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This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity of Del Monte during the three-year period ended June 30, 2000. This discussion should be read in conjunction with the audited consolidated financial statements of Del Monte for the three-year period ended June 30, 2000 and notes thereto included elsewhere in this Annual Report on Form 10-K. General Del Monte reports its financial results on a July 1 to June 30 fiscal year basis to coincide with its inventory production cycle, which is highly seasonal. Raw product is harvested and packed primarily in the months of June through October, during which time inventories rise to their highest levels. At the same time, consumption of canned products declines, reflecting, in part, lower levels of promotional activity, the availability of fresh alternatives and other factors. This situation impacts operating results as sales volumes, revenues and profitability decline during this period. Results over the remainder of the fiscal year are affected by many factors including industry supply and Del Monte’s share of that supply. See “—Seasonality” In 1997, in connection with Del Monte’s recapitalization, Del Monte began implementing a new business strategy designed to improve sales and operating margins by: (1) increasing market share and distribution of high margin value-added products; (2) introducing new products and packaging; (3) increasing penetration of high growth distribution channels, such as supercenters and warehouse clubs; (4) achieving cost savings through operating efficiencies, plant consolidations and investments in new and upgraded equipment; and (5) completing strategic acquisitions. Consistent with Del Monte’s strategy to generate growth through acquisitions, Del Monte consummated the Contadina Acquisition in December 1997. The Contadina Acquisition contributes another established brand and positions Del Monte as the branded market leader in the high margin canned solid tomato category. The Contadina Acquisition also establishes a strong presence for Del Monte in the branded paste-based tomato products category, which includes tomato paste, tomato sauce and pizza sauce. Del Monte believes that Contadina’s strong brand recognition, particularly in paste-based tomato products, complements Del Monte’s brand leadership in canned solid tomato products and enhances Del Monte’s market share and household penetration. Del Monte also reacquired the rights to the Del Monte brand in South America in August 1998. That acquisition has opened a new geographic market for Del Monte. In addition to diversifying further Del Monte’s revenue base, the Contadina Acquisition expanded Del Monte’s processing scale, which has resulted in production cost efficiencies. Moreover, among the facilities acquired by Del Monte was a state-of-the-art manufacturing facility at Hanford, California. In the third quarter of fiscal 1998, Del Monte committed to a plan to consolidate processing operations over a three-year period. As part of these efforts, Del Monte transferred tomato production at its Modesto, California facility to Hanford following the summer 1998 pack. Del Monte converted its Modesto facility to a fruit processing facility that has assumed the production previously conducted at Del Monte’s San Jose, California facility and will assume the production currently conducted at the Stockton, California facility. Del Monte closed its San Jose facility in December 1999 and will close its Stockton facility after the production season in 2000. In connection with these actions, Del Monte recorded charges of $6.6 million in the third quarter of fiscal 1998, principally relating to severance. Del Monte incurred additional charges as a result of these plant closures. These charges included accelerated depreciation resulting from the effects of adjusting the tomato and fruit processing assets’ remaining useful lives to match the period of use prior to the closure of these plants. Accelerated depreciation totaling $4.3 million and $9.4 million was recorded in fiscal 2000 and 1999, respectively, and $3.0 million of such depreciation was recorded in the fourth quarter of fiscal 1998. In addition, Del Monte incurred costs to remove and dispose of those assets, as well as ongoing fixed costs during the Modesto plant reconfiguration and until the sale of the San Jose and Stockton properties. These costs totaled $6.6 million in fiscal 2000 and $4.3 million in fiscal 1999. Del Monte’s results over the next three-year period are expected to be affected by related plant consolidation charges as follows: $2.9 million in fiscal 2001, $0.7 million in fiscal 2002, and $0.3 million in fiscal 2003. See Note 12 to the consolidated financial statements for the year ended June 30, 2000. In addition, Del Monte’s vegetable processing plant located in Arlington, Wisconsin was closed in August 1998. Total costs incurred in connection with this closure were $3.5 million primarily relating to asset write-offs. Del Monte recorded this expense in the first quarter of fiscal 1999. The plant consolidation plan is a major component of a capital investment program of approximately $100.0 million started by Del Monte a little over three years ago. A total of $94.0 million has been spent on this program as of June 30, 2000. Del Monte’s goal for this program is to achieve cumulative cost savings by the end of the fifth year estimated at approximately $170.0 million. As of June 30, 2000, Del Monte estimates that approximately $68.0 million in cumulative cost savings have been generated by this capital investment program. Results of Operations The following table sets forth, for the periods indicated, certain items from Del Monte’s consolidated statements of income, expressed as percentages of Del Monte’s net sales for such periods:
