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

 

 

 

 

Form 10-Q

 

 

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 and zip code)

 

Registrant’s telephone number, including area code:

(818) 879-6600

 

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

(Do not check if a smaller reporting company)

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

DOLE FOOD COMPANY, INC.

 

INDEX

 

 

DOLE FOOD COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

DOLE FOOD COMPANY, INC.

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

NOTE 1 — BASIS OF PRESENTATION

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Dole Food Company, Inc. and its consolidated subsidiaries (“Dole” or the “Company”) include all adjustments necessary, which are of a normal recurring nature, to present fairly the Company’s financial position, results of operations and cash flows. The Company operates under a 52/53-week year. The quarters ended March 22, 2008 and March 24, 2007 are twelve weeks in duration. For a summary of significant accounting policies and additional information relating to the Company’s financial statements, refer to the Notes to Consolidated Financial Statements in Item 8 of the Company’s Annual Report on Form 10-K (“Form 10-K”) for the year ended December 29, 2007.

 

Interim results are subject to seasonal variations and are not necessarily indicative of the results of operations for a full year. The Company’s operations are sensitive to a number of factors including weather-related phenomena and their effects on industry volumes, prices, product quality and costs. Operations are also sensitive to fluctuations in foreign currency exchange rates in both sourcing and selling locations as well as economic crises and security risks in developing countries.

 

Certain amounts in the prior year financial statements and related footnotes have been reclassified to conform to the 2008 presentation. As discussed in Note 4 — Business Disposition, the Company reclassified the operating results of its North American citrus and pistachio operations to discontinued operations.

 

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

 

During March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 161, Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133, (“FAS 161”). This new standard requires enhanced disclosures for derivative instruments, including those used in hedging activities. It is effective for fiscal years and interim periods beginning after November 15, 2008, and will be applicable to the Company in the first quarter of fiscal 2009. The Company is evaluating the potential impacts that the adoption of FAS 161 may have on its consolidated financial statements.

 

During February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 (“FAS 159”), which permits entities to elect to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS 159 became effective in the first quarter of fiscal 2008. The Company did not elect to apply the fair value option to any of its financial instruments.

 

During September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. FAS 157 requires companies to disclosure the fair value of financial instruments according to a fair value hierarchy as defined in the standard. In February 2008, the FASB issued FASB Staff Position 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (“FSP 157-1”) and FSP 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”). FSP 157-1 amends FAS 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of FAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and was adopted by the Company, as it applies to its financial instruments, effective December 30, 2007. The impact of adoption of FAS 157 is discussed in Note 14 — Derivative Financial Instruments.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

Included in other income (expense), net in the Company’s condensed consolidated statements of operations for the quarters ended March 22, 2008 and March 24, 2007 are the following items:

 

 

Refer to Note 14 — Derivative Financial Instruments for further discussion regarding the Company’s cross currency swap.

 

NOTE 4 — BUSINESS DISPOSITION

 

During the fourth quarter of 2007, the Company approved and committed to a formal plan to divest its citrus and pistachio operations (“Citrus”) located in central California. In evaluating the business, the Company concluded that this business met the definition of a discontinued operation as defined in Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). Accordingly, the results of operations of this business have been reclassified for all periods presented. Pursuant to FAS 144, the condensed consolidated balance sheets and condensed consolidated statements of cash flows are not required to reflect the reclassification of Citrus as a discontinued operation.

 

Refer to Note 13 — Assets Held-For-Sale for further discussion regarding the Company’s expected asset sales.

