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Dole Food Co Inc – ‘10-K’ for 12/30/06

On:  Friday, 3/23/07, at 5:25pm ET   ·   For:  12/30/06   ·   Accession #:  892569-7-319   ·   File #:  1-04455

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/23/07  Dole Food Co Inc                  10-K       12/30/06   10:2.5M                                   Bowne - Biv/FA

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML   1.58M 
 2: EX-3.1.BT   Articles of Incorporation/Organization or By-Laws   HTML      5K 
 3: EX-3.2.C    Articles of Incorporation/Organization or By-Laws   HTML     30K 
 5: EX-21       Subsidiaries                                        HTML     18K 
 6: EX-23       Consent of Experts or Counsel                       HTML      7K 
 4: EX-12       Statement re: Computation of Ratios                 HTML     18K 
 7: EX-31.1     Certification -- Sarbanes-Oxley Act - Sect. 302     HTML     12K 
 8: EX-31.2     Certification -- Sarbanes-Oxley Act - Sect. 302     HTML     12K 
 9: EX-32.1     Certification -- Sarbanes-Oxley Act - Sect. 906     HTML      8K 
10: EX-32.2     Certification -- Sarbanes-Oxley Act - Sect. 906     HTML      8K 


10-K   —   Annual Report
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Table of Contents
"Part I
"Business
"1A
"Risk Factors
"1B
"Unresolved Staff Comments
"Properties
"Legal Proceedings
"Submission of Matters to a Vote of Security Holders
"Part Ii
"Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
"Selected Financial Data
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"7A
"Quantitative and Qualitative Disclosures About Market Risk
"Financial Statements and Supplementary Data
"Report of Independent Registered Public Accounting Firm
"Consolidated Statements of Operations for the Years Ended December 30, 2006, December 31, 2005 and January 1, 2005
"Consolidated Balance Sheets as of December 30, 2006 and December 31, 2005
"Consolidated Statements of Cash Flows for the Years Ended December 30, 2006, December 31, 2005 and January 1, 2005
"Consolidated Statements of Shareholders' Equity for the Years Ended December 30, 2006, December 31, 2005 and January 1, 2005
"Notes to Consolidated Financial Statements
"Quarterly Financial Information (Unaudited)
"Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
"9A
"Controls and Procedures
"9B
"Other Information
"Part Iii
"10
"Directors and Executive Officers of the Registrant
"11
"Executive Compensation
"12
"Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
"13
"Certain Relationships and Related Transactions
"14
"Principal Accountant Fees and Services
"Part Iv
"15
"Exhibits and Financial Statement Schedules
"Signatures

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Table of Contents

 C: 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
 C: 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2006
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                 
 
Commission File Number 1-4455
 
 
 
 
Dole Food Company, Inc.
(Exact name of Registrant as specified in its charter)
 
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  99-0035300
(IRS Employer
Identification No.)
 
One Dole Drive, Westlake Village, California 91362
(Address of principal executive offices)
 
Registrant’s telephone number including area code:
(818) 879-6600
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, $0.001 Par Value   none
 
 
 
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.  Yes þ     No o
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer o     Accelerated Filer o     Non-accelerated Filer þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The approximate aggregate market value of voting and non-voting stock held by non-affiliates of the registrant was $0 as of the last business day of the registrant’s most recently completed second fiscal quarter.
 
The number of shares of Common Stock outstanding as of March 23, 2007 was 1,000.
 
DOCUMENTS INCORPORATED BY REFERENCE
None
 

 C: 


 

 
DOLE FOOD COMPANY, INC.
 
FORM 10-K
Fiscal Year Ended December 30, 2006
 
TABLE OF CONTENTS
 
                 
Item Number
       
In Form 10-K
      Page
 
  Business   1
  Risk Factors   10
  Unresolved Staff Comments   16
  Properties   16
  Legal Proceedings   18
  Submission of Matters to a Vote of Security Holders   21
 
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   22
  Selected Financial Data   23
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   24
  Quantitative and Qualitative Disclosures About Market Risk   42
  Financial Statements and Supplementary Data   45
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   101
  Controls and Procedures   101
  Other Information   101
 
10.
  Directors and Executive Officers of the Registrant   101
11.
  Executive Compensation   103
12.
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   113
13.
  Certain Relationships and Related Transactions   113
14.
  Principal Accountant Fees and Services   115
 
15.
  Exhibits and Financial Statement Schedules   116
  123
 EXHIBIT 3.1(BT)
 EXHIBIT 3.2(C)
 EXHIBIT 12
 EXHIBIT 21
 EXHIBIT 23
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2


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PART I
 
Item 1.   Business
 
Dole Food Company, Inc. was founded in Hawaii in 1851 and was incorporated under the laws of Hawaii in 1894. Dole reincorporated as a Delaware corporation in July 2001. Unless the context otherwise requires, Dole Food Company, Inc. and its consolidated subsidiaries are referred to in this report as the “Company,” “Dole” and “we.”
 
Dole’s principal executive offices are located at One Dole Drive, Westlake Village, California 91362, telephone (818) 879-6600. During fiscal year 2006, we had, on average, approximately 47,000 full-time permanent employees and 28,000 full-time seasonal or temporary employees, worldwide. Dole is the world’s largest producer and marketer of high-quality fresh fruit, fresh vegetables and fresh-cut flowers. Dole markets a growing line of packaged and frozen foods and is a produce industry leader in nutrition education and research. Our website address is www.dole.com. Since we have only one stockholder and since our debt securities are not listed or traded on any exchange, we do not make available free of charge, on or through our website, electronically or through paper copies our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, or any amendments to those reports.
 
Dole’s operations are described below. For detailed financial information with respect to Dole’s business and its operations, see Dole’s Consolidated Financial Statements and the related Notes to Consolidated Financial Statements, which are included in this report.
 
Overview
 
We are the world’s largest producer of fresh fruit, fresh vegetables and fresh-cut flowers, and we market a growing line of value-added products. We are one of the world’s largest producers of bananas and pineapples, a leading marketer of citrus and table grapes worldwide and an industry leader in packaged fruit products, ready-to-eat salads and vegetables. Our most significant products hold the number 1 or number 2 positions in the respective markets in which we compete. For the fiscal year ended December 30, 2006, we generated revenues of $6.2 billion.
 
We provide wholesale, retail and institutional customers around the world with high quality food products that bear the DOLE® trademarks. The DOLE brand was introduced in 1933 and we believe it is one of the most recognized for fresh and packaged produce in the United States, as evidenced by our 57% unaided consumer brand awareness, twice that of our nearest competitor, according to a 2004 study by TNS-NFO, an international market research firm. We utilize product quality, food safety, brand recognition, competitive pricing, customer service and consumer marketing programs to enhance our position within the food industry. Consumer and institutional recognition of the DOLE trademarks and related brands and the association of these brands with high quality food products contribute significantly to our leading positions in the markets that we serve.
 
We source or sell over 200 products in more than 90 countries. Our fully-integrated operations include sourcing, growing, processing, distributing and marketing our products. Our products are produced both directly on Dole-owned or leased land and through associated producer and independent grower arrangements under which we provide varying degrees of farming, harvesting, packing, storing, shipping, stevedoring and marketing services.
 
Industry
 
The worldwide fresh produce industry is characterized by consistent underlying demand and favorable growth dynamics. In recent years, the market for fresh produce has grown at a rate above population growth, supported by ongoing trends including greater consumer demand for healthy, fresh and convenient foods, increased retailer square footage devoted to produce, and increased emphasis on fresh produce as a differentiating factor in attracting customers. According to the Food and Agriculture Organization, worldwide produce production grew 3.6% per annum from 814 million metric tons in 1990 to an estimated 1.4 billion in 2005. Total wholesale fresh produce sales in the United States surpassed $97 billion in 2005, up from approximately $35 billion in 1987, representing a 5.8% compounded annual growth rate. In the U.S., wholesale fresh produce sales are split roughly evenly between the retail and foodservice channels.


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Health conscious consumers are driving much of the growth in demand for fresh produce. Over the past 20 years, the benefits of natural, preservative free foods have become an increasingly prominent element of the public dialogue on health and nutrition. As a result, consumption of fresh fruit and vegetables has increased markedly. According to the U.S. Department of Agriculture, Americans consumed 45 more pounds of fresh fruit and vegetables per capita in 2004 than they did in 1987. Related to the focus on health and nutrition, consumers are increasingly consuming organic foods. Specifically, organic produce sales grew 11% to $5.4 billion in 2006, according to the Organic Trade Association. Organics now represent 5.5% of total retail produce sales in the U.S.
 
Consumers are also demonstrating continued demand for convenient, ready-to-eat products. Food manufacturers have responded with new product introductions and packaging innovations in segments such as fresh-cut fruit and vegetables and ready-to-eat salads, contributing to industry growth. For example, the U.S. market for fresh-cut produce has increased from an estimated $5 billion in 1994 to a projected $13.4 billion in 2005, according to the Produce Marketing Association.
 
The North American packaged fruit industry is experiencing steady growth, driven by consumer demand for healthy snacking options. FRUIT BOWLS® in plastic cups, introduced by Dole in 1998, and other innovative packaging items have steadily displaced the canned alternative. These new products have driven overall growth in the packaged fruit category, while the consumption of traditional canned fruit has declined as consumers have opted for fresh products and more innovative packaging.
 
Retail consolidation and the growing importance of food to mass merchandisers are major factors affecting the food manufacturing and fresh produce industries. As food retailers have grown and expanded, they have sought to increase profitability through value-added product offerings and in-store services. The fresh produce category is also attractive to retailers due to its higher margins. On most packaged fruit products, retailers generate a 12-36% trade margin. Some retailers are reducing their dry goods sections of the store, in favor of expanding fresh and chilled items, offering new product and merchandising opportunities for packaged fruit. Fully integrated produce companies, such as Dole, are well positioned to meet the needs of large retailers through the delivery of consistent, high quality produce, reliable service, competitive pricing and innovative products. In addition, these companies have sought to strengthen relationships with leading retailers through value-added services such as banana ripening and distribution, category management, branding initiatives and establishment of long-term supply agreements.
 
Competitive Strengths
 
Our competitive strengths have contributed to our strong historical operating performance and should enable us to capitalize on future growth opportunities:
 
  •  Market Share Leader.  Our most significant products hold the number 1 or number 2 positions in the respective markets in which we compete. We maintain number 1 market share positions in North American bananas, North American iceberg lettuce, celery, cauliflower, winter fruits exported from Chile, and packaged fruit products, including our line of plastic fruit cups called FRUIT BOWLS, FRUIT BOWLS in Gel and our new fruit parfaits. In addition, we believe that we are the only fully integrated fresh-cut flower and bouquet supplier of our size in North America.
 
  •  Strong Global Brand.  Consumer and institutional recognition of the DOLE trademark and related brands and the association of these brands with high quality food products contribute significantly to our leading positions in the markets that we serve. By implementing a global marketing program, we have made the distinctive red “DOLE” letters and sunburst a familiar symbol of freshness and quality recognized around the world. We believe that opportunities exist to leverage the DOLE brand through product extensions and new product introductions.
 
  •  Low-Cost Production Capabilities.  We believe we are one of the lowest cost producers of many of our major product lines, including bananas, North American fresh vegetables and packaged fruit products. Over the last several years we have undertaken various initiatives to achieve this low-cost position, including leveraging our global logistics infrastructure more efficiently. We intend to maintain these low-cost positions through a continued focus on operating efficiency.


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  •  State-of-the-Art Infrastructure.  We have made significant investments in our production, processing, transportation and distribution infrastructure with the goal of efficiently delivering the highest quality and freshest product to our customers. We own or lease over 60 processing, ripening and distribution centers, and the largest dedicated refrigerated containerized shipping fleet in the world, with 25 ships and approximately 14,200 refrigerated containers. The investments in our infrastructure should allow for continued growth in the near term. In addition, our market-leading logistics and distribution capabilities allow us to act as a preferred fresh and packaged food provider to leading global supermarkets and mass merchandisers.
 
  •  Diversity of Sourcing Locations.  We currently source our fresh fruits, vegetables and fresh-cut flowers from 70 countries and distribute products in more than 90 countries. We are not dependent on any one country for the sourcing of our products. The largest concentration of production is in Ecuador, where we sourced approximately 34% of our Latin bananas in 2006. The diversity of our production sources reduces our risk from exposure to natural disasters and political disruptions in any one particular country.
 
  •  Experienced Management Team.  Our management team has a demonstrated history of delivering strong operating results through disciplined execution. The current management team has been instrumental in our continuing drive to transform Dole from a production driven company into a sales and marketing driven one.
 
Business Strategy
 
Key elements of our strategy include:
 
  •  Leveraging our Strong Brand and Market Leadership Position.  Our most significant products hold number 1 or number 2 market positions in the respective markets in which we compete. We intend to maintain those positions and continue to expand our leadership both in new product areas and with new customers. We have a history of leveraging our strong brand to successfully enter, and in many cases become the leading player in, value-added food categories. For example, we attained the number 1 market share in the plastic fruit cups category only 4 years after introducing FRUIT BOWLS and FRUIT BOWLS in Gel. We intend to continue to evaluate and to strategically introduce other branded products in the value-added sectors of our business.
 
  •  Focusing on Value-Added Products.  Since 1995, we have successfully shifted our product mix toward value-added food categories and away from commodity fruits and vegetables. For example, we have found major success in our ready-to-eat salad lines and, most recently, FRUIT BOWLS, FRUIT BOWLS in Gel and fruit parfaits. These value-added food categories are growing at a faster rate than our traditional commodity businesses and are generating healthy margins. Overall, we have significantly increased our percentage of revenue from value-added products. This shift has been most pronounced in our fresh vegetables and packaged foods businesses, where value-added products now account for approximately 50% and 55% of those businesses’ respective revenues. We plan to continue to address the growing demand for convenient and innovative products by investing in our higher margin, value-added food businesses.
 
  •  Further Improving Operating Efficiency and Cash Flow.  We intend to continue to focus on profit improvement initiatives and maximizing cash flow. We will continue to:
 
  •  analyze our current customer base and focus on profitable relationships with strategically important customers;
 
  •  leverage our purchasing power to reduce our costs of raw materials;
 
  •  make focused capital investments to improve productivity; and
 
  •  sell unproductive assets.
 
Business Segments
 
We have four business segments: fresh fruit, fresh vegetables, packaged foods and fresh-cut flowers. The fresh fruit segment contains several operating divisions that produce and market fresh fruit to wholesale, retail and institutional customers worldwide. The fresh vegetables segment contains two operating divisions that produce and


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market commodity and fresh-cut vegetables to wholesale, retail and institutional customers, primarily in North America, Europe and Asia. The packaged foods segment contains several operating divisions that produce and market packaged foods including fruit, juices and snack foods. Our fresh-cut flowers segment sources, imports and markets fresh-cut flowers, grown mainly in Colombia, primarily to wholesale florists and retail grocers in the United States. For financial information on the four business segments, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data, Note 14 — Business Segments, in this Form 10-K.
 
Fresh Fruit
 
Our fresh fruit business segment has four primary operating divisions: bananas, fresh pineapple, European Ripening and Distribution and Dole Chile. We believe that we are the industry leader in growing, sourcing, shipping and distributing consistently high-quality fresh fruit. The fresh fruit business segment represented approximately 65% of 2006 consolidated total revenues.
 
Bananas
 
We are one of the world’s largest producers of bananas, growing and selling more than 149 million boxes of bananas annually. We sell most of our bananas under the DOLE brand. We primarily sell bananas to customers in North America, Europe and Asia. We are the number 1 brand of bananas in both North America (an approximate 35% market share) and Japan (an approximate 28% market share) and the number 2 brand in Europe (an approximate 15% market share). In Latin America, our bananas are primarily sourced in Honduras, Costa Rica, Ecuador, Colombia, Guatemala and Peru and grown on approximately 36,500 acres of company-owned farms and approximately 82,000 acres of independent producers’ farms. Bananas produced by us in Latin America are shipped primarily to North America and Europe on our refrigerated and containerized shipping fleet. In Asia, we source our bananas primarily in the Philippines. Bananas accounted for approximately 40% of our fresh fruit business segment revenues in 2006.
 
Consistent with our strategy to focus on value-added products, we have continued to expand our focus on higher margin, niche bananas. While the traditional “green” bananas still comprise the majority of our banana sales, we have successfully introduced niche bananas (e.g., organic). We have also improved the profitability of our banana business by focusing on profitable customer relationships and markets.
 
While bananas are sold year round, there is a seasonal aspect to the banana business. Banana prices and volumes are typically higher in the first and second calendar quarters before there is increased competition from summer fruits. Approximately 90% of our total retail volume in North America is under contract. The contracts are typically one year in duration and help to insulate us from fluctuations in the banana spot market. Our principal competitors in the international banana business are Chiquita Brands International, Inc. and Fresh Del Monte Produce Inc.
 
European Ripening and Distribution
 
Our European Ripening & Distribution business distributes DOLE and non-DOLE branded fresh produce in Europe. This business operates 37 sales and distribution centers in eleven countries, predominantly in Western Europe. This is a value-added business for us since European retailers generally do not self-distribute or self-ripen. This business assists us in firmly establishing customer relationships in Europe. European Ripening and Distribution accounted for approximately 38% of our fresh fruit business segment’s revenues in 2006.
 
Fresh Pineapples
 
We are the number 2 global producer of fresh pineapples, growing and selling more than 30 million boxes annually. We sell our pineapples globally and source them from company operated farms and independent growers in Latin America, Hawaii, the Philippines and Thailand. We produce and sell two principal types of pineapples: the sweet yellow pineapple and the Champaka (or green) pineapple. The sweet yellow pineapple was introduced in 1999 under the DOLE PREMIUM SELECT® label. We now market a substantial portion of this fruit under the DOLE TROPICAL GOLD® label. The sweet yellow pineapple sells for a higher price than the Champaka, which


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translates into a higher margin for our customers and us. The Champaka pineapple, which traditionally had been the most widely available type of pineapple, is primarily sold to the foodservice sector and is also used in our packaged products. Our sweet yellow pineapple has had excellent market acceptance. Unit volume grew by 12% in 2006 as compared with 2005. Our primary competitor in fresh pineapples is Fresh Del Monte Produce Inc. Pineapples accounted for approximately 9% of our fresh fruit business segment’s revenues in 2006.
 
Dole Chile
 
We began our Chilean operations in 1982 and have grown to become the largest exporter of Chilean fruit. We export grapes, apples, pears, stone fruit (e.g., peaches and plums) and kiwifruit from approximately 3,800 Company owned or Company leased acres and 13,000 contracted acres. The weather and geographic features of Chile are similar to those of the Western United States, with opposite seasons. Accordingly, Chile’s harvest is counter-seasonal to that in the northern hemisphere, offsetting the seasonality in our other fresh fruit. We primarily export Chilean fruit to North America, Latin America and Europe. Our Dole Chile business division accounted for approximately 7% of our fresh fruit business segment’s revenues in 2006.
 
Fresh Vegetables
 
Our fresh vegetables business segment operates through two divisions: commodity and value-added. We source our fresh vegetables from company-owned and contracted farms. To satisfy the increasing demand for our products, we have continued to expand production and distribution capabilities of our fresh vegetables segment. Our Yuma, Arizona production facility transitioned from a five-month seasonal operation to a year-round production operation in the fall of 2002 to accommodate growth in this segment. We began construction of a fourth salad plant in Bessemer City, North Carolina, in November 2005 and the plant became operational in January 2007. The North Carolina plant will service east coast markets. Under our arrangements with independent growers, we purchase fresh produce at the time of harvest and are generally responsible for harvesting, packing and shipping the product to our central cooling and distribution facilities. We have continued to focus on our value-added products, which now account for more than 50% of revenues for this segment. The fresh vegetables business segment accounted for approximately 18% of 2006 consolidated total revenues.
 
Commodity Vegetables
 
We source, harvest, cool, distribute and market more than 20 different types of fresh vegetables, including iceberg lettuce, red and green leaf lettuce, romaine lettuce, butter lettuce, celery, cauliflower, broccoli, carrots, brussels sprouts, green onions, asparagus, snow peas and artichokes. We sell our commodity vegetable products primarily in North America, Asia and, to a lesser extent, Western Europe. In North America, we are the number one provider of iceberg lettuce, celery and cauliflower. Our primary competitors in this category include: Tanimura & Antle, Duda, Salyer American and Ocean Mist. In October 2004, we acquired Coastal Berry Company, LLC, subsequently renamed as Dole Berry Company, LLC, as a result of which, Dole became the third largest producer of strawberries in North America.
 
Value-Added
 
Our value-added vegetable products include ready-to-eat salads, broccoli florets and cauliflower florets. Our unit market share of the ready-to-eat salads category reported by Information Resources, Inc. (“IRI”) was approximately 34.7% for the 12-week period ended December 30, 2006. Our value-added products typically have more stable margins than commodity vegetables, thereby helping to reduce our exposure to commodity price fluctuations. New product development continues to be a key driver in the growth of this segment. Our primary competitors in this segment include Fresh Express, owned by Chiquita Brands International, Inc., Ready Pac and Taylor Farms.
 
Packaged Foods
 
Our packaged foods segment produces canned pineapple, canned pineapple juice, fruit juice concentrate, fruit in plastic cups, jars and pouches and fruit parfaits. Most of our significant packaged food products hold the number 1


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branded market position in North America. We remain the market leader in the plastic fruit cup category with six of the top ten items in category. Fruit for our packaged food products is sourced primarily in the Philippines, Thailand, the United States and China and packed primarily in four Asian canneries, two in Thailand and two in the Philippines. We have continued to focus on expanding our product range beyond our traditional canned fruit and juice products. Non-canned products accounted for approximately 55% of the segment’s revenues.
 
Our FRUIT BOWLS products were introduced in 1998 and continue to exceed our volume and share expectations. The trend towards convenience and healthy snacking has been responsible for the explosive growth in the plastic fruit cup category. The plastic fruit cup category is now larger than the applesauce cup and shelf-stable gelatin cup categories. In an effort to keep up with this demand, we have made significant investments in our Asian canneries. We have significantly increased our FRUIT BOWLS capacity in the past four years. These investments should ensure our position as an industry innovator and low cost producer. We are now producing more plastic cups than traditional cans. Our FRUIT BOWLS products had a 51% market share in the United States during 2006 as reported by IRI. In 2003, Dole introduced fruit in a 24.5 oz. plastic jar. This growing business achieved a 45% market share in the United States during 2006 as reported by IRI.
 
In June 2004, Dole acquired Wood Holdings, Inc. and its operating company, J.R. Wood, Inc. (subsequently renamed Dole Packaged Frozen Foods, Inc.), a frozen fruit producer and manufacturer, in order to further leverage the DOLE brand and strengthen our existing product portfolio. We began shipping DOLE branded frozen fruit products in February of 2005, and it is now the number one branded frozen fruit product in the United States. Effective as of January 1, 2006, Dole Packaged Frozen Foods, Inc. was converted to a limited liability company, the assets and liabilities of the Dole Packaged Foods division were contributed to Dole Packaged Frozen Foods, Inc., and the combined entity was renamed Dole Packaged Foods, LLC.
 
With a broader line of convenience-oriented products, we are gaining expanded distribution in non-grocery channels. These channels are growing faster than the grocery channel and the cost of gaining new distribution in them is lower. We have gained significant new distribution in these alternative channels, particularly for our fruit cup business.
 
Our packaged foods segment accounted for approximately 15% of 2006 consolidated revenues.
 
Fresh-Cut Flowers
 
We entered the fresh-cut flowers business in 1998 and are one of the largest producers of fresh-cut flowers in Latin America with over 90% of our Latin American flowers shipped into North America. Our products include over 500 varieties of fresh-cut flowers such as roses, carnations and alstroemeria. The fresh-cut flowers business fits our core competencies including expertise in perishable products, strong relationships with and knowledge of the grocery channel, the ability to manage production in the southern hemisphere, and sophisticated logistics capabilities.
 
We are the only flower importer with guaranteed daily deliveries by air. Immediately after harvesting, our flowers are flown to our Miami facility where temperatures are maintained within one-half degree of required levels in all warehouse and production operations. Maintaining the cold chain enables us to deliver the freshest and healthiest flowers to the market.
 
Dole’s focus is on supply chain optimization to provide its customers industry-leading service in the procurement of flowers. Current management emphasis is on increasing customer service, rationalizing operational costs, reducing SKUs and automating processes. Our fresh-cut flowers segment accounted for approximately 3% of 2006 consolidated revenues.
 
Global Logistics
 
We have significant food sourcing and related operations in Cameroon, Chile, China, Colombia, Costa Rica, Ecuador, Honduras, Ivory Coast, the Philippines, South Africa, Spain, Thailand and the United States. Significant volumes of Dole’s fresh fruit and packaged products are marketed in Canada, Western Europe, Japan and the United States, with lesser volumes marketed in Australia, China, Hong Kong, New Zealand, South Korea, and other countries in Asia, Europe and Central and South America.


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The produce that we distribute internationally is transported primarily by 25 owned or leased ocean-going vessels. We ship our tropical fruit in owned or chartered refrigerated vessels. All of our tropical fruit shipments into the North American and core European markets are delivered using pallets or containers. This increases efficiency and minimizes damage to the product from handling. Most of the vessels are equipped with controlled atmosphere technology, which improves product quality. “Backhauling” services, transporting third-party cargo primarily from North America and Europe to Latin America, reduce net transportation costs. We use vessels that are both owned or operated under long-term leases, as well as vessels chartered under contracts that typically last one year. Our fresh-cut flowers are primarily transported via chartered flights.
 
Customers
 
Our top 10 customers in 2006 accounted for approximately 29% of total revenues. No one customer accounted for more than 7% of total 2006 revenues. Our customer base is highly diversified, both geographically and in terms of product mix. Each of our segments’ largest customers accounted for less than 30% of that segment’s revenues. Our largest customers are leading global and regional mass merchandisers and supermarkets in North America, Europe and Asia.
 
Sales and Marketing
 
We sell and distribute our fruit and vegetable products through a network of fresh produce operations in North America, Europe, Asia and Latin America. Some of these operations involve the sourcing, distribution and marketing of fresh fruits and vegetables while others involve only distribution and marketing. We have regional sales organizations to service major retail and wholesale customers. We also use the services of brokers in certain regions, primarily for sales of packaged foods and ready-to-eat salads. Retail customers include large chain stores with which Dole enters into product and service contracts, typically for a one or two-year term. Wholesale customers include large distributors in North America, Europe and Asia. We use consumer advertising and promotion support, together with trade spending, to support awareness of new items to maintain and grow our exceptional brand awareness, as well as to increase nutrition and health awareness.
 
