-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AyOFi+xbEJhsOZ7eTZx8r/gG7jnUt5DJZx00vqC81CxylqrfK5JV9i5HAIUaAewy 2gnFCuT0KNBtTbIO/eOxlg== 0001045969-02-000447.txt : 20020415 0001045969-02-000447.hdr.sgml : 20020415 ACCESSION NUMBER: 0001045969-02-000447 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011230 FILED AS OF DATE: 20020319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUIGINOS INC CENTRAL INDEX KEY: 0001083751 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030] IRS NUMBER: 593015985 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 333-76569 FILM NUMBER: 02578490 BUSINESS ADDRESS: STREET 1: 524 LAKE AVENUE SOUTH CITY: DULUTH STATE: MN ZIP: 55802 BUSINESS PHONE: 2187235555 10-K405 1 d10k405.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001 COMMISION FILE NUMBER: 333-76569 - -------------------------------------------------------------------------------- LUIGINO'S, INC. (Exact name of registrant as specified in its charter) MINNESOTA 59-3015985 (State of incorporation) (I.R.S. Employer Identification No.) 525 LAKE AVENUE SOUTH DULUTH, MINNESOTA 55802 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (218) 723-5555 - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: None 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 [ ] As of March 19, 2002, the registrant had outstanding 1,000 shares of voting and non-voting common stock, par value $1.00 per share, which is the registrant's only class of common stock. DOCUMENTS INCORPORATED BY REFERENCE None. 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 Form 10-K or any amendment to this Form 10-K. [X] Part I This Form 10-K contains forward-looking statements within the meaning of federal securities laws that may include statements regarding intent, belief or current expectations of the Company and its management. These forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in these statements. Risks and uncertainties that might affect our results are detailed from time to time in the Company's filings with the Securities and Exchange Commission, including in Exhibit 99 to this Form 10-K. The Company does not intend to update any of the forward-looking statement after the date of this Form 10-K to conform them to actual results. Item 1. Business Description Luigino's, Inc. ("Luigino's" or the "Company") is one of the leading producers and marketers of frozen entrees in North America. Luigino's Michelina's and Budget Gourmet brands are the third and fifth most popular brands in the United States, respectively, and together represent 18.5% of the unit volume of the entire frozen entree category in the United States. The Company is the U.S. market leader in sales of non-diet entrees priced below $2.00, with an 80.0% market share based on unit volume. In Canada, the Company's Michelina's brand is the market share leader in the frozen dinners and entrees category, with a 42.0% market share. Luigino's produces over 200 different entrees, which it differentiates from its competition at all price points based on superior quality, freshness and value. The statistics in this paragraph are derived from information provided by A. C. Nielsen report on grocery retail greater than $2.0 million in sales for the 52-week period ended December 30, 2001. The frozen food market accounts for $24 billion of the entire supermarket industry. The frozen dinners and entrees category accounts for $5.0 billion of the frozen foods market. Entrees are defined as all precooked, frozen dishes packaged on a plate, on a tray, or in a boil-in-bag designed to be the main dish of a meal. In comparison, dinners are defined as all precooked, frozen, multi-component meals packaged on a plate, on a tray, or in a boil-in-bag designed to be the entire meal. Frozen dinners and entrees, the product group in which Luigino's competes, is the single largest product category within the frozen prepared food market accounting for approximately 91.0% of segment. According to A. C. Nielsen, frozen dinners and entrees remain one of the largest and fastest growing segments in the entire supermarket, increasing 6.4% from $4.7 billion in 2000 to $5.0 billion in 2001. Growth in the frozen dinner and entree category is attributed to the change in U.S. family profiles and consumer lifestyles, including dual-income households and single-parent families, and an increased emphasis on leisure time. The single-serve frozen entree category is further divided into three segments: Value priced entrees, Premium full flavor entrees and Healthy entrees. The $504 million Value segment is comprised of traditional, non-diet products priced below $2.00. The $1.1 billion Premium full flavor segment consists of traditional, non-diet products priced over $2.00. The $1.2 billion Healthy segment is made up of products that are low fat or reduced-calorie, most of which are priced over $2.00. Luigino's primarily competes in the Value segment of the U.S. single-serve frozen entree market, where it has an 80.0% share based on unit volume. The Company markets its Michelina's and Budget Gourmet brand products under five distinct product lines. Each product line has unique attributes and retail price points, as set forth below: 1
% of Net Sales Fiscal Years Ended ---------------------------------------- December 31, December 31, January 2, Product Line Brand Price Point Recipe 2001 2000 2000 - ------------ ----- ----------- ------ ------------ ------------ ---------- Popular Michelina's, Budget Gourmet, $1.59-$1.79 Traditional, Oriental 61.9% 64.9% 66.4% Michelina's Yu Sing Economy Michelina's, Budget Gourmet $1.00-$1.25 Pasta & Sauce 23.2% 12.0% 14.1% Signature Michelina's $1.99-$2.29 Premium 5.5% 10.0% 13.3% Snacks Michelina's $1.00-$2.50 Pizza & Appetizers 3.5% 5.3% 6.2% Kids Michelina's $1.00-$1.25 Pasta, Pizza & 5.9% 3.3% -- Appetizers
In November 1999, the Company entered into certain agreements with Self Serve Centers, Inc. (SSCI), an affiliated company, whereby SSCI manages the Company's vending business for a fee and the Company supplies product and certain support services at an agreed upon price. See "Items 13 - Certain Relationships and Related Transactions - Other Related Transactions." On February 9, 2001, the Company acquired all of the outstanding capital stock of The All American Gourmet Company, a Delaware corporation ("AAG") pursuant to a Purchase Agreement by and among the Company and Heinz Frozen Food Company ("Heinz"), a Delaware corporation and the parent company of AAG. At the date of closing, the only assets owned by AAG were intellectual property rights, including logos, trademarks, patent licenses, product formulas, quality specifications, customer lists and marketing materials. The aggregate consideration for the acquisition of AAG was $65 million in cash, of which $10 million was payable as a non-competition fee under a co-pack agreement entered into on the same date between the Company and Heinz. The cash used in the acquisition came from borrowings under a new five-year $100.0 million senior credit facility entered into as of the closing date among the Company, Bank One, NA and U.S. Bank NA. The new senior credit facility consists of $60.0 million of term debt and $40.0 million of revolver debt subject to certain borrowing base requirements. In addition, the Company agreed to purchase certain finished goods inventory from Heinz for a six-month period following the closing date and certain finished goods inventory remaining at the conclusion of the six-month period. As a result of this acquisition, the Company began to market and distribute the Budget Gourmet frozen entree product lines. Since its incorporation in 1990, Luigino's has elected to be taxed as a corporation under Subchapter S of the IRS code. The Company has made, and intends to continue to make, distributions to its shareholders to pay their income tax obligations as a result of the Company's status as an S Corporation. The Company's subsidiary, AAG, is a C-Corporation. As such, AAG will be responsible for federal, state and foreign taxes. Competitive Strengths Leading Market Positions. Luigino's primarily competes in the Value price segment of the U.S. frozen entree market, where it has an 80.0% share based on unit volume. Luigino's has an 18.5% market share, based on unit volume, of the overall U.S. frozen entree market. The Company produced 76 of the top 200 frozen entrees measured by unit sales per point of distribution for the twelve weeks ended December 30, 2001. In 1992, the Company entered the Canadian market, where the Company had eight of the top ten and 18 of the top 25 best selling frozen entrees as measured by A. C. Nielsen with more than 5% distribution for the 52-week period ended December 30, 2001. High Quality Products. Luigino's production process focuses on quality by starting with the freshest ingredients and by preparing its sauces from scratch based on its own recipes. Quality is continuously monitored by employee and management samplings, and employees are empowered to stop production if product quality is not being maintained. The Company's highly flexible production lines 2 enable it to quickly shift production among different products, essentially producing products to customer orders, which eliminates the need for substantial inventories, shortens cycle time between manufacture and consumption, and promotes higher quality product at the retail point of sale. Efficient Operations. Luigino's frozen entrees are produced at a state-of-the-art food processing plant located in Jackson, Ohio, where labor costs are relatively low, but locally competitive. The Jackson plant operates 14 highly efficient and flexible production lines, manufacturing approximately one million entrees per day. The Company's practices of manufacturing product in line with customer orders and shipping primarily in truckload quantities also contribute to the efficiency of operations. Strategic Distributions. The location of the Jackson, Ohio plant is key to the distribution system, since approximately 50.0% of the U.S. population lives within a 500 mile radius of Jackson. This enables the Company to quickly and cost effectively distribute its products. The strategic location of the plant also enables the Company to distribute products without outside warehousing, which eliminates expenses from spoilage and boosts inventory turnover. The Company currently turns its finished goods inventory approximately 20 times per year. Luigino's products are sold in the U.S. to retail grocery accounts through a national broker sales network of approximately 30 independent broker groups, who act as the direct link between Luigino's and the retail trade. The broker network is managed by an experienced internal sales force. Experienced and Motivated Management Team. The Company was founded in 1990 by Jeno F. Paulucci, a well-known food industry executive with over 50 years of experience. Mr. Paulucci has founded several successful food companies, including Chun King Corporation which he sold in 1967 to R.J. Reynolds Food Company and Jeno's Inc. which he sold in 1985 to The Pillsbury Co. Mr. Paulucci was the first Chairman of the Board of R.J. Reynolds Food Company (now RJR Nabisco, Inc.). Ron Bubar, the Company's President and Chief Executive Officer, who has managed production of Luigino's products since its inception, is a veteran with more than 30 years in the food industry, and has held senior management positions at The Pillsbury Co. and Jeno's Inc. A portion of senior management incentive compensation is linked to growth in EBITDA. Under management's stewardship, the Company has grown substantially since Luigino's was founded in 1990. Net sales have grown from $121.6 million in the fiscal year ended January 2, 1994 to $353.2 million in the fiscal year ended December 30, 2001, with a compound annual growth rate of 14.3%. Business Strategy Increase Product Penetration. Product penetration is measured by "all commodity volume," which measures the percentage of U.S. supermarkets with annual sales exceeding $2.0 million that sell the product in question. Although Michelina's and Budget Gourmet products as a group have a broad based national distribution represented by a total 94.0% all commodity volume; the all commodity volume of many of its best selling entrees is relatively low. For example, the average all commodity volume for the Company's top ten Popular products is 58.6%. Accordingly, the Company believes it can significantly increase sales by increasing the penetration levels of Michelina's and Budget Gourmet "best sellers." The Company is implementing this strategy by focusing "slotting" expenditures on increasing penetration of these best selling items. Slotting expenditures are paid to retailers to obtain shelf space for additional items. Acquisition and Introduction of New Product Lines. The acquisition of the Budget Gourmet brand, and its subsequent integration into Luigino's business, has enhanced the Company's presence in the frozen entree category. Together with the Michelina's brand, Luigino's now has a complete offering in the Value segment, meeting consumer needs for high quality, value priced frozen entrees. 3 The Company has a proven ability to successfully identify new market segments and created products and line extensions to fill these niches. One of the fastest-growing segments in the frozen entree category has been the Bowls segment. These are frozen entrees packaged in round, plastic bowls, that offer consumers a new level of convenience and variety. In late 2001, Luigino's launched a completely new line of Bowls, under both the Michelina's and Budget Gourmet brands. This new product line appears to be meeting a high degree of acceptance by the trade. In addition, the Company continues to develop and introduce new items to refresh existing product lines and maintain variety. Develop Pizza and Snacks Business. In 1998, Luigino's began marketing products in two of the fastest growing categories of the frozen prepared food industry - frozen appetizer/snack rolls and frozen pizza. Jeno Paulucci, Luigino's founder and Chairman, was a pioneer of the frozen hot snacks concept, and his company, Jeno's, Inc., was a market share leader in the frozen pizza category and manufactured and marketed the Pizza Roll, which is still the leading single product in the appetizers and snack roll category. The Company has developed and been issued a patent on a unique crisp microwavable pizza crust concept. The Jackson, Ohio facility is fully equipped to manufacture frozen pizza and snack products and currently produces such products for sale by the Company. Expand International Sales. Luigino's has successfully utilized joint marketing arrangements in Canada and Australia to build international sales while reducing the time and risk associated with entering new markets. In 2002, the Michelina's brand will be launched in Mexico and Japan, two large international markets (combined population greater than 220 million people) with a growing appetite for prepared frozen foods. The Company anticipates that Mexico, in particular, could become a growing market for the Company's products. Industry Overview The U.S. supermarket industry is relatively stable with growth based on modest price and population increases. The frozen food market accounts for $24 billion of the entire supermarket industry. Frozen dinners and entrees is the single largest product category within the frozen food market, increasing 6.4% from $4.7 billion in 2000 to $5.0 billion in 2001. Growth in the frozen dinner and entree category is attributed to the change in U.S. family profiles and consumer lifestyles, including dual-income households, single parent families, and an increased emphasis on leisure time. Luigino's primarily competes in the Value segment of the U.S. frozen entree market. Entrees are defined as all precooked, frozen, single dishes packaged on a plate, on a tray, or in a boil-in-bag designed to be the main dish of a meal. Products Entrees. Luigino's has marketed its Michelina's and Budget Gourmet brands frozen entree products under five distinct product lines. The Popular product line, which consists of products formerly presented as Green Label and Black Label, is targeted at quality-oriented, value-conscious consumers. The products are comprised of a variety of popular recipes using high-quality pasta and sauce and are usually accompanied by beef, chicken or seafood; the Asian entrees are marketed under the sub-brand Yu-Sing. The Popular products contributed approximately 61.9% of the net sales for the year ended December 30, 2001. These products are priced between $1.59 and $1.79, placing them in the Value segment. The following is a listing of typical Popular products available in the United States: 4 Macaroni & Cheese Macaroni & Cheese with Ham Chicken Primavera Fettuccine Primavera with Chicken Glazed Chicken Pepper Steak Penne Pasta with Mushroom Four-Cheese Lasagna Noodles Romanoff Roasted Sirloin Supreme Italian Sausage Fettuccine & Meatballs in Wine Sauce Layered Lasagna w/Meat Sauce Noodles Stroganoff Fettuccine Alfredo Swedish Meatballs Spaghetti Bolognese Noodles with Chicken, Peas & Carrots Penne Primavera Cheese Ravioli Lasagna with Meat Sauce Pepper Steak Lasagna Alfredo Oriental Beef & Peppers Fettuccine Alfredo w/Broccoli & Chicken Chicken & Almonds Macaroni & Sharp Cheddar Cheese Chicken Chow Mein Eggplant Parmigiano Garlic Chicken Salisbury Steak Shrimp Fried Rice Meatloaf Pork & Shrimp Fried Rice Layered Lasagna Pomodoro Sweet & Sour Chicken Stuffed Cheese Rigatoni Chicken Lo Mein Shaved, Cured Beef Shrimp Lo Mein Risotto Parmigiano Teriyaki Beef Chicken a la King Chicken Fried Rice Macaroni & Beef Pork Fried Rice Chicken Pesto Beef Stroganoff Fettuccine Creamy Pesto Cheese Manicotti with Marinara Sauce Black Bean Chili Beef Pepper Steak with Rice Teriyaki Chicken French Recipe Chicken Vegetable & Chicken Stir Fry Three Cheese Lasagna Layered Lasagna with Vegetables Glazed Turkey LF Linguini with Clams & Sauce Roast Beef Supreme Penne Pollo Fettuccini & Meatballs in Wine Sauce Lasagna Pollo Beef Cheddar Melt Lasagna with Vegetables Pasta,Wine & Mushroom Sauce w/ Chicken Spaghetti & Meatballs