 

NOTE 5 — INCOME TAXES

 

The Company recorded $9.1 million of income tax expense on $20.2 million of pretax losses from continuing operations for the quarter ended March 22, 2008. Income tax expense for the quarter included $5.4 million recorded to establish a valuation allowance against deferred income tax assets in Ecuador which as the result of a recently enacted tax law, have been determined to not be recoverable. Additionally, income tax expense included interest expense of $2.8 million (net of associated income tax benefits of approximately $1.3 million) related to the Company’s unrecognized tax benefits. The income tax expense for the quarter ended March 24, 2007 was $2 million, including interest expense of $2.4 million (net of associated income tax benefits of approximately $1.5 million) related to the Company’s unrecognized tax benefits. The Company’s effective tax rate varies significantly from period to period due to the level, mix and seasonality of earnings generated in its various U.S. and foreign jurisdictions.

 

Under Accounting Principles Board Opinion No. 28, Interim Financial Reporting (“APB 28”), and FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods (“FIN 18”), the Company is required to adjust its effective tax rate for each quarter to be consistent with the estimated annual effective tax rate. Jurisdictions with a projected loss where no tax benefit can be recognized are excluded from the calculation of the estimated annual effective tax rate. Applying the provisions of APB 28 and FIN 18 could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.

 

In applying APB 28 and FIN 18 to the income tax provision computation for the period ended March 22, 2008, the Company excluded, from its calculation of the estimated annual effective tax rate, income or loss earned in certain foreign jurisdictions having tax rates that vary significantly from those associated with the Company’s

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

earnings from operations in the rest of the jurisdictions in which it operates. Due to the volatility in the mix of earnings, the Company believes this approach is more representative of what is expected for the full year.

 

For the periods presented, the Company’s income tax provision differs from the U.S. federal statutory rate applied to the Company’s pretax losses primarily 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 current year uncertain tax positions.

 

The Company recognizes accrued interest and penalties related to its unrecognized tax benefits as a component of income taxes in the condensed consolidated statement of operations. Accrued interest and penalties before tax benefits were $64.6 million and $68.7 million at December 29, 2007 and March 22, 2008, respectively, and are included as a component of other long-term liabilities in the condensed consolidated balance sheet.

 

Dole Food Company or one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2001.

 

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

 

Internal Revenue Service Audit:  On June 29, 2006, the IRS completed an examination of the Company’s federal income tax returns for the years 1995 to 2001 and issued a Revenue Agent’s Report (“RAR”) that includes various proposed adjustments. The net tax deficiency associated with the RAR was $175 million, plus interest and penalties. The Company timely filed a protest letter contesting the proposed adjustments contained in the RAR on July 6, 2006. During January 2008, the Company was notified that the Appeals Branch of the IRS finalized its review of the Company’s protest; the Appeals Branch supported the Company’s position in all material respects. This review is subject to Joint Committee approval. As a result of the finalization of the review of the Company’s federal income tax returns for the years 1995 to 2001 by the Appeals Branch of the IRS, it is likely that the Company’s other long-term liabilities could decrease by as much as $110 million due to reductions in the Company’s gross unrecognized tax benefits. In that case, the impact on the Company’s condensed consolidated financial statements would be approximately $130 million, which includes the $110 million plus $20 million for interest and federal and state tax benefits. Approximately $60 million of this amount would reduce the Company’s income tax provision and effective tax rate, and the remaining $70 million would reduce goodwill.

 

The Company is currently under examination by the Internal Revenue Service for the tax years 2002-2005 and it is anticipated that the examination will be completed by the end of 2009.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

NOTE 6 — INVENTORIES

 

The major classes of inventories were as follows:

 

 

NOTE 7 — GOODWILL AND INTANGIBLE ASSETS

 

Goodwill has been allocated to the Company’s reporting segments as follows:

 

 

Details of the Company’s intangible assets were as follows:

 

 

Amortization expense of intangible assets totaled $1 million for each of the quarters ended March 22, 2008 and March 24, 2007, respectively.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

As of March 22, 2008, the estimated remaining amortization expense associated with the Company’s intangible assets for the remainder of 2008 and in each of the next four fiscal years is as follows (in thousands):

 

 

NOTE 8 — NOTES PAYABLE AND LONG-TERM DEBT

 

Notes payable and long-term debt consisted of the following amounts:

 

 

The Company amortized deferred debt issuance costs of $1 million during each of the quarters ended March 22, 2008 and March 24, 2007.