Competition
 
The global fresh and packaged produce markets are intensely competitive, and generally have a small number of global producers, filled out with independent growers, packers and middlemen. Our large, international competitors are Chiquita, Fresh Del Monte Produce and Del Monte Foods. In some product lines, we compete with smaller national producers. In fresh vegetables, a limited number of grower shippers in the United States and Mexico supply a significant portion of the United States market, with numerous smaller independent distributors also competing. We also face competition from grower cooperatives and foreign government sponsored producers. Competition in the various markets in which we operate is based on reliability of supply, product quality, brand recognition and perception, price and the ability to satisfy changing customer preferences through innovative product offerings.
 
Employees
 
During fiscal year 2006, we had on average approximately 47,000 full-time permanent employees and 28,000 full-time seasonal or temporary employees, worldwide. Approximately 32% of our employees work under collective bargaining agreements, some of which expire in 2007, subject to automatic renewals unless a notice of non- extension is given by the union or us. We have not received any notice yet that a union intends not to extend a collective bargaining agreement. We believe our relations with our employees are generally good.
 
Research and Development
 
Our research and development programs concentrate on sustaining the productivity of our agricultural lands, food safety, product quality of existing products and the development of new value-added products, as well as


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agricultural research and packaging design. Agricultural research is directed toward sustaining and improving product yields and product quality by examining and improving agricultural practices in all phases of production (such as development of specifically adapted plant varieties, land preparation, fertilization, cultural practices, pest and disease control, post-harvesting, handling, packing and shipping procedures), and includes on-site technical services and the implementation and monitoring of recommended agricultural practices. Research efforts are also directed towards integrated pest management and biological pest control. Specialized machinery is developed for various phases of agricultural production and packaging that reduces labor costs, improves productivity and efficiency and increases product quality. Agricultural research is conducted at field facilities primarily in California, Hawaii, Latin America and Asia. We also sponsor research related to environmental improvements and the protection of worker and community health. The aggregate amounts we spent on research and development in each of the last three years have not been material in any of such years.
 
Trademark Licenses
 
DOLE SOFT SERVE, a soft-serve, non-dairy dessert, is manufactured and marketed by Precision Foods, Inc. under license from us. In connection with the sale of the majority of our juice business to Tropicana Products, Inc. in May of 1995, we received cash payments up front and granted to Tropicana a license, requiring no additional future royalty payments, to use certain DOLE trademarks on certain beverage products. We continue to market DOLE canned pineapple juice and pineapple juice blend beverages. We have a number of additional license arrangements worldwide, none of which is material to Dole and its subsidiaries, taken as a whole.
 
Environmental and Regulatory Matters
 
Our agricultural operations are subject to a broad range of evolving environmental laws and regulations in each country in which we operate. In the United States, these laws and regulations include the Food Quality Protection Act of 1996, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Federal Insecticide, Fungicide and Rodenticide Act and the Comprehensive Environmental Response, Compensation and Liability Act.
 
Compliance with these foreign and domestic laws and related regulations is an ongoing process that is not currently expected to have a material effect on our capital expenditures, earnings or competitive position. Environmental concerns are, however, inherent in most major agricultural operations, including those conducted by us, and there can be no assurance that the cost of compliance with environmental laws and regulations will not be material. Moreover, it is possible that future developments, such as increasingly strict environmental laws and enforcement policies thereunder, and further restrictions on the use of agricultural chemicals, could result in increased compliance costs.
 
Our food operations are also subject to regulations enforced by, among others, the U.S. Food and Drug Administration and state, local and foreign equivalents and to inspection by the U.S. Department of Agriculture and other federal, state, local and foreign environmental, health and safety authorities. The U.S. Food and Drug Administration enforces statutory standards regarding the labeling and safety of food products, establishes ingredients and manufacturing procedures for certain foods, establishes standards of identity for foods and determines the safety of food substances in the United States. Similar functions are performed by state, local and foreign governmental entities with respect to food products produced or distributed in their respective jurisdictions.
 
In the United States, portions of our fresh fruit and vegetable farm properties are irrigated by surface water supplied by local government agencies using facilities financed by federal or state agencies, as well as from underground sources. Water received through federal facilities is subject to acreage limitations under the 1982 Reclamation Reform Act. Worldwide, the quantity and quality of water supplies varies depending on weather conditions and government regulations. We believe that under normal conditions these water supplies are adequate for current production needs.
 
Legal Proceedings
 
See Item 3, Legal Proceedings, in this Form 10-K.


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Trade Issues
 
Our foreign operations are subject to risks of expropriation, civil disturbances, political unrest, increases in taxes and other restrictive governmental policies, such as import quotas. Loss of one or more of our foreign operations could have a material adverse effect on our operating results. We strive to maintain good working relationships in each country where we operate. Because our operations are a significant factor in the economies of certain countries, our activities are subject to intense public and governmental scrutiny and may be affected by changes in the status of the host economies, the makeup of the government or public opinion in a particular country.
 
The European Union (“EU”) maintains banana regulations that impose tariffs on bananas. On January 1, 2006, the EU implemented a new “tariff only” import regime for bananas. The 2001 EC/US Understanding on Bananas required the EU to implement a tariff only banana import system on or before January 1, 2006, and the EU’s banana regime change was therefore expected by that date.
 
Banana imports from Latin America are subject to a tariff of 176 euro per metric ton for entry into the EU market. Under the EU’s previous banana regime, banana imports from Latin America were subject to a tariff of 75 euro per metric ton and were also subject to import license requirements and volume quotas. License requirements and volume quotas had the effect of limiting access to the EU banana market.
 
Although all Latin bananas are subject to a tariff of 176 euro per metric ton, up to 775,000 metric tons of bananas from African, Caribbean, and Pacific (“ACP”) countries may be imported to the EU duty-free. This preferential treatment of a zero tariff on up to 775,000 tons of ACP banana imports, as well as the 176 euro per metric ton tariff applied to Latin banana imports, has been challenged by Panama, Honduras, Nicaragua, and Colombia in consultation proceedings at the World Trade Organization (“WTO”). In addition, on March 8, 2007 and on March  20, 2007, Ecuador formally requested the WTO Dispute Settlement Body (“DSB”) to appoint a panel to review the matter. The EU blocked Ecuador’s initial request for establishment of a panel on March 8; however, the EU was unable to block Ecuador’s second request under WTO rules. On March 20, 2007, the DSB announced that it will establish a panel to rule on Ecuador’s complaint. The current tariff applied to Latin banana imports may be lowered and the ACP preference of a zero tariff may be affected depending on the outcome of these WTO proceedings, but the WTO proceedings are only in their initial stages and may take several years to conclude. The Company encourages efforts to lower the tariff through negotiations with the EU and is working actively to help achieve this result.
 
Exports of our products to certain countries or regions are subject to various restrictions that may be increased or reduced in response to international economic, currency and political factors, thus affecting our ability to compete in these markets.
 
We distribute our products in more than 90 countries throughout the world. Our international sales are usually transacted in U.S. dollars and major European and Asian currencies, while certain costs are incurred in currencies different from those that are received from the sale of products. Results of operations may be affected by fluctuations in currency exchange rates in both the sourcing and selling locations.
 
Seasonality
 
Our sales volumes remain relatively stable throughout the year. We experience seasonal earnings characteristics, predominantly in the fresh fruit segment, because fresh fruit prices traditionally are lower in the second half of the year, when summer fruits are in the markets, than in the first half of the year. Our fresh vegetables segment experiences some seasonality as reflected by higher earnings in the first half of the year. Our packaged foods and fresh-cut flowers segments experience peak demand during certain well-known holidays and observances; the impact is less than in the fresh fruit segment.


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Item 1A.   Risk Factors
 
RISK FACTORS
 
In addition to the risk factors described elsewhere in this Form 10-K, you should consider the following risk factors. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known or that we currently believe to be less significant may also adversely affect us.
 
Adverse weather conditions and crop disease can impose costs on our business.
 
Fresh produce, including produce used in canning and other packaged food operations, is vulnerable to adverse weather conditions, including windstorms, floods, drought and temperature extremes, which are quite common but difficult to predict. Unfavorable growing conditions can reduce both crop size and crop quality. In extreme cases, entire harvests may be lost in some geographic areas. These factors can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.
 
Fresh produce is also vulnerable to crop disease and to pests, which may vary in severity and effect, depending on the stage of production at the time of infection or infestation, the type of treatment applied and climatic conditions. For example, black sigatoka is a fungal disease that affects banana cultivation in most areas where they are grown commercially. The costs to control this disease and other infestations vary depending on the severity of the damage and the extent of the plantings affected. These infestations can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.
 
Our business is highly competitive and we cannot assure you that we will maintain our current market share.
 
Many companies compete in our different businesses. However, only a few well-established companies operate on both a national and a regional basis with one or several branded product lines. We face strong competition from these and other companies in all our product lines.
 
Important factors with respect to our competitors include the following:
 
  •  Some of our competitors may have greater operating flexibility and, in certain cases, this may permit them to respond better to changes in the industry or to introduce new products and packaging more quickly and with greater marketing support.
 
  •  Several of our packaged food product lines are sensitive to competition from national or regional brands, and many of our product lines compete with imports, private label products and fresh alternatives.
 
  •  We cannot predict the pricing or promotional actions of our competitors or whether those actions will have a negative effect on us.
 
There can be no assurance that we will continue to compete effectively with our present and future competitors, and our ability to compete could be materially adversely affected by our leveraged position. See “Business — Competition.”
 
Our earnings are sensitive to fluctuations in market prices and demand for our products.
 
Excess supplies often cause severe price competition in our industry. Growing conditions in various parts of the world, particularly weather conditions such as windstorms, floods, droughts and freezes, as well as diseases and pests, are primary factors affecting market prices because of their influence on the supply and quality of product.
 
Fresh produce is highly perishable and generally must be brought to market and sold soon after harvest. Some items, such as lettuce, must be sold more quickly, while other items can be held in cold storage for longer periods of time. The selling price received for each type of produce depends on all of these factors, including the availability and quality of the produce item in the market, and the availability and quality of competing types of produce.


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In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products. However, even if market prices are unfavorable, produce items which are ready to be, or have been, harvested must be brought to market promptly. A decrease in the selling price received for our products due to the factors described above could have a material adverse effect on our business, results of operations and financial condition.
 
Our earnings are subject to seasonal variability.
 
Our earnings may be affected by seasonal factors, including:
 
  •  the seasonality of our supplies and consumer demand;
 
  •  the ability to process products during critical harvest periods; and
 
  •  the timing and effects of ripening and perishability.
 
Although banana production tends to be relatively stable throughout the year, banana pricing is seasonal because bananas compete against other fresh fruit that generally comes to market beginning in the summer. As a result, banana prices are typically higher during the first half of the year. Our fresh vegetables segment experiences some seasonality as reflected by higher earnings in the first half of the year. Also, there is a seasonal aspect to our fresh-cut flower business, with peak demand generally around Valentine’s Day and Mother’s Day.
 
Currency exchange fluctuations may impact the results of our operations.
 
We distribute our products in more than 90 countries throughout the world. Our international sales are usually transacted in U.S. dollars, and European and Asian currencies. Our results of operations are affected by fluctuations in currency exchange rates in both sourcing and selling locations. Although we enter into foreign currency exchange forward contracts from time to time to reduce our risk related to currency exchange fluctuation, our results of operations might still be impacted by foreign currency exchange rates, primarily the yen-to-U.S. dollar and euro-to-U.S. dollar exchange rates. For instance, we currently estimate that a 10% strengthening of the U.S. dollar relative to the Japanese yen, euro and Swedish krona would lower operating income by approximately $43 million excluding the impact of foreign currency exchange hedges. Because we do not hedge against all of our foreign currency exposure, our business will continue to be susceptible to foreign currency fluctuations.
 
We face risks related to our former use of the pesticide DBCP.
 
We formerly used dibromochloropropane, or DBCP, a nematocide that was used on a variety of crops throughout the world. The registration for DBCP with the U.S. government was cancelled in 1979 based in part on an apparent link to male sterility among chemical factory workers who produced DBCP. There are a number of pending lawsuits in the United States and other countries against the manufacturers of DBCP and the growers, including us, who used it in the past. The cost to defend or settle these lawsuits, and the costs to pay any judgments or settlements resulting from these lawsuits, or other lawsuits which might be brought, could have a material adverse effect on our business, financial condition or results of operations. See Item 3, Legal Proceedings, in this Form 10-K.
 
Our substantial indebtedness could adversely affect our operations, including our ability to perform our obligations under the notes and our other debt obligations.
 
We have a substantial amount of indebtedness. As of December 30, 2006, we had approximately $1.135 billion in senior secured indebtedness and other structurally senior indebtedness, $1.105 billion in senior unsecured indebtedness, including outstanding senior notes and debentures, and approximately $88.4 million in capital leases.
 
Our substantial indebtedness could have important consequences. For example, it could:
 
  •  make it more difficult for us to satisfy our obligations;


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  •  require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which would reduce the availability of our cash flow to fund future working capital, capital expenditures, acquisitions and other general corporate purposes;
 
  •  expose us to the risk of increased interest rates, as certain of our borrowings are at variable rates of interest;
 
  •  require us to sell assets to reduce indebtedness or influence our decisions about whether to do so;
 
  •  increase our vulnerability to general adverse economic and industry conditions;
 
  •  limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
 
  •  restrict us from making strategic acquisitions or pursuing business opportunities;
 
  •  place us at a competitive disadvantage compared to our competitors that have relatively less indebtedness; and
 
  •  limit, along with the restrictive covenants in our credit facilities and senior notes indentures, among other things, our ability to borrow additional funds. Failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations.
 
The financing arrangements for the going-private merger transactions may increase our exposure to tax liability.
 
A portion of our senior secured credit facility has been incurred by our foreign subsidiaries and was used to fund the going-private merger transactions. Although we believe, based in part upon the advice of our tax advisors, that our intended tax treatment of such transactions is appropriate, it is possible that the Internal Revenue Service could seek to characterize the going-private merger transactions in a manner that could result in the immediate recognition of taxable income by us. Any such immediate recognition of taxable income would result in a material tax liability, which could have a material adverse effect on our business, results of operations and financial condition.
 
Restrictive covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions, which could adversely affect us.
 
The indentures governing our senior notes due 2009, our senior notes due 2010, our senior notes due 2011, our debentures due 2013 and our senior secured credit facilities contain various restrictive covenants that limit our discretion in operating our business. In particular, these agreements limit our ability to, among other things:
 
  •  incur additional indebtedness;
 
  •  make restricted payments (including paying dividends on, redeeming or repurchasing our capital stock);
 
  •  issue preferred stock of subsidiaries;
 
  •  make certain investments or acquisitions;
 
  •  create liens on our assets to secure debt;
 
  •  engage in transactions with affiliates;
 
  •  merge, consolidate or transfer substantially all of our assets; and
 
  •  transfer and sell assets.
 
These covenants could have a material adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities and to fund our operations. Any future debt could also contain financial and other covenants more restrictive than those imposed under the indentures governing our senior notes due 2009, our senior notes due 2010, our senior notes due 2011, our debentures due 2013 and our senior secured credit facilities.


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A breach of a covenant or other provision in any debt instrument governing our 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 our other debt instruments. Upon the occurrence of an event of default under the senior secured credit facility or any other debt instrument, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we 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 our current or future indebtedness accelerate the payment of the indebtedness, we cannot assure you that our assets or cash flow would be sufficient to repay in full our outstanding indebtedness.
 
We face other risks in connection with our international operations.
 
Our operations are heavily dependent upon products grown, purchased and sold internationally. In addition, our operations are a significant factor in the economies of many of the countries in which we operate, increasing our visibility and susceptibility to regulatory changes. These activities are subject to risks that are inherent in operating in foreign countries, including the following:
 
  •  foreign countries could change laws and regulations or impose currency restrictions and other restraints;
 
  •  in some countries, there is a risk that the government may expropriate assets;
 
  •  some countries impose burdensome tariffs and quotas;
 
  •  political changes and economic crises may lead to changes in the business environment in which we operate;
 
  •  international conflict, including terrorist acts, could significantly impact our business, financial condition and results of operations;
 
  •  in some countries, our operations are dependent on leases and other agreements; and
 
  •  economic downturns, political instability and war or civil disturbances may disrupt production and distribution logistics or limit sales in individual markets.
 
Banana imports from Latin America are subject to import license requirements and a tariff of 176 euro per metric ton for entry into the EU market. Under the EU’s previous banana regime, banana imports from Latin America were subject to a tariff of 75 euro per metric ton and were also subject to both import license requirements and volume quotas. These license requirements and volume quotas had the effect of limiting access to the EU banana market. The increase in the applicable tariff and the elimination of the volume restrictions applicable to Latin American bananas may increase volatility in the market, which could materially adversely affect our business, results of operations or financial condition. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation — Other Matters.
 
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 the Company’s interest in Cervecería Hondureña, S.A in 2001. The Company has been contesting the tax assessment. See Item 3, Legal Proceedings.
 
Terrorism and the uncertainty of war may have a material adverse effect on our operating results.
 
Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, the subsequent response by the United States in Afghanistan, Iraq and other locations, and other acts of violence or war in the United States or abroad may affect the markets in which we operate and our operations and profitability. From time to time in the past, our operations or personnel have been the targets of terrorist or criminal attacks, and the risk of such attacks impacts our operations and results in increased security costs. Further terrorist attacks against the United States or operators of United States-owned businesses outside the United States may occur, or hostilities could develop based on the current international situation. The potential near-term and long-term effect these attacks may have on our business operations, our customers, the markets for our products, the United States economy and the economies of other places we source or sell our products is uncertain. The consequences of any


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terrorist attacks, or any armed conflicts, are unpredictable, and we may not be able to foresee events that could have an adverse effect on our markets or our business.
 
Our worldwide operations and products are highly regulated in the areas of food safety and protection of human health and the environment.
 
Our worldwide operations are subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations, including laws and regulations governing the use and disposal of pesticides and other chemicals. These regulations directly affect day-to-day operations, and violations of these laws and regulations can result in substantial fines or penalties. There can be no assurance that these fines or penalties would not have a material adverse effect on our business, results of operations and financial condition. To maintain compliance with all of the laws and regulations that apply to our operations, we have been and may be required in the future to modify our operations, purchase new equipment or make capital improvements. Actions by regulators may require operational modifications or capital improvements at various locations. Further, we may recall a product (voluntarily or otherwise) if we or the regulators believe it presents a potential risk. In addition, we have been and in the future may become subject to private lawsuits alleging that our operations caused personal injury or property damage.
 
We are subject to the risk of product liability claims.
 
The sale of food products for human consumption involves the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling or transportation phases. We have from time to time been involved in product liability lawsuits, none of which were material to our business. While we are subject to governmental inspection and regulations and believe our facilities comply in all material respects with all applicable laws and regulations, we cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. We maintain product liability insurance in an amount that we believe is adequate. However, we cannot be sure that we will not incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage.
 
We are subject to transportation risks.
 
An extended interruption in our ability to ship our products could have a material adverse effect on our business, financial condition and results of operations. Similarly, any extended disruption in the distribution of our products could have a material adverse effect on our business, financial condition and results of operations. While we believe we are adequately insured and would attempt to transport our products by alternative means if we were to experience an interruption due to strike, natural disaster or otherwise, we cannot be sure that we would be able to do so or be successful in doing so in a timely and cost-effective manner.
 
The use of herbicides and other hazardous substances in our operations may lead to environmental damage and result in increased costs to us.
 
We use herbicides and other hazardous substances in the operation of our business. We may have to pay for the costs or damages associated with the improper application, accidental release or the use or misuse of such substances. Our insurance may not be adequate to cover such costs or damages or may not continue to be available at a price or under terms that are satisfactory to us. In such cases, payment of such costs or damages could have a material adverse effect on our business, results of operations and financial condition.


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Events or rumors relating to the DOLE brand could significantly impact our business.
 
Consumer and institutional recognition of the DOLE trademarks and related brands and the association of these brands with high quality and safe food products are an integral part of our business. The occurrence of any events or rumors that cause consumers and/or institutions to no longer associate these brands with high quality and safe food products may materially adversely affect the value of the DOLE brand name and demand for our products. We have licensed the DOLE brand name to several affiliated and unaffiliated companies for use in the United States and abroad. Acts or omissions by these companies over which we have no control may also have such adverse effects.
 
A portion of our workforce is unionized and labor disruptions could decrease our profitability.
 
As of December 30, 2006, approximately 32% of our employees worked under various collective bargaining agreements. Some of our collective bargaining agreements will expire in fiscal 2007, although each agreement is subject to automatic renewal unless we or the union party to the agreement provides notice otherwise. Our other collective bargaining agreements will expire in later years. While we believe that our relations with our employees are good, we cannot assure you that we will be able to negotiate these or other collective bargaining agreements on the same or more favorable terms as the current agreements, or at all, and without production interruptions, including labor stoppages. A prolonged labor dispute, which could include a work stoppage, could have a material adverse effect on the portion of our business affected by the dispute, which could impact our business, results of operations and financial condition.
 
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)
 
Some of the information included in this Form 10-K and other materials filed or to be filed by us with the Commission contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include the words “may,” “will,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or other words or expressions of similar meaning. We have based these forward-looking statements on our current expectations about future events. The forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations, anticipations and intentions with respect to our financial condition, results of operations, future performance and business, including statements relating to our business strategy and our current and future development plans.
 
The potential risks and uncertainties that could cause our actual financial condition, results of operations and future performance to differ materially from those expressed or implied in this Form 10-K include those set forth under the heading “Risk Factors” in Item 1A.
 
We urge you to review carefully this Form 10-K, particularly the section “Risk Factors,” for a more complete discussion of the risks to our business.
 
From time to time, oral or written forward-looking statements are also included in our reports on Forms 10-K, 10-Q and 8-K, press releases and other materials released to the public. Although we believe that at the time made, the expectations reflected in all of these forward-looking statements are and will be reasonable, any or all of the forward-looking statements in this Form 10-K, our reports on Forms 10-K, 10-Q and 8-K and any other public statements that are made by us may prove to be incorrect. This may occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this Form 10-K, certain of which are beyond our control, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Form 10-K, or other public communications that we might make, as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements.


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Item 1B.   Unresolved Staff Comments
 
None.
 
Item 2.   Properties
 
We own our executive office facility in Westlake Village, California. We also maintain a divisional office in Miami, Florida, which is owned by us. We also maintain a divisional office in Monterey, California, which is leased from an affiliate. We own offices in San Jose, Costa Rica, Bogota and Santa Marta, Colombia and La Ceiba, Honduras. We also maintain offices in Chile, Costa Rica and Ecuador, which are leased from third parties. We maintain our European headquarters in Paris, France and regional offices in Antwerp, Belgium, Athens, Greece, Hamburg, Germany, Milan, Italy, Stockholm, Sweden and Cape Town, South Africa, which are leased from third parties. We own our offices in Madrid, Spain, Rungis, France, Lübeck, Germany and Dartford, England.. We maintain offices in Japan, China, the Philippines, Thailand, Hong Kong and South Korea, which are leased from third parties. The inability to renew any of the above office leases by us would not have a material adverse effect on our operating results. We believe that our property and equipment are generally well maintained, in good operating condition and adequate for our present needs.
 
The following is a description of our significant properties.
 
North America
 
Our Hawaii pineapple operations for the fresh produce market are located on the island of Oahu and total approximately 2,700 acres, which we own. In addition, we farm coffee and cacao on 195 acres of owned land on the island of Oahu.
 
We own approximately 1,400 acres of farmland in California, and lease approximately 12,900 acres of farmland in California and another 4,300 acres in Arizona in connection with our vegetable and berry operations. The majority of this acreage is farmed under joint growing arrangements with independent growers, while we farm the remainder. We own cooling, packing and shipping facilities in Yuma, Arizona and the following California cities: Marina, Gonzales and Huron. Additionally, we have partnership interests in facilities in Yuma, Arizona and Salinas, California, and leases in facilities in the following California cities: Coachella, Oceanside, Oxnard and Watsonville. We own and operate state-of-the-art, ready-to-eat salad and vegetable plants in Yuma, Arizona, Soledad, California, Springfield, Ohio and Bessemer City, North Carolina.
 
We produce almonds from approximately 300 acres, pistachios from approximately 2,000 acres, olives from approximately 900 acres and citrus from approximately 2,800 acres on orchards in the San Joaquin Valley through agricultural partnerships in which we have a controlling interest. We produce grapes on approximately 570 acres of owned property in the San Joaquin Valley.
 
Our Florida based fresh-cut flowers distribution operates from a 328,000 square foot building completed in 2001, which we own. Approximately 200,000 square feet of this facility is refrigerated. Our fresh-cut flowers business also operates another cooling and distribution facility in the Miami area, which we own. We also operate a leased facility in Los Angeles, California.
 
We own approximately 2,700 acres of peach orchards in California, which we farm. We own and operate a plant in Atwater, California that produces individually quick frozen fruit.
 
Latin America
 
We produce bananas directly from owned plantations in Costa Rica, Colombia, Ecuador and Honduras as well as through associated producers or independent growing arrangements in those countries and others, including Guatemala. We own approximately 3,500 acres in Colombia, 34,500 acres in Costa Rica, 3,800 acres in Ecuador and 12,000 acres in Honduras, all related to banana production, although some of the acreage is not presently under production.
 
We own approximately 6,600 acres of land in Honduras, 7,300 acres of land in Costa Rica and 3,000 acres of land in Ecuador, all related to pineapple production, although some of the acreage is not presently under production.


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Pineapple is grown primarily for the fresh produce market. We own a juice concentrate plant in Honduras for pineapple and citrus. Coconuts are produced on approximately 800 acres of owned or leased land in Honduras.
 
We grow grapes, stone fruit, kiwi and pears on approximately 3,800 acres owned or leased by us in Chile. We own or operate 11 packing and cold storage facilities, a corrugated box plant and a wooden box plant in Chile. We also operate a fresh-cut salad plant and a small local fruit distribution company in Chile.
 
We also own and operate corrugated box plants in Colombia, Costa Rica, Ecuador and Honduras.
 
We operate an Ecuadorian port (Bananapuerto). We indirectly own 35% of Bananapuerto and operate the port pursuant to a port services agreement, the term of which is up to 30 years.
 
Dole Latin America operates a fleet of seven refrigerated container ships, of which four are owned, two are under long-term capital leases and one is long-term chartered. In addition, Dole Latin America operates a fleet of 18 breakbulk refrigerated ships, of which nine are owned, eight are long-term chartered and one is chartered for one year. We also cover part of our requirements under contracts with existing liner services and occasionally charter vessels for short periods on a time or voyage basis as and when required. We own or lease approximately 13,300 refrigerated containers, 2,400 dry containers, 5,500 chassis and 4,000 generator sets.
 
We produce flowers on approximately 1,100 acres in Colombia. We own and operate packing and cooling facilities at each of our flower farms and lease a facility in Bogota, Colombia for bouquet construction.
 
