UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

Commission File Number 1-4455

 

 

 

 

Dole Food Company, Inc.

(Exact name of Registrant as specified in its charter)

 

 

One Dole Drive, Westlake Village, California 91362
(Address of principal executive offices)

 

Registrant’s telephone number including area code:
(818) 879-6600

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Securities registered pursuant to Section 12(g) of the Act:
None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.  Yes þ     No o

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer o     Accelerated Filer o     Non-accelerated Filer þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The approximate aggregate market value of voting and non-voting stock held by non-affiliates of the registrant was $0 as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

The number of shares of Common Stock outstanding as of March 23, 2007 was 1,000.

 

DOCUMENTS INCORPORATED BY REFERENCE
None

 

 

DOLE FOOD COMPANY, INC.

 

FORM 10-K

Fiscal Year Ended December 30, 2006

 

TABLE OF CONTENTS

 

 

Dole Food Company, Inc. was founded in Hawaii in 1851 and was incorporated under the laws of Hawaii in 1894. Dole reincorporated as a Delaware corporation in July 2001. Unless the context otherwise requires, Dole Food Company, Inc. and its consolidated subsidiaries are referred to in this report as the “Company,” “Dole” and “we.”

 

Dole’s principal executive offices are located at One Dole Drive, Westlake Village, California 91362, telephone (818) 879-6600. During fiscal year 2006, we had, on average, approximately 47,000 full-time permanent employees and 28,000 full-time seasonal or temporary employees, worldwide. Dole is the world’s largest producer and marketer of high-quality fresh fruit, fresh vegetables and fresh-cut flowers. Dole markets a growing line of packaged and frozen foods and is a produce industry leader in nutrition education and research. Our website address is www.dole.com. Since we have only one stockholder and since our debt securities are not listed or traded on any exchange, we do not make available free of charge, on or through our website, electronically or through paper copies our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, or any amendments to those reports.

 

Dole’s operations are described below. For detailed financial information with respect to Dole’s business and its operations, see Dole’s Consolidated Financial Statements and the related Notes to Consolidated Financial Statements, which are included in this report.

 

Overview

 

We are the world’s largest producer of fresh fruit, fresh vegetables and fresh-cut flowers, and we market a growing line of value-added products. We are one of the world’s largest producers of bananas and pineapples, a leading marketer of citrus and table grapes worldwide and an industry leader in packaged fruit products, ready-to-eat salads and vegetables. Our most significant products hold the number 1 or number 2 positions in the respective markets in which we compete. For the fiscal year ended December 30, 2006, we generated revenues of $6.2 billion.

 

We provide wholesale, retail and institutional customers around the world with high quality food products that bear the DOLE^® trademarks. The DOLE brand was introduced in 1933 and we believe it is one of the most recognized for fresh and packaged produce in the United States, as evidenced by our 57% unaided consumer brand awareness, twice that of our nearest competitor, according to a 2004 study by TNS-NFO, an international market research firm. We utilize product quality, food safety, brand recognition, competitive pricing, customer service and consumer marketing programs to enhance our position within the food industry. Consumer and institutional recognition of the DOLE trademarks and related brands and the association of these brands with high quality food products contribute significantly to our leading positions in the markets that we serve.

 

We source or sell over 200 products in more than 90 countries. Our fully-integrated operations include sourcing, growing, processing, distributing and marketing our products. Our products are produced both directly on Dole-owned or leased land and through associated producer and independent grower arrangements under which we provide varying degrees of farming, harvesting, packing, storing, shipping, stevedoring and marketing services.

 

Industry

 

The worldwide fresh produce industry is characterized by consistent underlying demand and favorable growth dynamics. In recent years, the market for fresh produce has grown at a rate above population growth, supported by ongoing trends including greater consumer demand for healthy, fresh and convenient foods, increased retailer square footage devoted to produce, and increased emphasis on fresh produce as a differentiating factor in attracting customers. According to the Food and Agriculture Organization, worldwide produce production grew 3.6% per annum from 814 million metric tons in 1990 to an estimated 1.4 billion in 2005. Total wholesale fresh produce sales in the United States surpassed $97 billion in 2005, up from approximately $35 billion in 1987, representing a 5.8% compounded annual growth rate. In the U.S., wholesale fresh produce sales are split roughly evenly between the retail and foodservice channels.

Health conscious consumers are driving much of the growth in demand for fresh produce. Over the past 20 years, the benefits of natural, preservative free foods have become an increasingly prominent element of the public dialogue on health and nutrition. As a result, consumption of fresh fruit and vegetables has increased markedly. According to the U.S. Department of Agriculture, Americans consumed 45 more pounds of fresh fruit and vegetables per capita in 2004 than they did in 1987. Related to the focus on health and nutrition, consumers are increasingly consuming organic foods. Specifically, organic produce sales grew 11% to $5.4 billion in 2006, according to the Organic Trade Association. Organics now represent 5.5% of total retail produce sales in the U.S.

 

Consumers are also demonstrating continued demand for convenient, ready-to-eat products. Food manufacturers have responded with new product introductions and packaging innovations in segments such as fresh-cut fruit and vegetables and ready-to-eat salads, contributing to industry growth. For example, the U.S. market for fresh-cut produce has increased from an estimated $5 billion in 1994 to a projected $13.4 billion in 2005, according to the Produce Marketing Association.

 

The North American packaged fruit industry is experiencing steady growth, driven by consumer demand for healthy snacking options. FRUIT BOWLS^® in plastic cups, introduced by Dole in 1998, and other innovative packaging items have steadily displaced the canned alternative. These new products have driven overall growth in the packaged fruit category, while the consumption of traditional canned fruit has declined as consumers have opted for fresh products and more innovative packaging.

 

Retail consolidation and the growing importance of food to mass merchandisers are major factors affecting the food manufacturing and fresh produce industries. As food retailers have grown and expanded, they have sought to increase profitability through value-added product offerings and in-store services. The fresh produce category is also attractive to retailers due to its higher margins. On most packaged fruit products, retailers generate a 12-36% trade margin. Some retailers are reducing their dry goods sections of the store, in favor of expanding fresh and chilled items, offering new product and merchandising opportunities for packaged fruit. Fully integrated produce companies, such as Dole, are well positioned to meet the needs of large retailers through the delivery of consistent, high quality produce, reliable service, competitive pricing and innovative products. In addition, these companies have sought to strengthen relationships with leading retailers through value-added services such as banana ripening and distribution, category management, branding initiatives and establishment of long-term supply agreements.

 

Competitive Strengths

 

Our competitive strengths have contributed to our strong historical operating performance and should enable us to capitalize on future growth opportunities:

 

 

 

Business Strategy

 

Key elements of our strategy include:

 

 

 

Business Segments

 

We have four business segments: fresh fruit, fresh vegetables, packaged foods and fresh-cut flowers. The fresh fruit segment contains several operating divisions that produce and market fresh fruit to wholesale, retail and institutional customers worldwide. The fresh vegetables segment contains two operating divisions that produce and

market commodity and fresh-cut vegetables to wholesale, retail and institutional customers, primarily in North America, Europe and Asia. The packaged foods segment contains several operating divisions that produce and market packaged foods including fruit, juices and snack foods. Our fresh-cut flowers segment sources, imports and markets fresh-cut flowers, grown mainly in Colombia, primarily to wholesale florists and retail grocers in the United States. For financial information on the four business segments, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data, Note 14 — Business Segments, in this Form 10-K.

 

Fresh Fruit

 

Our fresh fruit business segment has four primary operating divisions: bananas, fresh pineapple, European Ripening and Distribution and Dole Chile. We believe that we are the industry leader in growing, sourcing, shipping and distributing consistently high-quality fresh fruit. The fresh fruit business segment represented approximately 65% of 2006 consolidated total revenues.

 

Bananas

 

We are one of the world’s largest producers of bananas, growing and selling more than 149 million boxes of bananas annually. We sell most of our bananas under the DOLE brand. We primarily sell bananas to customers in North America, Europe and Asia. We are the number 1 brand of bananas in both North America (an approximate 35% market share) and Japan (an approximate 28% market share) and the number 2 brand in Europe (an approximate 15% market share). In Latin America, our bananas are primarily sourced in Honduras, Costa Rica, Ecuador, Colombia, Guatemala and Peru and grown on approximately 36,500 acres of company-owned farms and approximately 82,000 acres of independent producers’ farms. Bananas produced by us in Latin America are shipped primarily to North America and Europe on our refrigerated and containerized shipping fleet. In Asia, we source our bananas primarily in the Philippines. Bananas accounted for approximately 40% of our fresh fruit business segment revenues in 2006.

 

Consistent with our strategy to focus on value-added products, we have continued to expand our focus on higher margin, niche bananas. While the traditional “green” bananas still comprise the majority of our banana sales, we have successfully introduced niche bananas (e.g., organic). We have also improved the profitability of our banana business by focusing on profitable customer relationships and markets.

 

While bananas are sold year round, there is a seasonal aspect to the banana business. Banana prices and volumes are typically higher in the first and second calendar quarters before there is increased competition from summer fruits. Approximately 90% of our total retail volume in North America is under contract. The contracts are typically one year in duration and help to insulate us from fluctuations in the banana spot market. Our principal competitors in the international banana business are Chiquita Brands International, Inc. and Fresh Del Monte Produce Inc.

 

European Ripening and Distribution

 

Our European Ripening & Distribution business distributes DOLE and non-DOLE branded fresh produce in Europe. This business operates 37 sales and distribution centers in eleven countries, predominantly in Western Europe. This is a value-added business for us since European retailers generally do not self-distribute or self-ripen. This business assists us in firmly establishing customer relationships in Europe. European Ripening and Distribution accounted for approximately 38% of our fresh fruit business segment’s revenues in 2006.

 

Fresh Pineapples

 

We are the number 2 global producer of fresh pineapples, growing and selling more than 30 million boxes annually. We sell our pineapples globally and source them from company operated farms and independent growers in Latin America, Hawaii, the Philippines and Thailand. We produce and sell two principal types of pineapples: the sweet yellow pineapple and the Champaka (or green) pineapple. The sweet yellow pineapple was introduced in 1999 under the DOLE PREMIUM SELECT^® label. We now market a substantial portion of this fruit under the DOLE TROPICAL GOLD^® label. The sweet yellow pineapple sells for a higher price than the Champaka, which

translates into a higher margin for our customers and us. The Champaka pineapple, which traditionally had been the most widely available type of pineapple, is primarily sold to the foodservice sector and is also used in our packaged products. Our sweet yellow pineapple has had excellent market acceptance. Unit volume grew by 12% in 2006 as compared with 2005. Our primary competitor in fresh pineapples is Fresh Del Monte Produce Inc. Pineapples accounted for approximately 9% of our fresh fruit business segment’s revenues in 2006.

 

Dole Chile

 

We began our Chilean operations in 1982 and have grown to become the largest exporter of Chilean fruit. We export grapes, apples, pears, stone fruit (e.g., peaches and plums) and kiwifruit from approximately 3,800 Company owned or Company leased acres and 13,000 contracted acres. The weather and geographic features of Chile are similar to those of the Western United States, with opposite seasons. Accordingly, Chile’s harvest is counter-seasonal to that in the northern hemisphere, offsetting the seasonality in our other fresh fruit. We primarily export Chilean fruit to North America, Latin America and Europe. Our Dole Chile business division accounted for approximately 7% of our fresh fruit business segment’s revenues in 2006.

 

Fresh Vegetables

 

Our fresh vegetables business segment operates through two divisions: commodity and value-added. We source our fresh vegetables from company-owned and contracted farms. To satisfy the increasing demand for our products, we have continued to expand production and distribution capabilities of our fresh vegetables segment. Our Yuma, Arizona production facility transitioned from a five-month seasonal operation to a year-round production operation in the fall of 2002 to accommodate growth in this segment. We began construction of a fourth salad plant in Bessemer City, North Carolina, in November 2005 and the plant became operational in January 2007. The North Carolina plant will service east coast markets. Under our arrangements with independent growers, we purchase fresh produce at the time of harvest and are generally responsible for harvesting, packing and shipping the product to our central cooling and distribution facilities. We have continued to focus on our value-added products, which now account for more than 50% of revenues for this segment. The fresh vegetables business segment accounted for approximately 18% of 2006 consolidated total revenues.

 

Commodity Vegetables

 

We source, harvest, cool, distribute and market more than 20 different types of fresh vegetables, including iceberg lettuce, red and green leaf lettuce, romaine lettuce, butter lettuce, celery, cauliflower, broccoli, carrots, brussels sprouts, green onions, asparagus, snow peas and artichokes. We sell our commodity vegetable products primarily in North America, Asia and, to a lesser extent, Western Europe. In North America, we are the number one provider of iceberg lettuce, celery and cauliflower. Our primary competitors in this category include: Tanimura & Antle, Duda, Salyer American and Ocean Mist. In October 2004, we acquired Coastal Berry Company, LLC, subsequently renamed as Dole Berry Company, LLC, as a result of which, Dole became the third largest producer of strawberries in North America.

 

Value-Added

 

Our value-added vegetable products include ready-to-eat salads, broccoli florets and cauliflower florets. Our unit market share of the ready-to-eat salads category reported by Information Resources, Inc. (“IRI”) was approximately 34.7% for the 12-week period ended December 30, 2006. Our value-added products typically have more stable margins than commodity vegetables, thereby helping to reduce our exposure to commodity price fluctuations. New product development continues to be a key driver in the growth of this segment. Our primary competitors in this segment include Fresh Express, owned by Chiquita Brands International, Inc., Ready Pac and Taylor Farms.

 

Packaged Foods

 

Our packaged foods segment produces canned pineapple, canned pineapple juice, fruit juice concentrate, fruit in plastic cups, jars and pouches and fruit parfaits. Most of our significant packaged food products hold the number 1

branded market position in North America. We remain the market leader in the plastic fruit cup category with six of the top ten items in category. Fruit for our packaged food products is sourced primarily in the Philippines, Thailand, the United States and China and packed primarily in four Asian canneries, two in Thailand and two in the Philippines. We have continued to focus on expanding our product range beyond our traditional canned fruit and juice products. Non-canned products accounted for approximately 55% of the segment’s revenues.

 

Our FRUIT BOWLS products were introduced in 1998 and continue to exceed our volume and share expectations. The trend towards convenience and healthy snacking has been responsible for the explosive growth in the plastic fruit cup category. The plastic fruit cup category is now larger than the applesauce cup and shelf-stable gelatin cup categories. In an effort to keep up with this demand, we have made significant investments in our Asian canneries. We have significantly increased our FRUIT BOWLS capacity in the past four years. These investments should ensure our position as an industry innovator and low cost producer. We are now producing more plastic cups than traditional cans. Our FRUIT BOWLS products had a 51% market share in the United States during 2006 as reported by IRI. In 2003, Dole introduced fruit in a 24.5 oz. plastic jar. This growing business achieved a 45% market share in the United States during 2006 as reported by IRI.

 

In June 2004, Dole acquired Wood Holdings, Inc. and its operating company, J.R. Wood, Inc. (subsequently renamed Dole Packaged Frozen Foods, Inc.), a frozen fruit producer and manufacturer, in order to further leverage the DOLE brand and strengthen our existing product portfolio. We began shipping DOLE branded frozen fruit products in February of 2005, and it is now the number one branded frozen fruit product in the United States. Effective as of January 1, 2006, Dole Packaged Frozen Foods, Inc. was converted to a limited liability company, the assets and liabilities of the Dole Packaged Foods division were contributed to Dole Packaged Frozen Foods, Inc., and the combined entity was renamed Dole Packaged Foods, LLC.

 

With a broader line of convenience-oriented products, we are gaining expanded distribution in non-grocery channels. These channels are growing faster than the grocery channel and the cost of gaining new distribution in them is lower. We have gained significant new distribution in these alternative channels, particularly for our fruit cup business.

 

Our packaged foods segment accounted for approximately 15% of 2006 consolidated revenues.

