and Proctor & 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 the Company'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 the
Company's and RJR Nabisco's tax and financial organizations.
Irvin R. Holmes, Senior Vice President, Marketing. Mr. Holmes joined Del
Monte in November 1990 and was elected to his current position in May 1998.
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 the Company, Mr. Sawyers was with the
law firm of Shearman & Sterling from 1987 to 1993.
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<PAGE> 19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange and
the Pacific Exchange under the symbol DLM. The table below states the high and
low closing prices by quarter on the New York Stock Exchange from the date of
the Company's public equity offering through June 30, 1999:
<TABLE>
High Low
-------- --------
<S> <C> <C>
February 5 - March 31, 1999 $15.6250 $11.3750
April 1 - June 30, 1999 $16.7500 $11.8750
</TABLE>
As of July 31, 1999, there were approximately 298 holders of record of
the Company's common stock. The Company has not paid any cash dividends since
issuance of the common stock. The terms of the Company's debt limit the ability
of Del Monte's subsidiaries to distribute cash or other assets, which could
affect the Company's ability to pay dividends or make other distributions on the
common stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and Note 5 to the
audited consolidated financial statements for the Company for the year ended
June 30, 1999.
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<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth historical consolidated financial
information of the Company. The statement of operations data for each of the
fiscal years in the two-year period ended June 30, 1996 and the balance sheet
data as of June 30, 1996 and 1995 have been derived from consolidated financial
statements of the Company audited by Ernst & Young LLP, independent auditors.
The statement of operations data for each of the fiscal years in the three-year
period ended June 30, 1999 and the balance sheet data as of June 30, 1999, 1998
and 1997 have been derived from consolidated financial statements of the Company
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 the Company
and related notes and other financial information included elsewhere in this
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ -------------- ------------- -------------- ---------------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................................... $ 1,505 $ 1,313 $ 1,217 $ 1,305 $ 1,527
Cost of products sold ....................... 999 898 819 984 1,183
Selling, administrative and general
expense(a) ................................ 375 316 327 239 264
Special charges related to plant
consolidation ............................ 17 10 -- -- --
Acquisition expense ......................... 1 7 -- -- --
----------- ------------ ------------ ------------ ------------
Operating income ............................ 113 82 71 82 80
Interest expense ............................ 78 77 52 67 76
Loss (gain) on sale of divested assets(b) ... -- -- 5 (123) --
Other (income) expense(c) ................... 2 (1) 30 3 (11)
----------- ------------ ------------ ------------ ------------
Income (loss) before income taxes, minority
interest, extraordinary item and cumulative
effect of accounting change ............... 33 6 (16) 135 15
Provision for income taxes .................. -- 1 -- 11 2
Minority interest in earnings of subsidiary . -- -- -- 3 1
----------- ------------ ------------ ------------ ------------
Income (loss) before extraordinary item and
cumulative effect of accounting
change .................................... 33 5 (16) 121 12
Extraordinary loss(d) ....................... 19 -- 42 10 7
Cumulative effect of accounting change(e) ... -- -- -- 7 --
----------- ------------ ------------ ------------ ------------
Net income (loss) ........................... $ 14 $ 5 $ (58) $ 104 $ 5
=========== ============ ============ ============ ============
Net income (loss) attributable to common
shares .................................... $ 10 $ -- $ (128) $ 22 $ (66)
Net income (loss) per common
share(f) .................................. $ 0.23 $ 0.01 $ (2.07) $ 0.29 $ (0.85)
Weighted average number of shares
outstanding ............................... 41,979,665 31,619,642 61,703,436 75,047,353 76,671,294
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------
(IN MILLIONS)
OTHER DATA:
Adjusted EBITDA:(g)
<S> <C> <C> <C> <C> <C>
EBIT .................................. $ 111 $ 83 $ 36 $ 202 $ 91
Depreciation and amortization(h)....... 34 29 24 26 35
EBITDA of Divested Operations(i)....... -- -- -- (22) (35)
Asset write-down/impairment(j) ........ -- -- 7 -- --
Loss (gain) on sale of Divested
Operations(b) ....................... -- -- 5 (123) --
Terminated transactions(k) ............ 2 -- -- -- (22)
Benefit costs(l) ...................... -- 3 -- -- 7
Headcount reduction and relocation(m) -- -- -- 9 --
Recapitalization expenses(a)(c) ....... -- -- 47 -- --
Special charges related to plant
consolidation ....................... 17 10 -- -- --
Expenses of acquisitions(n) ........... 1 7 -- -- --
Inventory write-up(n) ................. 3 3 -- -- --
----- ----- ----- ----- ----
Adjusted EBITDA ..................... $ 168 $ 135 $ 119 $ 92 $ 76
===== ===== ===== ===== ====
Adjusted EBITDA margin(g) ............... 11.2% 10.3% 10.2% 8.6% 6.9%
Cash flows provided by operating
activities ............................ $ 97 $ 97 $ 25 $ 60 $ 63
Cash flows provided by (used in)
investing activities .................... (87) (222) 37 170 (21)
Cash flows provided by (used in)
financing activities .................. (10) 127 (63) (224) (44)
Capital expenditures .................... 55 32 20 16 24
SELECTED RATIOS:
Ratio of earnings to fixed charges(o).. 1.4x 1.1x -- 2.8x 1.2x
Deficiency of earnings to cover fixed
charges(o) ........................ -- -- $ 16 -- --
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------
(IN MILLIONS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital .............. $ 188 $ 210 $ 118 $ 209 $ 99
Total assets ................. 872 844 667 736 960
Total debt ................... 544 709 610 373 576
Redeemable preferred stock ... -- 33 32 213 215
Stockholders' equity (deficit) (118) (350) (398) (288) (393)
</TABLE>
- ----------------------
(a) In connection with the Company's recapitalization, which was consummated
on April 18, 1997, expenses of approximately $25 million were incurred
primarily for management incentive payments and, in part, for severance
payments.
21
<PAGE> 22
(b) In the fiscal quarter ended December 1996, the Company sold Del Monte
Latin America. The combined sales price of $50 million, reduced by $2
million of related transaction expenses, resulted in a loss of $5 million.
In November 1995, the Company sold its pudding business for $89 million,
net of $4 million of related transaction fees. The sale resulted in a gain
of $71 million. In March 1996, the Company sold its 50.1% ownership
interest in Del Monte Philippines for $100 million, net of $2 million of
related transaction fees. The sale resulted in a gain of $52 million.
(c) In fiscal 1997, $22 million of expenses were incurred in conjunction with
the recapitalization, primarily for legal, investment advisory and
management fees. In fiscal 1995, other income includes the Company's
receipt of proceeds of a $30 million letter of credit, reduced by $4
million of related transaction expenses, as a result of the termination of
a merger agreement with Grupo Empacador de Mexico, S.A. de C.V.
(d) In fiscal 1999, the Company recorded a $19 million extraordinary loss. In
conjunction with the February 1999 public equity offering, the Company
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 million
of capitalized debt issue costs were written off and $14 million of
redemption premiums were paid, both of which the Company recorded as
extraordinary items. In fiscal 1997, $42 million of expenses related to
the early retirement of debt due to the exchange of PIK Notes (as defined
herein) and to the Company's recapitalization was charged to net income.
In September 1996, the Company 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 $4 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, the Company recorded a $38 million extraordinary loss related
to the early retirement of debt. The $38 million consisted of previously
capitalized debt issue costs of approximately $19 million and a note
premium payment and a term loan make-whole payment aggregating $19
million. In June 1995, the Company refinanced its then-outstanding
revolving credit facility, term loan and senior secured floating rate
notes. In conjunction with this debt retirement, capitalized debt issue
costs of $7 million were written off and accounted for as an extraordinary
loss. In December 1995 and April 1996, the Company prepaid part of its
term loan and senior secured notes. In conjunction with the early debt
retirement, the Company recorded an extraordinary loss of $10 million. The
extraordinary loss consisted of a $5 million prepayment premium and a $5
million write-off of capitalized debt issue costs related to the early
retirement of debt.
(e) Effective July 1, 1995, the Company 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 million.
(f) 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.
(g) Adjusted EBITDA represents EBITDA (income (loss) before provision 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 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 the Company
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 the Company 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
22
<PAGE> 23
percentage of net sales (excluding net sales of Divested Operations of $48
million, $233 million and $417 million for the years ended June 30, 1997,
1996 and 1995).
(h) Depreciation and amortization excluded amortization of $3 million, $3
million, $5 million, $5 million and $5 million of deferred debt issuance
costs for fiscal 1999, 1998, 1997, 1996 and 1995, which are included in
the caption "Interest expense." In addition, in fiscal 1999 and fiscal
1998, depreciation and amortization excluded $9 million and $3 million of
accelerated depreciation, which is included in the caption "Special
charges related to plant consolidation."
(i) 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, the Company sold its pudding business, its
50.1% interest in Del Monte Philippines and all of its interest in Del
Monte Latin America. In fiscal 1995, Del Monte terminated an exclusive
supply agreement with Pacific Coast Producers, an unaffiliated grower
co-operative, to purchase substantially all of PCP's tomato and fruit
production. Since terminating its agreement with PCP, the Company on
occasion buys from and sells to PCP a limited amount of product on a spot
basis. These events are collectively referred to as the "Divested
Operations."
(j) In fiscal 1997, non-cash charges included $7 million related to the
recognition of an other than temporary impairment of a long-term equity
investment.
(k) In fiscal 1999, one-time charges included $2 million of costs of the
public equity offering that was withdrawn due to conditions in the equity
securities market in July 1998. In fiscal 1995, one-time charges and
credits included $26 million received in connection with a terminated
transaction and $4 million paid by the Company to terminate its alliance
with PCP.
(l) In fiscal 1998, one-time and non-cash charges included $3 million of stock
compensation and related benefit expense. In fiscal 1995, one-time and
non-cash charges included $7 million related to the termination of a
management equity plan.
(m) In fiscal 1996, other one-time charges included $3 million for relocation
costs and $6 million of costs associated with a significant headcount
reduction.
(n) In fiscal 1999, one-time charges included $1 million of indirect
acquisition-related expenses incurred in connection with the South America
Acquisition and $3 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 $7 million of
indirect acquisition-related expenses incurred in connection with the
Contadina Acquisition and $3 million of inventory step-up due to the
purchase price allocation related to the Contadina Acquisition.
(o) 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 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.
23
<PAGE> 24
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 the Company
during the three-year period ended June 30, 1999. This discussion should be read
in conjunction with the audited consolidated financial statements of the Company
for the three-year period ended June 30, 1999 and notes thereto included
elsewhere in this Annual Report on Form 10-K.
GENERAL
The Company 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 drops, 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 the
Company's share of that supply. See "-- Seasonality."
In 1997, in connection with the Company's recapitalization, the Company
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 the Company's strategy to generate growth through
acquisitions, the Company consummated the Contadina Acquisition in December
1997. The Contadina Acquisition contributes another established brand and
positions the Company as the branded market leader in the high margin canned
solid tomato category. The Contadina Acquisition also establishes a strong
presence for the Company in the branded paste-based tomato products category,
which includes tomato paste, tomato sauce and pizza sauce. The Company believes
that Contadina's strong brand recognition, particularly in paste-based tomato
products, complements the Company's brand leadership in canned solid tomato
products and will enhance the Company's market share and household penetration.
The Company also reacquired the rights to the Del Monte brand in South America
in August 1998. That acquisition has opened a new geographic market for the
Company.
In addition to diversifying further the Company's revenue base, the
Contadina Acquisition expanded the Company's processing scale, which has
resulted in production cost efficiencies. Moreover, among the facilities
acquired by the Company was a state-of-the-art manufacturing facility at
Hanford, California. In the third quarter of fiscal 1998, the Company committed
to a plan to consolidate processing operations over a three-year period. As part
of these efforts, the Company transferred tomato production at its Modesto,
California facility to Hanford following the summer 1998 pack. The Company is
converting its Modesto facility to a fruit processing facility that will assume
the production currently conducted at the Company's San Jose and Stockton
facilities in California. The Company expects to close its San Jose facility
after the production season in 1999 and its Stockton facility after the
production season in 2000. In connection with these actions, the Company
recorded charges of $7 million in the third quarter of fiscal 1998, principally
relating to severance. The Company anticipates that it will incur additional
material charges as a result of these plant closures. These charges will include
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 ($9 million of depreciation was recorded in
fiscal 1999, and $3 million of depreciation was recorded in the fourth quarter
of fiscal 1998). In addition, the Company will incur costs to remove and dispose
of those assets, as well as ongoing fixed costs to be incurred during
24
<PAGE> 25
the Modesto plant reconfiguration ($5 million recorded in fiscal 1999) and until
the sale of the San Jose and Stockton properties. The Company's results over the
next three-year period are expected to be affected by these charges as follows:
$10 million in fiscal 2000 (including depreciation expense of $4 million), $4
million in fiscal 2001 and $1 million in fiscal 2002. See Note 13 to the
consolidated financial statements for the year ended June 30, 1999. In addition,
in August 1998, the Company's vegetable processing plant located in Arlington,
Wisconsin was closed after the summer 1998 pack. Total costs incurred in
connection with this closure were approximately $3 million primarily relating to
asset write-offs. The Company 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 million started by the Company a little
over two years ago. A total of $57 million has been spent on this program as of
June 30, 1999. The Company's goal for this program is to achieve cumulative cost
savings by the end of the fifth year estimated at approximately $170 million. As
of June 30, 1999, the Company estimates that $29 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 the Company's consolidated statements of operations, expressed as
percentages of the Company's net sales for such periods:
FISCAL YEAR ENDED JUNE 30,
--------------------------
1999 1998 1997
--------------------------
Net sales 100% 100% 100%
Cost of products sold 66 69 67
Selling, administrative and general expense 25 24 27
Special charges related to plant consolidation 1 1 --
--- --- ---
Operating income 8% 6% 6%
=== === ===
Interest expense 5% 6% 4%
=== === ===
The following table sets forth, for the periods indicated, the Company's
net sales by product categories, expressed in dollar amounts and as percentages
of the Company's total net sales for such periods:
FISCAL YEAR ENDED JUNE 30,
1999 1998 1997
------ ------ -------
(IN MILLIONS)
NET SALES:
Canned vegetables(a) $ 508 $ 466 $ 437
Canned fruit(a) 563 526 496
Tomato products(a) 424 321 238
Other(b) -- -- 32
------ ------ -------
Subtotal domestic 1,495 1,313 1,203
Latin America(c) -- -- 17
South America(d) 10 -- --
Intercompany sales -- -- (3)
------ ------ -------
Total Net Sales $1,505 $1,313 $ 1,217
====== ====== =======
25
<PAGE> 26
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
AS A PERCENTAGE OF NET SALES:
<S> <C> <C> <C>
Canned vegetables(a) 34% 35% 36%
Canned fruit(a) 37 40 40
Tomato products(a) 28 25 20
Other(b) -- -- 3
--- --- ---
Subtotal domestic 99 100 99
Latin America(c) -- -- 1
South America(d) 1 -- --
Intercompany sales -- -- --
--- --- ---
Total 100% 100% 100%
=== === ====
</TABLE>
- ----------------------
(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
the Company's foodservice, food ingredients, export and vegetable
private label businesses and military sales.