The following table sets forth, for the periods indicated, Del Monte’s net sales by product categories, expressed in dollar amounts and as percentages of Del Monte’s total net sales for such periods:
Seasonality Del Monte’s quarterly operating results have varied in the past and are likely to vary in the future based upon a number of factors. Del Monte’s historical net sales have exhibited seasonality, with the second and third fiscal quarters having the highest net sales. These two quarters reflect increased sales of Del Monte’s products during the holiday period in the United States extending from late November through December, as well as sales associated with the Easter holiday. Lower levels of promotional activity, the availability of fresh produce and other factors have historically affected net sales in the first fiscal quarter. Quarterly gross profit primarily reflects fluctuations in sales volumes and is also affected by the overall product mix. Del Monte’s fruit operations have a greater percentage of annual sales and cost of products sold in the first fiscal quarter, as compared to its vegetable and tomato operations, due principally to increased sales of fruit cups during the “back to school” period. Del Monte’s vegetable and fruit operations have a greater percentage of annual sales and cost of products sold in the second and third fiscal quarters, principally due to the year-end holiday season, and sales of ketchup and related cost of products sold typically increase in the fourth fiscal quarter. Selling, administrative and general expense tends to be greater in the first half of the fiscal year, reflecting promotional expenses relating to the “back to school” period and the year-end holiday season, while Easter is the only major holiday in the second half of the fiscal year. The annual production volume of vegetable, fruit and tomatoes is driven by projected demand in the following year. Annual production is also influenced by general seasonal fluctuations primarily due to weather and overall growing conditions. Del Monte ended fiscal 2000 with higher than desired inventory levels. In order to reduce certain inventory levels, production volumes will be lower during the 2000 production season. This lower pack will result in higher fixed costs per case. These higher costs are expected to increase costs of products sold as expressed as a percentage of net sales, but are not expected to significantly impact overall profitability. FISCAL 2000 VS. FISCAL 1999 Net Sales Consolidated net sales for fiscal 2000 decreased by $42.4 million, or 2.8%, from fiscal 1999. (Approximately 0.9% of consolidated net sales were generated by Del Monte’s South American business in fiscal 2000.) The decrease in sales in the current year primarily reflects the Company’s strategy to shift emphasis towards sales of higher margin products and to reduce emphasis on lower margin commodity items. This resulted in a decrease in sales in the foodservice/food ingredients channel. Excluding the foodservice/food ingredients channel, net sales for the year increased approximately one percent over last year, primarily reflecting continued growth in the club and mass merchandisers channel and growth from new products (Fruit-to-Go and continued expansion of Orchard Select) offset by lower sales in the retail tomato business. Ketchup sales declined due to strong competitive activity; additionally, tomato sauce sales declined due to less aggressive merchandising. Although net sales were down as compared to prior year, the Company’s market share increased in all three major processed food categories. In fiscal 2000, Del Monte’s market share for Del Monte branded vegetables, based on case volume, was 23.7% versus 21.3% in the previous year, while Del Monte’s market share for Del Monte branded fruit products was 44.2% compared to 42.8% for the previous year. Del Monte’s market share for solid tomato products was 17.5% in fiscal 2000 compared to 17.0% in the fiscal 1999. Cost of Products Sold Costs decreased by $77.8 million in fiscal 2000 as compared to fiscal 1999, with cost of products sold expressed as a percentage of net sales of 63.0% in fiscal 2000 and 66.4% in fiscal 1999. The decrease in costs in fiscal 2000 was primarily due to lower sales. In addition, the decrease in cost of products sold as a percentage of net sales was due to lower costs as a result of capital spending initiatives and other favorable cost reductions, as well as a favorable sales mix of