 

Fresh-Cut Flowers

 

We entered the fresh-cut flowers business in 1998 and are one of the largest producers of fresh-cut flowers in Latin America with over 90% of our Latin American flowers shipped into North America. Our products include over 500 varieties of fresh-cut flowers such as roses, carnations and alstroemeria. The fresh-cut flowers business fits our core competencies including expertise in perishable products, strong relationships with and knowledge of the grocery channel, the ability to manage production in the southern hemisphere, and sophisticated logistics capabilities.

 

We are the only flower importer with guaranteed daily deliveries by air. Immediately after harvesting, our flowers are flown to our Miami facility where temperatures are maintained within one-half degree of required levels in all warehouse and production operations. Maintaining the cold chain enables us to deliver the freshest and healthiest flowers to the market.

 

Dole’s focus is on supply chain optimization to provide its customers industry-leading service in the procurement of flowers. Current management emphasis is on increasing customer service, rationalizing operational costs, reducing SKUs and automating processes. Our fresh-cut flowers segment accounted for approximately 3% of 2006 consolidated revenues.

 

Global Logistics

 

We have significant food sourcing and related operations in Cameroon, Chile, China, Colombia, Costa Rica, Ecuador, Honduras, Ivory Coast, the Philippines, South Africa, Spain, Thailand and the United States. Significant volumes of Dole’s fresh fruit and packaged products are marketed in Canada, Western Europe, Japan and the United States, with lesser volumes marketed in Australia, China, Hong Kong, New Zealand, South Korea, and other countries in Asia, Europe and Central and South America.

 

The produce that we distribute internationally is transported primarily by 25 owned or leased ocean-going vessels. We ship our tropical fruit in owned or chartered refrigerated vessels. All of our tropical fruit shipments into the North American and core European markets are delivered using pallets or containers. This increases efficiency and minimizes damage to the product from handling. Most of the vessels are equipped with controlled atmosphere technology, which improves product quality. “Backhauling” services, transporting third-party cargo primarily from North America and Europe to Latin America, reduce net transportation costs. We use vessels that are both owned or operated under long-term leases, as well as vessels chartered under contracts that typically last one year. Our fresh-cut flowers are primarily transported via chartered flights.

 

Customers

 

Our top 10 customers in 2006 accounted for approximately 29% of total revenues. No one customer accounted for more than 7% of total 2006 revenues. Our customer base is highly diversified, both geographically and in terms of product mix. Each of our segments’ largest customers accounted for less than 30% of that segment’s revenues. Our largest customers are leading global and regional mass merchandisers and supermarkets in North America, Europe and Asia.

 

Sales and Marketing

 

We sell and distribute our fruit and vegetable products through a network of fresh produce operations in North America, Europe, Asia and Latin America. Some of these operations involve the sourcing, distribution and marketing of fresh fruits and vegetables while others involve only distribution and marketing. We have regional sales organizations to service major retail and wholesale customers. We also use the services of brokers in certain regions, primarily for sales of packaged foods and ready-to-eat salads. Retail customers include large chain stores with which Dole enters into product and service contracts, typically for a one or two-year term. Wholesale customers include large distributors in North America, Europe and Asia. We use consumer advertising and promotion support, together with trade spending, to support awareness of new items to maintain and grow our exceptional brand awareness, as well as to increase nutrition and health awareness.

 

Competition

 

The global fresh and packaged produce markets are intensely competitive, and generally have a small number of global producers, filled out with independent growers, packers and middlemen. Our large, international competitors are Chiquita, Fresh Del Monte Produce and Del Monte Foods. In some product lines, we compete with smaller national producers. In fresh vegetables, a limited number of grower shippers in the United States and Mexico supply a significant portion of the United States market, with numerous smaller independent distributors also competing. We also face competition from grower cooperatives and foreign government sponsored producers. Competition in the various markets in which we operate is based on reliability of supply, product quality, brand recognition and perception, price and the ability to satisfy changing customer preferences through innovative product offerings.

 

Employees

 

During fiscal year 2006, we had on average approximately 47,000 full-time permanent employees and 28,000 full-time seasonal or temporary employees, worldwide. Approximately 32% of our employees work under collective bargaining agreements, some of which expire in 2007, subject to automatic renewals unless a notice of non- extension is given by the union or us. We have not received any notice yet that a union intends not to extend a collective bargaining agreement. We believe our relations with our employees are generally good.

 

Research and Development

 

Our research and development programs concentrate on sustaining the productivity of our agricultural lands, food safety, product quality of existing products and the development of new value-added products, as well as

agricultural research and packaging design. Agricultural research is directed toward sustaining and improving product yields and product quality by examining and improving agricultural practices in all phases of production (such as development of specifically adapted plant varieties, land preparation, fertilization, cultural practices, pest and disease control, post-harvesting, handling, packing and shipping procedures), and includes on-site technical services and the implementation and monitoring of recommended agricultural practices. Research efforts are also directed towards integrated pest management and biological pest control. Specialized machinery is developed for various phases of agricultural production and packaging that reduces labor costs, improves productivity and efficiency and increases product quality. Agricultural research is conducted at field facilities primarily in California, Hawaii, Latin America and Asia. We also sponsor research related to environmental improvements and the protection of worker and community health. The aggregate amounts we spent on research and development in each of the last three years have not been material in any of such years.

 

Trademark Licenses

 

DOLE SOFT SERVE, a soft-serve, non-dairy dessert, is manufactured and marketed by Precision Foods, Inc. under license from us. In connection with the sale of the majority of our juice business to Tropicana Products, Inc. in May of 1995, we received cash payments up front and granted to Tropicana a license, requiring no additional future royalty payments, to use certain DOLE trademarks on certain beverage products. We continue to market DOLE canned pineapple juice and pineapple juice blend beverages. We have a number of additional license arrangements worldwide, none of which is material to Dole and its subsidiaries, taken as a whole.

 

Environmental and Regulatory Matters

 

Our agricultural operations are subject to a broad range of evolving environmental laws and regulations in each country in which we operate. In the United States, these laws and regulations include the Food Quality Protection Act of 1996, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Federal Insecticide, Fungicide and Rodenticide Act and the Comprehensive Environmental Response, Compensation and Liability Act.

 

Compliance with these foreign and domestic laws and related regulations is an ongoing process that is not currently expected to have a material effect on our capital expenditures, earnings or competitive position. Environmental concerns are, however, inherent in most major agricultural operations, including those conducted by us, and there can be no assurance that the cost of compliance with environmental laws and regulations will not be material. Moreover, it is possible that future developments, such as increasingly strict environmental laws and enforcement policies thereunder, and further restrictions on the use of agricultural chemicals, could result in increased compliance costs.

 

Our food operations are also subject to regulations enforced by, among others, the U.S. Food and Drug Administration and state, local and foreign equivalents and to inspection by the U.S. Department of Agriculture and other federal, state, local and foreign environmental, health and safety authorities. The U.S. Food and Drug Administration enforces statutory standards regarding the labeling and safety of food products, establishes ingredients and manufacturing procedures for certain foods, establishes standards of identity for foods and determines the safety of food substances in the United States. Similar functions are performed by state, local and foreign governmental entities with respect to food products produced or distributed in their respective jurisdictions.

 

In the United States, portions of our fresh fruit and vegetable farm properties are irrigated by surface water supplied by local government agencies using facilities financed by federal or state agencies, as well as from underground sources. Water received through federal facilities is subject to acreage limitations under the 1982 Reclamation Reform Act. Worldwide, the quantity and quality of water supplies varies depending on weather conditions and government regulations. We believe that under normal conditions these water supplies are adequate for current production needs.

 

Legal Proceedings

 

See Item 3, Legal Proceedings, in this Form 10-K.

 

Trade Issues

 

Our foreign operations are subject to risks of expropriation, civil disturbances, political unrest, increases in taxes and other restrictive governmental policies, such as import quotas. Loss of one or more of our foreign operations could have a material adverse effect on our operating results. We strive to maintain good working relationships in each country where we operate. Because our operations are a significant factor in the economies of certain countries, our activities are subject to intense public and governmental scrutiny and may be affected by changes in the status of the host economies, the makeup of the government or public opinion in a particular country.

 

The European Union (“EU”) maintains banana regulations that impose tariffs on bananas. On January 1, 2006, the EU implemented a new “tariff only” import regime for bananas. The 2001 EC/US Understanding on Bananas required the EU to implement a tariff only banana import system on or before January 1, 2006, and the EU’s banana regime change was therefore expected by that date.

 

Banana imports from Latin America are subject to a tariff of 176 euro per metric ton for entry into the EU market. Under the EU’s previous banana regime, banana imports from Latin America were subject to a tariff of 75 euro per metric ton and were also subject to import license requirements and volume quotas. License requirements and volume quotas had the effect of limiting access to the EU banana market.

 

Although all Latin bananas are subject to a tariff of 176 euro per metric ton, up to 775,000 metric tons of bananas from African, Caribbean, and Pacific (“ACP”) countries may be imported to the EU duty-free. This preferential treatment of a zero tariff on up to 775,000 tons of ACP banana imports, as well as the 176 euro per metric ton tariff applied to Latin banana imports, has been challenged by Panama, Honduras, Nicaragua, and Colombia in consultation proceedings at the World Trade Organization (“WTO”). In addition, on March 8, 2007 and on March  20, 2007, Ecuador formally requested the WTO Dispute Settlement Body (“DSB”) to appoint a panel to review the matter. The EU blocked Ecuador’s initial request for establishment of a panel on March 8; however, the EU was unable to block Ecuador’s second request under WTO rules. On March 20, 2007, the DSB announced that it will establish a panel to rule on Ecuador’s complaint. The current tariff applied to Latin banana imports may be lowered and the ACP preference of a zero tariff may be affected depending on the outcome of these WTO proceedings, but the WTO proceedings are only in their initial stages and may take several years to conclude. The Company encourages efforts to lower the tariff through negotiations with the EU and is working actively to help achieve this result.

 

Exports of our products to certain countries or regions are subject to various restrictions that may be increased or reduced in response to international economic, currency and political factors, thus affecting our ability to compete in these markets.

 

We distribute our products in more than 90 countries throughout the world. Our international sales are usually transacted in U.S. dollars and major European and Asian currencies, while certain costs are incurred in currencies different from those that are received from the sale of products. Results of operations may be affected by fluctuations in currency exchange rates in both the sourcing and selling locations.

 

Seasonality

 

Our sales volumes remain relatively stable throughout the year. We experience seasonal earnings characteristics, predominantly in the fresh fruit segment, because fresh fruit prices traditionally are lower in the second half of the year, when summer fruits are in the markets, than in the first half of the year. Our fresh vegetables segment experiences some seasonality as reflected by higher earnings in the first half of the year. Our packaged foods and fresh-cut flowers segments experience peak demand during certain well-known holidays and observances; the impact is less than in the fresh fruit segment.

 

RISK FACTORS

 

In addition to the risk factors described elsewhere in this Form 10-K, you should consider the following risk factors. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known or that we currently believe to be less significant may also adversely affect us.

 

Adverse weather conditions and crop disease can impose costs on our business.

 

Fresh produce, including produce used in canning and other packaged food operations, is vulnerable to adverse weather conditions, including windstorms, floods, drought and temperature extremes, which are quite common but difficult to predict. Unfavorable growing conditions can reduce both crop size and crop quality. In extreme cases, entire harvests may be lost in some geographic areas. These factors can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.

 

Fresh produce is also vulnerable to crop disease and to pests, which may vary in severity and effect, depending on the stage of production at the time of infection or infestation, the type of treatment applied and climatic conditions. For example, black sigatoka is a fungal disease that affects banana cultivation in most areas where they are grown commercially. The costs to control this disease and other infestations vary depending on the severity of the damage and the extent of the plantings affected. These infestations can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.

 

Our business is highly competitive and we cannot assure you that we will maintain our current market share.

 

Many companies compete in our different businesses. However, only a few well-established companies operate on both a national and a regional basis with one or several branded product lines. We face strong competition from these and other companies in all our product lines.

 

Important factors with respect to our competitors include the following:

 

 

There can be no assurance that we will continue to compete effectively with our present and future competitors, and our ability to compete could be materially adversely affected by our leveraged position. See “Business — Competition.”

 

Our earnings are sensitive to fluctuations in market prices and demand for our products.

 

Excess supplies often cause severe price competition in our industry. Growing conditions in various parts of the world, particularly weather conditions such as windstorms, floods, droughts and freezes, as well as diseases and pests, are primary factors affecting market prices because of their influence on the supply and quality of product.

 

Fresh produce is highly perishable and generally must be brought to market and sold soon after harvest. Some items, such as lettuce, must be sold more quickly, while other items can be held in cold storage for longer periods of time. The selling price received for each type of produce depends on all of these factors, including the availability and quality of the produce item in the market, and the availability and quality of competing types of produce.

 

In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products. However, even if market prices are unfavorable, produce items which are ready to be, or have been, harvested must be brought to market promptly. A decrease in the selling price received for our products due to the factors described above could have a material adverse effect on our business, results of operations and financial condition.

 

Our earnings are subject to seasonal variability.

 

Our earnings may be affected by seasonal factors, including:

 

 

Although banana production tends to be relatively stable throughout the year, banana pricing is seasonal because bananas compete against other fresh fruit that generally comes to market beginning in the summer. As a result, banana prices are typically higher during the first half of the year. Our fresh vegetables segment experiences some seasonality as reflected by higher earnings in the first half of the year. Also, there is a seasonal aspect to our fresh-cut flower business, with peak demand generally around Valentine’s Day and Mother’s Day.

 

Currency exchange fluctuations may impact the results of our operations.

 

We distribute our products in more than 90 countries throughout the world. Our international sales are usually transacted in U.S. dollars, and European and Asian currencies. Our results of operations are affected by fluctuations in currency exchange rates in both sourcing and selling locations. Although we enter into foreign currency exchange forward contracts from time to time to reduce our risk related to currency exchange fluctuation, our results of operations might still be impacted by foreign currency exchange rates, primarily the yen-to-U.S. dollar and euro-to-U.S. dollar exchange rates. For instance, we currently estimate that a 10% strengthening of the U.S. dollar relative to the Japanese yen, euro and Swedish krona would lower operating income by approximately $43 million excluding the impact of foreign currency exchange hedges. Because we do not hedge against all of our foreign currency exposure, our business will continue to be susceptible to foreign currency fluctuations.

 

We face risks related to our former use of the pesticide DBCP.

 

We formerly used dibromochloropropane, or DBCP, a nematocide that was used on a variety of crops throughout the world. The registration for DBCP with the U.S. government was cancelled in 1979 based in part on an apparent link to male sterility among chemical factory workers who produced DBCP. There are a number of pending lawsuits in the United States and other countries against the manufacturers of DBCP and the growers, including us, who used it in the past. The cost to defend or settle these lawsuits, and the costs to pay any judgments or settlements resulting from these lawsuits, or other lawsuits which might be brought, could have a material adverse effect on our business, financial condition or results of operations. See Item 3, Legal Proceedings, in this Form 10-K.

 

Our substantial indebtedness could adversely affect our operations, including our ability to perform our obligations under the notes and our other debt obligations.

 

We have a substantial amount of indebtedness. As of December 30, 2006, we had approximately $1.135 billion in senior secured indebtedness and other structurally senior indebtedness, $1.105 billion in senior unsecured indebtedness, including outstanding senior notes and debentures, and approximately $88.4 million in capital leases.

 

Our substantial indebtedness could have important consequences. For example, it could:

 

 

 

The financing arrangements for the going-private merger transactions may increase our exposure to tax liability.

 

A portion of our senior secured credit facility has been incurred by our foreign subsidiaries and was used to fund the going-private merger transactions. Although we believe, based in part upon the advice of our tax advisors, that our intended tax treatment of such transactions is appropriate, it is possible that the Internal Revenue Service could seek to characterize the going-private merger transactions in a manner that could result in the immediate recognition of taxable income by us. Any such immediate recognition of taxable income would result in a material tax liability, which could have a material adverse effect on our business, results of operations and financial condition.

 

Restrictive covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions, which could adversely affect us.