(b) Includes dried fruit. The Company's distribution agreement with Premier
Valley Foods expired in June 1997.
(c) The Company received $48 million in net proceeds from the sale of Del
Monte Latin America in the second quarter of fiscal 1997. Net sales in
fiscal 1997 from this Divested Operation prior to disposition were $17
million.
(d) Includes sales of the Company's Venezuelan operations since acquisition
on August 28, 1998.
SEASONALITY
The Company's quarterly operating results have varied in the past and
are likely to vary in the future based upon a number of factors. The Company'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 the Company'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.
The Company'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. The Company'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
impacted by general seasonal fluctuations primarily due to weather and overall
growing conditions. The summer 1996 pack was slightly below average for fruit,
while tomato production was slightly higher than expected. Vegetable production
during the summer of 1996 was above average. This, coupled with an industry
decrease in sales, resulted in higher than expected carry-in inventories
(inventories on hand at the start of the packing season) of vegetables. In
response, planned vegetable plantings were decreased for summer 1997, which
resulted in higher vegetable costs. In addition, cooler weather than normal
resulted in late plantings for some
26
<PAGE> 27
vegetables causing lower recoveries, while smaller fruit size lowered raw
product fruit recoveries. The high level of carry-in inventories at the
beginning of the 1997 summer pack, together with the 1997 pack inventory,
resulted in adequate product available for sale in fiscal 1998.
In the winter and spring of 1997-98, certain areas in California, one of
the Company's principal growing regions for tomatoes and fruit, experienced
substantial rainfall as a result of the "El Nino" phenomenon. The 1998
California fruit and tomato harvests and raw product recoveries were somewhat
reduced for the Company and the industry as a whole due to the El Nino weather
conditions. However, the resulting 1998 industry harvest was in a balanced
position overall. Although cooler than normal weather during summer 1999 has
resulted in a harvest period commencing later than on an historical basis, the
Company does not expect, at this time, any significant impact on volume or cost
of products of vegetable, fruit or tomatoes.
FISCAL 1999 VS. FISCAL 1998
South America Acquisition. On July 10, 1998, the Company 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 $32 million. In connection with this acquisition, the Company incurred
approximately $1 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 million to inventory, $1 million to property,
plant and equipment and $28 million representing intangible assets.
Net Sales. Consolidated net sales for fiscal 1999 increased by $192
million, or 15%, 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 million of the increase in fiscal 1999 primarily due to a full year of
Contadina versus six months in fiscal 1998). Approximately 1% of consolidated
net sales was generated by the Company's South American business. The following
discusses the increases within the Company's major product lines. Vegetable
product sales have increased in the current year 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 have 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
Select fruit-in-glass product), which began national distribution during the
first quarter of fiscal 1999. Fruit product sales also have increased due to
growth in the higher margin segments of fruit cups, specialty fruit and buffet
fruit. In fiscal 1999, the Company's market share for Del Monte branded
vegetables, based on case volume, was 20.8% versus 19.6% in the previous year,
while the Company's market share for Del Monte branded fruit products was 42.4%
compared to 41.9% for the previous year. The Company's market share for solid
tomato products was 17.1% 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 $59 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.
27
<PAGE> 28
Included in general and administrative expenses are research and
development costs of $6 million and $5 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. The Company incurred
special charges of $17 million in fiscal 1999 compared to special charges of $10
million ($7 million severance accrual and $3 million accelerated depreciation)
in fiscal 1998. Special charges for fiscal 1999 included $9 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
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 $3 million of
on-going fixed costs and other period costs incurred at the Modesto facility
while under reconfiguration, as well as a $2 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 million, representing 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 increased by $1 million for fiscal
1999 as compared to fiscal 1998. 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 for Income Taxes. As of June 30, 1999, the Company had $53
million in net operating loss carryforwards for tax purposes, which will expire
between 2009 and 2012.
Net Income (Loss) before Extraordinary Item. Net income before
extraordinary item for fiscal 1999 was $33 million compared to net income of $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 charge
consisted of the write-off of $5 million of previously capitalized debt issue
costs related to the redeemed notes and early debt retirement and $14 million of
redemption premiums.
FISCAL 1998 VS. FISCAL 1997
Contadina Acquisition. On December 19, 1997, the Company completed the
Contadina Acquisition for a purchase price of $195 million. The consideration
was paid solely in cash. The Contadina Acquisition also included the assumption
of liabilities of approximately $5 million, primarily consisting of liabilities
in respect of reusable packaging materials, employee benefits and product
claims. In conjunction with the Contadina Acquisition, approximately $7 million
in indirect acquisition-related expenses were incurred. The Contadina
Acquisition was accounted for using the purchase method of accounting. In
conjunction with the purchase price allocation relating to the Contadina
Acquisition, the Company wrote up, to estimated fair value, the purchased
inventory by a total of approximately $6 million.
28
<PAGE> 29
Net Sales. Consolidated net sales for fiscal 1998 increased by $96
million or 7.9% from fiscal 1997. This increase was attributable to higher sales
across all businesses and the Contadina Acquisition offset by the absence of the
Divested Operations of dried fruit and Latin America. Net sales were $1,237
million for fiscal 1998 before acquisitions as compared to net sales of $1,169
million for fiscal 1997 absent the Divested Operations. This represented an
increase of $68 million or 5.8% for fiscal 1998 versus fiscal 1997 on a
comparable basis. Fruit volume and net sales increased for the year ended June
30, 1998 as compared to the year ended June 30, 1997, primarily due to an
increase in retail fruit cup sales and sales of flavored fruits, which were
introduced in 1997. Due to competitive pricing pressures in the fruit
foodservice market, the gains in retail fruit sales were partially offset by
volume and sales declines in the foodservice business. Vegetable volume and net
sales increased for the year ended June 30, 1998 as compared to the year ended
June 30, 1997. Although competitive pricing pressures were experienced in the
vegetable market as well, an effective mix of targeted trade and consumer
promotions resulted in increased volumes leading to an overall increase in net
sales. In fiscal 1998, the Company's market share for Del Monte branded
vegetables, based on case volume, was 19.6% versus 20.3% in the previous year,
while the Company's market share for Del Monte branded fruit products was 41.9%
compared to 40.6% for the previous year.
Cost of Products Sold. Costs increased for fiscal 1998 as compared to
fiscal 1997 by $79 million (which includes $3 million of inventory step-up
resulting from the purchase price allocation related to the Contadina
Acquisition), with cost of products sold expressed as a percentage of net sales
of 68.4% in fiscal 1998 and 67.3% in fiscal 1997. Cost of products sold for
fiscal 1998 before acquisitions were $835 million versus $774 million in fiscal
1997 absent Divested Operations or, expressed as a percentage of net sales,
67.5% for fiscal 1998 compared to 66.2% for fiscal 1997. The increased costs in
fiscal 1998 were offset in part by a favorable sales mix of higher margin
products. Increased costs for the year ended June 30, 1998 reflected primarily
an increase in processing costs caused by a compressed harvesting season for
fruit. These conditions resulted in the increased use of cold storage until
processing capacity became available. Reduced plantings for some vegetables and
lower fruit raw product recoveries due to adverse weather conditions also
affected costs.
Special Charges Related to Plant Consolidation. In the third quarter of
fiscal 1998, management committed to a plan to consolidate processing
operations. In connection with this plan, the Company recorded charges of $7
million. These costs related to severance and benefit costs for 433 employees to
be terminated. Total charges relating to plant closures recorded in fiscal 1998
were $10 million, including accelerated depreciation expense of $3 million
recorded in the fourth quarter of fiscal 1998 resulting from the effects of
adjusting the assets' remaining useful lives to accelerate the depreciation
thereof. This accelerated depreciation is included in "Special charges related
to plant consolidation."
Selling, Administrative and General Expense. Selling, administrative and
general expense as a percentage of net sales was 25.1% and 26.9% in fiscal 1998
and 1997, respectively. Selling, administrative and general expense for fiscal
1997 was higher due to management incentive payments and, in part, severance
payments related to the Company's recapitalization of approximately $25 million.
Research and development costs of $5 million in each of fiscal 1998 and
1997 were included in general and administrative expenses.
Acquisition Expense. In connection with the Contadina Acquisition,
approximately $7 million of indirect acquisition-related expenses were incurred.
Interest Expense. Interest expense increased 48% in fiscal 1998 compared
to fiscal 1997. This increase was due to the lower outstanding debt balances
during the first nine months of fiscal 1997 (before the Company's
recapitalization) and additional debt in fiscal 1998 due to the Contadina
Acquisition.
Other (Income) Expense. Other expense for fiscal 1998 decreased as
compared to fiscal 1997 due to the inclusion in 1997 of recapitalization
expenses and the write-down of an investment. Other expense for fiscal 1997
represented $22 million of expenses incurred in the Company's recapitalization
(primarily
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legal, investment advisory and management fees). Other expense in fiscal 1997
also included $7 million relating to the recognition of an other than temporary
impairment of a long-term equity investment.
Provision for Income Taxes. As of June 30, 1998, the Company had $77
million in net operating loss carryforwards for tax purposes, which expire
between 2008 and 2012.
Net Income. Net income for fiscal 1998 increased by $63 million compared
to the same period of prior year. The increase in net income is primarily due to
expenses related to the recapitalization and extraordinary losses due to early
debt retirement included in the fiscal 1997 net loss. These items were offset in
part by the plant consolidation severance accrual and accelerated depreciation
cost in fiscal 1998, as well as, expenses of the Contadina Acquisition and an
increase in interest expense.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 98-1 "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." This SOP provides guidance
with respect to the recognition, measurement and disclosure of costs of computer
software developed or obtained for internal use. SOP 98-1 is required to be
adopted for fiscal years beginning after December 15, 1998. The Company will
adopt this statement in fiscal 2000.
In fiscal 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (as amended
by SFAS No. 137). 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. The Company is currently reviewing the effect of adoption of this
statement on its financial statements.
YEAR 2000
In the first quarter of fiscal 1998, the Company contracted with its
information services outsourcing provider, EDS, to assist the Company in
implementation of the Company's Year 2000 compliance project. The Company's Year
2000 compliance project was initiated to address the issue of computer hardware
and software that are time-sensitive or define dates using two digits rather
than four. EDS maintains and operates most of the Company's software
applications and also owns and operates a significant portion of the related
hardware under a base service contract. The Company's compliance project
includes both information technology ("IT") systems and non-IT systems that
could be impacted by Year 2000 issues.
In June 1999, the Company completed the evaluation and modification of
key systems for Year 2000 compliance. Implementations of Year 2000 compliant
systems were approximately 95% completed by June 30, 1999, with the remaining
implementations completed by the end of August 1999. Testing and unforeseen
issues resolution will be on-going through early 2000. Due to the Company's
production cycle, most non-IT equipment will not be in full use until
mid-calendar 2000. Therefore, testing on this equipment is expected to continue
through early calendar 2000, with substantially all of the Company's embedded
systems Year 2000 compliant as of June 30, 1999. Overall, the project is
proceeding as scheduled.
The Company expects costs incremental to the Company's base service
contract with EDS to total approximately $2 million, which is not material to
the Company's financial position. The Company is funding these costs through
operating cash flow. More than $1 million of this $2 million estimate had been
incurred as of June 30, 1999. The Company is expensing all costs associated with
these system changes as the costs are incurred.
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The Company is continuing to conduct inquiries regarding the Year 2000
compliance programs of its key suppliers and customers and will continue to
update its understanding of their Year 2000 programs throughout calendar 1999.
No assurance can be given that the Company's suppliers and customers will all be
Year 2000 compliant. The failure of the Company's suppliers and customers to
address the Year 2000 issue adequately, or the failure of any material aspect of
the Company's Year 2000 compliance project with respect to its own systems,
could result in disruption to the Company's operations and have a significant
adverse impact on its results of operations, the extent of which the Company
cannot yet determine.
The Company is developing contingency plans to address internal system
failures, as well as external supplier and customer failures, that may result
from Year 2000 issues. The Company will continue to update these contingency
plans through calendar 1999 as new information becomes known. These contingency
plans identify alternatives for the Company's business operations it believes
could be affected by external Year 2000 system failures. These operations
include principally communications with key suppliers and customers and
distribution of finished goods to distribution centers and customer locations.