higher margin products. Selling, Administrative and General Expense Selling, administrative and general expense as a percentage of net sales was 26.3% and 24.9% in fiscal 2000 and 1999, respectively. Selling, administrative and general expense for fiscal 2000 was higher due to an investment in new products and in order to support growth in the retail business. Research and development costs of $6.6 million and $6.2 million in fiscal 2000 and 1999, respectively, were included in general and administrative expenses. Special Charges Related to Plant Consolidation Del Monte incurred special charges of $10.9 million in fiscal 2000 compared to special charges of $17.2 million in the prior year. These charges included accelerated depreciation expense of $4.3 million and $9.4 million in fiscal 2000 and fiscal 1999, respectively, resulting from the effects of adjusting the assets’ remaining useful lives to accelerate the depreciation thereof. Special charges for fiscal 2000 and 1999 also included $5.9 million and $2.4 million, respectively, of on-going fixed costs and other period costs primarily incurred at the Modesto facility while under reconfiguration. Costs incurred for removal of tomato and fruit processing equipment to be disposed of totaled $2.7 million and $1.9 million in fiscal 2000 and 1999, respectively. Also included in fiscal 2000 was a reduction of $1.3 million in the severance accrual established in fiscal 1998, and a reduction of the accrual related to the Arlington plant closure of $0.7 million as the proceeds of the sale of the plant exceeded original projections. Interest Expense Interest expense decreased 13.5% in fiscal 2000 compared to fiscal 1999. This decrease was due to the lower average outstanding debt balances. Other (Income) Expense Other expense for fiscal 2000 decreased as compared to fiscal 1999 due to the inclusion in 1999 of expenses related to the withdrawn July 1998 public equity offering. Provision (Benefit) for Income Taxes The income tax benefit of $53.6 million was primarily attributable to the release of the majority of the valuation allowance. Management evaluated the available evidence and concluded it is more likely than not that the Company will realize its net deferred tax assets. In reaching this conclusion, significant weight was given to the Company’s current, as well as recent cumulative profitability. Net Income before Extraordinary Item Net income for fiscal 2000 increased by $100.3 million compared to the same period of prior year. The increase in net income is primarily due to the recognition of the valuation allowance, a more profitable mix of products sold and reduced plant consolidation costs. Extraordinary Item In conjunction with the repayment of $31.0 million of senior subordinated notes, Del Monte recorded an extraordinary loss. The extraordinary item charge consisted of the write-off of $1.5 million of previously capitalized debt issue costs related to the redeemed notes and original issue discount and $3.7 million of redemption premiums, net of tax benefit. FISCAL 1999 VS. FISCAL 1998 South America Acquisition On July 10, 1998, Del Monte entered into an agreement with Nabisco Inc. (“Nabisco”) to reacquire rights to the Del Monte brand in South America from Nabisco, Inc. and to purchase Nabisco’s canned vegetable and tomato business in Venezuela, including a food processing plant in Venezuela. The transaction closed on August 28, 1998 for a cash purchase price of $31.8 million. In connection with this acquisition, Del Monte incurred approximately $0.9 million of indirect acquisition expenses. RJR Nabisco had retained ownership of the Del Monte brand in South America and the Del Monte business in Venezuela when it sold other Del Monte businesses in 1990. This transaction was accounted for using the purchase method of accounting. The purchase price was allocated as $3.1 million to inventory, $0.5 million to property, plant and equipment and $28.2 million representing intangible assets. Net Sales Consolidated net sales for fiscal 1999 increased by $191.2 million, or 14.6%, compared to fiscal 1998, primarily due to higher volumes in the vegetable and fruit businesses, sales growth of 38% over prior year in the club and mass merchandisers channel and Contadina product sales (which accounted for $95.1 million of the increase in fiscal 2000 primarily due to a full year of Contadina versus six months in fiscal 1998). Approximately 0.7% of consolidated net sales were generated by Del Monte’s South American business. The following discusses the increases within Del Monte’s major product lines. Vegetable product sales increased due to the successful implementation of a new vegetable marketing strategy, which has resulted in merchandising efficiencies, the impact of improved packaging in club stores and a higher margin product mix. Fruit product sales increased in fiscal 1999 as compared to the prior year, primarily due to the introduction of new products (FruitRageous and Fruit Pleasures single-serve fruit products and the Orchard Select fruit-in-glass product), which began national distribution during the first quarter of fiscal 1999. Fruit product sales also increased