Asia
 
We operate a pineapple plantation of approximately 34,000 leased acres in the Philippines. Approximately 19,000 acres of the plantation are leased to us by a cooperative of our employees that acquired the land pursuant to agrarian reform law. The remaining 15,000 acres are leased from individual land owners. Two multi-fruit canneries, blast freezer, cold storage, juice concentrate plant, a box forming plant, a can and drum manufacturing plant, warehouses, wharf and a fresh fruit packing plant, each owned by us, are located at or near the pineapple plantation.
 
We own and operate a tropical fruit cannery and multi fruit processing factory in central Thailand and a second tropical fruit cannery in southern Thailand. Dole also grows pineapple in Thailand on approximately 3,800 acres of leased land, not all of which are currently under cultivation.
 
We produce bananas and asparagus from leased lands in the Philippines and also source these products through associated producers or independent growing arrangements in the Philippines. A plastic extruding plant and a box forming plant, both owned by us, are located near the banana plantations. We also operate banana ripening and distribution centers in Hong Kong, South Korea, Taiwan, The People’s Republic of China and the Philippines.
 
Additionally, we source products from over 1,200 Japanese farmers through independent growing arrangements.
 
Europe
 
We operate eight banana ripening, produce and flower distribution centers in Sweden, nine in France, six in Spain, one in Portugal, four in Italy, one in Belgium, one in Austria and four in Germany; with the exception of two owned facilities in Sweden, three owned facilities in France, two owned facilities in Spain, two owned facilities in Germany and one owned facility in Italy, these facilities are leased. We have a minority interest in a French company that owns a majority interest in banana and pineapple plantations in Cameroon, Ghana and the Ivory Coast. We are the majority owner in a company operating a port terminal and distribution facility in Livorno, Italy. We own a banana ripening and fruit distribution facility near Istanbul, Turkey.
 
We wholly-own Saba Fresh Cuts AB, which owns and operates a state-of-the-art, ready-to-eat salad and vegetable plant in Helsingborg, Sweden. During 2006, we acquired the remaining 65% ownership in JP Fruit Distributors Limited (renamed JP Fresh Limited). JP Fresh owns two banana ripening and fruit distribution facilities located in Kent and Somerset, England, and leases a distribution center in Lancashire, England.


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Item 3.   Legal Proceedings
 
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.
 
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 530 lawsuits, in various stages of proceedings, alleging injury as a result of exposure to DBCP, seeking enforcement of Nicaraguan judgments, or seeking to bar Dole’s efforts to resolve DBCP claims in Nicaragua. Nineteen of these lawsuits (decreased from 35 as of December 6, 2006) are currently pending in various jurisdictions in the United States; the decrease results from settlement of 16 lawsuits pending in Texas and Louisiana. Of the 19 U.S. lawsuits, 10 have been brought by foreign workers who allege exposure to DBCP in countries where Dole did not have operations during the relevant time period. A prior order embargoing Dole’s trademark in Nicaragua was recently revoked by the 4th District Court of Managua, Nicaragua. One case pending in Los Angeles Superior Court with 13 Nicaraguan plaintiffs has a trial date of May 2, 2007 (changed from February 28, 2007). The remaining cases are pending in Latin America and the Philippines, including 302 labor cases pending in Costa Rica under that country’s national insurance program. Claimed damages in DBCP cases worldwide total approximately $41 billion, with lawsuits in Nicaragua representing approximately 87% of this amount. In almost all of the non-labor cases, the Company is a joint defendant with the major DBCP manufacturers and, typically, other banana growers. Except as described below, none of these lawsuits has resulted in a verdict or judgment against the Company.
 
In Nicaragua, 187 (up from 178) cases are currently filed in various courts throughout the country, with all but one of the lawsuits 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.
 
Twenty-three 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 February 25, 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; and $809 million (six cases consolidated with 1,248 claimants) on December 1, 2006. The Company has appealed all judgments to the


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Nicaragua Courts of Appeal, with the Company’s appeal of the August 8, 2005 $98.5 million judgment currently pending.
 
There are 27 active cases currently pending in civil courts in Managua (15), Chinandega (10) and Puerto Cabezas (2), all of which have been brought under Law 364 except for one of the cases pending in Chinandega. In the 26 active cases under Law 364, except for six cases in Chinandega and five cases in Managua, where the Company has not yet been ordered to answer, the Company has sought to have the cases returned to the United States pursuant to Law 364. A Chinandega court in one case has ordered the plaintiffs to respond to our request. In the other 2 active cases under Law 364 pending there, the Chinandega courts have denied the Company’s requests; and the court in Puerto Cabezas has denied the Company’s request in the two cases there. The Company’s requests in ten of the cases in Managua are still pending; and the Company expects to make similar requests in the remaining five cases at the appropriate time. The Company has appealed the two decisions of the court in Puerto Cabezas and the 2 decisions of the courts in Chinandega.
 
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.
 
Claimants have also indicated their intent to seek enforcement of the Nicaraguan judgments in Colombia, Ecuador, Venezuela and other countries in Latin America and elsewhere, including the United States. In Venezuela, the claimants are attempting 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). 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 June 15, 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 refiled 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 civil trial courts’ 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 the agricultural chemical 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.
 
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


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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 and U.S. Class Action Lawsuits:  The European Commission (“EC”) is investigating alleged violations of European Union competition (antitrust) laws by banana and pineapple importers and distributors operating within the European Economic Area. On June 2 and 3, 2005, the EC conducted a search of certain of the Company’s offices in Europe. During this same period, the EC also conducted similar unannounced searches of other companies’ offices located in the European Union. The Company is cooperating with the EC and has responded to the EC’s information requests. Although no assurances can be given concerning the course or outcome of that EC investigation, the Company believes that it has not violated the European Union competition laws.
 
Following the public announcement of the EC searches, a number of class action lawsuits were filed against the Company and three competitors in the U.S. District Court for the Southern District of Florida. The lawsuits were filed on behalf of entities that directly or indirectly purchased bananas from the defendants and have now been consolidated into two separate class action lawsuits: one by direct purchasers (customers); and another by indirect purchasers (those who purchased bananas from customers). Both consolidated class action lawsuits allege that the defendants conspired to artificially raise or maintain prices and control or restrict output of bananas. The Company believes these lawsuits are without merit.
 
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 the Company’s interest in Cervecería Hondureña, S.A in 2001. The Company 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 is seeking dismissal of the lawsuit and attachment of assets, which the Company is challenging. The Honduran Supreme Court recently 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 is now challenging the constitutionality of the statute requiring such payment or payment plan. No reserve has been provided for this tax assessment.
 
Hurricane Katrina Cases:  Dole is 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 assert 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 believes that it took reasonable precautions and that property damage was due to the unexpected force of Hurricane Katrina, a Category 5 hurricane that was one of the costliest disasters in U.S. history. Dole expects that this Katrina-related litigation will not have a material adverse effect on its financial condition or results of operations.
 
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, one of which was DOLE®. Natural Selection Foods produced and packaged all spinach items under the DOLE label (with the names “Spinach,” “Baby Spinach” and “Spring Mix”). On September  15, 2006, Dole announced that it supported the voluntary recall issued by Natural Selection Foods. 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,


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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. FDA reports that, as of October 20, 2006, testing of other environmental samples from all four ranches that supplied the implicated lot of contaminated spinach is in progress.
 
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. Dole is aware of 14 lawsuits that have been filed against Natural Selection Foods and Dole, among others. Dole expects that the vast majority of the spinach E. coli O157:H7 claims will be handled outside the formal litigation process. 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. Dole expects that the company or companies (and their insurance carriers) that grew the implicated spinach for Natural Selection Foods also will be 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.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
There were no matters submitted to a vote of security holders during the fiscal quarter ended December 30, 2006.


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PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
All 1,000 authorized shares of Dole’s common stock are held by one stockholder, Dole Holding Company, LLC, which itself is a direct, wholly-owned subsidiary of DHM Holding Company, Inc., of which David H. Murdock is the 100% beneficial owner. There are no other Dole equity securities. There is no market for Dole’s equity securities.
 
Additional information required by Item 5 is contained in Note 13 — Shareholders’ Equity, to Dole’s Consolidated Financial Statements in this Form 10-K.


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Item 6.   Selected Financial Data
 
                                                 
    Year
    Year
    Year
    Three Quarters
    Quarter
    Year
 
    Ended
    Ended
    Ended
    Ended
    Ended
    Ended
 
    December 30,
    December 31,
    January 1,
    January 3,
    March 22,
    December 28,
 
    2006     2005     2005     2004     2003     2002  
    Successor     Successor     Successor     Successor     Predecessor     Predecessor  
    (In millions)  
 
Summary of Operations
                                               
Revenues, net
  $ 6,171     $ 5,827     $ 5,285     $ 3,675     $ 1,068     $ 4,362  
Cost of products sold
    5,632       5,142       4,546       3,190       890       3,670  
                                                 
Gross margin
    539       685       739       485       178       692  
Selling, marketing and general and administrative expenses
    453       460       422       319       89       418  
                                                 
Operating income
    86       225       317       166       89       274  
Interest expense — net
    168       137       148       120       17       69  
Other income (expense) — net
    15       (5 )     (9 )     (19 )           2  
                                                 
Income (loss) from continuing operations before income taxes, minority interest expense and equity earnings
    (67 )     83       160       27       72       207  
Income taxes
    20       45       26       7       13       54  
Minority interest expense, net of income taxes
    5       3       10       3       1       6  
Equity in earnings of unconsolidated subsidiaries, net of income taxes
          (7 )     (10 )     (6 )     (3 )     (9 )
                                                 
Income (loss) from continuing operations, net of income taxes
    (92 )     42       134       23       61       156  
Income from discontinued operations, net of income taxes
          2                          
Gain on disposal of discontinued operations, net of income taxes
    3                                
                                                 
Income (loss) before cumulative effect of a change in accounting principle
    (89 )     44       134       23       61       156  
Cumulative effect of a change in accounting principle
                                  120  
                                                 
Net income (loss)
  $ (89 )   $ 44     $ 134     $ 23     $ 61     $ 36  
                                                 
Balance Sheet and Other Information
                                               
Working capital
  $ 686     $ 535     $ 423     $ 279           $ 715  
Total assets
    4,608       4,410       4,322       3,988             3,037  
Long-term debt
    2,316       2,001       1,837       1,804             882  
Total debt
    2,364       2,027       1,869       1,851             1,125  
Total shareholders’ equity
    335       617       678       456             745  
Cash dividends
    164       77       20             8       34  
Capital additions
    119       146       102       102       4       234  
Depreciation and amortization
    149       150       145       107       25       107  
 
 
Note: As a result of the going-private merger transaction, the Company’s Consolidated Financial Statements present the results of operations, financial position and cash flows prior to the date of the merger transaction as the “Predecessor.” The merger transaction and the Company’s results of operations, financial position and cash flows thereafter are presented as the Successor.” Predecessor results have not been aggregated with those of the Successor in accordance with accounting principles generally accepted in the U.S. and accordingly the Company’s Consolidated Financial Statements do not show the results of operations or cash flows for the year ended January 3, 2004.
 
Discontinued operations for the periods presented relate to the sale of the Company’s Pacific Coast Truck operations during 2006 and the resolution during 2005 of a contingency related to the 2001 disposition of the Company’s interest in Cerveceria Hondureña, S.A.


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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
2006 Overview
 
For the year ended December 30, 2006, Dole Food Company, Inc. and its consolidated subsidiaries (“Dole” or the “Company”) achieved record revenues of $6.2 billion, reflecting growth of 6% compared to the prior year. Higher revenues were reported in the Company’s fresh fruit and packaged foods operating segments. The Company earned operating income of $86 million in 2006, compared to $225 million earned in 2005. A net loss of $89 million was reported for 2006 compared to net income of $44 million in 2005. Cash flows provided by operations were $16 million during 2006, compared to $73 million of cash flows provided by operations in 2005.
 
Revenues were largely driven by strong banana and pineapples sales worldwide and higher volumes and pricing in Dole’s packaged foods business. In addition, sales increased in the European ripening and distribution operations due primarily to the October 2006 acquisition of the remaining 65% ownership in JP Fruit Distributors Limited (renamed JP Fruit) that the Company did not previously own. Operating income decreased as a result of higher costs affecting the European banana operations due to the European Union’s new import tariff-only system for bananas, which became effective in 2006. Operating income was also impacted by lower packaged salad sales in the fresh vegetables business, resulting primarily from the E. Coli related incidents discussed in this document. The Company also incurred restructuring costs in the fresh-cut flowers operations and higher production, shipping and distribution costs in all of its operating segments. Unfavorable foreign currency exchange movements in Dole’s various sourcing locations also impacted operating income.
 
Higher commodity costs, primarily fuel and tinplate, continued to adversely impact operations. Throughout 2006 and 2005, the Company has experienced significant cost increases in many of the commodities it uses in production, including containerboard, tinplate, resin and other agricultural chemicals. In addition, significantly higher average fuel prices resulted in additional shipping and distribution costs. On a year-over-year basis, higher commodity costs impacted operating income by approximately $38 million and $45 million for the years ended December 30, 2006 and December 31, 2005, respectively. In an effort to mitigate the exposure to further commodity cost increases, the Company entered into fuel hedging contracts and renegotiated certain commodity supply contracts.
 
During the third quarter of 2006, the Company initiated a plan to restructure its fresh-cut flowers business in order to implement changes that will create efficiencies, improve performance and better align supply with demand. In connection with this initiative, the Company expects to incur total costs of approximately $29.8 million. For the year ended December 30, 2006, the Company recorded a charge of $29 million which consisted of $6.4 million of restructuring costs and $22.6 million of non-cash impairment charges related to the write-off of certain assets. The Company also currently estimates that an additional $0.8 million of land clearing costs and employee severance, will be incurred and paid by the end of 2007. Refer to Note 5 of the Consolidated Financial Statements for further discussion of this restructuring.


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Results of Operations
 
Selected results of operations for the years ended December 30, 2006, December 31, 2005 and January 1, 2005 were as follows:
 
                         
    Year Ended
    Year Ended
    Year Ended
 
    December 30,
    December 31,
    January 1,
 
    2006     2005     2005  
    (In thousands)  
 
Revenues, net
  $ 6,171,464     $ 5,826,785     $ 5,284,731  
Operating income
    85,619       224,591       316,706  
Interest income and other income (expense), net
    22,416       696       (4,530 )
Interest expense
    174,715       142,452       152,503  
Income taxes
    19,995       44,356       25,530  
Minority interest expense and equity in earnings of unconsolidated subsidiaries, net of income taxes
    5,356       (3,382 )     (131 )
Income from discontinued operations, net of income taxes
    234       2,235       144  
Gain on disposal of discontinued operations, net of income taxes
    2,814              
Net income (loss)
    (88,983 )     44,096       134,418  
 
Revenues
 
For the year ended December 30, 2006, revenues increased 6% to $6.2 billion from $5.8 billion in the prior year. The most significant revenue drivers were the higher worldwide sales of fresh fruit as well as higher sales of packaged foods products. Higher volumes of bananas and pineapples accounted for approximately $126 million or 37% of the overall revenues increase. The Company’s European ripening and distribution operations also had higher revenues as a result of the October 2006 acquisition of JP Fruit. The acquisition generated revenues of approximately $69 million during the fourth quarter of 2006. Fresh fruit revenues also benefited from higher volumes of deciduous products sold in North America. Higher sales of packaged foods products, primarily for FRUIT BOWLS, canned pineapple and fruit parfaits also increased revenues by $84 million. Fresh vegetables sales remained flat as additional sales of commodity vegetables were offset by a decrease in volumes of packaged salads. The Company’s fresh-cut flowers business reported overall lower sales volumes due primarily to the impact of the implementation of the third quarter 2006 restructuring, partially offset by higher sales volumes at Valentine’s Day and overall higher pricing in 2006. Net changes in foreign currency exchange rates versus the U.S. dollar did not have a significant impact on consolidated revenues in 2006.
 
For the year ended December 31, 2005, revenues increased 10% to $5.8 billion from $5.3 billion in the prior year. The most significant revenue drivers were the acquisitions of Dole Berry Company during the fourth quarter of 2004 and Dole Packaged Frozen Foods during the second quarter of 2004. These acquisitions increased 2005 revenues by approximately $130 million and $76 million, respectively, over revenues reported in 2004. Revenues also benefited from higher worldwide sales of fresh fruit, primarily for bananas and pineapples. Sales of fresh fruit also increased due to higher sales in the Company’s European ripening and distribution operations. In addition, revenues benefited from higher sales of packaged salads and packaged foods products, primarily for FRUIT BOWLS, canned pineapple and fruit in plastic jars. These increases were partially offset by lower deciduous sales in North America and Asia and lower citrus sales in Asia. Net changes in foreign currency exchange rates versus the U.S. dollar did not have a significant impact on consolidated revenues in 2005.
 
Operating Income
 
For the year ended December 30, 2006, operating income was $85.6 million compared with $224.6 million in 2005. The decrease was primarily attributable to lower operating results from the Company’s European banana operations, fresh-cut flowers and packaged salads businesses. These decreases were partially offset by higher worldwide pineapple earnings, higher sales volumes and pricing in the packaged foods business and higher pricing in the North America commodity vegetables operations. The European banana operations were impacted by higher purchased fruit costs and distribution costs, due mainly to the European Union’s (“EU”) new import tariff-only


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system, which became effective January 1, 2006. The Company’s fresh-cut flowers business incurred $29 million of charges associated with the closing of its operations in Ecuador, the closing and downsizing of farms in Colombia, and the impairment of long-lived assets, trade names and inventory. In addition, all of the Company’s reporting segments were impacted by higher product, distribution and shipping costs, due to higher commodity costs. Unfavorable foreign currency exchange movements also impacted operating results. If foreign currency exchange rates in the Company’s significant foreign operations during 2006 had remained unchanged from those experienced in 2005, the Company estimates that its operating income would have been higher by approximately $28 million. The $28 million is primarily related to exchange rate movements in the Company’s sourcing locations. Operating income in 2006 included realized foreign currency transaction gains of $4 million.
 
For the year ended December 31, 2005, operating income was $224.6 million compared with $316.7 million in 2004. The decrease was primarily due to higher production costs, higher shipping and distribution costs and an increase in selling and marketing expenses. Higher production costs were driven by significantly higher commodity costs, particularly for fuel and containerboard. These factors were partially offset by higher European banana earnings and higher sales volumes and pricing in the packaged foods business. Operating income in 2005 also increased due to an employee-related restructuring charge of $8.8 million in Ecuador recorded in 2004. In addition, unfavorable foreign currency exchange movements contributed to lower operating results. If foreign currency exchange rates in the Company’s significant foreign operations during 2005 remained unchanged from those experienced in 2004, the Company estimates that its operating income would have been higher by approximately $15 million. The $15 million is primarily related to exchange rate movements in the Company’s sourcing locations. Operating income in 2005 included realized foreign currency transaction losses of $4 million, partially offset by the impact of hedges of $2 million, and $5 million related to foreign currency hedging incentives from the Colombian government.
 
Interest Income and Other Income (Expense), Net
 
For the year ended December 30, 2006, interest income increased to $7.2 million from $6 million in 2005. The increase was primarily due to interest income earned during the second quarter of 2006 related to the timing of the borrowings and repayment of the senior secured credit facilities in connection with the April 2006 debt refinancing.
 
Other income (expense), net improved to income of $15.2 million in 2006 from expense of $5.4 million in 2005. The improvement was due to a decrease in debt-related expenses of $35.7 million when comparing the April 2006 debt refinancing to the April 2005 refinancing and bond tender transactions. In addition, the Company recorded a gain of $24.8 million on its cross currency swap and $6.5 million on the settlement of its interest rate swap in April 2006. These increases were partially offset by lower unrealized foreign currency exchange gains in 2006 versus 2005. In 2006, the Company recorded $1.5 million of foreign currency exchange gains due to the repayment of the Japanese yen denominated term loan (“Yen loan”) compared to $27.1 million of gains in the prior year. In addition, the Company’s British pound sterling capital lease vessel obligation (“vessel obligation”) generated foreign currency exchange losses of $10.6 million in 2006 compared to foreign currency exchange gains of $9.5 million in 2005.
 
For the year ended December 31, 2005, interest income increased to $6 million from $4.2 million in 2004. Higher interest income was primarily generated from interest earned on an account receivable balance settled in 2005. Higher interest rates associated with outstanding growers loans also contributed to the increase.
 
Other income (expense), net improved to an expense of $5.4 million in 2005 from an expense of $8.7 million in 2004. The improvement was primarily due to the change in unrealized foreign currency exchange gains of $43.5 million. In 2005, the Company’s Yen loan and vessel obligation generated foreign currency exchange gains of $27.1 million and $9.5 million, respectively, compared to a foreign currency exchange loss on the vessel obligation of $6.9 million in 2004. These improvements were partially offset by $41.1 million of additional expenses related to the early extinguishment of debt.


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Interest Expense
 
Interest expense for the year ended December 30, 2006 was $174.7 million compared to $142.5 million in 2005. The increase was primarily related to higher levels of borrowings and higher effective market-based borrowing rates on the Company’s debt facilities.
 
Interest expense for the year ended December 31, 2005 was $142.5 million compared to $152.5 million in 2004. The decrease was primarily related to lower overall effective borrowing rates that resulted from the Company’s refinancing and bond tender transactions during the second quarter of 2005.
 
Income Taxes
 
The Company recorded $20 million of income tax expense on $66.7 million of pretax losses from continuing operations for the year ended December 30, 2006, reflecting a (30%) effective income tax rate for the year. Income tax expense increased $13.4 million from $6.6 million in 2005, after excluding the impact of the repatriation of certain foreign earnings of $37.8 million during 2005. The change in the effective income tax rate in 2006 from the 2005 rate of 8% is principally due to non-U.S. taxable earnings from operations decreasing by a larger relative percentage than the associated taxes, including the impact of the accrual for certain tax-related contingencies, required to be provided on such earnings. For 2006, the Company’s income tax provision differs from the U.S. federal statutory rate applied to the Company’s pretax losses due to operations in foreign jurisdictions that are taxed at a rate lower than the U.S. federal statutory rate offset by the accrual for certain tax-related contingencies.
 
Income tax expense for the year ended December 31, 2005 increased to $44.4 million from $25.5 million in 2004. Excluding the impact of the repatriation of foreign earnings under Section 965 of the Internal Revenue Code of $37.8 million, income tax expense for the year ended December 31, 2005 was $6.6 million, which reflects the Company’s effective tax rate of 8% for the 2005 fiscal year. The reduction in the effective income tax rate in 2005 of 8% from the 2004 rate of 16% is primarily due to a change in the mix of taxable earnings, resulting in part from lower domestic earnings. For the years ended 2005 and 2004, the effective income tax rate differs from the U.S. federal statutory rate primarily due to earnings from operations being taxed in foreign jurisdictions at lower net effective rates than the U.S. rate.
 
During October 2004, the American Jobs Creation Act of 2004 was signed into law, adding Section 965 to the Internal Revenue Code. Section 965 provides a special one-time deduction of 85% of certain foreign earnings that are repatriated under a domestic reinvestment plan, as defined therein. The effective federal tax rate on any qualified foreign earnings repatriated under Section 965 equals 5.25%. Taxpayers could elect to apply this provision to a qualified earnings repatriation made during calendar year 2005. During the second quarter of 2005, the Company repatriated $570 million of earnings from its foreign subsidiaries, of which approximately $489 million qualified for the 85% dividends received deduction under Section 965. A tax provision of approximately $37.8 million for the repatriation of certain foreign earnings has been recorded as income taxes for the year ended December 31, 2005.
 
For 2006, 2005 and 2004, other than the taxes provided on the $570 million of repatriated foreign earnings, no U.S. taxes were provided on unremitted foreign earnings from operations because such earnings are intended to be indefinitely invested outside the U.S.
 
Minority Interest and Equity in Earnings of Unconsolidated Subsidiaries
 
Minority interest expense for the year ended December 30, 2006 increased to $5.5 million from $3.2 million in 2005. The increase was primarily related to 2006 seasonal pistachio earnings, which volumes fluctuate every other year, generated by several majority-owned partnerships.
 
Equity in earnings of unconsolidated subsidiaries for the year ended December 30, 2006 decreased to $0.2 million from $6.6 million in 2005. The decrease was primarily related to lower earnings generated by one of the Company’s European investments.
 
Minority interest expense for the year ended December 31, 2005 decreased to $3.2 million from $10.2 million in 2004. The decrease was primarily due to the Company’s purchase of the 40% minority interest in Saba Trading AB (“Saba”) in December 2004.


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Equity in earnings of unconsolidated subsidiaries for the year ended December 31, 2005 decreased to $6.6 million from $10.3 million in 2004. The decrease was primarily related to the sale of the Company’s investment in a Guatemalan joint venture during 2005.
 
Discontinued Operation
 
During the fourth quarter of 2006, the Company sold all of the assets and substantially all of the liabilities associated with its Pacific Coast Truck operations (“Pac Truck”) 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 net proceeds of $15.3 million from the sale after the assumption of $5.4 million of debt, realizing a gain of approximately $2.8 million, net of income taxes of $2 million. The Company’s Consolidated Financial Statements and Notes to Consolidated Financial Statements reflect the Pac Truck business as a discontinued operation.
 
Segment Results of Operations
 
The Company has four reportable operating segments: fresh fruit, fresh vegetables, packaged foods and fresh-cut flowers. These reportable segments are managed separately due to differences in their products, production processes, distribution channels and customer bases.
 
The Company’s management evaluates and monitors segment performance primarily through earnings before interest expense and income taxes (“EBIT”). EBIT is calculated by adding interest expense and income taxes to net income. In 2006 and 2005, EBIT is calculated by subtracting income from discontinued operations, net of income taxes and gain on disposal of discontinued operations, net of income taxes, and adding interest expense and income taxes to net income. 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 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.


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In the tables below, revenues from external customers and EBIT only reflect results from continuing operations.
 