The Economy products, which formerly were presented as Red Label, contributed approximately 23.2% of the net sales for the year ended December 30, 2001. These products are priced $1.00 to $1.25, placing them in the Value segment. The products are generally comprised of pasta and sauce entrees. The Economy line is targeted to working singles and children. The following is a listing of typical Economy products available in the United States: Fettuccine Carbonara Penne with Mushroom Sauce Rigatoni Pomodoro Wheels & Cheese Shells & Cheese with Jalapeno Spicy Spirals Egg Noodles Alfredo Chili-Mac Macaroni & Beef Ziti Parmesan Spaghetti with Tomato & Basil Rigatoni Cr. Sauce w/ Broccoli & Chicken Noodles `N Chicken 4 Cheese Fettucini Alfredo Spaghetti Marinara Chinese Vegetable & White Chicken Macaroni & Cheese Szechwan Vegetable & Chicken Vegetable Stir Fry Angel Hair Pasta w/ Tom. & Meat Sauce
5 Lasagna Alfredo with Broccoli Escalloped Noodles & Turkey Pasta Primavera Parmesan Lasagna with Meat Sauce Lasagna Mozzarella Italian Vegetable & White Chicken with Rice Penne Pasta with Tomatoes & Sausage Wild Rice Pilaf with Vegetables
The Signature products contributed approximately 5.5% of the net sales for the year ended December 30, 2001. The Signature product line is designed to be a value-priced, premium product. These products are restaurant-style recipes priced between $1.99 and $2.29. The following is a list of typical Signature products available in the United States: Chicken Marsala w/Garlic Mashed Potatoes Beef Burgundy with Garlic Mashed Potatoes Sirloin Beef Peppercorn w/Egg Noodles Shrimp Alfredo with Fettuccine Beef Pot Roast w/Roasted Potatoes Grilled Chicken Alfredo Salisbury Steak & Gravy w/Shells & Cheese Meatloaf & Gravy w/ Sour Cream Potatoes Layered Lasagna with Meat Sauce
The Snack products contributed approximately 3.5% of the net sales for the year ended December 30, 2001. These products are priced between $1.00 and $2.50, placing them in the Value segment. The following is a listing of typical Snack products available in the United States: Pizza Rolls Egg Rolls Single-Serve Pizzas - ----------- --------- ------------------- Cheese Shrimp Cheese Hamburger Chicken Pepperoni & Cheese Pepperoni Pork & Shrimp Combination Nachos Sweet & Sour Pork Supreme Combination Szechwan Chicken Four Meat The Kids products contributed approximately 5.9% of the net sales for the year ended December 30, 2001. These products are priced between $1.00 and $1.25, placing them in the Value segment. The product line is targeted to kids of all ages. The following is a listing of typical Kids products available in the United States: Chicken Littles Pizza Pasta Corn Dawgs That'za Pizza - Cheese Ravin' Ravioli That'za Pizza - Pepperoni Stir Crazy Pop'n Chicken Socceroni Pepperoni Pizza Rolls Rockin' Tacos Mini Apple Snack Rolls Marketing, Sales and Distribution United States. Luigino's markets its products through a network of approximately 30 independent broker groups managed by an internal sales force organized by regional territories. The brokers are responsible for local execution of new item introductions, trade promotions and on-shelf merchandising. The Company's territory managers are responsible for working with the broker network to develop trade promotion and merchandising strategies and are individually responsible for achieving new item penetration, sales growth and performance of the promotion and merchandising strategies. Luigino's has broad-based national presence, with Michelina's and Budget Gourmet products selling in approximately 94.0% of the U.S. supermarkets with annual sales exceeding $2.0 million. 6 Luigino's markets its products to national and regional supermarket chains, which operate their own warehouses and distribution facilities as well as retail outlets. Luigino's products are also sold to wholesalers, which service independent retailers and retail groups. Wholesalers offer a full line of services that may include warehouse, accounting and in-store merchandising for their retail customers. In addition, the Company sells its products to U.S. military commissaries. Shipments are generally made to customers directly from the Company's production facilities through public carriers. One of Luigino's ongoing marketing initiatives is the focusing of "slotting" payments to retailers to obtain additional shelf space for its proven best selling products. The Company plans and executes various promotional programs which provide price reductions from normal suggested retail prices to retail stores. These programs are for specified time periods and may be limited to geographic areas and products. They are often coupled with local and cooperative advertising campaigns to stimulate volume. Historically, the Company has not conducted any significant advertising in the United States. However, in Canada, where the Company has conducted significant advertising during the past 4 1/2 years, Michelina's brand awareness has increased from 18% in 1997 to 71% in 2001. International Marketing. Luigino's has successfully utilized joint marketing arrangements in Canada and Australia. In Canada, Michelina's products are sold and distributed by Schneider Foods Inc., one of the country's largest and most prominent food producers. Wholesale sales have more than quadrupled in the past five years, exceeding $100 million (Canadian) in 2001. With a 42% share of market, Michelina's is the number one selling brand of frozen entrees in Canada. In Australia, under a joint marketing and exclusive distribution arrangement with H.J. Heinz Company-Australia Limited, the Company's products are marketed under the co-brands Heinz Michelina's and hold a 9.1% share of market. Luigino's also markets and distributes its products in Central America and the Pacific Rim. In 2002, the Company plans to expand into other international markets. See "Business Strategy-Expanded International Sales." Competition The frozen food industry is highly competitive. Within the U.S. frozen food entree market, there are a number of established brands, many of which are produced and distributed by very large and diversified companies. Luigino's principal competitors are ConAgra, Inc. (Healthy Choice, Marie Callender and Banquet), Nestle Holdings, Inc. (Stouffer's and Lean Cuisine), Tyson (Jose Ole'), and H.J. Heinz Co. (Weight Watchers and Boston Market). Certain of these companies have introduced and may continue to introduce products and pricing strategies intended to compete directly with Luigino's. Other companies in the frozen food manufacturing industry may compete with Luigino's in the future, such as Mars, Inc., who introduced a line of Uncle Ben's in 1999. Luigino's primarily competes in the Value price segment of the frozen entree market, where the Michelina's and Budget Gourmet brands are the market share leader with an 80.0% share based on unit volume. Luigino's has 18.5% market share of the overall frozen entree market while competing with much larger companies, such as Nestle, H.J. Heinz and ConAgra. The Company believes that its greatest competitive strengths lie in brand recognition, efficient operations, quality, price and prompt delivery to meet the customer's needs. Raw Materials Luigino's uses large quantities of ingredients in its frozen entrees, including principally beef, chicken, cheese, tomatoes and flour, which are generally sourced from the U.S. commodity market. The 7 Company also produces meatballs and pasta and grows bean sprouts for some of its entrees. In some cases, the Company enters into one to three year supply contracts that fix the price for raw materials, but such contracts do not cover all of its ingredients. Luigino's manages the cost of production by growing and producing some of its own ingredients, by entering into long-term contracts and also by the customization of shipments in order to reduce warehousing time and space. Luigino's also utilizes significant quantities of plastic and cardboard for its packaging requirements. Supplies of raw materials and packaging requirements are readily available from a number of sources. Trademarks and Patents Luigino's registered trademarks include Michelina's(R), Signature(R) and Yu Sing (R). The Company has several other trademarks in connection with various product lines. The registrations for trademarks expire from time to time and are renewed in the ordinary course of business before the expiration dates. Luigino's has registered patents for some of the processes used in its production lines. In conjunction with the acquisition of the All American Gourmet Company from Heinz Frozen Food Company on February 9, 2001, the Company acquired certain trademarks including Budget Gourmet(TM) and Value Classics(TM). Luigino's considers its trademarks and patents to be of significant importance in its business. The Company is not aware of any circumstances that would negatively impact its intellectual property, however, future litigation by Luigino's could be necessary to enforce the trademark or patent rights or to defend Luigino's against claimed infringement of the rights of others. Adverse determinations in any of these proceedings could have a material adverse effect on the Company's business. Employees Luigino's has approximately 1,272 employees, of whom 151 are engaged in production and distribution in Duluth, 883 are engaged in production and distribution in Jackson, and 238 are involved in management, administration and field support. As of December 30, 2001, approximately 1,034 of Luigino's employees at the Duluth, Minnesota and Jackson, Ohio facilities were represented by collective bargaining agreements with the United Food and Commercial Workers Union. The Duluth agreement expires in July 2003, and the Jackson agreement expires in March 2006. Although Luigino's considers employee relations generally to be good and has not experienced any strikes or work stoppages in the past, a prolonged work stoppage or strike at any facility with union employees could have a material adverse effect on the Company's business. The Company cannot be certain that when the existing collective bargaining agreements expire, new agreements will be reached without union action or that any new agreements will be on terms satisfactory to the Company. Government Regulation Luigino's production facilities and products are subject to extensive regulation regarding, among other things, the processing, packaging, storage, distribution, advertising and labeling of its products, and environmental compliance. The material regulations to which Luigino's is subject include regulations promulgated under the Federal Food, Drug and Cosmetic Act, the Nutrition Labeling and Education Act, the Federal Trade Commission Act and the Occupational Safety and Health Act, each as amended. Luigino's manufacturing facilities and products are subject to periodic inspection by federal, state and local authorities. Compliance with existing federal, state and local laws and regulations is not expected to have a material adverse effect on Luigino's. However, the Company cannot predict the effect, if any, of laws and regulations that may be enacted in the future, or of changes in the enforcement of existing laws and regulations that are subject to extensive regulatory discretion. Luigino's may need to incur expenses or liabilities to comply with these laws and regulations in the future, including those resulting from 8 changes in health laws and regulations, that may have a material adverse effect on Luigino's. As required by law, U.S. Department of Agriculture employees are stationed at the Duluth and Jackson facilities to inspect all meat and poultry products processed by Luigino's. The Duluth and Jackson facilities are also subject to federal, state and local regulation regarding work place health and safety. Difficulties with or failures to obtain any governmental approval of products or plant working conditions could have a material adverse effect on Luigino's. Environmental Matters Luigino's ownership and operation of real property are subject to extensive and changing regulation by various federal, state and local authorities. As a result, the Company may be involved from time to time in administrative and judicial proceedings and inquiries relating to environmental matters. Luigino's cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. Compliance with more stringent laws or regulations, stricter interpretation of existing laws or discovery of unknown conditions may require additional expenditures by Luigino's, some of which may be material. Luigino's believes that it is currently in material compliance with all known material and applicable environmental regulations, but there is a risk that additional environmental issues relating to presently known matters or identified sites or to other matters or sites will require additional, currently unanticipated investigation, assessment, or expenditures. Item 2. Properties The Company maintains office and production facilities as follows: (a) approximately 40,280 feet of office space is leased by the Company in Duluth, Minnesota; (b) approximately 80,000 square feet of production, storage and office space is owned by the Company in Duluth, Minnesota; (c) approximately 35,000 square feet of warehouse space is owned by the Company in Duluth, Minnesota; (d) approximately 375,000 square feet of production and storage space is leased by the Company in Jackson, Ohio; (e) approximately 52,000 square feet of freezer space is owned by the Company and is located on property partially owned by the Company and partially leased from the City of Jackson, Ohio; (f) approximately 6,000 square feet of office space is leased by the Company in Sanford, Florida; and (g) approximately 3,600 square feet of office space is leased by the Company in Minneapolis, Minnesota. On June 25, 1999, the Company announced that the State of West Virginia intends to construct and lease to the Company a 230,000 square foot production facility in Parkersburg, West Virginia, located approximately 75 miles from Jackson, Ohio. The facility will provide the Company with increased production capacity. The Company currently is negotiating the lease with the West Virginia Economic Development office. No start date for construction has been set. Once construction begins, it will be 18-20 months before occupancy. Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders None. 9 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters There is no established public trading market for the Company's common stock. The Company's 10% Senior Subordinated Notes Due 2006 (the "Notes") have been registered pursuant to the Securities Act of 1933. The Notes are not listed on a securities exchange nor quoted on an automated quotation system. The Company made no dividend distributions to its stockholders during the fiscal year 2000. The Company made dividend distributions to its stockholders of $8.1 million in January 2002 to cover stockholders' tax liabilities for fiscal 2001. Item 6. Selected Financial Data The following selected financial information should be read in conjunction with the Financial Statements and related Notes to Financial Statements on pages F-1 through F-7 of this report. The income statement data and balance sheet data presented below as of and for the fiscal years ended December 30, 2001, December 31, 2000, January 2, 2000, January 3, 1999, and January 4, 1998 have been derived from the financial statements, which have been audited by Arthur Andersen LLP, independent public accountants.
