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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of Dole Food Company, Inc.:
We have audited the accompanying consolidated balance sheets of Dole Food Company, Inc. and
subsidiaries (the “Company”) as of January 3, 2009 and December 29, 2007, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for the years ended
January 3, 2009, December 29, 2007, and December 30, 2006. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of the Company at January 3, 2009 and December 29, 2007, and the results of
its operations and its cash flows for the years ended January 3, 2009, December 29, 2007, and
December 30, 2006, in conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 2 to the consolidated financial statements, the Company adopted, effective at
the beginning of its fiscal 2008 year, a new accounting standard for fair value measurements.
Additionally, the Company adopted, effective at the beginning of its fiscal 2007 year, new
accounting standards for uncertainty in income taxes and planned major maintenance activities, and
effective December 30, 2006, a new accounting standard for retirement benefits.
Deloitte & Touche LLP
Los Angeles, California March 18, 2009
At January 3, 2009, December 29, 2007 and December 30, 2006, accounts payable included
approximately $6.7 million, $17.8 million and $18 million, respectively, for capital expenditures.
Of the $17.8 million of capital expenditures included in accounts payable at December 29, 2007,
approximately $16.7 million had been paid during fiscal 2008. Of the $18 million of capital
expenditures included in accounts payable at December 30, 2006, approximately $17.4 million had
been paid during fiscal 2007.
During the year ended January 3, 2009, the Company recorded $77.8 million of tax related
adjustments that resulted from changes to unrecognized tax benefits that existed at the time of the
going-private merger transaction. This tax-related adjustment resulted in a decrease to goodwill
and a decrease to the liability for unrecognized tax benefits. Refer to Note 7 — Income Taxes for
additional information.
Dole Food Company, Inc. was incorporated under the laws of Hawaii in 1894 and was
reincorporated under the laws of Delaware in July 2001.
Dole Food Company, Inc. and its consolidated subsidiaries (the “Company”) are engaged in the
worldwide sourcing, processing, distributing and marketing of high quality, branded food products,
including fresh fruit and vegetables, as well as packaged foods.
Operations are conducted throughout North America, Latin America, Europe (including eastern
European countries), Asia (primarily in Japan, Korea, the Philippines and Thailand), the Middle
East and Africa (primarily in South Africa). As a result of its global operating and financing
activities, the Company is exposed to certain risks including changes in commodity pricing,
fluctuations in interest rates, fluctuations in foreign currency exchange rates, as well as other
environmental and business risks in both sourcing and selling locations.
The Company’s principal products are produced on both Company-owned and leased land and are
also acquired through associated producer and independent grower arrangements. The Company’s
products are primarily packed and processed by the Company and sold to wholesale, retail and
institutional customers and other food product companies.
In March 2003, the Company completed a going-private merger transaction (“going-private merger
transaction”). The privatization resulted from the acquisition by David H. Murdock, the Company’s
Chairman, of the approximately 76% of the Company that he and his affiliates did not already own.
As a result of the transaction, the Company became wholly-owned by Mr. Murdock through David H.
Murdock (“DHM”) Holding Company, Inc.
NOTE 2 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation: The Company’s consolidated financial statements include the accounts
of Dole Food Company, Inc. and its controlled subsidiaries. Intercompany accounts and transactions
have been eliminated in consolidation.
Annual Closing Date: The Company’s fiscal year ends on the Saturday closest to December 31.
The fiscal years 2008, 2007 and 2006 ended on January 3, 2009, December 29, 2007 and December 30,2006, respectively. The Company operates under a 52/53 week year. Fiscal 2008 was a 53-week year.
Fiscal 2007 and 2006 were both 52-week years. The impact of the additional week in fiscal 2008
was not material to the Company’s consolidated statement of operations or consolidated statement of
cash flows.
Revenue Recognition: Revenue is recognized at the point title and risk of loss is transferred
to the customer, collection is reasonably assured, persuasive evidence of an arrangement exists and
the price is fixed or determinable.
Sales Incentives: The Company offers sales incentives and promotions to its customers
(resellers) and to its consumers. These incentives include consumer coupons and promotional
discounts, volume rebates and product placement fees. The Company follows the requirements of
Emerging Issues Task Force No. 01-09, Accounting for Consideration Given by a Vendor to a Customer
(including a Reseller of the Vendor’s Products). Consideration given to customers and consumers
related to sales incentives is recorded as a reduction of revenues. Estimated sales discounts are
recorded in the period in which the related sale is recognized. Volume rebates are recognized as
earned by the customer, based upon the contractual terms of the arrangement with the customer and,
where applicable, the Company’s estimate of sales volume over the term of the arrangement.
Adjustments to estimates are made periodically as new information becomes available and actual
sales volumes become known. Adjustments to these estimates have historically not been significant
to the Company.
Agricultural Costs: Recurring agricultural costs include costs relating to irrigation,
fertilizing, disease and insect control and other ongoing crop and land maintenance activities.
Recurring agricultural costs are charged to
operations as incurred or are recognized when the crops are harvested and sold, depending on the
product. Non-
8
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
recurring agricultural costs, primarily comprising of soil and farm improvements and other
long-term crop growing costs that benefit multiple harvests, are deferred and amortized over the
estimated production period, currently from two to seven years.
Shipping and Handling Costs: Amounts billed to third-party customers for shipping and
handling are included as a component of revenues. Shipping and handling costs incurred are included
as a component of cost of products sold and represent costs incurred by the Company to ship product
from the sourcing locations to the end consumer markets.
Marketing and Advertising Costs: Marketing and advertising costs, which include media,
production and other promotional costs, are generally expensed in the period in which the marketing
or advertising first takes place. In limited circumstances, the Company capitalizes payments
related to the right to stock products in customer outlets or to provide funding for various
merchandising programs over a specified contractual period. In such cases, the Company amortizes
the costs over the life of the underlying contract. The amortization of these costs, as well as the
cost of certain other marketing and advertising arrangements with customers, are classified as a
reduction in revenues. Advertising and marketing costs, included in selling, marketing and general
and administrative expenses, amounted to $72.9 million, $77.1 million and $70.6 million during the
years ended January 3, 2009, December 29, 2007 and December 30, 2006.
Research and Development Costs: Research and development costs are expensed as incurred.
Research and development costs were not material for the years ended January 3, 2009, December 29,2007 and December 30, 2006.
Income Taxes: The Company accounts for income taxes under the asset and liability method,
which requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements. Under this method,
deferred tax assets and liabilities are determined based on the differences between the financial
statements and tax basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. The effect of a change in tax rates on deferred
tax assets and liabilities is recognized in income in the period that includes the enactment date.
Income taxes, which would be due upon the repatriation of foreign subsidiary earnings, have not
been provided where the undistributed earnings are considered indefinitely invested. A valuation
allowance is provided for deferred income tax assets for which it is deemed more likely than not
that future taxable income will not be sufficient to realize the related income tax benefits from
these assets. The Company establishes additional provisions for income taxes when, despite the
belief that tax positions are fully supportable, there remain certain positions that do not meet
the minimum probability threshold, as defined by Financial Accounting Standards Boards (“FASB”)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB
Statement No. 109 (“FIN 48”), which is a tax position that is more likely than not to be sustained
upon examination by the applicable taxing authority. The impact of provisions for uncertain tax
positions, as well as the related net interest and penalties, are included in “Income taxes” in the
consolidated statements of operations.
Dole Food Company, Inc. and subsidiaries file its U.S. federal income tax return and various
state income tax returns as part of the DHM Holding Company, Inc. consolidated tax group. Dole Food
Company, Inc. and subsidiaries calculate current and deferred tax provisions on a stand-alone
basis.
Cash and Cash Equivalents: Cash and cash equivalents consist of cash on hand and highly
liquid investments, primarily money market funds and time deposits, with original maturities of
three months or less.
Grower Advances: The Company makes advances to third-party growers primarily in Latin America and
Asia for various farming needs. Some of these advances are secured with property or other
collateral owned by the growers. The Company monitors these receivables on a regular basis and
records an allowance for these grower
receivables based on estimates of the growers’ ability to repay advances and the fair value of
the collateral. Grower advances are stated at the gross advance amount less allowances for
potentially uncollectible balances.
Inventories: Inventories are valued at the lower of cost or market. Costs related to certain
packaged foods products are determined using the average cost basis. Costs related to other
inventory categories, including fresh
9
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
fruit and vegetables are determined on the first-in,
first-out basis. Specific identification and average cost methods are also used primarily for
certain packing materials and operating supplies. Crop growing costs primarily represent the costs
associated with growing bananas on company-owned farms or growing vegetables on third-party farms
where the Company bears substantially all of the growing risk.
Investments: Investments in affiliates and joint ventures with ownership of 20% to 50% are
recorded on the equity method, provided the Company has the ability to exercise significant
influence. All other non-consolidated investments are accounted for using the cost method. At
January 3, 2009 and December 29, 2007, substantially all of the Company’s investments have been
accounted for under the equity method.
Property, Plant and Equipment: Property, plant and equipment is stated at cost plus the fair
value of asset retirement obligations, if any, less accumulated depreciation. Depreciation is
computed by the straight-line method over the estimated useful lives of these assets. The Company
reviews long-lived assets to be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If an evaluation of
recoverability is required, the estimated undiscounted future cash flows directly associated with
the asset are compared to the asset’s carrying amount. If this comparison indicates that there is
an impairment, the amount of the impairment is calculated by comparing the carrying value to
discounted expected future cash flows or comparable market values, depending on the nature of the
asset. All long-lived assets, for which management has committed itself to a plan of disposal by
sale, are reported at the lower of carrying amount or fair value less cost to sell. Long-lived
assets to be disposed of other than by sale are classified as held and used until the date of
disposal. Routine maintenance and repairs are charged to expense as incurred.
Goodwill and Intangibles: Goodwill represents the excess cost of a business acquisition over
the fair value of the net identifiable assets acquired. Goodwill and indefinite-lived intangible
assets are reviewed for impairment annually, or more frequently if certain impairment indicators
arise. Goodwill is allocated to various reporting units, which are either the operating segment or
one reporting level below the operating segment. Fair values for goodwill and indefinite-lived
intangible assets are determined based on discounted cash flows, market multiples or appraised
values, as appropriate.
The Company’s indefinite-lived intangible asset, consisting of the DOLE brand, is considered
to have an indefinite life because it is expected to generate cash flows indefinitely and as such
is not amortized. The Company’s intangible assets with a definite life consist primarily of
customer relationships. Amortizable intangible assets are amortized on a straight-line basis over
their estimated useful life. The weighted average useful life of the Company’s customer
relationships is 11 years.
Concentration of Credit Risk: Financial instruments that potentially subject the Company to a
concentration of credit risk principally consist of cash equivalents, derivative contracts, grower
advances and trade receivables. The Company maintains its temporary cash investments with high
quality financial institutions, which are invested primarily in short-term U.S. government
instruments and certificates of deposit. The counterparties to the Company’s derivative contracts
are major financial institutions. Grower advances are principally with farming enterprises located
throughout Latin America and Asia and are secured by the underlying crop harvests. Credit risk
related to trade receivables is mitigated due to the large number of customers dispersed worldwide.
To reduce credit risk, the Company performs periodic credit evaluations of its customers but does
not generally require advance payments or collateral. Additionally, the Company maintains
allowances for credit losses. No individual customer accounted for greater than 10% of the
Company’s revenues during the years ended January 3, 2009, December 29,2007 and December 30, 2006. No individual customer accounted for greater than 10% of accounts
receivable as of January 3, 2009 or December 29, 2007.
Fair Value of Financial Instruments: The Company’s financial instruments are primarily
composed of short-term trade and grower receivables, trade payables, notes receivable and notes
payable, as well as long-term grower receivables, capital lease obligations, term loans, revolving
credit facility, notes and debentures. For short-term instruments, the carrying amount approximates
fair value because of the short maturity of these instruments. For the other long-term financial
instruments, excluding the Company’s unsecured notes and debentures, and term loans, the carrying
amount approximates the fair value since they bear interest at variable rates or fixed rates which
approximate market.
10
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The Company also holds derivative instruments to hedge against foreign currency exchange, fuel
pricing and interest rate movements. The Company’s derivative financial instruments are recorded at
fair value (Refer to Note 17 for additional information). The Company estimates the fair values of
its derivatives based on quoted market prices or pricing models using current market rates less any
credit valuation adjustments.
Foreign Currency Exchange: For subsidiaries with transactions that are denominated in a
currency other than the functional currency, the net foreign currency exchange transaction gains or
losses resulting from the translation of monetary assets and liabilities to the functional currency
are included in determining net income. Net foreign currency exchange gains or losses resulting
from the translation of assets and liabilities of foreign subsidiaries whose functional currency is
not the U.S. dollar are recorded as a part of cumulative translation adjustment in shareholders’
equity. Unrealized foreign currency exchange gains and losses on certain intercompany transactions
that are of a long-term-investment nature (i.e. settlement is not planned or anticipated in the
foreseeable future) are also recorded in cumulative translation adjustment in shareholders’ equity.