                         
    2006     2005     2004  
    (In thousands)  
 
Revenues from external customers
                       
Fresh fruit
  $ 3,989,490     $ 3,717,020     $ 3,535,666  
Fresh vegetables
    1,082,416       1,083,227       887,409  
Packaged foods
    938,336       854,230       691,780  
Fresh-cut flowers
    160,074       171,259       169,845  
Corporate
    1,148       1,049       31  
                         
    $ 6,171,464     $ 5,826,785     $ 5,284,731  
                         
EBIT
                       
Fresh fruit
  $ 108,302     $ 205,191     $ 257,880  
Fresh vegetables
    (7,301 )     11,375       58,645  
Packaged foods
    91,392       87,495       64,191  
Fresh-cut flowers
    (57,001 )     (5,094 )     1,853  
                         
Total operating segments
    135,392       298,967       382,569  
Corporate
    (32,713 )     (70,298 )     (70,262 )
Interest expense
    174,715       142,452       152,503  
Income taxes
    19,995       44,356       25,530  
                         
Income (loss) from continuing operations, net of income taxes
  $ (92,031 )   $ 41,861     $ 134,274  
                         
 
2006 Compared with 2005
 
Fresh Fruit:  Fresh fruit revenues in 2006 increased 7% to $4 billion from $3.7 billion in 2005. The increase in fresh fruit revenues was primarily driven by higher worldwide sales of bananas and pineapples, higher sales in the European ripening and distribution operations and more Chilean deciduous fruit sold in North America. Higher banana sales resulted from improved volumes worldwide and higher pricing and surcharges for bananas sold in North America. Strong pineapple sales reflected higher sales volumes worldwide. Higher volumes of European bananas was made possible by the EU implementation of a new “tariff only” import fee effective January 1, 2006, which ended volume restrictions on Latin American imported bananas. The increase in sales of European bananas was partially offset by significantly lower pricing of bananas as a result of excess supply brought into the market by non-traditional sellers. European ripening and distribution sales also increased as a result of the October 2006 acquisition of JP Fruit. These factors were partially offset by lower sales volumes as a result of the Company ending a substantial portion of its commercial relationship with a significant customer of Saba Trading AB (“Saba”).
 
Fresh fruit EBIT decreased 47% to $108.3 million in 2006 from $205.2 million in 2005. Lower EBIT in the Company’s banana operations was primarily due to higher costs in Europe related to the new tariff system imposed by the EU and significantly lower local banana pricing in Europe. Additionally, EBIT decreased as a result of higher product costs that impacted worldwide banana operations and deciduous fruit sold in North America. EBIT was also impacted by restructuring costs of $12.8 million incurred by Saba. These factors were offset by higher pineapple EBIT due to increased worldwide volumes and lower advertising expenditures in Asia. If foreign currency exchanges rates, primarily in the Company’s fresh fruit foreign sourcing locations, during 2006 had remained unchanged from those experienced in 2005, the Company estimates that fresh fruit EBIT would have been higher by approximately $18 million. Fresh fruit EBIT in 2006 included $10.6 million of an unrealized foreign currency exchange loss related to the vessel obligation and realized foreign currency transaction gains of $4 million.
 
Fresh Vegetables:  Fresh vegetables revenues of $1.1 billion for 2006 remained relatively unchanged from 2005. Higher pricing in the North America commodity vegetables business for lettuce, berries, celery, green onions, brussels sprouts and artichokes were offset by lower volumes and lower pricing in the packaged salads business.


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Sales of packaged salads decreased mainly as a result of the E. coli incident discussed below, which continued to impact consumer demand for the packaged salads category.
 
Fresh vegetables EBIT for 2006 decreased to a loss of $7.3 million from earnings of $11.4 million in 2005. The decrease in EBIT was primarily due to lower sales volumes and higher product, distribution and marketing costs in the packaged salads business. These decreases were partially offset by higher earnings generated in the North America commodity vegetables business due to higher pricing and lower distribution and selling costs.
 
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, one of which was DOLE®. Natural Selection Foods produced and packaged all spinach items under the DOLE label (with the names “Spinach,” “Baby Spinach” and “Spring Mix”). On September 15, 2006, Dole announced that it supported the voluntary recall issued by Natural Selection Foods. Dole has no ownership or other economic interest in Natural Selection Foods. Since the recall, sales in the packaged salad category have dropped by approximately 10%. This recall itself did not have a significant impact on the Company’s consolidated results of operations for the year ended December 30, 2006. The Company does expect that future sales of packaged salads category products will continue to be impacted as a result of this event.
 
Packaged Foods:  Packaged foods revenues for 2006 increased 10% to $938.3 million from $854.2 million in 2005. The increase in revenues was primarily due to higher pricing and volumes of FRUIT BOWLS, canned solid pineapple and juice, higher volumes of fruit parfaits, fruit in plastic jars and packaged frozen food products sold in North America. Revenues also grew in Europe due to higher sales volumes of concentrate and FRUIT BOWLS. These benefits were partially offset by lower sales in Asia due to lower pricing of canned fruit products in Japan and the disposition of a small distribution company in the Philippines during the fourth quarter.
 
Packaged foods EBIT in 2006 increased 4% to $91.4 million from $87.5 million in 2005. The increase in EBIT was primarily due to higher sales in North America related to FRUIT BOWLS, canned solid pineapple and juice, fruit parfaits, fruit in plastic jars and packaged frozen food products, partially offset by higher product and distribution costs in all markets. If foreign currency exchanges rates, primarily in the Company’s packaged foods sourcing locations, during 2006 had remained unchanged from those experienced in 2005, the Company estimates that packaged foods EBIT would have been higher by approximately $11 million.
 
Fresh-cut Flowers:  Fresh-cut flowers revenues in 2006 decreased 7% to $160.1 million from $171.3 million in 2005. The decrease was primarily due to lower sales volumes during the second half of the year associated with changes in the customer base related to the implementation of the third quarter restructuring plan, partially offset by higher overall pricing and additional sales generated from the Valentine’s Day holiday.
 
EBIT in the fresh-cut flowers segment in 2006 decreased to a loss of $57 million from a loss of $5.1 million in 2005. EBIT decreased primarily due to $29 million of restructuring-related and asset impairment charges, together with higher crop growing costs and higher third-party flower purchases.
 
Corporate:  Corporate EBIT includes general and administrative costs not allocated to the operating segments. Corporate EBIT in 2006 was a loss of $32.7 million compared to a loss of $70.3 million in 2005. The improvement in EBIT was primarily due to a decrease in debt-related expenses of $35.7 million when comparing the April 2006 debt refinancing transaction to the April 2005 refinancing and bond tender transactions. In addition, Corporate EBIT for 2006 included a gain of $24.8 million on its cross currency swap and $6.5 million on the settlement of the interest rate swap in April 2006. These increases to EBIT were partially offset by unrealized foreign currency exchange gains of $25.6 million related to the Yen loan incurred in 2005.
 
2005 Compared with 2004
 
Fresh Fruit:  Fresh fruit revenues increased 5% to $3.7 billion in 2005 from $3.5 billion in 2004. The increase in fresh fruit revenues was primarily due to higher worldwide sales of bananas and pineapples and higher sales in the European ripening and distribution operations. Higher worldwide banana sales resulted from improved volumes in North America and Asia, and higher pricing in Europe and North America. Stronger pineapple sales reflected


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improved volumes sold in North America, Europe and Asia and higher local pricing in Asia. These benefits were partially offset by lower sales volume of citrus in Asia and lower sales of deciduous fruit in North America and Asia.
 
Fresh fruit EBIT decreased 20% to $205.2 million in 2005 from $257.9 million in 2004. EBIT decreased primarily as a result of higher product costs that impacted bananas and fresh pineapple operations worldwide and deciduous fruit. EBIT was also impacted by higher fuel costs which increased shipping and distribution costs worldwide and by higher selling, marketing and general and administrative costs. These factors were partially offset by improved banana pricing in Europe and the absence of an $8.8 million restructuring charge in Ecuador recorded during 2004. If foreign currency exchanges rates in the Company’s significant fresh fruit foreign operations during 2005 had remained unchanged from those experienced in 2004, the Company estimates that fresh fruit EBIT would have been higher by approximately $7 million. Fresh fruit EBIT in 2005 included realized foreign currency transaction losses of $6 million and $9 million of unrealized foreign currency exchange gains related to the vessel obligation.
 
Fresh Vegetables:  Fresh vegetables revenues for 2005 increased 22% to $1.1 billion from $887.4 million in 2004. The increase was primarily due to the October 2004 acquisition of Dole Berry Company as well as higher sales volumes in commodity vegetables and packaged salads. Dole Berry Company generated revenues of approximately $131 million in 2005. These benefits were partially offset by lower pricing of commodity vegetables mainly for mixed vegetables, celery, broccoli and lettuce.
 
Fresh vegetables EBIT for 2005 decreased to $11.4 million from $58.6 million in 2004. The decrease in EBIT was primarily related to lower commodity vegetable earnings and lower packaged salad earnings. Commodity vegetable earnings were lower as a result of higher growing costs, higher fuel costs, and higher harvest and packing costs. EBIT was also affected by lower packaged salads earnings as a result of higher product, labor, manufacturing and freight costs. Dole Berry Company’s EBIT was a loss of $2.7 million during 2005.
 
Packaged Foods:  Packaged foods revenues for 2005 increased 23% to $854.2 million from $691.8 million in 2004. The increase in revenues was a result of higher North American sales of FRUIT BOWLS, canned solid pineapple and juice, and fruit in plastic jars due in part to higher pricing. Revenues grew in Asia due to higher sales of concentrate and tropical fruit mix. Revenues also benefited from the June 2004 acquisition of Dole Packaged Frozen Foods, which increased sales by $76 million compared to prior year.
 
Packaged foods EBIT in 2005 increased 36% to $87.5 million from $64.2 million in 2004. The increase in EBIT was primarily due to a more favorable product mix and higher revenues in North America, partially offset by higher shipping and distribution costs and higher selling, general and administrative expenses.
 
Fresh-cut Flowers:  Fresh-cut flowers revenues in 2005 increased to $171.3 million from $169.8 million in 2004. The increase was primarily due to increased sales to the retail market partially offset by decreased sales volumes to the wholesale market.
 
EBIT in the fresh-cut flowers segment in 2005 decreased to a loss of $5.1 million from earnings of $1.9 million in 2004. EBIT decreased primarily as a result of higher product costs due to the weakening of the U.S. dollar against the Colombian peso. If the Colombian peso exchange rate during 2005 had remained unchanged from that experienced in 2004, the Company estimates that its fresh-cut flowers EBIT would have been higher by approximately $9 million. EBIT was also impacted by additional third-party flower purchases and higher shipping costs, partially offset by lower general and administrative expenses. In addition, 2005 EBIT included approximately $5 million of foreign currency exchange hedging incentives offered by the Colombian government. The Colombian government offered these incentives to banana and flower growers in the exporting sector.
 
Corporate:  Corporate EBIT includes general and administrative costs not allocated to the operating segments. Corporate EBIT in both 2005 and 2004 was a loss of $70.3 million. Corporate EBIT for 2005 included $43.8 million of expenses incurred in connection with the early retirement of debt and related refinancing and $27.1 million of unrealized foreign currency exchange gains associated with the Yen loan. EBIT did not change significantly in 2005 compared to 2004, as lower general and administrative costs were offset by the $43.8 million refinancing charge and $27.1 million of unrealized foreign currency exchange gains.


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Liquidity and Capital Resources
 
CASH REQUIREMENTS:
 
The following tables summarize the Company’s contractual obligations and commitments at December 30, 2006:
 
                                         
    Payments Due by Period  
    Less Than
                After
       
    1 Year     1-2 Years     3-4 Years     4 Years     Total  
    (In thousands)  
 
Contractual obligations Fixed rate debt
  $     $ 350,000     $ 600,000     $ 155,000     $ 1,105,000  
Variable rate debt
    44,256       20,500       19,578       1,086,467       1,170,801  
Capital lease obligations
    4,328       7,924       7,329       68,799       88,380  
Non-cancelable operating lease commitments
    110,055       186,341       72,902       69,802       439,100  
Cancelable operating lease commitments
    10,625       21,734       22,660       52,823       107,842  
Purchase obligations
    698,701       747,071       334,768       195,509       1,976,049  
Minimum required pension funding
    8,635       43,693       39,288       78,883       170,499  
Postretirement benefit payments
    6,130       12,369       12,177       28,481       59,157  
Interest payments on fixed and variable rate debt
    178,892       331,304       226,405       144,663       881,264  
                                         
Total contractual cash obligations
  $ 1,061,622     $ 1,720,936     $ 1,335,107     $ 1,880,427     $ 5,998,092  
                                         
 
Long-Term Debt:  Details of amounts included in long-term debt can be found in Note 11 of the Consolidated Financial Statements. The table assumes that long-term debt is held to maturity.
 
The variable rate maturities include amounts payable under the Company’s senior secured credit facilities.
 
Capital Lease Obligations:  The Company’s capital lease obligations include $85.6 million related to two vessel leases. The obligations under these leases, which continue through 2024, are denominated in British pound sterling. The lease payment commitments are presented in U.S. dollars at the exchange rate in effect on December 30, 2006 and therefore will change as foreign currency exchange rates fluctuate.
 
Operating Lease Commitments:  The Company has obligations under non-cancelable and cancelable operating leases, primarily for land, as well as for certain equipment and office facilities. The leased assets are used in the Company’s operations where leasing offers advantages of operating flexibility and is less expensive than alternate types of funding. A significant portion of the Company’s operating lease payments are fixed. Lease payments are charged to operations, primarily through cost of products sold. Total rental expense, including rent related to cancelable and non-cancelable leases, was $153 million, $130 million and $101.4 million (net of sublease income of $16.4 million, $15.9 million and $15.1 million) for 2006, 2005 and 2004, respectively.
 
Included in operating lease commitments is a residual value guarantee obligation under an aircraft lease agreement. The Company’s maximum potential undiscounted future payment under this residual value guarantee amounts to approximately $8.2 million. This payment would occur if the fair value of the aircraft is less than $20 million at the termination of the lease in 2010. The Company does not currently anticipate any future payments related to this residual value guarantee.
 
Purchase Obligations:  In order to secure sufficient product to meet demand and to supplement the Company’s own production, the Company enters into non-cancelable agreements with independent growers, primarily in Latin America, to purchase substantially all of their production subject to market demand and product quality. Prices under these agreements are generally fixed and contract terms range from one to seventeen years.


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Total purchases under these agreements were $474.5 million, $433.4 million and $340.1 million for 2006, 2005 and 2004, respectively.
 
In order to ensure a steady supply of packing supplies and to maximize volume incentive rebates, the Company enters into contracts with certain suppliers for the purchase of packing supplies, as defined in the respective agreements, over periods of up to five years. Purchases under these contracts for 2006, 2005 and 2004 were approximately $207.6 million, $227.3 million and $181.8 million, respectively.
 
Interest payments on fixed and variable rate debt:  Commitments for interest expense on debt, including capital lease obligations, were determined based on anticipated annual average debt balances, after factoring in mandatory debt repayments. Interest expense on variable-rate debt has been based on the prevailing interest rates at December 30, 2006.
 
Other Obligations and Commitments:  The Company has obligations with respect to its pension and other postretirement benefit (“OPRB”) plans (Note 12 to the Consolidated Financial Statements). During 2006, the Company contributed $3 million to its qualified U.S. pension plan, which included voluntary contributions above the minimum requirements for the plan. Under the Internal Revenue Service funding requirements, no contribution will be required for 2007. However, the Company expects to make contributions of $6.6 million to its U.S. qualified plan during 2007. The Company also has nonqualified U.S. and international pension and OPRB plans. For the year ended December 30, 2006, the Company made payments of $15.7 million related to these pension and OPRB plans.
 
The Company has numerous collective bargaining agreements with various unions covering approximately 32% of the Company’s hourly full-time and seasonal employees. Of the unionized employees, 9% are covered under a collective bargaining agreement that will expire within one year and the remaining 91% 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.
 
SOURCES AND USES OF CASH:
 
                         
    2006     2005     2004  
    (In thousands)  
 
Cash flow provided by (used in):
                       
Operating activities
  $ 15,921     $ 72,589     $ 217,392  
Investing activities
    (117,000 )     (164,323 )     (281,584 )
Financing activities
    142,832       69,937       107,571  
Foreign currency impact
    1,849       (8,608 )     2,356  
                         
Increase (decrease) in cash
  $ 43,602     $ (30,405 )   $ 45,735  
                         
 
Operating Activities:  The primary drivers of the Company’s operating cash flows are operating earnings, adjusted for cash generated from or used in net working capital, interest paid and taxes paid or refunded. The Company defines net working capital as the sum of receivables, inventories, prepaid expenses and other current assets less accounts payable and accrued liabilities. Factors that impact the Company’s operating earnings that do not impact cash flows include depreciation and amortization, gains and losses on the sale and write-off of assets, minority interest expense and equity earnings, unrealized foreign currency exchange gains or losses and purchase accounting expenses.
 
Changes in working capital generally correspond to operating activity. For example, as sales increase, a larger investment in working capital is typically required. Management attempts to keep the Company’s investment in net working capital to a reasonable minimum by closely monitoring inventory levels and matching production to expected market demand, keeping tight control over collection of receivables and optimizing payment terms on its trade and other payables. Debt levels and interest rates impact interest payments, and tax payments are impacted by tax rates, the tax jurisdiction of earnings and the availability of tax operating losses.


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Cash flows provided by operating activities were $15.9 million in 2006 compared to cash flows provided by operating activities of $72.6 million in 2005. The decrease was primarily due to lower earnings in 2006 and lower levels of accounts payable partially offset by lower levels of inventory. The decrease in accounts payable was attributable to the timing of payments to suppliers and growers. The reduction in inventory was driven mainly by lower inventory requirements in the packaged foods segment. Cash flows from operations decreased in 2005 to $72.6 million due primarily to an increase in net working capital of $122.7 million, driven primarily by higher accounts receivable and a greater investment in inventory, partially offset by higher accounts payable. The increase in accounts receivable was driven mainly by higher sales. The increase in inventory was primarily attributable to higher anticipated sales of packaged foods products in 2006. Higher accounts payable was primarily the result of higher inventory-related purchases and the timing of payments to suppliers.
 
Investing Activities:  Cash flows used in investing activities decreased to $117 million in 2006 from $164.3 million in the prior year. The decrease in cash outflow during 2006 was due to less cash spent on acquisitions, lower capital expenditures of $6.4 million and higher cash proceeds of $12.1 million received from the sales of a business and other assets. In 2006, the Company acquired the remaining 65% of JP Fruit it did not already own for $22.7 million, net of cash acquired, compared to the 2005 acquisition of the minority interest in Saba for $47.1 million. The purchase of JP Fruit and 2006 capital expenditures were funded by operating cash flows and through additional borrowings.
 
Financing Activities:  Cash flows provided by financing activities increased to $142.8 million in 2006 from $69.9 million in 2005. The increase in cash of $72.9 million was primarily due to higher net borrowings incurred in 2006 of $339.4 million versus 2005 net borrowings of $150 million to fund current year operations. This increase was offset by higher dividend payments of $86.4 million and a net return of capital payment of $31 million to the Company’s parent, Dole Holding Company, LLC (“DHC”) during 2006.
 
At December 30, 2006, the Company had total outstanding long-term borrowings of $2.4 billion, consisting primarily of $1.1 billion of unsecured senior notes and debentures due 2009 through 2013 and $1.2 billion of secured debt (consisting of revolving credit and term loan facilities and capital lease obligations).
 
Capital Contribution and Return of Capital:  On March 3, 2006, DHM Holding Company, Inc. (“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 within the next year. The Company has accounted for the intercompany loan as a distribution of additional paid-in capital.
 
Debt Refinancing:  In April 2005, the Company amended and restated its senior secured credit agreement, repaying its then existing term loans through new term loan borrowings and a revolving credit facility. In June 2005, the Company executed a technical amendment, which changed the scheduled amortization payment dates of the term loans. In December 2005, the Company executed a second amendment, which permitted the Company to reinvest proceeds from the sale of any of its principal properties into a new principal property and also allowed DHM Holding Company, Inc. to borrow under project financing facilities. The second amendment also modified both the minimum consolidated interest coverage ratio and the maximum leverage ratio.
 
Also during 2005, the Company repurchased $325 million aggregate principal amount of its Company’s outstanding debt securities. The Company repurchased $50 million of its 2009 Notes and $275 million of its 2011 Notes.


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In April, 2006, the Company completed another amendment and restatement of its senior secured credit facilities. 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 of the higher-cost bank indebtedness of 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. 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 Second Lien Senior Credit 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.
 
As of December 30, 2006, the ABL revolver borrowing base was $294.8 million and the amount outstanding under the ABL revolver was $167.6 million. After taking into account approximately $18 million of outstanding letters of credit issued under the ABL revolver, the Company had approximately $109.2 million available for borrowings as of December 30, 2006. Amounts outstanding under the term loan facilities were $967.7 million at December 30, 2006. In addition, the Company had approximately $82.4 million of letters of credit and bank guarantees outstanding under its pre-funded letter of credit facility at December 30, 2006.
 
Refer to Note 11 of the Consolidated Financial Statements for additional details of the Company’s outstanding debt.
 
In addition to amounts available under the revolving credit facilities, the Company’s subsidiaries have uncommitted lines of credit of approximately $156 million at various local banks, of which $108.6 million was available at December 30, 2006. 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 2007 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 believes that available borrowings under the revolving credit facility and subsidiaries’ uncommitted lines of credit, together with its existing cash balance of $92.4 million at December 30, 2006, future cash flow from operations and access to capital markets will enable it to meet its working capital, capital expenditure, debt maturity and other commitments and funding requirements. Factors impacting the Company’s cash flow from operations include such items as commodity prices, interest rates and foreign currency exchange rates, among other things. These factors are set forth under “Risk Factors” in Item 1A. of this Form 10-K and under “Quantitative and Qualitative Disclosures About Market Risk “in Item 7A. and elsewhere in this Form 10-K.
 
GUARANTEES, CONTINGENCIES AND DEBT COVENANTS:
 
The Company is a guarantor of indebtedness of some of its key fruit suppliers and other entities integral to the Company’s operations. At December 30, 2006, guarantees of $1.7 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.
 
In connection with the April 2006 refinancing transaction, the Company obtained a $100 million pre-funded letter of credit facility. As of December 30, 2006, letters of credit and bank guarantees outstanding under this facility totaled $82.4 million. In addition, the Company issues letters of credit and bonds through major banking institutions, insurance companies and its ABL revolver as required by certain regulatory authorities, vendor and other operating agreements. As of December 30, 2006, total letters of credit and bonds outstanding under these arrangements were $60.5 million.
 
As part of its normal business activities, the Company and its subsidiaries also provide guarantees to various regulatory authorities, primarily in Europe, in order to comply with foreign regulations when operating businesses overseas. These guarantees relate to customs duties and banana import license fees that were granted to the European Union member states’ agricultural authority. These guarantees are obtained from commercial banks in the


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form of letters of credit or bank guarantees, primarily issued under the Company’s 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 $152.9 million of its subsidiaries’ obligations to their suppliers and other third parties as of December 30, 2006.
 
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. Refer to Item 11 of this Form 10-K, under the heading “Employment, Severance and Change of Control Arrangements” for additional information concerning the change of control agreements.
 
As disclosed in Note 17 to the Consolidated Financial Statements, the Company is subject to legal actions, most notably related to the Company’s prior use of the agricultural chemical dibromochloropropane, or “DBCP”. 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 business, financial condition or results of operations.
 
Provisions under the senior secured credit facilities and the indentures to the 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 Company could borrow approximately an additional $228 million at December 30, 2006 and remain within its covenants. At December 30, 2006, the Company was in compliance with all applicable covenants contained in the indentures and senior secured credit facilities.
 
Critical Accounting Policies and Estimates
 
The preparation of the Consolidated Financial Statements requires management to make estimates and assumptions that affect reported amounts. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and on other factors that management believes are reasonable. 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.
 
The Company believes that the following represent the areas where more critical estimates and assumptions are used in the preparation of the Consolidated Financial Statements. Refer to Note 2 of the Consolidated Financial Statements for a summary of the Company’s significant accounting policies.
 
Application of Purchase Accounting:  The Company makes strategic acquisitions of entities to enhance its product portfolio and to leverage the DOLE brand. These acquisitions require the application of purchase accounting in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations.  This results in tangible and identifiable intangible assets and liabilities of the acquired entity being recorded at fair value. The difference between the purchase price and the fair value of net assets acquired is recorded as goodwill.
 
In determining the fair values of assets and liabilities acquired in a business combination, the Company uses a variety of valuation methods including present value, depreciated replacement cost, market values (where available) and selling prices less costs to dispose. Valuations are performed by either independent valuation specialists or by Company management, where appropriate.
 
Assumptions must often be made in determining fair values, particularly where observable market values do not exist. Assumptions may include discount rates, growth rates, cost of capital, royalty rates, tax rates and remaining useful lives. These assumptions can have a significant impact on the value of identifiable assets and accordingly can impact the value of goodwill recorded. Different assumptions could result in materially different values being attributed to assets and liabilities. Since these values impact the amount of annual depreciation and


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amortization expense, different assumptions could also significantly impact the Company’s statement of operations and could impact the results of future impairment reviews.
 
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. These estimates require significant judgment because of the inherent risks and uncertainties underlying the growers’ ability to repay these advances. These factors include weather-related phenomena, government-mandated fruit prices, market responses to industry volume pressures, grower competition, fluctuations in local interest rates, economic crises, security risks in developing countries, political instability, outbreak of plant disease, inconsistent or poor farming practices of growers, and foreign currency fluctuations. The aggregate amounts of grower advances made during fiscal years 2006, 2005 and 2004 were approximately $156.5 million, $148 million and $146.6 million, respectively. Net grower advances receivable were $39.4 million and $44.3 million at December 30, 2006 and December 31, 2005, respectively.
 
Long-Lived Assets:  The Company’s long-lived assets consist of 1) property, plant and equipment and amortized intangibles and 2) goodwill and indefinite-lived intangible assets.
 
1) Property, Plant and Equipment and Amortized Intangibles:  The Company depreciates property, plant and equipment and amortizes intangibles principally by the straight-line method over the estimated useful lives of these assets. Estimates of useful lives are based on the nature of the underlying assets as well as the Company’s experience with similar assets and intended use. Estimates of useful lives can differ from actual useful lives due to the inherent uncertainty in making these estimates. This is particularly true for the Company’s significant long-lived assets such as land improvements, buildings, farming machinery and equipment, vessels and customer relationships. Factors such as the conditions in which the assets are used, availability of capital to replace assets, frequency of maintenance, changes in farming techniques and changes to customer relationships can influence the useful lives of these assets. Refer to Notes 9 and 10 of the Consolidated Financial Statements for a summary of useful lives by major asset category and for further details on the Company’s intangible assets, respectively. The Company incurred depreciation expense of approximately $144.8 million, $137.9 million and $133.3 million in 2006, 2005 and 2004, respectively, and amortization expense of approximately $4.5 million, $11.9 million and $11.6 million in fiscal 2006, 2005 and 2004, respectively.
 
The Company reviews property, plant and equipment and amortizable intangibles 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 total undiscounted future cash flows directly associated with the asset is 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 the discounted expected future cash flows expected to result from the use of the asset and its eventual disposition or comparable market values, depending on the nature of the asset. Changes in commodity pricing, weather-related phenomena and other market conditions are events that have historically caused the Company to assess the carrying amount of its long-lived assets.
 