 

The indentures governing our senior notes due 2009, our senior notes due 2010, our senior notes due 2011, our debentures due 2013 and our senior secured credit facilities contain various restrictive covenants that limit our discretion in operating our business. In particular, these agreements limit our ability to, among other things:

 

 

These covenants could have a material adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities and to fund our operations. Any future debt could also contain financial and other covenants more restrictive than those imposed under the indentures governing our senior notes due 2009, our senior notes due 2010, our senior notes due 2011, our debentures due 2013 and our senior secured credit facilities.

 

A breach of a covenant or other provision in any debt instrument governing our current or future indebtedness could result in a default under that instrument and, due to cross-default and cross-acceleration provisions, could result in a default under our other debt instruments. Upon the occurrence of an event of default under the senior secured credit facility or any other debt instrument, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them, if any, to secure the indebtedness. If the lenders under our current or future indebtedness accelerate the payment of the indebtedness, we cannot assure you that our assets or cash flow would be sufficient to repay in full our outstanding indebtedness.

 

We face other risks in connection with our international operations.

 

Our operations are heavily dependent upon products grown, purchased and sold internationally. In addition, our operations are a significant factor in the economies of many of the countries in which we operate, increasing our visibility and susceptibility to regulatory changes. These activities are subject to risks that are inherent in operating in foreign countries, including the following:

 

 

Banana imports from Latin America are subject to import license requirements and a tariff of 176 euro per metric ton for entry into the EU market. Under the EU’s previous banana regime, banana imports from Latin America were subject to a tariff of 75 euro per metric ton and were also subject to both import license requirements and volume quotas. These license requirements and volume quotas had the effect of limiting access to the EU banana market. The increase in the applicable tariff and the elimination of the volume restrictions applicable to Latin American bananas may increase volatility in the market, which could materially adversely affect our business, results of operations or financial condition. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation — Other Matters.

 

In 2005, the Company received a tax assessment from Honduras of approximately $137 million (including the claimed tax, penalty, and interest through the date of assessment) relating to the disposition of all of the Company’s interest in Cervecería Hondureña, S.A in 2001. The Company has been contesting the tax assessment. See Item 3, Legal Proceedings.

 

Terrorism and the uncertainty of war may have a material adverse effect on our operating results.

 

Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, the subsequent response by the United States in Afghanistan, Iraq and other locations, and other acts of violence or war in the United States or abroad may affect the markets in which we operate and our operations and profitability. From time to time in the past, our operations or personnel have been the targets of terrorist or criminal attacks, and the risk of such attacks impacts our operations and results in increased security costs. Further terrorist attacks against the United States or operators of United States-owned businesses outside the United States may occur, or hostilities could develop based on the current international situation. The potential near-term and long-term effect these attacks may have on our business operations, our customers, the markets for our products, the United States economy and the economies of other places we source or sell our products is uncertain. The consequences of any

terrorist attacks, or any armed conflicts, are unpredictable, and we may not be able to foresee events that could have an adverse effect on our markets or our business.

 

Our worldwide operations and products are highly regulated in the areas of food safety and protection of human health and the environment.

 

Our worldwide operations are subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations, including laws and regulations governing the use and disposal of pesticides and other chemicals. These regulations directly affect day-to-day operations, and violations of these laws and regulations can result in substantial fines or penalties. There can be no assurance that these fines or penalties would not have a material adverse effect on our business, results of operations and financial condition. To maintain compliance with all of the laws and regulations that apply to our operations, we have been and may be required in the future to modify our operations, purchase new equipment or make capital improvements. Actions by regulators may require operational modifications or capital improvements at various locations. Further, we may recall a product (voluntarily or otherwise) if we or the regulators believe it presents a potential risk. In addition, we have been and in the future may become subject to private lawsuits alleging that our operations caused personal injury or property damage.

 

We are subject to the risk of product liability claims.

 

The sale of food products for human consumption involves the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling or transportation phases. We have from time to time been involved in product liability lawsuits, none of which were material to our business. While we are subject to governmental inspection and regulations and believe our facilities comply in all material respects with all applicable laws and regulations, we cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. We maintain product liability insurance in an amount that we believe is adequate. However, we cannot be sure that we will not incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage.

 

We are subject to transportation risks.

 

An extended interruption in our ability to ship our products could have a material adverse effect on our business, financial condition and results of operations. Similarly, any extended disruption in the distribution of our products could have a material adverse effect on our business, financial condition and results of operations. While we believe we are adequately insured and would attempt to transport our products by alternative means if we were to experience an interruption due to strike, natural disaster or otherwise, we cannot be sure that we would be able to do so or be successful in doing so in a timely and cost-effective manner.

 

The use of herbicides and other hazardous substances in our operations may lead to environmental damage and result in increased costs to us.

 

We use herbicides and other hazardous substances in the operation of our business. We may have to pay for the costs or damages associated with the improper application, accidental release or the use or misuse of such substances. Our insurance may not be adequate to cover such costs or damages or may not continue to be available at a price or under terms that are satisfactory to us. In such cases, payment of such costs or damages could have a material adverse effect on our business, results of operations and financial condition.

 

Events or rumors relating to the DOLE brand could significantly impact our business.

 

Consumer and institutional recognition of the DOLE trademarks and related brands and the association of these brands with high quality and safe food products are an integral part of our business. The occurrence of any events or rumors that cause consumers and/or institutions to no longer associate these brands with high quality and safe food products may materially adversely affect the value of the DOLE brand name and demand for our products. We have licensed the DOLE brand name to several affiliated and unaffiliated companies for use in the United States and abroad. Acts or omissions by these companies over which we have no control may also have such adverse effects.

 

A portion of our workforce is unionized and labor disruptions could decrease our profitability.

 

As of December 30, 2006, approximately 32% of our employees worked under various collective bargaining agreements. Some of our collective bargaining agreements will expire in fiscal 2007, although each agreement is subject to automatic renewal unless we or the union party to the agreement provides notice otherwise. Our other collective bargaining agreements will expire in later years. While we believe that our relations with our employees are good, we cannot assure you that we will be able to negotiate these or other collective bargaining agreements on the same or more favorable terms as the current agreements, or at all, and without production interruptions, including labor stoppages. A prolonged labor dispute, which could include a work stoppage, could have a material adverse effect on the portion of our business affected by the dispute, which could impact our business, results of operations and financial condition.

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)

 

Some of the information included in this Form 10-K and other materials filed or to be filed by us with the Commission contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include the words “may,” “will,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or other words or expressions of similar meaning. We have based these forward-looking statements on our current expectations about future events. The forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations, anticipations and intentions with respect to our financial condition, results of operations, future performance and business, including statements relating to our business strategy and our current and future development plans.

 

The potential risks and uncertainties that could cause our actual financial condition, results of operations and future performance to differ materially from those expressed or implied in this Form 10-K include those set forth under the heading “Risk Factors” in Item 1A.

 

We urge you to review carefully this Form 10-K, particularly the section “Risk Factors,” for a more complete discussion of the risks to our business.

 

From time to time, oral or written forward-looking statements are also included in our reports on Forms 10-K, 10-Q and 8-K, press releases and other materials released to the public. Although we believe that at the time made, the expectations reflected in all of these forward-looking statements are and will be reasonable, any or all of the forward-looking statements in this Form 10-K, our reports on Forms 10-K, 10-Q and 8-K and any other public statements that are made by us may prove to be incorrect. This may occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this Form 10-K, certain of which are beyond our control, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Form 10-K, or other public communications that we might make, as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements.

 

None.

 

We own our executive office facility in Westlake Village, California. We also maintain a divisional office in Miami, Florida, which is owned by us. We also maintain a divisional office in Monterey, California, which is leased from an affiliate. We own offices in San Jose, Costa Rica, Bogota and Santa Marta, Colombia and La Ceiba, Honduras. We also maintain offices in Chile, Costa Rica and Ecuador, which are leased from third parties. We maintain our European headquarters in Paris, France and regional offices in Antwerp, Belgium, Athens, Greece, Hamburg, Germany, Milan, Italy, Stockholm, Sweden and Cape Town, South Africa, which are leased from third parties. We own our offices in Madrid, Spain, Rungis, France, Lübeck, Germany and Dartford, England.. We maintain offices in Japan, China, the Philippines, Thailand, Hong Kong and South Korea, which are leased from third parties. The inability to renew any of the above office leases by us would not have a material adverse effect on our operating results. We believe that our property and equipment are generally well maintained, in good operating condition and adequate for our present needs.

 

The following is a description of our significant properties.

 

North America

 

Our Hawaii pineapple operations for the fresh produce market are located on the island of Oahu and total approximately 2,700 acres, which we own. In addition, we farm coffee and cacao on 195 acres of owned land on the island of Oahu.

 

We own approximately 1,400 acres of farmland in California, and lease approximately 12,900 acres of farmland in California and another 4,300 acres in Arizona in connection with our vegetable and berry operations. The majority of this acreage is farmed under joint growing arrangements with independent growers, while we farm the remainder. We own cooling, packing and shipping facilities in Yuma, Arizona and the following California cities: Marina, Gonzales and Huron. Additionally, we have partnership interests in facilities in Yuma, Arizona and Salinas, California, and leases in facilities in the following California cities: Coachella, Oceanside, Oxnard and Watsonville. We own and operate state-of-the-art, ready-to-eat salad and vegetable plants in Yuma, Arizona, Soledad, California, Springfield, Ohio and Bessemer City, North Carolina.

 

We produce almonds from approximately 300 acres, pistachios from approximately 2,000 acres, olives from approximately 900 acres and citrus from approximately 2,800 acres on orchards in the San Joaquin Valley through agricultural partnerships in which we have a controlling interest. We produce grapes on approximately 570 acres of owned property in the San Joaquin Valley.

 

Our Florida based fresh-cut flowers distribution operates from a 328,000 square foot building completed in 2001, which we own. Approximately 200,000 square feet of this facility is refrigerated. Our fresh-cut flowers business also operates another cooling and distribution facility in the Miami area, which we own. We also operate a leased facility in Los Angeles, California.

 

We own approximately 2,700 acres of peach orchards in California, which we farm. We own and operate a plant in Atwater, California that produces individually quick frozen fruit.

 

Latin America

 

We produce bananas directly from owned plantations in Costa Rica, Colombia, Ecuador and Honduras as well as through associated producers or independent growing arrangements in those countries and others, including Guatemala. We own approximately 3,500 acres in Colombia, 34,500 acres in Costa Rica, 3,800 acres in Ecuador and 12,000 acres in Honduras, all related to banana production, although some of the acreage is not presently under production.

 

We own approximately 6,600 acres of land in Honduras, 7,300 acres of land in Costa Rica and 3,000 acres of land in Ecuador, all related to pineapple production, although some of the acreage is not presently under production.

Pineapple is grown primarily for the fresh produce market. We own a juice concentrate plant in Honduras for pineapple and citrus. Coconuts are produced on approximately 800 acres of owned or leased land in Honduras.

 

We grow grapes, stone fruit, kiwi and pears on approximately 3,800 acres owned or leased by us in Chile. We own or operate 11 packing and cold storage facilities, a corrugated box plant and a wooden box plant in Chile. We also operate a fresh-cut salad plant and a small local fruit distribution company in Chile.

 

We also own and operate corrugated box plants in Colombia, Costa Rica, Ecuador and Honduras.

 

We operate an Ecuadorian port (Bananapuerto). We indirectly own 35% of Bananapuerto and operate the port pursuant to a port services agreement, the term of which is up to 30 years.

 

Dole Latin America operates a fleet of seven refrigerated container ships, of which four are owned, two are under long-term capital leases and one is long-term chartered. In addition, Dole Latin America operates a fleet of 18 breakbulk refrigerated ships, of which nine are owned, eight are long-term chartered and one is chartered for one year. We also cover part of our requirements under contracts with existing liner services and occasionally charter vessels for short periods on a time or voyage basis as and when required. We own or lease approximately 13,300 refrigerated containers, 2,400 dry containers, 5,500 chassis and 4,000 generator sets.

 

We produce flowers on approximately 1,100 acres in Colombia. We own and operate packing and cooling facilities at each of our flower farms and lease a facility in Bogota, Colombia for bouquet construction.

 

Asia

 

We operate a pineapple plantation of approximately 34,000 leased acres in the Philippines. Approximately 19,000 acres of the plantation are leased to us by a cooperative of our employees that acquired the land pursuant to agrarian reform law. The remaining 15,000 acres are leased from individual land owners. Two multi-fruit canneries, blast freezer, cold storage, juice concentrate plant, a box forming plant, a can and drum manufacturing plant, warehouses, wharf and a fresh fruit packing plant, each owned by us, are located at or near the pineapple plantation.

 

We own and operate a tropical fruit cannery and multi fruit processing factory in central Thailand and a second tropical fruit cannery in southern Thailand. Dole also grows pineapple in Thailand on approximately 3,800 acres of leased land, not all of which are currently under cultivation.

 

We produce bananas and asparagus from leased lands in the Philippines and also source these products through associated producers or independent growing arrangements in the Philippines. A plastic extruding plant and a box forming plant, both owned by us, are located near the banana plantations. We also operate banana ripening and distribution centers in Hong Kong, South Korea, Taiwan, The People’s Republic of China and the Philippines.

 

Additionally, we source products from over 1,200 Japanese farmers through independent growing arrangements.

 

Europe

 

We operate eight banana ripening, produce and flower distribution centers in Sweden, nine in France, six in Spain, one in Portugal, four in Italy, one in Belgium, one in Austria and four in Germany; with the exception of two owned facilities in Sweden, three owned facilities in France, two owned facilities in Spain, two owned facilities in Germany and one owned facility in Italy, these facilities are leased. We have a minority interest in a French company that owns a majority interest in banana and pineapple plantations in Cameroon, Ghana and the Ivory Coast. We are the majority owner in a company operating a port terminal and distribution facility in Livorno, Italy. We own a banana ripening and fruit distribution facility near Istanbul, Turkey.

 

We wholly-own Saba Fresh Cuts AB, which owns and operates a state-of-the-art, ready-to-eat salad and vegetable plant in Helsingborg, Sweden. During 2006, we acquired the remaining 65% ownership in JP Fruit Distributors Limited (renamed JP Fresh Limited). JP Fresh owns two banana ripening and fruit distribution facilities located in Kent and Somerset, England, and leases a distribution center in Lancashire, England.

 

The Company is involved from time to time in claims and legal actions incidental to its operations, both as plaintiff and defendant. The Company has established what management currently believes to be adequate reserves for pending legal matters. These reserves are established as part of an ongoing worldwide assessment of claims and legal actions that takes into consideration such items as changes in the pending case load (including resolved and new matters), opinions of legal counsel, individual developments in court proceedings, changes in the law, changes in business focus, changes in the litigation environment, changes in opponent strategy and tactics, new developments as a result of ongoing discovery, and past experience in defending and settling similar claims. In the opinion of management, after consultation with outside counsel, the claims or actions to which the Company is a party are not expected to have a material adverse effect, individually or in the aggregate, on the Company’s financial condition or results of operations.

 

A significant portion of the Company’s legal exposure relates to lawsuits pending in the United States and in several foreign countries, alleging injury as a result of exposure to the agricultural chemical DBCP (1,2-dibromo-3-chloropropane). DBCP was manufactured by several chemical companies including Dow and Shell and registered by the U.S. government for use on food crops. The Company and other growers applied DBCP on banana farms in Latin America and the Philippines and on pineapple farms in Hawaii. Specific periods of use varied among the different locations. The Company halted all purchases of DBCP, including for use in foreign countries, when the U.S. EPA cancelled the registration of DBCP for use in the United States in 1979. That cancellation was based in part on a 1977 study by a manufacturer which indicated an apparent link between male sterility and exposure to DBCP among factory workers producing the product, as well as early product testing done by the manufacturers showing testicular effects on animals exposed to DBCP. To date, there is no reliable evidence demonstrating that field application of DBCP led to sterility among farm workers, although that claim is made in the pending lawsuits. Nor is there any reliable scientific evidence that DBCP causes any other injuries in humans, although plaintiffs in the various actions assert claims based on cancer, birth defects and other general illnesses.