Fiscal Years Ended ------------------------------------------------------------------ December 30, December 31, January 2, January 3, January 4, 2001 2000 2000 1999 1998 ------------ ------------ ---------- ---------- ---------- (Dollars in thousands) Income Statement Data: Net sales $ 353,219 $ 271,143 $ 251,976 $ 210,991 $ 207,308 Costs of goods sold 205,943 160,453 148,097 118,334 116,820 --------- --------- --------- --------- --------- Gross profit 147,276 110,690 103,879 92,657 90,488 Selling and promotional expenses 78,454 65,591 71,009 47,540 47,485 General and administrative expenses 36,847 26,061 24,536 21,272 20,490 Reserve for plant impairment (a) -- -- (776) 5,172 -- --------- --------- --------- --------- --------- Total operating expenses 115,301 91,652 94,769 73,984 67,975 --------- --------- --------- --------- --------- Operating income 31,975 19,038 9,110 18,673 22,513 Interest expense (16,634) (13,299) (12,323) (6,509) (6,476) Interest income 435 373 379 436 786 Other income (expense), net (107) 543 168 235 180 --------- --------- --------- --------- --------- Net income (loss) $ 15,669 $ 6,655 $ (2,666) $ 12,835 $ 17,003 ========= ========= ========= ========= ========= Balance Sheet Data: Working capital (deficit) $ (737) $ 15,215 $ 4,067 $ (493) $ 5,604 Total assets 223,693 148,968 152,608 124,521 101,337 Total debt 162,446 119,398 120,427 85,534 66,764 Stockholders' equity (deficit) $ 6,847 $ (748) $ (7,403) $ 10,263 $ 10,627
(a) Represents a non-cash charge of $4,722 and estimated cash expenditures of $450 incurred in connection with the impairment of assets related to a potential plant facility located in Hibbing, Minnesota. In 1999, the Company received a cash settlement of $776. Certain amounts in the selected financial data for fiscal years 1999, 1998, and 1997 have been reclassified to conform with the fiscal years 2001 and 2000 presentation. These reclassifications had no effect on stockholders' equity (deficit) or net income (loss). 10 Item 7. Management's Discussion and Analysis Significant Accounting Policies Our significant accounting policies are described in Note 2 of the Notes to the Financial Statements included in Item 8 of this Form 10-K. The following is a brief discussion of the more significant accounting policies and methods employed by the Company. Revenue Recognition and Promotional Expenses. The Company recognizes revenues upon shipment of product to its customers. In conjunction with these revenues the Company records estimated accruals for trade sales promotional expense, new product introduction fees, and feature price discounts. The Company has historically classified certain costs covered by the provisions of Issue No. 00-14 and 00-25 as promotional expenses within selling and promotional expenses. However, new accounting and guidance issued by the EITF requires that certain consumer and trade sales promotion expenses, such as coupon redemption costs, cooperative advertising programs, new product introduction fees, feature price discounts and in-store display incentives, should be classified as a reduction of sales rather than as marketing expenses. The Company will adopt this accounting guidance in the first quarter 2002. Based on historical information, annual net sales as currently reported will be reduced by approximately 16%. Prior period amounts will be restated upon adoption. As reclassifications, these changes will not affect the Company's financial position or earnings. Depreciable Lives. Property, plant and equipment are stated at cost. Additions and improvements that extend the life of an asset are capitalized, while repairs and maintenance costs are charged to expense as incurred. Depreciation is provided principally using the straight-line method based upon an estimated useful life of 20 to 40 years for buildings and leasehold improvements, 5 to 10 years for machinery and equipment and 3 to 10 years for office equipment. Property, plant and equipment, and other long-term assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. Such analyses necessarily involve significant judgement. Impairment of Goodwill or Other Intangible Assets. At December 30, 2001, the Company had $68.4 million of goodwill and other intangible assets, accounting for approximately 31% of the Company's total assets. The Company periodically evaluates the acquired business for potential impairment indicators. The Company's judgement regarding the existence of impairment indicators is based on market conditions and future expected cash flows of the acquired business. Future events could cause the Company to conclude that impairment indicators exist and the goodwill and other intangible assets acquired are impaired. Any resulting impairment loss could have a material adverse impact on the Company's financial condition and operational performance. The following discussion of the financial condition and results of operations of Luigino's should be read in conjunction with the Company's Financial Statements and Notes thereto. Results of Operations The following table sets forth, for the periods indicated, the major components of Luigino's statements of operations expressed as a percentage of sales. 11
Fiscal Years Ended ------------------------------------------------------- December 30, 2001 December 31, 2000 January 2, 2000 ----------------- ----------------- --------------- Net Sales ......................... 100.0 % 100.0 % 100.0 % Cost of Goods Sold ................ 58.3 59.2 58.8 ----- ----- ----- Gross Profit ................ 41.7 40.8 41.2 Operating (Income) Expenses: Selling and promotional ..... 22.2 24.2 28.2 General and administrative .. 10.4 9.6 9.7 Reserve for plant impairment - -- (0.3) ----- ----- ----- Total operating expenses .... 32.6 33.8 37.6 Operating income ............ 9.1 7.0 3.6 Other Income (Expense): Interest expense ............ (4.7) (4.9) (4.8) Interest income ............. 0.1 0.1 0.1 Other, net .................. - 0.2 0.1 ----- ----- ----- Total other expense, net (4.6) (4.6) (4.6) ----- ----- ----- Net Income (Loss) ................. 4.5 % 2.4 % (1.0)% ----- ----- -----
Fiscal Year 2001 compared to Fiscal Year 2000 Net Sales. The following table shows the Company's net sales by product line and the percentage change from prior year. Fiscal Years Ended ------------------------------------- Percentage December 30, 2001 December 31, 2000 Change ----------------- ----------------- ---------- (Dollars in thousands) Popular .................... $218,516 $188,305 16.0% Economy .................... 81,879 32,449 152.3 Signature .................. 19,548 27,039 (27.7) Snacks ..................... 12,517 14,475 (13.5) Kids ....................... 20,759 8,875 133.9 -------- -------- ---- $353,219 $271,143 30.3% ======== ======== ==== Total net sales increased 30.3% or $82.1 million to $353.2 million in 2001 from $271.1 million in 2000. Net sales in the Popular and Economy product lines increased $30.2 million and $49.4 million respectively, due primarily to the acquisition of AAG. Signature and Snacks net sales decreased $7.5 million and $2.0 million respectively, due to decreased distribution. Net sales in the Kids product line increased $11.9 million due to distribution gains. Canadian sales contributed $40.0 million or 11.3% to net sales for fiscal 2001 compared to $34.6 million or 12.8% for fiscal 2000. This increase in net sales is primarily the result of the introduction of Kids product line in Canada, as well as the continued growth of all the other product lines in Canada. 12 Volume increases were recorded in the Popular and Economy product lines, primarily due to the acquisition of AAG and in the Kids product line due to distribution gains. These increases were partially offset by volume decreases in Signature and Snacks. Price increases were recorded in the Popular, Economy and Signature product lines. Decreases were recorded in Snacks and Kids. The following table reflects the percentage change in sales attributable to the changes in volume and the change in selling price by product line.
Fiscal Years Ended December 30, 2001 compared to December 31, 2000 ------------------------------------------------------ Percentage Percentage Increase (Decrease) Increase (Decrease) Percentage in Sales due to in Sales due to Change Volume Change Price Change in Sales ------------------- ------------------- ---------- Popular ...................... 11.8% 4.2% 16.0% Economy ...................... 139.7 12.6 152.3 Signature .................... (45.0) 17.3 (27.7) Snacks ....................... (12.0) (1.5) (13.5) Kids ......................... 141.1 (7.2) 133.9 ----- ---- ----- 30.0% 0.3% 30.3% ===== ==== =====
Gross Profit. Gross profit in 2001 increased 33.1% or $36.6 million to $147.3 million. This increase in gross profit is primarily the result of the acquisition of AAG. The gross margin increased to 41.7% of net sales in fiscal 2001 as compared to 40.8% in fiscal 2000. The margin improvement is primarily the result of the price increase implemented in January 2001. Selling and Promotional Expense. Selling and promotional expenses increased $12.9 million or 19.6% to $78.5 million in 2001. This increase is the result of higher promotional expenses, $16.8 million primarily on products related to the acquisition of AAG, offset by a $2.8 million reduction in advertising expense and a $1.1 million reduction in slotting expense. General and Administrative Expense. General and administrative expenses increased $10.8 million or 41.4% to $36.8 million in 2001. This increase was due primarily to higher amortization of $7.8 million in intangible assets associated with the acquisition of AAG; increased spending of $1.5 million to support the integration of AAG; and $1.5 million increase in general spending. Operating Income. Operating income increased $13.0 million in 2001 or 68.4% to $32.0 million. As a percentage of net sales, operating income increased to 9.1% of net sales in 2001, as compared to 7.0% in 2000. This increase in operating income is primarily the result of the acquisition of AAG. Interest Expense. Interest expense for 2001 increased $3.3 million to $16.6 million as compared to $13.3 million in 2000. This increase was the result of the increase in senior debt associated with the acquisition of AAG. Interest Income. Interest income was $0.4 million for both 2001 and 2000. Other Income (Expense). Other expense for 2001 was $0.1 million as compared to other income of $0.5 million in 2000. 13 Net Income. For reasons stated above, net income increased $9.0 million to $15.7 million in 2001. As a percentage of net sales, net income increased to 4.5% in 2001 compared to 2.4% of net sales in 2000. Fiscal Year 2000 compared to Fiscal Year 1999 Net Sales. The following table shows Luigino's net sales by product line and the percentage change from prior year. Fiscal Years Ended ----------------------------------- Percentage December 31, 2000 January 2, 2000 Change ----------------- --------------- ---------- (Dollars in thousands) Popular .................... $188,305 $167,319 12.5% Economy .................... 32,449 35,562 (8.8) Signature .................. 27,039 33,486 (19.3) Snacks ..................... 14,475 15,609 (7.3) Kids ....................... 8,875 -- 100.0 -------- -------- --- $271,143 $251,976 7.6% ======== ======== === Total net sales increased 7.6% or $19.1 million to $271.1 million in 2000 from $252.0 million in 1999. The net sales increase is attributed to the launch of the Kid Meal product line resulting in $8.9 million in net sales combined with the continued growth of Popular product line in the United States and Canadian markets with net sales increasing $17.5 million and $3.5 million, respectively. These increases were partially offset by decreases in Economy, Signature and Snacks net sales of $3.1 million, $6.4 million and $1.1 million respectively due to decline in distribution. Canadian sales contributed $34.6 million or 12.8% to net sales for fiscal 2000 compared to $30.0 million or 11.9% for fiscal 1999. Canadian sales have benefited from the continued growth in the frozen entree market, new product introduction and continued advertising. Volume increases were recorded in Popular, Snacks and Kids. These increases were partially offset by a volume decrease in Economy and Signature. Price increases were recorded in Popular and Economy lines. Decreases were recorded in Signature and Snacks. The table below shows the percentage change in sales attributable to the change in selling prices and the change in volume by product line. 14 Fiscal Years Ended December 30, 2001 compared to December 31, 2000 ------------------------------------------------------ Percentage Percentage Increase (Decrease) Increase (Decrease) Percentage in Sales due to in Sales due to Change Volume Change Price Change in Sales ------------------- ------------------- ---------- Popular ...................... 10.7% 1.8% 12.5% Economy ...................... (9.3) 0.5 (8.8) Signature .................... (18.6) (0.7) (19.3) Snacks ....................... 2.7 (10.0) (7.3) Kids ......................... 100.0 -- 100.0 ----- ---- ----- 7.3% 0.3% 7.6% ===== ==== =====
Gross Profit. Gross profit in 2000 increased 6.5% or $6.8 million from $103.9 million in fiscal 1999. The increase in gross profit is the result of the increase in overall sales levels. The gross margin decreased to 40.8% of net sales from 41.2% in fiscal 1999. The decrease was primarily due to a higher concentration of lower margin Canadian sales. Selling and Promotional Expense. Selling and promotional expense for 2000 decreased $5.4 million or 7.6% to $65.6 million. The decrease resulted primarily from a $9.4 million decrease in slotting expenses and a $3.2 million reduction in advertising expenses, partially offset by an increase in trade promotion and freight expenses of $5.4 million and $0.7 million respectively, due to higher sales, a $0.7 million increase in management fees from the vending business, and an increase in general spending. General and Administrative Expense. General and administrative expenses increased 6.2% or $1.5 million to $26.1 million in 2000. The increase was due primarily to higher amortization costs of $0.6 million and an increase in general spending. Operating Income. Operating income for 2000 increased 108.8% to $19.0 million from $9.1 million in 1999. As a percentage of net sales, operating income increased to 7.0% of net sales in 2000 compared to 3.6% in 1999. The increase resulted from a $6.8 million increase in gross profit and a $3.1 million decrease in operating expenses. Interest Expense. Interest expense for 2000 increased $1.0 million or 8.1% from $12.3 million in 1999. The increase resulted primarily from the full-year interest impact on the senior subordinated notes issued in February 1999. Interest Income. Interest income was $0.4 million for 2000 and 1999. Other Income. Other income was $0.5 million in 2000 compared to $0.2 million in 1999. Net Income (Loss). For the reasons stated above, the net income increased $9.3 million to $6.7 million in 2000, compared to a ($2.7) million loss in 1999. 