 

As of March 22, 2008, the term loan facilities consisted of $221 million of Term Loan B and $736.9 million of Term Loan C. The term loan facilities bear interest at LIBOR plus a margin ranging from 1.75% to 2%, dependent upon the Company’s senior secured leverage ratio. The weighted average variable interest rates at March 22, 2008 for Term Loan B and Term Loan C were LIBOR plus 2%, or 5.7%. The term loan facilities require quarterly principal payments, plus a balloon payment due in 2013. Related to the term loan facilities, the Company holds an interest rate swap to hedge future changes in interest rates and a cross currency swap to effectively lower the U.S. dollar fixed interest rate to a Japanese yen fixed interest rate. Refer to Note 14 — Derivative Financial Instruments for additional information related to these instruments.

 

As of March 22, 2008, the asset based revolving credit facility (“ABL revolver”) borrowing base was $345.9 million and the amount outstanding under the ABL revolver was $233.5 million. The ABL revolver bears

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

interest at LIBOR plus a margin ranging from 1.25% to 1.75%, dependent upon the Company’s historical borrowing availability under this facility. At March 22, 2008, the weighted average variable interest rate for the ABL revolver was LIBOR plus 1.5%, or 4.6%. The ABL revolver matures in April 2011. After taking into account approximately $4.3 million of outstanding letters of credit issued under the ABL revolver, the Company had approximately $108.1 million available for borrowings as of March 22, 2008. In addition, the Company had approximately $82.3 million of letters of credit and bank guarantees outstanding under its pre-funded letter of credit facility as of March 22, 2008.

 

Provisions under the Company’s senior secured credit facilities and the indentures governing the Company’s senior notes and debentures require the Company to comply with certain covenants. These covenants include limitations on, among other things, indebtedness, investments, loans to subsidiaries, employees and third parties, the issuance of guarantees and the payment of dividends. At March 22, 2008, the Company was in compliance with all applicable covenants.

 

NOTE 9 — SHAREHOLDERS’ EQUITY

 

Comprehensive Loss

 

The components of comprehensive loss were as follows in each period:

 

 

Dividends

 

The Company did not declare or pay a dividend to its parent during either of the quarters ended March 22, 2008 or March 24, 2007.

 

The Company’s ability to declare dividends is limited under the terms of its senior secured credit facilities and senior notes indentures. As of March 22, 2008, the Company had no ability to declare and pay dividends or other similar distributions.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

NOTE 10 — EMPLOYEE BENEFIT PLANS

 

The components of net periodic benefit cost for the Company’s U.S. and international pension plans and other postretirement benefit (“OPRB”) plans were as follows:

 

 

NOTE 11 — SEGMENT INFORMATION

 

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.

 

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

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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

 

Revenues from external customers and EBIT for the reportable operating segments and corporate were as follows:

 

 

 

The Company’s equity earnings in unconsolidated subsidiaries, which have been included in EBIT in the table above, relate primarily to the fresh fruit and fresh vegetables operating segments.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Total assets for the reportable operating segments and corporate were as follows:

 

 

NOTE 12 — CONTINGENCIES

 

The Company is a guarantor of indebtedness to some of its key fruit suppliers and other entities integral to the Company’s operations. At March 22, 2008, guarantees of $3.5 million consisted primarily of amounts advanced under third-party bank agreements to independent growers that supply the Company with product. The Company has not historically experienced any significant losses associated with these guarantees.

 

The Company issues letters of credit and bank guarantees through its ABL revolver and its pre-funded letter of credit facilities, and, in addition, separately through major banking institutions. The Company also provides insurance-company-issued bonds. These letters of credit, bank guarantees and insurance company bonds are required by certain regulatory authorities, suppliers and other operating agreements. As of March 22, 2008 total letters of credit, bank guarantees and bonds outstanding under these arrangements were $138.2 million, of which $82.3 million was issued under its pre-funded letter of credit facility.

