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Slide 1: Dole Food Company, Inc. Dole Food Company Inc. Annual Report 1998 , Annual Report 1998
Slide 2: DOLE WORLDWIDE OPERATIONS Q Sourcing Ripening/Distribution Markets Q Corporate FOOD OPERATING DIVISIONS AND LOCATIONS EUROPE AND AFRICA • Belgium • Cameroon • Canary Islands • France • Germany • Ghana • Greece • Italy Ivory Coast • Kenya • Namibia • Netherlands • South Africa • Spain • Tunisia • Turkey • United Kingdom • Zimbabwe LATIN AMERICA AND CARIBBEAN • Argentina • Brazil • Chile • Colombia • Costa Rica • Ecuador Guadeloupe • Guatemala • Honduras • Jamaica • Martinique • Mexico • Nicaragua • Peru • Venezuela • Windward Islands ASIA • Australia • China • Japan • New Zealand • Philippines • Thailand NORTH AMERICA • Canada • United States: Arizona, California, Florida, Hawaii, Ohio, Washington FOOD MARKETING DIVISIONS AND LOCATIONS EUROPE AND MIDDLE EAST • Albania • Algeria • Austria • Azerbaijan • Bahrain • Belarus • Belgium Bosnia • Bulgaria • Croatia • Czech Republic • Denmark • Estonia • Egypt • Finland • France • Georgia • Germany Greece • Hungary • Iceland • India • Ireland • Israel • Italy • Jordan • Kazakhstan • Kuwait • Latvia • Lebanon • Lithuania Luxembourg • Malta • Morocco • Netherlands • Norway • Oman • Poland • Portugal • Qatar • Romania • Russia Saudia Arabia • Senegal • Slovakia • Spain • Sweden • Switzerland • Syria • Tajikistan • Tunisia • Turkey • Ukraine United Arab Emirates • United Kingdom • Uzbekistan • LATIN AMERICA AND CARIBBEAN • Argentina • Bahamas • Barbados Bermuda • Bolivia • Brazil • Chile • Colombia • Costa Rica • Dominican Republic • Ecuador • Guadeloupe • Guatemala Honduras • Jamaica • Martinique • Mexico • Netherlands-Antilles • Peru • Puerto Rico • Trinidad & Tobago Uruguay • Venezuela • ASIA • Australia • China • Cambodia • Hong Kong • Indonesia • Japan • Malaysia New Zealand • Philippines • Singapore • South Korea • Taiwan • Thailand NORTH AMERICA • Canada • United States 2 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 3: Financial Highlights Dole Financial Highlights (in millions, except per share data) 1998 1997 1996 1995 1994 Revenue Income from continuing operations Income (loss) from discontinued operations Net income Diluted net income (loss) per common share Continuing operations Discontinued operations Net income Diluted average common shares outstanding Total assets Capitalization Short-term debt Long-term debt Minority interests Common shareholders’ equity Total Book value per common share Common stock price at year-end Market price range High Low Annual cash dividends per common share $ $ $ $ $ $ $ 4,424 12 – 12 0.20 – 0.20 60 2,915 36 1,116 57 622 $ $ $ $ $ $ $ 4,336 160 – 160 2.65 – 2.65 60 2,464 14 755 38 666 $ $ $ $ $ $ $ 3,840 89 – 89 1.47 – 1.47 60 2,487 22 904 30 550 $ $ $ $ $ $ $ 3,804 120 (97) 23 2.00 (1.61) 0.39 60 2,442 24 896 26 508 $ $ $ $ $ $ $ 3,499 58 10 68 0.98 0.16 1.14 60 3,685 54 1,555 25 1,081 $ $ $ $ $ $ 1,831 10.49 30 57 1/8 285/16 0.40 $ $ $ $ $ $ 1,473 11.10 45 3/4 49 5/8 33 3/8 0.40 $ $ $ $ $ $ 1,506 9.18 34 431/2 32 7/8 0.40 $ $ $ $ $ $ 1,454 8.49 35 38 24 0.40 $ $ $ $ $ $ 2,715 18.17 23 351/2 221/2 0.40 Note: Income from continuing operations for 1998 and 1996 includes pre-tax charges of $120 million and $50 million, respectively. Income from continuing operations for 1995 includes a pre-tax gain of $62 million related to assets sold or held for sale. The real estate and resorts business distributed to shareholders in 1995 has been presented throughout this report as discontinued operations. GROWTH 4,336 4,424 CASH FLOW 372 CAPITALIZATION 1,081 RETURN 24.6% 26.3% 97 3,804 3,840 338 3,499 308 328 508 550 622 6.4% 94 95 96 97 98 94 95 96 97 98 94 95 96 97 98 94 16.0% 666 95 96 Revenue (in millions) EBITDA* (in millions) Depreciation & Amortization Shareholder Equity (in millions) EBIT Return on Equity** (in percent) * Before special charges in 1998 and 1996 and net gain on asset dispositions in 1995. ** Before special charges in 1998 and 1996 and asset impairment in 1995. 17.5% 98 265 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 1
Slide 4: To Our Shareholders 1998 was a difficult and challenging year for Dole Food Company. We entered the year coping with the Asian economic crisis, which slowed growth in one of our most dynamic markets. The El Niño weather phenomenon adversely affected the agricultural producDavid H. Murdock Chairman and tion in virtually every area in Chief Executive Officer which Dole operates. Late in the year, the collapse of the Russian economy in essence destroyed an important market for Dole products. During the last week of October, Hurricane Mitch, perhaps the worst hurricane of the century, made a direct hit on the country of Honduras and Dole operations in that country, leaving destruction in its wake. Finally, in late December, the California citrus industry suffered a devastating freeze, which essentially destroyed most of the orange crop in the state. While it is saddening to recall such a litany of difficulties, it is gratifying to remember the response of the Dole team throughout the world to each adversity. FINANCIAL RESULTS bananas, 10,000 acres of sugar cane, 2,000 acres of African palm, as well as roads, bridges, employee housing, packing plants, irrigation systems, river dikes, warehouses, trucks, trailers, and other equipment, all of which were virtually destroyed. Fortunately, due to initial preparations and a rapid response to the crisis, no employee lives were lost. I would like to personally acknowledge and thank the thousands of employees, friends and associates from around the world that responded immediately to the relief and rehabilitation effort. The heroic efforts of so many are too great to list, but their actions and deeds will always be gratefully remembered by all of us at Dole and the entire populace we serve in these areas. OPERATIONS In the 4th Quarter of 1998, Dole took two special charges. The first charge of $100 million reflected the $160 million in damages caused by Hurricane Mitch. The second charge of $20 million was primarily due to the damage caused by a major freeze to the California citrus crop just prior to harvest. After these charges, Dole’s net income was $12.1 million in 1998 on revenues of $4.4 billion. Before the special charges, operating earnings totaled $206.2 million and EBITDA totaled $328.3 million. HURRICANE MITCH Dole’s worldwide operations were severely tested in 1998 by the weather disruptions in all of its growing areas. The El Niño weather pattern caused severe flooding in Ecuador, extremely heavy rains in California, and drought in Thailand and the Philippines. The year ended with Hurricane Mitch in Honduras and the freeze in California. In turn, these weather anomalies caused production shortages and logistical disruptions throughout the year in our banana, pineapple, vegetable and citrus businesses. Despite these issues, most of our core businesses performed well and are indeed well positioned for a more normal 1999. The financial crisis in Russia, which began in September 1998, had a significant negative effect on demand for bananas in that country. In recent years, the Russian market had grown to consume approximately eight percent of the world banana supply, so the loss of this market will be an ongoing concern for the banana industry in general. MANAGEMENT CHANGES/ENVIRONMENTAL Hurricane Mitch, one of the strongest hurricanes in recorded history, with sustained winds up to 180 mph, had a devastating effect on the country of Honduras, as well as caused severe damage to Nicaragua and Guatemala. Dole has a 100-year history of investments in Honduras, which were severely damaged or destroyed by winds and floods. Operations affected included growing crops of over 20,000 acres of 2 In May 1998, Sharon Hayes joined Dole as its new Director of Environmental Affairs. Having spent over thirteen years with the Environmental Protection Agency, including working for the Agency’s administrator on pesticide and toxic chemical issues, Ms. Hayes’ background and expertise are assets for Dole. D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 5: Dole Food Company Board of Directors (Seated): David H. Murdock (Standing, left to right): David A. DeLorenzo, James F. Gary, Richard M. Ferry, Elaine L. Chao, Mike Curb, Zoltan Merszei Dole strives to lead in environmental protection and over the last decade has reduced its reliance on traditional crop protection products by integrating cultural and biological controls into its pest management strategies. Dole standards of environmental excellence in its worldwide operations intend to meet standards held in the United States and European Union. ACQUISITIONS Flowers In 1998, Dole made a strategic move into the fresh-cut flower industry with the acquisition of several of the largest companies in the floral and flower growing business. First year revenues from these acquisitions are expected to exceed $200 million. The flower business offers many parallels to existing core businesses. For example, flowers are perishable, imported, and industry growth comes through the same supermarket channel of distribution as other Dole products. We are very pleased with the acquisitions of Sunburst Farms, Four Farmers, Finesse, CCI and their affiliated companies. The combination of these premier companies, their assets and employees into the Dole Flower Division, is an exciting first step in building a global flower network. 3 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 6: SABA Trading AB During 1998, Dole also purchased sixty percent of SABA Trading AB, the leading importer and distributor of fresh fruit, vegetables, and flowers in Sweden. Dole purchased its position from Axel Johnson AB and the Swedish Cooperative Society, each of which will remain as minority shareholders. Annual sales total approximately $500 million, with 950 employees. SABA adds another strong company to Dole’s distribution system, which continues to grow throughout the world. FINANCING ACTIVITIES Dole strengthened its financial infrastructure in 1998 with a highly successful $300 million public bond issue. Additionally, the five-year revolving $400 million credit facility continues to provide strong operational flexibility. Agents in the facility are Chase Manhattan Bank, Bank of America and Citibank. OUTLOOK In a year filled with adversity, Dole continued to demonstrate the strength of its worldwide sourcing and distribution network. The Dole® brand and quality continued to flourish on supermarket and foodservice shelves around the globe. In addition to its acquisitions, Dole took a number of steps to ensure continued, accelerated growth of the Dole® brand. In the United States, our value-added salads had another spectacular year of growth. In Springfield, Ohio, Dole opened its first processing plant to meet the demands for these safe, convenient, ready to eat salads in the Midwestern and Eastern states. New salad products, ready for introduction in early 1999, should continue to spur demand for Dole salads into the year 2000. Dole also built and opened its first salad plant in Japan in 1998, and gained excellent distribution on its first product introduction. Fresh-cut salads are a natural extension to Dole’s powerful perishable distribution network in Japan, and are expected to be a significant growth vehicle in that market. Dole also established itself firmly in South Africa in 1998, following that country’s deregulation of its fresh fruit industry. In South Africa, Dole was the second largest citrus exporter in its first year of operation, and 4 the Company is positioning the unit to be a leading deciduous fruit exporter as well. Dole South Africa services the winter fruit market needs of Dole’s global distribution system, complementing the leading export position it already maintains in Chile. These strategic moves, combined with the 1998 acquisitions and a return to normality of our base businesses, gives us every reason to be optimistic for a year of profitability in 1999. Dole’s new headquarters facility in Westlake Village, a suburb of Los Angeles, will be completed in the latter part of 1999. We are looking forward to combining our current offices into one building. The efficiency of proximity for management and staff will materially enhance operations and eliminate duplication of efforts. Throughout the 14 years that I have been chief executive officer of Dole, we have consistently built upon and, I believe, attained the strongest management team in Dole’s history. Throughout the world we have excellent senior management as well as creative, well-trained and dedicated day-to-day managers and employees. Through the combined efforts of our workforce, Dole’s fresh fruit, vegetable and flower products are grown with respect for the environment and with a genuine interest in the health and welfare of our people and the consumer. We begin 1999 with renewed spirit and commitment to rebuild and rehabilitate, and to accelerate our growth and profitability. We would like to express our appreciation and gratitude to our employees, shareholders and customers for their continued support and confidence. Once again, we offer our support and sympathy to the many thousands of people in Honduras, Nicaragua, Guatemala, and Ecuador where lives were lost and economies affected by this year’s weather disruptions. Sincerely, David H. Murdock Chairman and Chief Executive Officer D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 7: Dole Food Products Worldwide Dole Fresh Fruit Dole Apples Dole Apricots Dole Bananas Dole Blueberries Dole Cantaloupe Dole Cherries Dole Clementines Dole Coconuts Dole Cranberries Dole Grapefruit Dole Grapes Dole Honeydew Melon Dole Kiddie Pack (bananas) Dole Kiwi Dole Lemons Dole Lychees Dole Mangos Dole Morado Banana Dole Native Banana Dole Nectarines Dole Oranges Dole Papayas Dole Peaches Dole Pears Dole Persimmons Dole Fresh-Cut Pineapple Dole Pineapple Dole Plantains Dole Plums Dole Pomegranates Dole Raspberries Dole Satsumas Dole Strawberries Dole Super Sweet Pine Dole Sweet Banana Dole Tangelos Dole Tangerines Dole Yucca Dole Pitted Prunes in Reclosable Bags Dole Seedless Raisins Canister Dole Seedless Raisins Carton Dole Seedless Raisins in Reclosable Bags Dole Seedless Raisins Mini Snacks Dole Seedless Raisins Six Packs Dole Sliced Natural Almonds in Reclosable Bags Dole Whole Natural Almonds in Reclosable Bags Saman Dole