10-Q 1 dg0605q.txt FORM 10-Q 2ND QUARTER ENDED 7/2/2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended July 2, 2005 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to _____ Commission File Number: 1-1790 DI GIORGIO CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-0431833 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 380 Middlesex Avenue Carteret, New Jersey 07008 (Address of principal executive offices) (Zip Code) (732) 541-5555 (Registrant's Telephone Number, Including Area Code) 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 X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Exchange Act) Yes__ No_X As of July 25, 2005 there were outstanding 78.1158 shares of Class A Common Stock and 76.8690 shares of Class B Common Stock. The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant is $0 because all voting and non-voting stock is held by affiliates of the registrant. DI GIORGIO CORPORATION AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Balance Sheets, January 1, 2005 and July 2, 2005 (Unaudited).......................... 1 Consolidated Condensed Income Statements, Twenty-six and Thirteen Weeks Ended June 26, 2004 and July 2, 2005 (Unaudited)......................................... 2 Consolidated Condensed Statement of Stockholders' Equity, Twenty-six Weeks Ended July 2, 2005 (Unaudited)....................... 3 Consolidated Condensed Statements of Cash Flows, Twenty-six Weeks Ended June 26, 2004 and July 2, 2005 (Unaudited).......................................... 4 Notes to Consolidated Condensed Financial Statements (Unaudited)........ 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................ 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 12 Item 4. Controls and Procedures............................................ 12 PART II.OTHER INFORMATION Item 1. Legal Proceedings.................................................. 13 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 13 Item 3. Defaults Upon Senior Securities.................................... 13 Item 4. Submission of Matters to a Vote of Security Holders................ 13 Item 5. Other Information.................................................. 13 Item 6. Exhibits........................................................... 13 Signatures ................................................................ 14 Di Giorgio Corporation and Subsidiaries Consolidated Condensed Balance Sheets (in thousands) January 1, 2005 July 2, 2005 (unaudited) ASSETS Current Assets: Cash $8,181 $8,715 Accounts and notes receivable-net 112,902 100,416 Inventories 65,838 62,550 Deferred income taxes 3,590 3,829 Prepaid expenses 5,904 5,216 ------ ------ Total current assets 196,415 180,726 -------- -------- Property, Plant and Equipment Cost 29,695 32,223 Accumulated depreciation and amortization (21,334) (22,413) ------- ------- Net 8,361 9,810 ------ ------ Long-term notes receivable 8,826 10,715 Other assets 35,148 34,346 Deferred financing costs-net 1,655 1,305 Goodwill 68,893 68,893 ------- ------- Total assets $319,298 $305,795 ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities: Revolving credit facility $29,119 $12,370 Accounts payable 67,806 71,945 Accrued expenses 27,419 24,494 Capital lease payable 69 71 --- --- Total current liabilities 124,413 108,880 -------- -------- Long-term debt 148,300 148,300 Capital lease liability 1,808 1,772 Other long-term liabilities 14,150 14,095 Stockholders' Equity: Common stock -- -- Additional paid-in-capital 8,002 8,002 Retained earnings 22,625 24,746 ------- ------- Total stockholders' equity 30,627 32,748 ------- ------- Total liabilities & stockholders' equity $319,298 $305,795 ========= ========= See Notes to Consolidated Condensed Financial Statements -1- Di Giorgio Corporation and Subsidiaries Consolidated Condensed Income Statements (in thousands) (unaudited)

See Notes to Consolidated Condensed Financial Statements -2- Di Giorgio Corporation and Subsidiaries Consolidated Condensed Statement of Stockholders' Equity (in thousands, except share data) (unaudited)

See Notes to Consolidated Condensed Financial Statements -3- Di Giorgio Corporation and Subsidiaries Consolidated Condensed Statements of Cash Flows (in thousands) (unaudited) Twenty-six weeks ended ---------------------- June 26, July 2, 2004 2005 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,652 $ 2,121 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization of fixed assets 1,073 1,094 Other amortization 401 639 Provision for doubtful accounts 250 250 Actuarially calculated pension expense 675 511 Gain on sale of equipment (18) (6) Deferred income taxes (492) (233) Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (605) 4,658 Inventories (1,024) 3,288 Prepaid expenses (789) 688 Other assets (185) 231 Increase (decrease) in: Accounts payable 1,183 