15 Liquidity and Capital Resources As of December 30, 2001, the Company had no outstanding amount on the $40.0 million line of senior revolving credit with Bank One, NA. The cash balance as of December 30, 2001 was $3.4 million compared to $0.3 million as of December 31, 2000. In connection with the acquisition of AAG on February 9, 2001, the Company entered into a $100 million senior credit facility with Bank One, N.A. and US Bank, N.A. including: (a) a $60.0 million term loan which has outstanding balance of $55,000 as of December 30, 2001, with remaining maturity for each of the four fiscal years subsequent to December 30, 2001 of $10,000, $15,750, $13,250 and $16,000, and (b) a $40.0 million revolving credit facility expiring on December 31, 2005, subject to certain borrowing base limitations. The Senior Subordinated Notes are due February 1, 2006 and may be redeemed by the Company for a premium after March 1, 2003. The Notes do not serve as a continued source of liquidity. The Company will need to obtain new sources of funding to repay the Notes and to provide liquidity when the Notes come due in 2006. The Company's sole source of short-term liquidity from borrowings is a $40 million revolving credit facility with Bank One, N.A. and US Bank, N.A. that expires in 2005. Under terms of the debt agreements, the Company must meet certain financial and nonfinancial covenants, including maintaining certain levels of net worth and meeting or exceeding certain financial ratios, such as fixed charge coverage ratio, senior and total leverage ratios. Certain covenants also require minimum employment levels at specified locations by specified dates, require certain reporting; place limitations on stock ownership, additional indebtedness, capital expenditures and cash dividends; and the movement of assets and operations. As of December 30, 2001, the Company was in compliance with all such covenants. Fiscal Year 2001 compared to Fiscal Year 2000. Operating Activities. The Company generated $40.0 million of cash flow from operating activities during 2001, compared to $8.5 million in 2000. The $31.5 million increase in cash flow from operations was the result of the increase in net income of $9.0 million; the increase in depreciation and amortization of $8.6 million, due primarily to the acquisition of AAG, and the $13.9 million increase in cash provided by working capital. Investing Activities. Investing activities used $79.7 million in 2001 as compared to $7.5 million in 2000. This increase was primarily caused by the acquisition of AAG on February 9, 2001 for $66.6 million; purchase of machinery and equipment increased $5.1 million in 2001 from 2000; and purchases of other assets increased $0.5 million. Financing Activities. Financing activities provided $42.8 million of cash in 2001 as compared to $0.8 million of cash used in financing activities in 2000. The Company obtained $66.6 million of cash for the acquisition of AAG through borrowings under a $100.0 million senior credit facility. Fiscal Year 2000 compared to Fiscal Year 1999. Operating Activities. The Company generated $8.5 million of cash flow from operating activities during 2000, compared to $8.7 million in 1999. The $0.2 million decline in cash flow from operations was the result of increased use of cash for working capital of $11.7 million partially offset by cash generated from the increase in net income of $9.3 million and the increase in depreciation and amortization of $2.2 million. 16 Investing Activities. Investing activities used $7.5 million in 2000 compared to $29.8 million in 1999. The decrease is the result of the reduction in machinery and equipment purchases. Financing Activities. Financing activities used $0.8 million in cash in 2000 compared to $20.1 million generated in 1999. Fiscal 2000 uses are the result of a reduction in debt of $1.0 million. 2002 Planned Expenditures. As a part of the Company's strategic growth plan, the Company is budgeting approximately $11.4 million in slotting expenses in 2002 to introduce new products and increase product penetration. The Company estimates that its overall capital expenditures in 2002 will be approximately $8.0 million. The Company intends to finance these expenditures through internally generated funds and borrowings under the revolving credit agreement. The Company anticipates continuing to elect Subchapter S treatment under the U.S. Internal Revenue Code. Consequently, the Company will continue to make quarterly distributions to the stockholders based upon their estimated tax liabilities. The Company's subsidiary, AAG, is a C-corporation. As such, AAG will be responsible for federal, state and foreign taxes. Luigino's ability to make scheduled payments of principal of, or to pay the interest or premiums, if any, on, or to refinance, its indebtedness or to fund planned capital expenditures will depend on future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company's control. Based upon the current level of operations, the Company believes that cash flow from operations and available cash, together with available borrowings under the credit agreement, will be adequate to meet the future liquidity needs for at least the next several years. The Company may, however, need to refinance all or a portion of the principal of the senior subordinated notes on or before maturity. There can be no assurance that the business will generate sufficient cash flow from operations, or that future borrowings will be available under the credit agreement in an amount sufficient to enable the Company to service indebtedness or to fund other liquidity needs. In addition, there can be no assurance that the Company will be able to affect any such refinancing on commercially reasonable terms or at all. Commitments and Contingencies The Company has long-term debt commitments as described in Note 4 to the consolidated financial statements. The facility includes senior subordinated notes due February 1, 2006, notes payable to bank under the credit agreement, and notes payable to government bodies. Additionally, the Company leases warehouse and office space, equipment and certain items under noncancelable operating leases. The Company also entered into purchase commitments on tomatoes to secure stable prices over a period of two years. As part of the acquisition of AAG, the Company entered into a two-year co-pack agreement with Heinz Frozen Food Company. The agreement expires on February 9, 2003. 17 Payments Due By Period (in millions)
Less than After Contractual Cash Obligations Amount 1 year 1-3 years 4-5 years 5 years - ---------------------------- -------- --------- --------- --------- ------- Long-term debt ..... ........... $ 162.4 $ 10.5 $ 29.9 $ 116.9 $ 5.1 Operating leases ... ........... 1.2 0.7 0.3 0.1 0.1 Purchase obligations ........... 4.4 1.9 2.5 -- -- Co-pack contract ... ........... 36.8 33.0 3.8 -- -- -------- --------- --------- --------- ------- $ 204.8 $ 46.1 $ 36.5 $ 117.0 $ 5.2 ======== ========= ========= ========= =======
The Company has guaranteed a $2.0 million note payable in connection with a building in Jackson, Ohio, which the Company currently occupies under a 15-year sublease agreement. Recent Accounting Pronouncements Effective January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133)", as amended. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The adoption of SFAS No. 133 did not have a material impact on the Company's consolidated financial statements. In January 2001, the EITF reached consensus on Issue 00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future." Issue 00-22 requires that certain volume-based cash rebates to customers currently recognized as selling and promotional expenses be classified as a reduction of sales. The consensus was effective for the first part of 2001 and was not material to the Company's consolidated financial statements. In May 2000, the EITF issued a consensus on Issue No. 00-14 "Accounting for Certain Sales Incentives." This Issue addresses the recognition, measurement and income statement classification of certain sales incentives, including discounts, coupons, and free products. In April 2001, the EITF reached a consensus on Issue No. 00-25 "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" and delayed the implementation date of Issue No. 00-14 to coincide with the January 1, 2002 effective date of Issue No. 00-25. Under these Issues, the EITF concluded that certain consumer and trade sales promotion expenses, such as coupon redemption costs, cooperative advertising programs, new product introduction fees, feature price discounts and in-store display incentives, should be classified as a reduction of sales rather than as marketing expenses. The Company will adopt this accounting guidance in the first quarter of 2002. The Company has historically classified certain costs covered by the provisions of Issues No. 00-14 and 00-25 as promotional expenses within selling and promotional expenses. The Company is continuing to evaluate the impact of the new accounting guidance and expects that certain costs historically recorded as selling and promotional expenses will be reclassified as a reduction of sales. Based on historical information, annual net sales as currently reported will be reduced by approximately 18 16%. Prior period amounts will be restated upon adoption. As reclassifications, these changes will not affect the Company's financial position or earnings. On June 29, 2001, the Financial Accounting Standards Board (FASB) approved for issuance Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. Major provisions of these Statements are as follows: all business combinations initiated after June 30, 2001 must use the purchase accounting method of accounting; the pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001; intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized but tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; effective January 1, 2002, goodwill will no longer be subject to amortization. With the adoption of this accounting change the Company expects the results of operations will be impacted favorably by approximately $3.2 million in fiscal 2002. The Company is in the process of completing its analysis of testing for goodwill impairment. Related Party Transactions Luigino's has advanced an aggregate of $14.2 million to Jeno F. Paulucci under a promissory note dated November 2, 1997 from Mr. Paulucci, which matures January 15, 2006. Of this amount, $5.0 million was outstanding at December 30, 2001. Amounts due under the shareholder note bear interest at the prime rate payable quarterly with annual amortization of a portion of principal. The prime rate was 4.75% at December 30, 2001. Luigino's is not obligated to make additional advances under the shareholder note. Luigino's leases its executive offices in Duluth, Minnesota from Etor Properties Limited Partnership. The general partners of Etor Properties are Jeno F. Paulucci and Michael J. Paulucci, and the limited partners are Michael J. Paulucci, Cynthia J. Soderstrom and Gina J. Paulucci, and trusts for their respective benefit. Michael J. Paulucci, Cynthia J. Soderstrom and Gina J. Paulucci are the children of Jeno F. Paulucci. When the interests of each of these children are aggregated with their respective trust interests, the ownership interest of the partners in Etor Properties are divided as follows: Michael J. Paulucci, approximately 60.0%, Cynthia J. Soderstrom, approximately 20.0%; and Gina J. Paulucci, approximately 20%. Jeno F. Paulucci has less than a 1.0% ownership in Etor Properties. The lease under which the Duluth office facility is currently occupied became effective on January 1, 2000 for a three-year initial term. Luigino's has an option to extend the lease for an additional two years, provided that Luigino's is not in default upon expiration of the initial term. The annual rent payments under the lease were $334,000 in 2001, $289,649 in 2000, and $252,025 in 1999 and will be $361,000 in 2002, payable in monthly installments. If the lease is extended at Luigino's option, the initial rental rate will be adjusted by the percentage change in the consumer price index from the effective date of the lease to a date 90 days before the expiration date of the initial lease term. During fiscal 2001, 2000, and 1999 Jeno F. Paulucci and Paulucci International Ltd., Inc., a corporation wholly owned by Jeno F. Paulucci, provided Luigino's various consulting and administrative support services. The combined payments by Luigino's to Mr. Paulucci and Paulucci International for such services in fiscal 2001, 2000, and 1999 were $4.1 million, $3.6 million and $3.2 million, respectively. Mr. Paulucci and his wife, Lois Paulucci, have personally guaranteed the payment of some of the Company's debt, of which a balance of $7.4 million was outstanding as of December 30, 2001. These 19 guarantees continue in force until all indebtedness to the various creditors have been paid in full. Mr. and Mrs. Paulucci received no consideration from Luigino's for these guarantees. From time to time Luigino's makes use, for business entertainment purposes, of Canadian hunting and fishing lodge facilities owned by Mr. Paulucci, for which it pays Mr. Paulucci. Luigino's paid Mr. Paulucci $280,000, $260,000 and $265,000 for such use in fiscal 2001, 2000, and 1999, respectively. Luigino's has entered into a Tax Distribution Agreement with each of its shareholders relating to federal and state income tax matters involving Luigino's and its shareholders. This agreement generally provides that for so long as Luigino's is an S corporation or a substantially similar pass-through entity for federal income tax purposes, the Company may make quarterly distributions to the shareholders for their income tax obligations resulting from income of Luigino's being subject to tax at the shareholder level. The Company's subsidiary, AAG, is a Corporation. As such, AAG will be responsible for federal, state and foreign taxes. In November 1999, the Company entered into two agreements with Self Serve Centers, Inc. ("SSCI"), a corporation in which the Jeno F. Paulucci Revocable Trust and the Lois Mae Paulucci Revocable Trust hold voting and non-voting shares. Pursuant to a vending management agreement as currently amended, SSCI manages the Company's vending business at the rate of 25.0% of all sales of the Company's products sold through vending machines managed by SSCI for the Company per each four week period. The arrangement commenced on January 3, 2000, and extends until either party terminates the agreement upon 60 days prior written notice. Pursuant to a custom packing agreement with SSCI, the Company packs certain products for SSCI; the arrangement commenced on January 1, 2000 and extends until December 31, 2004. The agreement can be extended for an additional term of up to five years. SSCI has the right to terminate this agreement at any time upon 60 days prior written notice to Luigino's. The Company is paid 105% of the Company's manufacturing cost for each product manufactured. In addition, the Company has agreed to provide to SSCI certain support services, including accounting, order taking, warehousing, shipping and clerical support. SSCI will pay to the Company a quarterly fee of 1% of SSCI's total retail sales, not including sales of products under the Michelina's or other labels of the Company. For the fiscal year ended December 30, 2001, no amount was due the Company under this agreement. Cautionary Statement on Forward Looking Statements The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statement. These forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in these statements. Risks and uncertainties that might affect our results are detailed from time to time in the Company's filings with the Securities and Exchange Commission, including in Exhibit 99 to this Form 10-K. The Company does not intend to update any of the forward-looking statements after the date of this Form 10-K to conform them to actual results. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Market Risk Factors. The Company is exposed to market risks from adverse changes in interest rates, commodity prices and foreign exchange rates. The Company currently is not engaged in any 20 hedging transactions. The Company periodically assesses its exposure to market risks and takes action as it deems appropriate. The Company does not use financial instruments for trading or speculative purposes. Interest Rate Sensitivity. The Company manages its exposure to interest rate risk through the proportion of fixed rate debt and variable rate debt in its total debt portfolio. To manage this mix, the Company may enter into interest rate swap agreements, in which it exchanges periodic payments based on a notional amount, and agreed upon fixed and variable interest rates. As of December 30, 2001, the Company had no interest rate derivative agreements. The Company's percentage of fixed rate debt to total debt was 66.1% at December 30, 2001. A 1% change in variable interest rates would have caused a $0.6 million increase in interest expense associated with variable debt in fiscal 2001. Commodity Price Sensitivity. The Company is exposed to price risk related to purchases of certain commodities used as raw materials in the Company's products. The Company manages this risk primarily through annual purchase agreements with vendors. A 1% increase in our top two commodities purchased, dairy and beef products, would have resulted in higher cost of goods sold of $0.5 million. Foreign Exchange Rates. The Company has some exposure to foreign exchange rate fluctuations in Canada and Australia. This risk is mitigated by the fact that the Company sells its products to its Canadian and Australian joint marketing arrangement partners in U.S. dollars. The Company's exchange rate risk is then limited to the profit sharing portion of the joint marketing arrangements. The impact of exchange rate fluctuations has not been significant historically. Item 8. Consolidated financial statements and supplementary data The following financial statements are filed as part of this report. Index to Consolidated Financial Statements.................................F-1 Report of independent public accountants...................................F-2 Consolidated Balance Sheets as of December 30, 2001 and December 31, 2000......................................................F-3 Consolidated Statements of Operations for the Fiscal Years Ended December 30, 2001, December 31, 2000, and January 2, 2000 .............F-4 Consolidated Statements of Cash Flows for the Fiscal Years Ended December 30, 2001, December 31, 2000, and January 2, 2000 .............F-5 Consolidated Statements of Stockholders' Equity (Deficit) for the Fiscal Years Ended December 30, 2001, December 31, 2000, and January 2, 2000........................................................F-6 Notes to Consolidated Financial Statements.................................F-7 Item 9. Changes in and Disagreements with Accountants None. 21 PART III Item 10. Directors and Executive Officers of the Registrant The following table provides information with respect to Luigino's directors and executive officers.
Name Age Title - ---- --- ----- Ronald O. Bubar.............60 President, Chief Executive Officer and Director Thomas W. Knuesel...........54 Chief Financial Officer Joel Conner.................50 Senior Executive Vice President of Marketing and International Sales Charles W. Pountney.........42 Executive Vice President of Sales James C. Reed...............49 Executive Vice President of Operations Jeno F. Paulucci............83 Chairman of the Board Nicholas A. Pope............53 Director Joe C. Hall.................52 Director Lois M. Paulucci............79 Director Larry W. Nelson.............51 Director Jack H. Helms...............49 Director
Ronald O. Bubar has been the President and Chief Executive Officer of Luigino's since January 2000. Mr. Bubar has been a director of Luigino's since November 1999. Mr. Bubar served as President and Chief Operating Officer of Luigino's since 1996 and Executive Vice President of Operations from 1991 to 1996. From 1990 to 1991, Mr. Bubar provided consulting services to Luigino's. Before 1990, Mr. Bubar was Vice President of Operations of The Pillsbury Company from 1986 to 1990 and Director of Manufacturing of Pillsbury from 1985 to 1986. Mr. Bubar served as Executive Vice President of Operations of Jeno's, Inc. from 1980 to 1985. Thomas W. Knuesel joined Luigino's in November 2000 as the Chief Financial Officer. From 1995 to 2000, Mr. Knuesel served as the Vice President and Chief Financial Officer of Diamond Brands Incorporated. He was the Vice President of Finance for VEE Corporation from 1989 to 1995. From 1986 to 1989, Mr. Knuesel was the Corporate Controller for Diamond Brands Incorporated. Joel Conner joined Luigino's in 1990 and has served in various positions of increasing responsibility, currently serving as Senior Executive Vice President of Marketing and International Sales. Before joining Luigino's, Mr. Conner founded and operated Conner Management Corporation and Cornell Associates, companies that provided management and consulting services to the hospitality industry worldwide. From 22 1982 to 1990, he was Vice President of Marketing for ServiceMaster Industries. Charles W. Pountney joined Luigino's in June 1999 as Executive Vice President of Sales. Prior to joining Luigino's, he served for four years as Executive Vice President and Chief Operating Officer for the Paul Inman Associates, Inc., food brokerage located in Grand Rapids, Michigan. Prior to joining the Inman brokerage, he was associated with American Home Food Products for 12 years, starting in direct sales in Michigan and earning successive promotions to Vice President, Field Sales. James C. Reed joined Luigino's as the Executive Vice President, Operations in September of 2001. Mr. Reed has over 30 years experience in the Food Processing Industry. Prior to joining the Company, he was Executive Vice President, Chief Operating Officer of Empire Kosher Poultry in Mifflintown, Pennsylvania. Before joining Empire, Mr. Reed spent ten years with Con-Agra in various senior level management positions. Jeno F. Paulucci is the founder of Luigino's. He has been Luigino's Chairman of the Board since Luigino's inception in April 1990, and was the Chief Executive Officer of Luigino's from 1990 until January 2000. Mr. Paulucci is a well-known food industry executive who, over the past 50 years, has founded several successful food companies, including Chun King Corporation and Jeno's, Inc. He was the former Chairman of the Board of Cornelius Company, a producer and marketer of food and beverage equipment, and was the first Chairman of the Board of R.J. Reynolds Food Company, now RJR Nabisco, Inc. Nicholas A. Pope was elected as a director of Luigino's in November 2001. Mr. Pope is the managing partner in the Orlando, Florida law firm of Lowndes, Drosdick, Doster, Kantor & Reed, PA. Joe C. Hall was elected as a director of Luigino's in February 2001. Mr. Hall has 26 years of grocery industry experience and most recently held the title President and Chief Operating Officer of Food Lion LLC. Lois M. Paulucci has been a director of Luigino's since January 1999. She is an independent investor and is the wife of Jeno Paulucci. Larry W. Nelson has been a director of Luigino's since January 1999. He has been the President of Paulucci International, Ltd., Inc. since 1988. Mr. Nelson is a trustee of trusts that are the beneficial owners of shares of the Common Stock of Luigino's, as indicated in the "Ownership of Common Stock" section of this report. Jack H. Helms was re-elected as a director in November 2001, after previously serving as a director of the Company from January 1999 to January 2001. Mr. Helms joined Goldsmith, Agio, Helms and Company in 1987 and has served as President and Chief Operating Officer since 1992. He also serves on the Board of Directors of Applebees International Inc., Goldsmith, Agio, Helms Securities Co. and Agio Capital Mgmt. LLC. 23 Item 11. Executive Compensation The following table shows the cash compensation paid in the last fiscal year to or accrued for the Chairman and the four highest paid executive officers of Luigino's whose salary and bonus earned in 2001 exceeded $100,000.
Annual Compensation ------------------- Other ----- Annual All Other ------ --------- Year Salary Bonus Compensation Compensation ---- -------- -------- ------------ ------------ Jeno F. Paulucci 2001 $ -- $ -- $250,000 (1) $ -- Chairman 2000 $ -- -- $250,000 (1) $ -- 1999 $ -- $ -- $250,000 (1) $ -- Ronald O. Bubar 2001 $474,231 $400,000 $ 5,100 (2) $1,300,000 (3) President and Chief 2000 $359,327 $360,000 $ 5,100 (2) $1,300,000 (3) Executive Officer 1999 $322,596 $300,000 $ 4,800 (2) $1,300,000 (3) Joel Conner 2001 $244,039 $240,000 $ 5,100 (2) $ -- Senior Executive Vice 2000 $231,088 $225,000 $ 5,100 (2) $ -- President of Marketing 1999 $209,616 $200,000 $ 4,800 (2) $ -- and International Sales Charles W. Pountney 2001 $225,289 $230,000 $ 5,100 (2) $ -- Executive Vice President 2000 $187,481 $150,000 $ 5,100 (2) $ 32,759 (4) of Sales 1999 $ 93,462 $ 60,000 $ 2,804 (2) $ -- Thomas W. Knuesel 2001 $161,923 $160,000 $ 4,858 (2) $ -- Chief Financial Officer 2000 $ 15,385 $ -- $ -- $ -- 1999 $ -- $ -- $ -- $ --
(1) Payments by Paulucci International Ltd., Inc., a Subchapter S Corporation wholly owned by Mr. Paulucci, for consulting services provided to Luigino's in 2000 and 1999. Mr. Paulucci also receives Subchapter S distributions from Paulucci International. Mr. Paulucci served as the Company's Chief Executive Officer until January 2000. See "Consulting and Employment Agreements" and "Certain Relationships and Related Transactions." (2) Includes compensation paid by Luigino's under its matching 401(k) plan. (3) Payments under Executive Compensation Plans. See "Consulting and Employment Agreements." (4) Payment made for relocation expenses. Consulting and Employment Agreements Luigino's and Paulucci International, Ltd., Inc., a Subchapter S corporation wholly owned by Jeno F. Paulucci, are parties to a consulting agreement, dated January 1, 1999, under which Paulucci International provides consulting services to Luigino's, as described in the paragraph below, relating to the frozen entree and frozen snack food businesses. Under the terms of the consulting agreement, Paulucci International is currently paid an annual fee of $4.4 million and is reimbursed for its actual out-of-pocket expenses incurred in rendering these services. The Company paid Paulucci International $4.0 million under the consulting agreement in 2001 and $3.6 million under a similar consulting agreement in 24 2000. Paulucci International distributed $3.0 million and $2.6 million to Mr. Paulucci in his capacity as sole shareholder of Paulucci International in 2001 and 2000, respectively. The current consulting agreement has a seven-year term, but may be terminated by either party after two years upon 90 days notice. If the consulting agreement is terminated by Luigino's, a termination fee is payable to Paulucci International equal to the prior twelve month's consulting fee if termination is in the third or fourth year of the agreement, 75.0% of such amount in the fifth year and 50.0% of such amount in the sixth year. Paulucci International provides the following services to Luigino's under the terms of the consulting agreement: . Prepare marketing and advertising strategies for building brand awareness. . Establish and maintain relationships with major customers of Luigino's. . Identify new market opportunities in frozen foods and related food segments of the industry. . Create new product ideas or lines and assist in researching and developing them. . Develop strategies for increasing the penetration / distribution of existing products. . Services relating to international expansion, including: . Product and packaging identification, production and distribution; . Negotiate agreements with third parties for production, marketing and distribution; . Examine potential plant sites and related financing options. . Services relating to expansion of existing domestic plants or identification of potential new plant sites and related financing options. . Monitor product quality. . Formulate organizational structure for all departments including, administrative, operations, international and sales and marketing. . Services relating to corporate transactions including legal, tax, financing and others that may affect the company's shareholders. . Services relating to corporate aircraft acquisitions, maintenance and staffing. . Various other services relating to the business, including marketing, financing, taxes, insurance and legal. Mr. Bubar serves as President and Chief Executive Officer of Luigino's under an employment agreement which was extended by Luigino's in 2001 and is in effect until December 2003, subject to early termination or extensions thereunder. Mr. Bubar receives an annual salary of $525,000 during the term of the agreement and receives a bonus in the amount of 75.0% to 100.0% of his base salary based on earnings criteria. The employment agreement provides for an 18-month non-competition covenant upon 25 termination of the agreement. In addition, Mr. Bubar is paid an incentive compensation under the Company's executive compensation plans, for which he received $1,300,000 in fiscal 2001 and fiscal 2000. The other officers of Luigino's are also party to incentive agreements that link a portion of their future compensation to EBITDA. Item 12. Security Ownership of Certain Beneficial Owners and Management Luigino's has 1,500 authorized shares of common stock, of which 600 are entitled to vote and 900 are non-voting. The 100 shares of voting stock currently issued and outstanding are beneficially owned by Jeno F. Paulucci, the founder and Chairman of the Board of Luigino's. The 900 shares of non-voting stock, all of which are issued and outstanding, are beneficially owned by Mr. Paulucci and his wife, one of his adult children, and trusts established for the benefit of such adult children and their children. Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission, and includes generally voting power and investment power with respect to securities. Except as indicated by footnote, the persons named in the table below have sole investment power with respect to all shares of Luigino's common stock shown as beneficially owned by them. The shares shown in the table are non-voting shares. The individuals and entities who beneficially own more than 5.0% of the outstanding non-voting shares are as follows:
Non-voting Shares Beneficially Owned ------------------ Shareholders Number Percent - ------------ ------ ------- Jeno F. Paulucci ....................................................... 300 33 Trust for the primary benefit of................................................ 120 13 Lois M. Paulucci (1) Michael J. Paulucci (2) ....................................................... 80 9 Trusts for the benefit of....................................................... 80 9 Michael Paulucci and his children (1) (2) c/o MJP Management 525 Lake Avenue South Duluth, Minnesota 55802 Trusts for the benefit of....................................................... 160 18 Cynthia J. Soderstrom and her children (1) c/o Paulucci International, Inc. 201 West First Street Sanford, Florida 32771 Trusts for the benefit of....................................................... 160 18 Gina J. Paulucci (1) (3) c/o Paulucci International, Inc. 201 West First Street Sanford, Florida 32771