Soelia Pistachios Guyennoise Prunor Pitted Prunes Guyennoise Prunor Whole Prunes JA Whole Dates JA Whole Prunes Soelia Blanched Whole Almonds Soelia Dried Apricots Soelia Dried Figs Soelia Pitted Prunes Soelia Sliced Thin Almonds Soelia Whole Peanuts Soelia Whole Prunes Whole Deglet Nour Dates Dole Fresh Vegetables Dole Artichokes Dole Asparagus Dole Bell Peppers Dole Broccoli Dole Brussels Sprouts Dole Butter Lettuce Dole Carrots Dole Cauliflower Dole Celery Dole Green Leaf Lettuce Dole Green Onions Dole Iceberg Lettuce Dole Dried Fruit & Nuts Dole Idaho Potatoes Dole Blanched Slivered Dole Radishes Almonds in Recloseable Bags Dole Red Leaf Lettuce Dole Blanched Whole Almonds Dole Romaine Lettuce in Reclosable Bags Dole Sugar Peas Dole Chopped Dates in Dole Taro Reclosable Bags Dole Packaged Foods Dole Chopped Natural Dole Aloe Vera (Solid) Almonds in Reclosable Bags Dole Apricot Halves Dole CinnaRaisins in Dole Apricot Snack Cup Reclosable Bags Dole Apricots in Juice or Syrup Dole Golden Seedless Raisins Dole Crushed Pineapple in Dole Pitted Dates in Juice or Syrup Reclosable Bags Dole Deciduous Fruit Cocktail Dole Pitted Prunes Canister in Juice and Syrup Dole Pitted Prunes Carton Dole Fruit Bowls – Cherry Flavored Mixed Fruit Dole Fruit Bowls – Diced Peaches Dole Fruit Bowls – Mixed Fruit Dole Fruit Bowls – Pineapple Tidbits Dole Fruit Bowls – Tropical Fruit in Blended Juice Dole Fruit Festival Snack Cup Dole Fruit Mix, Easy Open Dole Guava in Syrup Dole Guava Halves Dole Ketchup (Regular and Hot Spice) Dole Longans in Syrup Dole Mandarin Orange Fruit Cups Dole Mandarin Orange Segments Dole Mandarin Orange Segments, Easy Open Dole Mango Cubes Snack Cup Dole Mango Juice Drink Dole Mango Slices in Blended Juice or Syrup Dole Mushroom Dole Nata de Coco in Syrup Dole Papaya in Syrup Dole Peach Halves in Syrup Dole Peach Snack Cup Dole Peaches in Juice and Syrup Dole Sliced Peaches, Easy Open Dole Pear Snack Cup Dole Pears in Juice and Syrup Dole Pineapple Chunks in Juice or Syrup Dole Pineapple Concentrate Dole Pineapple Cubes in Syrup Dole Pineapple Fun Shapes – Cosmic Dole Pineapple Fun Shapes – Sea Creatures Dole Pineapple Grapefruit Juice Dole Pineapple Grapefruit Juice Drink Dole Pineapple Juice Dole Pineapple Juice Drink Dole Pineapple Lychee Juice Drink Dole Pineapple Orange Juice Dole Pineapple Orange Juice Box Dole Pineapple Orange Juice Drink Dole Pineapple Orange Raspberry Juice Box Dole Pineapple Pink Grapefruit Drink Dole Pineapple Slices in Juice or Syrup Dole Pineapple Snack Cup Dole Pineapple Snack Wedges, Easy Open Dole Pineapple Strawberry Juice Drink Dole Pineapple Tidbits for Pizza Dole Pineapple Tidbits in Juice or Syrup Dole Pine Orange Banana Juice Dole Rambutan in Syrup Dole Rambutan Snack Cup Dole Red Papaya Chunks in Light Syrup Dole Tropical Fruit Cocktail in Juice and Syrup Dole Tropical Fruit Cocktail in Syrup with Passion Fruit Juice Dole Tropical Fruit Juice Box Dole Tropical Fruit Salad, Easy Open Dole Yellow Papaya Chunks in Syrup Dole White Asparagus Seasons Pineapple Juice Seasons Tropical Fruit Mix Dole Fresh-Cut Vegetables Dole American Special Blend Salad Dole Caesar Lunch For One™ Dole Chopped Romaine Salad Dole Classic Cole Slaw Dole Classic Iceberg Salad Dole Classic Romaine Salad Dole Complete Caesar Salad Dole Complete Caesar Salad with Fat Free Dressing Dole Complete Creamy Garlic Caesar Salad Dole Complete Oriental Salad Dole Complete Roasted Garlic Caesar Salad with Fat Free Dressing Dole Complete Romano Salad Dole Complete Sunflower Ranch Salad Dole Complete Zesty Italian Salad with Fat Free Dressing Dole European Special Blend Salad Dole French Special Blend Salad Dole Greener Selection™ Salad Dole Italian Special Blend Salad Dole Mediterranean Special Blend Salad Dole Peeled-Mini Carrots Dole Ranch Lunch For One™ Dole Romaine Special Blend Salad Dole Shredded Carrots Dole Shredded Lettuce Dole Shredded Red Cabbage Dole Spring Mix Special Blend Salad Dole Tuscany Special Blend Salad Dole Verona Special Blend Salad Dole Fresh Flowers Agapanthus Alstroemeria Aster Butterfly Aster Mini Rainbow Aster Montecasino Bells of Ireland Bouvardia Byplurem Calla Lillies Carnations Chinese Carnations Delphinium Eremurus Farm Bouquets Freesia Gerbera Gerspider Gipsy Godetia Gypsophilia Kangaroo Paws Leatherleaf Liatris Lillies Limonium Lisianthus Mini Carnations Monk’s Hood Mums Orchidiola Pompons Queen Anne’s Lace Roses (Hybrid Tea) Rover Mums Snapdragons Solidago Solidaster Spider Mums Spray Roses Star of Bethlehem Statice Stock Strawflower Sunflowers Sweetheart Roses Treefern Waxflower Yarrow D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 5
Slide 8: Operational Review Dole Food Company is the largest producer of fresh fruits, vegetables and flowers in the world. Dole employs over 53,500 people who are dedicated to the production, handling, and distribution of perishable products throughout the globe. Its products are shipped on David A. DeLorenzo President and Dole vessels which continually Chief Operating Officer cross all of the world’s seaways. Dole is organized on both a product and a regional basis. Regions are divided into both sources and markets, and products are produced both for local regional markets as well as for export to other regions of the world. For example, our Asian region produces both for its own market demand within Asia as well as exports to Dole markets in North America, Europe and Latin America. The nutritional facts, presented in this report by some of the Dole 5 A Day Fruit and Vegetable Friends, are taken from Dole5aday.com. This website, developed along with other interactive materials, is part of Dole’s commitment to the nutritional education of children and their families. Another educational project, scheduled for release in 1999, is THE ENCYCLOPEDIA OF FOODS: THE HOW AND WHY OF HEALTHY NUTRITION, This is true of all of our regions and thus creates an international web of Dole trade, tied together by Dole’s shipping services and its experienced management group who work together as a cross-cultural global team. Proprietary agricultural practices, customized systems, worldwide refrigerated shipping capability, and specialized customer service and distribution allow Dole to properly handle over five million perishable cartons per week in over 90 countries of the world. Despite the weather, 1998 was a very significant year for the Dole environmental management program. In July 1998, Dole’s banana operations in Costa Rica became the first agricultural producer in the world to receive certification that its operations conform to the environmental management system requirements of ISO 14001 (the International Standard Organization’s environmental management standard). Certification to the standard means that Standard Fruit de Costa Rica, a wholly-owned Dole company, has the systems in place to manage its environmental obligations responsibly, minimizing risks to the environment while maximizing the quality and safety of its products. Later in 1998, Dole’s subsidiaries in Thailand and Ecuador became the next operations to be ISO 14001 certified. Other Dole operations around the world are soon to demonstrate that they also deserve ISO 14001 certification. Certification to the ISO 14001 standard is just one more indicator that, for Dole, excellence in product quality and excellence in environmental protection go hand in hand. a comprehensive publication authored by nutrition experts at the Mayo Clinic, the University of California, Los Angeles, and Dole Food Company. The beautifully illustrated book will provide healthful dietary guidelines for nutrition and fitness as well as teach the connection between food and nutrients. Flower Division Management (Seated): Geno Valdes (Standing, left to right): Lorenzo de la Torre, Lourdes Espinoza, Evelyn Macia, Josefina de Zuluaga The recently acquired fresh-cut flower businesses will integrate well into Dole’s established distribution network and customer base. 6 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 9: To further diversify its wide range of products, Dole acquired several large fresh-cut flower companies in 1998. These acquisitions afford the opportunity of supplying flowers to the supermarket customers that already purchase the Company’s other perishable products.
Slide 10: Innovative field harvesting and packing ensures better quality produce and fast, fresh delivery from field to supermarket.
Slide 11: Dole North America The North American consumer demand for fresh, healthy products allowed Dole to once again reach record market shares in its leading products, such as bananas, packaged salads and canned pineapple. DOLE FRESH VEGETABLES Dole Fresh Vegetables achieved record sales and earnings in 1998. The commodity business was the one segment that capitalized upon favorable market conditions associated with El Niño rains. Additionally, investment in Dole’s state-of-the-art manufacturing plants, customer service and new products drove fresh-cut salads to new sales, earnings and market share records. The retail freshcut salad category continued to exhibit strong growth, with an eighteen percent increase in sales for 1998. Dole’s growth outpaced the category posting a thirty-five percent increase in retail sales for the same period. Based upon strong customer demand, Dole expanded its asparagus operations to provide year-round supplies. Sales to the food service trade grew significantly as food service operators turned to Dole for reliable supplies of consistently high quality and safe vegetable products. Dole Fresh Vegetables leads the industry in food safety. After extensive research, Dole will introduce an exciting new line of gourmet salads called “Great Restaurant Salads” in early 1999. New products continue to energize the fresh-cut category and Dole is committed to introducing marketing programs and new products that will continue to attract consumers to the Dole franchise. FRUIT OPERATIONS levels, affecting the citrus, deciduous and almond operations. The Washington apple operations were impacted by hail-related problems in key orchards. Foremost among the year’s weatherrelated events was the freeze that hit California’s San Joaquin Valley during Christmas week. The extremely low temperatures associated with this freeze severely damaged the Company’s citrus crops that are located throughout the Valley. As previously announced, Dole took a charge of $20 million, which consists primarily of (from top) Lawrence A. Kern, President, Dole Fresh Vegetables Gregory L. Costley, President, Dole North American Fruit Peter M. Nolan, President, Dole Packaged Foods Adverse weather conditions in 1998 affected Dole North American fruit operations. Due to El Niño, rainfall in California and Florida hit record D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 9
Slide 12: Barney Broccoli says, “Eating cruciferous vegetables such as broccoli, Brussels sprouts, cabbage, cauliflower, and turnips may guard against cancer. Broccoli is an excellent source of vitamin C and a good source of vitamin A and fiber.” crop inventory losses and reductions in grower receivable recovery estimates. In addition to that charge, three of five California citrus packing houses have been closed, and will remain closed for most of 1999. The major thrust of the California citrus operation in 1999 will be to rehabilitate properties in anticipation of the next season. In addition to the charge taken in 1998, Dole currently estimates that the freeze will negatively impact 1999 operating earnings by approximately $10 million to $15 million. Major changes have been made which will position Dole for greater success in the future. The Florida citrus operation entered into a joint venture with Metropolitan Life Insurance Company. This venture brings together Dole’s farming, packing and selling expertise, with MetLife’s citrus production properties. The alliance has resulted in one of the strongest operations in the state of Florida. In California, Dole will be reformatting its fresh cherry business, which will involve relocating assets to match the growth of the early-season California cherry crop. Apple operations in Washington State were significantly enhanced by the acquisition of a third packing facility. This purchase, done in conjunction with an acreage acquisition by Prudential Insurance Company, has resulted in Dole packing facilities operating at near capacity. It has also positioned the Company to better handle the increasing varieties of specialty apples, including the Cameo apple. The Cameo apple has enjoyed great success and production is rapidly increasing. Dole markets the vast majority of the available Cameo crop, and its market leadership has led to strong acceptance of this product and has enhanced returns to Dole Cameo growers. PACKAGED FOODS Dole’s market shares in canned pineapple and canned pineapple juice reached new highs for the 1990 decade of forty-five percent and forty-two percent, respectively. This growth was achieved in spite of significant El Niñorelated supply disruptions from Thailand and the Philippines in 1998. New products continue to play a large role in the growth of Dole Packaged Foods. Two new fruit items, Dole peaches and Dole mixed fruit, were successfully introduced in Atlanta and Jacksonville in early 1998. The expanded line will be introduced to additional markets in 1999. Dole’s cinnamon covered raisins, Cinnaraisins TM, the first new item in the dried fruit category in years, has been successfully introduced in selected markets. The food service division posted its second year of record earnings. Pineapple as a pizza topping has become extremely popular. Dominos Pizza ® named Dole as its “Pizza Topping Supplier of the Year.” In the new product area, mangoes have been added to the “salad bar” line-up to complement tropical fruit salad. Automation is the key to improving the commodity vegetable segment. Also, Dole has been a leader in developing and expanding the value-added pre-cut salad and vegetable segment, investing in production capacity to satisfy growing demand. 10 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 13: The fresh vegetable business achieved record sales and earnings in 1998 as the business transitions from commodity to value-added. The highly profitable fresh-cut salad business continues to benefit from strong demand, and the 1998 opening of the Springfield, Ohio plant has helped gain market share, particularly in East Coast markets.