Leases: The Company leases fixed assets for use in operations where leasing offers advantages
of operating flexibility and is less expensive than alternative types of funding. The Company also
leases land in countries where land ownership by foreign entities is restricted. The Company’s
leases are evaluated at inception or at any subsequent modification and, depending on the lease
terms, are classified as either capital leases or operating leases, as appropriate under Statement
of Financial Accounting Standards No. 13, Accounting for Leases. For operating leases that contain
rent escalations, rent holidays or rent concessions, rent expense is recognized on a straight-line
basis over the life of the lease. The majority of the Company’s leases are classified as operating
leases. The Company’s principal operating leases are for land and machinery and equipment. The
Company’s capitalized leases primarily consist of two vessel leases. The Company’s decision to
exercise renewal options is primarily dependent on the level of business conducted at the location
and the profitability thereof. The Company’s leasehold improvements were not significant at January3, 2009 or December 29, 2007.
Guarantees: The Company makes guarantees as part of its normal business activities. These
guarantees include guarantees of the indebtedness of some of its key fruit suppliers and other
entities integral to the Company’s operations. The Company also issues bank guarantees as required
by certain regulatory authorities, suppliers and other operating agreements as well as to support
the borrowings, leases and other obligations of its subsidiaries. The majority of the Company’s
guarantees relate to guarantees of subsidiary obligations and are scoped out of the initial
measurement and recognition provisions of FASB Interpretation No. 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
Use of Estimates: The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the amounts and disclosures reported in the financial statements and
accompanying notes. Estimates and assumptions include, but are not limited to, the areas of
customer and grower receivables, inventories, impairment of assets, useful lives of property, plant
and equipment, intangible assets, marketing programs, income taxes, self-insurance
reserves, retirement benefits, financial instruments and commitments and contingencies. Actual
results could differ from these estimates.
Reclassifications: Certain prior year amounts have been reclassified to conform with the 2008
presentation.
Recently Adopted Accounting Pronouncements
During September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (“FAS 157”). FAS 157 defines fair value, establishes a framework for
measuring fair value and requires enhanced disclosures about fair value measurements. FAS 157
requires companies to disclose the fair value of financial instruments according to a fair value
hierarchy as defined in the standard. In February 2008, the FASB issued FASB Staff Position 157-1,
Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13 (“FSP 157-1”) and FSP 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”).
FSP 157-1 amends FAS 157 to remove certain leasing transactions from its scope. FSP 157-2 delays
11
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
the effective date of FAS 157 for all non-financial assets and non-financial liabilities, except
for items that are recognized or disclosed at fair value in the financial statements on a recurring
basis, until fiscal years beginning after November 15, 2008. These nonfinancial items include
assets and liabilities such as reporting units measured at fair value in a goodwill impairment test
and nonfinancial assets acquired and liabilities assumed in a business combination. FAS 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007 and
was adopted by the Company, as it applies to its financial instruments, effective December 30,2007. Refer to Note 17 — Derivative Financial Instruments.
Recently Issued Accounting Pronouncements
During May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The
Hierarchy of Generally Accepted Accounting Principles (“FAS 162”). FAS 162 identifies the sources
of accounting principles and the framework for selecting principles to be used in the preparation
and presentation of financial statements in accordance with generally accepted accounting
principles. This statement will be effective 60 days after the Securities and Exchange Commission
approves the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning
of ‘Present Fairly in Conformity With Generally Accepted Accounting Principles’. The Company does
not anticipate that the adoption of FAS 162 will have an effect on its consolidated financial
statements.
During March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement
No. 133 (“FAS 161”). This new standard requires enhanced disclosures for derivative instruments,
including those used in hedging activities. It is effective for fiscal years and interim periods
beginning after November 15, 2008, and will be applicable to the Company in the first quarter of
fiscal 2009. The Company is currently evaluating the impact, if any, the adoption of FAS 161 will
have on its consolidated financial statements.
During December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements (“FAS 160”). FAS 160 requires all
entities to report noncontrolling (minority) interests in entities in the same way as equity in the
consolidated financial statements. The Company is required to adopt FAS 160 for the first fiscal
year beginning after December 15, 2008. The Company is currently evaluating the impact, if any, the
adoption of FAS 160 will have on its consolidated financial statements.
During December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007), Business Combinations (“FAS 141R”). FAS 141R provides revised guidance for recognizing and
measuring assets acquired and liabilities assumed in a business combination. It establishes the
acquisition-date fair value as the measurement objective for all assets acquired and liabilities
assumed and also requires the acquirer to disclose to
investors and other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. Changes in acquired tax contingencies,
including those existing at the date of
adoption, will be recognized in earnings if outside the maximum measurement period (generally
one year). FAS 141R will be applied prospectively to business combinations with acquisition dates
on or after January 1, 2009. Following the date of adoption of FAS 141R, the resolution of such
items at values that differ from recorded amounts will be adjusted through earnings, rather than
goodwill.
NOTE 3 — 2009 DEBT MATURITY AND DEBT ISSUANCE
During the second quarter of 2008, the Company reclassified to current liabilities its $350
million 8.625% notes due May 2009 (“2009 Notes”). The Company also completed the early redemption
of $5 million of the 2009 Notes during the third quarter of 2008.
On February 13, 2009, the Company commenced a tender offer to purchase for cash any and all of
the outstanding 2009 Notes for a purchase price equal to $980 per $1,000 of 2009 Notes validly
tendered, with an additional payment of $20 per $1,000 of 2009 Notes tendered early in the process.
In connection with the tender offer, the Company sought consents to certain amendments to the
indenture governing the 2009 Notes to eliminate substantially all of the restrictive covenants and
certain events of default contained therein. On March 4, 2009, the Company announced that it had
received the required consents necessary to amend the indenture with respect to the 2009 Notes and,
accordingly, executed the supplemental indenture effecting such amendments, which became operative
on March 18, 2009, when the Company accepted and paid for the tendered 2009 Notes. The tender offer
expired on March 17, 2009.
On March 18, 2009, the Company completed the sale and issuance of $350 million aggregate
principal amount of 13.875% Senior Secured Notes due March 2014 (“2014 Notes”) at a discount of $25
million. The 2014 Notes were sold to qualified institutional investors pursuant to Rule 144A under
the Securities Act of 1933 (“Securities Act”) and to persons outside the United States in
compliance with Regulation S under the Securities Act. The sale was exempt from the registration
requirements of the Securities Act. Interest on the 2014 Notes will be paid semiannually in
arrears on March 15 and September 15 of each year, beginning on September 15, 2009. The 2014 Notes
have the benefit of a lien on certain U.S. assets of the Company that is junior to the liens of the
Company’s senior secured credit facilities, and are senior obligations of the Company ranking
equally with the Company’s existing senior debt. The Company used the net proceeds from this
offering, together with cash on hand and/or borrowings under the revolving credit facility, to
purchase all of the tendered 2009 Notes and to irrevocably deposit with the trustee of the 2009
Notes funds that will be sufficient to repay the remaining outstanding 2009 Notes at maturity on
May 1, 2009.
In connection with these refinancing transactions, the Company received approval from its
lenders to amend its senior secured credit facilities. Such amendments, among things, (i) permit
debt securities secured by a junior lien to be issued to refinance its senior notes due in 2009 and
2010 in an amount up to the greater of (x) $500 million and (y) the amount of debt that would not
cause the senior secured leverage ratio to exceed 3.75 to 1.00; (ii) add a new restricted payments
basket of up to $50 million to be used to prepay its senior notes due in 2009 and 2010 subject to
pro forma compliance with the senior secured credit facilities and $70 million of unused
availability under the revolving credit facility; (iii) increase the applicable margin for (x) the
term loan facilities to LIBOR plus 5.00% or the base rate plus 4.00% subject to a 50 basis point
step down when the priority senior secured leverage ratio is less than or equal to 1.75 to 1.00 and
(y) for the revolving credit facility, to a range of LIBOR plus 3.00% to 3.50% or the base rate
plus 2.00% to 2.50%; (iv) provide for a LIBOR floor of 3.00% per annum for the term loan
facilities; (v) add a first priority secured leverage maintenance covenant to the term loan
facilities; and (vi) provide for other technical and clarifying changes. These amendments became
effective concurrently with the closing of the 2014 Notes offering.
12
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
NOTE 4 — OTHER INCOME (EXPENSE), NET
Included in other income (expense), net in the Company’s consolidated statements of operations
for fiscal 2008, 2007 and 2006 are the following items:
2008
2007
2006
(In thousands)
Unrealized gain (loss) on the cross currency swap
$
(50,411
)
$
(10,741
)
$
20,664
Realized gain on the cross currency swap
11,209
12,780
4,102
Gains (losses) on foreign denominated borrowings
24,889
(1,414
)
(9,270
)
Other
247
1,223
(320
)
Other income (expense), net
$
(14,066
)
$
1,848
$
15,176
Refer to Note 17 — Derivative Financial Instruments for further discussion regarding the
Company’s cross currency swap.
NOTE 5 — DISCONTINUED OPERATIONS
During the second quarter of 2008, the Company approved and committed to a formal plan to divest
its fresh-cut flowers operations (“Flowers transaction”). The first phase of the Flowers transaction was completed
during the first quarter of 2009. In addition, during the fourth quarter of 2007, the Company
approved and committed to a formal plan to divest its citrus and pistachio operations (“Citrus”)
located in central California. The operating results of Citrus were included in the fresh fruit
operating segment. The sale of Citrus was completed during the third quarter of 2008 and the sale
of the fresh-cut flowers operations was completed during the first quarter of 2009. Refer to
Note 9 — Assets Held-For-Sale. In evaluating the two businesses, the Company concluded that
they each met the definition of a discontinued operation as defined in Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS
144”). Accordingly, the results of operations of these businesses have been reclassified for all
periods presented.
During the fourth quarter of 2006, the Company completed the sale of its Pacific Coast Truck
Center (“Pac Truck”) business for $20.7 million. The Pac Truck business consisted of a full service
truck dealership that provided medium and heavy-duty trucks to customers in the Pacific Northwest
region. The Company received $15.3 million of net proceeds from the sale after the assumption of
$5.4 million of debt and realized a gain of approximately $2.8 million on the sale, net of income
taxes of $2 million. The sale of Pac Truck qualified for discontinued operations treatment under
FAS 144. Accordingly, the historical results of operations of this business have been reclassified
for all periods presented. The operating results of Pac Truck were included in the other operating
segment:
13
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The operating results of fresh-cut flowers, Citrus and Pac Truck for fiscal 2008, 2007 and
2006 are reported in the following table:
Fresh-Cut Flowers
Citrus
Pac Truck
Total
(In thousands)
2008
Revenues
$
106,919
$
5,567
$
—
$
112,486
Loss before income taxes
$
(43,235
)
$
(1,408
)
$
—
$
(44,643
)
Income taxes
16,936
316
—
17,252
Loss from discontinued
operations, net of income taxes
$
(26,299
)
$
(1,092
)
$
—
$
(27,391
)
Gain on disposal of discontinued
operations, net of income taxes
of $4.3 million
$
—
$
3,315
$
—
$
3,315
2007
Revenues
$
110,153
$
13,586
$
—
$
123,739
Income (loss) before income taxes
$
(19,146
)
$
733
$
—
$
(18,413
)
Income taxes
2,994
(300
)
—
2,694
Income (loss) from discontinued
operations, net of income taxes
$
(16,152
)
$
433
$
—
$
(15,719
)
2006
Revenues
$
160,074
$
20,527
$
47,851
$
228,452
Income (loss) before income taxes
$
(57,001
)
$
3,767
$
397
$
(52,837
)
Income taxes
4,379
(1,765
)
(163
)
2,451
Income (loss) from discontinued
operations, net of income taxes
$
(52,622
)
$
2,002
$
234
$
(50,386
)
Gain on disposal of discontinued
operations, net of income taxes
of $2 million
$
—
$
—
$
2,814
$
2,814
Included in the fresh-cut flowers loss before income taxes for fiscal 2008 is a $17 million
impairment charge. Refer to Note 9 — Assets Held-For-Sale for further information.
Included in the fresh-cut flowers loss before income taxes for fiscal 2007 and 2006 are $1.1
million and $29 million, respectively, of charges related to restructuring costs and impairment
charges associated with the write-off of certain long-lived assets, intangible assets and
inventory. During the third quarter of 2006, the Company restructured its fresh-cut flowers
division to better focus on high-value products and flower varieties, and position the business
unit for future growth. In connection with the restructuring, fresh-cut flowers ceased its farming
operations in Ecuador, closed two farms in Colombia and downsized other Colombian farms.
Minority interest expense included in Citrus income (loss) from discontinued operations was
$0.5 million, $0.4 million and $2.3 million for fiscal years 2008, 2007 and 2006, respectively.
Gain on disposal of discontinued operations, net of income taxes, for Citrus for fiscal 2008
included minority interest expense of $12.3 million.
NOTE 6 — RESTRUCTURINGS AND RELATED ASSET IMPAIRMENTS
During the first quarter of 2006, the commercial relationship substantially ended between the
Company’s wholly-owned subsidiary, Saba, and Saba’s largest customer. Saba is a leading importer
and distributor of fruit, vegetables and flowers in Scandinavia. Saba’s financial results are
included in the fresh fruit reporting segment. The Company restructured certain lines of Saba’s
business and as a result, incurred $12.8 million of total related costs. Of the $12.8 million
incurred during the year ended December 30, 2006, $9 million is included in cost of products sold
and $3.8 million in selling, marketing, and general and administrative expenses in the consolidated
statement of operations. Total restructuring costs include $9.9 million of employee severance costs
which impacted
14
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
275 employees, $2.4 million of contractual lease obligations as well as $0.5 million
of fixed asset write-offs. At December 29, 2007 all of the restructuring costs had been paid.