2) Goodwill and Indefinite-Lived Intangible Assets:  The Company’s indefinite-lived intangible assets consist of the DOLE brand trade name, with a carrying value of $689.6 million. In determining whether intangible assets have indefinite lives, the Company considers the expected use of the asset, legal or contractual provisions that may limit the life of the asset, length of time the intangible has been in existence, as well as competitive, industry and economic factors. The determination as to whether an intangible asset is indefinite-lived or amortizable could have a significant impact on the Company’s statement of operations in the form of amortization expense and potential future impairment charges.
 
Goodwill and indefinite-lived intangible assets are tested for impairment annually and whenever events or circumstances indicate that an impairment may have occurred. Indefinite-lived intangibles are tested for impairment by comparing the fair value of the asset to the carrying value.


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Goodwill is tested for impairment by comparing the fair value of a reporting unit with its net book value including goodwill. The fair value of reporting units is determined using a discounted cash flow methodology, which requires making estimates and assumptions including pricing and volumes, industry growth rates, future business plans, profitability, tax rates and discount rates. If the fair value of the reporting unit exceeds its carrying amount, then goodwill of that reporting unit is not considered to be impaired. If the carrying amount of the reporting unit exceeds its fair value, then the implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. An impairment loss is recognized if the implied fair value of goodwill exceeds its carrying amount. Changes to assumptions and estimates can significantly impact the fair values determined for reporting units and the implied value of goodwill, and consequently can impact whether or not an impairment charge is recognized, and if recognized, the size thereof. Management believes that the assumptions used in the Company’s annual impairment review are appropriate.
 
Income Taxes:  Deferred income taxes are recognized for the income tax effect of temporary differences between financial statement carrying amounts and the income tax bases of assets and liabilities. The Company regularly reviews its deferred income tax assets to determine whether future taxable income will be sufficient to realize the benefits of these assets. 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 amount of the net deferred income tax asset that is considered realizable could, however, be adjusted if estimates of future taxable income are adjusted.
 
Refer to Note 6 of the Consolidated Financial Statements for additional information about the Company’s income taxes.
 
The Company believes its tax positions comply with the applicable tax laws and that it is adequately provided for all tax related matters. The Company is subject to examination by taxing authorities in the various jurisdictions in which it files tax returns. 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 its results of operations.
 
Pension and Other Postretirement Benefits:  The Company has qualified and nonqualified defined benefit pension plans covering some of its full-time employees. Benefits under these plans are generally based on each employee’s eligible compensation and years of service, except for hourly plans, which are based on negotiated benefits. In addition to pension plans, the Company has OPRB plans that provide 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. Pension and OPRB costs and obligations are calculated based on actuarial assumptions including discount rates, health care cost trend rates, compensation increases, expected return on plan assets, mortality rates and other factors.
 
Pension obligations and expenses are most sensitive to the expected return on pension plan assets and discount rate assumptions. OPRB obligations and expenses are most sensitive to discount rate assumptions and health care cost trend rates. The Company determines the expected return on pension plan assets based on an expectation of average annual returns over an extended period of years. This expectation is based, in part, on the actual returns achieved by the Company’s pension plans over the prior ten-year period. The Company also considers the weighted-average historical rates of return on securities with similar characteristics to those in which the Company’s pension assets are invested. In the absence of a change in the Company’s asset allocation or investment philosophy, this estimate is not expected to vary significantly from year to year. The Company’s 2006 and 2005 pension expense was determined using an expected rate of return on U.S. plan assets of 8.25% and 8.50%, respectively. The Company’s 2007 pension expense will be determined using an expected rate of return on U.S. plan assets of 8%. At December 30, 2006, the Company’s U.S. pension plan investment portfolio was invested approximately 59% in equity securities, 39% in fixed income securities and 2% in alternative investments. A 25 basis point change in the expected rate of return on pension plan assets would impact annual pension expense by $0.6 million.
 
The Company’s U.S. pension plan’s discount rate of 5.75% in both 2006 and 2005 was determined based on a hypothetical portfolio of high-quality, non-callable, zero-coupon bond indices with maturities that approximate the


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duration of the liabilities in the Company’s pension plans. A 25 basis point decrease in the assumed discount rate would increase the projected benefit obligation by $8.6 million and increase the annual expense by $0.6 million.
 
The Company’s foreign pension plans’ weighted average discount rate was 6.61% and 9.08% for 2006 and 2005, respectively. A 25 basis point decrease in the assumed discount rate of the foreign plans would increase the projected benefit obligation by approximately $4.4 million and increase the annual expense by approximately $0.3 million.
 
While management believes that the assumptions used are appropriate, actual results may differ materially from these assumptions. These differences may impact the amount of pension and other postretirement obligations and future expense. Refer to Note 12 of the Consolidated Financial Statements for additional details of the Company’s pension and other postretirement benefits.
 
Litigation:  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. Changes in accruals, both up and down, are part of the ordinary, recurring course of business, in which management, after consultation with legal counsel, is required to make estimates of various amounts for business and strategic planning purposes, as well as for accounting and SEC reporting purposes. These changes are reflected in the reported earnings of the Company each quarter. The litigation accruals at any time reflect updated assessments of the then existing pool of claims and legal actions. Actual litigation settlements could differ materially from these accruals.
 
Recently Adopted and Recently Issued Accounting Pronouncements
 
See Note 2 to the Consolidated Financial Statements for information regarding the Company’s adoption of new accounting pronouncements and recently issued accounting pronouncements.
 
Other Matters
 
European Union Banana Import Regime:  On January 1, 2006, the EU implemented a new “tariff only” import regime for bananas. The 2001 Understanding on Bananas between the European Communities and the U.S. required the EU to implement a tariff only banana import system on or before January 1, 2006, and the EU’s banana regime change was therefore expected by that date.
 
Banana imports from Latin America are subject to import license requirements and a tariff of 176 euro per metric ton for entry into the EU market. Under the EU’s previous banana regime, banana imports from Latin America were subject to a tariff of 75 euro per metric ton and were also subject to both import license requirements and volume quotas. License requirements and volume quotas had the effect of limiting access to the EU banana market.
 
Although all Latin bananas are subject to a tariff of 176 euro per metric ton, up to 775,000 metric tons of bananas from African, Caribbean, and Pacific (“ACP”) countries may be imported to the EU duty-free. This preferential treatment of a zero tariff on up to 775,000 tons of ACP banana imports, as well as the 176 euro per metric ton tariff applied to Latin banana imports, has been challenged by Panama, Honduras, Nicaragua, and Colombia in consultation proceedings at the World Trade Organization (“WTO”). In addition, on March 8, 2007 and March 20, 2007, Ecuador formally requested the WTO Dispute Settlement Body (“DSB”) to appoint a panel to review the matter. The EU blocked Ecuador’s initial request for establishment of a panel on March 8; however, the EU was unable to block Ecuador’s second request under WTO rules. On March 20, 2007, the DBS announced that it will establish a panel to rule on Ecuador’s complaint. The current tariff applied to Latin banana imports may be lowered and the ACP preference of a zero tariff may be affected depending on the outcome of these WTO proceedings, but the WTO proceedings are only in their initial stages and may take several years to conclude. The


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Company encourages efforts to lower the tariff through negotiations with the EU and is working actively to help achieve this result.
 
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 at the beginning of the fourth quarter of 2005. However, the facility has not yet been fully rebuilt. The financial impact to the Company’s fresh fruit operations includes 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 includes 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.
 
During 2006, the Company incurred direct incremental expenses of $1.8 million related to Hurricane Katrina, bringing the total charge to $11.9 million of which $4.7 million is associated with cargo related expenses and $7.2 million is associated with property related expenses. The total charge includes direct incremental expenses of $5.6 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. In addition, the Company collected $7.3 million in 2006 from insurance carriers related to cargo and property damage bringing the total cash collected to $13.3 million. In December 2006, the Company settled its cargo claim for $9.2 million resulting in a gain of $4.5 million which is included as a component of cost of products sold in the consolidated statement of operations. The Company is continuing to work with its insurers to evaluate the extent of the costs incurred under the property claim and to determine the extent of the insurance coverage for that damage.
 
Restructurings and Related Asset Impairments During the third quarter of 2006, the Company restructured its fresh-cut flowers division (“DFF”) to better focus on high-value products and flower varieties, and position the business unit for future growth. In connection with this restructuring, DFF ceased its farming operations in Ecuador, closed one farm in Colombia and will close another in Colombia in 2007, and downsized other Colombian farms. DFF expects to incur total costs of approximately $29.8 million related to this initiative, of which $7.2 million relates to cash restructuring costs and $22.6 million to non-cash impairment charges associated with the write-off of certain long-lived assets, intangible assets and inventory.
 
For the year ended December 30, 2006, total restructuring and impairment costs incurred amounted to approximately $6.4 million and $22.6 million, respectively. The $6.4 million of restructuring costs relate to approximately 1,700 employees who have been severed as of December 30, 2006 and another 800 that will be severed by the end of fiscal 2007. As of December 30, 2006, $4.3 million of restructuring costs had been paid. The $22.6 million charge relates to the impairment and write-off of the following assets: trade names ($4.9 million), deferred crop growing costs ($8.5 million), property, plant and equipment ($8.4 million), and inventory ($0.8 million). Of the $29 million total costs incurred during the year ended December 30, 2006, $24 million has been included in cost of products sold and $5 million in selling, marketing, and general and administrative expenses, in the consolidated statement of operations. The Company also currently estimates that an additional $0.8 million of land clearing costs and employee severance will be incurred and paid by the end of 2007.
 
During the first quarter of 2006, the commercial relationship substantially ended between the Company’s wholly-owned subsidiary, Saba Trading AB (“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. Other than the expected charges described below, the loss of this customer’s business is not expected to be material to the Company’s ongoing earnings. 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 275 employees, $2.4 million of contractual lease


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obligations as well as $0.5 million of fixed asset write-offs. As of December 30, 2006, the remaining amounts of accrued employee severance costs and contractual lease obligations were $3.5 million and $1.1 million, respectively. The Company currently estimates that these remaining costs will be paid by the end of 2007. In addition, during the third quarter of 2006, Saba settled a contractual claim against this customer.
 
In connection with the Company’s ongoing farm optimization programs in Asia, approximately $6.7 million of crop-related costs were written-off during the third quarter of 2006. The $6.7 million non-cash charge has been included in cost of products sold in the consolidated statement of operations.
 
Supplemental Financial Information
 
The following financial information has been presented, as management believes that it is useful information to some readers of the Company’s Consolidated Financial Statements (in thousands):
 
                 
    December 30,
    December 31,
 
    2006     2005  
    (In thousands)  
 
Balance Sheet Data:
               
Total working capital (current assets less current liabilities)
  $ 686,212     $ 534,663  
Total assets
  $ 4,607,994     $ 4,409,727  
Total debt
  $ 2,364,181     $ 2,027,257  
Total shareholders’ equity
  $ 335,212     $ 616,543  
 
                         
    Year
    Year
    Year
 
    Ended
    Ended
    Ended
 
    December 30,
    December 31,
    January 1,
 
    2006     2005     2005  
    (In thousands)  
 
Other Financial Data:
                       
Net income (loss)
  $ (88,983 )   $ 44,096     $ 134,418  
Income from discontinued operations, net of income taxes
    (234 )     (2,235 )     (144 )
Gain on disposal of discontinued operations, net of income taxes
    (2,814 )            
Interest expense
    174,715       142,452       152,503  
Income taxes
    19,995       44,356       25,530  
Depreciation and amortization
    148,700       149,134       144,411  
                         
EBITDA
  $ 251,379     $ 377,803     $ 456,718  
EBITDA margin
    4.1 %     6.5 %     8.6 %
Capital expenditures
  $ 119,335     $ 146,306     $ 101,667  
 
“EBITDA” is defined as earnings before interest expense, income taxes, and depreciation and amortization. EBITDA is calculated by adding interest expense, income taxes and depreciation and amortization to net income. In 2006 and 2005, EBIT is calculated by subtracting income from discontinued operations, net of income taxes and gain on disposal of discontinued operations, net of income taxes, and adding interest expense and income taxes to net income. EBITDA margin is defined as the ratio of EBITDA, as defined, relative to net revenues. EBITDA is reconciled to net income in the Consolidated Financial Statements in the tables above. EBITDA and EBITDA margin fluctuated primarily due to the same factors that impacted the changes in operating income and segment EBIT discussed earlier.
 
The Company presents EBITDA and EBITDA margin because management believes, similar to EBIT, EBITDA is a useful performance measure for the Company. In addition, EBITDA is presented because management believes it is frequently used by securities analysts, investors and others in the evaluation of companies, and because certain covenants on the Company’s Senior Notes are tied to EBITDA. EBITDA and EBITDA margin should not be considered in isolation from or as a substitute for net income and other consolidated income statement


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data prepared in accordance with GAAP or as a measure of profitability. Additionally, the Company’s computation of EBITDA and EBITDA margin may not be comparable to other similarly titled measures computed by other companies, because not all companies calculate EBITDA and EBITDA margin in the same manner.
 
This Management’s Discussion and Analysis contains forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements, which are based on management’s assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by the use of terms such as “anticipate”, “will”, “expect”, “believe”, “should” or similar expressions. The potential risks and uncertainties that could cause the Company’s actual results to differ materially from those expressed or implied herein include weather-related phenomena; market responses to industry volume pressures; product and raw materials supplies and pricing; changes in interest and currency exchange rates; economic crises in developing countries; quotas, tariffs and other governmental actions and international conflict. Refer to “Disclosure Regarding Forward-Looking Statements” in Item 1A. of this Form 10-K for additional information concerning these matters.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
As a result of its global operating and financing activities, the Company is exposed to market risks including fluctuations in interest rates, fluctuations in foreign currency exchange rates and changes in commodity pricing.
 
The Company uses derivative instruments to hedge against fluctuations in interest rates, foreign currency exchange rate movements and bunker fuel prices. With the exception of the South African rand forward contracts, all of the Company’s derivative instruments have been designated as effective hedges of cash flows as defined by Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The fair value of all instruments designated as effective hedges of December 30, 2006 has been included as a component of accumulated other comprehensive loss in shareholders’ equity. The Company has not utilized derivatives for trading or other speculative purposes
 
Interest Rate Risk:  As a result of its normal borrowing and leasing activities, the Company’s operating results are exposed to fluctuations in interest rates. The Company has short-term and long-term debt with both fixed and variable interest rates. Short-term debt is primarily comprised of the current portion of long-term debt maturing twelve months from the balance sheet date. Short-term debt also includes unsecured notes payable to banks and bank lines of credit used to finance working capital requirements. Long-term debt represents publicly held unsecured notes and debentures, as well as amounts outstanding under the Company’s senior secured credit facilities
 
Generally, the Company’s short-term debt is at variable interest rates, while its long-term debt, with the exception of amounts outstanding under the Company’s senior secured credit facilities and vessel lease obligations, is at fixed interest rates.
 
As of December 30, 2006, the Company had $1.11 billion of fixed-rate debt and $2.8 million of fixed-rate capital lease obligations with a combined weighted-average interest rate of 8.2% and a fair value of $1.05 billion. The Company currently estimates that a 100 basis point increase in prevailing market interest rates would decrease the fair value of its fixed-rate debt by approximately $35.5 million.
 
As of December 30, 2006, the Company had the following variable-rate arrangements: $1.17 billion of variable-rate debt with a weighted-average interest rate of 7.2% and $85.6 million of variable-rate capital lease obligations with a weighted-average interest rate of 5.1%. Interest expense under the majority of these arrangements is based on the London Interbank Offered Rate (“LIBOR”). The Company currently estimates that a 100 basis point increase in LIBOR would lower pretax income by $12.6 million.
 
As part of the Company’s strategy to manage the level of exposure to fluctuations in interest rates, the Company entered into an interest rate swap agreement that effectively converted $320 million of variable-rate term loan debt to a fixed-rate basis. The interest rate swap fixed the interest rate at 7.2%. The paying and receiving rates under the interest rate swap were 5.5% and 5.4% as of December 30, 2006. The fair value of the interest rate swap at December 30, 2006 was a liability of $6.4 million.


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The Company also executed a cross currency swap to synthetically convert $320 million of term loan debt into Japanese yen denominated debt in order to effectively lower the U.S. dollar fixed interest rate of 7.2% to a Japanese yen interest rate of 3.6%. The fair value of the cross currency swap was an asset of $20.7 million at December 30, 2006.
 
Foreign Currency Exchange Risk:  The Company has production, processing, distribution and marketing operations worldwide in more than 90 countries. Its international sales are usually transacted in U.S. dollars and major European and Asian currencies. Some of the Company’s costs are incurred in currencies different from those received from the sale of products. Results of operations may be affected by fluctuations in currency exchange rates in both sourcing and selling locations.
 
The Company has significant sales denominated in Japanese yen as well as European sales denominated primarily in euro and Swedish krona. Product and shipping costs associated with a significant portion of these sales are U.S. dollar-denominated. In 2006, the Company had approximately $550 million of annual sales denominated in Japanese yen, $1.3 billion of annual sales denominated in euro, and $320 million of annual sales denominated in Swedish krona. If U.S. dollar exchange rates versus the Japanese yen, euro and Swedish krona during 2006 had remained unchanged from 2005, the Company’s revenues and operating income would have been higher by approximately $15 million and $11 million, respectively. In addition, the Company currently estimates that a 10% strengthening of the U.S. dollar relative to the Japanese yen, euro and Swedish krona would lower operating income by approximately $43 million, excluding the impact of foreign currency exchange hedges.
 
The Company sources the majority of its products in foreign locations and accordingly is exposed to changes in exchange rates between the U.S. dollar and currencies in these sourcing locations. The Company’s exposure to exchange rate fluctuations in these sourcing locations is partially mitigated by entering into U.S. dollar denominated contracts for third-party purchased product and most other major supply agreements, including shipping contracts. However, the Company is still exposed to those costs that are denominated in local currencies. The most significant production currencies to which the Company has exchange rate risk are the Colombian peso, Chilean peso, Thai baht, Philippine peso and South African rand. If U.S. dollar exchange rates versus these currencies during 2006 had remained unchanged from 2005, the Company’s operating income would have been higher by approximately $22 million. In addition, the Company currently estimates that a 10% weakening of the U.S. dollar relative to these currencies would lower operating income by approximately $54 million, excluding the impact of foreign currency exchange hedges.
 
At December 30, 2006, the Company had British pound sterling denominated capital lease obligations. The British pound sterling denominated capital lease of $85.6 million is owed by foreign subsidiaries whose functional currency is the U.S. dollar. Fluctuations in the British pound sterling to U.S. dollar exchange rate resulted in losses that were recognized through results of operations. In 2006, the Company recognized $10.6 million in unrealized foreign currency exchange losses related to the British pound sterling. The Company currently estimates that the weakening of the value of the U.S. dollar against the British pound sterling by 10% as it relates to the capital lease obligation would lower operating income by approximately $8.8 million.
 
Some of the Company’s divisions operate in functional currencies other than the U.S. dollar. The net assets of these divisions are exposed to foreign currency translation gains and losses, which are included as a component of accumulated other comprehensive loss in shareholders’ equity. Such translation resulted in unrealized losses of $17.6 million in 2006. The Company has historically not attempted to hedge this equity risk.
 
The ultimate impact of future changes to these and other foreign currency exchange rates on 2007 revenues, operating income, net income, equity and comprehensive income is not determinable at this time.
 
As part of its risk management strategy, the Company uses derivative instruments to hedge certain foreign currency exchange 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 uses foreign currency exchange forward contracts and participating forward contracts to reduce its risk related to anticipated dollar equivalent foreign currency cash flows, specifically forecasted revenue transactions and forecasted operating expenses. Participating forwards are the combination of a put and call option,


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structured such that there is no premium payment, there is a guaranteed strike price, and the Company can benefit from positive foreign currency exchange movements on a portion of the notional amount.
 
At December 30, 2006, the Company’s foreign currency hedge portfolio was comprised of the following:
 
                                                     
    Gross Notional Value     Unrecognized
             
    Participating
                Gains
    Average Strike
    Settlement
 
    Forwards     Forwards     Total     (Losses)     Price     Year  
 
Foreign Currency Hedges(Buy/Sell):
                                                   
U.S Dollar/Japanese yen
  $ 72,476     $ 73,950     $ 146,426     $ 2,873     JPY     114.5       2007  
U.S Dollar/Euro
    168,524             168,524       (1,046 )   EUR     1.30       2007  
U.S Dollar/Canadian Dollar
    19,050             19,050       537     CAD     1.13       2007  
Chilean peso/U.S. Dollar
    9,609       9,323       18,932       95     CLP     532.1       2007  
Colombian peso/U.S. Dollar
    17,506       14,094       31,600       279     COP     2,269.7       2007  
Philippine peso/U.S. Dollar
          34,434       34,434       788     PHP     50.10       2007  
Euro/South African Rand
          5,388       5,388           EUR/ZAR     9.43       2007  
South African Rand/Euro
          5,388       5,388           EUR/ZAR     9.45       2007  
                                                     
Total
  $ 287,165     $ 142,577     $ 429,742     $ 3,526                      
                                                     
 
Commodity Sales Price Risk:  Commodity pricing exposures include the potential impacts of weather phenomena and their effect on industry volumes, prices, product quality and costs. The Company manages its exposure to commodity price risk primarily through its regular operating activities, however, significant commodity price fluctuations, particularly for bananas, pineapples and commodity vegetables could have a material impact on the Company’s results of operations.
 
Commodity Purchase Price Risk:  The Company uses a number of commodities in its operations including tinplate in its canned products, plastic resins in its fruit bowls, containerboard in its packaging containers and bunker fuel for its vessels. The Company is most exposed to market fluctuations in prices of containerboard and fuel. The Company currently estimates that a 10% increase in the price of containerboard would lower operating income by approximately $16.7 million and a 10% increase in the price of bunker fuel would lower operating income by approximately $11.7 million.
 
The Company enters into bunker fuel hedges to reduce its risk related to price fluctuations on anticipated bunker fuel purchases. At December 30, 2006, bunker fuel hedges had an aggregate outstanding notional amount of 129,300 metric tons. The fair value of the bunker fuel hedges at December 30, 2006 was a liability of $2.5 million.
 
Counterparty Risk:  The counterparties to the Company’s derivative instruments contracts 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.


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Item 8.   Financial Statements and Supplementary Data
 
I.   Index to Consolidated Financial Statements of Dole Food Company, Inc.
 
         
    Form 10-K
    Page
 
 Audited Financial Statements for the Three Years Ended December 30, 2006:
   
  46
  47
  48
  49
  51
  52
II.  Supplementary Data
   
  100


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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 December 30, 2006 and December 31, 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years ended December 30, 2006, December 31, 2005, and January 1, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule 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 December 30, 2006 and December 31, 2005, and the results of its operations and its cash flows for the years ended December 30, 2006, December 31, 2005, and January 1, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
As discussed in Note 12 to the consolidated financial statements, the Company adopted, effective December 30, 2006, a new accounting standard for retirement benefits.
 
Deloitte & Touche LLP
 
Los Angeles, California
March 23, 2007


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DOLE FOOD COMPANY, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 30, 2006, December 31, 2005 and January 1, 2005
 
                         
    2006     2005     2004  
    (In thousands)  
 
Revenues, net
  $ 6,171,464     $ 5,826,785     $ 5,284,731  
Cost of products sold
    5,632,278       5,142,028       4,545,894  
                         
Gross margin
    539,186       684,757       738,837  
Selling, marketing and general and administrative expenses
    453,567       460,166       422,131  
                         
Operating income
    85,619       224,591       316,706  
Other income (expense), net
    15,176       (5,353 )     (8,737 )
Interest income
    7,240       6,049       4,207  
Interest expense
    174,715       142,452       152,503  
                         
Income (loss) from continuing operations before income taxes, minority interest expense and equity earnings
    (66,680 )     82,835       159,673  
Income taxes
    19,995       44,356       25,530  
Minority interest expense, net of income taxes
    5,533       3,244       10,200  
Equity in earnings of unconsolidated subsidiaries, net of income taxes
    (177 )     (6,626 )     (10,331 )
                         
Income (loss) from continuing operations, net of income taxes
    (92,031 )     41,861       134,274  
Income from discontinued operations, net of income taxes
    234       2,235       144  
Gain on disposal of discontinued operations, net of income taxes
    2,814              
                         
Net income (loss)
  $ (88,983 )   $ 44,096     $ 134,418  
                         
 
See Notes to Consolidated Financial Statements


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DOLE FOOD COMPANY, INC.
 