The contingency plans include the development of risk avoidance actions, such as
increasing the Company's finished goods and materials inventory position during
calendar 1999 to carry the Company through any brief period of disruption that
may occur due to either internal or external Year 2000 system failures. The
Company believes that with completion of the project as scheduled and ongoing
monitoring, any significant disruptions of core operations should be reduced.
LIQUIDITY AND CAPITAL RESOURCES
The Company'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 are
the Company's primary sources of liquidity.
Management believes that cash flow from operations and availability
under the Revolving Credit Facility (as defined herein) will provide adequate
funds for the Company's working capital needs, planned capital expenditures and
debt service obligations for at least the next 12 months. The Revolving Credit
Facility is the Company's only revolving credit facility.
The Company'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 the Company's control.
As part of its business strategy, the Company continuously reviews
acquisition opportunities. The Company believes that any acquisition would
likely require the incurrence of additional debt, which could exceed amounts
available under the Bank Financing (as defined herein). 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 the Company's compliance with its covenants. The Company cannot predict
whether, or the terms on which, the lenders under the Bank Financing would grant
their consent.
Funding requirements for the South America Acquisition were satisfied
through borrowings under the Revolving Credit Facility.
Operating Activities
The working capital position of the Company 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. The Company
uses funds from its
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Revolving Credit Facility, which provides for a $350 million line of credit, to
finance the seasonal working capital needs of its operations.
In fiscal 1999, cash provided by operations was $97 million primarily
due to a significant increase in sales. In fiscal 1998, cash provided by
operations was also $97 million, or a $72 million increase over fiscal 1997
primarily due to a significant decrease in inventories.
Investing Activities
In fiscal 1999, cash used in investing decreased by $135 million as
compared to fiscal 1998 due to the purchase of Contadina in fiscal 1998. In
fiscal 1998, cash used in investing increased by $259 million due to the
Contadina Acquisition and increased capital expenditures.
Capital expenditures for fiscal 1999 were $55 million including
approximately $1 million for environmental compliance as the Company 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 $55 million spent in fiscal 1999, the Company spent approximately $21
million in connection with its plans to consolidate processing operations and
$13 million for general manufacturing improvements. The Company plans an
aggregate of approximately $27 million of additional capital expenditures
through 2001, of which $19 million and $8 million are expected to be spent in
fiscal 2000 and 2001, respectively, in connection with its plans to consolidate
processing operations. In addition to the foregoing, the Company budgets certain
amounts for ordinary repairs and maintenance. The Company continually evaluates
its capital expenditure requirements, and such plans are subject to change
depending on market conditions, the Company's cash position, the availability of
alternate means of financing and other factors. The Company expects to fund
capital expenditures from internally generated cash flows and by borrowing from
available financing sources.
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 the Company
and 3,333,000 shares of common stock sold by certain stockholders of the
Company, was consummated at an initial offering price of $15.00 per share. The
Company received net proceeds of $230 million. Total common shares outstanding
after the offering were 52,163,943. The Company used a portion of the net
proceeds from the public equity offering to redeem $46 million of its redeemable
preferred stock, including $2 million of unamortized discount, $10 million of
accreted dividends and $1 million of redemption premium. The Company also used
$57 million of the net proceeds to redeem a portion of its senior discount
notes, including $1 million of accrued interest and $6 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 million of its
indebtedness under its bank term loans, to redeem $62 million of its senior
subordinated notes, including $1 million of accelerated amortization of original
issue discount, $3 million of accrued interest and $7 million of redemption
premium, and to repay $2 million of indebtedness under the revolving credit
facility.
Lease Financing. In April 1999, the Company completed a $38 million
lease financing that is being used to finance construction of four warehouse
facilities adjacent to the Company's Hanford, Kingsburg and Modesto, California,
and Plymouth, Indiana production plants. Construction of the new facilities
(totaling approximately 1.4 million square feet) has begun and is expected to be
completed at all four sites during calendar 1999. The lease will be classified
as an operating lease with related rentals charged to expense in the period
incurred. The lease has an initial term of five years. Under certain
circumstances, the lease can be renewed for up to five additional years. At the
expiration of the lease, the Company has the option to purchase the leased
facilities for specified amounts, or to sell them on behalf of the lessor.
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Financing Activities - 1998 Activity
Contadina Acquisition. In connection with the $195 million Contadina
Acquisition, Del Monte issued the senior discount notes (the "Del Monte Notes")
with an aggregate principal amount at maturity of $230 million and received
gross proceeds of approximately $126 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 were used to
redeem 35% of the Del Monte Notes.
In connection with the Contadina Acquisition, the Company 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 million, thus
increasing the aggregate amount outstanding at that time under the Term Loan
Facility to $430 million. Amortization of such additional Term B loan amount is
incremental to the scheduled amortization of the previously existing Term B
loan. The additional amortization began on a quarterly basis in the second
quarter of fiscal 1999 in the amount of $0.5 million on an annual basis with
such amortization initially set to increase in the fourth quarter of fiscal
2004, through the third quarter of fiscal 2005, to approximately $12 million per
quarter. This amortization has been adjusted to reflect the effect of the early
repayment discussed above.
Financing Activities - 1997 Activity
The Recapitalization. On February 21, 1997, Del Monte entered into a
Merger Agreement, which was amended and restated as of April 14, 1997, with TPG
and Shield. On April 18, 1997, Del Monte was recapitalized through the merger of
Shield with and into Del Monte. Del Monte was the surviving corporation. By
virtue of the recapitalization, shares of Del Monte's preferred stock having an
implied value of approximately $14 million held by certain of Del Monte's
stockholders who remained investors were canceled and were converted into the
right to receive new Del Monte common stock. All other shares of Del Monte stock
were canceled and were converted into the right to receive cash consideration.
In connection with the recapitalization, the Company repaid substantially all of
its funded debt obligations existing immediately before the recapitalization. In
the recapitalization, the common stock and preferred stock of Shield was
converted into new shares of common stock and preferred stock, respectively, of
Del Monte.
Cash funding requirements for the recapitalization totaled $809 million
and included repayment of $158 million of the outstanding notes, $113 million of
the then-existing term loan, and $30 million of the then-existing revolving
credit facility. In addition, $422 million was paid to former shareholders as
cash consideration for their shares and approximately $86 million was paid in
other fees and expenses. These cash funding requirements were satisfied through
the following: (i) a cash equity investment by TPG and other investors of $126
million in common stock; (ii) a cash equity investment by TPG and other
investors of $35 million in shares of redeemable preferred stock and warrants to
purchase common stock; (iii) $380 million of borrowings under the Term Loan
facility; (iv) $119 million of borrowings under the revolving credit facility
(the "Revolving Credit Facility" and , together with the Term Loan Facility, the
"Bank Financing"); (v) $147 million from the net proceeds of the offering of the
DMC Notes; and (vi) $2 million of proceeds from the sale of a surplus property.
Bank Financing. Concurrent with the Company's recapitalization, the
Company entered into a credit agreement with respect to the Bank Financing. The
Term Loan Facility provided for term loans in the aggregate amount of $380
million, consisting of Term Loan A of $200 million and Term Loan B of $180
million. The Revolving Credit Facility provided for revolving loans in an
aggregate amount of $350 million, including a $70 million Letter of Credit
subfacility. The Revolving Credit Facility terminates in fiscal 2003. Term Loan
A will mature in fiscal 2003, and Term Loan B will mature in fiscal 2005.
Senior Subordinated Notes. In connection with the recapitalization, on
April 18, 1997, Del Monte Corporation, a wholly owned subsidiary of Del Monte,
issued the DMC Notes with an aggregate principal
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amount of $150 million and received gross proceeds of $147 million. The DMC
Notes accrue interest at 12.25% per year, payable semi-annually in cash on each
April 15 and October 15. The DMC Notes are guaranteed by Del Monte and mature on
April 15, 2007. Del Monte's guarantee is secured by a pledge of the stock of
DMC. A portion of the net proceeds from the February 1999 public equity offering
was contributed to DMC in order to redeem 35% of the DMC Notes.
Exchange Offer. Also included in fiscal 1997 financing activity is an
exchange offer that occurred in September 1996. In August 1996, the Company
offered to redeem a portion of its outstanding Subordinated Guaranteed
Pay-in-Kind Notes ("PIK Notes") for a cash payment and exchange the remaining
PIK Notes for new Senior Subordinated Guaranteed Pay-in-Kind Notes due 2002. On
September 11, 1996, the Company repurchased PIK Notes in an aggregate amount of
$102 million for a cash payment of $100 million and, concurrently, exchanged
essentially all remaining PIK Notes for new PIK Notes in an aggregate amount of
$156 million. In addition, $13 million of then-outstanding senior notes was
repaid. Funding for the exchange offer was accomplished through the application
of $30 million from a collateral account held by the then-existing term lenders,
additional borrowing in an aggregate amount of $55 million under the
then-existing term loan, and borrowings of approximately $36 million from the
then-existing revolving credit facility. In conjunction with the exchange offer,
capitalized debt issue costs of approximately $4 million, net of a discount on
the PIK Notes, were charged to net income in fiscal 1997 and accounted for as an
extraordinary loss.
Restrictive Covenants
The DMC Notes, the Del Monte Notes, Term Loan and Revolving Credit
Facility agreements contain restrictive covenants which require the Company to
meet certain financial tests, including minimum levels of consolidated EBITDA
(as defined in the credit agreement), 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. The Company was in compliance with all debt covenants at June 30,
1999. 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 9 of the audited consolidated financial
statements as of and for the year ended June 30, 1999, the Company's defined
benefit retirement plans were previously determined to be underfunded under
federal ERISA guidelines. It had been the Company's policy to fund the Company'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 the Company's
recapitalization, the Company entered into an agreement with the Pension Benefit
Guaranty Corporation dated April 7, 1997 whereby the Company contributed $15
million within 30 days after the consummation of the recapitalization. The
Company contributed $15 million in calendar 1998. The Company will also
contribute a minimum of $9 million in calendar 1999, of which approximately $5
million has been paid by June 30, 1999. The Company will also contribute a
minimum of $8 million in calendar 2000 and $8 million in calendar 2001, for a
total of $55 million. The contributions required to be made in 1999, 2000 and
2001 have been secured by a $20 million letter of credit. This letter of credit
is subject to periodic reduction as contributions are made in accordance with
the agreement.
Environmental Matters
The Company spent approximately $4 million on environmental expenditures
from fiscal 1997 through fiscal 1999, primarily related to UST remediation
activities and upgrades to boilers and wastewater treatment systems. The Company
projects that it will spend an aggregate of approximately $2 million in fiscal
2000 and 2001 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
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tomato processing operations and continued UST remediation activities. The
Company believes that its CERCLA and other environmental liabilities will not
have a material adverse effect on the Company's financial position or results of
operations. See "Business -- Environmental Compliance".
Tax Net Operating Loss Carryforwards
As of June 30, 1999, the Company had $53 million in net operating loss
carryforwards for tax purposes, which will expire between 2009 and 2012.
Applicable laws may limit the Company's use of these net operating loss
carryforwards in any year.
Inflation
The Company's costs are affected by inflation and the Company may
experience the effects of inflation in future periods. However, the Company has
historically mitigated the inflationary impact of increases in its costs by
controlling its overall cost structure.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT POLICIES
The Company's primary market risk exposure is that of interest rate
risk. Certain of the Company's debt agreements require interest rate protection.
To satisfy these requirements, the Company has entered into interest-rate swap
agreements limiting the Company's exposure to interest rate increases, thus
reducing the impact of interest-rate changes on future income. The Company uses
derivatives only for purposes of managing risk associated with the underlying
exposures. The Company 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 the Company's best interest and that
any resulting market risk exposure would not materially effect the Company'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.)
The Company also has an insignificant degree of market risk exposure in
regards to currency risk. Except for sales within South America by the Company's
subsidiary in Venezuela, the Company 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.
The Company does not believe it has any material commodity risk since
the Company 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 11 to the audited consolidated financial
statements for the year ended June 30, 1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The future operating results of the Company may be materially affected
by a number of factors, including, among others, those factors discussed below.
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 the Company's beliefs or
expectations, are forward-looking statements. These statements are based on
plans, estimates and projections at the time the Company makes the statements,
and you should not place undue reliance on them. The Company does not undertake
to update any of these statements in light of new information or future events.
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Forward-looking statements involve inherent risks and uncertainties. The
Company 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; Year 2000 compliance; 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. The Company is
highly leveraged. The Company can incur additional indebtedness, even though its
principal credit facility imposes some limits on the ability to do so. Because
its business is seasonal, the Company's borrowings fluctuate significantly
during the year, generally peaking in September and October. The Company's high
degree of leverage can have important adverse consequences, such as:
- Limiting the Company's ability to obtain additional financing;
- Limiting the Company's ability to invest operating cash flow in its
business;
- Limiting the Company's ability to compete with companies that are not
as highly leveraged;
- Increasing the Company's vulnerability to economic downturns and
changing market conditions; and
- Increasing the Company's vulnerability to fluctuations in market
interest rates.
The Company's ability to pay its debt service depends partly on its
performance. The Company's financial position could also prevent it from
obtaining necessary financing at favorable rates, including at times when it
must refinance maturing debt. If the Company cannot pay its debt service and
meet its other liquidity needs from operating cash flow, it could have
substantial liquidity problems. If the Company defaults on any of its debt, the
relevant lenders could accelerate the maturity of the debt and take other
actions that could adversely affect the Company. For example, in the event of a
default under the Company's Bank Financing, the lenders could foreclose on the
security for the facility, which includes virtually all of the assets of the
Company.