In connection with the Company’s ongoing farm optimization programs in Asia, $2.8 million and
$6.7 million of crop-related costs were written-off during 2007 and 2006, respectively. These
non-cash charges have been recorded in cost of products sold in the consolidated statements of
operations.
NOTE 7 — INCOME TAXES
Income tax expense (benefit) was as follows:
2008
2007
2006
(In thousands)
Current
Federal, state and local
$
835
$
735
$
406
Foreign
22,753
15,399
18,644
23,588
16,134
19,050
Deferred
Federal, state and local
(16,218
)
(29,122
)
(15,690
)
Foreign
(3,723
)
(3,573
)
(5,581
)
(19,941
)
(32,695
)
(21,271
)
Non-current tax expense
(51,662
)
20,615
24,830
$
(48,015
)
$
4,054
$
22,609
Pretax earnings attributable to foreign operations including earnings from discontinued
operations, equity method investments and minority interests were $185.5 million, $53.9 million and
$30.7 million for the years ended January 3, 2009, December 29, 2007 and December 30, 2006,
respectively. The Company has not provided for U.S. federal income and foreign withholding taxes
on approximately $2.3 billion of the excess of the amount for financial reporting over the tax
basis of investments that are essentially permanent in duration. Generally, such amounts
become subject to U.S. taxation upon the remittance of dividends and under certain other
circumstances. It is currently not practicable to estimate the amount of deferred tax liability
related to investments in these foreign subsidiaries.
The Company’s reported income tax expense (benefit) on continuing operations differed from the
expense calculated using the U.S. federal statutory tax rate for the following reasons:
2008
2007
2006
(In thousands)
Expense (benefit) computed at U.S. federal statutory
income tax rate of 35%
$
32,383
$
(12,668
)
$
(5,748
)
Foreign income taxed at different rates
(40,236
)
8,963
27,440
State and local income tax, net of federal income taxes
(8,467
)
(3,948
)
(1,854
)
Valuation allowances
9,787
11,071
6,842
U.S. Appeals Settlement and Other FIN 48 Related
(36,993
)
—
—
Permanent items and other
(4,489
)
636
(4,071
)
Income tax expense (benefit)
$
(48,015
)
$
4,054
$
22,609
15
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Deferred tax assets (liabilities) comprised the following:
The Company has gross federal, state and foreign net operating loss carryforwards of $82.4
million, $1 billion and $119.9 million, respectively, at January 3, 2009. The Company has recorded
deferred tax assets of $29.8 million for federal net operating loss and other carryforwards, which,
if unused, will expire between 2023 and 2028. The Company has recorded deferred tax assets of $45.8
million for state operating loss carryforwards, which, if unused, will start to expire in 2009. The
Company has recorded deferred tax assets of $30.8 million for foreign net operating loss
carryforwards which are subject to varying expiration rules. Tax credit carryforwards of $21.8
million include foreign tax credit carryforwards of $18.4 million which will expire in 2011, U.S.
general business credit carryforwards of $0.3 million which expire between 2023 and 2027, and state
tax credit carryforwards of $3.1 million with varying expiration dates. The Company has recorded a
U.S. deferred tax asset of $35.8 million for disallowed interest expense which, although subject to
certain limitations, can be carried forward indefinitely.
A valuation allowance has been established to offset foreign tax credit carryforwards, state
net operating loss carryforwards, certain foreign net operating loss carryforwards and certain
other deferred tax assets in foreign jurisdictions. The Company has deemed it more likely than not
that future taxable income in the relevant taxing jurisdictions will
be insufficient to realize all of the
related income tax benefits for these assets.
Total deferred tax assets and deferred tax liabilities were as follows:
2008 activity includes $110 million reduction in gross unrecognized tax benefits due to the
settlement of the federal income tax audit for the years 1995 to 2001 less a cash refund received
of $6 million on this settlement plus various state and foreign audit settlements totaling
approximately $1million.
The total for unrecognized tax benefits, including interest, was $143 million and $269 million
at January 3, 2009 and December 29, 2007, respectively. The change is primarily due to the
settlement of the federal income tax audit for the years 1995 to 2001. If recognized,
approximately $131.5 million, net of federal and state tax benefits, would be recorded as a
component of income tax expense and accordingly impact the effective tax rate.
The Company recognizes accrued interest and penalties related to its unrecognized tax benefits
as a component of income taxes in the consolidated statements of operations. Accrued interest and
penalties before tax benefits were $26.9 million and $64.6 million at January 3, 2009 and December29, 2007, respectively, and are included as a component of other long-term liabilities in the
consolidated balance sheet. The decrease is primarily attributable to the reduction in liabilities
for unrecognized tax benefits associated with the settlement of the federal income tax audit for
the years 1995-2001. Interest and penalties recorded in the Company’s consolidated statements of
operations for 2008, 2007 and 2006 were ($32.2) million, including the impact of the settlement,
$17.2 million and $6.9 million, respectively.
Dole Food Company or one or more of its subsidiaries file income tax returns in the U.S.
federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the
Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations
by tax authorities for years prior to 2001.
Income Tax Audits: The Company believes its tax positions comply with the applicable tax laws
and that it is adequately provided for all tax related matters. Matters raised upon audit may
involve substantial amounts and could result in material cash payments if resolved unfavorably;
however, management does not believe that any material payments will be made related to these
matters within the next year. Management considers it unlikely that the resolution of these matters
will have a material adverse effect on the Company’s results of operations.
1995 — 2001 Federal Income Tax Audit: In June 2006, the IRS completed an examination of the
Company’s federal income tax returns for the years 1995 to 2001 and issued a Revenue Agent’s Report
(“RAR”) that included various proposed adjustments. The net tax deficiency associated with the RAR
was $175 million for which the Company provided $110 million of gross unrecognized tax benefits,
plus penalties and interest. The Company filed a protest letter contesting the proposed
adjustments contained in the RAR. During January 2008, the Company was
notified that the Appeals Branch of the IRS had finalized its review of the Company’s protest
and that the Appeals Branch’s review supported the Company’s position in all material respects. On
June 13, 2008, the Appeals review was approved by the Joint Committee on Taxation. The impact of
the settlement on the Company’s year ended January 3, 2009 consolidated financial statements is
$136 million, which includes a $110 million reduction in gross unrecognized tax benefits recorded
in other long-term liabilities plus a reduction of $26 million for interest and penalties, net of
federal and state tax benefits. Of this amount, $61 million reduced the Company’s income tax
provision and effective tax rate for the year ended January 3, 2009 and the remaining $75 million
reduced goodwill.
17
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
2002 — 2005 Federal Income Tax Audit: The Company is currently under examination by the
Internal Revenue Service for the tax years 2002-2005 and it is anticipated that the examination
will be completed by the end of 2009.
At this time, the Company does not anticipate that total unrecognized tax benefits will
significantly change due to the settlement of audits and the expiration of statutes of limitations
within the next twelve months.
NOTE 8 — DETAILS OF CERTAIN ASSETS AND LIABILITIES
Details of receivables and inventories were as follows:
Accrued postretirement and other employee benefits
$
245,357
$
249,230
Liability for unrecognized tax benefits
90,767
217,570
Other
85,655
74,434
$
421,779
$
541,234
18
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
NOTE 9 — ASSETS HELD-FOR-SALE
The Company continuously reviews its assets in order to identify those assets that do not meet
the Company’s future strategic direction or internal economic return criteria. As a result of this
review, the Company has identified and is in the process of selling certain businesses and
long-lived assets. In accordance with FAS 144, the Company has reclassified these assets as
held-for-sale.
Total assets held-for-sale by segment were are follows:
The major classes of assets and liabilities held-for-sale included in the Company’s
consolidated balance sheet at January 3, 2009 were as follows:
Fresh-Cut
Flowers —
Fresh
Packaged
Discontinued
Fresh Fruit
Vegetables
Foods
Operation
Total
(In thousands)
Assets held-for-sale:
Receivables
$
3,314
$
—
$
—
$
14,000
$
17,314
Inventories
6,301
—
—
2,883
9,184
Property, plant and equipment, net of
accumulated depreciation
85,629
38,600
4,182
30,069
158,480
Other assets, net
2,861
—
—
15,037
17,898
Total assets held-for-sale
$
98,105
$
38,600
$
4,182
$
61,989
$
202,876
Liabilities held-for-sale:
Accounts payable and accrued liabilities
$
5,037
$
—
$
—
$
18,028
$
23,065
Long-term debt
—
—
—
25,857
25,857
Deferred income tax and other liabilities
210
—
—
1,333
1,543
Total liabilities held-for-sale
$
5,247
$
—
$
—
$
45,218
$
50,465
19
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The Company received cash proceeds of $226.5 million on assets sold during the year ended
January 3, 2009, including $214 million on assets which had been reclassified as held-for-sale.
The total realized gain recorded on assets classified as held-for-sale, excluding the 2008
amortization of the deferred gain on the ship discussed below, was $18 million for the year ended
January 3, 2009. The Company also realized gains on assets not classified as held-for-sale,
totaling $9 million for fiscal 2008. Total realized gains on asset sales of $27 million are shown
as a separate component of operating income in the consolidated statement of operations for 2008.
The net book value associated with these sales from continuing operations was approximately $103
million.
Fresh Fruit
During the year ended January 3, 2009, the Company added $252.6 million to the assets
held-for-sale balance in the fresh fruit reporting segment. These assets primarily consist of a
packing and cooling facility and wood box plant located in Chile and approximately 11,000 acres of
Hawaiian land.
During the fourth quarter of 2008, the Company entered into a binding letter of intent to sell
certain portions of its Latin American banana operations. The related assets and liabilities from
these operations were reclassified to held-for-sale during the fourth quarter of 2008. The sale
closed during the first quarter of 2009.
During the third quarter ended October 4, 2008, the Company entered into a definitive purchase
and sale agreement to sell its JP Fresh subsidiary in the United Kingdom and its Dole France
subsidiary which were in the European ripening and distribution business to Compagnie Fruitière
Paris. Compagnie Fruitière Paris is a subsidiary of Compagnie Financière de Participations, a
company in which Dole holds a non-controlling 40% ownership interest. The sale closed during the
fourth quarter of 2008.
2008 Sales and First Quarter 2009 Sales
The Company sold the following assets during the year ended January 3, 2009, which had been
classified as held-for-sale: approximately 2,200 acres of land parcels in Hawaii, additional
agricultural acreage in California, two Chilean farms, property located in Turkey and a breakbulk
refrigerated ship. In addition, the Company sold its
JP Fresh and Dole France subsidiaries. The amount of cash collected on these sales totaled
approximately $133.6 million. The total sales proceeds of $133.6 million includes $12.7 million for
the sale of the ship. The Company also entered into a lease agreement for the same ship and
recognized a deferred gain of $11.9 million on the sale. The deferred gain is amortized over the 3
year lease term.
During the fourth quarter of 2007, the Company reclassified approximately 4,400 acres of land
and other related assets of its citrus and pistachio operations located in central California as
assets held-for-sale. These assets were
held by non-wholly owned subsidiaries of the Company. In March 2008, the Company entered into
an agreement to sell these assets. The sale was completed during the third quarter of 2008 and the
subsidiaries received net proceeds of $44 million. The Company’s share of these net proceeds was $28.1
million. The Company recorded a gain of $3.3 million, net of income taxes, which was recorded as
gain on disposal of discontinued operations, net of income taxes, for the year ended January 3,2009.
During January 2009, the Company completed the sale of certain portions of its Latin American
banana operations. Net sales proceeds from the sale totaled approximately $27.3 million. Of this
amount, $15.8 million was collected in cash and the remaining $11.5 million was recorded as a
receivable, to be collected over the next twelve months.
Fresh Vegetables
During the fourth quarter of 2008, the Company reclassified approximately 1,100 acres of
vegetable property located in California as assets held-for-sale and signed a definitive purchase
and sale agreement to sell this property. The sale is expected to
close towards the end of the first
quarter of 2009.
20
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Packaged Foods
During the second quarter of 2008, the Company reclassified approximately 600 acres of peach
orchards located in California as assets held-for-sale. During the fourth quarter of 2008, the
Company sold 40 acres for approximately $0.7 million.
Fresh-Cut Flowers— Discontinued Operation
During the second quarter of 2008, the Company approved and committed to a formal plan to
divest its fresh-cut flowers operating segment. Accordingly, all the assets and liabilities were
reclassified as held-for-sale.
During the third quarter of 2008, the Company signed a binding letter of intent to sell its
fresh-cut flowers division (“Flowers transaction”). The sale of the fresh-cut flowers division is
expected to take place in phases. The first phase closed during the
first quarter of 2009 as a stock-sale transaction. The
remaining assets can be purchased by the same buyer under separate option contracts that expire in
one year. The remaining phases are expected to close within the next year. If the
options on the remaining assets are exercised, the Company will receive additional sales proceeds
of approximately $26 million on assets with a net book value of $10 million.
Included
in liabilities held-for-sale of $45.2 million is
$25.9 million of long-term debt of the former flowers subsidiaries.
This debt ceased to be an obligation of the Company upon the closing of the first phase of
the Flowers transaction.
The Company recorded an impairment loss of $17 million on the assets sold in the first phase
of the Flowers transaction. The impairment charge represents the amount by which the net book value
exceeds the fair market value less cost to sell. The fair market value of the assets was determined
by the sales price agreed upon in the binding letter of intent. The impairment loss was recorded as
a component of loss from discontinued operations, net of income taxes, for the year ended January3, 2009.