Slide 14: Dole packs fruit in more than 1,000 packing houses throughout Latin America and controls over 135,000 acres of banana producing land.
Slide 15: Dole Latin America Hurricane Mitch wrought devastation to over 30,000 acres of Dole agricultural plantings and infrastructure in Honduras, Guatemala and Nicaragua. Thankfully, no employee lives were lost in the hurricane or its aftermath due to a tremendous outpouring of assistance and relief aid from Dole’s worldwide family. BANANA PRODUCTION AND HURRICANE MITCH In October of 1998, Hurricane Mitch struck Honduras, Guatemala and Nicaragua. This devastating event damaged eighty-two percent of Dole’s producing acres in Honduras. The Dole team immediately mobilized to assist with relief efforts in the region. Dole employees worked around-the-clock to provide emergency rescue services, food, clothing, shelter and medical supplies to the recovering populations. After extensive review, Dole has started to rehabilitate selected parts of the lost production areas and a recovery program is under way. Looking to the future, Dole expects to recover the production losses of 1998 and has implemented plans to replace the lost volume related to Hurricane Mitch with its Ecuadorian and Colombian sources. The past year has been one of the most challenging production years in recent history for Dole’s banana operations. Extreme flooding from the El Niño weather phenomenon reduced overall banana industry production by eighteen percent in Ecuador, and drought conditions caused by El Niño reduced industry production by seven percent in Colombia. Despite extremely adverse weather effects, total Dole production decreased only seven percent from the record year in 1997. Over 22,000 employees are part of the Dole Latin America team which strives to bring to market the quality, safest fresh produce possible. Dole highest quality, safest fresh produce possible. Dole p a c k fruit i n more h a n 1,000 a c k i n g packs s f r u i t in m o r e t than 1, 0 0 0 ppacking houses throughout Latin America and controls over 135,000 acres of banana producing land. Dole supplements Company production and reduces risk by purchasing a significant portion of product needs from independent growers throughout Latin America. Dole assists over 350 growers to successfully grow and pack Dole quality bananas. Dole’s team of highly skilled agronomists and technical staff train growers about Dole’s environmental procedures and standards. BEVERAGES (from top) Juergen Schumacher President, Dole Latin America Roberto Zacarias President, Dole Honduran Beverage Dole’s majority-owned beverage operation is the dominant supplier of carbonated beverages in Honduras, with commanding market shares of approximately seventy-five percent in soft drinks and ninety-nine percent in beer. The operation exclusively represents Coca-Cola® and Canada Dry® products, and has its own brand of fruit-flavored soft drinks, Tropical ®, which accounts for twenty percent of its soft drink sales volume in Honduras. Soft drink consumption per capita in Honduras is one of the highest in Latin America. The division also produces and/or distributes four leading domestic brands of beer, along with the internationally recognized brands of Holsten ® and Budweiser ®. Vertical D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 13
Slide 16: “Just one-half of a grapefruit contains all of the vitamin C your body needs for the day,” proclaims Gretta Grapefruit. Vitamin C heals cuts and scrapes, helps teeth and gums stay healthy, bones stay strong, and may also reduce the risk of heart disease and some types of cancer. operations include a sugar mill, a plastic case and bottle business, and bottle cap manufacturing. The division also operates an edible oil and soap operation with wellestablished local brands. During the year, a new soft drink bottling line was installed. State-of-the-art technology is used for the production of the family-size returnable plastic bottle that Coca-Cola® has strategically positioned in Latin America to expand sales. Additionally, eight new beer tanks for fermentation and maturation were added to Dole’s existing facility. These and other plant upgrades are being made to fulfill projected growth in product demand. Dole’s efforts to expand its responsibility for product distribution in Honduras’ rural regions continue and Dole now handles approximately eighty percent of these sales. This strategic move has rendered outstanding results as new routes and distribution centers are added. Damage by Hurricane Mitch, particularly in the rural regions of Honduras, continues to affect Dole’s distribution in this market but it is expected that this situation will significantly improve in the forthcoming months. JOINT VENTURES/NEW BUSINESS OPPORTUNITIES Proban Alliance At the close of 1998, Dole entered into a strategic alliance with Proban, a well-established prominent grower group in Colombia. As a result of this alliance, Dole will ship approximately twenty-eight percent of total Colombian banana exports. This addition will yield greater efficiencies and lower production and shipping costs. Value-Added Dole Latin America continues to focus on its core products and markets and evaluate opportunities to build earnings and expand the Dole® brand name throughout Latin and South America. Dole expanded its local Chilean distribution business by opening a new, state-of-the-art distribution center. Additionally, Dole constructed a new salad processing facility at this site that marks Dole Latin America’s entry into the fresh vegetable value-added business. Dole also completed a state-of-the art fruit processing facility in Honduras and plans to launch fresh, processed products into the North American market in 1999. CHILE Today, Dole Chile exports to over fifty countries worldwide. Dole Chile had another record year of export volumeswith the exportation of 18 million packagesof grapes, stonefruit, apples, pears and kiwis. Dole continues to be Chile's largest fruit exporter and the volumes in 1998 further established Dole’s position as the premier Chilean exporter. Throughout the world, the diversification of markets gives Dole great flexibility in maximizing sales and directing product volumes when facing challenges in certain markets. In 1998, this allowed Dole to successfully send fruit to different markets after the virtual economic collapse of several Asian nations as well as Russia. Great care goes into the packing of Dole bananas by thousands of dedicated employees throughout the world. 14 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 17: Dole has the world’s largest dedicated refrigerated containerized shipping fleet, which will be strengthened in 1999 with the addition of two new state-of-the-art vessels.
Slide 18: Increased automated field harvesting and packing at Pascual Hermanos in Spain has assisted in expanding the division to be a year-round, rather than seasonal producer of fresh vegetables.
Slide 19: Dole Europe Dole Europe sales were $1.2 billion in 1998. Dole Europe continued to concentrate on building retail relationships through service. The essence of the Dole ® brand is consistency in both product quality and condition, on-time delivery, innovation, range of product line, and an assurance of agricultural and distribution practices that meet the highest criteria of food safety and environmental protection. FORWARD INTEGRATION SOUTH AFRICA William F. Feeney, President, Dole Europe Dole Europe completed the acquisition of sixty percent of SABA Trading AB during the fall of 1998. SABA is Scandinavia’s largest fruit and vegetable importer and distributor with over $500 million in sales. Headquartered in Stockholm, Sweden, SABA has banana ripening facilities, produce distribution centers and flower distribution facilities throughout Sweden. Dole is the majority shareholder while two of Sweden’s largest retail groups each hold minority shares. SABA provides Dole with an opportunity, in joint venture with retailers, to develop retail service centers and add value to Dole’s produce imports. SABA owns one of Europe’s largest exotic fruit import and distribution companies, FTK Netherlands. Together with Dole’s exotic fruit importer VBH, Belgium, Dole has added leading lines of exotic fruits, such as mango, avocado, passion fruit and lychee to its expanding product range. The new South African government deregulated fresh fruit exports at the end of 1997. Previously, growers were required to export through export boards, which controlled distribution through European panelists. South Africa is a major supplier of citrus, apples, grapes, pears and stonefruits to Europe. Dole founded Dole South Africa in March 1998, at the beginning of the citrus export season, establishing it as the second largest citrus exporter behind the South African Citrus Board. D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 17
Slide 20: Kevin Kiwi is proud of the fact that two kiwifruit provide 240% of your body’s daily requirement for vitamin C, and one serving provides 16%, 14% and 10% of your daily requirements for fiber, potassium and vitamin E, respectively. First season citrus exports exceeded $25 million. Dole South Africa began stonefruit and grape exports in November while the main export season of grapes, apples and pears is early 1999. Dole South Africa will have nearly $100 million in sales for 1999, supplying southern hemisphere fruits to Asia, North America, and Europe, fully complementing the Dole Chile export and marketing programs. SPAIN ducer. Dole looks forward to a large contribution from Pascual Hermanos through expanded produce volume, distribution range and profit growth. RUSSIA Dole’s Spanish citrus and vegetable business, Pascual Hermanos, greatly improved performance during 1998. Management was changed and the citrus operation downsized. Citrus programs focused on supermarket requirements. The iceberg lettuce operation was improved with increased drip irrigation and expanded field packing. Production was increased in specialty salads such as baby lettuce and leafy salads. Specialty tomato production, especially cherry tomatoes, was increased with expanded green housing. Pascual Hermanos is now a year-round, rather than a seasonal pro- The collapse of the Russian economy during the summer of 1998, resulted in drastically reduced banana and other fresh fruit sales to that market. The Russian problem also had short-term effects on adjacent markets such as the Ukraine, Poland and the Balkan states. Dole’s St. Petersburg office has reduced receivables and selected only sound and reliable distributors that can withstand the pressures of uncertain economic policy. Dole continues to cautiously supply the Russian market which represents over 150 million consumers. The reduction in Russian imports puts considerable pressure on other Eastern European markets which made pricing in the second half of the year very challenging. NEW EUROPEAN UNION QUOTA The European Union has changed the E.U. banana regime, commencing January 1999, due to a ruling by the World Trade Organization (“WTO”) subsequent to complaints from the United States, Ecuador, Guatemala, Honduras, Panama and Mexico. There will continue to be a Latin American Quota and an ACP Quota (i.e., former European colonies in Africa, and the Caribbean) as well as licenses and tariffs on Latin American production. The new regime is still being challenged by the United States and Latin American banana producers and will be subject to new WTO panel findings early in 1999. SABA, the recently acquired Scandinavian fruit and vegetable distribution business, is a significant step in Dole’s strategy to be the dominant supplier of fresh produce in Europe. 18 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 21: Dole’s acquisitions of SABA Trading AB of Sweden and Pascual Hermanos of Spain have increased the Company’s European growing and packing capacity and added strength to Dole’s transportation and distribution network.
Slide 22: In Asia, Dole has the broadest product mix of any region in the world. In Japan, Dole is developing partnerships with local retailers and distributors to jointly establish ripening facilities and distribution centers.
Slide 23: Dole Asia Despite the 1998 El Niño weather pattern, Dole Asia achieved sales of approximately $800 million by the maximum utilization of its production resources in Asia and its sourcing capability with affiliated companies and strategic partners around the world. Dole Asia sales in Japan, its flagship market, increased seventeen percent in local currency compared to 1997. This increase was achieved by continued consumer confidence in Dole’s high quality banana and pineapple products, and the successful new product introduction of locally processed, fresh-cut vegetables and salads. Dole’s new product line of fruits packed in clear plastic cups continues to enjoy brisk sales in Asia and Europe. Manufactured primarily by Dole Philippines and Dole Thailand, these convenient fruit cup products provide Dole’s customers with an excellent alternative to conventional, canned fruit packaging. The addition of Dole’s high quality, valueadded pre-cut vegetables and fruit cups further expanded consumer awareness of the Dole brand in Asia where Dole enjoys a ninety-two percent consumer brand recognition. LOW COST PRODUCER Paul Cuyegkeng President, Dole Asia operation in 1998. This year, Stanfilco shipped more than twenty-three million boxes of fruit to Japan, Korea, China, New Zealand and the Middle East, while Dolefil, Dole’s pineapple production division also located on Mindanao, produced 414,000 tons of fresh and processed pineapple. In early 1998, Dole Asia’s key divisions in the Philippines and Thailand embarked upon a cost reduction program designed to counter the expected negative effects of El Niño. Tropifresh, Dole Asia’s diversified fruit, vegetable and cut flower producer located in the Philippines, significantly reduced its farm maintenance costs. DISTRIBUTION Despite the economic recession in Asia, demand remains high for Dole ® products in Japan. Dole currently markets more than 100 products in Japan, the broadest product Devaluation of currencies in Asia contributed favorably to reducing the cost of Dole Asia key operations from production to marketing. As expected, Dole Asia experienced downturns in its pineapple, banana, asparagus and papaya operations due, in part, to the El Niño-related drought in Thailand and the Philippines. Stanfilco, Dole Asia’s producer of high quality bananas located on Mindanao in the Philippines, celebrated its 30th year of D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 21
Slide 24: Bananas are a good source of fiber, vitamin C, and potassium. One Bobby Banana has 16% of the fiber, 15% of vitamin C, and 11% of the potassium we need every day for good health. mix of any region in the world. Following Dole Asia’s strategy of forward integration, nine Dole distribution centers were fully operational in 1998, which allows Dole to service its customers more efficiently with the optimal product quality control. Dole Asia opened its latest Dole Distribution Center in Manila, again affirming Dole Asia’s commitment to deliver the freshest, highest-quality products possible to all of its customers. MAJOR INVESTMENTS By early 1999, Dole Asia’s largest corrugated box manufacturing plant, Carmen Corrugated Containers (“CCC”), will be in full operation. CCC will service the increased packaging requirements of Dole Asia’s divisions in the Philippines as the new century begins. PARTNERSHIP WITH GROWERS Dole Asia pursued an aggressive strategy of infrastructure development during 1998. In September, Dole opened a Vapor Heat Treatment Plant in the Philippines, the first plant of its kind in the Southern Philippines. The Vapor Heat Treatment Plant is particularly important to the efficient, high-quality production of mango and papaya and is enabling Dole Asia to forge new partnerships with mango and papaya growers located on Mindanao. Following its successful partnering with growers in the Philippines, Dole Asia expanded its contract-grower program to other parts of the region, creating revolutionary changes in the Asian agribusiness structure. From an initial base of 1,200 Japanese farmers in 1997, Dole’s network of contract growers has rapidly expanded, giving Dole a larger source of domestically grown products, such as broccoli, tomatoes, cherry tomatoes, cabbage, radishes, carrots, lettuce and melons for distribution to Dole Distribution Centers throughout Japan. Dole Asia hopes to enlist 20,000 Japanese farmers by the year 2002. Dole Asia’s contract-grower program is being expanded to include local farmers in Thailand, for pineapple, papaya, guava and passion fruit. GROWTH OPPORTUNITIES One of the keys to delivering the freshest, highest quality produce throughout the world is Dole’s substantial investment in refrigerated containerized shipping. As the effects of 1998’s long drought diminish, Dole looks forward to opportunities for growth in the AsiaPacific region. In New Zealand, the newest and largest supermarket, Pak ’N Save, opened for business during 1998 carrying Dole products as its preferred fresh produce brand. In Japan, increased demand for value-added products will provide further opportunities for growth into the future. Economic resurgence in the Philippines, increased demand in Japan and New Zealand, and decreased trade restrictions in China, Taiwan and Korea offer growth opportunities for Dole Asia. Dole Asia’s Philippine banana division has begun phasing in a new cropping technology. This new process is designed to augment productivity by as much as thirty-five percent, and enable Dole to match high yield periods to seasons of high market demand. The system, developed by Dole scientists based in Mindanao, assures lower chemical usage, consistent with Dole’s commitment to establishing ways to provide high-quality products while protecting the environment. 22 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 25: Dole canneries processed and shipped over 648,000 tons of fresh and packaged pineapples in 1998.