4,139 Accrued expenses and other liabilities 429 (3,214) -------- -------- Net cash provided by operating activities 5,550 14,166 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to notes receivable (3,188) (5,902) Collections of notes receivable 7,114 8,273 Proceeds from note participation sale 1,981 3,318 Additions to property, plant and equipment (359) (2,538) Proceeds from sale of equipment 90 -- -------- -------- Net cash provided by investing activities 5,638 3,151 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net repayments under revolving line-of-credit (2,633) (16,749) Dividends paid (10,000) -- Financing fees paid (462) -- Capital lease payments (31) (34) -------- -------- Net cash used in financing activities (13,126) (16,783) -------- -------- Increase (decrease) in cash (1,938) 534 Cash at beginning of period 10,367 8,181 -------- -------- Cash at end of period $ 8,429 $ 8,715 ======== ======== Supplemental Disclosure of Cash Flow Information Cash paid during the period: Interest $ 7,565 $ 7,999 ======== ======== Income taxes $ 1,896 $ 1,125 ======== ======== See Notes to Consolidated Condensed Financial Statements -4- DI GIORGIO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated condensed balance sheet as of July 2, 2005, the consolidated condensed income statements for the twenty-six weeks and thirteen weeks ended June 26, 2004 and July 2, 2005, the consolidated condensed statement of stockholders' equity for the thirteen weeks ended July 2, 2005, and the consolidated condensed statements of cash flows for the twenty-six weeks ended June 26, 2004 and July 2, 2005, and related notes are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP") have been omitted pursuant to such rules and regulations. The accompanying unaudited interim consolidated condensed financial statements and related notes should be read in conjunction with the financial statements and related notes included in the Form 10-K for the fiscal year ended January 1, 2005 (from which the consolidated condensed balance sheet as of January 1, 2005 has been derived) and Form 10-Q for the quarter ended April 2, 2005 as filed with the Securities and Exchange Commission. The information furnished herein reflects, in the opinion of the management of the Company, all adjustments, consisting of normal recurring accruals, which are necessary to present a fair statement of the results for the interim periods presented. The interim results are not necessarily indicative of the results to be expected for the full fiscal year. Certain reclassifications have been made to the prior period financial statements in order to conform them to the current period presentation. -5- 2. PENSION BENEFITS Effective April 1, 2005, the Company discontinued the accretion of future retiree benefits under the Di Giorgio Retirement Plan, its defined benefit pension plan, which covered substantially all of its non-union employees. The Company remains responsible to make contributions to this plan in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974. This change was considered a plan curtailment and requires that the plan assets and liabilities be remeasured and that a gain or loss, if any, be recorded as of the remeasurement date. The remeasurement was done as of February 28, 2005, the end of the month in which the amendment was approved and communicated. The curtailment resulted in a charge to income of $59,000. Net periodic costs for the Di Giorgio Retirement Plan for the thirteen and twenty-six week periods ended July 2, 2005 and June 26, 2004 include the following components: Thirteen Weeks Ended Twenty-Six Weeks Ended -------------------- ---------------------- July 2, June 26, July 2, June 26, 2005 2004 2005 2004 (in thousands) Service cost $ -- $ 273 $ 316 $ 546 Interest cost 884 889 1,802 1,777 Expected return on plan assets (1,344) (1,181) (2,693) (2,363) Amortization of prior service cost -- 5 3 10 Amortization of net (gain) / loss 371 291 794 585 ------- ------- ------- ------- Net periodic benefit cost (89) 277 222 555 Curtailment loss -- -- 59 -- ------- ------- ------- ------- Total net periodic benefit cost $ (89) $ 277 $ 281 $ 555 ======= ======= ======= ======= Weighted-average assumptions used to determine Net periodic benefit cost for years ended December 31 (including the assumptions for remeasurement) 2005 2004 ---- ---- Discount rate 6.00% 6.25% Expected long-term return on plan assets 8.25% 8.25% Rate of compensation increase 6.00% 6.00% -6- In conjunction with the change to the Di Giorgio Retirement Plan mentioned above, the Company also modified the Di Giorgio Retirement Savings Plan (the "401(k) Plan") to provide its employees with an alternative source of retirement benefits. Effective April 1, 2005, the Company replaced the current match of employee contributions with an increased employer contribution (paid quarterly) which will be paid regardless of whether an employee makes a 401(k) contribution, and regardless of the amount of that contribution. The Company incurred approximately $260,000 of expense in the second quarter for this change. 