2008 Sales and First Quarter 2009 Sales
The Company reclassified its fresh-cut flowers headquarters facility, located in Miami,
Florida as assets held-for-sale during the third quarter of 2007. The Company completed the sale of
this facility during the third quarter of 2008 and received net cash proceeds of $34 million. In
addition, the Company received net cash proceeds of $1.9
million on the sale of two farms. The gain realized on the sale of these assets, net of income
taxes, was approximately $3.1 million and is included as a component of loss from discontinued
operations, net of income taxes in the consolidated statement of operations for the year ended
January 3, 2009.
During January 2009, the first phase of the Flowers transaction was completed. The Company
retains only certain real estate of the former flowers divisions to be sold in the subsequent
phases of the transaction. Net sales proceeds from the sale totaled approximately $30 million. Of
this amount, $21.7 million was collected in cash and the remaining $8.3 million was recorded as a
receivable, to be collected over the next two years.
21
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
NOTE 10 — PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment were as follows:
Depreciation is computed by the straight-line method over the estimated useful lives of the
assets as follows:
Years
Land improvements
5 to 40
Buildings and leasehold improvements
2 to 50
Machinery and equipment
2 to 35
Vessels and containers
5 to 20
Vessels and equipment under capital leases
Shorter of useful life or life
of lease
Depreciation expense on property, plant and equipment for continuing operations totaled $133.4
million, $146.9 million and $139 million for the years ended January 3, 2009, December 29, 2007 and
December 30, 2006, respectively. Depreciation expense on property, plant and equipment for
discontinued operations totaled $1.1 million, $4.2 million and $5.8 million for the years ended
January 3, 2009, December 29, 2007 and December 30, 2006, respectively.
NOTE 11 — GOODWILL AND INTANGIBLE ASSETS
Goodwill has been allocated to the Company’s reporting segments as follows:
The tax-related adjustments in 2007 resulted from changes to deductible temporary differences,
operating loss or tax credit carryforwards and contingencies that existed at the time of the
going-private merger transaction. The tax-related adjustments in 2008 resulted from changes to
unrecognized tax benefits that existed at the time of the going-
22
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
private merger transaction which were due to the settlement of the federal income tax audit as
discussed in Note 7 — Income Taxes.
During the third quarter of 2008, the Company reclassified all of the assets and liabilities
of JP Fresh to assets held-for-sale. The sale of JP Fresh was completed during the fourth quarter
of 2008. Goodwill and intangible assets related to JP Fresh totaled $24 million and $7.3 million,
respectively.
Details of the Company’s intangible assets were as follows:
Amortization expense of identifiable intangibles totaled $4.3 million, $4.5 million and $4.5
million for the years ended January 3, 2009, December 29, 2007 and December 30, 2006, respectively.
Estimated remaining amortization expense associated with the Company’s identifiable intangible
assets in each of the next five fiscal years is as follows (in thousands):
Fiscal Year
Amount
2009
$
3,677
2010
$
3,677
2011
$
3,677
2012
$
3,677
2013
$
1,498
The Company performed its annual impairment review of goodwill and indefinite-lived intangible
assets pursuant to Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (“FAS 142”), during the second quarter of fiscal 2008. This review indicated no
impairment to goodwill or any of the Company’s indefinite-lived intangible assets. As market
conditions change, the Company continues to monitor and perform updates of its impairment testing
of recoverability of goodwill and long-lived assets.
23
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
NOTE 12 — NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following amounts:
Contracts and notes, at a
weighted-average interest rate of
6.1% in 2008 (8.4% in 2007)
through 2014
9,221
3,255
Capital lease obligations
60,448
85,959
Unamortized debt discount
(309
)
(610
)
Notes payable
48,789
81,018
2,204,093
2,411,397
Current maturities
(405,537
)
(95,189
)
$
1,798,556
$
2,316,208
Notes Payable
The Company borrows funds on a short-term basis to finance current operations. The terms of
these borrowings range from one month to three months. The Company’s notes payable at January 3,2009 consist primarily of foreign borrowings in Asia and Latin America.
Notes and Debentures
In April 2002, the Company completed the sale and issuance of $400 million aggregate principal
amount of Senior Notes due 2009 (the “2009 Notes”). The 2009 Notes are redeemable, at the
discretion of the Company, at par plus a make-whole amount, if any, and accrued and unpaid
interest, any time prior to maturity. The 2009 Notes were issued at 99.50% of par. In 2005 in
conjunction with an amendment and restatement of its senior secured credit agreement, the Company
repurchased $50 million of its 2009 Notes. During September 2008, the Company completed the early
redemption of $5 million of its 2009 Notes at a price of 99% of the principal amount plus accrued
interest through the date of redemption. Refer to Note 3 — 2009 Debt
Maturity and Debt Issuance.
In May 2003, the Company issued and sold $400 million aggregate principal amount of 7.25%
Senior Notes due 2010 (the “2010 Notes”). The 2010 Notes were issued at par. The Company may redeem
some or all of the 2010 Notes at a redemption price of 100% of their principal amount during 2009
and thereafter, plus accrued and unpaid interest.
In connection with the going-private merger transaction of 2003, the Company issued $475
million aggregate principal amount of 8.875% Senior Notes due 2011 (the “2011 Notes”). The 2011
Notes were issued at par. The Company may redeem some or all of the 2011 Notes at a redemption
price of 100% of their principal amount during 2009 and thereafter, plus accrued and unpaid
interest. In 2005 in conjunction with an amendment and restatement of its senior secured credit
agreement, the Company repurchased $275 million of its 2011 Notes.
In July 1993, the Company issued and sold debentures due 2013 (the “2013 Debentures”). The
2013 Debentures are not redeemable prior to maturity and were issued at 99.37% of par.
Interest on the notes and debentures is paid semi-annually.
24
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
None of the Company’s notes or debentures are subject to any sinking fund requirements. The
notes and debentures are guaranteed by the Company’s wholly-owned domestic subsidiaries (Note 21).
April 2006 Amendments to Credit Facilities
In April 2006, the Company completed an amendment and restatement of its senior secured credit
agreement. The purposes of this refinancing included increasing the combined size of the Company’s
revolving credit and letter of credit facilities, eliminating certain financial maintenance
covenants, realizing currency gains arising out of the Company’s then existing yen-denominated term
loan, and refinancing the higher-cost bank indebtedness of the Company’s immediate parent, Dole
Holding Company, LLC (“DHC”) at the lower-cost Dole Food Company, Inc. level. The Company obtained
$975 million of term loan facilities and $100 million in a pre-funded letter of credit facility,
both of which mature in April 2013. The proceeds of the term loans were used to repay the then
outstanding term loans and revolving credit facilities, as well as pay a dividend of $160 million
to DHC, which proceeds were used to repay its existing debt facility.
In addition, the Company entered into a new asset based revolving credit facility (“ABL
revolver”) of $350 million. The facility is secured by and is subject to a borrowing base
consisting of up to 85% of eligible accounts receivable plus a predetermined percentage of eligible
inventory, as defined in the credit facility. The ABL revolver matures in April 2011.
Revolving Credit Facility and Term Loans
As of January 3, 2009, the term loan facilities consisted of $176.8 million of Term Loan B and
$658.6 million of Term Loan C, bearing interest at LIBOR plus a margin
ranging from 1.75% to 2%, dependent upon the Company’s senior secured leverage ratio. The weighted
average variable interest rates at January 3, 2009 for Term Loan B and Term Loan C were LIBOR plus
2%, or 4.3%. The term loan facilities require quarterly principal payments, plus a balloon payment
due in 2013. Related to the term loan facilities, the Company holds an interest rate swap to hedge
future changes in interest rates and a cross currency swap to effectively lower the U.S. dollar
fixed interest rate of 7.2% to a Japanese yen fixed interest rate of 3.6%. Refer to Note 17 —
Derivative Financial Instruments for additional discussion of the Company’s hedging activities.
As of January 3, 2009, the ABL revolver borrowing base was $328.6 million and the amount
outstanding under the ABL revolver was $150.5 million, bearing interest at LIBOR
plus a margin ranging from 1.25% to 1.75%, dependent upon the Company’s historical borrowing
availability under this facility. At January 3, 2009, the weighted average variable interest rate
for the ABL revolver was LIBOR plus 1.5%, or 2.2%. The ABL revolver matures in April 2011. After
taking into account approximately $5.3 million of outstanding letters of credit issued under the
ABL revolver, the Company had approximately $172.8 million available for borrowings as of January3, 2009. In addition, the Company had approximately $71 million of letters of credit and bank
guarantees outstanding under its pre-funded letter of credit facility as of January 3, 2009.
A commitment fee, which fluctuated between 0.25% and 0.375%, was paid based on the total
unused portion of the revolving credit facility. In addition, there is a facility fee on the
pre-funded letter of credit facility. The Company paid a total of $1 million, $0.7 million and $1
million in commitment and facility fees for the years ended January 3, 2009, December 29, 2007 and
December 30, 2006.
The revolving credit facility and term loan facilities are collateralized by substantially all
of the Company’s tangible and intangible assets, other than certain intercompany debt, certain
equity interests and each of the Company’s U.S. manufacturing plants and processing facilities that
has a net book value exceeding 1% of the Company’s net tangible
assets. Refer to Note 3 — 2009 Debt Maturity and Debt Issuance
- for information on the March 2009 amendments to the credit
facilities.
Capital Lease Obligations
At January 3, 2009 and December 29, 2007, included in capital lease obligations was $58.5
million and $83.4 million, respectively, of vessel financing related to two vessel leases
denominated in British pound sterling. The reduction in the capital lease obligation was primarily
due to the weakening of the British pound sterling against the U.S. dollar during 2008, which
resulted in the Company recognizing $21.3 million of unrealized gains. These unrealized gains were
recorded as other income (expense), net in the consolidated statement of operations. The
25
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
interest rates on these leases are based on LIBOR plus a spread. The remaining $1.9 million of
capital lease obligations relate primarily to machinery and equipment. Interest rates under these
leases are fixed. The capital lease obligations are collateralized by the underlying leased assets.
Total payments, including principal and interest, through the remaining life of the lease total
approximately $98.7 million. These leases expire in 2024.
Covenants
Provisions under the indentures to the Company’s senior notes and debentures require the
Company to comply with certain covenants. These covenants include limitations on, among other
things, indebtedness, investments, loans to subsidiaries, employees and third parties, the issuance
of guarantees and the payment of dividends. The senior secured revolving credit facility
contains a “springing covenant,” but that covenant has never been effective
and would only become effective if the availability under the revolving credit
facility were to fall below $35 million for any eight consecutive business days,
which it has never done during the life of such facility. In the event that such
availability were to fall below $35 million for such eight consecutive business day period,
the “springing covenant” would require that the
Company’s fixed charge coverage ratio,
defined as (x) consolidated EBITDA for the four consecutive fiscal quarters then ending
divided by (y) consolidated fixed charges for such four fiscal quarter period, equal or
exceed 1.00:1.00.
The Company expects such fixed charge coverage ratio to continue to
be in excess of 1.00:1.00. At January 3, 2009, the Company was in compliance with
all applicable covenants.
The Company has
received approval from its lenders for an amendment to its senior
secured credit facilities to, among other things, permit the Company to issue
a certain amount of junior lien notes; the amendment became effective concurrently with the closing of the 2014
Notes offering. The amendment to the term
loan facilities will impose a first priority
secured leverage maintenance covenant on the Company, which the
Company expects to continue to be able to satisfy.
A breach of a covenant or other provision in a debt instrument governing the Company’s
current or future indebtedness could result in a default under that instrument and, due to
cross-default and cross-acceleration provisions, could result in a default under the Company’s
other debt instruments. Upon the occurrence of an event of default under the senior secured credit
facilities or other debt instrument, the lenders or holders of such other debt instruments
could elect to declare all amounts outstanding to be immediately due and payable and terminate all
commitments to extend further credit. If the Company were unable to repay those amounts, the
lenders could proceed against the collateral granted to them, if any, to secure the indebtedness.
If the lenders under the Company’s current indebtedness were to accelerate the payment of the indebtedness,
the Company cannot give assurance that its assets or cash flow would be sufficient to repay in full
its outstanding indebtedness, in which event the Company likely would seek reorganization or
protection under bankruptcy or other, similar laws.
The Company’s parent, DHM Holding Company, Inc. (“HoldCo”), entered into an amended and
restated loan agreement for $135 million on March 17, 2008 in connection with its investment in
Westlake Wellbeing Properties, LLC. The obligations under such loan agreement mature on March 3,2010. In addition, a $20 million principal payment on the loan is due on June 17, 2009. Failure to
make this payment when due would give lenders under this loan agreement the right to accelerate
that debt. Because HoldCo is a party to the Dole’s senior secured credit facilities, any failure of
Holdco to pay the $20 million principal payment by June 17, 2009 or any other default under the
Holdco agreement would result in a default under the Company’s senior secured credit facilities
under the existing cross-default and cross-acceleration provisions set forth in those senior
secured credit facilities. If such a default were to occur, the Company’s senior secured credit
facilities could be declared due at the request of the lenders holding a majority of the senior
secured debt under the applicable agreement and unless the default were waived the Company would no
longer have the ability to request advances or letters of credit under its revolving credit
facility. The acceleration of the indebtedness under the senior secured credit facilities would, if
not cured within 30 days, also allow the holders of 25% or more in principal amount of any series
of the Company’s notes or debentures to accelerate the maturity of such series. Although
HoldCo has assured the Company that it expects to have sufficient funds available from its
shareholders to timely make the $20 million principal payment by June 17, 2009, there is no
assurance that it will occur.