 

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

 

In Nicaragua, 187 (up from 178) cases are currently filed in various courts throughout the country, with all but one of the lawsuits brought pursuant to Law 364, an October 2000 Nicaraguan statute that contains substantive and procedural provisions that Nicaragua’s Attorney General formally opined are unconstitutional. In October 2003, the Supreme Court of Nicaragua issued an advisory opinion, not connected with any litigation, that Law 364 is constitutional.

 

Twenty-three cases have resulted in judgments in Nicaragua: $489.4 million (nine cases consolidated with 468 claimants) on December 11, 2002; $82.9 million (one case with 58 claimants) on February 25, 2004; $15.7 million (one case with 20 claimants) on May 25, 2004; $4 million (one case with four claimants) on May 25, 2004; $56.5 million (one case with 72 claimants) on June  14, 2004; $64.8 million (one case with 86 claimants) on June 15, 2004; $27.7 million (one case with 39 claimants) on March 17, 2005; $98.5 million (one case with 150 claimants) on August 8, 2005; $46.4 million (one case with 62 claimants) on August 20, 2005; and $809 million (six cases consolidated with 1,248 claimants) on December 1, 2006. The Company has appealed all judgments to the

Nicaragua Courts of Appeal, with the Company’s appeal of the August 8, 2005 $98.5 million judgment currently pending.

 

There are 27 active cases currently pending in civil courts in Managua (15), Chinandega (10) and Puerto Cabezas (2), all of which have been brought under Law 364 except for one of the cases pending in Chinandega. In the 26 active cases under Law 364, except for six cases in Chinandega and five cases in Managua, where the Company has not yet been ordered to answer, the Company has sought to have the cases returned to the United States pursuant to Law 364. A Chinandega court in one case has ordered the plaintiffs to respond to our request. In the other 2 active cases under Law 364 pending there, the Chinandega courts have denied the Company’s requests; and the court in Puerto Cabezas has denied the Company’s request in the two cases there. The Company’s requests in ten of the cases in Managua are still pending; and the Company expects to make similar requests in the remaining five cases at the appropriate time. The Company has appealed the two decisions of the court in Puerto Cabezas and the 2 decisions of the courts in Chinandega.

 

The claimants’ attempted enforcement of the December 11, 2002 judgment for $489.4 million in the United States resulted in a dismissal with prejudice of that action by the United States District Court for the Central District of California on October 20, 2003. The claimants have voluntarily dismissed their appeal of that decision, which was pending before the United States Court of Appeals for the Ninth Circuit. Defendants’ motion for sanctions against Plaintiffs’ counsel is still pending before the Court of Appeals in that case.

 

Claimants have also indicated their intent to seek enforcement of the Nicaraguan judgments in Colombia, Ecuador, Venezuela and other countries in Latin America and elsewhere, including the United States. In Venezuela, the claimants are attempting to enforce five of the Nicaraguan judgments in that country’s Supreme Court: $489.4 million (December 11, 2002); $82.9 million (February 25, 2004); $15.7 million (May 25, 2004); $56.5 million (June 14, 2004); and $64.8 million (June 15, 2004). An action filed to enforce the $27.7 million Nicaraguan judgment (March 17, 2005) in the Colombian Supreme Court was dismissed. In Ecuador, the claimants attempted to enforce the five Nicaraguan judgments issued between February 25, 2004 through June 15, 2004 in the Ecuador Supreme Court. The First, Second and Third Chambers of the Ecuador Supreme Court issued rulings refusing to consider those enforcement actions on the ground that the Supreme Court was not a court of competent jurisdiction for enforcement of a foreign judgment. The plaintiffs subsequently refiled those five enforcement actions in the civil court in Guayaquil, Ecuador. Two of these subsequently filed enforcement actions have been dismissed by the 3rd Civil Court — $15.7 million (May 25, 2004) — and the 12th Civil Court — $56.5 million (June 14, 2004) — in Guayaquil; plaintiffs have sought reconsideration of those dismissals. The remaining three enforcement actions are still pending.

 

The Company believes that none of the Nicaraguan civil trial courts’ judgments will be enforceable against any Dole entity in the U.S. or in any other country, because Nicaragua’s Law 364 is unconstitutional and violates international principles of due process. Among other things, Law 364 is an improper “special law” directed at particular parties; it requires defendants to pay large, non-refundable deposits in order to even participate in the litigation; it provides a severely truncated procedural process; it establishes an irrebuttable presumption of causation that is contrary to the evidence and scientific data; and it sets unreasonable minimum damages that must be awarded in every case.

 

On October 23, 2006, Dole announced that Standard Fruit de Honduras, S.A. reached an agreement with the Government of Honduras and representatives of Honduran banana workers. This agreement establishes a Worker Program that is intended by the parties to resolve in a fair and equitable manner the claims of male banana workers alleging sterility as a result of exposure to the agricultural chemical DBCP. The Honduran Worker Program will not have a material effect on Dole’s financial condition or results of operations. The official start of the Honduran Worker Program was announced on January 8, 2007.

 

As to all the DBCP matters, the Company has denied liability and asserted substantial defenses. While Dole believes there is no reliable scientific basis for alleged injuries from the agricultural field application of DBCP, Dole continues to seek reasonable resolution of other pending litigation and claims in the U.S. and Latin America. For example, as in Honduras, Dole is committed to finding a prompt resolution to the DBCP claims in Nicaragua, and is prepared to pursue a structured worker program in Nicaragua with science-based criteria. Although no assurance can be given concerning the outcome of these cases, in the opinion of management, after consultation with legal

counsel and based on past experience defending and settling DBCP claims, the pending lawsuits are not expected to have a material adverse effect on the Company’s financial condition or results of operations.

 

European Union Antitrust Inquiry and U.S. Class Action Lawsuits:  The European Commission (“EC”) is investigating alleged violations of European Union competition (antitrust) laws by banana and pineapple importers and distributors operating within the European Economic Area. On June 2 and 3, 2005, the EC conducted a search of certain of the Company’s offices in Europe. During this same period, the EC also conducted similar unannounced searches of other companies’ offices located in the European Union. The Company is cooperating with the EC and has responded to the EC’s information requests. Although no assurances can be given concerning the course or outcome of that EC investigation, the Company believes that it has not violated the European Union competition laws.

 

Following the public announcement of the EC searches, a number of class action lawsuits were filed against the Company and three competitors in the U.S. District Court for the Southern District of Florida. The lawsuits were filed on behalf of entities that directly or indirectly purchased bananas from the defendants and have now been consolidated into two separate class action lawsuits: one by direct purchasers (customers); and another by indirect purchasers (those who purchased bananas from customers). Both consolidated class action lawsuits allege that the defendants conspired to artificially raise or maintain prices and control or restrict output of bananas. The Company believes these lawsuits are without merit.

 

Honduran Tax Case:  In 2005, the Company received a tax assessment from Honduras of approximately $137 million (including the claimed tax, penalty, and interest through the date of assessment) relating to the disposition of all of the Company’s interest in Cervecería Hondureña, S.A in 2001. The Company believes the assessment is without merit and filed an appeal with the Honduran tax authorities, which was denied. As a result of the denial in the administrative process, in order to negate the tax assessment, on August 5, 2005, the Company proceeded to the next stage of the appellate process by filing a lawsuit against the Honduran government, in the Honduran Administrative Tax Trial Court. The Honduran government is seeking dismissal of the lawsuit and attachment of assets, which the Company is challenging. The Honduran Supreme Court recently affirmed the decision of the Honduran intermediate appellate court that a statutory prerequisite to challenging the tax assessment on the merits is the payment of the tax assessment or the filing of a payment plan with the Honduran courts; Dole is now challenging the constitutionality of the statute requiring such payment or payment plan. No reserve has been provided for this tax assessment.

 

Hurricane Katrina Cases:  Dole is one of a number of parties sued, including the Mississippi State Port Authority as well as other third-party terminal operators, in connection with the August 2005 Hurricane Katrina. The plaintiffs assert that they suffered property damage because of the defendants’ alleged failure to reasonably secure shipping containers at the Gulfport, Mississippi port terminal before Hurricane Katrina hit. Dole believes that it took reasonable precautions and that property damage was due to the unexpected force of Hurricane Katrina, a Category 5 hurricane that was one of the costliest disasters in U.S. history. Dole expects that this Katrina-related litigation will not have a material adverse effect on its financial condition or results of operations.

 

Spinach E. coli Outbreak:  On September 15, 2006, Natural Selection Foods LLC recalled all packaged fresh spinach that Natural Selection Foods produced and packaged with Best-If-Used-By dates from August 17 through October 1, 2006, because of reports of illness due to E. coli O157:H7 following consumption of packaged fresh spinach produced by Natural Selection Foods. These packages were sold under 28 different brand names, one of which was DOLE^®. Natural Selection Foods produced and packaged all spinach items under the DOLE label (with the names “Spinach,” “Baby Spinach” and “Spring Mix”). On September  15, 2006, Dole announced that it supported the voluntary recall issued by Natural Selection Foods. Dole has no ownership or other economic interest in Natural Selection Foods.

 

The U.S. Food and Drug Administration announced on September 29, 2006 that all spinach implicated in the current outbreak has traced back to Natural Selection Foods. The FDA stated that this determination was based on epidemiological and laboratory evidence obtained by multiple states and coordinated by the Centers for Disease Control and Prevention. The trace back investigation has narrowed to four implicated fields on four ranches. FDA and the State of California announced October 12, 2006 that the test results for certain samples collected during the field investigation of the outbreak of E. coli O157:H7 in spinach were positive for E. coli O157:H7. Specifically,

samples of cattle feces on one of the implicated ranches tested positive based on matching genetic fingerprints for the same strain of E. coli O157:H7 found in the infected persons. FDA reports that, as of October 20, 2006, testing of other environmental samples from all four ranches that supplied the implicated lot of contaminated spinach is in progress.

 

To date, 204 cases of illness due to E. coli O157:H7 infection have been reported to the Centers for Disease Control and Prevention (203 in 26 states and one in Canada) including 31 cases involving a type of kidney failure called Hemolytic Uremic Syndrome (HUS), 104 hospitalizations, and three deaths. Dole is aware of 14 lawsuits that have been filed against Natural Selection Foods and Dole, among others. Dole expects that the vast majority of the spinach E. coli O157:H7 claims will be handled outside the formal litigation process. Since Natural Selection Foods, not Dole, produced and packaged the implicated spinach products, Dole has tendered the defense of these and other claims to Natural Selection Foods and its insurance carriers and has sought indemnity from Natural Selection Foods, based on the provisions of the contract between Dole and Natural Selection Foods. Dole expects that the company or companies (and their insurance carriers) that grew the implicated spinach for Natural Selection Foods also will be involved in the resolution of the E. coli O157:H7 claims. Dole expects that the spinach E. coli O157:H7 matter will not have a material adverse effect on Dole’s financial condition or results of operations.

 

There were no matters submitted to a vote of security holders during the fiscal quarter ended December 30, 2006.

 

All 1,000 authorized shares of Dole’s common stock are held by one stockholder, Dole Holding Company, LLC, which itself is a direct, wholly-owned subsidiary of DHM Holding Company, Inc., of which David H. Murdock is the 100% beneficial owner. There are no other Dole equity securities. There is no market for Dole’s equity securities.

 

Additional information required by Item 5 is contained in Note 13 — Shareholders’ Equity, to Dole’s Consolidated Financial Statements in this Form 10-K.

 

 

 

Note: As a result of the going-private merger transaction, the Company’s Consolidated Financial Statements present the results of operations, financial position and cash flows prior to the date of the merger transaction as the “Predecessor.” The merger transaction and the Company’s results of operations, financial position and cash flows thereafter are presented as the Successor.” Predecessor results have not been aggregated with those of the Successor in accordance with accounting principles generally accepted in the U.S. and accordingly the Company’s Consolidated Financial Statements do not show the results of operations or cash flows for the year ended January 3, 2004.

 

Discontinued operations for the periods presented relate to the sale of the Company’s Pacific Coast Truck operations during 2006 and the resolution during 2005 of a contingency related to the 2001 disposition of the Company’s interest in Cerveceria Hondureña, S.A.

 

2006 Overview

 

For the year ended December 30, 2006, Dole Food Company, Inc. and its consolidated subsidiaries (“Dole” or the “Company”) achieved record revenues of $6.2 billion, reflecting growth of 6% compared to the prior year. Higher revenues were reported in the Company’s fresh fruit and packaged foods operating segments. The Company earned operating income of $86 million in 2006, compared to $225 million earned in 2005. A net loss of $89 million was reported for 2006 compared to net income of $44 million in 2005. Cash flows provided by operations were $16 million during 2006, compared to $73 million of cash flows provided by operations in 2005.

 

Revenues were largely driven by strong banana and pineapples sales worldwide and higher volumes and pricing in Dole’s packaged foods business. In addition, sales increased in the European ripening and distribution operations due primarily to the October 2006 acquisition of the remaining 65% ownership in JP Fruit Distributors Limited (renamed JP Fruit) that the Company did not previously own. Operating income decreased as a result of higher costs affecting the European banana operations due to the European Union’s new import tariff-only system for bananas, which became effective in 2006. Operating income was also impacted by lower packaged salad sales in the fresh vegetables business, resulting primarily from the E. Coli related incidents discussed in this document. The Company also incurred restructuring costs in the fresh-cut flowers operations and higher production, shipping and distribution costs in all of its operating segments. Unfavorable foreign currency exchange movements in Dole’s various sourcing locations also impacted operating income.

 

Higher commodity costs, primarily fuel and tinplate, continued to adversely impact operations. Throughout 2006 and 2005, the Company has experienced significant cost increases in many of the commodities it uses in production, including containerboard, tinplate, resin and other agricultural chemicals. In addition, significantly higher average fuel prices resulted in additional shipping and distribution costs. On a year-over-year basis, higher commodity costs impacted operating income by approximately $38 million and $45 million for the years ended December 30, 2006 and December 31, 2005, respectively. In an effort to mitigate the exposure to further commodity cost increases, the Company entered into fuel hedging contracts and renegotiated certain commodity supply contracts.

 

During the third quarter of 2006, the Company initiated a plan to restructure its fresh-cut flowers business in order to implement changes that will create efficiencies, improve performance and better align supply with demand. In connection with this initiative, the Company expects to incur total costs of approximately $29.8 million. For the year ended December 30, 2006, the Company recorded a charge of $29 million which consisted of $6.4 million of restructuring costs and $22.6 million of non-cash impairment charges related to the write-off of certain assets. The Company also currently estimates that an additional $0.8 million of land clearing costs and employee severance, will be incurred and paid by the end of 2007. Refer to Note 5 of the Consolidated Financial Statements for further discussion of this restructuring.

Results of Operations

 

Selected results of operations for the years ended December 30, 2006, December 31, 2005 and January 1, 2005 were as follows:

 

 

Revenues

 

For the year ended December 30, 2006, revenues increased 6% to $6.2 billion from $5.8 billion in the prior year. The most significant revenue drivers were the higher worldwide sales of fresh fruit as well as higher sales of packaged foods products. Higher volumes of bananas and pineapples accounted for approximately $126 million or 37% of the overall revenues increase. The Company’s European ripening and distribution operations also had higher revenues as a result of the October 2006 acquisition of JP Fruit. The acquisition generated revenues of approximately $69 million during the fourth quarter of 2006. Fresh fruit revenues also benefited from higher volumes of deciduous products sold in North America. Higher sales of packaged foods products, primarily for FRUIT BOWLS, canned pineapple and fruit parfaits also increased revenues by $84 million. Fresh vegetables sales remained flat as additional sales of commodity vegetables were offset by a decrease in volumes of packaged salads. The Company’s fresh-cut flowers business reported overall lower sales volumes due primarily to the impact of the implementation of the third quarter 2006 restructuring, partially offset by higher sales volumes at Valentine’s Day and overall higher pricing in 2006. Net changes in foreign currency exchange rates versus the U.S. dollar did not have a significant impact on consolidated revenues in 2006.