Slide 26: FRESH FRUIT FRESH VEGETABLES PROCESSED FOODS OTHER OPERATING SEGMENTS REVENUE (in millions) 2,238 2,583 2,692 915 962 654 756 790 835 33 35 96 97 98 96 97 98 96 97 98 96 97 107 98 3,840 4,336 Dole Product Category Highlights 96 97 4,424 98 97 Fresh Fruit Fresh Vegetables Processed Foods Other Operating Segments Total 280.9 254.8 EBIT* 172.2 (in millions) 150.0 110.5 89.8 30.3 40.2 49.4 52.2 89.5 0.1 0.9 2.8 96 97 98 96 97 98 96 97 98 96 97 98 252.2 98 97 96 Fresh Fruit * excludes special charges Fresh Vegetables Processed Foods Other Operating Segments Total Operating Segments 2,756 2,355 ASSETS (in millions) 1,459 1,516 1,383 659 303 336 362 533 591 10 15 96 97 98 96 97 98 96 97 98 96 97 287 98 2,343 96 98 Fresh Fruit Fresh Vegetables Processed Foods Other Operating Segments Total Operating Segments 24 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 27: Consolidated Statements of Income (in thousands, except per share data) 1998 1997 1996 Revenue Cost of products sold Gross margin Selling, marketing and administrative expenses Hurricane Mitch charge Citrus charge Dried Fruit restructuring charge Operating income Interest income Other income (expense) – net Earnings before interest and taxes Interest expense Income from operations before income taxes Income taxes Net income Net income per common share Basic Diluted See Notes to Consolidated Financial Statements $ 4,424,160 3,785,745 638,415 433,509 100,000 20,000 – 84,906 9,312 (7,996) 86,222 68,943 17,279 5,200 $ 4,336,120 3,692,277 643,843 399,800 – – – 244,043 7,776 8,034 259,853 64,589 195,264 35,100 $ 3,840,303 3,256,345 583,958 369,675 – – 50,000 164,283 8,412 4,535 177,230 68,699 108,531 19,500 $ $ 12,079 0.20 0.20 $ $ 160,164 2.67 2.65 $ $ 89,031 1.48 1.47 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 25
Slide 28: Consolidated Balance Sheets (in thousands) 1998 1997 Current assets Cash and short-term investments Receivables – net Inventories Prepaid expenses Total current assets Investments Property, plant and equipment – net Goodwill – net Other assets Total assets Current liabilities Notes payable Current portion of long-term debt Accounts payable Accrued liabilities Total current liabilities Long-term debt Deferred income taxes and other long-term liabilities Minority interests Commitments and contingencies Common shareholders’ equity Total liabilities and equity See Notes to Consolidated Financial Statements $ 35,352 616,579 475,524 43,200 1,170,655 71,923 1,102,285 277,962 292,228 $ 31,202 534,844 468,692 48,438 1,083,176 69,248 1,024,247 65,942 221,282 $ $ 2,915,053 29,637 6,451 264,732 504,058 804,878 1,116,422 314,527 57,394 621,832 $ $ 2,463,895 11,290 2,326 230,143 432,680 676,439 754,849 328,293 37,842 666,472 $ 2,915,053 $ 2,463,895 26 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 29: Consolidated Statements of Cash Flow (in thousands) 1998 1997 1996 Operating activities Income from operations Adjustments to operations Depreciation and amortization Equity earnings, net of distributions Provision for deferred income taxes Hurricane Mitch charge, net Citrus charge Dried Fruit restructuring charge Other Change in operating assets and liabilities, net of effects from acquisitions Receivables – net Inventories Prepaid expenses and other assets Accounts payable and accrued liabilities Internal Revenue Service payment related to prior years’ audits Other Cash flow provided by operating activities Investing activities Proceeds from sales of assets Capital additions Purchases of investments and acquisitions, net of cash acquired Hurricane Mitch insurance proceeds Cash flow used in investing activities Financing activities Short-term borrowings Repayments of short-term debt Long-term borrowings Repayments of long-term debt Cash dividends paid Issuance of common stock Repurchase of common stock Cash flow provided by (used in) financing activities Increase (decrease) in cash and short-term investments Cash and short term investments at beginning of year Cash and short term investments at end of year See Notes to Consolidated Financial Statements $ 12,079 122,058 (4,421) (33,288) 86,312 20,000 — (1,342) $ 160,164 112,081 373 11,575 — — – (23,005) $ 89,031 111,073 (2,875) (1,741) — — 50,000 (8,203) 39,027 2,463 (9,716) (41,537) (17,145) (17,392) 157,098 19,291 (150,207) (332,100) 22,500 (440,516) 39,508 (38,693) 366,785 (25,692) (24,027) 11,773 (42,086) 287,568 4,150 31,202 $ 35,352 $ (10,438) 72,066 (1,167) (7,487) — (23,126) 291,036 38,700 (129,171) (40,010) — (130,481) 28,414 (40,887) 35,232 (169,110) (23,988) 6,644 – (163,695) (3,140) 34,342 31,202 $ (89,176) 27,222 (8,846) (34,270) — (37,262) 94,953 58,855 (109,686) (58,775) — (109,606) 19,694 (20,449) 168,060 (163,799) (24,020) 11,232 (13,874) (23,156) (37,809) 72,151 34,342 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 27
Slide 30: Notes to Consolidated Financial Statements Note 1 — Nature Of Operations 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 fruits and vegetables, as well as processed foods including packaged fruits, fruit juices and beverage operations in Honduras. Additionally, the Company sources and markets a full line of premium fresh-cut flowers. Operations are conducted throughout North America, Latin America, Europe (including eastern European countries) and Asia (primarily in Japan and the Philippines). 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 retail and institutional customers and other food product and flower companies. Note 2 — Summary Of Accounting Policies Principles of Consolidation: The Consolidated Financial Statements include the accounts of all significant majority-owned subsidiaries. All significant 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. Fiscal year 1998 ended January 2, 1999 and included 52 weeks, while fiscal years 1997 and 1996 included 53 weeks and 52 weeks, respectively. Cash and Short-Term Investments: Cash and short-term investments include cash on hand and time deposits with original maturities of three months or less. Inventories: Inventories are valued at the lower of cost or market. Cost is determined principally on a first-in, first-out basis. Specific identification and average cost methods are also used for certain packing materials and operating supplies. Recurring Agricultural Costs: The costs of growing bananas and pineapples are charged to operations as incurred. Growing costs related to other crops are recognized when the crops are harvested and sold. Investments: Investments in affiliates and joint ventures with ownership of 20% to 50% are generally recorded on the equity method. Other investments are accounted for using the cost method. Property, Plant and Equipment: Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. As necessary, the Company reviews the recoverability of these assets, as well as certain intangible assets including goodwill, based on analyses of undiscounted expected future cash flows without interest charges (see Note 4). Goodwill and Other Intangible Assets: Goodwill and other intangible assets, generally representing the excess of the cost over the net asset value of acquired businesses, are stated at cost and are amortized principally on a straight-line basis over the estimated future periods to be benefited (not exceeding 40 years). Foreign Exchange: For subsidiaries in which the functional currency is the United States dollar, net foreign exchange transaction gains or losses are included in determining net income. These resulted in net losses of $4.8 million, $5.0 million and $2.1 million for 1998, 1997 and 1996, respectively. Net foreign exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries whose local currency is the functional currency are accumulated as a separate component of common shareholders’ equity. Income Taxes: Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates to the differences between financial statement carrying amounts and the tax bases of assets and liabilities. Income taxes which would be due upon the distribution of foreign subsidiary earnings have not been provided where the undistributed earnings are considered permanently invested. Earnings Per Common Share: In accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share”, basic earnings per common share are calculated using the weighted-average number of common shares outstanding during the period without consideration of the dilutive effect of stock options. The basic weighted-average number of common shares outstanding was 60.0 million for 1998, 1997 and 1996. Diluted earnings per common share are calculated using the weighted-average number of common shares outstanding during the period after consideration of the dilutive effect of stock options. The diluted weighted-average number of common shares and equivalents outstanding was 60.4 million for 1998, 1997 and 1996. Financial Instruments: The Company’s financial instruments are primarily composed of short-term trade and grower receivables, notes receivable and notes payable, as well as long-term grower receivables, notes receivable, notes payable and debentures. For short-term instruments, the historical carrying amount is a reasonable estimate of fair value. Fair values for long-term financial instruments not readily marketable were estimated based upon discounted future cash flows at prevailing market interest rates. Based on these assumptions, management believes the fair market values of the Company’s financial instruments, other than certain debt instruments (see Note 7), are not materially different from their recorded amounts as of January 2, 1999. 28 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 31: The Company has historically not attempted to hedge fluctuations resulting from foreign currency denominated transactions in both sourcing and selling locations. However, the Company occasionally enters into forward contracts related to specific foreign currency denominated purchase commitments and sales. Such contracts are designated as hedges and meet the criteria for correlation and risk mitigation. Accordingly, unrealized gains or losses on the fair value of hedge instruments are deferred. Gains or losses on these contracts are recognized when the underlying transactions settle and are recorded in the income statement or as a component of the underlying asset or liability, as appropriate. As of January 2, 1999, the Company had contracted to purchase German marks to facilitate payment for two German-made refrigerated container vessels (see Note 11) at a weighted-average exchange rate of DM 1.78 to $1.00 for a total notional value of $98.3 million. These fixed-rate contracts will be settled during the fourth quarter of 1999, and as of January 2, 1999, their fair value was approximately $105.8 million. Stock-Based Compensation: Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation”, defines a fair value method of accounting for employee stock-based compensation cost but allows for the continuation of the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (“APB 25”). In accordance with SFAS 123, the Company has elected to continue to utilize the accounting method prescribed by APB 25 and has adopted the disclosure requirements of SFAS 123 (see Note 9). Comprehensive Income: Effective January 4, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (“SFAS 130”), “Reporting Comprehensive Income”. SFAS 130 established standards for the reporting of comprehensive income and its components, which consist of net income and other comprehensive income. Other comprehensive income is comprised of changes to shareholders’ equity, other than contributions from or distributions to shareholders, excluded from the determination of net income under generally accepted accounting principles. The Company’s other comprehensive income is comprised of unrealized foreign currency translation gains and losses and is presented in the Company’s changes in shareholders’ equity (see Note 10). Adoption of SFAS 130 did not impact the Company’s net income or shareholders’ equity for the years presented. Use of Estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and 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 to the 1998 presentation. Note 3 — Acquisitions During the second half of 1998, the Company acquired and invested in operations in Latin America, North America and Europe with an aggregate cash purchase price, net of cash acquired, of approximately $332 million. The acquisitions were comprised primarily of the purchases of Sunburst Farms, Inc., Four Farmers, Inc., Finesse Farms, Colombian Carnations, Inc. and their affiliated companies and 60% of the SABA Trading AB Scandinavian distribution business. Each acquisition was accounted for as a purchase, and accordingly, the purchase price was allocated to the net assets acquired based upon their estimated fair values as of the date of acquisition. Preliminary allocations of purchase price resulted in approximately $217 million of goodwill, which is being amortized over 30 years. The fair values of assets acquired and liabilities assumed were approximately $493 million and $161 million, respectively. Net income from acquired operations included in the Company’s results for 1998 was $1.7 million. The following unaudited pro forma information presents the results of operations of the Company as if the acquisitions had taken place on December 29, 1996: (in thousands, except per share data) 1998 1997 Revenues Net income Net income per common share: Basic Diluted $ 4,954,428 20,638 $ 0.34 0.34 $ 5,050,709 163,044 $ 2.72 2.70 These pro forma results of operations have been prepared for comparative purposes only and may not be indicative of the results of operations had the acquisitions occurred on the date indicated or of future results of operations of the Company. The Company acquired and invested in production and distribution operations in Europe, Latin America and Asia with an aggregate purchase price, net of cash acquired, of approximately $40 million in 1997 and $59 million in 1996. Each acquisition was accounted for as a purchase, and accordingly, the purchase price was allocated to the net assets acquired based upon their estimated fair values as of the date of acquisition. The allocations of purchase price resulted in approximately $11 million and $4 million of goodwill in 1997 and 1996, respectively. The goodwill is being amortized over a period of up to 40 years. The fair values of assets acquired and liabilities assumed were approximately $79 million and $39 million, respectively, in 1997 and approximately $107 million and $48 million, respectively, in 1996. Results of acquired operations were not significant in 1997 or 1996. D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 29