3. CONTINGENCIES Legal Proceedings -- Various suits and claims arising in the ordinary course of business are pending against the Company. In the opinion of management, these matters are appropriately provided for and are not expected to materially affect the Company's consolidated financial position, cash flows or results of operations. The Company has been named in various claims and litigation relating to potential environmental problems. In the opinion of management, these claims are either without merit, covered by insurance, adequately provided for, or not expected to result in any material loss to the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward- Looking Statements Forward-looking statements in this Form 10-Q include, without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may be identified by their use of words like "plans", "expects", "aims", "believes", "projects", "anticipates", "intends", "estimates", "will", "should", "could", and other expressions that indicate future events and trends. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, among others, the following: general economic and business conditions and those in particular in the New York City metropolitan area; the Company's reliance on several significant customers; potential losses from loans to its retailers; restrictions imposed by the agreements governing the Company's indebtedness; current wholesale competition, as well as future competition from presently unknown sources; competition in the retail segment of the supermarket business; the Company's labor relations; potential environmental liabilities which the Company may have; dependence on key personnel; changes in business regulation; business abilities and judgment of personnel; changes in, or failure to comply with government regulations; potential commercial vehicle restrictions; inflation especially with respect to wages and energy costs; and the results of terrorism or terrorist acts against the Company. -7- General Revenue in the current quarter was flat from the same period in the prior year. Higher distribution expenses and gross margin pressure continued to negatively affect the Company's net income and EBITDA. Included in the quarter's higher expenses was $.6 million in severance related expenses, $.5 million of which related to payments and benefits to several employees that should result in annual savings of approximately $.8 million. Results of Operations Thirteen weeks ended July 2, 2005 and June 26, 2004 Net sales for the thirteen weeks ended July 2, 2005 increased slightly to $312.4 million from $312.2 million in the prior period. Other revenue, consisting of recurring customer related services, decreased slightly to $2.8 million for the thirteen weeks ended July 2, 2005 as compared to $3.0 million in the prior period. Gross profit decreased to $36.4 million or 11.7% of net sales for the thirteen weeks ended July 2, 2005 as compared to $37.6 million or 12.1% of net sales in the prior period reflecting competitive pricing pressures as well as a change in the mix of both customers and products sold. Caution should be taken when comparing the Company's gross margin to that of other companies because other companies, while still complying with GAAP, may characterize income and expenses differently. Warehouse expense increased to $15.1 million or 4.8% of net sales for the thirteen weeks ended July 2, 2005, as compared to $14.8 million or 4.7% of net sales in the prior period, primarily as a result of additional labor, taxes and fringe benefits of $.4 million partially offset by a $.1 million decrease in rent expense. Transportation expense increased to $7.4 million or 2.4% of net sales for the thirteen weeks ended July 2, 2005 as compared to $6.7 million or 2.1% of net sales in the prior period, primarily as a result of increased fuels costs of $.2 million and increased worker's compensation expense of $.3 million. Selling, general and administrative expense decreased to $8.7 million or 2.8% as a percentage of sales for the thirteen weeks ended July 2, 2005 as compared to $8.9 million or 2.8% of net sales in the prior period. Excluding severance costs of $.6 million in the current quarter and transaction expenses of $.3 million in the second quarter of 2004, selling, general and administrative expenses decreased $.5 million. Among the components of the decrease were bad debt recoveries of $.2 million, savings resulting from the severance of employees, and savings in connection with the change in the Company's pension plan that became effective April 1, 2005. Net income for the