 

For the year ended December 31, 2005, revenues increased 10% to $5.8 billion from $5.3 billion in the prior year. The most significant revenue drivers were the acquisitions of Dole Berry Company during the fourth quarter of 2004 and Dole Packaged Frozen Foods during the second quarter of 2004. These acquisitions increased 2005 revenues by approximately $130 million and $76 million, respectively, over revenues reported in 2004. Revenues also benefited from higher worldwide sales of fresh fruit, primarily for bananas and pineapples. Sales of fresh fruit also increased due to higher sales in the Company’s European ripening and distribution operations. In addition, revenues benefited from higher sales of packaged salads and packaged foods products, primarily for FRUIT BOWLS, canned pineapple and fruit in plastic jars. These increases were partially offset by lower deciduous sales in North America and Asia and lower citrus sales in Asia. Net changes in foreign currency exchange rates versus the U.S. dollar did not have a significant impact on consolidated revenues in 2005.

 

Operating Income

 

For the year ended December 30, 2006, operating income was $85.6 million compared with $224.6 million in 2005. The decrease was primarily attributable to lower operating results from the Company’s European banana operations, fresh-cut flowers and packaged salads businesses. These decreases were partially offset by higher worldwide pineapple earnings, higher sales volumes and pricing in the packaged foods business and higher pricing in the North America commodity vegetables operations. The European banana operations were impacted by higher purchased fruit costs and distribution costs, due mainly to the European Union’s (“EU”) new import tariff-only

system, which became effective January 1, 2006. The Company’s fresh-cut flowers business incurred $29 million of charges associated with the closing of its operations in Ecuador, the closing and downsizing of farms in Colombia, and the impairment of long-lived assets, trade names and inventory. In addition, all of the Company’s reporting segments were impacted by higher product, distribution and shipping costs, due to higher commodity costs. Unfavorable foreign currency exchange movements also impacted operating results. If foreign currency exchange rates in the Company’s significant foreign operations during 2006 had remained unchanged from those experienced in 2005, the Company estimates that its operating income would have been higher by approximately $28 million. The $28 million is primarily related to exchange rate movements in the Company’s sourcing locations. Operating income in 2006 included realized foreign currency transaction gains of $4 million.

 

For the year ended December 31, 2005, operating income was $224.6 million compared with $316.7 million in 2004. The decrease was primarily due to higher production costs, higher shipping and distribution costs and an increase in selling and marketing expenses. Higher production costs were driven by significantly higher commodity costs, particularly for fuel and containerboard. These factors were partially offset by higher European banana earnings and higher sales volumes and pricing in the packaged foods business. Operating income in 2005 also increased due to an employee-related restructuring charge of $8.8 million in Ecuador recorded in 2004. In addition, unfavorable foreign currency exchange movements contributed to lower operating results. If foreign currency exchange rates in the Company’s significant foreign operations during 2005 remained unchanged from those experienced in 2004, the Company estimates that its operating income would have been higher by approximately $15 million. The $15 million is primarily related to exchange rate movements in the Company’s sourcing locations. Operating income in 2005 included realized foreign currency transaction losses of $4 million, partially offset by the impact of hedges of $2 million, and $5 million related to foreign currency hedging incentives from the Colombian government.

 

Interest Income and Other Income (Expense), Net

 

For the year ended December 30, 2006, interest income increased to $7.2 million from $6 million in 2005. The increase was primarily due to interest income earned during the second quarter of 2006 related to the timing of the borrowings and repayment of the senior secured credit facilities in connection with the April 2006 debt refinancing.

 

Other income (expense), net improved to income of $15.2 million in 2006 from expense of $5.4 million in 2005. The improvement was due to a decrease in debt-related expenses of $35.7 million when comparing the April 2006 debt refinancing to the April 2005 refinancing and bond tender transactions. In addition, the Company recorded a gain of $24.8 million on its cross currency swap and $6.5 million on the settlement of its interest rate swap in April 2006. These increases were partially offset by lower unrealized foreign currency exchange gains in 2006 versus 2005. In 2006, the Company recorded $1.5 million of foreign currency exchange gains due to the repayment of the Japanese yen denominated term loan (“Yen loan”) compared to $27.1 million of gains in the prior year. In addition, the Company’s British pound sterling capital lease vessel obligation (“vessel obligation”) generated foreign currency exchange losses of $10.6 million in 2006 compared to foreign currency exchange gains of $9.5 million in 2005.

 

For the year ended December 31, 2005, interest income increased to $6 million from $4.2 million in 2004. Higher interest income was primarily generated from interest earned on an account receivable balance settled in 2005. Higher interest rates associated with outstanding growers loans also contributed to the increase.

 

Other income (expense), net improved to an expense of $5.4 million in 2005 from an expense of $8.7 million in 2004. The improvement was primarily due to the change in unrealized foreign currency exchange gains of $43.5 million. In 2005, the Company’s Yen loan and vessel obligation generated foreign currency exchange gains of $27.1 million and $9.5 million, respectively, compared to a foreign currency exchange loss on the vessel obligation of $6.9 million in 2004. These improvements were partially offset by $41.1 million of additional expenses related to the early extinguishment of debt.

 

Interest Expense

 

Interest expense for the year ended December 30, 2006 was $174.7 million compared to $142.5 million in 2005. The increase was primarily related to higher levels of borrowings and higher effective market-based borrowing rates on the Company’s debt facilities.

 

Interest expense for the year ended December 31, 2005 was $142.5 million compared to $152.5 million in 2004. The decrease was primarily related to lower overall effective borrowing rates that resulted from the Company’s refinancing and bond tender transactions during the second quarter of 2005.

 

Income Taxes

 

The Company recorded $20 million of income tax expense on $66.7 million of pretax losses from continuing operations for the year ended December 30, 2006, reflecting a (30%) effective income tax rate for the year. Income tax expense increased $13.4 million from $6.6 million in 2005, after excluding the impact of the repatriation of certain foreign earnings of $37.8 million during 2005. The change in the effective income tax rate in 2006 from the 2005 rate of 8% is principally due to non-U.S. taxable earnings from operations decreasing by a larger relative percentage than the associated taxes, including the impact of the accrual for certain tax-related contingencies, required to be provided on such earnings. For 2006, the Company’s income tax provision differs from the U.S. federal statutory rate applied to the Company’s pretax losses due to operations in foreign jurisdictions that are taxed at a rate lower than the U.S. federal statutory rate offset by the accrual for certain tax-related contingencies.

 

Income tax expense for the year ended December 31, 2005 increased to $44.4 million from $25.5 million in 2004. Excluding the impact of the repatriation of foreign earnings under Section 965 of the Internal Revenue Code of $37.8 million, income tax expense for the year ended December 31, 2005 was $6.6 million, which reflects the Company’s effective tax rate of 8% for the 2005 fiscal year. The reduction in the effective income tax rate in 2005 of 8% from the 2004 rate of 16% is primarily due to a change in the mix of taxable earnings, resulting in part from lower domestic earnings. For the years ended 2005 and 2004, the effective income tax rate differs from the U.S. federal statutory rate primarily due to earnings from operations being taxed in foreign jurisdictions at lower net effective rates than the U.S. rate.

 

During October 2004, the American Jobs Creation Act of 2004 was signed into law, adding Section 965 to the Internal Revenue Code. Section 965 provides a special one-time deduction of 85% of certain foreign earnings that are repatriated under a domestic reinvestment plan, as defined therein. The effective federal tax rate on any qualified foreign earnings repatriated under Section 965 equals 5.25%. Taxpayers could elect to apply this provision to a qualified earnings repatriation made during calendar year 2005. During the second quarter of 2005, the Company repatriated $570 million of earnings from its foreign subsidiaries, of which approximately $489 million qualified for the 85% dividends received deduction under Section 965. A tax provision of approximately $37.8 million for the repatriation of certain foreign earnings has been recorded as income taxes for the year ended December 31, 2005.

 

For 2006, 2005 and 2004, other than the taxes provided on the $570 million of repatriated foreign earnings, no U.S. taxes were provided on unremitted foreign earnings from operations because such earnings are intended to be indefinitely invested outside the U.S.

 

Minority Interest and Equity in Earnings of Unconsolidated Subsidiaries

 

Minority interest expense for the year ended December 30, 2006 increased to $5.5 million from $3.2 million in 2005. The increase was primarily related to 2006 seasonal pistachio earnings, which volumes fluctuate every other year, generated by several majority-owned partnerships.

 

Equity in earnings of unconsolidated subsidiaries for the year ended December 30, 2006 decreased to $0.2 million from $6.6 million in 2005. The decrease was primarily related to lower earnings generated by one of the Company’s European investments.

 

Minority interest expense for the year ended December 31, 2005 decreased to $3.2 million from $10.2 million in 2004. The decrease was primarily due to the Company’s purchase of the 40% minority interest in Saba Trading AB (“Saba”) in December 2004.

 

Equity in earnings of unconsolidated subsidiaries for the year ended December 31, 2005 decreased to $6.6 million from $10.3 million in 2004. The decrease was primarily related to the sale of the Company’s investment in a Guatemalan joint venture during 2005.

 

Discontinued Operation

 

During the fourth quarter of 2006, the Company sold all of the assets and substantially all of the liabilities associated with its Pacific Coast Truck operations (“Pac Truck”) for $20.7 million. The Pac Truck business consisted of a full service truck dealership that provided medium and heavy-duty trucks to customers in the Pacific Northwest region. The Company received net proceeds of $15.3 million from the sale after the assumption of $5.4 million of debt, realizing a gain of approximately $2.8 million, net of income taxes of $2 million. The Company’s Consolidated Financial Statements and Notes to Consolidated Financial Statements reflect the Pac Truck business as a discontinued operation.

 

Segment Results of Operations

 

The Company has four reportable operating segments: fresh fruit, fresh vegetables, packaged foods and fresh-cut flowers. These reportable segments are managed separately due to differences in their products, production processes, distribution channels and customer bases.

 

The Company’s management evaluates and monitors segment performance primarily through earnings before interest expense and income taxes (“EBIT”). EBIT is calculated by adding interest expense and income taxes to net income. In 2006 and 2005, EBIT is calculated by subtracting income from discontinued operations, net of income taxes and gain on disposal of discontinued operations, net of income taxes, and adding interest expense and income taxes to net income. Management believes that segment EBIT provides useful information for analyzing the underlying business results as well as allowing investors a means to evaluate the financial results of each segment in relation to the Company as a whole. EBIT is not defined under accounting principles generally accepted in the United States of America (“GAAP”) and should not be considered in isolation or as a substitute for net income measures prepared in accordance with GAAP or as a measure of the Company’s profitability. Additionally, the Company’s computation of EBIT may not be comparable to other similarly titled measures computed by other companies, because not all companies calculate EBIT in the same fashion.

 

In the tables below, revenues from external customers and EBIT only reflect results from continuing operations.

 

 

2006 Compared with 2005

 

Fresh Fruit:  Fresh fruit revenues in 2006 increased 7% to $4 billion from $3.7 billion in 2005. The increase in fresh fruit revenues was primarily driven by higher worldwide sales of bananas and pineapples, higher sales in the European ripening and distribution operations and more Chilean deciduous fruit sold in North America. Higher banana sales resulted from improved volumes worldwide and higher pricing and surcharges for bananas sold in North America. Strong pineapple sales reflected higher sales volumes worldwide. Higher volumes of European bananas was made possible by the EU implementation of a new “tariff only” import fee effective January 1, 2006, which ended volume restrictions on Latin American imported bananas. The increase in sales of European bananas was partially offset by significantly lower pricing of bananas as a result of excess supply brought into the market by non-traditional sellers. European ripening and distribution sales also increased as a result of the October 2006 acquisition of JP Fruit. These factors were partially offset by lower sales volumes as a result of the Company ending a substantial portion of its commercial relationship with a significant customer of Saba Trading AB (“Saba”).

 

Fresh fruit EBIT decreased 47% to $108.3 million in 2006 from $205.2 million in 2005. Lower EBIT in the Company’s banana operations was primarily due to higher costs in Europe related to the new tariff system imposed by the EU and significantly lower local banana pricing in Europe. Additionally, EBIT decreased as a result of higher product costs that impacted worldwide banana operations and deciduous fruit sold in North America. EBIT was also impacted by restructuring costs of $12.8 million incurred by Saba. These factors were offset by higher pineapple EBIT due to increased worldwide volumes and lower advertising expenditures in Asia. If foreign currency exchanges rates, primarily in the Company’s fresh fruit foreign sourcing locations, during 2006 had remained unchanged from those experienced in 2005, the Company estimates that fresh fruit EBIT would have been higher by approximately $18 million. Fresh fruit EBIT in 2006 included $10.6 million of an unrealized foreign currency exchange loss related to the vessel obligation and realized foreign currency transaction gains of $4 million.

 

Fresh Vegetables:  Fresh vegetables revenues of $1.1 billion for 2006 remained relatively unchanged from 2005. Higher pricing in the North America commodity vegetables business for lettuce, berries, celery, green onions, brussels sprouts and artichokes were offset by lower volumes and lower pricing in the packaged salads business.

Sales of packaged salads decreased mainly as a result of the E. coli incident discussed below, which continued to impact consumer demand for the packaged salads category.

 

Fresh vegetables EBIT for 2006 decreased to a loss of $7.3 million from earnings of $11.4 million in 2005. The decrease in EBIT was primarily due to lower sales volumes and higher product, distribution and marketing costs in the packaged salads business. These decreases were partially offset by higher earnings generated in the North America commodity vegetables business due to higher pricing and lower distribution and selling costs.

 

On September 15, 2006, Natural Selection Foods LLC recalled all packaged fresh spinach that Natural Selection Foods produced and packaged with Best-If-Used-By dates from August 17 through October 1, 2006, because of reports of illness due to E. coli O157:H7 following consumption of packaged fresh spinach produced by Natural Selection Foods. These packages were sold under 28 different brand names, one of which was DOLE^®. Natural Selection Foods produced and packaged all spinach items under the DOLE label (with the names “Spinach,” “Baby Spinach” and “Spring Mix”). On September 15, 2006, Dole announced that it supported the voluntary recall issued by Natural Selection Foods. Dole has no ownership or other economic interest in Natural Selection Foods. Since the recall, sales in the packaged salad category have dropped by approximately 10%. This recall itself did not have a significant impact on the Company’s consolidated results of operations for the year ended December 30, 2006. The Company does expect that future sales of packaged salads category products will continue to be impacted as a result of this event.

 

Packaged Foods:  Packaged foods revenues for 2006 increased 10% to $938.3 million from $854.2 million in 2005. The increase in revenues was primarily due to higher pricing and volumes of FRUIT BOWLS, canned solid pineapple and juice, higher volumes of fruit parfaits, fruit in plastic jars and packaged frozen food products sold in North America. Revenues also grew in Europe due to higher sales volumes of concentrate and FRUIT BOWLS. These benefits were partially offset by lower sales in Asia due to lower pricing of canned fruit products in Japan and the disposition of a small distribution company in the Philippines during the fourth quarter.

 

Packaged foods EBIT in 2006 increased 4% to $91.4 million from $87.5 million in 2005. The increase in EBIT was primarily due to higher sales in North America related to FRUIT BOWLS, canned solid pineapple and juice, fruit parfaits, fruit in plastic jars and packaged frozen food products, partially offset by higher product and distribution costs in all markets. If foreign currency exchanges rates, primarily in the Company’s packaged foods sourcing locations, during 2006 had remained unchanged from those experienced in 2005, the Company estimates that packaged foods EBIT would have been higher by approximately $11 million.

 

Fresh-cut Flowers:  Fresh-cut flowers revenues in 2006 decreased 7% to $160.1 million from $171.3 million in 2005. The decrease was primarily due to lower sales volumes during the second half of the year associated with changes in the customer base related to the implementation of the third quarter restructuring plan, partially offset by higher overall pricing and additional sales generated from the Valentine’s Day holiday.

 

EBIT in the fresh-cut flowers segment in 2006 decreased to a loss of $57 million from a loss of $5.1 million in 2005. EBIT decreased primarily due to $29 million of restructuring-related and asset impairment charges, together with higher crop growing costs and higher third-party flower purchases.