Slide 32: Note 4 — Special Charges During the fourth quarter of 1998, the Company recorded a $100 million charge, net of insurance proceeds received, for losses sustained from Hurricane Mitch. The charge has been classified as a separate caption in the Consolidated Statements of Income. The hurricane impacted over 30,000 acres of agricultural plantings and severely damaged the Company’s general agricultural infrastructure at both its Honduran banana and beverage operations. A majority of the charge is for writedowns of fixed assets, grower and trade receivables, inventories and certain deferred crop growing costs that were completely or partially destroyed or impaired by the hurricane. The Company has started to rehabilitate selected parts of the affected areas. In this regard, the Company spent $13.7 million on rehabilitation and relief efforts during 1998. Future rehabilitation costs, net of insurance recoveries, will continue to be reported on a separate line in the Consolidated Statements of Income in future years. Included in the charge is $61.8 million related to property, plant and equipment which consists of $23.7 million of asset write-offs for property destroyed by the hurricane and $38.1 million of assets impaired by the hurricane. The Company reviewed the impaired assets to determine whether expected future cash flows from them (undiscounted and without interest charges) would result in the recovery of the carrying amount of such property. As a result of this review, the Company determined that these assets were impaired in accordance with generally accepted accounting principles, and accordingly, an impairment loss was recognized. The Company also recorded $3.1 million of accrued liabilities for lease settlements and committed relief efforts as of January 2, 1999. The amounts recorded, utilized and to be utilized in each asset, liability and expense category are as follows: (in thousands) 1998 Charge Utilized 1998 To be Utilized From December 21 to December 24, 1998 freezing temperatures destroyed or severely damaged citrus crops in California. The Company has ownership interests in approximately 6,500 acres of citrus in the areas affected by the freeze. As a result of the freeze and changes in industry economics, the Company recorded a $20 million charge. Of the $20 million charge, $13.3 million related to write-downs of deferred crop costs and property, plant and equipment as well as reductions in grower receivable recovery estimates due to damages sustained during the freeze. The remaining $6.7 million of the charge related to reductions in grower receivable recovery estimates in other areas of the Company’s North American citrus operations due to the recognition of changes in industry economics that impacted certain independent growers. The charge has been classified as a separate caption in the Consolidated Statements of Income. This loss was largely not covered by insurance. Included in the charge is $3.1 million of property, plant and equipment impaired by the freeze. The Company reviewed these assets to determine whether expected future cash flows from them (undiscounted and without interest charges) would result in the recovery of the carrying amount of such assets. As a result of this review, the Company determined that these assets were impaired in accordance with generally accepted accounting principles, and accordingly, an impairment loss was recognized. Included in accrued liabilities is $0.2 million related to the severance of 29 employees, as well as $0.6 million of incremental freeze protection costs incurred in 1998. During 1999, crop costs to finish the crop year and unutilized overhead in idled packing facilities will be charged to cost of products sold as incurred. The amounts recorded, utilized and to be utilized in each asset and liability category are as follows: (in thousands) 1998 Charge Utilized 1998 To be Utilized Receivables $ 19,283 Inventory 13,266 Investment 2,000 Property, plant and equipment 61,750 Deferred costs 9,442 Accrued liabilities 3,071 Rehabilitation expenses 13,688 Insurance recoveries (22,500) Total Hurricane Mitch charge $ 100,000 $ 19,283 13,266 2,000 61,750 9,442 – 13,688 (22,500) $ 96,929 $ – – – – – 3,071 – – Grower receivables – freeze areas Grower receivables – other areas Crop costs inventory Property, plant and equipment Accrued liabilities Total citrus charge $ 6,177 6,737 3,171 3,148 767 $ 6,177 6,737 3,171 3,148 – $ – – – – 767 $ 20,000 $ 19,233 $ 767 $ 3,071 In 1996, the Company implemented a formal plan to close its dried fruit facility located in Fresno, California, which had suffered continued losses. During the fourth quarter of 1996, a restructuring charge of $50.0 million was recorded related to the closure of this facility. The principal component of the charge was a provision for asset write-downs of $38.5 million. The closure of this facility was essentially completed in the second quarter of 1997. During 1997, $30.0 million for asset writedowns, $2.2 million for contract terminations and $2.6 million for severance payments were charged against this provision. 30 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 33: During 1998, $1.3 million for asset write-downs, $0.3 million for contract terminations and $0.3 million for severance payments were charged against this provision. In total, 466 employees were terminated as a result of the closure of this facility. Note 5 — Current Assets And Liabilities Note 7 — Debt Notes payable consisted primarily of short-term borrowings required to fund certain foreign operations and totaled $29.6 million with a weighted-average interest rate of 13.0% as of January 2, 1999 and $11.3 million with a weighted-average interest rate of 19.3% as of January 3, 1998. Long-term debt consisted of: (in thousands) 1998 1997 Short-term investments of $0.6 million and $1.8 million as of January 2, 1999 and January 3, 1998, respectively, consisted principally of time deposits. Outstanding checks, which are funded as presented for payment, totaled $33.5 million and $22.1 million as of January 2, 1999 and January 3, 1998, respectively, and were included in accounts payable. Details of certain current assets were as follows: (in thousands) 1998 1997 Receivables Trade Notes and other Affiliated operations Allowance for doubtful accounts Inventories Finished products Raw materials and work in progress Crop growing costs Operating supplies and other $ 494,587 190,331 24,426 709,344 (92,765) $ 616,579 $ 168,423 156,623 47,676 102,802 $ 475,524 $ 434,781 142,820 17,342 594,943 (60,099) $534,844 $ 149,933 167,426 46,207 105,126 $468,692 Unsecured debt Notes payable to banks at an average interest rate of 5.5 % (6.2% – 1997) $ 63,500 6.75% notes due 2000 225,000 7% notes due 2003 300,000 6.375% notes due 2005 300,000 7.875% debentures due 2013 175,000 Various other notes due 1999 – 2004 at an average interest rate of 5.8% (7.8% – 1997) 38,064 Secured debt Mortgages, contracts and notes due 1999 – 2012 at an average interest rate of 6.4% (9.2% – 1997) 23,824 Unamortized debt discount and issue costs (2,515) Current maturities 1,122,873 (6,451) $ 1,116,422 $ 14,600 225,000 300,000 — 175,000 36,102 8,525 (2,052) 757,175 (2,326) $ 754,849 Included in notes receivable is a $10 million note from Castle & Cooke, Inc. which bears interest at the rate of 7% per annum and is due December 8, 2000. Accrued liabilities as of January 2, 1999 and January 3, 1998 included $92.9 million and $86.4 million, respectively, of amounts due to growers. Note 6 — Property, Plant And Equipment Major classes of property, plant and equipment were as follows: (in thousands) 1998 1997 Land and land improvements Buildings and improvements Machinery and equipment Construction in progress Accumulated depreciation $ 448,151 314,460 957,478 101,130 1,821,219 (718,934) $ 444,686 264,494 864,431 84,954 1,658,565 (634,318) $ 1,024,247 $ 1,102,285 The Company estimates the fair value of its fixed interest rate unsecured debt based on current quoted market prices. The estimated fair value of unsecured notes (face value $1,000 million in 1998 and $700 million in 1997) was approximately $1,017 million at January 2, 1999 and $716 million at January 3, 1998. In July 1998, the Company extended its 5-year $400 million revolving credit facility (the “Facility”) to 2003. At the Company’s option, borrowings under the Facility bear interest at a certain percentage over the agent’s prime rate or the London Interbank Offered Rate (“LIBOR”). Provisions under the Facility require the Company to comply with certain financial covenants which include a maximum permitted ratio of consolidated debt to net worth and a minimum required fixed charge coverage ratio. At January 2, 1999 and January 3, 1998, there were no borrowings outstanding under the Facility. The Company may also borrow under uncommitted lines of credit at rates offered from time to time by various banks that may not Depreciation expense for 1998, 1997 and 1996 totaled $103.4 million, $101.9 million and $102.5 million, respectively. D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 31
Slide 34: be lenders under the Facility. Net borrowings outstanding under the uncommitted lines of credit totaled $63.5 million and $14.6 million at January 2, 1999 and January 3, 1998, respectively. On October 6, 1998 the Company issued $300 million of unsecured notes in a public offering for which it received cash proceeds of $297.2 million. The notes bear interest at 6.375% and mature in 2005. Net proceeds from the sale of the notes were used to repay amounts outstanding under the Facility and to fund acquisitions during the fourth quarter of 1998. Sinking fund requirements and maturities with respect to long-term debt as of January 2, 1999 were as follows (in millions): 1999 – $6.5; 2000 – $240.6; 2001 – $13.4; 2002 – $5.1; 2003 – $368.4; and thereafter – $488.9. Interest payments totaled $67.1 million, $66.2 million and $68.4 million, during 1998, 1997 and 1996, respectively. Note 8 — Employee Benefit Plans The Company has qualified and non-qualified defined benefit pension plans covering certain full-time employees. 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 providing pension benefits, the Company has other 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 U.S.plans, the Company’s policy is to fund the net periodic pension cost plus a 15-year amortization of the unfunded liability. Most of the Company’s international pension plans and all of the Company’s plans other than pensions are unfunded. The status of the defined benefit pension plans and other plans was as follows: U.S. Pension Plans (in thousands) 1998 1997 International Pension Plans 1998 1997 Other Plans 1998 1997 Change in projected benefit obligation Benefit obligation at beginning of year Service cost Interest cost Participant contributions Plan amendments Exchange rate changes Actuarial loss (gain) Curtailments and settlements Benefits paid Benefit obligation at end of year Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets Company contributions Participant contributions Exchange rate changes Settlements Benefits paid Fair value of plan assets at end of year Funded status Unrecognized net loss (gain) Unrecognized prior service cost (benefit) Unrecognized net transition obligation (asset) Net amount recognized Amounts recognized in the Consolidated Balance Sheets Prepaid benefit cost Accrued benefit liability Additional minimum liability Net amount recognized $ 276,767 4,238 19,492 — 2,686 — 20,621 — (21,716) 302,088 $ 248,676 4,083 18,405 — — — 26,825 — (21,222) 276,767 $ 30,535 1,826 4,079 28 195 605 (1,635) — (1,693) 33,940 $ 30,776 1,828 3,650 41 — (9,497) 5,559 (404) (1,418) 30,535 $ 71,507 186 5,031 — — — (3,063) — (5,737) 67,924 $ 73,176 212 5,423 — — — (1,182) — (6,122) 71,507 $ $ $ $ $ $ $ 281,944 39,704 7,443 — — — (21,716) 307,375 5,287 (419) 4,539 (467) $ 250,154 46,222 6,790 — — — (21,222) 281,944 5,177 (2,967) 2,099 (650) $ 1,737 150 1,679 28 128 — (1,693) 2,029 (31,911) 1,172 3,589 1,655 $ 2,473 60 2,162 41 (831) (750) (1,418) 1,737 (28,798) 2,588 3,815 1,677 $ — — 5,737 — — — (5,737) — (67,924) (18,232) (1,407) — $ (87,563) $ $ — — 6,122 — — — (6,122) — (71,507) (15,968) (1,740) — (89,215) $ $ $ $ $ $ $ $ $ 8,940 $ 3,659 $ (25,495) $ (20,718) $ 16,234 (11,045) 3,751 8,940 $ 9,410 (7,455) 1,704 3,659 $ — (25,897) 402 (25,495) $ — (20,858) 140 (20,718) $ — (87,563) — (87,563) $ — (89,215) — (89,215) $ $ 32 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 35: For U.S. plans, the projected benefit obligation was determined using assumed discount rates of 7.0% in 1998 and 7.25% in 1997 and assumed rates of increase in future compensation levels of 4.5% in 1998 and 1997. The expected long-term rate of return on assets was 9.25% in 1998 and 1997. For international plans, the projected benefit obligation was determined using assumed discount rates of 7.0% to 20.0% in 1998 and 7.25% to 20.0% in 1997 and assumed rates of increase in future compensation levels of 4.5% to 17.5% in 1998 and 1997. The expected long-term rate of return on assets for international plans was 9.25% to 20.0% in 1998 and 1997. The accumulated plan benefit obligation (“APBO”) for the Company’s other plans in 1998 was determined using an annual rate of increase in the per capita cost of covered health care benefits of 8.5% in 1999 decreasing to 5.0% in 2006 and thereafter. The annual rate of increase assumed in the 1997 APBO was 9.0% in 1998 decreasing to 5.0% in 2006 and thereafter. An increase in the assumed health care cost trend rate of one percentage point in each year would have increased the Company’s APBO as of January 2, 1999 by approximately $5.6 million and would have increased the service and interest cost components of postretirement benefit expense for 1998 by $0.5 million, in aggregate. A decrease in the assumed health care cost trend rate by one percentage point in each year would have decreased the Company’s APBO as of January 2, 1999 by approximately $5.5 million and would have decreased the service and interest cost components of postretirement benefit expense for 1998 by $0.4 million, in aggregate. The weighted-average discount rate used in determining the APBO was 7.0% for the U.S. and international plans in 1998 and 7.25% for the U.S. and international plans in 1997. The Company’s U.S. ERISA Excess Plan had an APBO of $11.0 million in 1998 and $7.5 million in 1997. Due to the nature of the plan, it remains unfunded. The remainder of the Company’s domestic pension plans were fully funded. The APBO for the Company’s unfunded international pension plans, in aggregate, was $15.9 million in 1998 and $13.2 million in 1997. The components of net periodic benefit cost for the U.S. and international plans were as follows: Pension Plans (in thousands) 1998 1997 1996 1998 Other Plans 1997 1996 Components of net periodic benefit cost Service cost $ Interest cost Expected return on plan assets Amortization of: Unrecognized net loss (gain) Unrecognized prior service cost (benefit) Unrecognized net obligation (asset) Curtailment (gain) $ 6,064 $ 23,571 (22,712) 500 681 (29) — 8,075 $ 5,911 $ 22,055 (21,312) 200 688 (41) — 7,501 $ 9,143 $ 21,968 (20,156) 486 673 59 — 12,173 $ 186 5,031 — (799) (333) — — 4,085 $ 212 5,423 — — (333) — (600) $ 237 5,482 — (156) (325) — (577) $ 4,702 $ 4,661 The Company recognized net curtailment losses of $1.3 million in 1996 for the domestic plans and $2.4 million in 1997 for the international plans. These losses were due to additional benefit payments resulting from reductions in workforce. The Company offers two 401(k) plans to salaried U.S. employees. Eligible employees may defer a percentage of their annual compensation up to a maximum allowable amount under federal income tax law to supplement their retirement income. These plans provide for Company contributions based on a certain percentage of each participant’s contribution, subject to a maximum contribution by the Company. Total Company contributions to these plans in 1998, 1997 and 1996 were $3.4 million, $3.2 million and $3.8 million, respectively. The Company is also a party to various industry-wide collective bargaining agreements which provide pension benefits. Total contributions to these plans plus direct payments to pensioners in 1998, 1997 and 1996 were $0.6 million, $0.8 million and $1.2 million, respectively. In 1998, the Company adopted Statements of Financial Accounting Standards No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. Such adoption did not impact the Company’s financial position or results of operations. D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 33