 

The Company also provides various guarantees, mostly to foreign banks, in the course of its normal business operations to support the borrowings, leases and other obligations of its subsidiaries. The Company guaranteed $240.1 million of its subsidiaries’ obligations to their suppliers and other third parties as of March 22, 2008.

 

The Company has change of control agreements with certain key executives, under which severance payments and benefits would become payable in the event of specified terminations of employment following a change of control (as defined) of the Company.

 

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

 

DBCP Cases:  A significant portion of the Company’s legal exposure relates to lawsuits pending in the United States and in several foreign countries, alleging injury as a result of exposure to the agricultural chemical DBCP (1,2-dibromo-3-chloropropane). As to all the DBCP matters, the Company has denied liability and asserted substantial defenses. Although no assurance can be given concerning the outcome of these cases, in the opinion of management,

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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.

 

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 446 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. Twenty-four of these lawsuits are currently pending in various jurisdictions in the United States, of which nine have been brought by foreign workers who allege exposure to DBCP in countries where Dole did not even have operations during the relevant time period. The remaining cases are pending in Latin America and the Philippines, including 212 labor cases pending in Costa Rica under that country’s national insurance program. Claimed damages in DBCP cases worldwide total approximately $42.1 billion, with lawsuits in Nicaragua representing approximately 85% 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.

 

One case pending in Los Angeles Superior Court with 12 Nicaraguan plaintiffs initially resulted in verdicts which totaled approximately $5 million in damages against Dole in favor of six of the plaintiffs. As a result of the court’s March 7, 2008 favorable rulings on Dole’s post-verdict motions, including, importantly, the court’s decision striking down punitive damages in the case on U.S. Constitutional grounds, the damages against Dole have now been reduced to $1.58 million in total compensatory awards to four of the plaintiffs; and the court granted Dole’s motion for a new trial as to the claims of one of the plaintiffs. The court has scheduled a hearing on the form of the judgment for May 6, 2008. Additionally, the court appointed a mediator to explore possible settlement of all DBCP cases currently pending before the court.

 

In Nicaragua, 189 cases are currently filed (of which 26 are active) in various courts throughout the country, all but one of which were brought pursuant to Law 364, an October 2000 Nicaraguan statute that contains substantive and procedural provisions that Nicaragua’s Attorney General formally opined are unconstitutional. In October 2003, the Supreme Court of Nicaragua issued an advisory opinion, not connected with any litigation, that Law 364 is constitutional. Twenty-four cases have resulted in judgments in Nicaragua: $489.4 million on December 11, 2002; $82.9 million on February 25, 2004; $15.7 million on May 25, 2004; $4 million on May 25, 2004; $56.5 million on June 14, 2004; $64.8 million on June 15, 2004; $27.7 million on March 17, 2005; $98.5 million on August 8, 2005; $46.4 million on August 20, 2005; $809 million on December 1, 2006; and $38.4 million on November 14, 2007. The Company has appealed all judgments, with the Company’s appeal of the August 8, 2005 $98.5 million judgment and of the December 1, 2006 $809 million judgment currently pending before the Nicaragua Court of Appeal.

 

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

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

against Plaintiffs’ counsel is still pending before the Court of Appeals in that case. A Special Master appointed by the Court of Appeals has recommended that Plaintiffs’ counsel be ordered to pay Defendants’ fees and costs up to $130,000 each to Dole and the other two defendants. The Court of Appeals has not yet acted on that recommendation.

 

Claimants have also sought to enforce the Nicaraguan judgments in Colombia, Ecuador and Venezuela. In addition, there is one case pending in U.S. District Court in Miami, Florida seeking enforcement of the August 8, 2005 $98.5 million Nicaraguan judgment.