- ---------- (1) Each of these trusts has two trustees, and the trustees share investment power. William Hippee is one of the trustees of each of these trusts. The other trustee is one of Larry Nelson, Larry Scanlon or Larry Johnson. 26 (2) Michael Paulucci has pledged all of his and some of the trusts' shares of Common Stock of Luigino's to Jeno F. Paulucci, U.S. Bank National Association-Minneapolis, U.S. Bank National Association-Duluth and the Bank of Boston in connection with various debt obligations unrelated to Luigino's. (3) One of the trusts for the benefit of Gina J. Paulucci has US Bank NA SD as Corporate trustee and William Hippee and Larry Johnson as individual trustees. Item 13. Certain Relationships and Related Transactions Shareholder Control Agreement The holders of the common stock of Luigino's have executed a shareholder control agreement which removes from the board of directors of Luigino's, and vests in the holders of its voting common stock, presently Mr. Paulucci, the sole power to make decisions with respect to the management and affairs of Luigino's that would normally be made by the board of directors. The agreement does not remove from the board of directors its authority to accept or reject any agreements between Luigino's and any of its shareholders and other affiliates that are not entered into on arms-length terms. Luigino's may not take any of the actions listed below without the approval of Mr. Paulucci, notwithstanding that no vote may be required, or that a lesser percentage vote may be specified by law, by the articles of incorporation or bylaws of Luigino's: . amend its articles of incorporation, bylaws or any other charter document; . issue any equity security, including any security convertible into or exercisable or exchangeable for any equity security; . redeem or otherwise acquire shares of its capital stock or warrants or options for its capital stock; . declare dividends or make other distributions on its capital stock except dividends and distributions from or to a wholly-owned subsidiary of Luigino's; . sell or otherwise dispose of any assets except dispositions of : (1) inventory in the ordinary course of business, and (2) assets with a fair market value of less than $100,000 in any fiscal year; . enter into any agreement which prohibits any subsidiaries to pay dividends or distributions to Luigino's or otherwise to transfer assets or engage in transactions with Luigino's; . recapitalize or change its capital structure which would result in a change in control from one person to another person of the power to vote any of the securities for the election of directors of Luigino's or otherwise having voting power to direct management policies of Luigino's; . voluntarily dissolve or liquidate; . have a subsidiary which is not wholly-owned by Luigino's; . change its business in any material respect; 27 . voluntarily subject any of its assets to any lien or encumbrance, except permitted encumbrances and (1) accounts payable and accrued expenses incurred in the ordinary course of business, (2) encumbrances under the note indenture, or (3) encumbrances under the new credit agreement; . acquire any securities or assets of any other person, except for acquisitions of supplies and equipment in the ordinary course of business; . make capital expenditures or commitments for additions to property, plant or equipment constituting capital assets which individually are more than $50,000 or in the aggregate are more than $100,000 in any 12-month period; . enter into joint ventures or partnerships; . incur any indebtedness, including capitalized leases, except (1) accounts payable and accrued expenses incurred in the ordinary course of business, (2) indebtedness under the note indenture, or (3) indebtedness under the new credit agreement; . adopt any employee benefit or incentive plan; . enter proceedings under Title 11 of the United States Code or any other federal or state bankruptcy or similar law; . remove, appoint and elect members of the board of directors, including filling vacancies. The provisions listed above are a summary of the terms of the shareholder control agreement filed as an exhibit to the Company's S-4 Registration Statement filed with the Security and Exchange Commission on April 19, 1999. This summary is qualified in its entirety by reference to the agreement. Other Related Transactions Luigino's has advanced an aggregate of $14.2 million to Jeno F. Paulucci under a promissory note dated November 2, 1997 from Mr. Paulucci, which matures January 15, 2006. Of this amount, $5.0 million was outstanding at December 30, 2001. Amounts due under the shareholder note bear interest at the prime rate payable quarterly with annual amortization of a portion of principal. The prime rate was 4.75% at December 30, 2001. Luigino's is not obligated to make additional advances under the shareholder note. Luigino's leases its executive offices in Duluth, Minnesota from Etor Properties Limited Partnership. The general partners of Etor Properties are Jeno F. Paulucci and Michael J. Paulucci, and the limited partners are Michael J. Paulucci, Cynthia J. Soderstrom and Gina J. Paulucci, and trusts for their respective benefit. Michael J. Paulucci, Cynthia J. Soderstrom and Gina J. Paulucci are the children of Jeno F. Paulucci. When the interests of each of these children are aggregated with their respective trust interests, the ownership interests of the partners in Etor Properties are divided as follows: Michael J. Paulucci, approximately 60.0%; Cynthia J. Soderstrom, approximately 20.0%; and Gina J. Paulucci, approximately 20.0%. Jeno F. Paulucci has less than a 1.0% ownership interest in Etor Properties. The lease under which the Duluth office facility is currently occupied became effective on January 1, 2000 for a three-year initial term. Luigino's has an option to extend the lease for an additional two years, provided that Luigino's is not in default upon expiration of the initial term. The annual rent payments under the lease were $334,000 in 2001, $289,649 in 2000, and $252,025 in 1999 and will be $361,000 in 2002, 28 payable in monthly installments. If the lease is extended at Luigino's option, the initial rental rate will be adjusted by the percentage change in the consumer price index from the effective date of the lease to a date 90 days before the expiration date of the initial lease term. As described above in Item 11 under the heading "Consulting and Employment Agreements," during fiscal 2001, 2000, and 1999 Jeno F. Paulucci and Paulucci International Ltd., Inc., a corporation wholly owned by Jeno F. Paulucci, provided Luigino's various consulting and administrative support services. The combined payments by Luigino's to Mr. Paulucci and Paulucci International for such services in fiscal 2001, 2000, and 1999 were $4,054,000, $3,616,666, and $3,168,225, respectively. Mr. Paulucci and his wife, Lois Paulucci, have personally guaranteed the payment of some of the Company's debt, of which a balance of $7.4 million was outstanding as of December 30, 2001. These guarantees continue in force until all indebtedness to the various creditors have been paid in full. Mr. and Mrs. Paulucci received no consideration from Luigino's for these guarantees. From time to time Luigino's makes use, for business entertainment purposes, of Canadian hunting and fishing lodge facilities owned by Mr. Paulucci, for which it pays Mr. Paulucci. Luigino's paid Mr. Paulucci $280,000, $260,000, and $265,000 for such use in fiscal 2001, 2000, and 1999, respectively. Luigino's has entered into a Tax Distribution Agreement with each of its shareholders relating to federal and state income tax matters involving Luigino's and its shareholders. This agreement generally provides that for so long as Luigino's is an S corporation or a substantially similar pass-through entity for federal income tax purposes, the Company may make quarterly distributions to the shareholders for their income tax obligations resulting from income of Luigino's being subject to tax at the shareholder level. The Company's subsidiary, AAG, is a C corporation. As such, AAG will be responsible for federal, state and foreign taxes. In November 1999, the Company entered into two agreements with Self Serve Centers, Inc. ("SSCI"), a corporation in which the Jeno F. Paulucci Revocable Trust and the Lois Mae Paulucci Revocable Trust hold voting and non-voting shares. Pursuant to a vending management agreement as currently amended, SSCI manages the Company's vending business at the rate of 25.0% of all sales of the Company's products sold through vending machines managed by SSCI for the Company per each four week period. The Company paid SSCI $0.6 million in the year ended December 30, 2001 for management fees. The arrangement commenced on January 3, 2000, and extends until either party terminates the agreement upon 60 days prior written notice. Pursuant to a custom packing agreement with SSCI, the Company packs certain products for SSCI; the arrangement commenced on January 1, 2000 and extends until December 31, 2004. The agreement can be extended for an additional term of up to five years. SCCI has the right to terminate this agreement at any time upon 60 days prior written notice to Luigino's. The Company is paid 105% of the Company's manufacturing cost for each product manufactured. In addition, the Company has agreed to provide to SSCI certain support services, including accounting, order taking, warehousing, shipping and clerical support. SSCI will pay to the Company a quarterly fee of 1% of SSCI's total retail sales, not including sales of products under the Michelina's or other labels of the Company. During fiscal 2001, no amount was paid the Company under this agreement. 29 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as part of this report: (1) Financial Statements All financial statements of the Company as set forth under Item 8 of this report. (2) Financial Statement Schedules All supplemental financial schedules omitted as not applicable or not required under the rules of Regulation S-X or the information presented in the financial statements or notes thereto. (3) Exhibits The following exhibits are filed herewith: Number Description - ------ ----------- 2.1 Purchase Agreement, dated February 9, 2001, by and among the Company and Heinz Frozen Food Company (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K, filed February 22, 2001). 3.1 Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 4.1 Indenture, dated February 4, 1999, between the Company and U.S. Bank Trust National Association with respect to the Company's 10% Senior Subordinated Notes due 2006 (incorporated by reference to Exhibit 4.1 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 4.2 Form of the Company's Note Certificate for New Notes (incorporated by reference to Exhibit 4.2 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.1 Amended and Restated Credit Agreement, dated February 4, 1999, between and among the Company, The First National Bank of Chicago, as Agent and the lenders named therein (incorporated by reference to Exhibit 10.1 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.2 Amendment No. 1 to Amended and Restated Credit Agreement, dated March 12, 1999, by and among the Company and The First National Bank of Chicago, as Agent, and the lenders named therein (incorporated 30 by reference to Exhibit 10.2 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.4 Consulting Agreement, dated January 1, 1999, between the Company and Paulucci International Ltd., Inc. (incorporated by reference to Exhibit 10.4 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.5 Tax Distribution Agreement, dated February 4, 1999, among the Company and all of its shareholders named therein (incorporated by reference to Exhibit 10.5 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.6 Twentieth Supplemental Trust Agreement, dated as of September 1, 1991, between the State of Ohio and the Provident Bank, as Trustee, relating to $6,715,000 State of Ohio Economic Development Revenue Bonds, Series 1991-10 (incorporated by reference to Exhibit 10.6 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.7 Lease, dated as of September 1, 1991, between the Director of Development of the State of Ohio and the Company (incorporated by reference to Exhibit 10.7 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.8 Thirty-Eighth Supplemental Trust Agreement, dated as of September 1, 1991, between the State of Ohio and the Provident Bank, as Trustee, relating to $8,100,000 State of Ohio Economic Development Revenue Bonds, Series 1993-5 (Foremost Mgmt., Inc. Project) (incorporated by reference to Exhibit 10.8 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.9 Lease, dated as of September 21, 1993, between the Director of Development of the State of Ohio and Foremost Mgmt., Inc. (incorporated by reference to Exhibit 10.9 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.10 Sublease, dated as of September 21, 1993, between Foremost Mgmt., Inc. and the Company (incorporated by reference to Exhibit 10.10 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.11 Amendment and Waiver, dated as of December 22, 1998, between the Company and Department of Development of the State of Ohio (incorporated by reference to Exhibit 10.11 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.12 Shareholder Control Agreement, dated February 4, 1999, among the Company and its shareholders (incorporated by reference to Exhibit 10.12 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 31 10.13 Amendment No. 2 to Amended and Restated Credit Agreement, dated March 12, 1999, by and among the Company and The First National Bank of Chicago, as Agent, and the lenders named therein (incorporated by reference to Exhibit 10.13 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.14 Amendment No. 3 to Amended and Restated Credit Agreement, dated July 16, 1999, by and among the Company and The First National Bank of Chicago, as Agent, and the lenders named therein (incorporated by reference to Exhibit 10.1 to the Company's Form 10Q filed August 25, 1999). 10.15 Amendment No. 4 to Amended and Restated Credit Agreement, dated July 17, 1999, by and among the Company and The First National Bank of Chicago, as Agent, and the lenders named therein (incorporated by reference to Exhibit 10.2 to the Company's Form 10Q filed August 25, 1999). 10.16 Amendment No. 5 to Amended and Restated Credit Agreement, dated November 16, 1999, by and among the Company and Bank One, N/A (f/k/a The First National Bank of Chicago), as Agent, and the lenders named therein. 10.17 Amendment No. 6 and Waiver to Amended and Restated Credit Agreement, dated November 16, 1999, by and among the Company and Bank One, N/A (f/k/a The First National Bank of Chicago), as Agent and the Lenders named therein (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed November 21, 2000). 10.18 Co-Pack Agreement, dated February 9, 2001, by and between Heinz Frozen Food Company and the Company (incorporated by reference to Exhibit 2.2 to the Company's Form 8-K, filed February 22, 2001). 10.19 Credit Agreement, dated as of February 9, 2001, among the Company, the Lenders named therein and Bank One NA as LC Issuer and as Agent, and U.S. Bank National Association, as Swing Line Lender (incorporated by reference to Exhibit 99.1 to the Company's Form 8-K, filed February 22, 2001). * 12.1 Statement of computation of ratios. * 24.1 Power of attorney. * 99.1 Cautionary Statements * Filed herewith. (b) Reports on Form 8-K 32 During the first fiscal quarter of the period covered by this report, the Company filed a Form 8-K dated February 22, 2001 relating to the acquisition of the All American Gourmet Company (AAG) on February 9, 2001. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. LUIGINO'S, INC. By: /s/ Thomas W. Knuesel --------------------------- Thomas W. Knuesel Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated below.