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. The Company faces strong competition from
these and other companies in all its product lines. Important competitive
considerations include the following:
- Some of the Company's competitors have greater financial resources and
operating flexibility;
- Several of the Company's product lines are sensitive to competition
from regional brands, and many of the Company's product lines compete
with imports, private label products and fresh alternatives;
- The Company cannot predict the pricing or promotional actions of its
competitors or whether they will have a negative effect on the Company.
Also, when the Company raises its prices, the Company 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.
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
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depends in part on its ability to reduce costs. The Company'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. The Company
also plans to increase operating results through acquisitions. All of these
plans involve risks, including the following:
- The Company is converting its Modesto facility from tomato to fruit
processing. Following its seasonal 1999 pack of fruit, the Company will
shut down the San Jose facility for consolidation into Modesto. To
assure production capacity for the 2000 fruit harvest, the Company must
complete the conversion of the Modesto facility by June 2000. If the
Company does not meet this timetable to any significant degree, fruit
production could be materially reduced;
- The Company 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 the Company'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 the Company'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 the Company's production schedules if harvests
are delayed.
Our Operating Results Are Highly Seasonal. The Company 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. The Company's working capital requirements are also
seasonal and are most significant in the first and second fiscal quarters. The
Company'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, the Company
is subject to various environmental laws and regulations. The Company 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 the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), or under similar
state laws. The Company 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 the Company's financial position or results of operations.
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TPG Continues to Control the Company. TPG Partners, L.P. and some of its
affiliates (collectively, "TPG") own 46.7% 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. The Company
also 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. The Company 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. The Company must also meet specified financial ratios and tests,
including minimum net worth, minimum fixed charge coverage, minimum EBITDA (as
defined in the agreements) and maximum leverage ratios. The Company 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. The
Company 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 the
Company'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 the Company's actual performance and that expected by
investors and analysts, changes in analysts' recommendations or projections,
pricing and competition in the Company'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.
38
<PAGE> 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
<TABLE>
PAGE
<S> <C>
Report of Independent Auditors.................................................... 40
Consolidated Balance Sheets - June 30, 1999 and 1998.............................. 41
Consolidated Statements of Operations - Years ended June 30, 1999, 1998 and 1997.. 42
Consolidated Statements of Stockholders' Equity (Deficit) - Years ended
June 30, 1999, 1998 and 1997...................................................... 43
Consolidated Statements of Cash Flows - Years ended June 30, 1999, 1998 and 1997.. 44
Notes to Consolidated Financial Statements........................................ 45
</TABLE>
39
<PAGE> 40
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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the years in the three-year period ended June 30, 1999. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended June 30, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
July 23, 1999
San Francisco, California
40
<PAGE> 41
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
ASSETS 1999 1998
- ------ ---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents ......................................... $ 7 $ 7
Trade accounts receivable, net of allowance ....................... 138 108
Inventories ....................................................... 343 366
Prepaid expenses and other current assets ......................... 14 19
----- -----
TOTAL CURRENT ASSETS ..................................... 502 500
Property, plant and equipment, net ...................................... 312 305
Intangibles, net ........................................................ 43 16
Other assets, net ....................................................... 15 23
----- -----
TOTAL ASSETS ............................................. $ 872 $ 844
===== =====
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses ............................. $ 266 $ 258
Short-term borrowings ............................................. 16 --
Current portion of long-term debt ................................. 32 32
----- -----
TOTAL CURRENT LIABILITIES ................................ 314 290
Long-term debt .......................................................... 496 677
Other noncurrent liabilities ............................................ 180 194
Redeemable preferred stock ($.01 par value per share, 1,000,000 shares
authorized; issued and outstanding 37,253 in 1998; aggregate
liquidation preference $41 in 1998) ............................... -- 33
Stockholders' equity (deficit):
Common stock ($.01 par value per share, shares authorized:
500,000,000; issued and outstanding: 52,171,537 in 1999 and
35,495,058 in 1998) ............................................... 1 --
Paid-in capital ................................................... 399 172
Retained earnings (deficit) ....................................... (518) (522)
----- -----
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ..................... (118) (350)
----- -----
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............... $ 872 $ 844
===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE> 42
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net sales $1,505 $1,313 $1,217
Cost of products sold 999 898 819
Selling, administrative and general expense 375 316 327
Special charges related to plant consolidation 17 10 --
Acquisition expense 1 7 --
------ ------ ------
OPERATING INCOME 113 82 71
Interest expense 78 77 52
Loss on sale of divested assets -- -- 5
Other (income) expense 2 (1) 30
------ ------- ------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 33 6 (16)
Provision for income taxes -- 1 --
------ ------ ------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 33 5 (16)
Extraordinary loss from early debt retirement 19 -- 42
------ ------ ------
NET INCOME (LOSS) $ 14 $ 5 $ (58)
====== ====== ======
Basic net income (loss) per common share
Income (loss) before extraordinary item $ 0.69 $ 0.01 $(1.40)
Net income (loss) 0.23 0.01 (2.07)
Diluted net income (loss) per common share
Income (loss) before extraordinary item $ 0.68 $ 0.01 $(1.40)
Net income (loss) 0.23 0.01 (2.07)
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
42
<PAGE> 43
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES TOTAL
RECEIVABLE RETAINED CUMULATIVE STOCKHOLDERS'
COMMON PAID-IN FROM EARNINGS TRANSLATION EQUITY
STOCK CAPITAL STOCKHOLDERS (DEFICIT) ADJUSTMENT (DEFICIT)
------- ------- ------------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $-- $ 3 $-- $(265) $(26) $(288)
Cancellation of shares in connection with
the Company's recapitalization (3) (204) (207)
Issuance of shares 129 129
Cumulative translation adjustment 26 26
Net loss -- -- -- (58) -- (58)
----- ----- --------- ----- ---- -----
Balance at June 30, 1997 -- 129 -- (527) -- (398)
Amortization of redeemable preferred
stock discount (1) (1)
Issuance of shares 44 44
Net income -- -- -- 5 -- 5
----- ----- --------- ----- ---- -----
Balance at June 30, 1998 -- 172 -- (522) -- (350)
Amortization of redeemable preferred
stock discount (2) (2)
Payment of preferred stock dividends (10) (10)
Issuance of shares 1 249 250
Costs of public equity offering (20) (20)
Net income -- -- -- 14 -- 14
----- ----- --------- ----- ---- -----
Balance at June 30, 1999 $ 1 $ 399 $ -- $(518) $ -- $(118)
===== ===== ========= ===== ==== =====
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
COMMON TOTAL COMMON
STOCK CLASS A CLASS B CLASS E SHARES
------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Shares issued and outstanding at June 30, 1996 -- 38,014,958 -- 4,788,550 42,803,508
Cancellation of shares -- (38,014,958) -- (4,788,550) (42,803,508)
Issuance of shares 26,815,880 -- -- -- 26,815,880
---------- ----------- ------ ---------- -----------
Shares issued and outstanding at June 30, 1997 26,815,880 -- -- -- 26,815,880
Issuance of shares 8,679,178 -- -- -- 8,679,178
---------- ----------- ------ ---------- -----------
Shares issued and outstanding at June 30, 1998 35,495,058 -- -- -- 35,495,058
Issuance of shares 16,676,479 -- -- -- 16,676,479
V ---------- ----------- ------ ---------- -----------
Shares issued and outstanding at June 30, 1999 52,171,537 -- -- -- 52,171,537
========== =========== ====== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE> 44
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
------- ------ ------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 14 $ 5 $ (58)
Adjustments to reconcile net income (loss)
to net cash flows:
Extraordinary loss from early debt retirement 19 -- 42
Loss on sale of divested assets -- -- 5
Net loss on disposal of assets 5 1 3
Depreciation and amortization 46 35 29
Stock option compensation expense -- 2 --
Changes in operating assets and liabilities net of
effects of acquisition:
Accounts receivable (30) (41) 18
Inventories 26 74 (48)
Prepaid expenses and other current assets 5 (3) 9
Other assets -- -- 6
Accounts payable and accrued expenses 8 27 29
Other non-current liabilities 4 (3) (10)
----- ----- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 97 97 25
----- ----- -------
INVESTING ACTIVITIES:
Capital expenditures (55) (32) (20)
Proceeds from sales of assets -- 5 9
Proceeds from sales of divested assets -- -- 48
Acquisition of business (32) (195) --
----- ----- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (87) (222) 37
----- ----- -------
FINANCING ACTIVITIES:
Short-term borrowings 494 300 1,137
Payment on short-term borrowings (478) (382) (1,098)
Proceeds from long-term borrowings -- 176 582
Principal payments on long-term debt (197) (2) (407)
Deferred debt issuance costs -- (7) (26)
Prepayment penalty (14) -- (20)
Payments to previous shareholders for cancellation of
stock -- -- (422)
Preferred stock dividends (10) -- --
Preferred stock redemption (35) -- --
Proceeds from issuance of common and preferred stock 250 42 161
Specific Proceeds Collateral Account -- -- 30
Equity offering costs (20) -- --
----- ----- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (10) 127 (63)
----- ----- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS -- 2 (1)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 7 5 6
----- ----- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7 $ 7 $ 5
===== ===== =======
</TABLE>
See Notes to Consolidated Financial Statements.
44
<PAGE> 45
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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") operates in one business segment: the
manufacturing and marketing of processed foods, primarily canned vegetables,
fruit and tomato products. The Company primarily sells its products under the
Del Monte brand to a variety of food retailers, supermarkets and mass
merchandising stores. The Company 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 Accounting: On February 21, 1997, Del Monte Foods Company
entered into a recapitalization agreement and plan of merger, which was amended
and restated as of April 14, 1997, with affiliates of Texas Pacific Group. Under
this agreement, TPG Shield Acquisition Corporation ("Shield"), a corporation
affiliated with TPG, was to be merged with and into Del Monte, with Del Monte
being the surviving corporation. The merger became effective on April 18, 1997.
In the merger, the common and preferred stock of Shield were converted into new
shares of common stock and preferred stock, respectively, of Del Monte. The
merger was accounted for as a leveraged recapitalization for accounting
purposes, and accordingly, all assets and liabilities continued to be stated at
historical cost.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
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: The Company 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. The
Company has established various LIFO pools that have measurement dates
coinciding with the natural business cycles of the Company's major inventory
items.
Inflation has had a minimal impact on production costs since the Company
adopted the LIFO method as of July 1, 1991. Accordingly, there is no significant
difference between LIFO inventory costs and current costs.
Property, Plant and Equipment and Depreciation: Property, plant and
equipment are stated at cost and 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; building and leasehold improvements -- 10 to 30 years; machinery and
equipment -- 7 to 15 years. Depreciation of plant and equipment and leasehold
amortization was $41, $32 and $24 for the years ended June 30, 1999, 1998 and
1997.
Intangibles: Intangibles consists 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 $2 for
the year ended June 30, 1999.
45
<PAGE> 46
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE DATA)
Environmental Remediation: The Company 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.
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.
Cost of Products Sold: Cost of products sold includes raw material,
labor and overhead.
Advertising Expenses: The Company expenses all costs associated with
advertising as incurred or when the advertising first takes place. Advertising
expense was $4, $2 and $6 for the years ended June 30, 1999, 1998 and 1997,
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, $5 and $5 for the years ended
June 30, 1999, 1998 and 1997, respectively.
Interest Rate Contracts: To manage interest rate exposure, the Company
uses interest-rate swap agreements. These agreements involve the receipt of
fixed rate amounts in exchange for floating rate interest payments 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 the Company'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
the Company'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 the Company'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, 1999, the fair value of the senior subordinated notes with a
carrying amount of $96 was $108 and of the senior discount notes with a carrying
value of $98 was $110, as estimated based on quoted market prices from dealers.
The fair value of the interest rate swap agreements at June 30, 1999 was
$(2). The fair value of interest rate swap agreements are the estimated amounts
that the Company would receive or (pay) to terminate the agreements at the
reporting date, taking into account current interest rates and the current
credit worthiness of the counterparties.
Impairment of Long-Lived Assets: SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires that the Company 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.
46
<PAGE> 47
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE DATA)
Stock Option Plan: The Company 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 123. Accordingly,
compensation cost is measured as the excess, if any, of the fair value of the
Company's stock at the date of the grant over the price the employee must pay to
acquire the stock.
Net Income (Loss) per Common Share: Net income (loss) per common share
is computed by dividing net income (loss) attributable to common shares by the
weighted average number of common shares outstanding during the period (Note 7).
Net income (loss) attributable to common shares is computed as net income (loss)
reduced by the cash and in-kind dividends for the period in which redeemable
preferred stock was outstanding.
Comprehensive Income: The Company has no items of other comprehensive
income in any period presented. Therefore, net income (loss) as presented in the
Consolidated Statements of Operations equals comprehensive income.
New Pronouncements: In March 1998, the AICPA Accounting Standards
Executive Committee issued Statement of Position ("SOP") No. 98-1 "Accounting
for the Cost of Computer Software Developed or Obtained for Internal Use." This
SOP provides guidance with respect to the recognition, measurement and
disclosure of costs of computer software developed or obtained for internal use.
SOP 98-1 is required to be adopted for fiscal years beginning after December 15,
1998. The Company will adopt this statement in fiscal 2000.
In fiscal 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." 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. The
Company is currently reviewing the effect of adoption of this statement on its
financial statements.
Reclassifications: Certain prior year balances have been reclassified to
conform with current year presentation.
NOTE 2 - ACQUISITIONS
South America Acquisition. On August 28, 1998, the Company 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, for a cash purchase price of $32 (the "South
America Acquisition"). In connection with this acquisition, approximately $1 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.
The South America Acquisition has been reflected in the balance sheet at
June 30, 1999 and was accounted for using the purchase method of accounting. The
total purchase price was allocated as $3 to inventory, $1 to property, plant and
equipment, and $28 representing intangible assets, which are being amortized
over twenty years. Results of operations of the acquired business and any other
expenses of the transaction are included in the Consolidated Statements of
Operation for the year ended June 30, 1999, and did not significantly effect the
results of operations of the Company for this period. The South American
operations had total revenues of $10 and no earnings for the year ended June 30,
1999, and total assets at June 30, 1999 were $7.