CONSOLIDATED BALANCE SHEETS
As of December 30, 2006 and December 31, 2005
 
                 
    2006     2005  
    (In thousands,
 
    except share data)  
 
ASSETS
Cash and cash equivalents
  $ 92,414     $ 48,812  
Receivables, net of allowances of $62,632 and $58,585, respectively
    745,730       637,636  
Inventories
    661,552       623,497  
Prepaid expenses
    65,388       58,864  
Deferred income tax assets
    66,606       34,756  
Assets held for sale
    31,588        
                 
Total current assets
    1,663,278       1,403,565  
Investments
    62,736       76,753  
Property, plant and equipment, net of accumulated depreciation of $840,891 and $705,115, respectively
    1,461,961       1,508,597  
Goodwill
    545,740       540,280  
Intangible assets, net
    726,689       726,700  
Other assets, net
    147,590       153,832  
                 
Total assets
  $ 4,607,994     $ 4,409,727  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable
  $ 454,685     $ 411,451  
Accrued liabilities
    473,797       431,037  
Current portion of long-term debt
    14,455       25,020  
Notes payable
    34,129       1,394  
                 
Total current liabilities
    977,066       868,902  
Long-term debt
    2,315,597       2,000,843  
Deferred income tax liabilities
    346,595       355,647  
Other long-term liabilities
    608,191       546,305  
Minority interests
    25,333       21,487  
Commitments and contingencies (Notes 15 and 17)
               
Shareholders’ equity
               
Common stock — $0.001 par value; 1,000 shares authorized, issued and outstanding
           
Additional paid-in capital
    409,032       440,032  
Retained earnings (deficit)
    (59,683 )     192,991  
Accumulated other comprehensive loss
    (14,137 )     (16,480 )
                 
Total shareholders’ equity
    335,212       616,543  
                 
Total liabilities and shareholders’ equity
  $ 4,607,994     $ 4,409,727  
                 
 
See Notes to Consolidated Financial Statements


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DOLE FOOD COMPANY, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 30, 2006, December 31, 2005 and January 1, 2005
 
                         
    2006     2005     2004  
    (In thousands)  
 
Operating Activities
                       
Net income (loss)
  $ (88,983 )   $ 44,096     $ 134,418  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Depreciation and amortization
    149,347       149,809       144,993  
Purchase accounting step-up of inventory
                4,181  
Foreign currency exchange (gains) losses
    (10,671 )     (41,503 )     9,567  
Asset write-offs, impairments and net (gain) loss on sale of assets
    20,760       (8,214 )     (6,065 )
Minority interests and equity earnings, net
    5,356       (3,382 )     (131 )
Amortization of debt issuance costs
    4,411       5,919       8,871  
Write-off of debt issuance costs
    8,133       10,722       2,656  
Provision for deferred income taxes
    (23,151 )     (31,918 )     (1,599 )
Pension and other postretirement benefit plan expense
    15,383       19,760       21,323  
Loss on early retirement of debt
          33,047        
Other
    2,062       3,799       2,789  
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
                       
Receivables
    (49,665 )     (41,837 )     (27,067 )
Inventories
    (47,859 )     (120,342 )     (50,136 )
Prepaid expenses and other assets
    (1,993 )     (18,400 )     (1,100 )
Accounts payable
    (4,613 )     76,218       26,770  
Accrued liabilities
    25,445       (18,342 )     (49,394 )
Other long-term liabilities
    11,959       13,157       (2,684 )
                         
Cash flow provided by operating activities
    15,921       72,589       217,392  
Investing Activities
                       
Proceeds from sales of assets
    14,963       11,729       11,435  
Proceeds from sales of investments and businesses, net of cash disposed
    16,310       7,402        
Acquisitions and investments, net of cash acquired
    (22,950 )     (51,460 )     (189,691 )
Capital additions
    (125,056 )     (131,495 )     (101,667 )
Repurchase of common stock in going-private merger transaction
    (267 )     (499 )     (1,300 )
Transaction costs paid in going-private merger transaction
                (361 )
                         
Cash flow used in investing activities
    (117,000 )     (164,323 )     (281,584 )
Financing Activities
                       
Short-term debt borrowings
    101,381       18,183       57,201  
Short-term debt repayments
    (52,872 )     (26,616 )     (35,261 )
Long-term debt borrowings, net of debt issuance costs
    2,260,545       1,575,869       606,070  
Long-term debt repayments
    (1,969,698 )     (1,417,413 )     (594,838 )
Capital contribution from parent
    28,390             100,000  
Return of capital to parent
    (59,390 )            
Dividends paid to minority shareholders
    (1,833 )     (2,836 )     (5,601 )
Dividends paid to parent
    (163,691 )     (77,250 )     (20,000 )
                         
Cash flow provided by financing activities
    142,832       69,937       107,571  
                         
Effect of foreign currency exchange rate changes on cash
    1,849       (8,608 )     2,356  
                         
Increase (decrease) in cash and cash equivalents
    43,602       (30,405 )     45,735  
Cash and cash equivalents at beginning of period
    48,812       79,217       33,482  
                         
Cash and cash equivalents at end of period
  $ 92,414     $ 48,812     $ 79,217  
                         


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DOLE FOOD COMPANY, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS — Continued
For the Years Ended December 30, 2006, December 31, 2005 and January 1, 2005

Supplemental cash flow information
 
At December 30, 2006 and December 31, 2005, accounts payable included approximately $18 million and $23.7 million, respectively, for capital expenditures.
 
The consolidated statement of cash flows for the year ended January 1, 2005 excludes a $6.3 million non-cash dividend of land to Dole Holding Company, LLC. Refer to Note 13 for additional details.
 
Income tax payments, net of refunds, for the years ended December 30, 2006, December 31, 2005 and January 1, 2005 were $25.7 million, $42.2 million and $(0.3) million, respectively.
 
Interest payments on borrowings totaled $159.5 million, $142.8 million and $141.2 million during the years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively.
 
See Notes to Consolidated Financial Statements


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DOLE FOOD COMPANY, INC.
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Years Ended December 30, 2006, December 31, 2005 and January 1, 2005
 
                                                                         
                            Accumulated Other
             
                            Comprehensive Income (Loss)              
    Common
          Additional
    Retained
    Pension & Other
    Cumulative
    Unrealized
    Total
       
    Shares
    Common
    Paid-In
    Earnings
    Post-retirement
    Translation
    Gains (Losses)
    Shareholders’
    Comprehensive
 
    Outstanding     Stock     Capital     (Deficit)     Benefits     Adjustment     on Hedges     Equity     Income (Loss)  
                            (In thousands)                    
 
Balance at January 3, 2004
    1     $     $ 340,032     $ 118,033     $ (3,845 )   $ 18,609     $ (16,401 )   $ 456,428     $ 44,536  
                                                                         
Net income
                      134,418                         134,418     $ 134,418  
Unrealized foreign currency translation and hedging gains
                                  16,354       5,018       21,372       21,372  
Reclassification of realized losses to net income
                                        11,582       11,582       11,582  
Additional minimum pension liability
                            (19,621 )                 (19,621 )     (19,621 )
Cash dividends
                      (20,000 )                       (20,000 )      
Non-cash dividends
                      (6,306 )                       (6,306 )      
Capital contribution by Dole Holding Company, LLC
                100,000                               100,000        
                                                                         
Balance at January 1, 2005
    1     $     $ 440,032     $ 226,145     $ (23,466 )   $ 34,963     $ 199     $ 677,873     $ 147,751  
                                                                         
Net income
                      44,096                         44,096     $ 44,096  
Unrealized foreign currency translation and hedging gains (losses)
                                  (31,530 )     5,465       (26,065 )     (26,065 )
Reclassification of realized gains to net income
                                        (2,842 )     (2,842 )     (2,842 )
Additional minimum pension liability
                            731                   731       731  
Cash dividends
                      (77,250 )                       (77,250 )      
                                                                         
Balance at December 31, 2005
    1     $     $ 440,032     $ 192,991     $ (22,735 )   $ 3,433     $ 2,822     $ 616,543     $ 15,920  
                                                                         
Net loss
                      (88,983 )                       (88,983 )   $ (88,983 )
Unrealized foreign currency translation and hedging gains (losses)
                                  17,557       (3,965 )     13,592       13,592  
Reclassification of realized gains to net loss
                                        (3,204 )     (3,204 )     (3,204 )
Additional minimum pension liability
                            (4,799 )                 (4,799 )     (4,799 )
Adjustment to adopt FAS 158, net of tax
                            (3,246 )                 (3,246 )      
Cash dividends
                      (163,691 )                       (163,691 )      
Capital contribution from parent
                28,390                               28,390        
Return of capital to parent
                (59,390 )                             (59,390 )      
                                                                         
Balance at December 30, 2006
    1     $     $ 409,032     $ (59,683 )   $ (30,780 )   $ 20,990     $ (4,347 )   $ 335,212     $ (83,394 )
                                                                         
 
See Notes to Consolidated Financial Statements


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS
 
Note 1 — Nature of Operations
 
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. Additionally, the Company markets a full-line of premium fresh-cut flowers.
 
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.
 
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 2006, 2005 and 2004 ended on December 30, 2006, December 31, 2005 and January 1, 2005, respectively.
 
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. Revenue is recorded net of expected returns, sales discounts and volume rebates. Estimated sales discounts and expected returns 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-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 revenue. 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,


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

the Company amortizes the costs over the life of the underlying contract. The amortization of these costs, as well as the cost of other marketing and advertising arrangements with customers, are classified as a reduction in revenue. Advertising and marketing costs, included in selling, marketing and general and administrative expenses, amounted to $70.6 million, $71.3 million and $62.1 million during the years ended December 30, 2006, December 31, 2005 and January 1, 2005.
 
Research and Development Costs:  Research and development costs are expensed as incurred. Research and development costs were not material for the years ended December 30, 2006, December 31, 2005 and January 1, 2005.
 
Income Taxes:  Deferred income taxes are recognized for the income tax effect of temporary differences between financial statement carrying amounts and the income tax bases of assets and liabilities. 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.
 
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 fruit, vegetables and flowers, 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.
 
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 December 30, 2006 and December 31, 2005, 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 principally 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


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

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 December 30, 2006, December 31, 2005 and January 1, 2005. No individual customer accounted for greater than 10% of accounts receivable as of December 30, 2006 or December 31, 2005.
 
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 facilities, 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. Based on these assumptions, with the exception of the Company’s notes and debentures, management believes the fair market values of the Company’s financial instruments are not materially different from their recorded amounts as of December 30, 2006 and December 31, 2005.
 
The Company estimates the fair value of its unsecured notes and debentures based on current quoted market prices. The estimated fair value of these unsecured notes and debentures (face value of $1.11 billion in both 2006 and 2005) was approximately $1.05 billion and $1.11 billion as of December 30, 2006 and December 31, 2005, respectively. 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. At December 30, 2006 and December 31, 2005, the carrying value of the Company’s term loans approximated the fair value.
 
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 16 for additional information). The Company estimates the fair values of its derivatives based on quoted market prices or pricing models using current market rates.
 
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.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
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. 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 December 30, 2006 and December 31, 2005.
 
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, as well as minimum price guarantees and guarantees of minimum volume purchases.
 
The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, on a prospective basis for all guarantees issued or modified after December 31, 2002. Following the adoption of FIN 45, at the inception of any new guarantee, the Company recognizes a liability equal to the fair value of the guarantee. The fair value of the guarantee is generally determined by calculating a probability-weighted present value of expected cash flows. The liability is generally reduced ratably over the term of the guarantee. Depending on the nature of the underlying arrangement the offsetting entry is either expensed or deferred and amortized. The Company has not historically experienced any significant losses associated with these guarantees. Liabilities relating to guarantees were not material at December 30, 2006 and December 31, 2005.
 
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 reported amounts of assets and liabilities as well as the disclosures of contingent assets and liabilities as of the date of these financial statements. Management’s use of estimates also affects the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
 
Reclassifications:  Certain prior year amounts have been reclassified to conform with the 2006 presentation. These reclassifications had no impact on previously reported net income or shareholders’ equity.
 
Recently Adopted Accounting Pronouncements
 
During September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (“SAB 108”), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for the first fiscal year ending after November 15, 2006. The adoption of SAB 108 did not materially impact the Company’s financial position or results of operations.
 
During September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, (“FAS 158”). 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 Company has early adopted the provisions of FAS 158 effective December 30, 2006. Refer to Note 12 — Employee Benefit Plans for additional disclosures required by FAS 158 and the effects of adoption.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
Recently Issued Accounting Pronouncements
 
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Liabilities — Including an amendment of FASB Statement No. 115 (FAS 159). FAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses, arising subsequent to adoption, are reported in earnings. The Company is required to adopt FAS 159 for the first fiscal year beginning after November 15, 2007. The Company does not expect that the implementation FAS 159 will have a material effect on the Company’s results of operations or financial position.
 
During September 2006, the FASB issued FASB Staff Position AUG AIR-1, Accounting For Planned Major Maintenance Activities (“FSP”), which eliminates the acceptability of the accrue-in-advance method of accounting for planned major maintenance activities. As a result, there are three alternative methods of accounting for planned major maintenance activities: direct expense, built-in-overhaul or deferral. The guidance in this FSP is effective for the Company at the beginning of fiscal 2007 and requires retrospective application for all financial statements presented. The Company has been accruing for planned major maintenance activities associated with its vessel fleet under the accrue-in-advance method. The Company will adopt the deferral method of accounting for planned major maintenance activities associated with its vessel fleet, beginning in 2007. When adopted in fiscal 2007, the impact of the adoption of this FSP will increase retained earnings as of the beginning of fiscal years 2006 and 2005 by approximately $5.9 million and $6.5 million, respectively. Net income will also decrease for the years ended December 30, 2006 and December 31, 2005 by approximately $0.6 million and $0.5 million, respectively. Net income for the year ended January 1, 2005 will increase by approximately $0.5 million.
 
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. FAS 157 is effective for the Company at the beginning of fiscal 2008 and will be applied on a prospective basis. The Company is currently evaluating the impact, if any, the adoption of FAS 157 will have on its financial position and results of operations.
 
During June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies what criteria must be met prior to recognition of the financial statement benefit of a position taken in a tax return. FIN 48 also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. FIN 48 is effective as of January 1, 2007 and the cumulative effects of applying FIN 48 will be recorded as an adjustment to retained earnings as of January 1, 2007. The Company is currently in the process of determining the impact the adoption of FIN 48 will have on its financial position and results of operations.
 
Note 3 — Business Dispositions
 
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. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”), the disposition of Pac Truck qualified for discontinued operations treatment. Accordingly, the historical results of operations of this business have been reclassified for all periods presented. Pursuant to FAS 144, the consolidated balance sheet and consolidated statement of cash flows do not reflect the reclassification of Pac Truck as a discontinued operation.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

The operating results of Pac Truck for fiscal 2006, 2005 and 2004, which were included in the “Other” operating segment, are reported in the following table:
 
                         
    2006     2005     2004  
    (In thousands)  
 
Revenues
  $ 47,851     $ 43,826     $ 31,471  
Income before income taxes
  $ 397     $ 355     $ 105  
Income taxes
  $ 163     $ 164     $ (39 )
Income from discontinued operations, net of income taxes
  $ 234     $ 191     $ 144  
Gain on disposal of discontinued operations, net of income taxes of $2 million
  $ 2,814              
 
During the fourth quarter of 2005, the Company resolved a contingency related to the sale of Cervecería Hondureña, S.A., a Honduran corporation principally engaged in the beverage business in Honduras, which occurred in 2001. As a result, the Company realized income of $2 million, net of income taxes of $1.4 million. The income has been recorded as income from discontinued operations in the Company’s consolidated statement of operations for the year ended December 31, 2005. In addition, the Company recorded $4.8 million in income from continuing operations related to the collection of a fully reserved receivable balance and interest income.
 
Note 4 — Business Acquisitions
 
Jamaica Producers Group, Ltd.
 
On October 3, 2006, Jamaica Producers Group Ltd.  (“JPG”) accepted the Company’s offer to purchase from JPG the 65% of JP Fruit Distributors Limited (renamed JP Fruit Limited) that the Company did not already own for $42.5 million in cash. JP Fruit imports and sells fresh produce in the United Kingdom. The acquisition of JP Fruit allows the Company to strengthen its penetration of the fresh produce market in the United Kingdom and the Republic of Ireland. The transaction closed during the fourth quarter of 2006. The acquisition resulted in goodwill of $24 million, which is included in the Company’s fresh fruit segment. Expected geographical synergies arising from this widening of the existing Dole network in Europe as well as the ability to leverage the Company’s tradition of top quality produce and exceptional service in these markets contributed to a purchase price that resulted in the recognition of goodwill. The results of operations for JP Fruit have been included in the Company’s consolidated results of operations from October 6, 2006, the effective date of acquisition. The Company is considering expressions of interest by potential partners with respect to the ownership and operation of JP Fruit.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
The following table represents the final values attributed to the assets acquired and liabilities assumed as of the date of the acquisition. These values include the historical values attributable to the Company’s predecessor basis (in thousands):
 
         
Total purchase price, including transaction expenses
  $ 42,500  
         
Current assets
  $ 58,280  
Property, plant and equipment
    19,060  
Intangible assets
    9,898  
Goodwill
    24,035  
Other assets
    3,797  
         
Total assets acquired
    115,070  
Current liabilities
    35,878  
Other long-term liabilities
    16,911  
         
Total liabilities assumed
    52,789  
         
Net assets
    62,281  
Less: Historical net assets attributable to predecessor basis
    10,125  
Less: Goodwill attributable to predecessor basis
    9,656  
         
Net assets acquired
  $ 42,500  
         
 
The fair values of the property, plant and equipment and intangible assets acquired were based on third-party appraisals.
 
The $9.9 million allocated to intangible assets is a valuation of customer relationships with finite lives. These customer relationships will be amortized over approximately 15 years.
 
Saba
 
On December 30, 2004, the Company acquired the remaining 40% of Saba Trading AB (“Saba”), for $47.1 million, which was paid in cash during the first fiscal quarter of 2005. The Company acquired its 60% majority ownership in Saba in 1998. The acquisition of Saba’s remaining shares resulted in the allocation of $33.5 million to goodwill, which has been included in the Company’s fresh fruit segment. Saba is the leading importer and distributor of fruit, vegetables and flowers in Scandinavia.
 
Coastal Berry
 
In October 2004, the Company acquired Coastal Berry Company, LLC and two affiliated companies (renamed Dole Berry Company, LLC) for $7 million in cash. In connection with the acquisition, the Company also repaid approximately $10 million of Dole Berry Company’s debt and capital lease obligations. This acquisition resulted in approximately $8.5 million of goodwill, which has been included in the Company’s fresh vegetables segment and is fully deductible for tax purposes over a 15-year period. Dole Berry Company is a leading California producer of fresh berries (including strawberries, raspberries and blackberries).
 
Wood Holdings, Inc.
 
In June 2004, the Company acquired all of the outstanding capital stock of Wood Holdings, Inc. (renamed Dole Packaged Frozen Foods, Inc.), a privately held frozen fruit producer and manufacturer. The total purchase price, including transaction expenses, was $174.3 million in cash. The acquisition resulted in goodwill of $47.8 million, which has been included in the Company’s packaged foods segment and is fully deductible for


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

tax purposes over a 15-year period. The results of operations for Dole Packaged Frozen Foods, Inc. have been included in the Company’s consolidated results of operations from June 8, 2004, the effective date of acquisition.
 
Pro forma financial information for the above acquisitions is not presented, as it is not material.
 
Note 5 — Restructurings and Related Asset Impairments
 
During the third quarter of 2006, the Company restructured its fresh-cut flowers division (“DFF”) to better focus on high-value products and flower varieties, and position the business unit for future growth. In connection with this restructuring, DFF ceased its farming operations in Ecuador, closed one farm in Colombia and will close another in Colombia in 2007, and downsized other Colombian farms. DFF expects to incur total costs of approximately $29.8 million related to this initiative, of which $7.2 million relates to cash restructuring costs and $22.6 million to non-cash impairment charges associated with the write-off of certain long-lived assets, intangible assets and inventory.
 
For the year ended December 30, 2006, total restructuring and impairment costs incurred amounted to approximately $6.4 million and $22.6 million, respectively. The $6.4 million of restructuring costs relate to approximately 1,700 employees who have been severed as of December 30, 2006 and another 800 that will be severed by the end of fiscal 2007. As of December 30, 2006, $4.3 million of restructuring costs had been paid. The $22.6 million charge relates to the impairment and write-off of the following assets: trade names ($4.9 million), deferred crop growing costs ($8.5 million), property, plant and equipment ($8.4 million), and inventory ($0.8 million). Of the $29 million total costs incurred during the year ended December 30, 2006, $24 million has been included in cost of products sold and $5 million in selling, marketing, and general and administrative expenses, in the consolidated statement of operations. The Company also currently estimates that an additional $0.8 million of land clearing costs and employee severance will be incurred and paid by the end of 2007.
 
During the first quarter of 2006, the commercial relationship substantially ended between the Company’s wholly- owned subsidiary, Saba Trading AB (“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. Other than the expected charges described below, the loss of this customer’s business is not expected to be material to the Company’s ongoing earnings. 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 275 employees, $2.4 million of contractual lease obligations as well as $0.5 million of fixed asset write-offs. As of December 30, 2006, the remaining amounts of accrued employee severance costs and contractual lease obligations were $3.5 million and $1.1 million, respectively. The Company currently estimates that these remaining costs will be paid by the end of 2007. In addition, during the third quarter of 2006, Saba settled a contractual claim against this customer.
 
In connection with the Company’s ongoing farm optimization programs in Asia, approximately $6.7 million of crop-related costs were written-off during the third quarter of 2006. The $6.7 million non-cash charge has been included in cost of products sold in the consolidated statement of operations.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

Note 6 — Income Taxes
 
Income tax expense (benefit) was as follows (in thousands):
 
                         
    2006     2005     2004  
 
Current
                       
Federal, state and local
  $ 27,626     $ 52,020     $ 13,373  
Foreign
    17,637       25,838       13,717  
                         
      45,263       77,858       27,090  
                         
Deferred
                       
Federal, state and local
    (19,611 )     (17,506 )     (909 )
Foreign
    (5,657 )     (15,996 )     (651 )
                         
      (25,268 )     (33,502 )     (1,560 )
                         
    $ 19,995     $ 44,356     $ 25,530  
                         
 
Pretax earnings attributable to foreign operations were $30.7 million, $199.2 million and $203.1 million for the years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively. Undistributed earnings of foreign subsidiaries, which are intended to be indefinitely invested, totaled $2 billion at December 30, 2006. Other than the repatriation discussed below, it is currently not practicable to estimate the tax liability that might be payable if these foreign earnings were repatriated.
 
During October 2004, The American Jobs Creation Act of 2004 was signed into law, adding Section 965 to the Internal Revenue Code. Section 965 provides a special one-time deduction of 85% of certain foreign earnings that are repatriated under a domestic reinvestment plan, as defined therein. The effective federal tax rate on any qualified repatriated foreign earnings under Section 965 equals 5.25%. Taxpayers could elect to apply this provision to a qualified earnings repatriation made during calendar year 2005.
 
During the second quarter of 2005, the Company repatriated $570 million of earnings from its foreign subsidiaries, of which approximately $489 million qualified for the 85% dividends received deduction under Section 965. A tax provision of approximately $37.8 million for the repatriation of certain foreign earnings has been recorded as income tax expense for year ended December 31, 2005.
 
Income tax expense for the year ended December 30, 2006 was $20 million, which reflects the Company’s effective tax rate of (30%) for the 2006 fiscal year.
 
The Company’s reported income tax expense on continuing operations differed from the expense calculated using the U.S. federal statutory tax rate for the following reasons (in thousands):
 
                         
          Year
    Year
 
    Year Ended
    Ended
    Ended
 
    December 30,
    December 31,
    January 1,
 
    2006     2005     2005  
 
Expense computed at U.S. federal statutory income tax rate of 35%
  $ (23,338 )   $ 28,992     $ 55,885  
Repatriation of certain foreign earnings
          37,772        
Foreign income taxed at different rates
    36,078       (39,766 )     (38,289 )
State and local income tax, net of federal income tax expense (benefit)
    (2,212 )     (2,028 )     945  
Valuation allowances
    13,848       19,522       7,557  
Permanent items and other
    (4,381 )     (136 )     (568 )
                         
Reported income tax expense
  $ 19,995     $ 44,356     $ 25,530  
                         


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

Deferred tax assets (liabilities) comprised the following (in thousands):
 
                 
    December 30,
    December 31,
 
    2006     2005  
 
Intangibles
  $ (277,955 )   $ (273,641 )
Property, plant and equipment
    (171,616 )     (179,784 )
Inventory valuation methods
    7,706       3,926  
Postretirement benefits
    67,600       46,079  
Operating accruals
    100,145       96,576  
Tax credit carryforwards
    20,641       18,913  
Net operating/capital loss carryforwards
    148,056       136,944  
Valuation allowances
    (170,800 )     (165,051 )
Other, net
    (3,766 )     (4,853 )
                 
    $ (279,989 )   $ (320,891 )
                 
 
The Company has gross federal, state and foreign net operating loss carryforwards of $136.7 million, $1.1 billion and $163.9 million, respectively, at December 30, 2006. In addition, the Company has a gross U.S. capital loss carryover of $4.5 million at December 30, 2006. The Company has recorded deferred tax assets of $47.8 million for federal net operating loss carryforwards, which, if unused, will expire between 2023 and 2025. The Company has recorded deferred tax assets of $49.4 million for state net operating loss carryforwards, which, if unused, will start to expire in 2007. The Company has recorded deferred tax assets of $49 million for foreign net operating loss carryforwards which are subject to varying expiration rules. The Company has recorded a deferred tax asset of $1.8 million for its U.S. capital loss carryover, which, if unused, will expire in 2010. Tax credit carryforwards of $20.6 million include foreign tax credit carryforwards of $18.4 million which will expire in 2011, U.S. general business credit carryforwards of $0.2 million which expire between 2023 and 2025, and state tax credit carryforwards of $2.0 million with varying expiration dates. The Company has recorded a U.S. deferred tax asset of $21.5 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 and capital 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 the related income tax benefits for these assets.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
Total deferred tax assets and deferred tax liabilities were as follows (in thousands):
 
                 
    December 30,
    December 31,
 
    2006     2005  
 
Deferred tax assets
  $ 541,594     $ 525,223  
Deferred tax asset valuation allowance
    (170,800 )     (165,051 )
                 
      370,794       360,172  
Deferred tax liabilities
    (650,783 )     (681,063 )
                 
Net deferred tax liabilities
  $ (279,989 )   $ (320,891 )
                 
Current deferred tax assets consist of:
               
Deferred tax assets, net of valuation allowance
  $ 88,853     $ 48,541  
Deferred tax liabilities
    (22,247 )     (13,785 )
                 
Net current deferred tax assets
    66,606       34,756  
Non-current deferred tax liabilities consist of:
               
Deferred tax assets, net of valuation allowance
    281,941       311,631  
Deferred tax liabilities
    (628,536 )     (667,278 )
                 
Net non-current deferred tax liabilities
    (346,595 )     (355,647 )
                 
Net deferred tax liabilities
  $ (279,989 )   $ (320,891 )
                 
 
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. The Company is subject to examination by taxing authorities in the various jurisdictions in which it files tax returns. Matters raised upon audit may involve substantial amounts and could result in material cash payments if resolved unfavorably; however, the Company does not believe that any material payments will be made related to these matters within the next twelve months. In addition, the Company considers it unlikely that the resolution of these matters will have a material adverse effect on its results of operations.
 
Internal Revenue Service Audit:  On June 29, 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 includes various proposed adjustments. The net tax deficiency associated with the RAR is $175 million, plus interest and penalties. The Company timely filed a protest letter contesting the proposed adjustments contained in the RAR on July 6, 2006 and is pursuing resolution of these issues with the Appeals Division of the IRS. The Company believes that its U.S. federal income tax returns were completed in accordance with applicable laws and regulations and disagrees with the proposed adjustments. The Company also believes that it is adequately reserved with respect to this matter. Management does not believe that any material payments will be made related to these matters within the next twelve months. In addition, management considers it unlikely that the resolution of these matters will have a material adverse effect on its results of operations.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
Note 7 — Details of Certain Assets and Liabilities
 
Details of receivables and inventories were as follows (in thousands):
 
                 
    December 30,
    December 31,
 
    2006     2005  
 
Receivables
               
Trade
  $ 654,785     $ 562,232  
Notes and other
    122,994       101,839  
Grower advances
    29,706       32,150  
Income tax refund
    877        
                 
      808,362       696,221  
Allowance for doubtful accounts
    (62,632 )     (58,585 )
                 
    $ 745,730     $ 637,636  
                 
Inventories
               
Finished products
  $ 322,122     $ 290,593  
Raw materials and work in progress
    132,047       145,146  
Crop-growing costs
    151,533       139,271  
Operating supplies and other
    55,850       48,487  
                 
    $ 661,552     $ 623,497  
                 
 
Accounts payable consists primarily of trade payables.
 