Debt Issuance Costs
Expenses related to the issuance of long-term debt are capitalized and amortized to interest
expense over the term of the underlying debt. During the years ended January 3, 2009, December 29,2007 and December 30, 2006, the Company amortized deferred debt issuance costs of $4.1 million,
$4.1 million and $4.4 million, respectively.
26
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The Company wrote off $8.1 million of deferred debt issuance costs during the year ended
December 30, 2006. The 2006 write-off was a result of a refinancing transaction that occurred in
April 2006. This write-off was recorded to other income (expense), net in the consolidated
statement of operations for the year ended December 30, 2006.
Fair Value of Debt
The Company estimates the fair value of its unsecured notes and debentures based on current
quoted market prices. The term loans are traded between institutional investors on the secondary
loan market, and the fair values of the term loans are based on the last available trading price.
The carrying value and estimated fair values of the Company’s debt is summarized below:
Maturities with respect to notes payable and long-term debt as of January 3, 2009 were as
follows (in thousands):
Fiscal Year
Amount
2009
$
405,537
2010
412,114
2011
363,189
2012
12,910
2013
960,498
Thereafter
49,845
Total
$
2,204,093
Other
In addition to amounts available under the revolving credit facility, the Company’s
subsidiaries have uncommitted lines of credit of approximately $142.9 million at various local
banks, of which $85.3 million was available at January 3, 2009. These lines of credit are used
primarily for short-term borrowings, foreign currency exchange settlement and the issuance of
letters of credit or bank guarantees. Several of the Company’s uncommitted lines of credit expire
in 2009 while others do not have a commitment expiration date. These arrangements may be cancelled
at any time by the Company or the banks. The Company’s ability to utilize these lines of credit
may be impacted by the terms of its senior secured credit facilities and bond indentures.
NOTE 13 — EMPLOYEE BENEFIT PLANS
The Company sponsors a number of defined benefit pension plans covering certain employees
worldwide. Benefits under these plans are generally based on each employee’s eligible compensation
and years of service, except for certain hourly plans, which are based on negotiated benefits. In
addition to pension plans, the Company has other postretirement benefit (“OPRB”) plans that provide
certain health care and life insurance benefits for eligible retired employees. Covered employees
may become eligible for such benefits if they fulfill established requirements upon reaching
retirement age.
The Company sponsors one qualified pension plan for U.S. employees, which is funded. All but
one of the Company’s international pension plans and all of its OPRB plans are unfunded.
All pension benefits for U.S. salaried employees were frozen in 2002. The assumption for the
rate of compensation increase of 2.5% on the U.S. plans represents the rate associated with those
participants whose benefits are negotiated under collective bargaining arrangements.
27
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The Company uses a December 31 measurement date for all of its plans.
Adoption of FAS 158
As of December 30, 2006, the Company adopted Statement of Financial Accounting Standards No.
158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (“FAS 158”),
which changed the accounting rules for reporting and disclosures related to pension and other
postretirement benefit plans. FAS 158 requires an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan as an asset or liability in its
statement of financial position and to recognize changes in that funded status in the year in which
the changes occur as a component of comprehensive income. The standard also requires an employer to
measure the funded status as of the date of its year-end statement of financial position. The
adoption in 2006 had no effect on the computation of net periodic benefit expense for pensions and
postretirement benefits.
Pension Protection Act of 2006 and Worker, Retiree, and Employer Recovery Act of 2008
In August 2006, the Pension Protection Act of 2006 was signed into law. This legislation
changed the method of valuing the U.S. qualified pension plan assets and liabilities for funding
purposes, as well as the minimum funding requirements. The Worker, Retiree, and Employer Recovery
Act of 2008 was signed into law in December 2008. The combined effect of these laws will be larger
contributions over the next eight to ten years, with the goal of being fully funded by the end of
that period. The amount of unfunded liability in future years will be affected by future
contributions, demographic changes, investment returns on plan assets, and interest rates, so full
funding may be achieved sooner or later. The Company anticipates funding pension contributions with
cash from operations.
As a result of the Pension Protection Act of 2006 and the decrease in the value of the U.S.
qualified plan’s assets, the Company anticipates contributions averaging approximately $12 million
per year over the next nine years. The Company also anticipates that certain forms of benefit
payments, such as lump sums, will be partially restricted over the next few years.
OPRB Plan Amendment
During the fourth quarter of 2008, the Company amended its domestic OPRB Plan. This amendment
became effective January 1, 2009. The Company replaced health care coverage (including
prescription drugs) for Medicare eligible retirees and surviving spouses who are age 65 and older
with a new Health Reimbursement Arrangement (“HRA”), whereby each participant will be provided an
annual amount in an HRA account. The HRA account will be used to offset health care costs. This
plan amendment will reduce the benefit obligation by $21.8 million. The amortization of this
reduction in liability, combined with a lower interest cost, will reduce the expense for this plan
by approximately $4.2 million for the next 8 years and by $1.5 million thereafter.
28
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Obligations and Funded Status — The status of the Company’s defined benefit pension and OPRB plans
was as follows:
Amounts recognized in the Consolidated Balance
Sheets
Current liabilities
$
(2,224
)
$
—
$
(5,729
)
$
—
$
(4,271
)
$
—
Long-term liabilities
(99,305
)
(70,216
)
(85,169
)
(103,229
)
(35,754
)
(63,803
)
$
(101,529
)
$
(70,216
)
$
(90,898
)
$
(103,229
)
$
(40,025
)
$
(63,803
)
During the fourth quarter of 2008, the Company sold two European businesses, each of which had
defined benefit plans. The sale of these businesses has been reflected in the tables above as
divestitures. Refer to Note 9 — Assets Held-For-Sale.
All of the Company’s pension plans were underfunded at January 3, 2009, having accumulated
benefit obligations exceeding the fair value of plan assets. The accumulated benefit obligation for
all defined benefit pension plans was $333.8 million and $417.6 million at January 3, 2009 and
December 29, 2007, respectively. The aggregate projected benefit obligation, accumulated benefit
obligation and fair value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were as follows:
Components of Net Periodic Benefit Cost and Other Changes Recognized in Other Comprehensive Loss
The components of net periodic benefit cost and other changes recognized in other
comprehensive loss for the Company’s U.S. and international pension plans and OPRB plans were as
follows:
Other changes recognized in other comprehensive loss
Net gain
$
(1,963
)
$
(5,194
)
Prior service benefit
(20,960
)
—
Amortization of:
Unrecognized net (loss) gain
8
(95
)
Unrecognized prior service benefit
914
914
Income taxes
9,936
2,271
Total recognized in other comprehensive loss
$
(12,065
)
$
(2,104
)
Total recognized in net periodic benefit cost and other comprehensive loss, net of income taxes
$
(8,940
)
$
2,024
The estimated net loss, prior service cost and transition obligation for the defined benefit
pension plans that will be amortized from accumulated other comprehensive loss into net periodic
benefit cost over the next fiscal year is $1.3 million of expense. The estimated actuarial net gain
and prior service benefit for the OPRB plans that will be amortized from accumulated other
comprehensive loss into periodic benefit cost over the next fiscal year is $4.1 million of income.
Weighted-average assumptions used to determine net periodic benefit cost for the years ended
January 3, 2009 and December 29, 2007 are as follows:
U.S. Pension
International
Plans
Pension Plans
OPRB Plans
2008
2007
2008
2007
2008
2007
Rate assumptions:
Discount rate
6.25
%
5.75
%
8.47
%
6.61
%
6.44
%
5.91
%
Compensation increase
2.50
%
2.50
%
5.85
%
5.15
%
—
—
Rate of return on plan assets
8.00
%
8.00
%
7.70
%
6.73
%
—
—
International plan discount rates, assumed rates of increase in future compensation and
expected long-term return on assets differ from the assumptions used for U.S. plans due to
differences in the local economic conditions in the countries in which the international plans are
based.
The APBO for the Company’s U.S. OPRB plan in 2008 and 2007 was determined using the following
assumed annual rate of increase in the per capita cost of covered health care benefits:
Year Ended
Year Ended
January 3,
December 29,
Fiscal Year
2009
2007
Health care costs trend rate assumed for next year
8
%
9
%
Rate of increase to which the cost of benefits is assumed to decline (the ultimate trend rate)
5.5
%
5.5
%
Year that the rate reaches the ultimate trend rate
2012
2012
32
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The health care plan offered to retirees in the U.S. who are age 65 or older was changed
effective January 1, 2009 to provide the reimbursement of health care expenses up to a certain
fixed amount. There is no commitment to increase the fixed dollar amount and no increase was
assumed in determining the APBO. Therefore, the trend rate applies only to benefits for U.S.
retirees prior to age 65 and to foreign retirees.
A one-percentage-point change in assumed health care cost trend rates would have the following
impact on the Company’s OPRB plans:
One-Percentage-Point
One-Percentage-Point
Increase
Decrease
(In thousands)
Increase (decrease) in service and interest cost
$
110
$
(98
)
Increase (decrease) in postretirement benefit obligation
$
1,470
$
(1,292
)
Plan Assets
The following is the plan’s target asset mix, which management believes provides the optimal
tradeoff of diversification and long-term asset growth:
The plan’s asset allocation includes a mix of fixed income investments designed to reduce
volatility and equity investments designed to maintain funding ratios and long-term financial
health of the plan. The equity investments are diversified across U.S. and international stocks as
well as growth, value, and small and large capitalizations.
Private equity and venture capital funds are used to enhance long-term returns while improving
portfolio diversification. The Company employs a total return investment approach whereby a mix of
fixed income and equity investments is used to maximize the long-term return of plan assets with a
prudent level of risk. The objectives of this strategy are to achieve full funding of the
accumulated benefit obligation, and to achieve investment experience over time that will minimize
pension expense volatility and minimize the Company’s contributions required to maintain full
funding status. Risk tolerance is established through careful consideration of plan liabilities,
plan funded status and corporate financial condition. Investment risk is measured and monitored on
an ongoing basis through annual liability measurements, periodic asset/liability studies and
quarterly investment portfolio reviews.
The Company’s actual weighted average asset allocation varied from the Company’s target
allocation at January 3, 2009 due to the economic volatility in the stock and bond markets during
2008. The Company is currently assessing its positions and expects to rebalance its portfolio
during 2009.
The Company determines the expected return on pension plan assets based on an expectation of
average annual returns over an extended period of years. The Company also considers the
weighted-average historical rate of returns on securities with similar characteristics to those in
which the Company’s pension assets are invested.
The Company applies the “10% corridor” approach to amortize unrecognized actuarial gains
(losses) on both its U.S. and international pension and OPRB plans. Under this approach, only
actuarial gains (losses) that exceed 10% of the greater of the projected benefit obligation or the
market-related value of the plan assets are amortized. The amortization period is based on the
average remaining service period of active employees expected to receive benefits under each plan
or over the life expectancy of inactive participants where all, or nearly all, participants are
inactive. For the year ended January 3, 2009, the average remaining service period used to amortize
unrecognized actuarial gains (losses) for its domestic plans was approximately 10.5 years.
Plan Contributions and Estimated Future Benefit Payments
During 2008, the Company did not make any contributions to its qualified U.S. pension plan.
Under the minimum funding requirements of the Pension Protection Act of 2006, no contribution was
required for fiscal 2008. The Company expects to contribute approximately $8 million to its U.S.
qualified plan in 2009, which is the estimated minimum funding requirement calculated under the
Pension Protection Act of 2006. Future contributions to the U.S. pension plan in excess of the
minimum funding requirement are voluntary and may change depending on the Company’s operating
performance or at management’s discretion. The Company expects to make $15.7 million of payments
related to its other U.S. and foreign pension and OPRB plans in 2009.
The following table presents estimated future benefit payments:
International
U.S. Pension
Pension
Fiscal Year
Plans
Plans
OPRB Plans
(In thousands)
2009
$
23,126
$
8,471
$
4,271
2010
22,848
8,941
4,179
2011
22,385
8,546
4,114
2012
22,375
9,110
3,999
2013
22,039
9,268
3,911
2014-2018
106,662
57,967
18,457
Total
$
219,435
$
102,303
$
38,931
Defined Contribution Plans
The Company offers defined contribution plans to eligible employees. Such employees may defer
a percentage of their annual compensation in accordance with plan guidelines. Some of these plans
provide for a Company match that is subject to a maximum contribution as defined by the plan.
Company contributions to its defined contribution plans totaled $8.1 million, $7.6 million and $7.3
million in the years ended January 3, 2009, December 29, 2007 and December 30, 2006, respectively.
Multi-Employer Plans
The Company is also party to various industry-wide collective bargaining agreements that
provide pension benefits. Total contributions to these plans for eligible participants were
approximately $1.6 million, $2.8 million and $3.7 million in the years ended January 3, 2009,
December 29, 2007 and December 30, 2006, respectively.
34
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
NOTE
14 — SHAREHOLDERS’ EQUITY
The Company’s authorized share capital as of January 3, 2009 and December 29, 2007 consisted
of 1,000 shares of $0.001 par value common stock of which 1,000 shares were issued and outstanding.
All issued and outstanding shares are owned by DHC, a Delaware limited liability company and a
direct wholly-owned subsidiary of DHM Holding Company, Inc. (“HoldCo”).
The Company’s ability to declare dividends is limited under the terms of its senior secured
credit facilities and senior notes indentures. As of January 3, 2009, the Company had no ability to
declare and pay dividends or other similar distributions.