Contadina Acquisition. On December 19, 1997, the Company acquired the
Contadina canned tomato business, including the Contadina trademark worldwide,
capital assets and inventory (the "Contadina Acquisition") from Nestle USA, Inc.
("Nestle") and Contadina Services, Inc. for a total purchase price of $197,
comprised of a base price of $177 and an estimated net working capital
adjustment of $20. The consideration was paid solely in cash. The purchase price
47
<PAGE> 48
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE DATA)
was subject to adjustment based on the final calculation of net working capital
as of the closing date. Nestle provided its calculation of the net working
capital which resulted in a payment to the Company of $2, and therefore a
reduction in the purchase price to a total of $195. The Contadina Acquisition
also included the assumption of certain liabilities of approximately $5,
consisting primarily of liabilities in respect of reusable packaging materials
and vacation accruals. In connection with the Contadina Acquisition,
approximately $7 of indirect acquisition-related expenses were incurred.
The Contadina Acquisition was accounted for using the purchase method of
accounting. The allocation of the purchase price to the assets acquired and
liabilities assumed was made using estimated fair values, which included values
based on independent appraisals and management estimates. The allocation of the
$195 purchase price was as follows: inventory $93, prepaid expenses $5,
property, plant and equipment $85, intangibles $16 and accrued liabilities $4.
NOTE 3 -- DIVESTED ASSETS
On August 27, 1996, the Company signed a stock purchase agreement to sell its
Latin America subsidiaries to an affiliate of Hicks, Muse, Tate & Furst
Incorporated ("Hicks Muse"). This agreement was amended and restated on October
25, 1996 to provide for the sale of only the Company's Mexican subsidiary,
Productos Del Monte, S.A. de C.V. ("PDM") to an affiliate of Hicks Muse for $38.
That sale was completed on October 28, 1996. The sale of the Company's Central
America and Caribbean subsidiaries to an affiliate of Donald W. Dickerson, Inc.
for $12 was completed on November 13, 1996. The combined proceeds of both sales
of $50, reduced by $2 of related transaction expenses, resulted in a loss of $5.
The following results of the Latin American operations are included in the
Consolidated Statement of Operations for the year ended June 30, 1997:
<TABLE>
<S> <C>
Net sales $ 17
Costs and expenses 17
----
Income from operations before income
taxes --
Provision for income taxes --
----
Income from Latin American operations $ --
====
</TABLE>
NOTE 4 - SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
JUNE 30,
1999 1998
---- ----
Trade accounts receivable:
<S> <C> <C>
Trade $140 $109
Allowance for doubtful accounts (2) (1)
---- ----
TRADE ACCOUNTS RECEIVABLE, NET $138 $108
==== ====
Inventories:
Finished product $219 $237
Raw materials and supplies 18 19
Other, principally packaging material 106 110
---- ----
TOTAL INVENTORIES $343 $366
==== ====
</TABLE>
48
<PAGE> 49
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
-------------
1999 1998
---- ----
Property, plant and equipment:
<S> <C> <C>
Land and land improvements $ 42 $ 42
Buildings and leasehold improvements 107 107
Machinery and equipment 321 307
Construction in progress 39 24
----- -----
509 480
Accumulated depreciation (197) (175)
----- -----
PROPERTY, PLANT AND EQUIPMENT, NET $ 312 $ 305
===== =====
Intangible assets:
Trademark $ 16 $ 16
Other intangibles 29 --
----- -----
45 16
Accumulated amortization (2) --
----- -----
INTANGIBLE ASSETS, NET $ 43 $ 16
===== =====
Other assets:
Deferred debt issue costs $ 21 $ 26
Accumulated amortization (6) (3)
----- -----
OTHER ASSETS, NET $ 15 $ 23
===== =====
Accounts payable and accrued expenses:
Accounts payable--trade $ 104 $ 99
Marketing and advertising 95 80
Payroll and employee benefits 19 18
Current portion of accrued pension liability 9 9
Current portion of other noncurrent liabilities 9 12
Other 30 40
----- -----
TOTAL ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 266 $ 258
===== =====
Other noncurrent liabilities:
Accrued postretirement benefits $ 143 $ 144
Accrued pension liability 2 16
Self-insurance liabilities 10 8
Other 25 26
----- -----
TOTAL OTHER NONCURRENT LIABILITIES $ 180 $ 194
===== =====
</TABLE>
NOTE 5 - SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings under the revolving credit agreement were $16 at
June 30, 1999 and zero at June 30, 1998. Unused amounts under the revolving
credit agreement at June 30, 1999 and 1998 totaled $292 and $327, respectively.
The Company used $57 of the net proceeds of the public equity offering
to redeem a portion of its senior discount notes, including $1 of accrued
interest and $6 of redemption premium and to redeem all preferred stock
outstanding (see Note 6). Del Monte contributed the remainder of the net
proceeds to DMC, its principal subsidiary. DMC used the contribution to prepay
$63 of its indebtedness under its bank term loans, to redeem $62 of its senior
subordinated notes, including $1 of accelerated amortization of original issue
discount, $3 of accrued interest and $7 of redemption premium, and to repay $2
of indebtedness under the revolving credit facility. In connection with the
repayment of debt, $5 of previously capitalized debt issue costs were charged to
income during the third quarter and
49
<PAGE> 50
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
accounted for as an extraordinary item, as well as a total of $14 of premiums on
debt and stock redemption resulting in total extraordinary item charges of $19.
In conjunction with the Contadina Acquisition, the Company issued $230
of 12 1/2% senior discount notes ("Del Monte Notes") and received proceeds of
$126. 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 the Company 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, $7 of deferred debt
issuance costs were capitalized.
On April 18, 1997, the Company completed a recapitalization transaction
in which $301 of proceeds from the transaction were used to repay the
outstanding balances of the then-existing $400 revolving credit facility, term
loan, and Subordinated Guaranteed Pay-in-Kind Notes. Concurrent with the
recapitalization, the Company entered into a credit agreement with respect to
the Term Loan Facility (the "Term Loan") and the Revolving Credit Facility (the
"Revolver"). The Revolver provides for revolving loans in an aggregate amount of
up to $350, including a $70 Letter of Credit subfacility. The Revolving Credit
Facility 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, the Company 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. Amortization
of the additional Term Loan B amount was incremental to the scheduled
amortization of the existing Term Loan B. Such additional amortization began on
a quarterly basis in the second quarter of fiscal 1999.
In connection with the Company's recapitalization, the Company incurred
expenses totaling $85 of which $25 were included in selling, administrative and
general expense, $22 were charged to other expense and $38 were accounted for as
an extraordinary loss. The extraordinary loss consisted of previously
capitalized debt issue costs of approximately $19 and a note premium and a term
loan make-whole aggregating $19. In addition, in conjunction with the Bank
Financing, $19 of debt issue costs were capitalized. Deferred debt issuance
costs are amortized on a straight-line basis over the life of the related debt
issuance.
The interest rates currently applicable to amounts outstanding under
Term Loan A and the Revolving Credit Facility are, at the Company's option,
either the base rate (the higher of 0.50% above the Federal Funds Rate or the
bank's reference rate) plus 0.75% or the reserve adjusted offshore rate plus
1.75% (6.8125% at June 30, 1999). Interest rates on Term Loan B are, at the
Company's option, either the base rate plus 2.00% or the offshore rate plus
3.00% (8.0625% at June 30, 1999).
The Company is required to pay the lenders under the Revolving Credit
Facility a commitment fee of 0.425% on the unused portion of such facility. The
Company is also required to pay the lenders under the Revolving Credit Facility
letter of credit fees of 1.50% per year for commercial letters of credit and
2.00% 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, 1999, a
balance of $42 was outstanding on these letters of credit.
Also in connection with the Company's recapitalization, DMC issued
senior subordinated notes (the "DMC Notes") with an aggregate principal amount
of $150 and received gross proceeds of $147. The DMC Notes accrue interest at
12.25% 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 the Company 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.
50
<PAGE> 51
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------
1999 1998
---- ----
<S> <C> <C>
Term Loan $334 $429
Senior Subordinated Notes 96 147
Senior Discount Notes 98 133
---- ----
528 709
Less current portion 32 32
---- ----
$496 $677
==== ====
</TABLE>
At June 30, 1999, scheduled maturities of long-term debt in each of the
next five fiscal years and thereafter were as follows:
<TABLE>
<S> <C>
2000 $ 32
2001 36
2002 40
2003 44
2004 47
Thereafter 382
----
581
Less discount on notes 53
----
$528
====
</TABLE>
The Term Loan and Revolver, with a combined balance of $350 at June 30,
1999, are collateralized by security interests in substantially all of the
Company's assets.
The DMC Notes, the Del Monte Notes, Term Loan and Revolver (collectively
"the Debt") agreements contain restrictive covenants with which the Company 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 addition, the Company is required to meet certain financial
tests, including minimum levels of consolidated EBITDA (as defined in the credit
agreement), minimum fixed charge coverage, minimum adjusted net worth and
maximum leverage ratios. The Company was in compliance with all of the Debt
covenants at June 30, 1999.
The Company made cash interest payments of $63, $71 and $24 for the
years ended June 30, 1999, 1998 and 1997.
Certain of the Company's debt agreements require interest rate
protection. To satisfy these requirements, the Company has entered into
interest-rate swap agreements limiting the Company's exposure to interest rate
increases, thus reducing the impact of interest-rate changes on future income.
The Company currently has two swap agreements in place, one entered into in May
1997 ($235 million notional principal) and a second agreement entered into in
March 1998 ($25 million notional principal). These agreements effectively
convert $260 million of notional principal amount of floating rate debt to a
fixed-rate basis. Both agreements are for three-year periods. These agreements
involve the payment of fixed rate amounts in exchange for receipt of floating
rate interest payments over the life of the agreements 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. For the year ended June 30, 1999, the Company paid
a fixed rate of 6.375% and received a weighted average rate representing 5.3% on
the $235 notional amount agreement. The incremental effect on interest expense
for the year ended June 30, 1999 was approximately $2. The $235 notional amount
agreement includes a provision establishing the rate the Company will pay as
6.375% if the three-month LIBOR sets at or below 6.375%. The $25 notional amount
agreement includes a provision establishing the rate the Company will pay as
4.60% if the three-month LIBOR rate sets at or below 4.60%. The agreements also
include a provision establishing the rate the Company will receive as 7.50% if
the three-month LIBOR rate sets at or above
51
<PAGE> 52
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE DATA)
7.50% during the term of the agreements. Additionally, under the $235 notional
amount agreement, the Company will continue to pay 7.50% until the three-month
LIBOR rate sets below 7.50% at which time the fixed rate of 6.375% will again
become effective. The Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate swap agreements.
However, the Company does not anticipate nonperformance by the counterparties.
NOTE 6 - STOCKHOLDERS' EQUITY AND REDEEMABLE STOCK
In fiscal 1998, the Company filed a registration statement on Form S-1
with the Securities and Exchange Commission for the purpose of making a public
offering of shares of its common stock. The offering was withdrawn in July 1998
due to conditions in the equity securities market. During the second quarter of
fiscal 1999, a post-effective amendment to the registration statement was filed
with the SEC for the purpose of reinitiating the offering.
On February 10, 1999, the public equity offering, consisting of
16,667,000 shares of common stock sold by the Company and 3,333,000 shares of
common stock sold by certain stockholders of the Company, was consummated at an
initial offering price of $15.00 per share. The Company received net proceeds of
$230. Total common shares outstanding after the offering were 52,163,943. The
Company used a portion of the net proceeds from the offering to redeem $46
(100%) of its preferred stock, including $2 of unamortized discount, $10 of
accreted dividends and $1 of redemption premium. The remainder of the net
proceeds of the offering was used to redeem notes and repay debt (see Note 5).
On February 21, 1997, Del Monte Foods Company entered into a
recapitalization agreement and plan of merger, which was amended and restated as
of April 14, 1997, with affiliates of Texas Pacific Group. Under this agreement,
Shield, a corporation affiliated with TPG, was to be merged with and into Del
Monte, with Del Monte being the surviving corporation. The merger became
effective on April 18, 1997. By virtue of the merger, shares of Del Monte's
outstanding preferred stock having a value implied by the merger consideration
of approximately $14, held by certain of Del Monte's pre-recapitalization
stockholders who remained investors pursuant to the recapitalization, were
canceled, and were converted into the right to receive new Del Monte common
stock. All other shares of Del Monte stock were canceled and were converted into
the right to receive cash consideration, as set forth in the Merger Agreement.
In the merger, the common and preferred stock of Shield were converted into new
shares of common stock and preferred stock, respectively, of Del Monte.
Immediately following the consummation of the Company's
recapitalization, the charter of Del Monte authorized Del Monte to issue capital
stock consisting of 191,542,000 shares of new common stock, $.01 par value, and
1,000,000 shares of new preferred stock, $.01 par value. The Company issued and
had outstanding 26,815,880 shares of common stock, and 35,000 shares of
preferred stock. TPG and certain of its affiliates or partners held 20,925,580
shares of Del Monte's common stock, continuing shareholders of Del Monte held
2,729,857 shares of such stock, and other investors held 3,160,443 shares. TPG
and certain of its affiliates held 17,500 outstanding shares of preferred stock,
and TCW Capital Investment Corporation held 17,500 outstanding shares of
preferred stock. On January 16, 1998, TPG and certain of its affiliates sold
approximately 93% of their preferred stock holdings to unaffiliated investors.