Accrued liabilities included the following (in thousands):
 
                 
    December 30,
    December 31,
 
    2006     2005  
 
Employee-related costs and benefits
  $ 130,875     $ 124,067  
Amounts due to growers
    107,478       91,370  
Marketing and advertising
    61,322       61,180  
Shipping related costs
    50,474       43,080  
Materials and supplies
    26,445       26,673  
Other
    97,203       84,667  
                 
    $ 473,797     $ 431,037  
                 
 
Remaining amounts included in other accrued liabilities shown above are comprised of individually insignificant operating accruals.
 
Other long-term liabilities were as follows (in thousands):
 
                 
    December 30,
    December 31,
 
    2006     2005  
 
Accrued postretirement and other employee benefits
  $ 258,319     $ 233,736  
Accrued income taxes
    279,802       254,487  
Other
    70,070       58,082  
                 
    $ 608,191     $ 546,305  
                 


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

Note 8 — Assets Held for Sale
 
During 2006, the Company began a review of its non-core assets with the intention to dispose of those that fell outside of the Company’s future strategic direction or that did not meet internal economic return criteria. As a result, the Company is in the process of selling certain long-lived assets, mainly land parcels located in central California. 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:
 
         
    December 30,
 
    2006  
    (In thousands)  
 
Assets held for sale by segment:
       
Fresh fruit
  $ 28,337  
Fresh vegetables
    3,251  
         
Total assets held for sale
  $ 31,588  
         
 
At December 30, 2006, included in the Company’s consolidated balance sheet are $31.6 million of assets held for sale related to property, plant and equipment, net of accumulated depreciation and $5.2 million related to accounts payable.
 
Note 9 — Property, Plant and Equipment
 
Major classes of property, plant and equipment were as follows (in thousands):
 
                 
    December 30,
    December 31,
 
    2006     2005  
 
Land and land improvements
  $ 754,051     $ 750,913  
Buildings and leasehold improvements
    430,715       395,240  
Machinery and equipment
    698,051       637,224  
Vessels and containers
    231,640       233,413  
Vessels and equipment under capital leases
    96,460       94,045  
Construction in progress
    91,935       102,877  
                 
      2,302,852       2,213,712  
Accumulated depreciation
    (840,891 )     (705,115 )
                 
    $ 1,461,961     $ 1,508,597  
                 
 
Depreciation is computed principally 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
  3 to 50
Machinery and equipment
  2 to 35
Vessels and containers
  3 to 20
Vessels and equipment under capital leases
  Shorter of useful life
or life of lease
 
Depreciation expense for property, plant and equipment totaled $144.2 million, $137.9 million and $133.3 million for the years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

Note 10 — Goodwill and Intangible Assets
 
Goodwill has been allocated to the Company’s reporting segments as follows (in thousands):
 
                                                 
          Fresh
    Packaged
    Fresh-cut
             
    Fresh Fruit     Vegetables     Foods     Flowers     Other     Total  
 
Balance as of January 1, 2005
  $ 375,676     $ 97,663     $ 63,526     $     $     $ 536,865  
Additions
    603       185       2,527                   3,315  
Tax-related adjustments
    76       20       4                   100  
                                                 
Balance as of December 31, 2005
  $ 376,355     $ 97,868     $ 66,057     $     $     $ 540,280  
                                                 
Additions
    24,035                               24,035  
Tax-related adjustments
    (13,765 )     (3,994 )     (816 )                 (18,575 )
                                                 
Balance as of December 30, 2006
  $ 386,625     $ 93,874     $ 65,241     $     $     $ 545,740  
                                                 
 
The additions to goodwill during the year ended December 30, 2006 relate to the acquisition of JPFD. Refer to Note 4 — Business Acquisitions for further details.
 
The additions to goodwill during the year ended December 31, 2005 relate primarily to a purchase price adjustment associated with the 2004 acquisition of Dole Packaged Frozen Foods. The purchase price adjustment is attributable to a change in the expected reimbursement of certain tax liabilities payable to the selling shareholders as a result of the transaction.
 
The tax-related adjustments result 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. Included in these tax-related adjustments is approximately $17.5 million of deferred tax assets established during 2006 that should have been established at the date of the going-private merger transaction.
 
Details of the Company’s intangible assets were as follows (in thousands):
 
                 
    December 30,
    December 31,
 
    2006     2005  
 
Amortized intangible assets:
               
Customer relationships
  $ 48,298     $ 38,501  
Other amortized intangible assets
    8,796       9,064  
                 
      57,094       47,565  
Accumulated amortization — customer relationships
    (13,056 )     (9,219 )
Other accumulated amortization
    (6,964 )     (6,164 )
                 
Accumulated amortization — intangible assets
    (20,020 )     (15,383 )
                 
Intangible assets, net
    37,074       32,182  
Indefinite-lived intangible assets:
               
Trademark and trade names
    689,615       694,518  
                 
Total identifiable intangible assets, net
  $ 726,689     $ 726,700  
                 
 
Amortization expense of identifiable intangibles totaled $4.5 million, $11.9 million and $11.6 million for the years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively. Estimated remaining


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

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  
 
2007
  $ 4,378  
2008
    4,378  
2009
    4,378  
2010
    4,378  
2011
    4,378  
 
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, during the second quarter of fiscal 2006. This review indicated no impairment to goodwill or any of the Company’s indefinite-lived intangible assets.
 
During the third quarter of 2006, the Company restructured its fresh-cut flowers business. Due to indicators of impairment, the Company performed a two-step impairment test in accordance with FAS 144. As a result, the Company determined that the fresh-cut flowers indefinite-lived trade names were fully impaired and recorded an impairment charge of $4.9 million which is included in selling, marketing and general and administrative expenses in the consolidated statement of operations. Additionally, the Company identified certain other impairments of long-lived assets as a result of this impairment test. See Note 5 for a discussion of the fresh-cut flowers restructuring and asset impairments.
 
Note 11 — Notes Payable and Long-Term Debt
 
Notes payable and long-term debt consisted of the following amounts (in thousands):
 
                 
    December 30,
    December 31,
 
    2006     2005  
 
Unsecured debt:
               
8.625% notes due 2009
  $ 350,000     $ 350,000  
7.25% notes due 2010
    400,000       400,000  
8.875% notes due 2011
    200,000       200,000  
8.75% debentures due 2013
    155,000       155,000  
Secured debt:
               
Revolving credit facilities
    167,600       137,000  
Term loan facilities
    967,688       698,149  
Contracts and notes, at a weighted-average interest rate of 7.5% (6.9% in 2005) through 2010
    2,291       5,952  
Capital lease obligations
    88,380       80,971  
Unamortized debt discount
    (907 )     (1,209 )
Notes payable
    34,129       1,394  
                 
      2,364,181       2,027,257  
Current maturities
    (48,584 )     (26,414 )
                 
    $ 2,315,597     $ 2,000,843  
                 


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

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 May 2003, the Company issued and sold $400 million aggregate principal amount of 7.25% Senior Notes due 2010 (the “2010 Notes”). The Company may, at its option, use the cash proceeds from an equity offering to redeem up to 35% of the aggregate principal amount of the 2010 Notes, at a redemption price of 107.25%, plus accrued and unpaid interest prior to June 15, 2006; or at specified premiums after June 15, 2007. The 2010 Notes were issued at par.
 
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. At its option, the Company may use the cash proceeds from an equity offering to redeem up to 35% of the aggregate principal amount of the 2011 notes, at a redemption price of 108.875%, plus accrued and unpaid interest, prior to March 15, 2006; or at specified premiums after March 15, 2007.
 
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.
 
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).
 
Amendments to Credit Facilities
 
In April 2005, the Company amended and restated its senior secured credit agreement, repaying its then existing term loans through new term loan borrowings and a revolving credit facility. In June 2005, the Company executed a technical amendment, which changed the scheduled amortization payment dates of the term loans. In December 2005, the Company executed a second amendment, which permitted the Company to reinvest proceeds from the sale of any of its principal properties into a new principal property, and also allowed DHM Holding Company, Inc. to borrow under project financing facilities. The second amendment also modified both the minimum consolidated interest coverage ratio and the maximum leverage ratio.
 
Also during 2005, the Company repurchased $325 million aggregate principal amount of its outstanding debt securities ($50 million of its 2009 Notes and $275 million of its 2011 Notes). As a result, the Company recorded a loss on early retirement of debt of $42.3 million, which is included in other income (expense), net in the consolidated statement of operations for the year ended December 31, 2005.
 
In April 2006, the Company completed another 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 Second Lien Senior Credit 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 2013.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
In connection with the 2006 refinancing transaction, the Company wrote-off deferred debt issuance costs of $8.1 million and recognized a gain of $6.5 million related to the settlement of its interest rate swap. These amounts were recorded to other income (expense), net in the consolidated statement of operations.
 
Revolving Credit Facilities and Term Loans
 
As of December 30, 2006, the term loan facilities consisted of $223.3 million of Term Loan B and $744.4 million of Term Loan C. The term loan facilities bear 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 December 30, 2006 for Term Loan B and Term Loan C were LIBOR plus 2%, or 7.5%.
 
As of December 30, 2006, the ABL revolver borrowing base was $294.8 million and the amount outstanding under the ABL revolver was $167.6 million. The ABL revolver bears 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 December 30, 2006, the weighted average variable interest rate for the ABL revolver was LIBOR plus 1.5%, or 7%. After taking into account approximately $18 million of outstanding letters of credit issued under the ABL revolver, the Company had approximately $109.2 million available for borrowings as of December 30, 2006. In addition, the Company had approximately $82.4 million of letters of credit and bank guarantees outstanding under its pre-funded letter of credit facility as of December 30, 2006.
 
A commitment fee, which fluctuated between 0.25% and 0.375%, was paid based on the total unused portion of the letter of credit and revolving credit facilities. The Company paid a total of $1 million, $0.7 million and $1.2 million in commitment fees for the years ended December 30, 2006, December 31, 2005 and January 1, 2005.
 
During June 2006, the Company entered into an interest rate swap agreement in order 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 16 — Derivative Financial Instruments for additional discussion of the Company’s hedging activities.
 
The revolving credit facilities 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.
 
Capital Lease Obligations
 
At December 30, 2006, included in capital lease obligations is $85.6 million of vessel financings related to two vessel leases denominated in British pound sterling. The interest rates on these leases are based on LIBOR plus a spread. The remaining $2.8 million of capital lease obligations relate primarily to machinery and equipment and interest rates under these leases are fixed. The capital lease obligations are collateralized by the underlying leased assets.
 
Covenants
 
Provisions under the indentures to the Company’s senior notes and debentures require the Company to comply with certain covenants. These covenants include financial performance measures, as well as limitations on, among other things, indebtedness, investments, loans to subsidiaries, employees and third parties, the issuance of guarantees and the payment of dividends. At December 30, 2006, the Company was in compliance with all applicable covenants.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
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 December 30, 2006, December 31, 2005 and January 1, 2005, the Company amortized deferred debt issuance costs of $4.4 million, $5.9 million and $8.9 million, respectively.
 
The Company wrote off $8.1 million, $10.7 million and $2.7 million of deferred debt issuance costs during the years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively. The 2006 write-off was a result of the April 2006 refinancing transaction. The write-off of debt issuance costs in 2005 resulted from the prepayment of $325 million of unsecured senior notes and $335 million of term loan facilities. In 2004, the write-off of debt issuance costs resulted from the prepayment of term loan facilities of $106.5 million.
 
Maturities of Notes Payable and Long-Term Debt
 
Maturities with respect to notes payable and long-term debt as of December 30, 2006 were as follows (in thousands):
 
         
Fiscal Year
  Amount  
 
2007
  $ 48,584  
2008
    14,335  
2009
    364,089  
2010
    413,534  
2011
    213,373  
Thereafter
    1,310,266  
         
Total
  $ 2,364,181  
         
 
Other
 
In addition to amounts available under the revolving credit facilities, the Company’s subsidiaries have uncommitted lines of credit of approximately $156 million at various local banks, of which $108.6 million was available at December 30, 2006. These lines of credit lines 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 2007 while others do not have a commitment expiration date. These arrangements may be cancelled at any time by the Company or the banks.
 
Note 12 — 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.
 
For the U.S. qualified pension plan, the Company’s historical policy is to fund the normal cost plus a 15-year amortization of the unfunded liability. However, as a result of the Pension Protection Act of 2006 (see discussion below), the Company will be required to fund minimum levels beginning in 2008 through 2014 in order to comply with its provisions. Most of the Company’s international pension plans and all of its OPRB plans are unfunded.
 
As of December 31, 2006, all pension benefits for U.S. salaried employees are frozen. The assumption for the rate of compensation increase of 2.5% on the U.S. plans represents the rate associated with the participants whose benefits are negotiated under collective bargaining arrangements.


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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 FAS 158, which changed the accounting rules for reporting and disclosures related to pension and other postretirement benefit plans. FAS 158 requires that companies include on the balance sheet an additional asset or liability to reflect the funded status of retirement and other postretirement benefit plans, and a corresponding after-tax adjustment to equity. Retroactive application of this accounting rule is prohibited; therefore, 2006 is presented as required under FAS 158 and 2005 is presented as required under the accounting rules prior to FAS 158. 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
 
In August 2006, the Pension Protection Act of 2006 was signed into law. This legislation changes the method of valuing the U.S. qualified pension plan assets and liabilities for funding purposes, as well as the minimum funding levels required beginning in 2008. The Company is determining what impact the new requirements will have on future cash flow. This estimate will be affected by future contributions, investment returns on plan assets, and interest rates. The Company must begin funding this shortfall during 2008, and must complete the funding by 2014. The Company anticipates funding pension contributions with cash from operations.
 
Medicare Prescription Drug, Improvement and Modernization Act of 2003
 
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law in December 2003. The Act introduced a prescription drug benefit under Medicare (“Medicare Part D”), as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a prescription drug benefit that is at least actuarially equivalent to Medicare Part D. The Company determined that the benefits provided by certain of its postretirement health care plans are actuarially equivalent to Medicare Part D and thus qualify for the subsidy under the Act. The expected subsidy decreased the accumulated postretirement benefit obligation (“APBO”) by $5 million and $5.6 million as of December 30, 2006 and December 31, 2005, respectively. The net periodic benefit costs for 2006 and 2005 were reduced by approximately $0.3 million and $0.5 million, respectively, due to the expected subsidy.
 
Plan Amendments
 
During 2005, the Company modified its existing postretirement medical plan by offering to certain retirees a medical plan under which Dole would be the secondary payer to Medicare, rather than the primary payer for these benefits. In addition, the Company’s prescription drug coverage will be provided through a self-insured program rather than a fully insured program. These changes resulted in a reduction of the projected benefit obligation for OPRB plans of approximately $6.7 million in 2005.


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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 (in thousands):
 
                                                 
    U.S. Pension Plans     International Pension Plans     OPRB Plans  
    Year Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
 
    December 30,
    December 31,
    December 30,
    December 31,
    December 30,
    December 31,
 
    2006     2005     2006     2005     2006     2005  
 
Change in projected benefit obligation
                                               
Benefit obligation at beginning of period
  $ 305,354     $ 311,705     $ 72,088     $ 63,876     $ 72,008     $ 77,117  
Service cost
    1,550       1,683       4,443       5,489       282       406  
Interest cost
    16,878       17,548       7,165       7,700       3,908       4,186  
Participant contributions
                176       39              
Foreign currency exchange rate changes
                7,894       (1,377 )            
Actuarial (gain) loss
    11,246       (902 )     9,245       2,498       (3,044 )     1,924  
Acquisitions
                42,340                    
Divestitures
                (212 )                  
Curtailments, settlements and terminations, net
                35       971              
Benefits paid
    (24,842 )     (24,680 )     (9,076 )     (7,108 )     (4,526 )     (4,947 )
Plan amendments
                                  (6,678 )
                                                 
Benefit obligation at end of period
  $ 310,186     $ 305,354     $ 134,098     $ 72,088     $ 68,628     $ 72,008  
                                                 
Change in plan assets
                                               
Fair value of plan assets at beginning of period
  $ 230,303     $ 223,000     $ 3,608     $ 2,925     $     $  
Actual return on plan assets
    26,121       17,961       541       158              
Company contributions
    5,130       14,022       9,040       7,112       4,526       4,947  
Participant contributions
                176       39              
Foreign currency exchange rate changes
                2,145       138              
Benefits paid
    (24,842 )     (24,680 )     (9,076 )     (7,108 )     (4,526 )     (4,947 )
Acquisitions
                28,710                    
Divestitures
                (108 )                  
Curtailments, settlements and terminations, net
                      (32 )            
Other
                      376              
                                                 
Fair value of plan assets at end of period
  $ 236,712     $ 230,303     $ 35,036     $ 3,608     $     $  
                                                 
Funded status
  $ (73,474 )   $ (75,051 )   $ (99,062 )   $ (68,480 )   $ (68,628 )   $ (72,008 )
Unrecognized net loss
            35,449               6,159               1,021  
Unrecognized prior service cost (benefit)
            2               444               (7,287 )
Unrecognized net transition obligation
                          216                
                                                 
Net amount recognized
  $ (73,474 )   $ (39,600 )   $ (99,062 )   $ (61,661 )   $ (68,628 )   $ (78,274 )
                                                 
Amounts recognized in the Consolidated Balance Sheets
                                               
Other assets
  $             $ 212             $          
Long-term liabilities
    (73,474 )             (99,274 )             (68,628 )        
Prepaid benefit cost
          $             $ 143             $  
Accrued benefit liability
            (74,506 )             (65,396 )             (78,274 )
Intangible assets
            2               621                
Accumulated other comprehensive loss
            34,904               2,971                
                                                 
Net amount recognized
  $ (73,474 )   $ (39,600 )   $ (99,062 )   $ (61,661 )   $ (68,628 )   $ (78,274 )
                                                 


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

Amounts recognized in accumulated other comprehensive loss at December 30, 2006 are as follows:
 
                         
    U.S Pension
    International
       
    Plans     Pension Plans     OPRB Plans  
    (In thousands)  
 
Net actuarial loss (gain)
  $ 37,941     $ 15,018     $ (847 )
Prior service cost (benefit)
    2       407       (6,374 )
Net transition obligation
          183        
Income taxes
    (15,535 )     (1,068 )     1,053  
                         
Total
  $ 22,408     $ 14,540     $ (6,168 )
                         
 
The majority of the Company’s pension plans were underfunded at December 30, 2006, having accumulated benefit obligations exceeding the fair value of plan assets. The accumulated benefit obligation for all defined benefit pension plans was $406.6 million and $366.5 million at December 30, 2006 and December 31, 2005, 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:
 
                 
    December 30,
    December 31,
 
    2006     2005  
    (In thousands)  
 
Projected benefit obligation
  $ 444,046     $ 376,955  
Accumulated benefit obligation
  $ 406,392     $ 366,139  
Fair value of plan assets
  $ 271,297     $ 233,434  
 
Effect of Adopting FAS 158
 
Effective December 30, 2006, the Company adopted the provisions of FAS 158. The incremental effects of applying FAS 158 on individual lines in the Company’s consolidated balance sheet are as follows:
 
                         
    Balances Before
          Balances After
 
    Adoptions of
          Adoptions of
 
    FAS 158     Adjustments     FAS 158  
    (In thousands)  
 
Other assets
  $ 299     $ (87 )   $ 212  
Long-term liabilities
  $ 235,039     $ 6,337     $ 241,376  
Deferred income tax liabilities
  $ (12,373 )   $ (3,178 )   $ (15,551 )
Accumulated other comprehensive loss
  $ (27,534 )   $ (3,246 )   $ (30,780 )
Total assets
  $ 4,608,081     $ (87 )   $ 4,607,994  
Total liabilities
  $ 4,269,623     $ 3,159     $ 4,272,782  
Total shareholders’ equity
  $ 338,458     $ (3,246 )   $ 335,212  


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

Components of Net Periodic Benefit Cost
 
The components of net periodic benefit cost for the Company’s U.S. and international pension plans and OPRB plans were as follows (in thousands):
 
                                                 
    U.S Pension Plans     International Pension Plans  
    Year
    Year
    Year
    Year
    Year
    Year
 
    Ended
    Ended
    Ended
    Ended
    Ended
    Ended
 
    December 30,
    December 31,
    January 1,
    December 30,
    December 31,
    January 1,
 
    2006     2005     2005     2006     2005     2005  
 
Components of net periodic benefit cost
                                               
Service cost
  $ 1,550     $ 1,683     $ 2,780     $ 4,443     $ 5,489     $ 4,098  
Interest cost
    16,878       17,548       16,635       7,165       7,700       5,007  
Expected return on plan assets
    (18,021 )     (18,075 )     (18,795 )     (905 )     (356 )     (247 )
Amortization of:
                                               
Unrecognized net loss
    652       862       67       201       129       130  
Unrecognized prior service cost
    1       2       3       69       65       65  
Unrecognized net transition obligation
                (1 )     51       49       48  
Curtailments, settlements and terminations, net
                      1,197       819       6,492  
                                                 
    $ 1,060     $ 2,020     $ 689     $ 12,221     $ 13,895     $ 15,593  
                                                 
 
                         
    OPRB Plans  
    Year
    Year
    Year
 
    Ended
    Ended
    Ended
 
    December 30,
    December 31,
    January 1,
 
    2006     2005     2005  
 
Components of net periodic benefit cost
                       
Service cost
  $ 282     $ 406     $ 93  
Interest cost
    3,908       4,186       5,058  
Amortization of:
                       
Unrecognized net loss (gain)
    (112 )           28  
Unrecognized prior service benefit
    (914 )     (747 )     (138 )
Curtailments, settlements and terminations, net
    (1,062 )            
                         
    $ 2,102     $ 3,845     $ 5,041  
                         
 
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 $2.1 million. 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 $0.8 million.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
Assumptions
 
Weighted-average assumptions used to determine benefit obligations at December 30, 2006 and December 31, 2005 are as follows:
 
                                                 
                International
       
    U.S. Pension Plans     Pension Plans     OPRB Plans  
    2006     2005     2006     2005     2006     2005  
 
Rate assumptions:
                                               
Discount rate
    5.75 %     5.75 %     6.61 %     9.08 %     5.91 %     5.64 %
Rate of compensation increase
    2.50 %     2.50 %     5.15 %     7.08 %           4.76 %
 
Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 30, 2006 and December 31, 2005 are as follows:
 
                                                 
                International
       
    U.S. Pension Plans     Pension Plans     OPRB Plans  
    2006     2005     2006     2005     2006     2005  
 
Rate assumptions:
                                               
Discount rate
    5.75 %     5.75 %     10.17 %     8.94 %     5.74 %     5.75 %
Compensation increase
    2.50 %     4.20 %     7.02 %     6.75 %     4.95 %     4.50 %
Rate of return on plan assets
    8.25 %     8.50 %     7.12 %     12.33 %            
 
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 2006 and 2005 was determined using the following assumed annual rate of increase in the per capita cost of covered health care benefits:
 
                 
    Year Ended
    Year Ended
 
    December 30,
    December 31,
 
Fiscal Year
  2006     2005  
 
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
    2010       2010  
 
A one-percentage-point change in assumed health care cost trend rates would have the following impact on the Company’s OPRB plans (in thousands):
 
                 
    One-Percentage-Point
    One-Percentage-Point
 
    Increase     Decrease  
 
Increase (decrease) in service and interest cost
  $ 330     $ (285 )
Increase (decrease) in postretirement benefit obligation
  $ 5,327     $ (4,604 )


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

Plan Assets
 
The Company’s U.S. pension plan weighted-average asset allocations at December 30, 2006 and December 31, 2005 by asset category, are as follows:
 
                 
    Plan Assets at  
    December 30,
    December 31,
 
Asset Category
  2006     2005  
 
Fixed income securities
    39 %     39 %
Equity securities
    59 %     58 %
Alternative investments
    2 %     3 %
                 
Total
    100 %     100 %
                 
 
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.
 
Alternative investments such as private equity and distressed debt 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 following is the plan’s target asset mix, which management believes provides the optimal tradeoff of diversification and long-term asset growth:
 
         
    Target
 
Asset Class
  Allocation  
 
Fixed income securities
    40 %
Equity securities
    55 %
Alternative investments
    5 %
 
The pension plan did not hold any of the Company’s common stock at December 30, 2006 and December 31, 2005.
 
The Company determines the expected return on pension plan assets based on an expectation of average annual returns over an extended period of years. This expectation is based, in part, on the actual returns achieved by the Company’s pension plans over the prior ten-year period. 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. For the year ended December 30, 2006, the average remaining service period used to amortize unrecognized actuarial gains (losses) for its domestic plans was approximately 10 years.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
Plan Contributions and Estimated Future Benefit Payments
 
During 2006, the Company contributed $3 million to its qualified U.S. pension plan, which included voluntary contributions above the minimum requirements for the plan. Under the Internal Revenue Service funding requirements, no contribution will be required during 2007. However, the Company expects to make contributions of $6.6 million to its U.S. qualified plan in 2007. Future contributions to the U.S. pension plan in excess of the minimum funding requirements are voluntary and may change depending on the Company’s operating performance or at management’s discretion. The Company expects to make payments related to its other U.S. and foreign pension and OPRB plans of $14.8 million in 2007.
 
The following table presents estimated future benefit payments (in thousands):
 
                         
          International
       
    U.S. Pension
    Pension
       
Fiscal Year
  Plans     Plans     OPRB Plans  
 
2007
  $ 24,223     $ 5,695     $ 6,130  
2008
    24,014       6,515       6,208  
2009
    23,672       7,041       6,161  
2010
    23,508       7,919       6,131  
2011
    23,233       8,403       6,046  
2012-2016
    113,638       50,572       28,481  
                         
Total
  $ 232,288     $ 86,145     $ 59,157  
                         
 
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 $9.4 million, $9.6 million and $12 million in the years ended December 30, 2006, December 31, 2005 and January 1, 2005, 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 $3.7 million, $3.6 million and $3.6 million in the years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively.
 
Note 13 — Shareholders’ Equity
 
The Company’s authorized share capital as of December 30, 2006 and December 31, 2005 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, a direct wholly-owned subsidiary of DHM Holding Company, Inc. (“HoldCo”).
 
Dividends
 
During the year ended December 30, 2006, the Company declared and paid dividends of $163.7 million to DHC.
 
During the year ended December 31, 2005, the Company declared and paid dividends of $77.3 million to DHC. As planned, the dividends were a partial return of the $100 million capital contribution made to the Company by DHC during 2004.


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Table of Contents

 
DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
During the year ended January 1, 2005, the Company paid cash dividends of $20 million to DHC. In addition, the Company entered into a transaction with a related party to exchange similarly valued land. The Company subsequently leased the land to a subsidiary of HoldCo, Westlake Wellbeing Properties, LLC, to be used in the construction of a hotel, spa and wellbeing center by such subsidiary. Due to its terms, the lease was treated for accounting purposes as a distribution of land and reflected as a non-cash dividend of $6.3 million to DHC in the consolidated financial statements. The non-cash dividend represents the tax-adjusted value of land used in the construction of the hotel, spa and wellbeing center.
 