 

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

 

On October 23, 2006, Dole announced that Standard Fruit de Honduras, S.A. reached an agreement with the Government of Honduras and representatives of Honduran banana workers. This agreement establishes a Worker Program that is intended by the parties to resolve in a fair and equitable manner the claims of male banana workers alleging sterility as a result of exposure to 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. On August 15, 2007, Shell Oil Company was included in the Worker Program. While Dole believes there is no reliable scientific basis for alleged injuries from the agricultural field application of DBCP, Dole continues to seek reasonable resolution of other pending litigation and claims in the U.S. and Latin America. 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. Additional information concerning DBCP matters is contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007, under the heading “Item 3. Legal Proceedings.”

 

European Union Antitrust Inquiry and U.S. Class Action Lawsuits: On July 25, 2007, the Company was informed that the European Commission (“EC”) had adopted a Statement of Objections against the Company, and other unrelated banana companies, alleging violations of the European competition (antitrust) laws by the banana companies within the European Economic Area (EEA). This Statement of Objections follows searches carried out by the European Commission in June 2005 at certain banana importers and distributors, including two of the Company’s offices. Recently, on November 28 and 29, 2007, the EC conducted searches of certain of the Company’s offices in Italy and Spain, as well as of other companies’ offices located in these countries.

 

A Statement of Objections is a procedural step in the EC’s antitrust investigation, in which the EC communicates its preliminary view with respect to a possible infringement of European competition laws. The EC will review Dole’s written and oral responses to the Statement of Objections in order to determine whether to issue a final Decision. Any Decision (including any fines that may be assessed under the Decision) will be subject to appeal to the European Court of First Instance and the European Court of Justice. The Company continues to cooperate with the EC in order to provide the Commission with a full and transparent understanding of the banana market. Although no assurances can be given concerning the course or outcome of the EC investigation, the Company believes that it has not violated the European 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 were consolidated into two separate putative class action lawsuits: one by direct purchasers (customers); and another by indirect purchasers (those who purchased bananas from customers). On June 26, 2007, Dole entered into settlement agreements resolving these

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

putative consolidated class action lawsuits filed by the direct purchasers and indirect purchasers. The Court entered final judgment orders approving the settlement agreements on November 21, 2007. The direct purchaser settlement is now completed. The indirect purchaser agreement is currently under appeal by a single party. The Company did not admit any wrongdoing in these settlements and continues to believe they were totally without merit; however, the Company elected to settle these lawsuits to bring a final conclusion to this litigation, which had been ongoing since 2005. Neither settlement will have a material adverse effect on the Company’s financial condition or results of operations.

 

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. Although no assurance can be given concerning the outcome of this case, in the opinion of management, after consultation with legal counsel, the pending lawsuits and tax-related matters are not expected to have a material adverse effect on the Company’s financial condition or results of operations. Additional information concerning this matter is contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007, under the heading “Item 3. Legal Proceedings.”

 

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. Additional information concerning this matter is contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007, under the heading “Item 3. Legal Proceedings.”

 

Spinach E. coli Outbreak:  On September 15, 2006, Natural Selection Foods LLC recalled all packaged fresh spinach that Natural Selection Foods produced and packaged with Best-If-Used-By dates from August 17 through October 1, 2006, because of reports of illness due to E. coli O157:H7 following consumption of packaged fresh spinach produced by Natural Selection Foods. These packages were sold under 28 different brand names, only one of which was ours. At that time, Natural Selection Foods produced and packaged all of our spinach items. Dole has no ownership or other economic interest in Natural Selection Foods. 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 expects that the vast majority of the spinach E. coli O157:H7 claims will be handled outside the formal litigation process. 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. Additional information concerning this matter is contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007, under the heading “Item 3. Legal Proceedings.”