Dividends on redeemable preferred stock were $4 for the year ended June
30, 1999. Dividends due on redeemable preferred stock were $5 for the year ended
June 30, 1998 consisting of $1 of additional shares issued and $4 of accretion,
and $1 for the year ended June 30, 1997. All dividends due on redeemable
preferred stock were paid upon redemption.
For the year ended June 30, 1997, the Company declared dividends for the
following series of then-outstanding redeemable preferred stock:
<TABLE>
<CAPTION>
SERIES DIVIDEND RATE PER SHARE
<S> <C>
A1 $1.92
B $1.95
D $1.98
E $1.98
</TABLE>
52
<PAGE> 53
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE DATA)
In the Company's recapitalization, all of the redeemable preferred stock
issued prior to April 18, 1997 was either canceled and converted into the right
to receive new Del Monte common stock or canceled and converted into the right
to receive cash consideration as set forth in the Merger Agreement.
NOTE 7 - EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------
1999 1998 1997
BASIC EARNINGS PER SHARE
Numerator:
<S> <C> <C> <C>
Income (loss) per common share before extraordinary item $ 33 $ 5 $ (16)
Preferred stock dividends (4) (5) (70)
Numerator for basic earnings (loss) per share - income (loss) ------------ ------------ ------------
attributable to common shares before extraordinary item 29 -- (86)
Extraordinary loss (19) -- (42)
------------ ------------ ------------
Numerator for basic earnings (loss) per share - income (loss)
attributable to common shares $ 10 $-- $ (128)
============ ============ ============
Denominator:
Denominator for basic earnings per share - weighted
average shares 41,979,665 31,619,642 61,703,436
Basic income (loss) per common share before extraordinary item $ 0.69 $ 0.01 $ (1.40)
Extraordinary loss per common share (0.46) -- (0.67)
------------ ------------ ------------
Basic income (loss) per common share $ 0.23 $ 0.01 $ (2.07)
============ ============ ============
DILUTED EARNINGS PER SHARE
Numerator:
Income (loss) per common share before extraordinary item $ 33 $ 5 $ (16)
Preferred stock dividends (4) (5) (70)
Numerator for diluted earnings (loss) per share - income (loss) ------------ ------------ ------------
attributable to common shares before extraordinary item 29 -- (86)
Extraordinary loss (19) -- (42)
------------ ------------ ------------
Numerator for diluted earnings (loss) per share - income (loss)
attributable to common shares $ 10 $-- $ (128)
============ ============ ============
Denominator:
Denominator for diluted earnings per share - weighted
average shares 42,968,652 32,355,131 61,840,245
Diluted income (loss) per common share before extraordinary item $ 0.68 $ 0.01 $ (1.40)
Extraordinary loss per common share (0.45) -- (0.67)
------------ ------------ ------------
Diluted income (loss) per common share $ 0.23 $ 0.01 $ (2.07)
============ ============ ============
</TABLE>
NOTE 8 - EMPLOYEE STOCK PLANS
STOCK OPTION INCENTIVE PLANS
On August 4, 1997, the Company 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
53
<PAGE> 54
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE DATA)
shares of the Company'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, options for 1,685,565
shares of common stock were held by eligible employees 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. The Company 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. The Company 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 3,195,687 shares of
common stock may be made to certain employees of the Company. 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, options for 1,842,344 shares of common
stock were held by eligible employees under the 1998 Plan, and 1,356,216
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.
Stock option activity during the periods indicated was as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE NUMBER OF
EXERCISE PRICE PER SHARES
SHARE
<S> <C> <C>
Balance at June 30, 1997 $ -- --
Granted 5.22 1,885,348
Canceled 5.22 46,353
Exercised -- --
---------
Balance at June 30, 1998 5.22 1,838,995
Granted 13.03 1,877,858
Canceled 13.00 35,519
Exercised 5.22 4,597
---------
Balance at June 30, 1999 $ 9.13 3,676,737
=========
</TABLE>
At June 30, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $5.22-$15.00 and 8.7
years, respectively.
At June 30, 1999 and 1998, the number of options exercisable was 868,453
and 452,422, respectively, and the exercise price for these options was $5.22
for both periods.
The Company 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 the Company 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
54
<PAGE> 55
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE DATA)
years ended June 30, 1999 and 1998: dividend yield of 0% for both years;
expected volatility of .23 and .00 respectively; risk-free interest rates of
4.623% and 5.74%, respectively, and expected lives of 7 years for both 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 the Company'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 value of its employee stock options. The weighted
average fair value per share of options granted during the year was $4.43.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information as calculated in accordance with SFAS 123 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998
------------ ----
<S> <C> <C>
Pro forma net income $ 11 $ 5
Pro forma earnings (loss) per
share:
Basic $ 0.19 $(0.01)
Fully Diluted $ 0.18 $(0.01)
</TABLE>
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 the Company are
reserved for issuance under the Employee Stock Purchase Plan. At June 30, 1999,
454,137 shares of the Company'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 year ended June 30, 1999 was less than $1 and for the year ended
June 30, 1998 was approximately $2.
NOTE 9 - RETIREMENT BENEFITS
Effective July 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
amends only the disclosure requirements with respect to pensions and other
postretirement benefits. Adoption of this statement has not impacted the
Company's consolidated financial position, results of operations or cash flows,
and any effect has been limited to the form and content of its disclosures.
The Company 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.
55
<PAGE> 56
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
JUNE 30, JUNE 30,
---------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Change in benefit obligation:
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $292 $279 $108 $104
Service cost 3 3 1 1
Interest cost 20 21 8 8
Amendments -- -- (24) --
Plan participants' contributions -- -- 3 2
Contadina acquisition -- -- -- 1
Actuarial (gains) losses (10) 14 (12) --
Benefits paid (26) (25) (9) (8)
------ ------ ----- -------
Benefit obligation at end of year $ 279 $ 292 $ 75 $ 108
===== ===== ==== =====
Change in plan assets:
Fair value of plan assets at beginning of year $299 $276 $-- $--
Actual return on plan assets 14 35 -- --
Employer contributions 10 13 6 6
Plan participants' contributions -- -- 3 2
Benefits paid (26) (25) (9) (8)
------ ------ ------ -----
Fair value of plan assets at end of year $ 297 $ 299 $-- $--
===== ===== === ===
Funded status $ 18 $ 7 $(75) $(108)
Unrecognized net actuarial gain (28) (31) (43) (35)
Unrecognized prior service cost (1) (1) (31) (8)
---- ---- --- ----
Net amount recognized $(11) $(25) $(149) $(151)
==== ==== ===== =====
</TABLE>
The net amount recognized for pension benefits as of June 30, 1999 and
1998 of $11 and $25, respectively, consisted of prepaid benefit costs.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
JUNE 30, JUNE 30,
---------------- --------------
WEIGHTED AVERAGE ASSUMPTIONS AS OF JUNE 30 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate used in determining projected
benefit obligation 7.50% 7.00% 7.50% 7.00%
Rate of increase in compensation levels 5.00 5.00 -- --
Long-term rate of return on assets 9.00 9.00 -- --
</TABLE>
The Company amended its defined benefit postretirement plans during
fiscal 1999. The plan amendment requires a significant increase in retiree
contributions. The Company has announced that retiree contributions will be
increased additionally in fiscal 2000 and 2001.
56
<PAGE> 57
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:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
JUNE 30, JUNE 30,
---------------- --------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Components of net periodic benefit cost
Service cost for benefits earned
<S> <C> <C> <C> <C> <C> <C>
during period $ 3 $ 3 $ 3 $ 1 $ 1 $ 1
Interest cost on projected benefit
obligation 20 21 21 8 8 9
Actual return on plan assets (26) (24) (35) -- -- --
Amortization of prior service cost -- -- -- (1) (1) (1)
Recognized net actuarial (gain) loss (1) (1) 13 (3) (3) (3)
----- ----- ---- ---- ------ ----
Benefit cost (credit) $ (4) $ (1) $ 2 $ 5 $ 5 $ 6
==== ===== ==== ==== ==== ====
</TABLE>
For measurement purposes, a 9.67% 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 6.00% in the year 2004 and remain at
that level thereafter.
It has been the Company's policy to fund the Company'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. In connection with
the Company's recapitalization, the Company entered into an agreement with the
Pension Benefit Guaranty Corporation, dated April 7, 1997, whereby the Company
will contribute a total of $55 to its defined benefit pension plans through
calendar 2001, of which approximately $35 had been contributed by June 30, 1999.
The contributions to be made in calendar 1999, 2000 and 2001 are secured by a
$20 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,
1999 by $7 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the period then ended by $1. A decrease
in the assumed health care cost trend by 1% in each year would decrease the
postretirement benefit obligation as of June 30, 1999 by $(7) and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost for the period then ended by $(1).
In addition, the Company 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, 1999, 1998
and 1997 were $7, $6 and $4, respectively. The Company 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 $2 , $1 and $1 for the years ended June 30, 1999, 1998
and 1997.
57
<PAGE> 58
NOTE 10 - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1999 1998 1997
---- ---- ----
Income before taxes after
extraordinary items:
<S> <C> <C> <C>
Domestic $14 $ 6 $(58)
Foreign -- -- 1
----- ----- -----
$14 $ 6 $(57)
=== ==== ====
Income tax provision (benefit)
Current:
Federal $ -- $ 1 $ --
State and foreign -- -- --
----- ----- -----
Total current -- 1 --
----- ------ -----
Deferred:
Federal -- -- --
State and foreign -- -- --
------ ------ ------
Total deferred -- -- --
------ ------ ------
$ -- $ 1 $ --
===== ===== =====
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE
30,
1999 1998
Deferred tax assets:
<S> <C> <C>
Post employment benefits $ 52 $ 53
Pension expense 6 12
Purchase accounting 7 7
Workers' compensation 4 4
Leases and patents 2 3
Interest 6 3
State income taxes 9 11
Other 23 17
Net operating loss and tax
credit carry forward 23 31
----- -----
Gross deferred tax assets 132 141
Valuation allowance (91) (97)
---- ----
Net deferred tax assets 41 44
----- -----
Deferred tax liabilities:
Depreciation 23 26
LIFO reserve 14 15
Intangible 4 3
------ ------
Gross deferred liabilities 41 44
----- -----
Net deferred tax asset $ -- $ --
==== ====
</TABLE>
The deferred tax liabilities at June 30, 1998 have been adjusted to
reflect an amount for the LIFO reserve, which was previously omitted.
Accordingly, the valuation allowance was reduced by an equivalent $15 to reflect
a net deferred tax asset of zero. The net change in the valuation allowance for
the years ended June 30, 1999 and 1998 was a decrease of $6 and $25,
respectively. The Company believes that based on a history of tax losses and
related absence of recoverable prior taxes through net operating loss carryback,
it is more likely than not that the net operating losses
58
<PAGE> 59
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE DATA)
and the net deferred tax assets will not be realized. Therefore, a full
valuation allowance in the amount of $91 has been recorded.
The differences between the provision for income taxes and income taxes
computed at the statutory U.S. federal income tax rates are explained as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
---- ---- ----
Income taxes (benefit) computed at the statutory
<S> <C> <C> <C>
U.S. federal income tax rates $5 $ 2 $(19)
Taxes on foreign income at rates different than U.S.
federal income tax rates -- -- --
State taxes, net of federal benefit -- -- --
Net operating losses for which no benefit has been
recognized -- -- 19
Realization of prior years' net operating losses
and tax credits (5) (1) --
----- ----- ----
Provision for income taxes $ -- $ 1 $ --
==== ==== ====
</TABLE>
As of June 30, 1999, the Company had operating loss carryforwards for
U.S. tax purposes totaling $53 which will expire between 2009 and 2012.
The Company made income tax payments of $3 and $4 for the years ended
June 30, 1999 and 1997. The Company made no income tax payments for the year
ended June 30, 1998.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Lease Commitments. The Company leases certain property and equipment and
office and plant facilities. At June 30, 1999, the aggregate minimum rental
payments required under operating leases that have initial or remaining terms in
excess of one year were as follows:
<TABLE>
<S> <C>
2000 $16
2001 14
2002 9
2003 7
2004 5
Thereafter 16
----
$67
====
</TABLE>
Minimum payments have not been reduced by minimum sublease rentals of $5
due through 2016 under noncancelable subleases. Rent expense was $37, $35 and
$32 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. Rent
expense includes contingent rentals on certain equipment based on usage.
Lease Financing. In April 1999, the Company completed a $38 million
lease financing that is being used to finance construction of four warehouse
facilities adjacent to the Company's Hanford, Kingsburg and Modesto, California,
and Plymouth, Indiana production plants. Construction of the new facilities
(totaling approximately 1.4 million square feet) has begun and is expected to be
completed at all four sites during calendar 1999. The lease will be classified
as an operating lease with related rentals charged to expense in the period
incurred. The lease has an initial term of five years. Under certain
circumstances, the lease can be renewed for up to five additional years. At the
expiration of the lease, the Company has the option to purchase the leased
facilities for specified amounts, or to sell them on behalf of the lessor.
59
<PAGE> 60
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE DATA)
Grower Commitments. The Company 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
$68, $66, $114 for the years ended June 30, 1999, 1998 and 1997. The Company
also has commitments to purchase certain finished goods.
At June 30, 1999, aggregate future payments under such purchase
commitments (priced at the June 30, 1999 estimated cost) are estimated as
follows:
<TABLE>
<S> <C>
2000 $ 58
2001 46
2002 39
2003 34
2004 32
Thereafter 74
---
$283
</TABLE> ====
In connection with the sale of the Company's 50.1% interest in Del Monte
Philippines, a joint venture operating primarily in the Philippines, on March
29, 1996, the Company signed an eight-year supply agreement whereby the Company
must source substantially all of its pineapple requirements from Del Monte
Philippines over the agreement term. The Company expects to purchase $46 in
fiscal 2000 under this supply agreement for pineapple products. During the year
ended June 30, 1999, the Company purchased $48 under the supply agreement.