Slide 36: Note 9 — Stock Options And Awards Under the 1982 and 1991 Stock Option and Award Plans (“the Option Plans”), the Company can grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards and performance share awards to officers and key employees of the Company. Stock options vest over time or based on stock price appreciation and may be exercised for up to 10 years from the date of grant, as determined by the committee of the Company’s Board of Directors administering the Option Plans. No stock appreciation rights, restricted stock awards or performance share awards were outstanding at January 2, 1999. Under the 1995 Non-Employee Directors Stock Option Plan (the “Directors Plan”), each active non-employee director will receive a grant of 1,500 non-qualified stock options (the “Options”) on February 15th (or the first trading day thereafter) of each year. The Options vest over three years and expire 10 years after the date of the grant or upon early termination as defined by the plan agreement. Changes in outstanding stock options were as follows: Shares WeightedAverage Price The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for grants in 1998, 1997 and 1996: 1998 1997 1996 Dividend yields Expected volatility Risk free interest rate Expected lives Weighted-average fair value 0.8% 28.0% 5.7% 10 years $ 24.69 1.0% 29.0% 6.5% 9 years $ 17.29 1.0% 30.0% 5.8% 9 years $ 15.08 The Company accounts for stock-based compensation under APB 25, and accordingly, no compensation costs have been recognized in the accompanying Consolidated Statements of Income for 1998, 1997 or 1996. Had compensation costs been determined under SFAS 123, pro forma net income and net income per share would have been as follows: (in thousands, except per share data) 1998 1997 1996 Net income $ 7,547 $156,779 $ 2.61 2.59 $ 86,022 $ 1.43 1.42 Net income per share – basic $ 0.13 Net income per share – diluted 0.12 Outstanding, December 30, 1995 Granted Exercised Canceled Outstanding, December 28, 1996 Granted Exercised Canceled Outstanding, January 3, 1998 Granted Exercised Canceled Outstanding, January 2, 1999 Exercisable, January 2, 1999 1,960,420 711,000 (373,952) (103,661) 2,193,807 449,630 (249,365) (25,288) 2,368,784 595,682 (413,016) (158,587) 2,392,863 1,286,370 $ 29.23 38.52 30.04 33.39 31.91 38.65 28.36 36.78 33.51 52.31 29.56 39.09 $ 38.50 $ 32.34 Since SFAS 123 was only applied to options granted subsequent to December 31, 1994, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Note 10 — Shareholders’ Equity The following table summarizes information about stock options outstanding at January 2, 1999: (shares in thousands) Options Outstanding Number WeightedOutstanding Average at January 2, Remaining 1999 Years WeightedAverage Exercise Price Options Exercisable Number WeightedExercisable Average at January 2, Exercise 1999 Price Range of Exercise Prices $25.32 - $30.92 33.72 - 44.25 50.19 - 54.81 $25.32 - $54.81 629 1,193 571 2,393 4.6 $ 27.30 5.8 37.79 9.1 52.32 6.3 $ 38.50 629 $ 27.30 657 37.13 — — 1,286 $ 32.34 Authorized capital at January 2, 1999 consisted of 80 million shares of no par value common stock and 30 million shares of no par value preferred stock issuable in series. At January 2, 1999, approximately 4.7 million shares and 0.1 million shares of common stock were reserved for issuance under the Option Plans and the Directors Plan, respectively. There was no preferred stock outstanding. The Company’s current policy is to pay quarterly dividends on common shares at an annual rate of 40 cents per share. During 1996, the Company announced a program to repurchase up to 5% of its outstanding common stock. During 1998, the Company increased the number of shares authorized for repurchase to 4.5 million, which approximated 7.6% of its common shares outstanding. As of January 2, 1999, the Company had repurchased 1,560,600 shares at a cost of approximately $56.0 million. 34 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 37: Comprehensive income and changes in shareholders’ equity were as follows: Common Shares Outstanding Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Common Shareholders’ Equity Comprehensive Income (in thousands, except share data) Balance, December 30, 1995 Net income Cash dividends declared ($.40 per share) Translation adjustments Issuance of common stock Repurchase of common stock Comprehensive income — 1996 Balance, December 28, 1996 Net income Cash dividends declared ($.40 per share) Translation adjustments Issuance of common stock Comprehensive income — 1997 Balance, January 3, 1998 Net income Cash dividends declared ($.40 per share) Translation adjustments Issuance of common stock Repurchase of common stock Comprehensive income — 1998 Balance, January 2, 1999 59,854,739 – – – 373,952 (395,400) — 59,833,291 – – – 231,156 — 60,064,447 – – – 394,652 (1,165,200) — 59,293,899 $ 320,497 – – – 374 (395) — 320,476 – – – 231 — 320,707 – – – 395 (1,165) — $ 170,266 – – – 10,858 (13,479) — 167,645 – – – 6,413 — 174,058 – – – 11,378 (40,921) — $ 58,269 89,031 (24,020) – – – — 123,280 160,164 (23,988) – – — 259,456 12,079 (24,027) – – – — $ (40,597) $ – – (21,244) – – — (61,841) – – (25,908) – — (87,749) – – (2,379) – – — 508,435 89,031 (24,020) (21,244) 11,232 (13,874) — 549,560 160,164 (23,988) (25,908) 6,644 — 666,472 12,079 (24,027) (2,379) 11,773 (42,086) — 621,832 $ 89,031 — (21,244) — — 67,787 160,164 — (25,908) — 134,256 12,079 — (2,379) — — $ 9,700 $ 319,937 $ 144,515 $ 247,508 $ (90,128) $ Note 11 — Contingencies At January 2, 1999, the Company was guarantor of approximately $76 million of indebtedness of certain key fruit suppliers and other entities integral to the Company’s operations. The Company has ordered two refrigerated container vessels from HDW in Kiel, Germany, which are scheduled for delivery in late 1999. The cost per ship is approximately DM 100 million. The Company is involved from time to time in various claims and legal actions incident to its operations, both as plaintiff and defendant. In the opinion of management, after consultation with legal counsel, none of such claims is expected to have a material adverse effect on the Company’s financial position or results of operations. Note 12 — Lease Commitments At January 2, 1999, the Company’s aggregate minimum rental commitments, before sublease income, were as follows (in millions): 1999 – $131.1; 2000 – $103.1; 2001 – $114.7; 2002 – $158.3; 2003 – $28.4; and thereafter – $197.1. Total future sublease income is $25.1 million. Note 13 — Income Taxes Income tax expense (benefit) was as follows: (in thousands) 1998 1997 1996 Current Federal, state and local $ 19,427 Foreign 19,061 38,488 Deferred Federal, state and local Foreign (29,407) (3,881) (33,288) $ 5,200 $ 2,810 20,715 23,525 12,285 (710) 11,575 $ 1,882 19,359 21,241 (444) (1,297) (1,741) The Company has obligations under non-cancelable operating leases, primarily for ship charters and containers, and certain equipment and office facilities. Lease terms are for less than the economic life of the property. Certain agricultural land leases provide for increases in minimum rentals based on production. Lease payments under a significant portion of the Company’s operating leases are based on variable interest rates. Total rental expense was $150.7 million, $182.2 million and $158.7 million (net of sublease income of $8.7 million, $10.6 million and $12.4 million) for 1998, 1997 and 1996, respectively. $ 35,100 $ 19,500 Pretax earnings attributable to foreign operations were $44 million, $170 million and $173 million for 1998, 1997 and 1996, respectively. Undistributed earnings of foreign subsidiaries, which have been or are intended to be permanently invested, aggregated $1.3 billion at January 2, 1999. D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 35
Slide 38: The Company’s reported income tax expense varied from the expense calculated using the U.S. federal statutory tax rate for the following reasons: (in thousands) 1998 1997 1996 Expense computed at U.S. federal statutory income tax rate $ 6,048 Foreign income taxed at different rates (28,097) Dividends from subsidiaries 486 State and local income tax, net of federal income tax benefit 762 Interest on prior years taxes (3,752) Hurricane losses taxed 9,886 at different rates Valuation allowance on foreign hurricane losses 18,742 Other 1,125 Reported income tax expense $ 5,200 $ 68,341 (36,437) 456 $ 37,986 (21,656) 618 In connection with the fourth quarter losses related to Hurricane Mitch, a valuation allowance in the amount of $18.7 million has been recognized to offset the deferred tax assets related to these losses. The Company has recorded deferred tax assets of $100.2 million reflecting the benefit of approximately $269 million in federal and state net operating loss carryovers which will, if unused, begin to expire in 2009. The tax credit carryforward amount of $1.3 million is comprised of general business credits which begin to expire in 2008. Total deferred tax assets and deferred tax liabilities were as follows: (in thousands) 1998 1997 1996 602 – – – 2,138 $ 35,100 1,100 – – – 1,452 $ 19,500 Deferred tax assets Deferred tax liabilities $ 238,212 (125,097) $ 113,115 $226,028 (146,020) $ 80,008 $ 253,831 (165,632) $ 88,199 Total income tax payments (net of refunds) for 1998, 1997 and 1996 were $36.7 million, $17.3 million and ($1.6) million, respectively. Deferred tax assets (liabilities) were comprised of the following: (in thousands) 1998 1997 1996 Operating reserves $ Accelerated depreciation Inventory valuation methods Effect of differences between book values assigned in prior acquisitions and historical tax values Postretirement benefits Current year acquisitions Tax credit carryforward Net operating loss carryforward Reserves for hurricane losses Valuation allowance on foreign hurricane losses Other, net 44,591 (16,538) 4,699 $ 24,892 (25,290) 3,024 $ 45,246 (21,717) 3,670 The Company remains contingently liable with respect to certain tax credits sold to Norfolk and Southern Railway (“Norfolk”) with recourse by Flexi-Van Corporation (“FlexiVan”), the Company’s former transportation equipment leasing business. Litigation with the Internal Revenue Service involving these credits concluded during the year. Litigation and settlement negotiations involving Flexi-Van and Norfolk (and the Company due to its contingent liability) are ongoing. Flexi-Van, which separated from the Company in 1987 and was subsequently acquired by David H. Murdock, has indemnified the Company against obligations that might result from the resolution of the matter. Note 14 — Business Segments (34,032) 34,098 (114) 1,263 100,221 22,847 (18,742) (25,178) (33,100) 34,278 – 1,263 86,670 – – (11,729) $ 80,008 (36,941) 33,946 (6,560) 4,987 77,685 – – (12,117) $ 88,199 $ 113,115 In accordance with Statement of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosures about Segments of an Enterprise and Related Information”, the Company has three reportable segments: Fresh Fruit, Fresh Vegetables, and Processed Foods. The Fresh Fruit segment contains several operating segments that produce and market fresh fruit to wholesale, retail and institutional customers worldwide. The Fresh Vegetables segment contains three operating segments that produce and market commodity and fresh packaged vegetables to wholesale, retail and institutional customers primarily 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 Processed Foods segment contains several operating segments that produce and market packaged foods including fruits, beverages and snack foods. The reportable segments are managed separately due to varying products, production processes, distribution channels and customer bases. The Company has other operating segments which include fresh-cut flower businesses acquired during 1998 and certain diversified operations. 36 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 39: Accounting policies for the three reportable segments and other operating segments are the same as those described in the summary of significant accounting policies. Company management evaluates and monitors segment performance primarily through earnings before interest and taxes (EBIT). The results of operations and financial position of the three reportable segments, other operating segments, and Corporate and other were as follows: (in thousands) 1998 1997 1996 The Company’s revenue from external customers and net property, plant and equipment by geographic area were as follows: (in thousands) 1998 1997 1996 Revenue Fresh Fruit Fresh Vegetables Processed Foods Other operating segments EBIT Fresh Fruit Fresh Vegetables Processed Foods Other operating segments Total operating segments Corporate and other Special charges Revenue United States Japan Germany Honduras France Other international Property, plant and equipment — net United States Honduras Costa Rica Colombia Oceangoing assets Philippines Other international $ 1,886,237 585,658 318,787 275,050 232,429 1,125,999 $ 4,424,160 $ 1,943,057 595,131 306,418 240,390 197,580 1,053,544 $ 4,336,120 $ 1,741,741 551,073 238,575 216,375 150,607 941,932 $ 3,840,303 $ 2,692,147 790,149 834,966 106,898 $ 4,424,160 $ 110,505 49,418 89,462 2,788 252,173 (45,951) (120,000) $ 86,222 $ 2,583,277 756,176 962,127 34,540 $ 4,336,120 $ 149,997 40,196 89,805 912 280,910 (21,057) – $ 259,853 $ 2,238,257 653,730 915,335 32,981 $ 3,840,303 $ 172,205 30,300 52,226 136 $ 408,385 109,650 96,293 89,279 82,213 67,061 249,404 $ 396,254 145,404 78,592 29,531 94,947 66,071 213,448 $ 397,141 125,320 58,178 28,037 104,756 61,561 249,142 $ 1,102,285 Note 15 — Subsequent Event $ 1,024,247 $ 1,024,135 254,867 (27,637) (50,000) $ 177,230 Assets Fresh Fruit Fresh Vegetables Processed Foods Other operating segments Total operating segments Corporate and other Depreciation and amortization Fresh Fruit Fresh Vegetables Processed Foods Other operating segments Corporate and other Capital additions Fresh Fruit Fresh Vegetables Processed Foods Other operating segments Corporate and other $ 1,516,551 361,544 591,188 286,578 2,755,861 159,192 $ 2,915,053 $ 1,459,204 335,827 532,629 15,470 2,343,130 120,765 $ 2,463,895 $ 1,383,064 302,698 658,977 10,652 2,355,391 131,416 $ 2,486,807 In February 1999, the Company increased the number of common shares authorized under its repurchase program to 8.3 million, which approximated 14% of its common shares outstanding. In January and February 1999, the Company repurchased 2,271,000 common shares, in aggregate, at a weighted-average price of $29.72 per share. $ 75,993 12,788 21,864 7,969 3,444 $ 77,634 9,145 20,727 164 4,411 $ 76,944 10,061 22,164 188 1,716 $ $ 122,058 79,746 20,724 47,078 2,222 437 $ $ 112,081 63,052 35,647 25,672 – 4,800 $ $ 111,073 52,211 8,118 36,651 100 12,606 $ 150,207 $ 129,171 $ 109,686 Note: Corporate and other EBIT in 1997 and 1996 includes certain gains on the disposition of investments and assets. D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 37