due to growth in the higher margin categories of fruit cups, specialty fruit and buffet fruit. In fiscal 1999, Del Monte’s market share for Del Monte branded vegetables, based on case volume, was 21.3% versus 20.0% in the previous year, while Del Monte’s market share for Del Monte branded fruit products was 42.8% compared to 42.2% for the previous year. Del Monte’s market share for solid tomato products was 17.0% in fiscal 1999 compared to 16.5% in the previous year. Cost of Products Sold Cost of products sold as a percent of net sales was 66.4% for fiscal 1999, compared to 68.4% for fiscal 1998. The decrease in cost of products sold as a percent of net sales was primarily due to manufacturing cost decreases, higher product pricing and a favorable product mix. Manufacturing costs were favorable in the current year period as compared to the prior year period due to more favorable raw product costs, cost savings from capital spending initiatives and increased production levels. Selling, Administrative and General Expense Selling, administrative and general expense increased by $58.9 million for fiscal 1999 compared to fiscal 1998. The increase in selling, administrative and general expense was primarily due to higher marketing costs associated with the introduction of new products, promotion cost increases resulting from higher volumes of product sold (including the increase due to the acquisition of Contadina) and increased spending resulting from higher levels of promotional activity. Included in general and administrative expenses are research and development costs of $6.2 million and $5.3 million for fiscal 1999 and 1998. Research and development spending in fiscal 1999 and 1998 remained focused on strategic spending to maintain the existing business and to develop product line extensions. Special Charges Related to Plant Consolidation Del Monte incurred special charges of $17.2 million in fiscal 1999 compared to special charges of $9.6 million ($6.6 million severance accrual and $3.0 million accelerated depreciation) in fiscal 1998. Special charges for fiscal 1999 included $9.4 million of accelerated depreciation related to buildings and machinery and equipment that will no longer be needed following the consolidation of the operations of two fruit processing plants and two tomato processing plants as compared to $3.0 million in fiscal 1998 related to accelerated depreciation. The plant consolidation plan was not implemented until the end of fiscal 1998, therefore, only three months of accelerated depreciation was included in prior year’s special charges as compared to twelve months of accelerated depreciation in the current year. Special charges for fiscal 1999 also included $2.4 million of on-going fixed costs and other period costs incurred at the Modesto facility while under reconfiguration, as well as a $1.9 million charge, recorded during the second quarter of fiscal 1999, representing costs to be incurred for removal of tomato processing equipment to be disposed of. In addition, special charges for 1999 also included $3.5 million, representing primarily the write-down to fair value of assets held for sale related to the closure of the Arlington, Wisconsin plant, which was recorded in the first quarter of fiscal 1999. Interest Expense Interest expense was relatively flat in fiscal 1999. Debt balances increased significantly in mid fiscal 1998 due to the Contadina Acquisition. However, after the February 1999 public equity offering, debt balances decreased in fiscal 1999 since the proceeds of the offering were used primarily to repay debt. Other Expense Other expense for fiscal 1999 represented expenses of the public equity offering that was withdrawn due to conditions in the equity securities market in July 1998. These expenses were charged to earnings during the first quarter of fiscal 1999 upon the withdrawal of that offering. Provision (Benefit) for Income Taxes As of June 30, 1999, Del Monte had $53.4 million in net operating loss carryforwards for tax purposes, which will expire between 2009 and 2012. Net Income before Extraordinary Item Net income before extraordinary item for fiscal 1999 was $32.7 million compared to net income of $5.5 million in fiscal 1998. This increase was primarily due to an increase in operating income resulting from higher net sales and more favorable manufacturing and product costs in fiscal 1999 compared to fiscal 1998. The increase was somewhat offset by higher special charges related to plant consolidation and costs of the withdrawn July 1998 public equity offering. Extraordinary Item Proceeds of the February 1999 public equity offering were used to redeem preferred stock and a portion of the outstanding subordinated notes and to repay senior debt. The extraordinary item charge consisted of the write-off of $5.5 million of previously capitalized debt issue costs related to the redeemed notes and early debt retirement and $13.7 million of redemption premiums. RECENTLY ISSUED ACCOUNTING STANDARDS In fiscal 1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) (as amended by SFAS Nos. 137 and 138). SFAS No. 133 is required to be adopted for all fiscal quarters and fiscal years beginning after June 15, 2000 and relates to accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Based on the Company’s current limited use of derivative instruments, Del Monte anticipates that adoption of SFAS No. 133 will not have a significant effect on its results of operations or its financial position. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.” SAB 101 is to be adopted for fiscal years beginning after December 15, 1999, which for the Company would be fiscal year 2001. SAB 101 addresses various topics in revenue recognition. The Company is currently analyzing SAB 101, however based on management’s current understanding and interpretation, SAB 101 is not expected to have a material impact on the Company’s consolidated financial statements. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock Compensation—An Interpretation of Accounting Principles Board Opinion (“APB”) No. 25.” FIN 44 clarifies the application of APB 25 and is effective July 1, 2000. The Company believes that its current accounting policies are in conformity with this interpretation, and does not believe that FIN 44 will have a material effect on the Company’s consolidated financial statements. In July 2000, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue 00-10, “Accounting for Shipping and Handling Fees and Costs.” This issue addresses the income statement classification for shipping and handling fees and costs by companies. The Company believes that its current accounting policies are in conformity with this issue, and does not believe that EITF 00-10 will have a material effect on the Company’s consolidated financial statements. In May 2000, the EITF reached a consensus on Issue 00-14, “Accounting for Certain Sales Incentives.” This issue addresses the recognition, measurement, and income statement classification for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or are exercisable by a customer as a result of, a single exchange transaction. The Company is currently analyzing EITF 00-14, however based on management’s current understanding and interpretation, EITF 00-14 is not expected to have a material impact on the Company’s consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES Del Monte’s primary cash requirements are to fund debt service, finance seasonal working capital needs and make capital expenditures. Internally generated funds and amounts available under its revolving credit facility (the “Revolver”) are Del Monte’s primary sources of liquidity. Management believes that cash flow from operations and availability under the Revolver will provide adequate funds for Del Monte’s working capital needs, planned capital expenditures and debt service obligations for at least the next 12 months. Del Monte’s ability to fund its cash requirements and to remain in compliance with all of the financial covenants under its debt agreements depends on its future operating performance and cash flow. These are in turn subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond Del Monte’s control. As part of its business strategy, Del Monte continuously reviews acquisition opportunities. Del Monte believes that any acquisition would likely require the incurrence of additional debt, which could exceed amounts available under the Bank Financing (as defined in “Financing Activities—2000 Activity”). As a result, completion of any such acquisition could require the consent of the lenders under the Bank Financing and the amendment and restatement of the terms thereof, including to permit Del Monte’s compliance with its covenants. Del Monte cannot predict whether, or the terms on which, the lenders under the Bank Financing would grant their consent. Operating Activities The working capital position of Del Monte is seasonally affected by the growing cycle of the vegetables, fruit and tomatoes it processes. Substantially all inventories are produced during the harvesting and packing months of June through October and depleted through the remaining seven months. Accordingly, working capital requirements fluctuate significantly. Del Monte uses funds from its Revolver, which provides for a $350.0 million line of credit, to finance the seasonal working capital needs of its operations. In fiscal 2000, cash used in operating activities was $7.1 million, primarily due to an increase in inventories. In fiscal 1999, cash provided by operations was $96.1 million, primarily due to a significant increase in sales. Investing Activities In fiscal 2000, cash used in investing decreased by $20.3 million as compared to fiscal 1999, primarily due to the purchase of the South American business in fiscal 1999. In fiscal 1999, cash used in investing decreased by $135.8 million as compared to fiscal 1998 due to the purchase of Contadina in fiscal 1998. Capital expenditures for fiscal 2000 were $67.8 million, including $11.0 million for the purchase of the Cambria, Wisconsin plant and approximately $0.6 million for domestic environmental compliance, as Del Monte continued its implementation of a program which is intended to generate cost savings by introducing new equipment that would result in general production efficiencies. Of