Capital Contributions and Return of Capital
There were no capital contributions or return of capital transactions during either of the
years ended January 3, 2009 and December 29, 2007.
On March 3, 2006, HoldCo executed a $150 million senior secured term loan agreement. In March
2006, HoldCo contributed $28.4 million to its wholly-owned subsidiary, DHC, the Company’s immediate
parent, which contributed the funds to the Company. As planned, in October 2006, the Company
declared a cash capital repayment of $28.4 million to DHC, returning the $28.4 million capital
contribution made by DHC in March 2006. The Company repaid this amount during the fourth quarter of
2006.
On October 4, 2006, the Company loaned $31 million to DHC, which then dividended the funds to
HoldCo for contribution to Westlake Wellbeing Properties, LLC. In connection with this funding, an
intercompany loan agreement was entered into between DHC and the Company. DHC has no operations and
would need to repay the loan with a dividend from the Company, a contribution from HoldCo, or
through a financing transaction. It is currently anticipated that amounts under the intercompany
loan agreement will be replaced with dividend proceeds or the loan would be forgiven in the
future. The Company has accounted for the intercompany loan as a distribution of additional paid-in
capital.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of changes to shareholders’ equity, other than
contributions from or distributions to shareholders, and net income (loss). The Company’s other
comprehensive income (loss) principally consists of unrealized foreign currency translation gains
and losses, unrealized gains and losses on cash flow hedging instruments and pension liability. The
components of, and changes in, accumulated other comprehensive income (loss) are presented in the
Company’s Consolidated Statements of Shareholders’ Equity.
NOTE 15 — BUSINESS SEGMENTS
As discussed in Note 5, the Company approved and committed to a formal plan to divest its
fresh-cut flowers operating segment and accordingly reclassified the results of operations to
discontinued operations. As a result of this reclassification of the fresh-cut flowers segment, the
Company now has three reportable operating segments.
The Company has three reportable operating segments: fresh fruit, fresh vegetables and
packaged foods. These reportable segments are managed separately due to differences in their
products, production processes, distribution channels and customer bases.
35
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Management evaluates and monitors segment performance primarily through, among other measures,
earnings before interest expense and income taxes (“EBIT”). EBIT is calculated by adding interest
expense and income taxes to income (loss) from continuing operations. Management believes that
segment EBIT provides useful information for analyzing the underlying business results as well as
allowing investors a means to evaluate the financial results of each segment in relation to the
Company as a whole. EBIT is not defined under accounting principles generally accepted in the
United States of America (“GAAP”) and should not be considered in isolation or as a substitute for
net income or cash flow measures prepared in accordance with GAAP or as a measure of the Company’s
profitability. Additionally, the Company’s computation of EBIT may not be comparable to other
similarly titled measures computed by other companies, because not all companies calculate EBIT in
the same fashion.
In the tables below, only revenues from external customers and EBIT reflect results from
continuing operations. Total assets, depreciation and amortization and capital additions reflect
results from continuing and discontinued operations for 2008, 2007 and 2006.
The results of operations and financial position of the three reportable operating segments
and corporate were as follows:
Results of Operations:
2008
2007
2006
(In thousands)
Revenues from external customers
Fresh fruit
$
5,401,145
$
4,736,902
$
3,968,963
Fresh vegetables
1,086,888
1,059,401
1,082,416
Packaged foods
1,130,791
1,023,257
938,336
Corporate
1,128
1,252
1,148
$
7,619,952
$
6,820,812
$
5,990,863
EBIT
Fresh fruit
$
305,782
$
170,598
$
103,891
Fresh vegetables
1,123
(21,725
)
(7,301
)
Packaged foods
69,100
78,492
91,392
Total operating segments
376,005
227,365
187,982
Corporate:
Unrealized gain (loss) on cross currency swap
(50,411
)
(10,741
)
20,664
Operating and other expenses
(54,043
)
(59,506
)
(53,377
)
Corporate
(104,454
)
(70,247
)
(32,713
)
Interest expense
(174,485
)
(194,851
)
(174,715
)
Income taxes
48,015
(4,054
)
(22,609
)
Income (loss) from continuing operations, net of income taxes
$
145,081
$
(41,787
)
$
(42,055
)
Corporate EBIT includes general and administrative costs not allocated to operating segments.
Substantially all of the Company’s equity earnings in unconsolidated subsidiaries, which have
been included in EBIT in the table above, relate to the fresh fruit operating segment.
In addition to obligations recorded on the Company’s Consolidated Balance Sheet as of January3, 2009, the Company has commitments under cancelable and non-cancelable operating leases,
primarily for land, machinery and equipment, vessels and containers and office and warehouse
facilities. A significant portion of the Company’s lease payments are fixed. Total rental expense,
including rent related to cancelable and non-cancelable leases, was $204.2 million, $169.2 million
and $153 million (net of sublease income of $17.1 million, $16.6 million and $16.4 million) for the
years ended January 3, 2009, December 29, 2007 and December 30, 2006, respectively.
The Company modified the terms of its corporate aircraft lease agreement during 2007. The
modification primarily extended the lease period from terminating in 2010 to 2018. The Company’s
corporate aircraft lease agreement includes a residual value guarantee of up to $4.8 million at the
termination of the lease in 2018.
As of January 3, 2009, the Company’s non-cancelable minimum lease commitments, including the
residual value guarantee, before sublease income, were as follows (in thousands):
Fiscal Year
Amount
2009
$
143,054
2010
110,736
2011
85,026
2012
62,842
2013
47,677
Thereafter
115,034
Total
$
564,369
Total expected future sublease income expected to be earned over 7 years is $42.6 million.
In order to secure sufficient product to meet demand and to supplement the Company’s own
production, the Company has entered into non-cancelable agreements with independent growers,
primarily in Latin America and North America, to purchase substantially all of their production
subject to market demand and product quality. Prices under these agreements are generally tied to
prevailing market rates and contract terms generally range from one to ten years. Total purchases
under these agreements were $658.8 million, $564.5 million and $474.5 million for the years ended
January 3, 2009, December 29, 2007 and December 30, 2006, respectively.
38
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
At January 3, 2009, aggregate future payments under such purchase commitments (based on
January 3, 2009 pricing and volumes) are as follows (in thousands):
Fiscal Year
Amount
2009
$
622,921
2010
395,143
2011
348,642
2012
218,687
2013
184,596
Thereafter
131,404
Total
$
1,901,393
In order to ensure a steady supply of packing supplies and to maximize volume incentive
rebates, the Company has entered into contracts for the purchase of packing
supplies; some of these contracts run through 2010. Prices under these agreements are
generally tied to prevailing market rates. Purchases under these contracts for the years ended
January 3, 2009, December 29, 2007 and December 30, 2006 were approximately $292.6 million, $272.7
million and $207.6 million, respectively.
Under these contracts, the Company was committed at January 3, 2009, to purchase packing
supplies, assuming current price levels, as follows (in thousands):
Fiscal Year
Amount
2009
$
158,638
2010
133,875
Total
$
292,513
The Company has numerous collective bargaining agreements with various unions covering
approximately 35% of the Company’s hourly full-time and seasonal employees. Of the unionized
employees, 35% are covered under a collective bargaining agreement that will expire within one year
and the remaining 65% are covered under collective bargaining agreements expiring beyond the
upcoming year. These agreements are subject to periodic negotiation and renewal. Failure to renew
any of these collective bargaining agreements may result in a strike or work stoppage; however,
management does not expect that the outcome of these negotiations and renewals will have a material
adverse impact on the Company’s financial condition or results of operations.
NOTE 17 — DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to foreign currency exchange rate fluctuations, bunker fuel price
fluctuations and interest rate changes in the normal course of its business. As part of its risk
management strategy, the Company uses derivative instruments to hedge certain foreign currency,
bunker fuel and interest rate exposures. The Company’s objective is to offset gains and losses
resulting from these exposures with losses and gains on the derivative contracts used to hedge
them, thereby reducing volatility of earnings. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes.
Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended (“FAS 133”), establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability and measured at
fair value. FAS 133 also requires that changes in the derivative’s fair value be recognized
currently in earnings unless specific criteria are met and that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge accounting. For those
instruments that qualify for hedge accounting as cash flow hedges, any unrealized gains or losses
are included in accumulated other comprehensive income (loss), with the corresponding asset or
liability recorded on the balance sheet. Any portion of a cash flow hedge that is deemed to be
ineffective is recognized into current period earnings. When the transaction underlying the hedge
is recognized into earnings, the related other comprehensive income (loss) is reclassified to
current period earnings.
Through the first quarter of 2007, all of the Company’s derivative instruments, with the
exception of the cross currency swap, were designated as effective hedges of cash flows as defined
by FAS 133. However, during the
39
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
second quarter of 2007, the Company elected to discontinue its designation of both its foreign
currency and bunker fuel hedges as cash flow hedges under FAS 133. The interest rate swap continues
to be accounted for as a cash flow hedge under FAS 133. As a result, all changes in the fair value
of the Company’s derivative financial instruments from the time of discontinuation of hedge
accounting are reflected in the Company’s consolidated statements of operations. Gains and losses
on foreign currency and bunker fuel hedges are recorded as a component of cost of products sold in
the consolidated statement of operations. Gains and losses related to the interest rate swap are
recorded as a component of interest expense in the consolidated statements of operations.
Foreign Currency Hedges
Some of the Company’s divisions operate in functional currencies other than the U.S. dollar.
As a result, the Company enters into cash flow derivative instruments to hedge portions of
anticipated revenue streams and operating expenses. At January 3, 2009, the Company had forward
contract hedges for forecasted revenue transactions denominated in the Japanese yen, the Euro and
the Swedish krona and for forecasted operating expenses denominated in the Chilean peso, Colombian
peso and the Philippine peso. The Company uses foreign currency exchange forward contracts and
participating forward contracts to reduce its risk related to anticipated dollar equivalent foreign
currency cash flows.
In addition, the net assets of some of the Company’s foreign subsidiaries are exposed to
foreign currency translation gains and losses, which are included as a component of accumulated
other comprehensive income (loss) in shareholders’ equity. The Company has historically not
attempted to hedge this equity risk.
At January 3, 2009, the gross notional value and fair market value of the Company’s foreign
currency hedges were as follows:
Gross Notional Value
Average
Participating
Fair Market Value
Strike
Forwards
Forwards
Total
Assets (Liabilities)
Price
(In thousands)
Foreign Currency Hedges(Buy/Sell):
U.S. Dollar/Japanese Yen
$
147,474
$
—
$
147,474
$
(9,800
)
JPY 104
U.S. Dollar/Euro
100,207
—
100,207
5,206
EUR 1.43
Euro/SEK
—
4,709
4,709
(153
)
SEK 11.09
Chilean Peso/U.S. Dollar
—
22,495
22,495
419
CLP 668
Colombian Peso/U.S. Dollar
—
52,262
52,262
(441
)
COP 2,294
Philippine Peso/U.S. Dollar
—
39,053
39,053
(846
)
PHP 47.5
Total
$
247,681
$
118,519
$
366,200
$
(5,615
)
At December 29, 2007the Company had outstanding hedges denominated in the Japanese yen, the
Euro, the Canadian dollar, the Chilean peso and the Thai baht. The fair market value of these
hedges was a liability of $12.1 million at December 29, 2007.
Bunker Fuel Hedges
The Company enters into bunker fuel hedges for its shipping operations to reduce its risk
related to price fluctuations on anticipated bunker fuel purchases. At January 3, 2009, the
notional volume and the fair market value of the Company’s bunker fuel hedges were as follows:
Fair Market
Notional Volume
Value
Average Price
(metric tons)
(In thousands)
(per metric ton)
Bunker Fuel Hedges:
Rotterdam
15,018
$
(3,576
)
$
418
40
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
At December 29, 2007, the fair market value of the bunker fuel hedges was an asset of $1.1
million, which included $0.4 million related to unsettled bunker fuel hedges that received FAS 133
treatment prior to the discontinuation of hedge accounting during the second quarter of 2007.
For both the foreign currency and bunker fuel hedges, the fair market value of these
instruments is recorded in the consolidated balance sheet as either a current asset or current
liability. Settlement of these hedges will occur during 2009.
Net unrealized gains (losses) and realized gains (losses) included as a component of cost of
products sold in the consolidated statement of operations on the foreign currency and bunker fuel
hedges for fiscal 2008, 2007 and 2006 were as follows:
With the exception of some Colombian peso hedges, all unrealized gains (losses) on foreign
currency and bunker fuel hedges for 2006 were included as a component of other comprehensive income
(loss) in shareholders’ equity. Unrealized losses for 2006 included in the table above relate to
Colombian peso hedges that did not receive FAS 133 treatment and the ineffective portion of bunker
fuel hedges. The realized and unrealized gains (losses) related to discontinued operations were
included as a component of loss from discontinued operations.
Interest Rate and Cross Currency Swaps
As discussed in Note 12, the Company completed an amendment and restatement of its senior
secured credit facilities in April 2006. As a result of this refinancing transaction, the Company
recognized a gain of $6.5 million related to the settlement of its interest rate swap associated
with its then existing Term Loan A. This amount was recorded to other income (expense), net in the
consolidated statement of operations for the year ended December 30, 2006.