 

NOTE 13 — ASSETS HELD-FOR-SALE

 

The Company reviews its assets in order to identify those assets that do not meet the Company’s future strategic direction or internal economic return criteria. As a result of this review, the Company has identified and is in the process of selling certain long-lived assets. In accordance with FAS 144, the Company has reclassified these assets as held-for-sale.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Total assets held-for-sale, relating primarily to property, plant and equipment, net of accumulated depreciation, by segment were as follows:

 

 

During February 2008, the Company entered into an agreement to sell approximately 2,000 acres of land parcels located in Hawaii for approximately $39 million. These land parcels were reclassified as assets held-for-sale during the first quarter of 2008. The sale is expected to be completed by the third quarter of 2008. The Company owns other land in Hawaii which is being evaluated for potential sale and expects to reclassify a portion as assets held-for-sale during the second quarter of 2008.

 

During the fourth quarter of 2007, the Company reclassified approximately 4,400 acres of land and other related assets of its citrus and pistachio operations located in central California as assets held-for-sale. In March 2008, the Company entered into an agreement to sell these assets for approximately $46 million. These assets are held by non-wholly owned subsidiaries of the Company. The Company’s share of the proceeds is estimated to be approximately $30 million. The Company is targeting to close the sale by the end of the second quarter of 2008.

 

During the fourth quarter of 2007, the Company reclassified a breakbulk refrigerated ship owned by a Latin American subsidiary as assets held-for-sale. In the first quarter of 2008, the Company sold the ship for $12.7 million and also entered into a lease agreement for that ship. The Company recognized a deferred gain of $11.9 million on the sale which is being amortized over the 3 year lease term.

 

During the third quarter of 2007, the Company reclassified its fresh-cut flowers headquarters facility, located in Miami, Florida as assets held-for-sale. In April 2008, the Company entered into an agreement to sell this facility for approximately $35 million. The sale is expected to close during the third quarter of 2008.

 

NOTE 14 — DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company is exposed to foreign currency exchange rate fluctuations, bunker fuel price fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, the Company uses derivative instruments to hedge certain foreign currency, bunker fuel and interest rate exposures. The Company’s objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.

 

Through the first quarter of 2007, all of the Company’s derivative instruments, with the exception of the cross currency swap, were designated as effective hedges of cash flows as defined by Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“FAS 133”). However, during the second quarter of 2007, the Company elected to discontinue its designation of both its foreign currency and bunker fuel hedges as cash flow hedges under FAS 133. The interest rate swap will continue to be accounted for as a cash flow hedge under FAS 133. As a result, all changes in the fair value of the Company’s derivative financial instruments from the time of discontinuation of hedge accounting are reflected in the Company’s condensed consolidated statements of operations.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

At March 22, 2008, the gross notional value, fair market value and unrealized gains (losses) of the Company’s foreign currency hedges were as follows:

 

 

At March 22, 2008, the notional volume, fair market value and unrealized gains of the Company’s bunker fuel hedges were as follows:

 

 

For both the foreign currency and bunker fuel hedges, the fair market value of these instruments is recorded in the condensed consolidated balance sheet as either a current asset or current liability. Settlement of these hedges will occur during 2008 and 2009.

 

Net unrealized losses related to foreign currency and bunker fuel hedges were $3.2 million at March 22, 2008. The Company also recorded net realized losses, related to the settlement of foreign currency and bunker fuel contracts, of $1.9 million for the quarter ended March 22, 2008. Net realized gains for the quarter ended March 24, 2007 were not material. These realized and unrealized gains and losses were included as a component of cost of products sold in the condensed consolidated statements of operations for 2008 and 2007.