the remaining $56.2 million of capital expenditures for fiscal 2000, Del Monte spent approximately $21.5 million in connection with its plans to consolidate processing operations and $34.7 million for general manufacturing improvements. Del Monte plans an aggregate of approximately $50.0 million in capital expenditures for fiscal 2001 with approximately $5.5 million of those expenditures to be incurred in connection with the Company’s continuing program to consolidate processing operations. Del Monte continually evaluates its capital expenditure requirements, and such plans are subject to change depending on market conditions, Del Monte’s cash position, the availability of alternate means of financing and other factors. Del Monte expects to fund capital expenditures from internally generated cash flows and by borrowing from available financing sources. Financing Activities—2000 Activity Credit Agreement Amendment and Repayment of a Portion of 12 1/4% Notes. On January 14, 2000, the Company amended its senior credit agreement with respect to its Revolver and term loan facility (Term A Loan and Term B Loan, collectively the “Term Loan,” and together with Revolver, the “Bank Financing”). The amendment provided for additional borrowing capacity (up to $100.0 million) under either the Revolver or Term B Loan. The proceeds of this borrowing were used to reduce the Revolver balance. Under this provision, the Company increased its Term B borrowings by $100.0 million in August 2000. The amendment also adjusted certain financial covenants to reflect changes in the Company’s recent financial performance. The amendment did not change the Revolver’s expiration date, the Term Loan maturity dates or the terms of the pricing schedule. The amendment allowed the prepayment of up to $35.0 million of senior subordinated notes. During February 2000, the Company repurchased $31.0 million of 12 1/4% notes through the use of funds that carry a lower interest rate. In conjunction with this early debt prepayment, an extraordinary loss of $5.2 million ($4.3 million net of tax benefit of $0.9 million) was recorded, consisting of prepayment premiums and a write-off of capitalized deferred debt issue costs and original issue discount. Financing Activities—1999 Activity Public Equity Offering. On February 10, 1999, the public equity offering, consisting of 16,667,000 shares of common stock sold by Del Monte and 3,333,000 shares of common stock sold by certain stockholders of Del Monte, was consummated at an initial offering price of $15.00 per share. Del Monte received net proceeds of $229.7 million. Total common shares outstanding after the offering were 52,163,943. Del Monte used a portion of the net proceeds from the public equity offering to redeem $45.6 million of its redeemable preferred stock, including $2.3 million of unamortized discount, $10.0 million of accreted dividends and $0.7 million of redemption premium. Del Monte also used $57.4 million of the net proceeds to redeem a portion of its senior discount notes, including $1.5 million of accrued interest and $6.4 million of redemption premium. Del Monte contributed the remainder of the net proceeds to DMC, its principal subsidiary. DMC used the contribution to prepay $63.3 million of its indebtedness under its bank term loans, to redeem $61.8 million of its senior subordinated notes, including $0.9 million of accelerated amortization of original issue discount, $2.7 million of accrued interest and $6.6 million of redemption premium, and to repay $1.6 million of indebtedness under the Revolver. Financing Activities—1998 Activity Contadina Acquisition. In connection with the $194.9 million Contadina Acquisition, Del Monte issued the senior discount notes (the “Del Monte Notes”) with an aggregate principal amount at maturity of $230.0 million and received gross proceeds of $125.5 million. The Del Monte Notes accrue interest at 12.50% which accretes on each June 15 and December 15 through December 15, 2002, after which time interest is required to be paid in cash until maturity. The Del Monte Notes mature on December 15, 2007. A portion of the net proceeds from the February 1999 public equity offering was used to redeem 35% of the Del Monte Notes. In connection with the Contadina Acquisition, Del Monte also amended the Bank Financing and certain related debt covenants to permit additional funding under the existing Term B Loan in an amount of $50.0 million, thus increasing the aggregate amount outstanding at that time under the Term Loan to $430.0 million. Restrictive Covenants The DMC Notes, the Del Monte Notes, Term Loan and Revolver agreements contain restrictive covenants which require Del Monte to meet certain financial tests, including minimum fixed charge coverage, minimum adjusted net worth and maximum leverage ratios. These requirements and ratios generally become more restrictive over time, subject to allowances for seasonal fluctuations. Del Monte was in compliance with all debt covenants at June 30, 2000. The credit agreements applicable to DMC generally limit through restricted payment covenants the ability of DMC to make cash payments to Del Monte, thereby limiting