Supply Agreement. Effective December 21, 1993, the Company 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, the Company entered into a
ten-year supply agreement under which Silgan, effective immediately after the
sale, began supplying substantially all of the Company 's metal container
requirements for foods and beverages in the United States. Purchases under the
agreement during the year ended June 30, 1999 amounted to $203. The Company
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, the Company entered
into an agreement with Electronic Data Systems Corporation ("EDS") to provide
services and administration to the Company 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, 1999, 1998 and 1997 were $18, $16 and $18, respectively. The
agreement expires in November 2002 with optional successive one-year extensions.
At June 30, 1999, base payments under the agreement are as follows:
<TABLE>
<S> <C>
2000 $14
2001 13
2002 14
2003 5
----
$46
</TABLE> ====
Union Contracts. Del Monte has a concentration of labor supply in
employees working under union collective bargaining agreements, which represent
approximately 84% of its hourly and seasonal work force. Of these represented
employees, 89% of employees are under agreements that will expire in calendar
2000.
Legal Proceedings. The Company 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 the Company
breached certain purported contractual and fiduciary duties and made
misrepresentations and failed to disclose material information to the plaintiff
about the value of the Company and its prospects for sale. The plaintiff also
alleges that it relied on the Company's alleged statements in selling its
preferred and common stock interest in
60
<PAGE> 61
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(IN MILLIONS, EXCEPT SHARE DATA)
the Company to a third party at a price lower than that which the plaintiff
asserts it could have received absent the Company's alleged conduct. The
complaint seeks compensatory damages of at least $24 million, plus punitive
damages. This case is in the early stages of procedural motions and the Company
cannot at this time reasonably estimate a range of exposure, if any. The Company
believes that this proceeding is without merit and plans to defend it
vigorously.
The Company 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 the Company's
financial position.
NOTE 12 - RELATED PARTY TRANSACTIONS
DMC is directly-owned and wholly-owned by Del Monte. For the year ended
June 30, 1999, DMC and DMC's subsidiaries accounted for 100% of the consolidated
revenues and net earnings of the Company, except for those expenses incidental
to the Del Monte Notes. As of June 30, 1999, 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.
In connection with the Company's recapitalization, the Company 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 the Company for management advisory
services equal to the greater of $.5 and 0.05% of the budgeted consolidated net
sales of the Company. For the year ended June 30, 1999, TPG received fees of
less than $1 under this agreement. In addition, the Company 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 the
Company'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. The Company cannot
otherwise obtain the services that TPG will provide without the addition of
personnel or the engagement of outside professional advisors.
In connection with the recapitalization, the Company also entered into a
ten-year agreement dated April 18, 1997 (the "Transaction Advisory Agreement")
with TPG. Under this agreement, TPG received a cash financial advisory fee of
approximately $8 upon the closing of the recapitalization as compensation for
its services as financial advisor for the recapitalization. These services
included assistance in connection with the evaluation and fairness of the
recapitalization and the valuation of the Company for those purposes. TPG is
also entitled to receive a fee of 1.5% of the "transaction value" for each
transaction in which the Company 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. Under this agreement,
TPG or its designee received from the Company a fee of approximately $3 upon the
closing of the
61
<PAGE> 62
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
Contadina Acquisition, approximately $.5 in connection with the South America
Acquisition and approximately $4 in connection with the public equity offering
as compensation for its services as financial advisor for these transactions.
NOTE 13 - PLANT CONSOLIDATION
In the third quarter of fiscal 1998, management committed to a plan to
consolidate processing operations. In connection with this plan, the Company
established an accrual of $7 in fiscal 1998 relating to severance and benefit
costs for 433 employees to be terminated. No expenditures have been recorded
against this accrual as of June 30, 1999. Implementation of this plan 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 is
currently taking place at the San Jose and Stockton facilities (which sites will
be permanently closed). The tomato processing formerly performed at the Modesto
facility has been moved to the Hanford facility.
As anticipated upon adoption of the plan, the Company established an
accrual of $2 during the second quarter of fiscal 1999 upon the closure of the
Modesto facility to accommodate reconfiguration of the plant to a fruit
processing operation. This accrual represented direct costs to be incurred to
remove and dispose of tomato processing equipment at Modesto that would not be
transferred to the Company's tomato processing operations at the Hanford
facility. Under current accounting rules, these costs could not be accrued until
the Company had the ability to dispose of the equipment. The Company expects to
establish additional accruals for similar costs at the time of the closure of
the San Jose and Stockton facilities in fiscal 2000 and 2001. At June 30 1999,
$2 of costs have been charged to this accrual. As the equipment removal project
at Modesto has been substantially completed, the Company does not expect that
there will be any adjustments to this reserve.
In August 1998, management announced its intention to close the
Company's vegetable processing plant located in Arlington, Wisconsin after the
summer 1998 pack. Upon completion of this pack, a charge of $3 was taken during
the first quarter of fiscal 1999 representing the write-down to fair value of
the assets held for sale. These assets primarily included building, building
improvements, and machinery and equipment with a carrying value of $4. 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. Based on the level of
interest demonstrated in the facility by third parties, it is expected that
these assets will be disposed of within a year. At June 30, 1999, no costs have
been charged against this accrual.
The Company incurred charges representing accelerated depreciation of $9
during fiscal 1999 and $3 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.
The Company anticipates that it will incur additional charges of
approximately $15 as a result of these plant closures. These expenses include
costs, net of estimated salvage values, of $4 representing accelerated
depreciation resulting from the effects of adjusting the assets' remaining
useful lives to match the period of use prior to the plant closure and various
other costs totaling $11, such as costs to remove and dispose of those assets
and ongoing fixed costs to be incurred until the sale of the San Jose and
Stockton properties. Total charges relating to plant closures were $17 in fiscal
1999, including depreciation expense of $9, $2 for equipment removal, as well as
$3 for the Arlington closure and $3 of ongoing fixed costs and other period
costs, as discussed above. Costs relating to plant closures recorded in fiscal
1998 totaled $10 (including depreciation expense of $3 million). Additional
charges relating to plant closures are expected to affect the Company's results
over the next three-year period as follows: $10 in fiscal 2000 (including
depreciation expense of $4), $4 in fiscal 2001 and $1 in fiscal 2002.
62
<PAGE> 63
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
NOTE 14 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
1999(1)(2) First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Net Sales $318 $427 $390 $370
Operating income 12 32 32 37
Income (loss) before extraordinary item (11) 10 12 22
Net income (loss) (11) 10 (7) 22
Per share data:(3)
Basic income (loss) per share before (0.34) 0.24 0.25 0.41
extraordinary item
Diluted income (loss) per share before (0.34) 0.24 0.25 0.40
extraordinary item
1998(1)(2)
Net Sales $251 $369 $348 $345
Operating income 17 20 20 25
Income (loss) before extraordinary item -- 2 (2) 5
Net income (loss) -- 2 (2) 5
Per share data: (3)
Basic income (loss) per share before
extraordinary item (0.06) 0.05 (0.10) 0.11
Diluted income (loss) per share before
extraordinary item (0.06) 0.05 (0.10) 0.10
</TABLE>
(1) The first quarter of 1999 included $3 of inventory step-up related to
inventory purchased in the Contadina Acquisition and the South America
Acquisition. The third and fourth quarters of 1998 included $2 and $1,
respectively, of inventory step-up related to the Contadina Acquisition.
(2) Quarterly plant consolidation charges for the first, second, third and
fourth quarters of fiscal 1999 were $7, $5, $3 and $2, respectively. The
third and fourth quarters of 1998 included $7 and $3, respectively, of
charges related to the Company's plant consolidation program.
(3) Earnings per share was 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.
63
<PAGE> 64
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 11, 1999 (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 and 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
1999", "Aggregated Option Exercises in Fiscal Year 1999 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.
64
<PAGE> 65
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, 1999 and 1998
Consolidated Statements of Operations - Years ended
June 30, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity (Deficit)
- Years ended June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended
June 30, 1999, 1998 and 1997
Notes to consolidated financial statements
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
No reports on Form 8-K were filed by registrant 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.
65
<PAGE> 66
SIGNATURES
PURSUANT TO THE REQUIREMENTS 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 Date: September 3, 1999
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ RICHARD G. WOLFORD President and Chief Executive September 3, 1999
- -----------------------------------
Richard G. Wolford Officer; Director
/s/ DAVID L. MEYERS Executive Vice President, September 3, 1999
- -----------------------------------
David L. Meyers Administration and Chief
Financial Officer
/s/ RICHARD L. FRENCH Senior Vice President and Chief September 3, 1999
- -----------------------------------
Richard L. French Accounting Officer
/s/ RICHARD W. BOYCE Director; Chairman of the Board September 3, 1999
- -----------------------------------
Richard W. Boyce
/s/ TIMOTHY G. BRUER Director September 3, 1999
- -----------------------------------
Timothy G. Bruer
/s/ AL CAREY Director September 3, 1999
- -----------------------------------
Al Carey
/s/ PATRICK FOLEY Director September 3, 1999
- -----------------------------------
Patrick Foley
/s/ BRIAN E. HAYCOX Director September 3, 1999
- -----------------------------------
Brian E. Haycox
/s/ DENISE O'LEARY Director September 3, 1999
- -----------------------------------
Denise O'Leary
/s/ WILLIAM S. PRICE, III Director September 3, 1999
- -----------------------------------
William S. Price, III
</TABLE>
S-1
<PAGE> 67
<TABLE>
<S> <C> <C>
/s/ JEFFREY A. SHAW Director September 3, 1999
- -----------------------------------
Jeffrey A. Shaw
/s/ WESLEY J. SMITH Director; Chief Operating Officer September 3, 1999
- -----------------------------------
Wesley J. Smith
</TABLE>
S-2
<PAGE> 68
EXHIBIT INDEX
EXHIBIT
NO. 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.
X-1
<PAGE> 69
10.4 Amended and Restated Credit Agreement, dated as of December 17,
1997, among Del Monte Corporation, Bank of America National
Trust and Savings Association, as Administrative Agent, and the
other financial institutions parties thereto (the "Amended
Credit Agreement") (incorporated by reference to Exhibit 4.4 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
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 Glynn M.
Phillips, dated October 5, 1994 (incorporated by reference to
Exhibit 10.4 to the DMC Registration Statement)
*10.15 Retention Agreement between Del Monte Corporation and Brent D.
Bailey, dated January 19, 1998
10.16 Del Monte Foods Annual Incentive Award Plan, as amended
(incorporated by reference to Exhibit 10.8 to the DMC
Registration Statement)
10.17 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)
10.18 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)
10.19 Del Monte Foods Company Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-8)
10.20 Del Monte Foods Company 1997 Stock Incentive Plan (incorporated
by reference to Exhibit 4.2 to the Registration Statement on
Form S-8)
10.21 Agreement for Information Technology Services between Del Monte
Corporation and Electronic Data Systems Corporation, dated
November 1, 1992, as amended as of September 1, 1993 and as of
September 15, 1993 (incorporated by reference to Exhibit 10.11
to the DMC Registration Statement)
X-2
<PAGE> 70
10.22 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)
10.23 Del Monte Foods Company Non-Employee Directors and Independent
Contractors 1997 Stock Incentive Plan (incorporated by reference
to Exhibit 10.23 to Amendment No. 1 to the Registration
Statement on Form S-1)
10.24 Del Monte Foods Company 1998 Stock Incentive Plan (incorporated
by reference to Exhibit 10.24 to Amendment No. 2 to the
Registration Statement on Form S-1 No. 333-48235, filed June 3,
1998)
10.25 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"))
10.26 Employment Agreement and Promissory Note of Wesley Smith
(incorporated by reference to Exhibit 10.26 to the 1998 Form
10-K)
10.27 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)
10.28 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)
10.29 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)
10.30 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
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
*23.1 Consent of KPMG LLP, Independent Accountants
*27.1 Financial Data Schedule
* filed herewith
X-3
<PAGE> 1
EXHIBIT 10.15
RETENTION AGREEMENT
THIS AGREEMENT, made as of this 19th day of January, 1998 (the
"Effective Date"), by and between DEL MONTE CORPORATION, a New York corporation
(the "Company") and Brent D. Bailey (the "Executive").
W I T N E S S E T H:
WHEREAS, in order to provide the Executive continued incentives
to remain in the services of the Company, its subsidiaries or affiliates, the
Company desires to provide the Executive with compensation security under the
conditions set forth in this Agreement in the event that the Executive's
employment hereunder is terminated by the Company or any such subsidiary or
affiliate without Cause (as hereinafter defined);
NOW, THEREFORE, in consideration of the premises and covenants
herein contained, the parties hereby agree as follows:
1. Employment. The Executive agrees to devote his working time,
on substantially a full-time basis, to the performance of services for the
Company, its subsidiaries and affiliates as may be assigned to him from time to
time and to perform such services faithfully and to the best of his ability.
This Agreement shall commence on the Effective Date and shall remain in effect
so long as the Executive remains employed by the Company, any of its
subsidiaries, or affiliates, or any successor organization.
2. Termination for Cause; Resignation for Good Reason;
Termination by Reason of Death. (a) This Agreement shall be terminated
immediately and neither party shall have any obligation hereunder, except as so
provided herein, if the Executive's employment is terminated for Cause (as
hereinafter defined) or by reason of the Executive's death.
(b) The Executive shall be terminated for "Cause" only if the
Executive's employment is terminated as a result of (i) dishonesty; (ii)
deliberate and continual refusal to perform employment duties on substantially a
full-time basis; (iii) failure to act in accordance with any specific lawful
instructions given to the Executive in connection with the performance of his
duties for the Company or any of its subsidiaries or affiliates,
<PAGE> 2
unless, the Executive is disabled, or (iv) deliberate misconduct which is
reasonably likely to be materially damaging to the Company without a reasonable
good faith belief by the Executive that such conduct was in the best interests
of the Company.