 

Corporate:  Corporate EBIT includes general and administrative costs not allocated to the operating segments. Corporate EBIT in 2006 was a loss of $32.7 million compared to a loss of $70.3 million in 2005. The improvement in EBIT was primarily due to a decrease in debt-related expenses of $35.7 million when comparing the April 2006 debt refinancing transaction to the April 2005 refinancing and bond tender transactions. In addition, Corporate EBIT for 2006 included a gain of $24.8 million on its cross currency swap and $6.5 million on the settlement of the interest rate swap in April 2006. These increases to EBIT were partially offset by unrealized foreign currency exchange gains of $25.6 million related to the Yen loan incurred in 2005.

 

2005 Compared with 2004

 

Fresh Fruit:  Fresh fruit revenues increased 5% to $3.7 billion in 2005 from $3.5 billion in 2004. The increase in fresh fruit revenues was primarily due to higher worldwide sales of bananas and pineapples and higher sales in the European ripening and distribution operations. Higher worldwide banana sales resulted from improved volumes in North America and Asia, and higher pricing in Europe and North America. Stronger pineapple sales reflected

improved volumes sold in North America, Europe and Asia and higher local pricing in Asia. These benefits were partially offset by lower sales volume of citrus in Asia and lower sales of deciduous fruit in North America and Asia.

 

Fresh fruit EBIT decreased 20% to $205.2 million in 2005 from $257.9 million in 2004. EBIT decreased primarily as a result of higher product costs that impacted bananas and fresh pineapple operations worldwide and deciduous fruit. EBIT was also impacted by higher fuel costs which increased shipping and distribution costs worldwide and by higher selling, marketing and general and administrative costs. These factors were partially offset by improved banana pricing in Europe and the absence of an $8.8 million restructuring charge in Ecuador recorded during 2004. If foreign currency exchanges rates in the Company’s significant fresh fruit foreign operations during 2005 had remained unchanged from those experienced in 2004, the Company estimates that fresh fruit EBIT would have been higher by approximately $7 million. Fresh fruit EBIT in 2005 included realized foreign currency transaction losses of $6 million and $9 million of unrealized foreign currency exchange gains related to the vessel obligation.

 

Fresh Vegetables:  Fresh vegetables revenues for 2005 increased 22% to $1.1 billion from $887.4 million in 2004. The increase was primarily due to the October 2004 acquisition of Dole Berry Company as well as higher sales volumes in commodity vegetables and packaged salads. Dole Berry Company generated revenues of approximately $131 million in 2005. These benefits were partially offset by lower pricing of commodity vegetables mainly for mixed vegetables, celery, broccoli and lettuce.

 

Fresh vegetables EBIT for 2005 decreased to $11.4 million from $58.6 million in 2004. The decrease in EBIT was primarily related to lower commodity vegetable earnings and lower packaged salad earnings. Commodity vegetable earnings were lower as a result of higher growing costs, higher fuel costs, and higher harvest and packing costs. EBIT was also affected by lower packaged salads earnings as a result of higher product, labor, manufacturing and freight costs. Dole Berry Company’s EBIT was a loss of $2.7 million during 2005.

 

Packaged Foods:  Packaged foods revenues for 2005 increased 23% to $854.2 million from $691.8 million in 2004. The increase in revenues was a result of higher North American sales of FRUIT BOWLS, canned solid pineapple and juice, and fruit in plastic jars due in part to higher pricing. Revenues grew in Asia due to higher sales of concentrate and tropical fruit mix. Revenues also benefited from the June 2004 acquisition of Dole Packaged Frozen Foods, which increased sales by $76 million compared to prior year.

 

Packaged foods EBIT in 2005 increased 36% to $87.5 million from $64.2 million in 2004. The increase in EBIT was primarily due to a more favorable product mix and higher revenues in North America, partially offset by higher shipping and distribution costs and higher selling, general and administrative expenses.

 

Fresh-cut Flowers:  Fresh-cut flowers revenues in 2005 increased to $171.3 million from $169.8 million in 2004. The increase was primarily due to increased sales to the retail market partially offset by decreased sales volumes to the wholesale market.

 

EBIT in the fresh-cut flowers segment in 2005 decreased to a loss of $5.1 million from earnings of $1.9 million in 2004. EBIT decreased primarily as a result of higher product costs due to the weakening of the U.S. dollar against the Colombian peso. If the Colombian peso exchange rate during 2005 had remained unchanged from that experienced in 2004, the Company estimates that its fresh-cut flowers EBIT would have been higher by approximately $9 million. EBIT was also impacted by additional third-party flower purchases and higher shipping costs, partially offset by lower general and administrative expenses. In addition, 2005 EBIT included approximately $5 million of foreign currency exchange hedging incentives offered by the Colombian government. The Colombian government offered these incentives to banana and flower growers in the exporting sector.

 

Corporate:  Corporate EBIT includes general and administrative costs not allocated to the operating segments. Corporate EBIT in both 2005 and 2004 was a loss of $70.3 million. Corporate EBIT for 2005 included $43.8 million of expenses incurred in connection with the early retirement of debt and related refinancing and $27.1 million of unrealized foreign currency exchange gains associated with the Yen loan. EBIT did not change significantly in 2005 compared to 2004, as lower general and administrative costs were offset by the $43.8 million refinancing charge and $27.1 million of unrealized foreign currency exchange gains.

 

Liquidity and Capital Resources

 

CASH REQUIREMENTS:

 

The following tables summarize the Company’s contractual obligations and commitments at December 30, 2006:

 

 

Long-Term Debt:  Details of amounts included in long-term debt can be found in Note 11 of the Consolidated Financial Statements. The table assumes that long-term debt is held to maturity.

 

The variable rate maturities include amounts payable under the Company’s senior secured credit facilities.

 

Capital Lease Obligations:  The Company’s capital lease obligations include $85.6 million related to two vessel leases. The obligations under these leases, which continue through 2024, are denominated in British pound sterling. The lease payment commitments are presented in U.S. dollars at the exchange rate in effect on December 30, 2006 and therefore will change as foreign currency exchange rates fluctuate.

 

Operating Lease Commitments:  The Company has obligations under non-cancelable and cancelable operating leases, primarily for land, as well as for certain equipment and office facilities. The leased assets are used in the Company’s operations where leasing offers advantages of operating flexibility and is less expensive than alternate types of funding. A significant portion of the Company’s operating lease payments are fixed. Lease payments are charged to operations, primarily through cost of products sold. Total rental expense, including rent related to cancelable and non-cancelable leases, was $153 million, $130 million and $101.4 million (net of sublease income of $16.4 million, $15.9 million and $15.1 million) for 2006, 2005 and 2004, respectively.

 

Included in operating lease commitments is a residual value guarantee obligation under an aircraft lease agreement. The Company’s maximum potential undiscounted future payment under this residual value guarantee amounts to approximately $8.2 million. This payment would occur if the fair value of the aircraft is less than $20 million at the termination of the lease in 2010. The Company does not currently anticipate any future payments related to this residual value guarantee.

 

Purchase Obligations:  In order to secure sufficient product to meet demand and to supplement the Company’s own production, the Company enters into non-cancelable agreements with independent growers, primarily in Latin America, to purchase substantially all of their production subject to market demand and product quality. Prices under these agreements are generally fixed and contract terms range from one to seventeen years.

Total purchases under these agreements were $474.5 million, $433.4 million and $340.1 million for 2006, 2005 and 2004, respectively.

 

In order to ensure a steady supply of packing supplies and to maximize volume incentive rebates, the Company enters into contracts with certain suppliers for the purchase of packing supplies, as defined in the respective agreements, over periods of up to five years. Purchases under these contracts for 2006, 2005 and 2004 were approximately $207.6 million, $227.3 million and $181.8 million, respectively.

 

Interest payments on fixed and variable rate debt:  Commitments for interest expense on debt, including capital lease obligations, were determined based on anticipated annual average debt balances, after factoring in mandatory debt repayments. Interest expense on variable-rate debt has been based on the prevailing interest rates at December 30, 2006.

 

Other Obligations and Commitments:  The Company has obligations with respect to its pension and other postretirement benefit (“OPRB”) plans (Note 12 to the Consolidated Financial Statements). During 2006, the Company contributed $3 million to its qualified U.S. pension plan, which included voluntary contributions above the minimum requirements for the plan. Under the Internal Revenue Service funding requirements, no contribution will be required for 2007. However, the Company expects to make contributions of $6.6 million to its U.S. qualified plan during 2007. The Company also has nonqualified U.S. and international pension and OPRB plans. For the year ended December 30, 2006, the Company made payments of $15.7 million related to these pension and OPRB plans.

 

The Company has numerous collective bargaining agreements with various unions covering approximately 32% of the Company’s hourly full-time and seasonal employees. Of the unionized employees, 9% are covered under a collective bargaining agreement that will expire within one year and the remaining 91% are covered under collective bargaining agreements expiring beyond the upcoming year. These agreements are subject to periodic negotiation and renewal. Failure to renew any of these collective bargaining agreements may result in a strike or work stoppage; however management does not expect that the outcome of these negotiations and renewals will have a material adverse impact on the Company’s financial condition or results of operations.

 

SOURCES AND USES OF CASH:

 

 

Operating Activities:  The primary drivers of the Company’s operating cash flows are operating earnings, adjusted for cash generated from or used in net working capital, interest paid and taxes paid or refunded. The Company defines net working capital as the sum of receivables, inventories, prepaid expenses and other current assets less accounts payable and accrued liabilities. Factors that impact the Company’s operating earnings that do not impact cash flows include depreciation and amortization, gains and losses on the sale and write-off of assets, minority interest expense and equity earnings, unrealized foreign currency exchange gains or losses and purchase accounting expenses.

 

Changes in working capital generally correspond to operating activity. For example, as sales increase, a larger investment in working capital is typically required. Management attempts to keep the Company’s investment in net working capital to a reasonable minimum by closely monitoring inventory levels and matching production to expected market demand, keeping tight control over collection of receivables and optimizing payment terms on its trade and other payables. Debt levels and interest rates impact interest payments, and tax payments are impacted by tax rates, the tax jurisdiction of earnings and the availability of tax operating losses.

 

Cash flows provided by operating activities were $15.9 million in 2006 compared to cash flows provided by operating activities of $72.6 million in 2005. The decrease was primarily due to lower earnings in 2006 and lower levels of accounts payable partially offset by lower levels of inventory. The decrease in accounts payable was attributable to the timing of payments to suppliers and growers. The reduction in inventory was driven mainly by lower inventory requirements in the packaged foods segment. Cash flows from operations decreased in 2005 to $72.6 million due primarily to an increase in net working capital of $122.7 million, driven primarily by higher accounts receivable and a greater investment in inventory, partially offset by higher accounts payable. The increase in accounts receivable was driven mainly by higher sales. The increase in inventory was primarily attributable to higher anticipated sales of packaged foods products in 2006. Higher accounts payable was primarily the result of higher inventory-related purchases and the timing of payments to suppliers.

 

Investing Activities:  Cash flows used in investing activities decreased to $117 million in 2006 from $164.3 million in the prior year. The decrease in cash outflow during 2006 was due to less cash spent on acquisitions, lower capital expenditures of $6.4 million and higher cash proceeds of $12.1 million received from the sales of a business and other assets. In 2006, the Company acquired the remaining 65% of JP Fruit it did not already own for $22.7 million, net of cash acquired, compared to the 2005 acquisition of the minority interest in Saba for $47.1 million. The purchase of JP Fruit and 2006 capital expenditures were funded by operating cash flows and through additional borrowings.

 

Financing Activities:  Cash flows provided by financing activities increased to $142.8 million in 2006 from $69.9 million in 2005. The increase in cash of $72.9 million was primarily due to higher net borrowings incurred in 2006 of $339.4 million versus 2005 net borrowings of $150 million to fund current year operations. This increase was offset by higher dividend payments of $86.4 million and a net return of capital payment of $31 million to the Company’s parent, Dole Holding Company, LLC (“DHC”) during 2006.

 

At December 30, 2006, the Company had total outstanding long-term borrowings of $2.4 billion, consisting primarily of $1.1 billion of unsecured senior notes and debentures due 2009 through 2013 and $1.2 billion of secured debt (consisting of revolving credit and term loan facilities and capital lease obligations).

 

Capital Contribution and Return of Capital:  On March 3, 2006, DHM Holding Company, Inc. (“HoldCo”) executed a $150 million senior secured term loan agreement. In March 2006, HoldCo contributed $28.4 million to its wholly-owned subsidiary, DHC, the Company’s immediate parent, which contributed the funds to the Company.

 

As planned, in October 2006, the Company declared a cash capital repayment of $28.4 million to DHC, returning the $28.4 million capital contribution made by DHC in March 2006. The Company repaid this amount during the fourth quarter of 2006.

 

On October 4, 2006, the Company loaned $31 million to DHC, which then dividended the funds to HoldCo for contribution to Westlake Wellbeing Properties, LLC. In connection with this funding, an intercompany loan agreement was entered into between DHC and the Company. DHC has no operations and would need to repay the loan with a dividend from the Company, a contribution from HoldCo, or through a financing transaction. It is currently anticipated that amounts under the intercompany loan agreement will be replaced with dividend proceeds or, the loan would be forgiven within the next year. The Company has accounted for the intercompany loan as a distribution of additional paid-in capital.

 

Debt Refinancing:  In April 2005, the Company amended and restated its senior secured credit agreement, repaying its then existing term loans through new term loan borrowings and a revolving credit facility. In June 2005, the Company executed a technical amendment, which changed the scheduled amortization payment dates of the term loans. In December 2005, the Company executed a second amendment, which permitted the Company to reinvest proceeds from the sale of any of its principal properties into a new principal property and also allowed DHM Holding Company, Inc. to borrow under project financing facilities. The second amendment also modified both the minimum consolidated interest coverage ratio and the maximum leverage ratio.

 

Also during 2005, the Company repurchased $325 million aggregate principal amount of its Company’s outstanding debt securities. The Company repurchased $50 million of its 2009 Notes and $275 million of its 2011 Notes.

 

In April, 2006, the Company completed another amendment and restatement of its senior secured credit facilities. The purposes of this refinancing included increasing the combined size of the Company’s revolving credit and letter of credit facilities, eliminating certain financial maintenance covenants, realizing currency gains arising out of the Company’s then existing yen-denominated term loan and refinancing of the higher-cost bank indebtedness of DHC at the lower-cost Dole Food Company, Inc. level. The Company obtained $975 million of term loan facilities and $100 million in a pre-funded letter of credit facility. The proceeds of the term loans were used to repay the then outstanding term loans and revolving credit facilities, as well as pay a dividend of $160 million to DHC, which proceeds were used to repay its Second Lien Senior Credit Facility.

 

In addition, the Company entered into a new asset based revolving credit facility (“ABL revolver”) of $350 million. The facility is secured by and is subject to a borrowing base consisting of up to 85% of eligible accounts receivable plus a predetermined percentage of eligible inventory, as defined in the credit facility.

 

As of December 30, 2006, the ABL revolver borrowing base was $294.8 million and the amount outstanding under the ABL revolver was $167.6 million. After taking into account approximately $18 million of outstanding letters of credit issued under the ABL revolver, the Company had approximately $109.2 million available for borrowings as of December 30, 2006. Amounts outstanding under the term loan facilities were $967.7 million at December 30, 2006. In addition, the Company had approximately $82.4 million of letters of credit and bank guarantees outstanding under its pre-funded letter of credit facility at December 30, 2006.

 

Refer to Note 11 of the Consolidated Financial Statements for additional details of the Company’s outstanding debt.

 

In addition to amounts available under the revolving credit facilities, the Company’s subsidiaries have uncommitted lines of credit of approximately $156 million at various local banks, of which $108.6 million was available at December 30, 2006. These lines of credit are used primarily for short-term borrowings, foreign currency exchange settlement and the issuance of letters of credit or bank guarantees. Several of the Company’s uncommitted lines of credit expire in 2007 while others do not have a commitment expiration date. These arrangements may be cancelled at any time by the Company or the banks.

 

The Company believes that available borrowings under the revolving credit facility and subsidiaries’ uncommitted lines of credit, together with its existing cash balance of $92.4 million at December 30, 2006, future cash flow from operations and access to capital markets will enable it to meet its working capital, capital expenditure, debt maturity and other commitments and funding requirements. Factors impacting the Company’s cash flow from operations include such items as commodity prices, interest rates and foreign currency exchange rates, among other things. These factors are set forth under “Risk Factors” in Item 1A. of this Form 10-K and under “Quantitative and Qualitative Disclosures About Market Risk “in Item 7A. and elsewhere in this Form 10-K.