Del Monte’s ability to pay monetary dividends. Pension Funding As described more fully in Note 8 of the audited consolidated financial statements as of and for the year ended June 30, 2000, Del Monte’s defined benefit retirement plans were previously determined to be underfunded under federal ERISA guidelines. It had been Del Monte’s policy to fund Del Monte’s retirement plans in an amount consistent with the funding requirements of federal law and regulations and not to exceed an amount that would be deductible for federal income tax purposes. In connection with Del Monte’s recapitalization, Del Monte entered into an agreement with the Pension Benefit Guaranty Corporation dated April 7, 1997 whereby Del Monte contributed $15.0 million within 30 days after the consummation of the recapitalization. Del Monte contributed $15.0 million in calendar 1998 and $9.0 million in calendar 1999. Del Monte will contribute a minimum of $8.0 million in calendar 2000, of which $4.0 million has been paid by June 30, 2000. Del Monte will also contribute a minimum of $8.0 million in calendar 2001, for a total of $55.0 million. The contributions required to be made in 2000 and 2001 have been secured by a $14.0 million letter of credit. This letter of credit is subject to periodic reduction as contributions are made in accordance with the agreement. Environmental Matters Del Monte spent approximately $1.8 million on domestic environmental expenditures from fiscal 1998 through fiscal 2000, primarily related to UST remediation activities and upgrades to boilers and wastewater treatment systems. Del Monte projects that it will spend an aggregate of approximately $3.1 million in fiscal 2001 and 2002 on capital projects and other expenditures in connection with environmental compliance, primarily for boiler upgrades, compliance costs related to the consolidation of its fruit and tomato processing operations and continued UST remediation activities. Del Monte believes that its liabilities under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), and other environmental liabilities will not have a material adverse effect on Del Monte’s financial position or results of operations. See “Business—Environmental Compliance.” Tax Net Operating Loss Carryforwards As of June 30, 2000, Del Monte had $37.5 million in net operating loss carryforwards for tax purposes, which will expire in 2012. Applicable laws may limit Del Monte’s use of these net operating loss carryforwards in any year. Inflation Del Monte’s costs are affected by inflation and Del Monte may experience the effects of inflation in future periods. However, Del Monte has historically mitigated the inflationary impact of increases in its costs by controlling its overall cost structure. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT POLICIES Del Monte’s primary market risk exposure is that of interest rate risk. Del Monte has entered into interest-rate cap agreements limiting Del Monte’s exposure to interest rate increases, thus limiting the impact of interest-rate increases on future income. Del Monte uses derivatives only for purposes of managing risk associated with the underlying exposures. Del Monte does not trade or use instruments with the objective of earning financial gains on interest rate fluctuations alone, nor does it use instruments where there are not underlying exposures. Complex instruments involving leverage or multipliers are not used. Management believes that its use of these instruments to manage risk is in Del Monte’s best interest and that any resulting market risk exposure would not materially effect Del Monte’s operating results. (Market risk exposure has been defined as the change in fair value of a derivative financial instrument assuming a hypothetical 10% adverse change in market rates.) Del Monte also has an insignificant degree of market risk exposure in regards to currency risk. Except for sales within South America by Del Monte’s subsidiaries in Columbia and Venezuela, Del Monte requires payment in United States currency. If non-United States domiciled customers’ local currency devalues significantly against the United States dollar, the customers could potentially encounter difficulty in making the United States dollar-denominated payments.
Del Monte’s ability to pay its debt service depends partly on its performance. Del Monte’s financial position could also prevent it from obtaining necessary financing at favorable rates, including at times when it must refinance maturing debt. If Del Monte cannot pay its debt service and meet its other liquidity needs from operating cash flow, it could have substantial liquidity problems. If Del Monte defaults on any of its debt, the relevant lenders could accelerate the maturity of the debt and take other actions that could adversely affect Del Monte. For example, in the event of a default under Del Monte’s Bank Financing, the lenders could foreclose on the security for the facility, which includes virtually all of the assets of Del Monte. Severe Weather Conditions and Natural Disasters Can Affect Crop Supplies and Reduce Our Operating Results |
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