(c) Resignation for "Good Reason" shall mean the resignation of
the Executive after: (i) a reduction without the Executive's consent in the
Executive's salary or the bonus that the Executive is eligible to earn under the
Company's annual cash bonus plan (or successor plan thereto); provided, however,
that nothing herein shall be construed to guarantee the Executive's bonus for
any year if the applicable performance targets are not met; and provided,
further, that it shall not constitute Good Reason hereunder if the Company makes
an appropriate pro rata adjustment to the applicable bonus and targets under the
annual cash bonus plan in the event of a change in the Company's fiscal year;
(ii) a material reduction without the Executive's consent in the aggregate
welfare benefits provided to the Executive pursuant to the welfare plans,
programs and arrangements in which the Executive is eligible to participate, or
(iii) a material reduction without the Executive's consent in the Executive's
job title or responsibilities. Unless the Executive provides written
notification of an event described in clauses (i) through (iii) above within
ninety (90) days after the Executive knows or has reason to know of the
occurrence of any such event, the Executive shall be deemed to have consented
thereto and such event shall no longer constitute Good Reason for purposes of
this Agreement. If the Executive provides such written notice to the Company,
the Company shall have ten (10) business days from the date of receipt of such
notice to effect a cure of the event described therein and, upon cure thereof by
the Company to the reasonable satisfaction of the Executive, such event shall no
longer constitute Good Reason for purposes of this Agreement.
(d) The Executive may voluntarily terminate his employment at any
time prior to notice by the Company of termination under Sections 2(a) or 3(a)
of this Agreement by written notice to the Company. Upon such notice (other than
pursuant to Section 2(c), this Agreement shall be terminated immediately and the
Executive shall have no entitlement to any compensation other than what has
already been earned or accrued at the time of termination.
3. Termination Without Cause.
(a) Severance Amount. If the Executive's employment is terminated
by the Company without Cause or by the Executive for Good Reason, the Company
shall pay to the Executive the following Severance
<PAGE> 3
Amount. For purposes hereinafter, the Severance Period shall mean three (3)
months unless the Executive becomes entitled to eighteen (18) months as defined
hereunder:
The Executive shall be entitled to three months of current base
pay, to be paid on the Company's regular pay days. However, if the Executive
executes and delivers to the Company, on a timely basis, a written Agreement in
the form furnished by the Company by which the Executive effectively reaffirms
the conditions of Section 5 and releases the Company, its subsidiaries and
affiliates from all types of employment-related claims, the Company will then
provide the Executive over an 18 month period commencing on the date of
termination the total severance amount which is the sum of (A) plus (B), where
(A) is the Executive's highest annual rate of base salary in effect during the
twelve (12) month period prior to such termination and (B) is the target award
under the Company's annual cash bonus plan for the year in which such
termination occurs (or, if greater, the amount of the award for the next
preceding year of employment).
The Executive will also be eligible for an award under the annual
cash bonus plan of the Company, based upon the target award for the year in
which the Executive's termination without Cause or for Good Reason occurs,
prorated for the active employment period during such year and adjusted for
performance. Such pro rata bonus, if any, shall be paid following the end of the
normal performance cycle.
(b) Employee Benefit Plans. In the event the Company terminates
the Executive's employment other than for Cause, or the Executive terminates for
Good Reason, the Executive will continue to be eligible for the welfare benefits
(other than disability benefits) afforded by the employee welfare benefit plans
and programs maintained by the Company in which he participated (and at an
equivalent level of participation) immediately prior to such termination until
the earlier to occur of (i) the end of the Severance Period, or (ii) such time
as the Executive is covered by comparable programs of a subsequent employer. For
all other employee benefit plans of the Company, the date of termination of
employment will be treated as the Executive's severance date, as of which plan
participation will cease. Anything herein to the contrary notwithstanding, the
Company shall have no obligation to continue to maintain during the Severance
Period any plan or plan provision solely as a result of the provisions of this
Agreement and the Executive will be subject to all changes in such plans
occurring during the Severance Period generally applicable to all employees,
unless former employees on salary continuation are specifically excepted.
<PAGE> 4
(c) Death. In the event of the Executive's death subsequent to
commencement of the Severance Period, the balance of the Severance Amount will
be paid to his beneficiary in a lump sum. "Beneficiary" shall mean the person or
persons designated by the Executive in writing to the Company to receive
payments under this Agreement or, if no such person or persons are designated,
the Executive's estate.
(d) Outplacement Counseling. During the Severance Period, the
Executive will be provided with outplacement counseling services at Company
expense; provided, however, the expense for such services in any calendar year
shall not exceed eighteen percent (18%) of the Severance Amount paid to the
Executive for such calendar year. This counseling shall include, but not be
limited to, skill assessment, job market analysis, resume preparation,
interviewing skills, job search techniques and negotiating.
(e) Fringe Benefits. During the Severance Period, the Company
will continue the Executive's participation in any management perquisites
applicable to the Executive as of the date of such termination until the first
to occur of (i) the first anniversary of such termination; or (ii) the date the
Executive is covered by comparable fringe benefit programs and perquisites of a
subsequent employer, or (iii) the end of the Severance Period.
4. Disability. The event of Permanent Disability (as hereinafter
defined) shall not entitle the Executive to any of the payments or benefits
described in Section 3 above unless the Executive is terminated by the Company
other than for Cause. "Permanent Disability" shall mean physical or mental
disability as a result of which the Executive is unable to perform his duties
with the Company on substantially a full-time basis for any period of six (6)
consecutive months. Any dispute as to whether or not the Executive is so
disabled shall be resolved by a physician reasonably acceptable to the Executive
and the Company whose determination shall be final and binding upon both the
Executive and the Company.
5. Conditions Applicable to Severance Benefits.
(a) Confidentiality and Conduct. The Executive warrants and
agrees that he will not disclose to any person, other than the employees,
officers, directors or shareholders of Del Monte Foods Company, a Maryland
corporation, or its affiliates and subsidiaries in connection with the
performance of his duties hereunder, any confidential information or trade
secrets concerning the Company or any of its subsidiaries or affiliates at any
time. Notwithstanding the foregoing, confidential information and trade secrets
shall not be deemed to include,
<PAGE> 5
without limitation, information which (i) is or becomes available to the public
other than as a result of disclosure by the Executive in violation of this
Section 5(a), or (ii) the Executive is required to disclose under any applicable
laws, regulations or directives of any government agency, tribunal or authority
having jurisdiction in the matter or under subpoena or other process of law. The
Executive will at all times refrain from taking any action or making any
statements, written or oral, which are intended to and do demonstrably and
materially damage the Company, its subsidiaries and affiliates and their
respective directors, officers or employees. In the event that the Executive
materially violates the terms and conditions of this Section 5(a), the Company
may, at its election, upon ten (10) days' notice, terminate the Severance Period
and discontinue payments of the Severance Amount and cease providing the
benefits described in Section 3 above. The Company may also initiate any form of
legal action it may deem appropriate seeking damages or injunctive relief with
respect to any material violations of this Section 5(a).
(b) Non-Competition. The Severance Period shall be terminated and
the Company shall have no further obligation to pay the Severance Amount or to
provide the benefits described in Section 3 above if the Executive, without the
Company's written approval, accepts a position of employment with any other
company conducting a business which is substantially competitive with a business
conducted by the Company.
(c) No Other Severance Benefits. Except as specifically set forth
in this Agreement, the Executive covenants and agrees that he shall not be
entitled to any other form of severance benefits from the Company, including,
without limitation, benefits otherwise payable under any of the Company's
regular severance policies, (including any benefits under the existing
separation program referenced in Section 3(b) above) in the event his employment
with the Company ends for any reason and, except with respect to obligations of
the Company expressly provided for herein, the Executive unconditionally
releases the Company and its subsidiaries and affiliates, their respective
directors, officers, employees and stockholders, or any of them, from any and
all claims, liabilities or obligations under this Agreement or under any
severance or termination arrangement of the Company or any of its subsidiaries
or affiliates for compensation or benefits in connection with his employment or
the termination thereof.
<PAGE> 6
6. General Provisions.
(a) Notices. Any notice hereunder by either party to the other
shall be given in writing by personal delivery, telex, telecopy or registered
mail, return receipt requested, to the applicable address set forth below:
(i) To the Company: Del Monte Corporation
One Market
P. O. Box 193575
San Francisco, CA 94119-3575
Attn: Secretary of the Board
(ii) To the Executive: Brent D. Bailey
c/o Del Monte Corporation
P. O. Box 193575
San Francisco, CA 94119-3575
(b) Limited Waiver. The waiver by the Company or the Executive of
a violation of any of the provisions of this Agreement, whether express or
implied, shall not operate or be construed as a waiver of any subsequent
violation of any such provision.
(c) No Assignment. No right, benefit or interest hereunder shall
be subject to assignment, encumbrance, charge, pledge, hypothecation or set off
by the Executive in respect of any claim, debt, obligation or similar process.
This Agreement and all of the Company's rights and obligations hereunder may be
assigned, transferred or delegated to any business entity which, at the time of
any sale, merger, consolidation or other business combination, acquires all or
substantially all of the assets of the Company or to which the Company transfers
all or substantially all of its assets, but no such assignment, transfer or
delegation shall impair any rights that the Executive may have hereunder against
the Company. Upon such assignment, transfer or delegation, any such business
entity shall be deemed to be substituted for all purposes as the Company
hereunder; provided, however, that no such assignment, transfer or delegation
shall relieve the Company of its obligations under this Agreement in the event
that such obligations are not performed when due by any such successor to the
Company hereunder.
<PAGE> 7
(d) Amendment. This Agreement may not be amended, modified or
canceled except by written agreement of the parties.
(e) Severability. In the event that any provision or portion of
this Agreement shall be determined to be invalid or unenforceable for any
reason, the remaining provisions of this Agreement shall remain in full force
and effect to the fullest extent permitted by law.
(f) Unsecured Promise. Unless otherwise stated herein, no benefit
or promise hereunder shall be secured by any specific assets of the Company.
Unless otherwise stated herein, the Executive shall have only the rights of an
unsecured general creditor of the Company in seeking satisfaction of such
benefits or promises.
(g) Governing Law. This Agreement has been made in and shall be
governed by and construed in accordance with the laws of the State of New York.
(h) Entire Agreement. This Agreement sets forth the entire
agreement and understanding of the parties hereto with respect to the matters
covered hereby.
(i) Headings. The headings and captions of the Sections of this
Agreement are included solely for convenience of reference and shall not control
the meaning or interpretation of any provisions of this Agreement.
(j) Counterparts. This Agreement may be executed by the parties
hereto in counterparts, each of which shall be deemed an original, but both such
counterparts shall together constitute one and the same document.
IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the day and year first written above.
DEL MONTE CORPORATION
By: /s/ RICHARD G. WOLFORD
--------------------------
Chief Executive Officer
/s/ BRENT D. BAILEY
--------------------------
Executive: Brent D. Bailey
<PAGE> 1
Exhibit 12.1
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF EARNINGS TO FIXED CHARGES
(In millions)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
June 30, June 30, June 30, June 30, June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated pre-tax income (loss) $ 33 $ 6 $(16) $135 $ 15
Interest expense .................... 78 77 52 67 76
Interest portion of rent expense .... 12 12 11 9 11
---- --- ---- ---- ----
Earnings .................. $123 $95 $ 47 $211 $102
==== === ==== ==== ====
Interest expense .................... $ 78 $77 $ 52 $ 67 $ 76
Interest portion of rent expense(a).. 12 12 11 9 11
---- --- ---- ---- ----
Fixed charges ............. $ 90 $89 $ 63 $ 76 $ 87
==== === ==== ==== ====
Ratio of earnings to fixed charges 1.4x 1.1x N/A 2.8x 1.2x
Deficiency of earnings available
to cover fixed charges ............ -- -- $(16) -- --
</TABLE>
(a) Interest portion of rent expense is assumed equal to 33% of operating lease
and rental expense for the period
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF DEL MONTE FOOD COMPANY
Company State of Incorporation DBA Name
Del Monte Corporation New York Del Monte Foods
Mike Mac IHC, Inc. Delaware -
Hi Continental Corporation California -
Oak Grove Trucking Company California -
Contadina Foods, Inc. Delaware -
Del Monte Andina C.V. Venezuela -
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Del Monte Foods Company:
We consent to incorporation by reference in the registration statements (Nos.
333-40867 and 333-79315) on Form S-8 of Del Monte Foods Company of our report
dated July 23, 1999, relating to the consolidated balance sheets of Del Monte
Foods Company and subsidiaries as of June 30, 1999, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the years in the three-year period ended June 30,
1999, which report appears in the June 30, 1999, annual report on Form 10-K
of Del Monte Foods Company.
/s/ KPMG LLP
San Francisco, California
September 3, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 7
<SECURITIES> 0
<RECEIVABLES> 140
<ALLOWANCES> 2
<INVENTORY> 343
<CURRENT-ASSETS> 502
<PP&E> 509
<DEPRECIATION> 197
<TOTAL-ASSETS> 872
<CURRENT-LIABILITIES> 314
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (118)
<TOTAL-LIABILITY-AND-EQUITY> 872
<SALES> 1,505
<TOTAL-REVENUES> 1,505
<CGS> 999
<TOTAL-COSTS> 999
<OTHER-EXPENSES> 9
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78
<INCOME-PRETAX> 33
<INCOME-TAX> 0
<INCOME-CONTINUING> 33
<DISCONTINUED> 0
<EXTRAORDINARY> 19
<CHANGES> 0
<NET-INCOME> 14
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.23
</TABLE>