 

GUARANTEES, CONTINGENCIES AND DEBT COVENANTS:

 

The Company is a guarantor of indebtedness of some of its key fruit suppliers and other entities integral to the Company’s operations. At December 30, 2006, guarantees of $1.7 million consisted primarily of amounts advanced under third-party bank agreements to independent growers that supply the Company with product. The Company has not historically experienced any significant losses associated with these guarantees.

 

In connection with the April 2006 refinancing transaction, the Company obtained a $100 million pre-funded letter of credit facility. As of December 30, 2006, letters of credit and bank guarantees outstanding under this facility totaled $82.4 million. In addition, the Company issues letters of credit and bonds through major banking institutions, insurance companies and its ABL revolver as required by certain regulatory authorities, vendor and other operating agreements. As of December 30, 2006, total letters of credit and bonds outstanding under these arrangements were $60.5 million.

 

As part of its normal business activities, the Company and its subsidiaries also provide guarantees to various regulatory authorities, primarily in Europe, in order to comply with foreign regulations when operating businesses overseas. These guarantees relate to customs duties and banana import license fees that were granted to the European Union member states’ agricultural authority. These guarantees are obtained from commercial banks in the

form of letters of credit or bank guarantees, primarily issued under the Company’s pre-funded letter of credit facility.

 

The Company also provides various guarantees, mostly to foreign banks, in the course of its normal business operations to support the borrowings, leases and other obligations of its subsidiaries. The Company guaranteed $152.9 million of its subsidiaries’ obligations to their suppliers and other third parties as of December 30, 2006.

 

The Company has change of control agreements with certain key executives, under which severance payments and benefits would become payable in the event of specified terminations of employment following a change of control (as defined) of the Company. Refer to Item 11 of this Form 10-K, under the heading “Employment, Severance and Change of Control Arrangements” for additional information concerning the change of control agreements.

 

As disclosed in Note 17 to the Consolidated Financial Statements, the Company is subject to legal actions, most notably related to the Company’s prior use of the agricultural chemical dibromochloropropane, or “DBCP”. Although no assurance can be given concerning the outcome of these cases, in the opinion of management, after consultation with legal counsel and based on past experience defending and settling DBCP claims, the pending lawsuits are not expected to have a material adverse effect on the Company’s business, financial condition or results of operations.

 

Provisions under the senior secured credit facilities and the indentures to the senior notes and debentures require the Company to comply with certain covenants. These covenants include limitations on, among other things, indebtedness, investments, loans to subsidiaries, employees and third parties, the issuance of guarantees and the payment of dividends. The Company could borrow approximately an additional $228 million at December 30, 2006 and remain within its covenants. At December 30, 2006, the Company was in compliance with all applicable covenants contained in the indentures and senior secured credit facilities.

 

Critical Accounting Policies and Estimates

 

The preparation of the Consolidated Financial Statements requires management to make estimates and assumptions that affect reported amounts. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and on other factors that management believes are reasonable. Estimates and assumptions include, but are not limited to, the areas of customer and grower receivables, inventories, impairment of assets, useful lives of property, plant and equipment, intangible assets, marketing programs, income taxes, self-insurance reserves, retirement benefits, financial instruments and commitments and contingencies.

 

The Company believes that the following represent the areas where more critical estimates and assumptions are used in the preparation of the Consolidated Financial Statements. Refer to Note 2 of the Consolidated Financial Statements for a summary of the Company’s significant accounting policies.

 

Application of Purchase Accounting:  The Company makes strategic acquisitions of entities to enhance its product portfolio and to leverage the DOLE brand. These acquisitions require the application of purchase accounting in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations.  This results in tangible and identifiable intangible assets and liabilities of the acquired entity being recorded at fair value. The difference between the purchase price and the fair value of net assets acquired is recorded as goodwill.

 

In determining the fair values of assets and liabilities acquired in a business combination, the Company uses a variety of valuation methods including present value, depreciated replacement cost, market values (where available) and selling prices less costs to dispose. Valuations are performed by either independent valuation specialists or by Company management, where appropriate.

 

Assumptions must often be made in determining fair values, particularly where observable market values do not exist. Assumptions may include discount rates, growth rates, cost of capital, royalty rates, tax rates and remaining useful lives. These assumptions can have a significant impact on the value of identifiable assets and accordingly can impact the value of goodwill recorded. Different assumptions could result in materially different values being attributed to assets and liabilities. Since these values impact the amount of annual depreciation and

amortization expense, different assumptions could also significantly impact the Company’s statement of operations and could impact the results of future impairment reviews.

 

Grower Advances:  The Company makes advances to third-party growers primarily in Latin America and Asia for various farming needs. Some of these advances are secured with property or other collateral owned by the growers. The Company monitors these receivables on a regular basis and records an allowance for these grower receivables based on estimates of the growers’ ability to repay advances and the fair value of the collateral. These estimates require significant judgment because of the inherent risks and uncertainties underlying the growers’ ability to repay these advances. These factors include weather-related phenomena, government-mandated fruit prices, market responses to industry volume pressures, grower competition, fluctuations in local interest rates, economic crises, security risks in developing countries, political instability, outbreak of plant disease, inconsistent or poor farming practices of growers, and foreign currency fluctuations. The aggregate amounts of grower advances made during fiscal years 2006, 2005 and 2004 were approximately $156.5 million, $148 million and $146.6 million, respectively. Net grower advances receivable were $39.4 million and $44.3 million at December 30, 2006 and December 31, 2005, respectively.

 

Long-Lived Assets:  The Company’s long-lived assets consist of 1) property, plant and equipment and amortized intangibles and 2) goodwill and indefinite-lived intangible assets.

 

1) Property, Plant and Equipment and Amortized Intangibles:  The Company depreciates property, plant and equipment and amortizes intangibles principally by the straight-line method over the estimated useful lives of these assets. Estimates of useful lives are based on the nature of the underlying assets as well as the Company’s experience with similar assets and intended use. Estimates of useful lives can differ from actual useful lives due to the inherent uncertainty in making these estimates. This is particularly true for the Company’s significant long-lived assets such as land improvements, buildings, farming machinery and equipment, vessels and customer relationships. Factors such as the conditions in which the assets are used, availability of capital to replace assets, frequency of maintenance, changes in farming techniques and changes to customer relationships can influence the useful lives of these assets. Refer to Notes 9 and 10 of the Consolidated Financial Statements for a summary of useful lives by major asset category and for further details on the Company’s intangible assets, respectively. The Company incurred depreciation expense of approximately $144.8 million, $137.9 million and $133.3 million in 2006, 2005 and 2004, respectively, and amortization expense of approximately $4.5 million, $11.9 million and $11.6 million in fiscal 2006, 2005 and 2004, respectively.

 

The Company reviews property, plant and equipment and amortizable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If an evaluation of recoverability is required, the estimated total undiscounted future cash flows directly associated with the asset is compared to the asset’s carrying amount. If this comparison indicates that there is an impairment, the amount of the impairment is calculated by comparing the carrying value to the discounted expected future cash flows expected to result from the use of the asset and its eventual disposition or comparable market values, depending on the nature of the asset. Changes in commodity pricing, weather-related phenomena and other market conditions are events that have historically caused the Company to assess the carrying amount of its long-lived assets.

 

2) Goodwill and Indefinite-Lived Intangible Assets:  The Company’s indefinite-lived intangible assets consist of the DOLE brand trade name, with a carrying value of $689.6 million. In determining whether intangible assets have indefinite lives, the Company considers the expected use of the asset, legal or contractual provisions that may limit the life of the asset, length of time the intangible has been in existence, as well as competitive, industry and economic factors. The determination as to whether an intangible asset is indefinite-lived or amortizable could have a significant impact on the Company’s statement of operations in the form of amortization expense and potential future impairment charges.

 

Goodwill and indefinite-lived intangible assets are tested for impairment annually and whenever events or circumstances indicate that an impairment may have occurred. Indefinite-lived intangibles are tested for impairment by comparing the fair value of the asset to the carrying value.

 

Goodwill is tested for impairment by comparing the fair value of a reporting unit with its net book value including goodwill. The fair value of reporting units is determined using a discounted cash flow methodology, which requires making estimates and assumptions including pricing and volumes, industry growth rates, future business plans, profitability, tax rates and discount rates. If the fair value of the reporting unit exceeds its carrying amount, then goodwill of that reporting unit is not considered to be impaired. If the carrying amount of the reporting unit exceeds its fair value, then the implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. An impairment loss is recognized if the implied fair value of goodwill exceeds its carrying amount. Changes to assumptions and estimates can significantly impact the fair values determined for reporting units and the implied value of goodwill, and consequently can impact whether or not an impairment charge is recognized, and if recognized, the size thereof. Management believes that the assumptions used in the Company’s annual impairment review are appropriate.

 

Income Taxes:  Deferred income taxes are recognized for the income tax effect of temporary differences between financial statement carrying amounts and the income tax bases of assets and liabilities. The Company regularly reviews its deferred income tax assets to determine whether future taxable income will be sufficient to realize the benefits of these assets. A valuation allowance is provided for deferred income tax assets for which it is deemed more likely than not that future taxable income will not be sufficient to realize the related income tax benefits from these assets. The amount of the net deferred income tax asset that is considered realizable could, however, be adjusted if estimates of future taxable income are adjusted.

 

Refer to Note 6 of the Consolidated Financial Statements for additional information about the Company’s income taxes.

 

The Company believes its tax positions comply with the applicable tax laws and that it is adequately provided for all tax related matters. The Company is subject to examination by taxing authorities in the various jurisdictions in which it files tax returns. Matters raised upon audit may involve substantial amounts and could result in material cash payments if resolved unfavorably; however, management does not believe that any material payments will be made related to these matters within the next year. Management considers it unlikely that the resolution of these matters will have a material adverse effect on its results of operations.

 

Pension and Other Postretirement Benefits:  The Company has qualified and nonqualified defined benefit pension plans covering some of its full-time employees. Benefits under these plans are generally based on each employee’s eligible compensation and years of service, except for hourly plans, which are based on negotiated benefits. In addition to pension plans, the Company has OPRB plans that provide health care and life insurance benefits for eligible retired employees. Covered employees may become eligible for such benefits if they fulfill established requirements upon reaching retirement age. Pension and OPRB costs and obligations are calculated based on actuarial assumptions including discount rates, health care cost trend rates, compensation increases, expected return on plan assets, mortality rates and other factors.

 

Pension obligations and expenses are most sensitive to the expected return on pension plan assets and discount rate assumptions. OPRB obligations and expenses are most sensitive to discount rate assumptions and health care cost trend rates. The Company determines the expected return on pension plan assets based on an expectation of average annual returns over an extended period of years. This expectation is based, in part, on the actual returns achieved by the Company’s pension plans over the prior ten-year period. The Company also considers the weighted-average historical rates of return on securities with similar characteristics to those in which the Company’s pension assets are invested. In the absence of a change in the Company’s asset allocation or investment philosophy, this estimate is not expected to vary significantly from year to year. The Company’s 2006 and 2005 pension expense was determined using an expected rate of return on U.S. plan assets of 8.25% and 8.50%, respectively. The Company’s 2007 pension expense will be determined using an expected rate of return on U.S. plan assets of 8%. At December 30, 2006, the Company’s U.S. pension plan investment portfolio was invested approximately 59% in equity securities, 39% in fixed income securities and 2% in alternative investments. A 25 basis point change in the expected rate of return on pension plan assets would impact annual pension expense by $0.6 million.

 

The Company’s U.S. pension plan’s discount rate of 5.75% in both 2006 and 2005 was determined based on a hypothetical portfolio of high-quality, non-callable, zero-coupon bond indices with maturities that approximate the

duration of the liabilities in the Company’s pension plans. A 25 basis point decrease in the assumed discount rate would increase the projected benefit obligation by $8.6 million and increase the annual expense by $0.6 million.

 

The Company’s foreign pension plans’ weighted average discount rate was 6.61% and 9.08% for 2006 and 2005, respectively. A 25 basis point decrease in the assumed discount rate of the foreign plans would increase the projected benefit obligation by approximately $4.4 million and increase the annual expense by approximately $0.3 million.

 

While management believes that the assumptions used are appropriate, actual results may differ materially from these assumptions. These differences may impact the amount of pension and other postretirement obligations and future expense. Refer to Note 12 of the Consolidated Financial Statements for additional details of the Company’s pension and other postretirement benefits.

 

Litigation:  The Company is involved from time to time in claims and legal actions incidental to its operations, both as plaintiff and defendant. The Company has established what management currently believes to be adequate reserves for pending legal matters. These reserves are established as part of an ongoing worldwide assessment of claims and legal actions that takes into consideration such items as changes in the pending case load (including resolved and new matters), opinions of legal counsel, individual developments in court proceedings, changes in the law, changes in business focus, changes in the litigation environment, changes in opponent strategy and tactics, new developments as a result of ongoing discovery, and past experience in defending and settling similar claims. Changes in accruals, both up and down, are part of the ordinary, recurring course of business, in which management, after consultation with legal counsel, is required to make estimates of various amounts for business and strategic planning purposes, as well as for accounting and SEC reporting purposes. These changes are reflected in the reported earnings of the Company each quarter. The litigation accruals at any time reflect updated assessments of the then existing pool of claims and legal actions. Actual litigation settlements could differ materially from these accruals.

 

Recently Adopted and Recently Issued Accounting Pronouncements

 

See Note 2 to the Consolidated Financial Statements for information regarding the Company’s adoption of new accounting pronouncements and recently issued accounting pronouncements.

 

Other Matters

 

European Union Banana Import Regime:  On January 1, 2006, the EU implemented a new “tariff only” import regime for bananas. The 2001 Understanding on Bananas between the European Communities and the U.S. required the EU to implement a tariff only banana import system on or before January 1, 2006, and the EU’s banana regime change was therefore expected by that date.

 

Banana imports from Latin America are subject to import license requirements and a tariff of 176 euro per metric ton for entry into the EU market. Under the EU’s previous banana regime, banana imports from Latin America were subject to a tariff of 75 euro per metric ton and were also subject to both import license requirements and volume quotas. License requirements and volume quotas had the effect of limiting access to the EU banana market.

 

Although all Latin bananas are subject to a tariff of 176 euro per metric ton, up to 775,000 metric tons of bananas from African, Caribbean, and Pacific (“ACP”) countries may be imported to the EU duty-free. This preferential treatment of a zero tariff on up to 775,000 tons of ACP banana imports, as well as the 176 euro per metric ton tariff applied to Latin banana imports, has been challenged by Panama, Honduras, Nicaragua, and Colombia in consultation proceedings at the World Trade Organization (“WTO”). In addition, on March 8, 2007 and March 20, 2007, Ecuador formally requested the WTO Dispute Settlement Body (“DSB”) to appoint a panel to review the matter. The EU blocked Ecuador’s initial request for establishment of a panel on March 8; however, the EU was unable to block Ecuador’s second request under WTO rules. On March 20, 2007, the DBS announced that it will establish a panel to rule on Ecuador’s complaint. The current tariff applied to Latin banana imports may be lowered and the ACP preference of a zero tariff may be affected depending on the outcome of these WTO proceedings, but the WTO proceedings are only in their initial stages and may take several years to conclude. The

Company encourages efforts to lower the tariff through negotiations with the EU and is working actively to help achieve this result.

 

Impact of Hurricane Katrina:  During the third quarter of 2005, the Company’s operations in the Gulf Coast area of the United States were impacted by Hurricane Katrina. The Company’s fresh fruit division utilizes the Gulfport, Mississippi port facility to receive and store product from its Latin American operations. The Gulfport facility, which is leased from the Mississippi Port Authority, incurred significant damage from Hurricane Katrina. As a result of the damage sustained at the Gulfport terminal, the Company diverted shipments to other Dole port facilities including Freeport, Texas; Port Everglades, Florida; and Wilmington, Delaware. The Company resumed discharging shipments of fruit and other cargo in Gulfport at the beginning of the fourth quarter of 2005. However, the facility has not yet been fully rebuilt. The financial impact to the Company’s fresh fruit operations includes the loss of cargo and equipment, property damage and additional costs associated with re-routing product to other ports in the region. Equipment that was destroyed or damaged includes refrigerated and dry shipping containers, as well as chassis and generator-sets used for land transportation of the shipping containers. The Company maintains customary insurance for its property, including shipping containers, as well as for business interruption.