thirteen weeks ended July 2, 2005 was $1.0 million as compared to net income of $2.3 million in the prior period. -8- Twenty-six weeks ended July 2, 2005 and June 26, 2004 Net sales for the twenty-six weeks ended July 2, 2005 increased $13.6 million or 2.2% to $636.9 million from $623.3 million in the prior period as a result of the addition of new store locations by our existing customer base in the first quarter 2005. Other revenue, consisting of recurring customer related services, increased slightly to $5.7 million for the twenty-six weeks ended July 2, 2005 as compared to $5.6 million in the prior period. Gross profit decreased to $74.5 million or 11.7% of net sales for the twenty-six weeks ended July 2, 2005 as compared to $75.1 million or 12.0% of net sales in the prior period reflecting competitive pricing pressures as well as a change in the mix of both customers and products sold. Caution should be taken when comparing the Company's gross margin to that of other companies because other companies, while still complying with GAAP, may characterize income and expenses differently. Warehouse expense increased to $31.0 million or 4.9% of net sales for the twenty-six weeks ended July 2, 2005, as compared to $29.6 million or 4.7% of net sales in the prior period, primarily as a result of additional labor, taxes and fringe benefits of $1.3 million. In addition, utility expenses increased $.1 million in the current period as compared to the prior period. Transportation expense increased to $14.9 million or 2.3% of net sales for the twenty-six weeks ended July 2, 2005 as compared to $13.6 million or 2.2% of net sales in the prior period, primarily as a result of increased fuels costs of $.4 million , increased worker's compensation expense of $.4 million, increased owner operator delivery service costs of $.2 million and increased toll expense of $.1 million. Selling, general and administrative expense increased to $18.2 million or 2.9% as a percentage of net sales for the twenty-six weeks ended July 2, 2005 as compared to $17.3 million or 2.8% of net sales in the prior period. The current period included $.6 million of expenses incurred in connection with the Company's withdrawn tender offer to refinance its senior notes in January 2005 and $.6 million of severance related expenses. Excluding these non recurring expenses, selling, general and administrative expense decreased as a percentage of net sales to 2.7% as compared to 2.8% of net sales in the prior period. Net income for the twenty-six weeks ended July 2, 2005 was $2.1 million as compared to net income of $4.7 million in the prior period. Reconciliation of EBITDA to net income (in thousands): Twenty-six weeks ended July 2, 2005 June 26, 2004 EBITDA $13,465 $17,187 Less: depreciation and amortization of fixed assets 1,094 1,073 Less: other amortization 639 401 Less: interest expense 7,971 7,581 Less: income tax provision 1,640 3,480 ------- ------- Net income $ 2,121 $ 4,652 ======= ======= -9- The Company has presented EBITDA supplementally because management believes this information enables management, investors, and other readers to evaluate and compare, from period to period, the Company's results from ongoing operations in a meaningful and consistent manner. We believe net income is the most closely comparable GAAP measure as opposed to cash flows from operations. Similar to net income, management uses EBITDA as a measure of the performance of our operations without the vagaries of fluctuations in working capital that cash flows from operations would have. Management also uses the EBITDA results when making operating decisions that require additional resources and as a basis for certain calculations for compensation programs. We believe that the relevant metric for our business to measure liquidity is our working capital plus our availability under our existing line of credit, both of which are disclosed in our liquidity discussion under Liquidity and Capital Resources below. Liquidity and Capital Resources Cash flows from operations, cash on hand, and amounts available under the Company's $90 million bank credit facility are the Company's principal sources of liquidity. The Company's bank credit facility is scheduled to mature on February 1, 2007. The Company believes that cash flows from operations and amounts available under the bank credit facility will be adequate to meet its anticipated working capital needs, capital expenditures, dividend payments, if any, and debt service requirements during the next twelve months, as well as any investments the Company may make. There were $12.4 million of borrowings under the Company's revolving bank credit facility (excluding $6.1 million of outstanding letters of credit) at July 2, 2005. The Company had additional borrowing capacity of $71.5 million available at that time. The