Slide 40: Note 16 — Quarterly Financial Information (Unaudited) The following table presents summarized quarterly results: (in thousands, except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter Year 1998 Revenue Gross margin Net income (loss) Net income (loss) per common share — diluted 1997 Revenue Gross margin Net income Net income per common share – diluted $ 1,011,984 139,021 22,761 0.37 964,992 151,738 42,043 0.70 $ 1,163,986 208,198 82,095 1.35 1,107,804 191,006 70,429 1.17 $ 1,209,794 174,482 15,562 0.26 1,178,301 156,157 24,443 0.40 $ 1,038,396 116,714 (108,339) (1.82) $ 4,424,160 638,415 12,079 $ 0.20 $ $ $ $ $ $ $ $ 1,085,023 144,942 23,249 $ 0.38 $ 4,336,120 643,843 160,164 $ 2.65 $ $ $ The net loss for the fourth quarter of 1998 includes pre-tax charges of $100 million, net of insurance proceeds, and $20 million related to Hurricane Mitch and the Company’s North American citrus operations, respectively. The cumulative total of net income (loss) per common share reported in each quarter of 1998 differs from the full-year amount. The difference is due to the timing and significance of the special charges recorded in the fourth quarter combined with the repurchase of approximately 1.2 million common shares at the end of the third quarter. All quarters have twelve weeks, except the fourth quarter of 1997 which has thirteen weeks and the third quarters of both years which have sixteen weeks. Note 17 — Common Stock Data (Unaudited) The following table shows the market price range of the Company’s common stock for each quarter in 1998 and 1997: High Low 1998 First Quarter Second Quarter Third Quarter Fourth Quarter Year 1997 First Quarter Second Quarter Third Quarter Fourth Quarter Year $ 57 1/8 49 1/8 52 7/16 35 $ 57 1/8 $ 40 1/4 43 3/8 46 15/16 49 5/8 $ 49 5/8 $ 4 3 1/2 43 15/16 32 3/8 28 5/16 $ 28 5/16 $ 33 3/8 37 3/4 39 1/16 43 9/ 16 $ 33 3/8 38 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 41: Report of Independent Public Accountants To the Shareholders and Board of Directors of Dole Food Company, Inc.: We have audited the accompanying consolidated balance sheets of Dole Food Company, Inc., (a Hawaii corporation) and subsidiaries as of January 2, 1999 and January 3, 1998, and the related consolidated statements of income and cash flow for the years ended January 2, 1999, January 3, 1998, and December 28, 1996. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dole Food Company, Inc. and subsidiaries as of January 2, 1999 and January 3, 1998 and the results of its operations and its cash flow for the years ended January 2, 1999, January 3, 1998, and December 28, 1996, in conformity with generally accepted accounting principles. Los Angeles, California February 5, 1999 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 39
Slide 42: Management’s Discussion and Analysis of Results of Operations and Financial Position Overview In 1998, the Company’s results were negatively impacted by the effects of the El Niño weather pattern, Hurricane Mitch and the California citrus freeze. Additionally, economic turmoil in Asia, Eastern Europe and Latin America undermined the financial condition of emerging markets and impacted the fruit business worldwide. Also in 1998, the Company expanded its product offering to include fresh-cut flowers, increased its productive capacity in the growing pre-cut salad category and extended its European distribution network into Scandinavia. During 1998, the Company’s fruit operations were impacted by the following weather-related events: • The El Niño weather pattern reduced industry banana volumes from Ecuador by 18%, impacted production operations in California and reduced banana volumes from the Philippines and pineapple volumes from the Philippines and Thailand. Production volumes from these areas are anticipated to begin returning to normal during 1999. • Hurricane Mitch impacted over 30,000 acres of agricultural plantings and caused severe damage to the Company’s general agricultural infrastructure at both its Honduran banana and beverage operations. During the fourth quarter of 1998, the Company recorded a $100 million charge, net of insurance proceeds received, for losses sustained from Hurricane Mitch. Production in the impacted areas is not expected to fully recover in 1999. However, due to price sensitivity in worldwide banana markets, the impact on future operating results is not currently determinable. The Company has started to rehabilitate selected parts of the affected areas and will incur additional rehabilitation expenses in the future. The Company also continues to pursue recovery under various insurance policies for losses sustained. Future rehabilitation costs and insurance recoveries will be reported on a separate line in the Consolidated Statements of Income. • Following severe freezing temperatures in California’s San Joaquin Valley from December 21 to December 24, 1998, the Company recorded a $20 million charge in its citrus operations. The charge primarily related to write-downs of deferred crop costs, property, plant and equipment and grower receivables in the freeze areas. The charge also included writedowns of grower receivables in other locations due to the recognition of changes in industry economics. In addition to the charge taken in 1998, the Company currently estimates that the freeze damage will negatively impact its 1999 operating results by approximately $10 million to $15 million. The Company has substantial sales outside of the United States which had been expanding rapidly as personal incomes in developing countries rose. The economic crises in Asia, the collapse of the Russian economy and economic slowdowns in Latin America have affected the international fruit business and slowed its growth. During 1998, the Company entered the fresh-cut flower business in North America, which is relatively fragmented, and continued expanding its European fresh produce distribution network. Acquisitions during the second half of 1998 added approximately $150 million to 1998 revenue, and the Company anticipates they will add an additional $550 million to 1999 revenue when included for the full year. These businesses added approximately $2 million to net income in 1998. In 1999, category growth, efficiencies in production and distribution methodologies, and improved marketing leverage are expected to further strengthen the performance of these businesses. European Union Quota: The European Union (“E.U.”) banana regulations, which impose quotas and tariffs on bananas, remained in full effect in 1998 and continue in effect with some modifications as of the date of these financial statements. The World Trade Organization (“WTO”) issued a ruling during 1997, on the complaint made by the United States, Ecuador, Guatemala, Honduras, Panama and Mexico, that the European banana trade regime violated basic General Agreement on Tariffs and Trade (“GATT”) principles. The WTO found certain aspects of the regime discriminatory and asked the E.U. to modify the regime to eliminate these discriminatory aspects. In June 1998, E.U. farm ministers responded with certain modifications to the regime. The United States does not consider the changes sufficient to regulate banana sales consistent with the WTO ruling and has imposed tariffs on a variety of E.U. goods. Trade negotiations and discussions continue between the E.U., the United States and the individual banana exporting countries. These trade negotiations could lead to further changes in the regulations governing banana exports to the E.U. The net impact of these changing regulations on the Company’s future results of operations is not determinable at this time. Foreign Currencies: The Company distributes its products in more than 90 countries throughout the world. Its international sales are usually transacted in U.S. dollars and major European and Asian currencies. Certain costs are incurred in currencies different from those that are received from the sale of products. While results of operations may be affected by fluctuations in currency exchange rates in both the sourcing and selling locations, the Company has historically followed a policy, with certain exceptions, of not attempting to hedge these exposures. Additionally, the 1999 adoption of the Euro currency by the E.U. is not expected to materially impact the Company’s results of operations or financial position. New Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities”. The Company is assessing the impact of accounting for derivative instruments in accordance with SFAS 133. The Company’s derivative transactions are currently limited to hedging certain foreign currency denominated purchase commitments. The Company will adopt the statement during the first quarter of 2000. Such adoption is not expected to have a material impact on the Company’s financial condition or results of operations. Year 2000: The Company has assessed the effect of Year 2000 issues on its information technology, including computer hardware, software and embedded chip technology. Remediation has been completed at the majority of the Company’s operating units with most of the remaining operating units currently undergoing tests of remediated systems and software. The Company has now identified certain specific upgrade projects 40 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 43: and personal computer replacements that will be completed during the first half of 1999. Remediation efforts related to companies acquired during 1998 and Honduran operating units impacted by Hurricane Mitch are scheduled to be completed by June 1999. All other remediation work has been completed as of the December 1998 target date. The Company is also in the process of confirming Year 2000 compliance with key vendors and service providers, including suppliers of embedded chip technology. Once completed, the Company will develop a contingency plan related to its key vendors and service providers. Based on work performed to date, the Company believes that the total cost to remediate will not be material to its results of operations, liquidity or capital resources. The preceding discussion contains forward-looking statements regarding the Company’s timetable for solving its Year 2000 issues, costs to remediate and the ultimate impact on its finances, which involve a number of risks and uncertainties. The potential risks and uncertainties that could cause actual results to differ materially include: the continuing availability of key information technology personnel and consultants, the ability of third parties to complete their own Year 2000 remediation on time, unforeseen responses by the public to the perceived situation and, if necessary, the ability of the Company to identify and implement contingency plans. 1998 Compared with 1997 inability to pass on higher El Niño related costs in the form of higher prices. This was partially offset by improved European distribution earnings. The Company’s North American citrus and deciduous operations also had significant declines due to El Niño related cost issues compared to very strong results in 1997. Operating results improved in the Honduran beverage, processed pineapple, fresh-cut salad and European distribution categories, as well as through the addition of the acquired flower businesses and SABA Trading AB. Interest Expense, Net: Interest expense, net of interest income, increased to $59.6 million in 1998 from $56.8 million in 1997 due to increased debt levels in the second half of the year to fund acquisitions. Other Income (Expense), Net: Other income (expense) - net consists primarily of minority interest expense and gains and losses on sales of property. In 1997, other income included larger gains from sales of investments and fixed assets. Income Taxes: The Company’s effective tax rate increased in 1998 from 18% to 30% primarily due to the Hurricane Mitch charge, which was not fully tax benefitted. 