In June 2006, subsequent to the refinancing transaction, the Company entered into an interest
rate swap in order to hedge future changes in interest rates. This agreement effectively converted
$320 million of borrowings under Term Loan C, which was variable-rate debt, to a fixed-rate basis
through June 2011. The interest rate swap fixed the interest rate at 7.24%. The paying and
receiving rates under the interest rate swap were 5.49% and 4.82% as of January 3, 2009, with an
outstanding notional amount of $320 million. The critical terms of the interest rate swap were
substantially the same as those of Term Loan C, including quarterly principal and interest
settlements. The interest rate swap hedge has been designated as an effective hedge of cash flows
as defined by FAS 133. The fair value of the interest rate swap was a liability of $26.5 million
and $15.9 million at January 3, 2009 and December29, 2007, respectively. Net payments of the interest rate swap are recorded as a component of
interest expense in the consolidated statements of operations for 2008 and 2007. Net payments were
$5.6 million and $0.4 million for the years ended January 3, 2009 and December 29, 2007,
respectively.
41
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
In addition, in June 2006, the Company executed a cross currency swap to synthetically convert
$320 million of Term Loan C into Japanese yen denominated debt in order to effectively lower the
U.S. dollar fixed interest rate of 7.24% to a Japanese yen interest rate of 3.6%. Payments under
the cross currency swap were converted from U.S. dollars to Japanese yen at an exchange rate of
¥111.9. At January 3, 2009, the exchange rate of the Japanese yen to U.S. dollar was ¥90.6. The
value of the cross currency swap will fluctuate based on changes in the U.S. dollar to Japanese yen
exchange rate and market interest rates until maturity in 2011, at which time it will settle in
cash at the then current exchange rate. The fair market value of the cross currency swap was a
liability of $40.5 million and an asset of $9.9 million at January 3, 2009 and December 29, 2007,
respectively.
The unrealized gains (losses) and realized gains on the cross currency swap for fiscal 2008,
2007 and 2006 were as follows:
2008
2007
2006
(In thousands)
Unrealized gains (losses)
$
(50,411
)
$
(10,741
)
$
20,664
Realized gains
11,209
12,780
4,102
$
(39,202
)
$
2,039
$
24,766
Realized and unrealized gains and losses on the cross currency swap are recorded through other
income (expense), net in the consolidated statements of operations.
FAS 157
As discussed in Note 2, the Company adopted FAS 157 as of December 30, 2007 for financial
assets and liabilities measured on a recurring basis and the impact of the adoption was not
material. FAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable
inputs to valuation techniques used to measure fair value. These levels, in order of highest to
lowest priority are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement
date for assets or liabilities.
Level 2: Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The fair values of the Company’s derivative instruments are determined using Level 2 inputs,
which are defined as “significant other observable inputs.” The fair values of the foreign currency
exchange contracts, bunker fuel contracts, interest rate swap and cross currency swap were
estimated using internal discounted cash flow calculations based upon forward foreign currency
exchange rates, bunker fuel futures, interest-rate yield curves or quotes obtained from brokers for
contracts with similar terms less any credit valuation adjustments. The Company recorded a credit
valuation adjustment at January 3, 2009 which reduced the derivative liability balances by
approximately $16.3 million and resulted in a corresponding decrease in the unrealized loss
recorded for the derivative instruments. Approximately $2.7 million of the credit valuation
adjustment was recorded as a component of interest expense and $13.6 million was recorded as a
component of other income (expense), net.
42
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The following table provides a summary of the fair values of assets and liabilities under the
FAS 157 hierarchy:
The counterparties to the foreign currency exchange forward contracts, bunker fuel hedges and
the interest rate swap consist of a number of major international financial institutions. The
Company has established counterparty guidelines and regularly monitors its positions and the
financial strength of these institutions. While counterparties to hedging contracts expose the
Company to credit-related losses in the event of a counterparty’s non-performance, the risk would
be limited to the unrealized gains on such affected contracts. The Company does not anticipate any
such losses.
NOTE 18 — CONTINGENCIES
The Company is a guarantor of indebtedness to some of its key fruit suppliers and other
entities integral to the Company’s operations. At January 3, 2009, guarantees of $3.2 million
consisted primarily of amounts advanced under third-party bank agreements to independent growers
that supply the Company with product. The Company has not historically experienced any significant
losses associated with these guarantees.
The Company issues letters of credit and bank guarantees through its ABL revolver and its
pre-funded letter of credit facilities, and, in addition, separately through major banking
institutions. The Company also provides insurance company issued bonds. These letters of credit,
bank guarantees and insurance company bonds are required by certain regulatory authorities,
suppliers and other operating agreements. As of January 3, 2009, total letters of
credit, bank guarantees and bonds outstanding under these arrangements were $107.3 million, of
which $71 million were issued under its pre-funded letter of credit facility.
The Company also provides various guarantees, mostly to foreign banks, in the course of its
normal business operations to support the borrowings, leases and other obligations of its
subsidiaries. The Company guaranteed $218.8 million of its subsidiaries’ obligations to their
suppliers and other third parties as of January 3, 2009.
The Company has change of control agreements with certain key executives, under which
severance payments and benefits would become payable in the event of specified terminations of
employment following a change of control (as defined) of the Company.
43
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The Company is involved from time to time in claims and legal actions incidental to its
operations, both as plaintiff and defendant. The Company has established what management currently
believes to be adequate reserves for pending legal matters. These reserves are established as part
of an ongoing worldwide assessment of claims and legal actions that takes into consideration such
items as changes in the pending case load (including resolved and new matters), opinions of legal
counsel, individual developments in court proceedings, changes in the law, changes in business
focus, changes in the litigation environment, changes in opponent strategy and tactics, new
developments as a result of ongoing discovery, and past experience in defending and settling
similar claims. In the opinion of management, after consultation with outside counsel, the claims
or actions to which the Company is a party are not expected to have a material adverse effect,
individually or in the aggregate, on the Company’s financial condition or results of operations.
DBCP Cases: A significant portion of the Company’s legal exposure relates to lawsuits pending
in the United States and in several foreign countries, alleging injury as a result of exposure to
the agricultural chemical DBCP (1,2-dibromo-3-chloropropane). DBCP was manufactured by several
chemical companies including Dow and Shell and registered by the U.S. government for use on food
crops. The Company and other growers applied DBCP on banana farms in Latin America and the
Philippines and on pineapple farms in Hawaii. Specific periods of use varied among the different
locations. The Company halted all purchases of DBCP, including for use in foreign countries, when
the U.S. EPA cancelled the registration of DBCP for use in the United States in 1979. That
cancellation was based in part on a 1977 study by a manufacturer which indicated an apparent link
between male sterility and exposure to DBCP among factory workers producing the product, as well as
early product testing done by the manufacturers showing testicular effects on animals exposed to
DBCP. To date, there is no reliable evidence demonstrating that field application of DBCP led to
sterility among farm workers, although that claim is made in the pending lawsuits. Nor is there any
reliable scientific evidence that DBCP causes any other injuries in humans, although plaintiffs in
the various actions assert claims based on cancer, birth defects and other general illnesses.
Currently there are 249 lawsuits, in various stages of proceedings, alleging injury as a
result of exposure to DBCP or seeking enforcement of Nicaragua judgments. In addition, there are
150 labor cases pending in Costa Rica under that country’s national insurance program.
Thirty-three of the 249 lawsuits are currently pending in various jurisdictions in the United
States. Eighteen lawsuits in Los Angeles Superior Court brought by foreign workers who alleged
exposure to DBCP in countries where Dole did not even have operations during the relevant period,
are to be dismissed without prejudice by March 30, 2009 pursuant to a tolling agreement which
terminates on December 31, 2012. Two additional lawsuits in Texas and in Hawaii were also
dismissed. On April 21-23, 2009 the Los Angeles Superior Court will hold an order to show cause why
the two pending lawsuits brought by Nicaraguan plaintiffs (including the case with a previous trial
date of September 10, 2009) should not be terminated with prejudice, pursuant to the court’s stated
inherent power and responsibility to terminate litigation if deliberate and egregious misconduct
makes any sanctions other than dismissal inadequate to ensure a fair trial. Another case pending in
Hawaii Superior Court with 10 plaintiffs from Costa Rica, Guatemala, Ecuador and Panama currently
has a trial date of January 18, 2010. The remaining cases are pending in Latin America and the
Philippines. Claimed damages in DBCP cases worldwide total approximately $44.5 billion, with
lawsuits in Nicaragua representing approximately 88% of this amount. Typically in these cases the
Company is a joint defendant with the major DBCP manufacturers. Except as described below, none of
these lawsuits has resulted in a verdict or judgment against us.
One case pending in Los Angeles Superior Court with 12 Nicaraguan plaintiffs initially
resulted in verdicts which totaled approximately $5 million in damages against Dole in favor of six
of the plaintiffs. As a result of the court’s March 7, 2008 favorable rulings on Dole’s
post-verdict motions, including, importantly, the court’s decision striking down punitive damages
in the case on U.S. Constitutional grounds, the damages against Dole have now been reduced to $1.58
million in total compensatory awards to four of the plaintiffs; and the court granted Dole’s motion
for a new trial as to the claims of one of the plaintiffs. The parties in this lawsuit have filed
appeals. Once the court makes its determination of costs, the Company will file an appeal bond,
which will further stay the judgment pending the resolution of the appeal. Additionally, the court
appointed a mediator to explore possible settlement of all DBCP cases currently pending before the
court.
In Nicaragua, 196 cases are currently filed (of which 20 are active) in various courts
throughout the country, all but one of which were brought pursuant to Law 364, an October 2000
Nicaraguan statute that contains substantive and procedural provisions that Nicaragua’s Attorney
General formally opined are unconstitutional. In October 2003, the Supreme Court of Nicaragua
issued an advisory opinion, not connected with any litigation, that Law 364 is constitutional.
Thirty-two cases have resulted in judgments in Nicaragua: $489.4 million (nine cases consolidated
with 468 claimants) on December 11, 2002; $82.9 million (one case with 58 claimants) on February25, 2004; $15.7 million (one case with 20 claimants) on May 25, 2004; $4 million (one case with
four claimants) on May 25, 2004; $56.5 million (one case with 72 claimants) on June 14, 2004; $64.8
million (one case with 86 claimants) on June 15, 2004; $27.7 million (one case with 39 claimants)
on March 17, 2005; $98.5 million (one case with 150 claimants) on August 8, 2005; $46.4 million
(one case with 62 claimants) on August 20, 2005; $809 million (six cases consolidated with 1,248
claimants) on December 1, 2006; $38.4 million (one case with 192 claimants) on November 14, 2007;
and $357.7 million (eight cases with 417 claimants) on January 12, 2009, which the Company recently
learned of unofficially. Except for the latest one, the Company has appealed all judgments, with
our appeal of the August 8, 2005 $98.5 million judgment and of the December 1, 2006 $809 million
judgment currently pending before the Nicaragua Court of Appeal; and Dole will appeal the $357.7
million judgment once it has been served.
44
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The 20 active cases are currently pending in civil courts in Managua (9), Chinandega (10) and
Puerto Cabezas (1), all of which have been brought under Law 364 except for one of the cases
pending in Chinandega. In 2 of the 9 cases in Managua (Dole has not been ordered to answer in
seven cases), the Company has sought to have the cases returned to the United States pursuant to
Law 364. Dole’s requests are still pending and the Company expects to make similar requests in the
remaining seven cases at the appropriate time. In four of the 10 cases in Chinandega (Dole has not
been ordered to answer in six cases), the Company has sought to have the cases returned to the
United States pursuant to Law 364. In one case, the Chinandega court has ordered the plaintiffs to
respond to our request; in two cases, the court had denied the Company’s requests, and Dole has
appealed that decision; and in the other case, the court has not yet ruled on Dole’s request. In
the one case in Puerto Cabezas, the Company has sought to have the case returned to the United
States, and Dole has appealed the court’s denial of the Company’s request.
The claimants’ attempted enforcement of the December 11, 2002 judgment for $489.4 million in
the United States resulted in a dismissal with prejudice of that action by the United States
District Court for the Central District of California on October 20, 2003. The claimants have
voluntarily dismissed their appeal of that decision, which was pending before the United States
Court of Appeals for the Ninth Circuit. Defendants’ motion for sanctions against Plaintiffs’
counsel is still pending before the Court of Appeals in that case. A Special Master appointed by
the Court of Appeals has recommended that Plaintiffs’ counsel be ordered to pay Defendants’ fees
and costs up to $130,000 each to Dole and the other two defendants; and following such
recommendation, the Court of Appeals has appointed a special prosecutor.
Claimants have also sought to enforce the Nicaraguan judgments in Colombia, Ecuador, and
Venezuela. In addition, there is one case pending in the U.S. District Court in Miami, Florida
seeking enforcement of the August 8, 2005 $98.5 million Nicaraguan judgment. This case is currently
stayed. In Venezuela, the claimants have attempted to enforce five of the Nicaraguan judgments in
that country’s Supreme Court: $489.4 million (December 11, 2002); $82.9 million (February 25,2004); $15.7 million (May 25, 2004); $56.5 million (June 14, 2004); and $64.8 million (June 15,2004). These cases are currently inactive. An action filed to enforce the $27.7 million Nicaraguan
judgment (March 17, 2005) in the Colombian Supreme Court was dismissed. In Ecuador, the claimants
attempted to enforce the five Nicaraguan judgments issued between February 25, 2004 through June15, 2004 in the Ecuador Supreme Court. The First, Second and Third Chambers of the Ecuador Supreme
Court issued rulings refusing to consider those enforcement actions on the ground that the Supreme
Court was not a court of competent jurisdiction for enforcement of a foreign judgment. The
plaintiffs subsequently refilled those five enforcement actions in the civil court in Guayaquil,
Ecuador. Two of these subsequently filed enforcement actions have been dismissed by the 3rd Civil
Court — $15.7 million (May 25, 2004) — and the 12th Civil Court — $56.5 million (June 14, 2004) —
in Guayaquil; plaintiffs have sought reconsideration of those dismissals. The remaining three
enforcement actions are still pending.
