NOTE 1. SIGNIFICANT ACCOUNTING POLICIES


Business and Segment Information

Del Monte Foods Company (“Del Monte”) and its wholly-owned subsidiary, Del Monte Corporation (“DMC”), (Del Monte together with DMC, “the Company”) operate in one business segment: the manufacturing and marketing of processed foods, primarily canned vegetable, fruit and tomato products. Del Monte primarily sells its products under the Del Monte brand to a variety of food retailers, supermarkets and mass merchandising stores. Del Monte holds the rights to the Del Monte brand for processed foods in the United States and in South America and to the Contadina brand world-wide.


Basis of Presentation

In the second quarter of fiscal 2000, the financial statements were reformatted to extend dollars in millions out to one decimal place. All prior periods have been conformed to the current presentation. Minor rounding differences may result in prior periods due to this change in presentation.


Principles of Consolidation

The consolidated financial statements include the accounts of Del Monte and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company accounts for its investments in joint ventures under the equity method of accounting, whereby the investment in joint venture is adjusted for the Company’s share of the profit or loss of the joint venture.


Use of Estimates

Certain amounts reported in the consolidated financial statements are based on management estimates. The ultimate resolution of these items may differ from those estimates.
Cash EquivalentsDel Monte considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.


Inventories

Inventories are stated at the lower of cost or market. The cost of substantially all inventories is determined using the LIFO method. Del Monte has established various LIFO pools that have measurement dates coinciding with the natural business cycles of Del Monte’s major inventory items. Inflation has had a minimal impact on production costs since Del Monte adopted the LIFO method as of July 1, 1991. As of June 30, 2000 and 1999, the LIFO reserve was a debit balance of $12.8 and $5.7, respectively.


Property, Plant and Equipment and Depreciation

Property, plant and equipment are stated at cost and are depreciated over their estimated useful lives, principally by the straight-line method. Maintenance and repairs are expensed as incurred. Significant expenditures that increase useful lives are capitalized. The principal estimated useful lives are: land improvements—10 to 30 years; buildings and leasehold improvements—10 to 30 years; machinery and equipment—7 to 15 years; computer software—2 to 10 years. Depreciation of plant and equipment and leasehold amortization was $34.8, $41.3 and $31.5 for the years ended June 30, 2000, 1999 and 1998.


Intangibles

Intangibles consist of goodwill, trade names and trademarks, and are carried at cost less accumulated amortization. Amortization expense is calculated on a straight-line basis over the estimated useful lives of the assets, which range from 20 to 40 years. Amortization expense was $1.8, $1.6 and $0.2 for the years ended June 30, 2000, 1999 and 1998, respectively.


Environmental Remediation

Del Monte accrues for losses associated with environmental remediation obligations when such losses are probable, and the amounts of such losses are reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.


Revenue Recognition

Revenue from sales of product, and related cost of products sold, is recognized upon shipment of product at which time title passes to the customer. Customers generally do not have the right to return product unless damaged or defective. In the year ended June 30, 2000, one customer accounted for approximately 13% of net sales.


Cost of Products Sold

Cost of products sold includes raw material, labor and overhead.


Advertising Expenses

Del Monte expenses all costs associated with advertising as incurred or when the advertising first takes place. Advertising expense was $3.6, $4.3 and $1.6 for the years ended June 30, 2000, 1999 and 1998, respectively.


Research and Development

Research and development costs are included as a component of “Selling, administrative and general expense.” Research and development costs charged to operations were $6.6, $6.2 and $5.3 for the years ended June 30, 2000, 1999 and 1998, respectively.


Interest Rate Contracts

To manage interest rate exposure, Del Monte uses interest-rate cap agreements, and has used interest-rate swap agreements. These agreements involve the payment of fixed rate amounts in exchange for the receipt of floating rate interest over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the debt. The related amount payable to or receivable from counterparties is included in other liabilities or assets.


Foreign Currency Translation

For Del Monte’s operations in countries where the functional currency is other than the U.S. dollar, revenue and expense accounts are translated at the average rates during the period, and balance sheet items are translated at year-end rates.


Fair Value of Financial Instruments

The carrying amount of certain of Del Monte’s financial instruments, including accounts receivable, accounts payable, and accrued expenses, approximates fair value due to the relatively short maturity of such instruments.

The carrying amounts of Del Monte’s borrowings under its short-term revolving credit agreement and long-term debt instruments, excluding the senior subordinated notes and the senior discount notes, approximate their fair value. At June 30, 2000, the fair value of the senior subordinated notes with a carrying amount of $65.6 was $69.5 and of the senior discount notes with a carrying value of $110.4 was $111.5, as estimated based on quoted market prices from dealers.

The fair value of the interest rate cap agreements is the estimated amount that Del Monte would receive to terminate the agreements at the reporting date, taking into account current interest rates and the current credit worthiness of the counterparties. The fair value of the interest rate cap agreements at June 30, 2000 was insignificant.


Impairment of Long-Lived Assets

SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” requires that Del Monte review assets held and used, including intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an evaluation of recoverability is required, the estimated undiscounted future cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down is required. The statement also requires that all long-lived assets, for which management has committed to a plan to dispose, be reported at the lower of carrying amount or fair value.


Stock Option Plan

Del Monte accounts for its stock-based employee compensation for stock options using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, as allowed under SFAS No. 123. Accordingly, compensation cost is measured as the excess, if any, of the fair value of Del Monte’s stock at the date of the grant over the price the employee must pay to acquire the stock.


Net Income per Common Share

Net income per common share is computed by dividing net income attributable to common shares by the weighted average number of common shares outstanding during the period (Note 6). Net income attributable to common shares is computed as net income reduced by the cash and in-kind dividends for the period in which redeemable preferred stock was outstanding.


Comprehensive Income

Del Monte has no significant items of other comprehensive income in any period presented. Therefore, net income as presented in the Consolidated Statements of Income equals comprehensive income


Reclassifications

Certain prior year balances have been reclassified to conform with current year presentation.