 

The Company executed a cross currency swap during 2006 to synthetically convert $320 million of Term Loan C into Japanese yen denominated debt in order to effectively lower the U.S. dollar fixed interest rate of 7.2% to a Japanese yen interest rate of 3.6%. Payments under the cross currency swap were converted from U.S. dollars to Japanese yen at an exchange rate of 111.92 Japanese yen to the U.S. dollar. At March 22, 2008, the exchange rate of the Japanese yen to U.S. dollar was ¥99.51. The strengthening of the Japanese yen against the U.S. dollar resulted in non-cash unrealized losses of $32.4 million during the first quarter of 2008. The value of the cross currency swap will fluctuate based on changes in the U.S. dollar to Japanese yen exchange rate and market interest rates until maturity in 2011, at which time it will settle in cash at the then current exchange rate at that time. The fair value of the cross currency swap was a liability of $24.4 million at March 22, 2008. Unrealized losses related to the cross currency swap for the quarters ended March 22, 2008 and March 24, 2007 were $32.4 million and $1.8 million, respectively. Realized gains related to settlement of the cross currency swap amounted to $2.9 million and $3.3 million for the quarters ended March 22, 2008 and March 24, 2007, respectively. These gains and losses are recorded through other income (expense), net in the condensed consolidated statements of operations.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The Company entered into an interest rate swap in 2006 to hedge future changes in interest rates. This agreement effectively converted $320 million of borrowings under Term Loan C, which was variable-rate debt, to a fixed-rate basis through 2011. The interest rate swap fixed the interest rate at 7.2%. The paying and receiving rates under the interest rate swap are 5.49% and 4.26% as of March 22, 2008, with an outstanding notional amount of $320 million. The fair value of the interest rate swap was a liability of $26.7 million at March 22, 2008. Net payments of the interest rate swap are recorded as a component of interest expense in the condensed consolidated statements of operations for 2008 and 2007. Net payments for the first quarters of 2008 and 2007 were not material.

 

As discussed in Note 2 — Recent Accounting Pronouncements, the Company adopted FAS 157 as of December 30, 2007 for financial assets and liabilities measured on a recurring basis and the impact of the adoption was not material. The following table provides a summary of the fair values of assets and liabilities under the FAS 157 hierarchy:

 

 

FAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs to valuation techniques used to measure fair value. These levels, in order of highest to lowest priority are described below:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

 

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

Level 3: Unobservable inputs that are not corroborated by market data.

 

The fair values of the Company’s derivative instruments are determined using Level 2 inputs, which are defined as “significant other observable inputs”. The fair values of the foreign currency exchange contracts, bunker fuel contracts, interest rate swap and cross currency swap were estimated using internal discounted cash flow calculations based upon forward foreign currency exchange rates, bunker fuel futures, interest-rate yield curves or quotes obtained from brokers for contracts with similar terms.

 

NOTE 15 — GUARANTOR FINANCIAL INFORMATION

 

In connection with the issuance of the 2011 Notes in March 2003 and the 2010 Notes in May 2003, all of the Company’s wholly-owned domestic subsidiaries (“Guarantors”) have fully and unconditionally guaranteed, on a

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

joint and several basis, the Company’s obligations under the indentures related to such Notes and to the Company’s 2009 Notes and 2013 Debentures (the “Guarantees”). Each Guarantee is subordinated in right of payment to the Guarantors’ existing and future senior debt, including obligations under the senior secured credit facilities, and will rank pari passu with all senior subordinated indebtedness of the applicable Guarantor.

 

The accompanying guarantor consolidating financial information is presented on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the Company’s share in the subsidiaries’ cumulative results of operations, capital contributions and distributions and other changes in equity. Elimination entries relate primarily to the elimination of investments in subsidiaries and associated intercompany balances and transactions.

 

The following are condensed consolidating statements of operations of the Company for the quarters ended March 22, 2008 and March 24, 2007; condensed consolidating balance sheets as of March 22, 2008 and December 29, 2007; and condensed consolidating statements of cash flows for the quarters ended March 22, 2008 and March 24, 2007.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended March 22, 2008

 

 

For the Quarter Ended March 24, 2007

 

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET
As of March 22, 2008

 

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET
As of December 29, 2007