The Company believes that none of the Nicaraguan judgments will be enforceable against any
Dole entity in the U.S. or in any other country, because Nicaragua’s Law 364 is unconstitutional
and violates international principles of due process. Among other things, Law 364 is an improper
“special law” directed at particular parties; it requires defendants to pay large, non-refundable
deposits in order to even participate in the litigation; it provides a severely truncated
procedural process; it establishes an irrebuttable presumption of causation that is contrary to the
evidence and scientific data; and it sets unreasonable minimum damages that must be awarded in
every case.
On October 23, 2006, Dole announced that Standard Fruit de Honduras, S.A. reached an agreement
with the Government of Honduras and representatives of Honduran banana workers. This agreement
establishes a Worker Program that is intended by the parties to resolve in a fair and equitable
manner the claims of male banana workers alleging sterility as a result of exposure to DBCP. The
Honduran Worker Program will not have a material effect on Dole’s financial condition or results of
operations. The official start of the Honduran Worker Program was announced on January 8, 2007. On
August 15, 2007, Shell Oil Company was included in the Worker Program. While Dole believes there is
no reliable scientific basis for alleged injuries from the agricultural field application of DBCP,
Dole continues to seek reasonable resolution of other pending litigation and claims in the U.S. and
Latin America.
45
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
As to all the DBCP matters, the Company has denied liability and asserted substantial
defenses. While Dole believes there is no reliable scientific basis for alleged injuries from the
agricultural field application of DBCP, Dole continues to seek reasonable resolution of other
pending litigation and claims in the U.S. and Latin America. For example, as in Honduras, Dole is
committed to finding a prompt resolution to the DBCP claims in Nicaragua, and is prepared to pursue
a structured worker program in Nicaragua with science-based criteria. Although no assurance can be
given concerning the outcome of these cases, in the opinion of management, after consultation with
legal counsel and based on past experience defending and settling DBCP claims, the pending lawsuits
are not expected to have a material adverse effect on the Company’s financial condition or results
of operations.
European Union Antitrust Inquiry: On October 15, 2008, the European Commission (“EC”) adopted
a Decision against Dole Food Company, Inc. and Dole Fresh Fruit Europe OHG (collectively “Dole”)
and against other unrelated banana companies, finding violations of the European competition
(antitrust) laws. The Decision imposes €45.6 million in fines on Dole.
The Decision follows a Statement of Objections, issued by the EC on July 25, 2007, and
searches carried out by the EC in June 2005 at certain banana importers and distributors, including
two of Dole’s offices. On November 28 and 29, 2007, the EC conducted searches of certain of the
Company’s offices in Italy and Spain, as well as of other companies’ offices located in these
countries.
On December 3, 2008, the EC agreed in writing that if Dole makes an initial payment of $10
million to the EC on or before January 22, 2009, the EC will stay the deadline for a provisional
payment, or coverage by a prime bank guaranty, of the remaining balance (plus interest as from
January 22, 2009), until April 30, 2009. Dole made this initial $10 million (€7.6 million) payment
on January 21, 2009 and it will be included in other assets in the Company’s first quarter 2009
consolidated balance sheet.
Although no assurances can be given, and although there could be a material adverse effect on
the Company, the Company believes that it has not violated the European competition laws. No
accrual for the Decision has been made in the accompanying consolidated financial
statements, since the Company cannot determine at this time the amount of probable loss, if any,
incurred as a result of the Decision.
Honduran Tax Case: In 2005, the Company received a tax assessment from Honduras of
approximately $137 million (including the claimed tax, penalty, and interest through the date of
assessment) relating to the disposition of all of our interest in Cervecería Hondureña, S.A in
2001. Dole believes the assessment is without merit and filed an appeal with the Honduran tax
authorities, which was denied. As a result of the denial in the administrative process, in order to
negate the tax assessment, on August 5, 2005, the Company proceeded to the next stage of the
appellate process by filing a lawsuit against the Honduran government in the Honduran
Administrative Tax Trial Court. The Honduran government sought dismissal of the lawsuit and
attachment of assets, which Dole challenged. The Honduran Supreme Court affirmed the decision of
the Honduran intermediate appellate court that a statutory prerequisite to challenging the tax
assessment on the merits is the payment of the tax assessment or the filing of a payment plan with
the Honduran courts; Dole has challenged the constitutionality of the statute requiring such
payment or payment plan. Although no assurance can be given concerning the outcome of this case, in
the opinion of management, after consultation with legal counsel, the pending lawsuits and
tax-related matters are not expected to have a material adverse effect on the Company’s financial
condition or results of operations.
Hurricane Katrina Cases: Dole was one of a number of parties sued, including the Mississippi
State Port Authority as well as other third-party terminal operators, in connection with the August
2005 Hurricane Katrina. The plaintiffs asserted that they suffered property damage because of the
defendants’ alleged failure to reasonably secure shipping containers at the Gulfport, Mississippi
port terminal before Hurricane Katrina hit. Dole prevailed in its motions to dismiss several of
these cases, and the remainder were voluntarily withdrawn. No further litigation is pending
against the Company related to Hurricane Katrina, and any new claims would now be time-barred.
46
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Spinach E. coli Outbreak: On September 15, 2006, Natural Selection Foods LLC recalled all
packaged fresh spinach that Natural Selection Foods produced and packaged with Best-If-Used-By
dates from August 17 through October 1, 2006, because of reports of illness due to E. coli O157:H7
following consumption of packaged fresh spinach produced by Natural Selection Foods. These packages
were sold under 28 different brand names, only one of which was ours. At that time, Natural
Selection Foods produced and packaged all of our spinach items. Dole has no ownership or other
economic interest in Natural Selection Foods.
The U.S. Food and Drug Administration announced on September 29, 2006 that all spinach
implicated in the current outbreak has traced back to Natural Selection Foods. The FDA stated that
this determination was based on epidemiological and laboratory evidence obtained by multiple states
and coordinated by the Centers for Disease Control and Prevention. The trace back investigation has
narrowed to four implicated fields on four ranches. FDA and the State of California announced
October 12, 2006 that the test results for certain samples collected during the field investigation
of the outbreak of E. coli O157:H7 in spinach were positive for E. coli O157:H7. Specifically,
samples of cattle feces on one of the implicated ranches tested positive based on matching genetic
fingerprints for the same strain of E. coli O157:H7 found in the infected persons. To date, 204
cases of illness due to E. coli O157:H7 infection have been reported to the Centers for Disease
Control and Prevention (203 in 26 states and one in Canada) including 31 cases involving a type of
kidney failure called Hemolytic Uremic Syndrome (HUS), 104 hospitalizations, and three deaths. The
vast majority of the spinach E. coli O157:H7 claims were handled outside the formal litigation
process, and Dole expects that to continue to be true for the few remaining claims. Since Natural
Selection Foods, not Dole, produced and packaged the implicated spinach products, Dole has tendered
the defense of these and other claims to Natural Selection Foods and its insurance carriers and has
sought indemnity from Natural Selection Foods, based on the provisions of the contract between Dole
and Natural Selection Foods. The company (and its insurance carriers) that grew the implicated
spinach for Natural Selection Foods is involved in the resolution of the E. coli O157:H7 claims.
Dole expects that the spinach E. coli O157:H7 matter will not have a material adverse effect on
Dole’s financial condition or results of operations.
NOTE 19 — RELATED PARTY TRANSACTIONS
David
H. Murdock, the Company’s Chairman, owns, inter alia,
Castle & Cooke, Inc. (“Castle”), a transportation equipment
leasing company, a private dining club and a hotel. During the years ended January 3, 2009,
December 29, 2007 and December 30, 2006, the Company paid Mr. Murdock’s companies an aggregate of
approximately $9.3 million, $7.2 million and $7.6 million, respectively, primarily for the rental
of truck chassis, generator sets and warehousing services. Castle purchased approximately $0.7
million, $0.7 million and $1.1 million of products from the Company during the years ended January3, 2009, December 29, 2007 and December 30, 2006, respectively.
The Company and Castle are responsible for 68% and 32%, respectively, of all obligations under
an aircraft lease arrangement. Each party is responsible for the direct costs associated with its
use of this aircraft, and all other indirect costs are shared proportionately. During the year
ended January 3, 2009, December 29, 2007 and December 30, 2006, the Company’s proportionate share
of the direct and indirect costs for this aircraft was $2.2 million, $2 million and $1.9 million,
respectively.
The Company and Castle operate their risk management departments on a joint basis. Insurance
procurement and premium costs are based on the relative risk borne by each company as determined by
the insurance underwriters. Administrative costs of the risk management department, which were not
significant, are shared on a 50-50 basis.
The Company retains risk for commercial property losses sustained by the Company and Castle
totaling $3 million in the aggregate and $3 million per occurrence, above which the Company has
coverage provided through third-party insurance carriers. The arrangement provides for premiums to
be paid to the Company by Castle in exchange for the Company’s retained risk. The Company received
approximately $0.5 million, $0.6 million and $0.6 million from Castle during 2008, 2007 and 2006,
respectively.
The Company had a number of other transactions with Castle and other entities owned by Mr.
Murdock, generally on an arms-length basis, none of which, individually or in the aggregate, were
material. The Company had
outstanding net accounts receivable of $1.2 million and a note receivable of $5.7 million due
from Castle at January 3, 2009 and outstanding net accounts receivable of $0.5 million and a note
receivable of $6 million due from Castle at December 29, 2007.
47
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
During the first quarter of 2007, the Company and Castle executed a lease agreement pursuant
to which the Company’s fresh vegetables operations occupy an office building in Monterey,
California, which is owned by Castle. Rent expense for the years ended January 3, 2009 and December29, 2007 totaled $1.4 million and $1 million, respectively.
NOTE 20 — IMPACT OF HURRICANE KATRINA
During the third quarter of 2005, the Company’s operations in the Gulf Coast area of the
United States were impacted by Hurricane Katrina. The Company’s fresh fruit division utilizes the
Gulfport, Mississippi port facility to receive and store product from its Latin American
operations. The Gulfport facility, which is leased from the Mississippi Port Authority, incurred
significant damage from Hurricane Katrina. As a result of the damage sustained at the Gulfport
terminal, the Company diverted shipments to other Dole port facilities including Freeport, Texas;
Port Everglades, Florida; and Wilmington, Delaware. The Company resumed discharging shipments of
fruit and other cargo in Gulfport during the fourth quarter of 2005. The rebuilding of the
Company’s Gulfport facility was completed during 2007.
The financial impact to the Company’s fresh fruit operations included the loss of cargo and
equipment, property damage and additional costs associated with re-routing product to other ports
in the region. Equipment that was destroyed or damaged included refrigerated and dry shipping
containers, as well as chassis and generator-sets used for land transportation of the shipping
containers. The Company maintains customary insurance for its property, including shipping
containers, as well as for business interruption.
The Hurricane Katrina related expenses, insurance proceeds and net gain (loss) on the
settlement of the claims for 2007, 2006 and 2005 were as follows:
2007
2006
2005
Cumulative
(In thousands)
Total Cargo and Property Policies:
Expenses
$
(551
)
$
(1,768
)
$
(10,088
)
$
(12,407
)
Insurance proceeds
9,607
8,004
6,000
23,611
Net gain (loss)
$
9,056
$
6,236
$
(4,088
)
$
11,204
Total charges of $12.4 million include direct incremental expenses of $6.1 million, write-offs
of owned assets with a net book value of $4.1 million and leased assets of $2.2 million
representing amounts due to lessors. The Company settled all of its cargo claim for $9.2 million in
December 2006 and, as a result, recognized a gain of $5.2 million in 2006. In December 2007, the
Company settled all of its property claim for $14.4 million. The Company realized a gain of $9.1
million in 2007 associated with the settlement of its property claim, of which $5.2 million was for
the reimbursement of lost and damaged property. The realized gains associated with the settlements
of both the cargo and property claims are recorded in cost of products sold in the consolidated
statement of operations in 2007 and 2006.
48
DOLE FOOD COMPANY, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
NOTE 21 — GUARANTOR FINANCIAL INFORMATION
In connection with the issuance of the 2011 Notes in March 2003 and the 2010 Notes in May
2003, all of the Company’s wholly-owned domestic subsidiaries (“Guarantors”) have fully and
unconditionally guaranteed, on a joint and several basis, the Company’s obligations under the
indentures related to such Notes and to the Company’s 2009 Notes, 2013 Debentures and 2014 Notes (the
“Guarantees”). Each Guarantee is subordinated in right of payment to the Guarantors’ existing and
future senior debt, including obligations under the senior secured credit facilities, and will rank
pari passu with all senior subordinated indebtedness of the applicable Guarantor.
The accompanying guarantor consolidating financial information is presented on the equity
method of accounting for all periods presented. Under this method, investments in subsidiaries are
recorded at cost and adjusted for the Company’s share in the subsidiaries’ cumulative results of
operations, capital contributions and distributions and other changes in equity. Elimination
entries relate primarily to the elimination of investments in subsidiaries and associated
intercompany balances and transactions as well as cash overdraft and income tax reclassifications.