1997 Compared with 1996 Revenue: Revenue increased 2% to $4,424.2 million in 1998 from $4,336.1 million in 1997. The inclusion of the newly acquired flower businesses and SABA Trading AB toward the end of the year increased revenue by 4% in 1998. Revenue from existing businesses was up slightly after considering a 2% reduction due to the closure of the Company’s California dried fruit facility in the second quarter of 1997 and the inclusion of an additional week in fiscal year 1997. While the freshcut salad and Honduran beverage businesses had strong growth rates, processed pineapple suffered from El Niño induced product shortages, and the North American citrus and deciduous fruit businesses had reduced volumes and product quality due to El Niño. Revenues from bananas increased as higher sales in the Company’s European distribution businesses, including sales from businesses acquired late in 1997, served to offset decreased import volumes due largely to the closure of the Russian market. Selling, Marketing and Administrative Expenses: Selling, marketing and administrative expenses were $433.5 million or 9.8% of revenue in 1998 compared to $399.8 million or 9.2% of revenue in 1997. The increase resulted from growth in businesses with higher operating cost percentages such as the Honduran beverage, fresh-cut salad and European distribution businesses. At the same time, the banana import business experienced higher receivable write-offs related to the collapse of the Russian market, higher promotional costs as a result of market supply conditions and lower total revenues. Operating Income: Operating income decreased from $244.0 million in 1997 to $204.9 million before special charges in 1998. The decrease was largely driven by lower earnings in the banana import business as a result of the Company’s Revenue: Revenue increased 13% to $4,336.1 million in 1997 from $3,840.3 million in 1996. The increase in revenue is primarily attributable to higher worldwide banana volumes; increased volumes in fresh-cut salads and favorable pricing for the fresh vegetable business; continued growth at the Honduran beverage operation; newly acquired businesses; and an additional week in fiscal year 1997. The Company was able to grow revenue in spite of adverse currency movements in 1997. Selling, Marketing and Administrative Expenses: Selling, marketing and administrative expenses were $399.8 million or 9.2% of revenue in 1997 compared to $369.7 million or 9.6% of revenue in 1996. The increased expense is due to higher sales activity in existing product lines and the acquisition of new businesses, partially offset by the closure of the Company’s California dried fruit facility. Restructuring Charge: In 1996, the Company implemented a formal plan to close its dried fruit facility located in Fresno, California which had suffered continued losses. During the fourth quarter of 1996, a restructuring charge of $50.0 million was recorded related to the closure of this facility. Principal components of the charge were provisions for asset write-downs, contract terminations and severance payments. The closure of this facility was completed in the second quarter of 1997. Operating Income: Operating income improved to $244.0 million in 1997 from $214.3 million before the restructuring charge in 1996. Higher earnings in 1997 were the result of increased volumes of fresh-cut salads, favorable pricing in the fresh vegetables business and growth in the banana business. In addition, the processed pineapple and Honduran beverage businesses posted higher results in 1997, and the closure of the dried fruit facility in the second quarter reduced losses. Interest Expense, Net: Interest expense, net of interest income, decreased to $56.8 million in 1997 from $60.3 million in 1996, due to lower average debt levels. D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 41
Slide 44: Other Income (Expense): Other income for 1997 increased $3.5 million from 1996 primarily due to the gain on sales of certain investments and fixed assets. Income Taxes: The Company’s effective income tax rate was 18% in 1997 and 1996. Liquidity and Capital Resources The Company’s operations and capital expenditures were financed primarily by funds generated internally during 1998. The Company pursued an aggressive growth strategy of acquisitions in the fresh-cut flower industry and in its European product distribution network. In addition, the Company repurchased 1,165,200 of its common shares for $42.1 million. The acquisitions and stock repurchases were substantially funded by debt. The Hurricane Mitch and citrus fourth quarter special charges decreased equity. This resulted in a year-toyear increase in the net debt to net debt and equity percentage from 53% to 64%. During 1997, the Company used its cash flow from operations to reduce this ratio from 62% in 1996 to 53% in 1997. Cash and short-term investments increased from $31.2 million at January 3, 1998 to $35.4 million at January 2, 1999. Operating activities generated cash flow of $157.1 million in 1998 compared to $291.0 million in 1997. The decrease is primarily due to lower net earnings, a payment to the Internal Revenue Service related to prior years’ audits and the 1997 closure of the Company’s California dried fruit facility. The Company is currently pursuing a refund of the payment to the Internal Revenue Service. During 1997, the Company experienced a decrease in its working capital requirements as a result of the closure of its California dried fruit facility. The liquidation of inventory and other operating and fixed assets related to this closed facility provided approximately $70 million of cash flow in 1997. Capital expenditures for the acquisition and improvement of productive assets increased to $150.2 million in 1998 from $129.2 million in 1997 and were funded largely by operating cash flow. The Company expects the capital expenditure level to continue growing next year due to the Hurricane Mitch rehabilitation effort and acquisitions during 1998. The Company acquired a series of businesses in the fresh-cut flower industry during 1998 to form a new flower division. In addition, the Company acquired 60% of Saba Trading AB, a Scandinavian distributor of fresh fruits, vegetables and flowers, to complement its growing distribution network in Europe. The aggregate cash purchase price of these businesses and smaller acquisitions in 1998 was approximately $332 million. The Company is scheduled to take delivery of two new refrigerated container vessels in late 1999. The vessels are being manufactured by HDW in Kiel, Germany, and the cost per ship is approximately DM 100 million. In order to facilitate payment for these ships, the Company has contracted to purchase German marks at a weighted-average exchange rate of DM 1.78 to $1.00 for a total notional value of $98.3 million. These fixed rate contracts will be settled in the fourth quarter of 1999, and their fair value was approximately $105.8 million as of January 2, 1999. In January 1998, the Company announced plans to move to a new headquarters facility in Westlake Village, California. Construction of the complex is anticipated to be completed in late 1999, at which time the Company plans to occupy these leased facilities. The Company has in place a $400 million 5-year revolving credit facility (the “Facility”) which matures in 2003. Provisions under the Facility require the Company to comply with certain financial covenants which include a maximum permitted ratio of consolidated debt to net worth and a minimum required fixed charge coverage ratio. At January 2, 1999, no borrowings were outstanding under the Facility. The Company may also borrow under uncommitted lines of credit at rates offered from time to time by various banks that may not be lenders under the Facility. Net borrowings outstanding under the uncommitted lines of credit totaled $63.5 million at January 2, 1999. On October 6, 1998, the Company issued $300 million of 7-year 6.375% unsecured notes in a public offering for which it received cash proceeds of $297.2 million. The Company used a portion of the cash proceeds for acquisitions during the fourth quarter and the remainder to repay amounts outstanding under the Facility. Such credit facility borrowings were primarily incurred to fund business acquisitions made earlier in the year. In December 1998, the Board of Directors authorized an increase in the Company’s stock repurchase program to 4.5 million shares. In February 1999, the Board of Directors increased this authorization to 8.3 million shares. During 1998, the Company repurchased 1,165,200 of its common shares at a cost of $42.1 million. During January and February 1999, the Company repurchased an additional 2,271,000 of its common shares for $67.6 million. Approximately 4.5 million shares remain authorized for repurchase under the Company’s stock repurchase program after these transactions. The Company paid four quarterly dividends of 10 cents per share on its common stock totaling $24.0 million in 1998. The Company believes that cash from operations and its cash position and revolving credit facility will enable it to meet its capital expenditure, debt maturity, common stock repurchase, dividend payment and other funding requirements. This Annual Report contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. 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; economic crises in developing countries; quotas, tariffs and other governmental actions; changes in currency exchange rates; product supply and pricing; and computer conversion and Year 2000 issues. 42 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 45: Results of Operations and Selected Financial Data (in millions, except per share data) 1998 1997 1996 1995 1994 Revenue Cost of products sold Gross margin Selling, marketing, and administrative expenses Hurricane Mitch charge Citrus charge Dried Fruit restructuring charge Operating income Interest expense – net Net gain on assets sold or held for disposal Other income (expense) – net Income from continuing operations before income taxes Income taxes Net income from continuing operations Net income (loss) from discontinued operations Net income Diluted net income (loss) per common share Continuing operations Discontinued operations Net income Other statistics Working capital Total assets Long-term debt Total debt Common shareholders’ equity Annual cash dividends per common share Capital additions for continuing operations Depreciation and amortization from continuing operations $ 4,424 3,786 638 433 100 20 — 85 (60) — (8) 17 (5) 12 — $ 4,336 3,692 644 400 — — – 244 (57) – 8 195 (35) 160 – $ 3,840 3,256 584 370 — — 50 164 (60) – 5 109 (20) 89 – $ 3,804 3,218 586 393 — — – 193 (74) 62 (5) 176 (56) 120 (97) $ 3,499 2,966 533 395 — — – 138 (67) – (3) 68 (10) 58 10 $ $ $ $ 12 0.20 — 0.20 366 2,915 1,116 1,153 622 0.40 150 122 $ $ $ $ 160 2.65 – 2.65 407 2,464 755 768 666 0.40 129 112 $ $ $ $ 89 1.47 – 1.47 464 2,487 904 926 550 0.40 110 111 $ $ $ $ 23 2.00 (1.61) 0.39 480 2,442 896 920 508 0.40 90 113 $ $ $ $ 68 0.98 0.16 1.14 495 3,685 1,555 1,609 1,081 0.40 212 120 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8 43
Slide 46: Directors and Officers DOLE FOOD COMPANY, INC. DOLE FOOD COMPANY, INC. DOLE FOOD COMPANY Directors Elaine L. Chao 2 Distinguished Fellow The Heritage Foundation Mike Curb 1, 3 Chairman Curb Records, Inc. David A. DeLorenzo President and Chief Operating Officer Dole Food Company, Inc. Richard M. Ferry Chairman Korn/Ferry International (international executive search firm) 1, 2 Officers David H. Murdock Chairman of the Board and Chief Executive Officer David A. DeLorenzo President and Chief Operating Officer John W. Tate Vice President and Chief Financial Officer J. Brett Tibbitts Vice President - Corporate General Counsel and Corporate Secretary Patrick A. Nielson Vice President - International Legal and Regulatory Affairs George R. Horne Vice President - Human Resources Roberta Wieman Vice President David W. Perrigo Vice President - Taxes James A. Dykstra Controller and Chief Accounting Officer Beth Potillo Treasurer Operating Division Officers Paul Cuyegkeng President – Dole Asia William F. Feeney President – Dole Europe Juergen Schumacher President – Dole Latin America Peter M. Nolan President – Dole Packaged Foods Lawrence A. Kern President – Dole Fresh Vegetables Gregory L. Costley President – Dole North American Fruit Roberto Zacarias President – Dole Honduran Beverage James F. Gary 2, 3 Chairman Emeritus Pacific Resources, Inc. Zoltan Merszei 3 Former Chief Executive Officer, President and Chairman The Dow Chemical Company David H. Murdock 1 Chairman of the Board and Chief Executive Officer Dole Food Company, Inc. 1 Executive, Finance and Nominating Committee 2 Audit Committee 3 Compensation and Employee Benefits Committee Dole 5 A Day nutrition education materials (CD-ROM, Play, Cookbook, and Chart) have been distributed free of charge to more than 35,000 schools. The nutrition education program is designed to encourage children between the ages of five to ten years, and their parents, to eat 5–9 servings of fruits and vegetables a day. Visit www.dole5aday.com for more information. 44 D O L E F O O D C O M PA N Y, I N C . A N N U A L R E P O R T 1 9 9 8
Slide 47: Company and Shareholder Information THE COMPANY Founded in Hawaii in 1851, Dole Food Company, Inc. is the world’s largest producer and marketer of fresh fruit, vegetables and flowers, and markets a growing line of packaged foods. The Company does business in more than 90 countries and employs approximately 53,500 full-time people. Corporate Headquarters 31365 Oak Crest Drive, Westlake Village, CA 91361 (818) 879-6600 Auditors Additional Information Requests Arthur Andersen LLP 633 West Fifth Street, Los Angeles, CA 90071 Securities Transfer and Dividend Disbursement Agent EquiServe P.O. Box 8040, Boston, MA 02266-8040 (800) 733-5001 Internet Address: www.equiserve.com Dividend Information For a copy of the Annual Report and Form 10-K, please contact: Office of the Corporate Secretary Dole Food Company, Inc. 31365 Oak Crest Drive, Westlake Village, CA 91361 Telephone: (818) 879-6814 Facsimile: (818) 879-6615 Dole’s Annual Report is available on the internet at http://www.dole.com E-mail Address: shareholder_relations@na.dole.com Stock Exchange A cash dividend of $0.10 per common share was declared in each quarter of 1998 for a total annual dividend of $0.40 per share. Dole Food Company, Inc. does not have a dividend reinvestment plan. Investment Industry Inquiries Dole Food Company, Inc.’s common stock (DOL) is traded on The New York and Pacific Stock Exchanges Internet Addresses Members of the investment industry should direct inquiries to: Office of the Treasurer Dole Food Company, Inc. 31365 Oak Crest Drive, Westlake Village, CA 91361 (818) 879-6600 http://www.dole.com http://www.dole5aday.com Corporate Officers: (Seated – Left to Right): David H. Murdock, David A. DeLorenzo (Standing – Left to Right): George R. Horne, Roberta Wieman, J. Brett Tibbitts, James A. Dykstra, Beth Potillo, Patrick A. Nielson, David W. Perrigo (Not Shown): John W. Tate Operating Officers: (Seated – Left to Right): David A. DeLorenzo, David H. Murdock (Standing – Left to Right): Juergen Schumacher, Paul Cuyegkeng, William F. Feeney, Peter M. Nolan, Roberto Zacarias, Gregory L. Costley, Lawrence A. Kern DOLE ® IS A REGISTERED TRADEMARK OF DOLE FOOD COMPANY, INC. ©1998 DOLE FOOD COMPANY, INC. ALL RIGHTS RESERVED.
Slide 48: Dole Food Company Inc. , www.Dole.com