 

During 2006, the Company incurred direct incremental expenses of $1.8 million related to Hurricane Katrina, bringing the total charge to $11.9 million of which $4.7 million is associated with cargo related expenses and $7.2 million is associated with property related expenses. The total charge includes direct incremental expenses of $5.6 million, write-offs of owned assets with a net book value of $4.1 million and leased assets of $2.2 million representing amounts due to lessors. In addition, the Company collected $7.3 million in 2006 from insurance carriers related to cargo and property damage bringing the total cash collected to $13.3 million. In December 2006, the Company settled its cargo claim for $9.2 million resulting in a gain of $4.5 million which is included as a component of cost of products sold in the consolidated statement of operations. The Company is continuing to work with its insurers to evaluate the extent of the costs incurred under the property claim and to determine the extent of the insurance coverage for that damage.

 

Restructurings and Related Asset Impairments During the third quarter of 2006, the Company restructured its fresh-cut flowers division (“DFF”) to better focus on high-value products and flower varieties, and position the business unit for future growth. In connection with this restructuring, DFF ceased its farming operations in Ecuador, closed one farm in Colombia and will close another in Colombia in 2007, and downsized other Colombian farms. DFF expects to incur total costs of approximately $29.8 million related to this initiative, of which $7.2 million relates to cash restructuring costs and $22.6 million to non-cash impairment charges associated with the write-off of certain long-lived assets, intangible assets and inventory.

 

For the year ended December 30, 2006, total restructuring and impairment costs incurred amounted to approximately $6.4 million and $22.6 million, respectively. The $6.4 million of restructuring costs relate to approximately 1,700 employees who have been severed as of December 30, 2006 and another 800 that will be severed by the end of fiscal 2007. As of December 30, 2006, $4.3 million of restructuring costs had been paid. The $22.6 million charge relates to the impairment and write-off of the following assets: trade names ($4.9 million), deferred crop growing costs ($8.5 million), property, plant and equipment ($8.4 million), and inventory ($0.8 million). Of the $29 million total costs incurred during the year ended December 30, 2006, $24 million has been included in cost of products sold and $5 million in selling, marketing, and general and administrative expenses, in the consolidated statement of operations. The Company also currently estimates that an additional $0.8 million of land clearing costs and employee severance will be incurred and paid by the end of 2007.

 

During the first quarter of 2006, the commercial relationship substantially ended between the Company’s wholly-owned subsidiary, Saba Trading AB (“Saba”), and Saba’s largest customer. Saba is a leading importer and distributor of fruit, vegetables and flowers in Scandinavia. Saba’s financial results are included in the fresh fruit reporting segment. Other than the expected charges described below, the loss of this customer’s business is not expected to be material to the Company’s ongoing earnings. The Company restructured certain lines of Saba’s business and as a result, incurred $12.8 million of total related costs. Of the $12.8 million incurred during the year ended December 30, 2006, $9 million is included in cost of products sold and $3.8 million in selling, marketing, and general and administrative expenses in the consolidated statement of operations. Total restructuring costs include $9.9 million of employee severance costs which impacted 275 employees, $2.4 million of contractual lease

obligations as well as $0.5 million of fixed asset write-offs. As of December 30, 2006, the remaining amounts of accrued employee severance costs and contractual lease obligations were $3.5 million and $1.1 million, respectively. The Company currently estimates that these remaining costs will be paid by the end of 2007. In addition, during the third quarter of 2006, Saba settled a contractual claim against this customer.

 

In connection with the Company’s ongoing farm optimization programs in Asia, approximately $6.7 million of crop-related costs were written-off during the third quarter of 2006. The $6.7 million non-cash charge has been included in cost of products sold in the consolidated statement of operations.

 

Supplemental Financial Information

 

The following financial information has been presented, as management believes that it is useful information to some readers of the Company’s Consolidated Financial Statements (in thousands):

 

 

 

“EBITDA” is defined as earnings before interest expense, income taxes, and depreciation and amortization. EBITDA is calculated by adding interest expense, income taxes and depreciation and amortization to net income. In 2006 and 2005, EBIT is calculated by subtracting income from discontinued operations, net of income taxes and gain on disposal of discontinued operations, net of income taxes, and adding interest expense and income taxes to net income. EBITDA margin is defined as the ratio of EBITDA, as defined, relative to net revenues. EBITDA is reconciled to net income in the Consolidated Financial Statements in the tables above. EBITDA and EBITDA margin fluctuated primarily due to the same factors that impacted the changes in operating income and segment EBIT discussed earlier.

 

The Company presents EBITDA and EBITDA margin because management believes, similar to EBIT, EBITDA is a useful performance measure for the Company. In addition, EBITDA is presented because management believes it is frequently used by securities analysts, investors and others in the evaluation of companies, and because certain covenants on the Company’s Senior Notes are tied to EBITDA. EBITDA and EBITDA margin should not be considered in isolation from or as a substitute for net income and other consolidated income statement

data prepared in accordance with GAAP or as a measure of profitability. Additionally, the Company’s computation of EBITDA and EBITDA margin may not be comparable to other similarly titled measures computed by other companies, because not all companies calculate EBITDA and EBITDA margin in the same manner.

 

This Management’s Discussion and Analysis contains forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements, which are based on management’s assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by the use of terms such as “anticipate”, “will”, “expect”, “believe”, “should” or similar expressions. The potential risks and uncertainties that could cause the Company’s actual results to differ materially from those expressed or implied herein include weather-related phenomena; market responses to industry volume pressures; product and raw materials supplies and pricing; changes in interest and currency exchange rates; economic crises in developing countries; quotas, tariffs and other governmental actions and international conflict. Refer to “Disclosure Regarding Forward-Looking Statements” in Item 1A. of this Form 10-K for additional information concerning these matters.

 

As a result of its global operating and financing activities, the Company is exposed to market risks including fluctuations in interest rates, fluctuations in foreign currency exchange rates and changes in commodity pricing.

 

The Company uses derivative instruments to hedge against fluctuations in interest rates, foreign currency exchange rate movements and bunker fuel prices. With the exception of the South African rand forward contracts, all of the Company’s derivative instruments have been designated as effective hedges of cash flows as defined by Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The fair value of all instruments designated as effective hedges of December 30, 2006 has been included as a component of accumulated other comprehensive loss in shareholders’ equity. The Company has not utilized derivatives for trading or other speculative purposes

 

Interest Rate Risk:  As a result of its normal borrowing and leasing activities, the Company’s operating results are exposed to fluctuations in interest rates. The Company has short-term and long-term debt with both fixed and variable interest rates. Short-term debt is primarily comprised of the current portion of long-term debt maturing twelve months from the balance sheet date. Short-term debt also includes unsecured notes payable to banks and bank lines of credit used to finance working capital requirements. Long-term debt represents publicly held unsecured notes and debentures, as well as amounts outstanding under the Company’s senior secured credit facilities

 

Generally, the Company’s short-term debt is at variable interest rates, while its long-term debt, with the exception of amounts outstanding under the Company’s senior secured credit facilities and vessel lease obligations, is at fixed interest rates.

 

As of December 30, 2006, the Company had $1.11 billion of fixed-rate debt and $2.8 million of fixed-rate capital lease obligations with a combined weighted-average interest rate of 8.2% and a fair value of $1.05 billion. The Company currently estimates that a 100 basis point increase in prevailing market interest rates would decrease the fair value of its fixed-rate debt by approximately $35.5 million.

 

As of December 30, 2006, the Company had the following variable-rate arrangements: $1.17 billion of variable-rate debt with a weighted-average interest rate of 7.2% and $85.6 million of variable-rate capital lease obligations with a weighted-average interest rate of 5.1%. Interest expense under the majority of these arrangements is based on the London Interbank Offered Rate (“LIBOR”). The Company currently estimates that a 100 basis point increase in LIBOR would lower pretax income by $12.6 million.

 

As part of the Company’s strategy to manage the level of exposure to fluctuations in interest rates, the Company entered into an interest rate swap agreement that effectively converted $320 million of variable-rate term loan debt to a fixed-rate basis. The interest rate swap fixed the interest rate at 7.2%. The paying and receiving rates under the interest rate swap were 5.5% and 5.4% as of December 30, 2006. The fair value of the interest rate swap at December 30, 2006 was a liability of $6.4 million.

 

The Company also executed a cross currency swap to synthetically convert $320 million of term loan debt into Japanese yen denominated debt in order to effectively lower the U.S. dollar fixed interest rate of 7.2% to a Japanese yen interest rate of 3.6%. The fair value of the cross currency swap was an asset of $20.7 million at December 30, 2006.

 

Foreign Currency Exchange Risk:  The Company has production, processing, distribution and marketing operations worldwide in more than 90 countries. Its international sales are usually transacted in U.S. dollars and major European and Asian currencies. Some of the Company’s costs are incurred in currencies different from those received from the sale of products. Results of operations may be affected by fluctuations in currency exchange rates in both sourcing and selling locations.

 

The Company has significant sales denominated in Japanese yen as well as European sales denominated primarily in euro and Swedish krona. Product and shipping costs associated with a significant portion of these sales are U.S. dollar-denominated. In 2006, the Company had approximately $550 million of annual sales denominated in Japanese yen, $1.3 billion of annual sales denominated in euro, and $320 million of annual sales denominated in Swedish krona. If U.S. dollar exchange rates versus the Japanese yen, euro and Swedish krona during 2006 had remained unchanged from 2005, the Company’s revenues and operating income would have been higher by approximately $15 million and $11 million, respectively. In addition, the Company currently estimates that a 10% strengthening of the U.S. dollar relative to the Japanese yen, euro and Swedish krona would lower operating income by approximately $43 million, excluding the impact of foreign currency exchange hedges.

 

The Company sources the majority of its products in foreign locations and accordingly is exposed to changes in exchange rates between the U.S. dollar and currencies in these sourcing locations. The Company’s exposure to exchange rate fluctuations in these sourcing locations is partially mitigated by entering into U.S. dollar denominated contracts for third-party purchased product and most other major supply agreements, including shipping contracts. However, the Company is still exposed to those costs that are denominated in local currencies. The most significant production currencies to which the Company has exchange rate risk are the Colombian peso, Chilean peso, Thai baht, Philippine peso and South African rand. If U.S. dollar exchange rates versus these currencies during 2006 had remained unchanged from 2005, the Company’s operating income would have been higher by approximately $22 million. In addition, the Company currently estimates that a 10% weakening of the U.S. dollar relative to these currencies would lower operating income by approximately $54 million, excluding the impact of foreign currency exchange hedges.

 

At December 30, 2006, the Company had British pound sterling denominated capital lease obligations. The British pound sterling denominated capital lease of $85.6 million is owed by foreign subsidiaries whose functional currency is the U.S. dollar. Fluctuations in the British pound sterling to U.S. dollar exchange rate resulted in losses that were recognized through results of operations. In 2006, the Company recognized $10.6 million in unrealized foreign currency exchange losses related to the British pound sterling. The Company currently estimates that the weakening of the value of the U.S. dollar against the British pound sterling by 10% as it relates to the capital lease obligation would lower operating income by approximately $8.8 million.

 

Some of the Company’s divisions operate in functional currencies other than the U.S. dollar. The net assets of these divisions are exposed to foreign currency translation gains and losses, which are included as a component of accumulated other comprehensive loss in shareholders’ equity. Such translation resulted in unrealized losses of $17.6 million in 2006. The Company has historically not attempted to hedge this equity risk.

 

The ultimate impact of future changes to these and other foreign currency exchange rates on 2007 revenues, operating income, net income, equity and comprehensive income is not determinable at this time.

 

As part of its risk management strategy, the Company uses derivative instruments to hedge certain foreign currency exchange rate exposures. The Company’s objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings. The Company uses foreign currency exchange forward contracts and participating forward contracts to reduce its risk related to anticipated dollar equivalent foreign currency cash flows, specifically forecasted revenue transactions and forecasted operating expenses. Participating forwards are the combination of a put and call option,

structured such that there is no premium payment, there is a guaranteed strike price, and the Company can benefit from positive foreign currency exchange movements on a portion of the notional amount.

 

At December 30, 2006, the Company’s foreign currency hedge portfolio was comprised of the following:

 

 

Commodity Sales Price Risk:  Commodity pricing exposures include the potential impacts of weather phenomena and their effect on industry volumes, prices, product quality and costs. The Company manages its exposure to commodity price risk primarily through its regular operating activities, however, significant commodity price fluctuations, particularly for bananas, pineapples and commodity vegetables could have a material impact on the Company’s results of operations.

 

Commodity Purchase Price Risk:  The Company uses a number of commodities in its operations including tinplate in its canned products, plastic resins in its fruit bowls, containerboard in its packaging containers and bunker fuel for its vessels. The Company is most exposed to market fluctuations in prices of containerboard and fuel. The Company currently estimates that a 10% increase in the price of containerboard would lower operating income by approximately $16.7 million and a 10% increase in the price of bunker fuel would lower operating income by approximately $11.7 million.

 

The Company enters into bunker fuel hedges to reduce its risk related to price fluctuations on anticipated bunker fuel purchases. At December 30, 2006, bunker fuel hedges had an aggregate outstanding notional amount of 129,300 metric tons. The fair value of the bunker fuel hedges at December 30, 2006 was a liability of $2.5 million.

 

Counterparty Risk:  The counterparties to the Company’s derivative instruments contracts consist of a number of major international financial institutions. The Company has established counterparty guidelines and regularly monitors its positions and the financial strength of these institutions. While counterparties to hedging contracts expose the Company to credit-related losses in the event of a counterparty’s non-performance, the risk would be limited to the unrealized gains on such affected contracts. The Company does not anticipate any such losses.

 

 

 

To the Board of Directors and Shareholder of Dole Food Company, Inc.:

 

We have audited the accompanying consolidated balance sheets of Dole Food Company, Inc. and subsidiaries (the “Company”) as of December 30, 2006 and December 31, 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years ended December 30, 2006, December 31, 2005, and January 1, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 30, 2006 and December 31, 2005, and the results of its operations and its cash flows for the years ended December 30, 2006, December 31, 2005, and January 1, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

As discussed in Note 12 to the consolidated financial statements, the Company adopted, effective December 30, 2006, a new accounting standard for retirement benefits.

 

Deloitte & Touche LLP

 

Los Angeles, California

March 23, 2007

DOLE FOOD COMPANY, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 30, 2006, December 31, 2005 and January 1, 2005

 

 

See Notes to Consolidated Financial Statements

DOLE FOOD COMPANY, INC.

 

CONSOLIDATED BALANCE SHEETS

As of December 30, 2006 and December 31, 2005

 

 

See Notes to Consolidated Financial Statements

DOLE FOOD COMPANY, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 30, 2006, December 31, 2005 and January 1, 2005

 

 

DOLE FOOD COMPANY, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS — Continued

For the Years Ended December 30, 2006, December 31, 2005 and January 1, 2005

Supplemental cash flow information

 

At December 30, 2006 and December 31, 2005, accounts payable included approximately $18 million and $23.7 million, respectively, for capital expenditures.

 

The consolidated statement of cash flows for the year ended January 1, 2005 excludes a $6.3 million non-cash dividend of land to Dole Holding Company, LLC. Refer to Note 13 for additional details.

 

Income tax payments, net of refunds, for the years ended December 30, 2006, December 31, 2005 and January 1, 2005 were $25.7 million, $42.2 million and $(0.3) million, respectively.

 

Interest payments on borrowings totaled $159.5 million, $142.8 million and $141.2 million during the years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively.

 

See Notes to Consolidated Financial Statements

DOLE FOOD COMPANY, INC.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Years Ended December 30, 2006, December 31, 2005 and January 1, 2005