The Company’s ability to declare future dividends is limited under the terms of its senior secured credit facilities and bond indentures. As of December 30, 2006, the Company had no ability to declare and pay future dividends or other similar distributions.
 
Capital Contributions and Return of Capital
 
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 within the next year. 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 14 — Business Segments
 
The Company has four primary reportable operating segments: fresh fruit, fresh vegetables, packaged foods, and fresh-cut flowers. The fresh fruit segment contains several operating segments that produce and market primarily fresh fruit to wholesale, retail and institutional customers worldwide. The fresh vegetables segment contains operating segments that primarily produce and market commodity vegetables and ready-to-eat packaged salads to wholesale, retail and institutional customers mostly in North America, Europe and Asia. Both the fresh fruit and fresh vegetable segments sell produce grown by a combination of Company-owned and independent farms. The packaged foods segment contains several operating segments that produce and market packaged foods, including fruit, juices and snack foods. The Company’s fresh-cut flowers segment sources, imports and markets fresh-cut flowers, grown mainly in Colombia, primarily to wholesale florists and supermarkets in the United States. These reportable segments are managed separately due to differences in their products, production processes, distribution channels and customer bases.
 
Management evaluates and monitors segment performance primarily through earnings before interest expense and income taxes (“EBIT”). EBIT is calculated by adding interest expense and income taxes to net income. In 2006


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

and 2005, EBIT is calculated by subtracting income from discontinued operations, net of income taxes and gain on disposal of discontinued operations, net of income taxes, and adding interest expense and income taxes to net income (loss). 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.
 
Accounting policies for the reportable operating segments and corporate are the same as those described in the summary of significant accounting policies (Note 2).
 
In the tables below, revenues from external customers and EBIT only reflect results from continuing operations. Total assets and tangible long-lived assets for 2005 include the balances of Pac Truck, which was disposed of in 2006. Depreciation and amortization and capital additions for 2006, 2005 and 2004 include activity related to Pac Truck.
 
The results of operations and financial position of the four reportable operating segments and corporate were as follows:
 
Results of Operations:
 
                         
    2006     2005     2004  
    (In thousands)  
 
Revenues from external customers
                       
Fresh fruit
  $ 3,989,490     $ 3,717,020     $ 3,535,666  
Fresh vegetables
    1,082,416       1,083,227       887,409  
Packaged foods
    938,336       854,230       691,780  
Fresh-cut flowers
    160,074       171,259       169,845  
Corporate
    1,148       1,049       31  
                         
    $ 6,171,464     $ 5,826,785     $ 5,284,731  
                         
EBIT
                       
Fresh fruit
  $ 108,302     $ 205,191     $ 257,880  
Fresh vegetables
    (7,301 )     11,375       58,645  
Packaged foods
    91,392       87,495       64,191  
Fresh-cut flowers
    (57,001 )     (5,094 )     1,853  
                         
Total operating segments
    135,392       298,967       382,569  
Corporate
    (32,713 )     (70,298 )     (70,262 )
Interest expense
    174,715       142,452       152,503  
Income taxes
    19,995       44,356       25,530  
                         
Income (loss) from continuing operations, net of income taxes
  $ (92,031 )   $ 41,861     $ 134,274  
                         
 
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.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
Financial Position:
 
                 
    December 30,
    December 31,
 
    2006     2005  
    (In thousands)  
 
Total assets
               
Fresh fruit
  $ 2,447,156     $ 2,301,090  
Fresh vegetables
    479,217       451,490  
Packaged foods
    653,077       639,999  
Fresh-cut flowers
    115,477       153,565  
Other operating segments
          12,478  
                 
Total operating segments
    3,694,927       3,558,622  
Corporate
    913,067       851,105  
                 
    $ 4,607,994     $ 4,409,727  
                 
 
Depreciation and amortization and capital additions by segment were as follows:
 
                         
    2006     2005     2004  
    (In thousands)  
 
Depreciation and amortization
                       
Fresh fruit
  $ 92,788     $ 94,481     $ 91,504  
Fresh vegetables
    15,744       15,602       14,789  
Packaged foods
    31,454       30,704       26,012  
Fresh-cut flowers
    4,578       4,603       5,807  
Other operating segments
    647       675       582  
Corporate
    4,136       3,744       6,299  
                         
    $ 149,347     $ 149,809     $ 144,993  
                         
Capital additions
                       
Fresh fruit
  $ 42,482     $ 100,358     $ 59,471  
Fresh vegetables
    52,990       17,691       12,219  
Packaged foods
    19,728       21,845       18,382  
Fresh-cut flowers
    1,611       2,324       5,220  
Other operating segments
    1,549       2,555       852  
Corporate
    975       1,533       5,523  
                         
    $ 119,335     $ 146,306     $ 101,667  
                         


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

The Company’s revenues from external customers and tangible long-lived assets by country/region were as follows:
 
                         
    2006     2005     2004  
    (In thousands)  
 
Revenues from external customers
                       
United States
  $ 2,752,453     $ 2,663,634     $ 2,271,153  
Euro zone countries
    1,183,118       1,077,639       1,036,441  
Japan
    579,121       641,969       673,842  
Sweden
    354,484       479,888       462,854  
Canada
    224,906       141,642       99,484  
Other international
    1,077,382       822,013       740,957  
                         
    $ 6,171,464     $ 5,826,785     $ 5,284,731  
                         
 
In the Other international category above, there are no individual countries whose revenues from external customers are considered material.
 
                 
    December 30,
    December 31,
 
    2006     2005  
    (In thousands)  
 
Tangible long-lived assets
               
United States
  $ 706,929     $ 707,690  
Oceangoing assets
    191,544       219,703  
Philippines
    136,228       142,273  
Costa Rica
    120,088       130,421  
Honduras
    80,513       85,184  
Chile
    75,844       83,929  
Ecuador
    69,772       81,323  
Other international
    228,633       211,906  
                 
    $ 1,609,551     $ 1,662,429  
                 
 
Note 15 — Operating Leases and Other Commitments
 
In addition to obligations recorded on the Company’s Consolidated Balance Sheet as of December 30, 2006, the Company has commitments under cancelable and non-cancelable operating leases, primarily for land, equipment and office 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 $153 million, $130 million and $101.4 million (net of sublease income of $16.4 million, $15.9 million and $15.1 million) for the years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively.
 
The Company’s corporate aircraft lease agreement includes a residual value guarantee. The maximum exposure, which would occur if the fair value of the aircraft is less than $20 million at the termination of the lease in 2010, is approximately $8.2 million.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
As of December 30, 2006, the Company’s aggregate cancelable and non-cancelable minimum lease commitments, including residual value guarantees, before sublease income, were as follows (in thousands):
 
                         
Fiscal Year
  Cancelable     Non-Cancelable     Total  
 
2007
  $ 10,625     $ 110,055     $ 120,680  
2008
    10,850       99,693       110,543  
2009
    10,884       86,648       97,532  
2010
    11,213       45,697       56,910  
2011
    11,447       27,205       38,652  
Thereafter
    52,823       69,802       122,625  
                         
Total
  $ 107,842     $ 439,100     $ 546,942  
                         
 
Total expected future sublease income is $39.8 million.
 
The Company’s cancelable leases relate primarily to land leases in the Philippines, where foreign land ownership is prohibited under current law.
 
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 to purchase substantially all of their production subject to market demand and product quality. Prices under these agreements are generally fixed and contract terms range from one to seventeen years. Total purchases under these agreements were $474.5 million, $433.4 million and $340.1 million for the years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively.
 
At December 30, 2006, aggregate future payments under such purchase commitments (based on December 30, 2006 pricing and volumes) are as follows (in thousands):
 
         
Fiscal Year
  Amount  
 
2007
  $ 466,817  
2008
    278,489  
2009
    223,068  
2010
    164,463  
2011
    113,404  
Thereafter
    181,991  
         
    $ 1,428,232  
         
 
In order to ensure a steady supply of packing supplies and to maximize volume incentive rebates, the Company has entered into contracts with certain suppliers for the purchase of packing supplies, as defined in the respective agreements, over periods of up to five years. Purchases under these contracts for the years ended December 30, 2006, December 31, 2005 and January 1, 2005 were approximately $207.6 million, $227.3 million and $181.8 million, respectively.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
Under these contracts, the Company was committed at December 30, 2006, to purchase packing supplies, assuming current price levels, as follows (in thousands):
 
         
Fiscal Year
  Amount  
 
2007
  $ 231,884  
2008
    183,596  
2009
    61,918  
2010
    45,918  
2011
    10,983  
Thereafter
    13,518  
         
    $ 547,817  
         
 
The Company has numerous collective bargaining agreements with various unions covering approximately 32% of the Company’s hourly full-time and seasonal employees. Of the unionized employees, 9% are covered under a collective bargaining agreement that will expire within one year and the remaining 91% 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 16 — 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 (“FAS 133”), Accounting for Derivative Instruments and Hedging Activities, as amended, 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. The Company’s hedges consist of cash flow hedges. 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. Foreign currency exchange gains and losses associated with hedges and bunker fuel hedges discussed below are recorded as a component of cost of products sold in the consolidated statements of operations. Gains and losses related to the interest rate swap discussed below are recorded as a component of interest expense in the consolidated statements of operations.
 
The Company estimates the fair values of its derivatives based on quoted market prices or pricing models using current market rates and records all derivatives on the balance sheet at fair value.
 
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


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

operating expenses. At December 30, 2006, the Company had forward contract hedges for forecasted revenue transactions denominated in the Japanese yen, the Euro and the Canadian dollar and for forecasted operating expenses denominated in the Chilean peso, Colombian peso, Philippine peso and South African Rand. 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. The change in the fair value of these contracts relating to hedge ineffectiveness was not significant.
 
In addition, the net assets of these divisions are exposed to foreign currency translation gains and losses, which are included as a component of accumulated other comprehensive income in shareholders’ equity. The Company has historically not attempted to hedge this equity risk.
 
The Company recorded a gain of $0.9 million, $2 million and a loss of $11.6 million related to the settlement of foreign currency exchange contracts for the years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively. In addition, in 2006 and 2005, the South African rand hedges and certain Colombian peso hedges, respectively, did not receive hedge accounting treatment under FAS 133. The unrealized gain associated with these Colombian peso hedges was $0.5 million at December 31, 2005.
 
At December 30, 2006, the gross notional value and unrecognized gains (losses) of the Company’s foreign currency hedges were as follows (in thousands):
 
                                                 
    Gross Notional Value     Unrecognized
             
    Participating
                Gains
    Average Strike
    Settlement
 
    Forwards     Forwards     Total     (Losses)     Price     Year  
 
Foreign Currency Hedges(Buy/Sell):
                                               
U.S Dollar/Japanese yen
  $ 72,476     $ 73,950     $ 146,426     $ 2,873       JPY 114.5       2007  
U.S Dollar/Euro
    168,524             168,524       (1,046 )     EUR 1.30       2007  
U.S Dollar/Canadian Dollar
    19,050             19,050       537       CAD 1.13       2007  
Chilean peso/U.S. Dollar
    9,609       9,323       18,932       95       CLP 532.1       2007  
Colombian peso/U.S. Dollar
    17,506       14,094       31,600       279       COP 2,269.7       2007  
Philippine peso/U.S. Dollar
          34,434       34,434       788       PHP 50.10       2007  
Euro/South African Rand
          5,388       5,388             EUR/ZAR 9.43       2007  
South African Rand/Euro
          5,388       5,388             EUR/ZAR 9.45       2007  
                                                 
Total
  $ 287,165     $ 142,577     $ 429,742     $ 3,526                  
                                                 
 
The unrecognized gains and losses at December 30, 2006 are expected to be recognized into earnings during 2007.
 
At December 31, 2005 the Company had outstanding hedges denominated in the Japanese yen, Chilean peso, Colombian peso and Thai baht. The unrecognized gain associated with these hedges was $0.5 million at December 31, 2005.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

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 December 30, 2006, the gross notional value and unrecognized losses (in thousands) of the Company’s bunker fuel hedges were as follows:
 
                                 
                Average
       
                Price (per
       
    Notional Volume
    Unrecognized
    metric
    Settlement
 
    (metric tons)     Losses     ton)     Year  
 
Bunker Fuel Hedges:
                               
Houston
    12,600     $ (100 )   $ 263       2007  
Rotterdam
    106,700       (2,426 )     296       2007  
Singapore
    10,000       (19 )     285       2007  
                                 
Total
    129,300     $ (2,545 )                
                                 
 
The unrecognized losses at December 20, 3006 are expected to be recognized into earnings during 2007. At December 30, 2006, the fair value of the bunker fuel hedges, a liability of $2.5 million, included an ineffective loss component of approximately $1.1 million. At December 30, 2005, the fair value of the bunker fuel hedges was an asset of $0.5 million.
 
The Company recorded a loss of $3.5 million and a gain of $3.3 million related to the settlement of bunker fuel contracts for the years ended December 30, 2006 and December 31, 2005, respectively.
 
Interest Rate and Cross Currency Swaps
 
As discussed in Note 11, 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.
 
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 5.37% as of December 30, 2006, 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 at December 30, 2006 was a liability of $6.4 million. For the years ended December 30, 2006 and December 31, 2005, $(3.6) million and $1 million, respectively, were recognized as interest expense in the consolidated statements of operations related to the interest rate swap.
 
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 3.60%. Payments under the cross currency swap were converted from U.S. dollars to Japanese yen at an exchange rate of ¥111.92 Japanese yen to U.S. dollars. The cross currency swap does not qualify for hedge accounting and as a result all gains and losses are recorded through other income (expense) in the consolidated statement of operations. The fair value of the cross currency swap was an asset of $20.7 million at December 30, 2006. Realized gains related to settlements of the cross currency swap in 2006 amounted to $4.1 million. This gain is recorded through other income (expense) in the consolidated statement of operations.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
Credit Risk
 
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 17 — 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 December 30, 2006, guarantees of $1.7 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.
 
In connection with the April 2006 refinancing transaction, the Company obtained a $100 million pre-funded letter of credit facility. As of December 30, 2006, letters of credit and bank guarantees outstanding under this facility totaled $82.4 million. In addition, the Company issues letters of credit and bonds through major banking institutions, insurance companies and its ABL revolver as required by certain regulatory authorities, vendor and other operating agreements. As of December 30, 2006, total letters of credit and bonds outstanding under these arrangements were $60.5 million.
 
As part of its normal business activities, the Company and its subsidiaries also provide guarantees to various regulatory authorities, primarily in Europe, in order to comply with foreign regulations when operating businesses overseas. These guarantees relate to customs duties and banana import license fees that were granted to the European Union member states’ agricultural authority. These guarantees are obtained from commercial banks in the form of letters of credit or bank guarantees, primarily issued under the Company’s 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 $152.9 million of its subsidiaries’ obligations to their suppliers and other third parties as of December 30, 2006.
 
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.
 
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.
 
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


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

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 530 lawsuits, in various stages of proceedings, alleging injury as a result of exposure to DBCP, seeking enforcement of Nicaraguan judgments, or seeking to bar Dole’s efforts to resolve DBCP claims in Nicaragua. Nineteen of these lawsuits (decreased from 35 as of December 6, 2006) are currently pending in various jurisdictions in the United States; the decrease results from settlement of 16 lawsuits pending in Texas and Louisiana. Of the 19 U.S. lawsuits, 10 have been brought by foreign workers who allege exposure to DBCP in countries where Dole did not have operations during the relevant time period. A prior order embargoing Dole’s trademark in Nicaragua was recently revoked by the 4th District Court of Managua, Nicaragua. One case pending in Los Angeles Superior Court with 13 Nicaraguan plaintiffs has a trial date of May 2, 2007 (changed from February 28, 2007). The remaining cases are pending in Latin America and the Philippines, including 302 labor cases pending in Costa Rica under that country’s national insurance program. Claimed damages in DBCP cases worldwide total approximately $41 billion, with lawsuits in Nicaragua representing approximately 87% of this amount. In almost all of the non-labor cases, the Company is a joint defendant with the major DBCP manufacturers and, typically, other banana growers. Except as described below, none of these lawsuits has resulted in a verdict or judgment against the Company.
 
In Nicaragua, 187 (up from 178) cases are currently filed in various courts throughout the country, with all but one of the lawsuits 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.
 
Twenty-three 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 February 25, 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; and $809 million (six cases consolidated with 1,248 claimants) on December 1, 2006. The Company has appealed all judgments to the Nicaragua Courts of Appeal, with the Company’s appeal of the August 8, 2005 $98.5 million judgment currently pending.
 
There are 27 active cases currently pending in civil courts in Managua (15), Chinandega (10) and Puerto Cabezas (2), all of which have been brought under Law 364 except for one of the cases pending in Chinandega. In the 26 active cases under Law 364, except for six cases in Chinandega and five cases in Managua, where the Company has not yet been ordered to answer, the Company has sought to have the cases returned to the United States pursuant to Law 364. A Chinandega court in one case has ordered the plaintiffs to respond to our request. In the other 2 active cases under Law 364 pending there, the Chinandega courts have denied the Company’s requests; and the court in Puerto Cabezas has denied the Company’s request in the two cases there. The Company’s requests in ten of the cases in Managua are still pending; and the Company expects to make similar requests in the remaining five cases at the appropriate time. The Company has appealed the two decisions of the court in Puerto Cabezas and the 2 decisions of the courts in Chinandega.


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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.
 
Claimants have also indicated their intent to seek enforcement of the Nicaraguan judgments in Colombia, Ecuador, Venezuela and other countries in Latin America and elsewhere, including the United States. In Venezuela, the claimants are attempting 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). 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 June 15, 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 refiled 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 civil trial courts’ 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 the agricultural chemical 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.
 
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 and U.S. Class Action Lawsuits:  The European Commission (“EC”) is investigating alleged violations of European Union competition (antitrust) laws by banana and pineapple importers and distributors operating within the European Economic Area. On June 2 and 3, 2005, the EC conducted a search of certain of the Company’s offices in Europe. During this same period, the EC also conducted similar unannounced searches of other companies’ offices located in the European Union. The Company is cooperating with the EC and has responded to the EC’s information requests. Although no assurances can be given concerning the course or


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outcome of that EC investigation, the Company believes that it has not violated the European Union competition laws.
 
Following the public announcement of the EC searches, a number of class action lawsuits were filed against the Company and three competitors in the U.S. District Court for the Southern District of Florida. The lawsuits were filed on behalf of entities that directly or indirectly purchased bananas from the defendants and have now been consolidated into two separate class action lawsuits: one by direct purchasers (customers); and another by indirect purchasers (those who purchased bananas from customers). Both consolidated class action lawsuits allege that the defendants conspired to artificially raise or maintain prices and control or restrict output of bananas. The Company believes these lawsuits are without merit.
 
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 the Company’s interest in Cervecería Hondureña, S.A in 2001. The Company 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 is seeking dismissal of the lawsuit and attachment of assets, which the Company is challenging. The Honduran Supreme Court recently 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 is now challenging the constitutionality of the statute requiring such payment or payment plan. No reserve has been provided for this tax assessment.
 
Hurricane Katrina Cases:  Dole is 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 assert 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 believes that it took reasonable precautions and that property damage was due to the unexpected force of Hurricane Katrina, a Category 5 hurricane that was one of the costliest disasters in U.S. history. Dole expects that this Katrina-related litigation will not have a material adverse effect on its financial condition or results of operations.
 
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, one of which was DOLE®. Natural Selection Foods produced and packaged all spinach items under the DOLE label (with the names “Spinach,” “Baby Spinach” and “Spring Mix”). On September 15, 2006, Dole announced that it supported the voluntary recall issued by Natural Selection Foods. 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. FDA reports that, as of October 20, 2006, testing of other environmental samples from all four ranches that supplied the implicated lot of contaminated spinach is in progress.


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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. Dole is aware of 14 lawsuits that have been filed against Natural Selection Foods and Dole, among others. Dole expects that the vast majority of the spinach E. coli O157:H7 claims will be handled outside the formal litigation process. 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. Dole expects that the company or companies (and their insurance carriers) that grew the implicated spinach for Natural Selection Foods also will be 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 18 — Related Party Transactions
 
In September 1998, the Company acquired 60% of Saba. On December 30, 2004, the Company acquired the remaining 40% minority interest of Saba (Note 4). Prior to the Company’s acquisition of the minority interest, the 40% minority interest was held by two Swedish entities. As part of its normal operations, Saba routinely sold fresh fruit, vegetables and flowers to entities in which these minority shareholders are principal owners. Revenues from these entities were $349.6 million for the year ended January 1, 2005.
 
David H. Murdock, the Company’s Chairman and Chief Executive Officer, owns Castle & Cooke, Inc. (“Castle”) as well as a transportation equipment leasing company, a private dining club, a private country club and a hotel. During the years ended December 30, 2006, December 31, 2005 and January 1, 2005, the Company paid Mr. Murdock’s companies an aggregate of approximately $7.6 million, $7.3 million and $5.3 million, respectively, primarily for the rental of truck chassis, generator sets and warehousing services. Castle purchased approximately $1.1 million, $4 million and $0.4 million of products from the Company during the years ended December 30, 2006, December 31, 2005 and January 1, 2005, 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 December 30, 2006, December 31, 2005 and January 1, 2005, the Company’s proportionate share of the direct and indirect costs for this aircraft was $1.9 million, $1.9 million and $2.3 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 $4 million in the aggregate and $4 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 $0.6 million, $0.7 million and $1 million from Castle during 2006, 2005 and 2004, respectively. The Company paid approximately $0.2 million and $0.3 million to Castle for property losses in 2005 and 2004, 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 payable of $5.6 million to Castle at December 30, 2006 and outstanding net accounts receivable of $0.2 million from Castle at December 31, 2005. The net accounts payable balance of $5.6 million includes $5.2 million related to partnership land parcels held for sale, as discussed below.


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NOTES TO CONSOLIDATED STATEMENTS — (Continued)

 
As discussed in Note 20, the Company sold some land parcels located in Central California to Castle during the first quarter of 2007. The land parcels are owned by two partnerships in which the Company is the majority owner. As of December 30, 2006, the partnerships owe Castle $5.2 million related to the reimbursement of entitlement costs made by Castle on behalf of the partnership.
 
During September 2004, the Company and Castle entered into a tax-free real estate exchange agreement in which the Company transferred properties located in California and Hawaii for Castle’s property located in Westlake Village, California having substantially the same fair market value. Since the exchange of land was between two entities under common control, no gain was recognized on the exchange. Refer to Note 13 for further information.
 
In 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. The Company had taken occupancy of the building in 2006 and recorded $0.6 million of rent expense.
 
Note 19 — 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 at the beginning of the fourth quarter of 2005. However, the facility has not yet been fully rebuilt. The financial impact to the Company’s fresh fruit operations includes 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 includes 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.
 
During 2006, the Company incurred direct incremental expenses of $1.8 million related to Hurricane Katrina, bringing the total charge to $11.9 million of which $4.7 million is associated with cargo related expenses and $7.2 million is associated with property related expenses. The total charge includes direct incremental expenses of $5.6 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. In addition, the Company collected $7.3 million in 2006 from insurance carriers related to cargo and property damage bringing the total cash collected to $13.3 million. In December 2006, the Company settled its cargo claim for $9.2 million resulting in a gain of $4.5 million which is included as a component of cost of products sold in the consolidated statement of operations. The Company is continuing to work with its insurers to evaluate the extent of the costs incurred under the property claim and to determine the extent of the insurance coverage for that damage.
 
Note 20 — Subsequent Events
 
During March 2007, the Company entered into an agreement to sell land parcels located in central California to Castle. At December 30, 2006, the land parcels had been reclassified to assets held for sale in the consolidated balance sheet. The land parcels are owned by two partnerships in which the Company is a majority owner. The sale closed during the first quarter of 2007 for $40.8 million (payable 75% in cash and 25% by promissory note). The Company estimates its share of the gain to be approximately $8 million. Since the sale involves the transfer of assets between two parties under common control, the gain on the sale will be recorded as an increase to additional paid-in capital.


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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 and 2013 Debentures (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 of January 1, 2006, Dole Packaged Frozen Foods, Inc. was converted to a limited liability company. In addition, the assets and liabilities of the Dole Packaged Foods division were contributed to Dole Packaged Frozen Foods, Inc., and the combined entity was renamed Dole Packaged Foods, LLC. Prior to January 1, 2006, Dole Packaged Foods was included as a division of Dole Food Company, Inc. for all guarantor financial statements presented. Subsequent to the change in structure effective January 1, 2006, Dole Packaged Foods, LLC is presented as a Guarantor for disclosure purposes in the accompanying consolidated financial statements for the year ended December 30, 2006.
 
The following are consolidating statements of operations of the Company for the years ended December 30, 2006, December 31, 2005 and January 1, 2005; consolidating balance sheets as of December 30, 2006 and December 31, 2005 and consolidating statements of cash flows for the years ended December 30, 2006 December 31, 2005 and January 1, 2005.


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS
 
For the Year Ended December 30, 2006
 
                                         
    Dole Food
          Non
             
    Company, Inc.     Guarantors     Guarantors     Eliminations     Total  
    (In thousands)  
 
Revenues, net
  $ 66,151     $ 2,895,835     $ 4,451,560     $ (1,242,082 )   $ 6,171,464  
Cost of products sold
    58,484       2,603,295       4,186,948       (1,216,449 )     5,632,278  
                                         
Gross margin
    7,667       292,540       264,612       (25,633 )     539,186  
Selling, marketing and general and administrative expenses
    61,050       195,134       223,016       (25,633 )     453,567  
                                         
Operating income (loss)
    (53,383 )     97,406       41,596             85,619  
Equity in subsidiary income
    21,154       (42,835 )           21,681        
Other income (expense), net
    (3,207 )           18,383             15,176  
Interest income
    849       377       6,014             7,240  
Interest expense
    115,505       74       59,136             174,715  
                                         
Income (loss) from continuing operations before income taxes, minority interest expense and equity earnings
    (150,092 )     54,874       6,857       21,681       (66,680 )
Income taxes
    (61,157 )     34,409       46,743             19,995  
Minority interest expense, net of income taxes
    185       3,990       1,358             5,533  
Equity in earnings of unconsolidated subsidiaries, net of income taxes
    (137 )     (801 )     761             (177 )
                                         
Income (loss) from continuing operations, net of income taxes
    (88,983 )     17,276       (42,005 )     21,681       (92,031 )
Income from discontinued operations, net of income taxes
          234                   234  
Gain on disposal of discontinued operations, net of income taxes
          2,814                   2,814  
                                         
Net income (loss)
  $ (88,983 )   $ 20,324     $ (42,005 )   $ 21,681     $ (88,983 )
                                         


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DOLE FOOD COMPANY, INC.
 
NOTES TO CONSOLIDATED STATEMENTS — (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS
 
For the Year Ended December 31, 2005
 
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