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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
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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
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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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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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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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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:
LOCATION PRIMARY PRODUCT LINE SQUARE FOOTAGE
-------- -------------------- --------------
PRODUCTION FACILITIES* OWNED LEASED
----- ------
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 --
* 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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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.
NAME AGE POSITIONS
- ---- --- ---------
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
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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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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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:
High Low
-------- --------
February 5 - March 31, 1999 $15.6250 $11.3750
April 1 - June 30, 1999 $16.7500 $11.8750
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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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.
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ -------------- ------------- -------------- ---------------
(IN MILLIONS, EXCEPT SHARE DATA)
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
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FISCAL YEAR ENDED JUNE 30,
-------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------
(IN MILLIONS)
OTHER DATA:
Adjusted EBITDA:(g)
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 -- --
JUNE 30,
-------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------
(IN MILLIONS)
BALANCE SHEET DATA:
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)
- ----------------------
(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.
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(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
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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
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
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
====== ====== =======
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FISCAL YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
AS A PERCENTAGE OF NET SALES:
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%
=== === ====
- ----------------------
(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
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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
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
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 i