Company's bank credit facility bears interest at a rate per annum equal to (at the Company's option): (i) the Euro dollar offering rate plus 1.625% or (ii) the lead bank's prime rate. During the twenty-six weeks ended July 2, 2005, cash flows provided by operating activities were approximately $14.2 million, consisting primarily of cash generated from income before non-cash expenses of $4.4 million, an increase in accounts payable of $4.1 million and a decrease in (i) accounts receivable of $4.7 million, (ii) inventory of $3.3 million (iii) prepaid expenses of $.7 million and (iv) other assets of $.2 million, offset by a use of cash as a result of a decrease in accrued expenses and other liabilities of $3.2 million. Cash flows provided by investing activities during the twenty-six weeks ended July 2, 2005 were approximately $3.2 million consisting of collections of notes receivable of $8.3 million and proceeds from the sale of note participations of $3.3 million offset by $5.9 million of new loans to customers and $2.5 million for capital expenditures, approximately $2.0 million of which were for leasehold improvements related to its grocery warehouse expansion. The Company expects to spend approximately $1.0 million for additional capital expenditures over the rest of 2005, many of which relate to office reconfigurations as a result of the warehouse expansion. Net cash used in financing activities of approximately $16.8 million consisted primarily of net repayments under the bank credit facility. The Company is engaged in discussions with a financial institution to provide it with a new bank credit facility to replace its current $90 million bank credit facility. The new bank credit facility would include both a $120 million -10- revolving credit line and the ability, under certain circumstances, including the prior approval of the financial institution, to draw down an incremental $40 million term loan. The arrangement would require the Company to grant the financial institution a security interest in certain assets of the Company not currently pledged to secure the existing $90 million revolving bank credit facility. The Company anticipates entering into such a financing arrangement in the third quarter of 2005. The new bank credit facility would be subject to customary closing conditions and there can be no assurance that such an arrangement will be consummated. Under the terms of the Company's existing bank credit facility, the Company is required to meet certain financial tests, including minimum interest coverage ratios. As of July 2, 2005, the Company was in compliance with such covenants. The consolidated indebtedness of the Company decreased to $162.5 million at July 2, 2005 as compared to $179.3 million at January 1, 2005. Stockholders' equity increased to $32.7 million at July 2, 2005 as compared to $30.6 million at January 1, 2005. From time to time when the Company has considered market conditions attractive, the Company has purchased, and may in the future purchase, its senior notes on the open market and retire a portion of its public debt. -11- Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes in market risk for the Company in the period covered by this report. See our Annual Report on Form 10-K for the year ended January 1, 2005 for a discussion of market risk for the Company. Item 4. Controls and Procedures As of the end of the period covered by this report, an evaluation was performed with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of July 2, 2005. The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, evaluated the Company's internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Based on that evaluation, there have been no such changes during the quarter covered by this quarterly report. -12- Part II-OTHER INFORMATION Item 1. Legal Proceedings No material developments since our last filing. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information Concurrent with this filing the Company has updated its Code of Ethics for senior executive officers, a copy of which is included as an exhibit. Item 6. Exhibits (a) 31.1 - Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002. Filed herewith. 31.2- Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002. Filed herewith. 32.1 - Certification of the Chief Executive Officer and the Chief Financial Officer of Di Giorgio Corporation pursuant to 18 U. S.C. Section 1350. (b) 14.1 Di Giorgio Corporation Code of Ethics For Senior Executive Officers. -13- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. DI GIORGIO CORPORATION By: /s/ Stephen R. Bokser -------------------------- Stephen R. Bokser Co-Chairman and Chief Executive Officer By: /s/ Lawrence S. Grossman -------------------------- Lawrence S. Grossman Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: July 28, 2005 -14

DI GIORGIO CORP 10-Q