Signature Title Date - --------- ----- ---- /s/ Ronald O. Bubar President, Chief Executive Officer and Director March 15, 2002 - ------------------------------------ Ronald O. Bubar /s/ Thomas W. Knuesel Chief Financial Officer March 14, 2002 - ------------------------------------ Thomas W. Knuesel (Principal Financial and Accounting Officer) * Chairman and Director March 14, 2002 - ------------------------------------ Jeno F. Paulucci * Director March 15, 2002 - ------------------------------------ Jack H. Helms * Director March 15, 2002 - ------------------------------------ Joseph C. Hall * Director March 14, 2002 - ------------------------------------ Lois M. Paulucci * Director March 15, 2002 - ------------------------------------ Nicholas A. Pope * Director March 14, 2002 - ------------------------------------ Larry W. Nelson
*By: /s/ Ronald O. Bubar ------------------------------- Ronald O. Bubar Chief Executive Officer 34 LUIGINO'S, INC. AND SUBSIDIARY Index to Consolidated Financial Statements
Page ---- Report of independent public accountants...............................................F-2 Consolidated Balance Sheets as of December 30, 2001 and December 31, 2000..............F-3 Consolidated Statements of Operations for the Fiscal Years Ended December 30, 2001, December 31, 2000, and January 2, 2000 ....................F-4 Consolidated Statements of Cash Flows for the Fiscal Years Ended December 30, 2001, December 31, 2000, and January 2, 2000.....................F-5 Consolidated Statements of Stockholders' Equity (Deficit) for the Fiscal Years Ended December 30, 2001, December 31, 2000, and January 2, 2000.....................F-6 Notes to Consolidated Financial Statements.............................................F-7
Report of independent public accountants To Luigino's, Inc: We have audited the accompanying consolidated balance sheets of Luigino's, Inc. (a Minnesota corporation) and Subsidiary as of December 30, 2001 and December 31, 2000, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Luigino's, Inc. and Subsidiary as of December 30, 2001 and December 31, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2001 in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Minneapolis, Minnesota, February 21, 2002 F-2 LUIGINO'S, INC. AND SUBSIDIARY Consolidated Balance Sheets (In Thousands, Except Share and Per Share Data)
December 30, December 31, 2001 2000 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents ....................................... $ 3,440 $ 313 Receivables, net of allowance for doubtful accounts of $146 ..... 29,007 26,441 Inventories ..................................................... 19,571 19,066 Prepaid expenses and other ...................................... 2,939 2,163 --------- --------- Total current assets .......................................... 54,957 47,983 --------- --------- Property, Plant and Equipment: Land ............................................................ 22 22 Buildings and improvements ...................................... 16,878 16,818 Machinery and equipment ......................................... 116,636 111,390 Office equipment and leasehold improvements ..................... 5,855 5,566 Construction in progress ........................................ 7,486 1,552 Less - - Accumulated depreciation ............................... (57,644) (45,550) --------- --------- Net property, plant and equipment ............................. 89,233 89,798 --------- --------- Other Assets: Receivables from stockholders ................................... 4,722 5,891 Deferred costs, principally debt issuance costs ................. 6,323 4,587 Restricted cash ................................................. 44 709 Goodwill and other intangibles, net of amortization of $7,813 ... 68,414 -- --------- --------- Total other assets ............................................ 79,503 11,187 --------- --------- Total Assets ........................................................ $ 223,693 $ 148,968 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Current maturities of long-term debt ............................ $ 10,451 $ 2,450 Accounts payable ................................................ 20,557 16,461 Accrued expenses - - Accrued payroll and benefits .................................. 5,889 4,798 Accrued interest .............................................. 4,557 4,465 Accrued promotions and other .................................. 6,142 4,594 Deferred taxes ................................................ 443 -- Shareholder tax distributions payable ......................... 7,655 -- --------- --------- Total current liabilities ..................................... 55,694 32,768 Long-Term Debt, less current maturities ............................. 151,995 116,948 Deferred Taxes ...................................................... 9,157 -- --------- --------- Total liabilities ............................................. 216,846 149,716 --------- --------- Commitments and Contingencies (Notes 4, 5 and 7) Stockholders' Equity (Deficit): Common stocks -- Voting, $1 stated par value, 600 shares authorized; 100 shares issued and outstanding ........................... -- -- Nonvoting, $1 stated par value, 900 shares authorized; 900 shares issued and outstanding ........................... 1 1 Additional paid-in capital ...................................... 655 655 Retained earnings (deficit) ..................................... 6,191 (1,404) --------- --------- Total stockholders' equity (deficit) .......................... 6,847 (748) --------- --------- Total Liabilities and Stockholders' Equity (Deficit) ................ $ 223,693 $ 148,968 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-3
LUIGINO'S, INC. AND SUBSIDIARY Consolidated Statements of Operations (In Thousands) 52 Weeks Ended ----------------- ----------------- --------------- December 30, 2001 December 31, 2000 January 2, 2000 ----------------- ----------------- --------------- Net Sales ............................ $ 353,219 $ 271,143 $ 251,976 Cost of Goods Sold ................... 205,943 160,453 148,097 --------- --------- --------- Gross profit .................... 147,276 110,690 103,879 --------- --------- --------- Operating Expenses (Income): Selling and promotional ......... 78,454 65,591 71,009 General and administrative ...... 36,847 26,061 24,536 Other ........................... -- -- (776) --------- --------- --------- Total operating expenses ........ 115,301 91,652 94,769 --------- --------- --------- Operating income ................ 31,975 19,038 9,110 Other Income (Expense): Interest expense ................ (16,634) (13,299) (12,323) Interest income ................. 435 373 379 Other, net ...................... (107) 543 168 --------- --------- --------- Total other expense ............. (16,306) (12,383) (11,776) --------- --------- --------- Net Income (Loss) .................... $ 15,669 $ 6,655 $ (2,666) ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements. F-4
LUIGINO'S, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (In Thousands) 52 Weeks Ended --------------------------------------------------------- December 30, 2001 December 31, 2000 January 2, 2000 ----------------- ----------------- --------------- Operating Activities: Net Income (Loss) .................................... $ 15,669 $ 6,655 $ (2,666) Adjustments to net income (loss) provided by (used in) operating activites - Depreciation and amortization ....................... 21,089 12,489 10,305 Changes in operating assets and liabilities: Receivables ........................................ (2,566) (4,382) (2,350) Inventories ........................................ (505) 3,354 (6,873) Prepaid expenses and other ......................... (912) (366) (618) Accounts payable and accrued expenses .............. 7,270 (9,266) 10,860 -------- -------- --------- Net cash provided by operating activities ......... 40,045 8,484 8,658 -------- -------- --------- Investing Activities: Purchases of property, plant and equipment ........... (11,633) (6,527) (28,959) Purchases of other assets ............................ (1,445) (988) (869) Business acquisition ................................. (66,627) -- -- -------- -------- --------- Net cash used in investing activities ............. (79,705) (7,515) (29,828) -------- -------- --------- Financing Activities: Borrowings on revolving credit agreement ............. 72,712 64,200 76,600 Payments on revolving credit agreement ............... (79,712) (62,500) (86,400) Proceeds from debt ................................... 60,000 -- 100,000 Repayments of debt ................................... (9,954) (2,729) (55,307) Distributions to stockholders ........................ -- -- (15,000) Other ................................................ (259) 268 189 -------- -------- --------- Net cash provided by (used in) financing activities 42,787 (761) 20,082 -------- -------- --------- Increase (decrease) in cash and cash equivalents ........ 3,127 208 (1,088) Cash and cash equivalents, beginning of period .......... 313 105 1,193 -------- -------- --------- Cash and cash equivalents, end of period ................ $ 3,440 $ 313 $ 105 ======== ======== ========= Supplemental Information: Interest paid ...................................... $ 15,424 $ 13,264 $ 8,120 ======== ======== ========= Income taxes paid .................................. $ -- $ -- $ -- ======== ======== ========= Non-Cash Transactions: Declared tax distribution ........................... $ 8,074 $ -- $ -- ======== ======== ========= The accompanying notes are an integral part of these consolidated financial statements. F-5
LUIGINO'S INC. and SUBSIDIARY Statements of Stockholders' Equity (Deficit) For the Fiscal Years Ended December 30, 2001, December 31, 2000 and January 2, 2000 (In Thousands, Except Share Data) Common Stock ---------------------------------- Total Voting Nonvoting Additional Retained Stockholders' ---------------- --------------- Paid-In Earnings Equity Shares Amount Shares Amount Capital (Deficit) (Deficit) ------ ------ ------ ------ ---------- -------- ------------ Balance at January 3, 1999 100 $-- 900 $1 $655 $ 9,607 $ 10,263 Distributions to stockholders -- -- -- - -- (15,000) (15,000) Net loss -- -- -- - -- (2,666) (2,666) --- --- --- -- ---- -------- -------- Balance at January 2, 2000 100 -- 900 1 655 (8,059) (7,403) Net income -- -- -- - -- 6,655 6,655 --- --- --- -- ---- -------- -------- Balance at December 31, 2000 100 -- 900 1 655 (1,404) (748) Declared Shareholder Tax Distributions (8,074) (8,074) Net income -- -- -- - -- 15,669 15,669 --- --- --- -- ---- -------- -------- Balance at December 30, 2001 100 $-- 900 $1 $655 $ 6,191 $ 6,847 === === === == ==== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. F-6
Luigino's, Inc. and Subsidiary Notes to Consolidated Financial Statements (Dollars In Thousands, Except Share Data) 1. Operations: Luigino's, Inc., a Minnesota Corporation, and The All American Gourmet Company, a Delaware corporation, together (the "Company"), markets food products primarily under the Michelina's and Budget Gourmet name brands. The Michelina's label is manufactured at production facilities located in Minnesota and Ohio. The Budget Gourmet label is sourced through a co-pack agreement with Heinz Frozen Food Company (HFF). The Company's products, distributed predominately in the North American market, are sold through independent and chain store retail grocery outlets. 2. Summary of Significant Accounting Policies: Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. Significant intercompany balances and transactions have been eliminated in consolidation. Fiscal Year The Company has elected a 52/53-week fiscal year which ends on the Sunday closest to December 31. The years ended December 30, 2001 (fiscal year 2001), December 31, 2000 (fiscal year 2000), and January 2, 2000 (fiscal year 1999) were 52-week fiscal years. Cash and Cash Equivalents The Company considers all highly liquid investments which are convertible into known amounts of cash and have an original maturity of three months or less to be cash and cash equivalents. Cash and cash equivalents consist primarily of money market deposits. Restricted Cash Restricted cash includes cash restricted for foreign duty bonds and debt retirement. Inventories Inventories are stated at the lower of first-in, first-out cost or market and consisted of the following: December 30, 2001 December 31, 2000 ----------------- ----------------- Raw materials ........................ $ 7,748 $ 8,971 Finished goods ....................... 8,974 7,176 Packaging supplies ................... 2,849 2,919 ------- ------- $19,571 $19,066 ======= ======= F-7 Property, Plant and Equipment Property, plant and equipment are stated at cost. Additions and improvements that extend the life of an asset are capitalized, while repairs and maintenance costs are charged to expense as incurred. Depreciation is provided principally using the straight-line method based upon an estimated useful life of 20 to 40 years for buildings and leasehold improvements, 5 to 10 years for machinery and equipment and 3 to 10 years for office equipment. Depreciation expense was $12,199, $11,339 and $9,720 for fiscal 2001, 2000, and 1999, respectively. Intangible Assets Arising from Acquisition Goodwill, net of accumulated amortization, was $39,660 as of December 30, 2001 and $0 as of December 31, 2000. Restrictive covenants, patents and tradenames, stated at cost less accumulated amortization is $28,754 and $0 as of December 30, 2001 and December 31, 2000. Purchase Price Allocation Amount Life ------ ---- Restrictive Covenant $ 10,000 2 years Trademarks 24,000 20 years Transition Agreement 150 1 year Patent Sublicense 500 20 years Goodwill 41,577 20 years -------- Total $ 76,227 ======== Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. Such analyses necessarily involve significant judgement. Amortization expense for fiscal 2001 related to acquisition of AAG totaled $7,813. Impairment charges are recorded on goodwill and other intangibles when indications of impairment are present and the future undiscounted cash flows estimated to be generated by these assets are less than the assets' carrying amount. There were no impairments recognized in fiscal 2001 or 2000. Fair Value of Financial Instruments Fair values of financial instruments have been estimated in accordance with Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial Instruments." The Company has estimated fair values using available market information and appropriates valuation methods. However, considerable judgment is required in formulating fair value, and the estimated fair value amounts may not be indicative of amounts which would be realized in market transactions. As of December 30, 2001 the carrying value of the Company's fixed rate debt was approximately $15,000 less than its fair value. All other financial instruments' carrying values approximated fair value. F-8 Revenue Recognition Revenues are recognized as products are shipped, and promotions are accrued as commitments are made and related products are shipped. The Company records sales net of "off invoice" promotional discounts, which were $39,348, $25,985, and $25,851, for the fiscal years 2001, 2000, and 1999, respectively and net of "cash discounts" which were $6,890, $5,026 and $4,773, respectively. Concentration of Credit Risk Financial instruments which potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts receivable. Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers and their dispersion across many geographic areas. The Company does not currently foresee a credit risk associated with these receivables. The Company has an exclusive distribution agreement with a Canadian company to distribute the Company's products in Canada. The distributor accounted for 11.3%, 12.8% and 11.9% of net sales in fiscal years 2001, 2000 and 1999, respectively. Product Related Costs Expenditures for research and development, advertising, sales promotion, new item placement and other product related costs are expensed as incurred. Income Taxes The Company has elected to be classified as an S corporation for federal and state income tax purposes whereby the Company's taxable income and available tax credits are included in the individual income tax returns of the stockholders. The Company's subsidiary, AAG, is a C corporation. As such, AAG will be responsible for federal, state, and foreign taxes. As part of the acquisition of AAG (see Note 3), the Company recorded a $9,600 deferred tax liability and corresponding increase to goodwill due to financial reporting and tax reporting basis differences. At December 30, 2001, there were no other significant deferred tax items. There was no tax provision recorded for AAG in 2001. The Company reports certain items for income tax purposes on a different basis from what is reflected in the accompanying financial statements. The principal differences are related to the depreciation of certain assets using accelerated methods and reserves and accruals not currently deductible for income tax purposes. The tax liabilities and benefits relating to the reversal of temporary differences in future years will be the responsibility of the stockholders unless the S corporation election is terminated, at which time deferred income taxes applicable to the temporary differences would be the responsibility of the Company. The Company has entered into a Tax Distribution Agreement with each of its shareholders relating to federal and state income tax matters involving the Company and its shareholders. This agreement generally provides that for so long as the Company is an S corporation or a substantially similar pass-through entity for federal income tax purposes, the Company may make quarterly distributions to the shareholders for their income tax obligations resulting from income of the Company being subject to tax at the shareholder level. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Principal estimates for the F-9 Company include estimation of depreciable lives, certain accruals and realizability of goodwill. The ultimate results could differ from those estimates. Reclassification Certain amounts in the financial statements for the fiscal year 1999 have been reclassified to conform with fiscal years 2001 and 2000 presentation. Those reclassifications had no effect on stockholders' equity (deficit) or net income (loss). Recent Accounting Pronouncements Effective January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133)", as amended. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The adoption of SFAS No. 133 did not have a material impact on the Company's consolidated financial statements. In January 2001, the EIFT reached consensus on Issue 00-22, Accounting for "Points" and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future. Issue 00-22 requires that certain volume-based cash rebates to customers currently recognized as selling and promotional expenses be classified as a reduction of sales. The consensus was effective for the first part of 2001 and was not material to the Company's consolidated financial statements. In May 2000, the EITF issued a consensus on Issue No. 00-14 "Accounting for Certain Sales Incentives." This Issue addresses the recognition, measurement and income statement classification of certain sales incentives, including discounts, coupons, and free products. In April 2001, the EITF reached a consensus on Issue No. 00-25 "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" and delayed the implementation date of Issue No. 00-14 to coincide with the January 1, 2002 effective date of Issue No. 00-25. Under these Issues, the EITF concluded that certain consumer and trade sales promotion expenses, such as coupon redemption costs, cooperative advertising programs, new product introduction fees, feature price discounts and in-store display incentives, should be classified as a reduction of sales rather than as marketing expenses. The Company will adopt this accounting guidance in the first quarter 2002. The Company has historically classified certain costs covered by the provisions of Issues No. 00-14 and 00-25 as promotional expenses within selling and promotional expenses. The Company is continuing to evaluate the impact of the new accounting guidance and expects that certain costs historically recorded as selling and promotional expenses will be reclassified as a reduction of sales. Based on historical information, annual net sales as currently reported will be reduced by approximately 16%. Prior period amounts will be restated upon adoption. As reclassifications, these changes will not affect the Company's financial position or earnings. On June 29, 2001, the Financial Accounting Standards Board (FASB) approved for issuance Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. Major provisions of these Statements are as follows: all business combinations initiated after June 30, 2001 must use the purchase accounting method of accounting; the pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001; intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized but tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; effective January 1, 2002, goodwill will no longer be F-10 subject to amortization. With the adoption of this accounting change, the Company expects the results of operations will be impacted favorably by $3,200 in fiscal 2002 due to the termination of amortization of goodwill. 3. Acquisitions: On February 9, 2001, the Company acquired all of the outstanding capital stock of The All-American Gourmet Company, a Delaware Corporation (AAG) pursuant to a Purchase Agreement by and between the Company and Heinz Frozen Foods (HFF), a Delaware Corporation and the former parent of AAG. At the date of closing, the only assets owned by AAG were intangible assets consisting of trademarks, logos, patent licenses, product formulas, quality specifications, customer lists, and marketing materials. The Company also agreed to purchase certain finished goods inventory from the former parent HFF, over a six-month period following closing. The Company entered into a two-year co-pack agreement with HFF, whereby the Company has agreed to purchase a minimum of 6 million cases from February 9, 2002 to February 9, 2003. The AAG acquisition was accounted for using the purchase method. The purchase price was allocated to the acquired assets and assumed liabilities based on a determination of the fair values of the assets purchased and liabilities assumed. The purchase price and related acquisition costs exceeded the preliminary fair values assigned to tangible assets by approximately $66,927, which excess may be amortized over periods ranging from two to twenty years on a straight-line basis. The results of AAG have been included in its financial statements since the date of acquisition. The following unaudited pro forma condensed results of operations for fiscal years ended December 30, 2001 and December 31, 2000, have been prepared as if the transaction occurred on January 1, 2001 and January 3, 2000, respectively. Years Ended Pro Forma December 30, 2001 December 31, 2000 - ---------------------------------------- ----------------- ----------------- Net Sales .............................. $363,974 $391,885 Operating Income ....................... 33,920 28,041 Net Income ............................. 16,937 11,802 4. Long-Term Debt: The Company's long-term debt consisted of the following: F-11
December 30, 2001 December 31, 2000 ----------------- ----------------- Senior subordinated notes; principal due $ 100,000 $ 100,000 February 1, 2006; interest at 10.0% payable semi-annually Notes payable to bank under term credit 55,000 -- agreement, interest at LIBOR +2.75 (6.25%) Notes payable to government bodies; varying 7,446 8,187 maturity dates through 2013; interest at 2.3% to 7.8%; collateralized by certain equipment and assets related to state development revenue bonds and guaranteed by the principal stockholders Notes payable; repaid in 2001 -- 4,211 Notes payable to banks under revolving credit -- 7,000 agreement; repaid in 2001 --------- --------- 162,446 119,398 Less: Current maturities (10,451) (2,450) --------- --------- 151,995 116,948 ========= =========
The Company funded the purchase price of the AAG acquisition through a $100,000 credit facility which replaced its previous revolving credit facility. The new credit facility includes (a) a $60,000 term loan which has outstanding balance of $55,000 as of December 30, 2001, with remaining maturity for each of the four fiscal years subsequent to December 30, 2001 of $10,000, $15,750, $13,250 and $16,000, and (b) a $40,000 revolving credit facility expiring on December 31, 2005, subject to certain borrowing base limitations. The initial net proceeds of the credit facility were used to finance the acquisition of AAG, refinance the existing bank indebtedness of the Company, and pay related fees and expenses. Borrowings under the term loan and revolving credit facility bear interest at 2.25% to 3.25% over the rate offered to major banks in the London Interbank Eurodollar market ("Eurodollar Rate"), based on a leverage ratio calculated on a quarterly basis. The Company also pays a fee of 0.375% to 0.50% on the unused daily balance of the revolver based on a leverage ratio calculated on a quarterly basis. At December 30, 2001, the Company had $40,000 of unused revolver. On February 4, 1999, the Company issued $100,000 of 10% Senior Subordinated Notes due February 1, 2006. The Company used the proceeds of the Senior Subordinated Notes to retire the outstanding debt under a previous credit facility of $63,900, to pay the outstanding balances on certain operating leases and other indebtedness of $13,875 and to make a $15,000 distribution to its stockholders. The Senior Subordinated Notes were issued pursuant to an Indenture dated February 4, 1999 between the Company and U.S. Bank Trust National Association as trustee. The Senior Subordinated Notes are due February 1, 2006 and may be redeemed by the Company for a premium after March 1, 2003. The Company may also redeem up to $35,000 of the Senior Subordinated Notes with net cash proceeds of any public offerings of Common Stock at any time prior to February 1, 2002 at a redemption price of 110% of the principal amount redeemed, provided that such redemption occurs within 45 days of the closing of such public offering. Under terms of the debt agreements, the Company must meet certain financial and nonfinancial covenants, including maintaining certain levels of net worth and meeting or exceeding certain financial ratios, such as fixed charge coverage ratio, senior and total leverage ratios. Certain covenants and restrictions also require minimum employment levels at specified locations by specified dates; require certain reporting; place limitations on stock ownership, additional indebtedness, capital expenditures and cash dividends; and restrict the movement of assets and operations. As of December 30, 2001, the Company was in compliance with all such covenants. F-12 Aggregate maturities of long-term debt for each of the five years subsequent to fiscal year 2001 are $10,451, $16,202, $13,702, $16,452, $100,452 and $5,187 thereafter. 5. Related-Party Transactions: As of December 30, 2001 the Company had a note receivable from its chairman, Jeno F. Paulucci, of $4,972. Amounts due under the shareholder note bear interest at the prime rate in effect payable quarterly with annual amortization of a portion of principal. The prime rate was 4.75% at December 30, 2001. The note matures on January 15, 2006. The Company is not obligated to make additional advances under the shareholder note. The Company leases its executive offices in Duluth, Minnesota from Etor Properties Limited Partnership. The general partners of Etor Properties are also the principal shareholders of the Company. The lease under which the Duluth office facility is currently occupied expires January 1, 2003. The Company has an option to extend the lease for an additional two years, provided that the Company is not in default upon expiration of the initial term. The annual rent payments under the lease were $334 in 2001, $290 in 2000, and $252 in 1999 and will be $361 in 2002, payable in monthly installments. If the lease is extended at the Company's option, the initial rental rate will be adjusted by the percentage change in the consumer price index from the effective date of the lease to a date 90 days before the expiration date of the initial lease term. During fiscal 2001, 2000, and 1999, Jeno F. Paulucci and Paulucci International Ltd., Inc., a corporation wholly owned by Jeno F. Paulucci, provided the Company various consulting and administrative support services. The combined payments by the Company to Mr. Paulucci and Paulucci International for such services in fiscal 2001, 2000, and 1999 were $4,054, $3,617, and $3,168, respectively. From time to time the Company makes use, for business entertainment purposes, of Canadian hunting and fishing lodge facilities owned by Mr. Paulucci, for which it pays Mr. Paulucci. The Company paid Mr. Paulucci $280, $260, and $265 for such use in fiscal 2001, 2000, and 1999, respectively. In November 1999, the Company entered into two agreements with Self Serve Centers, Inc. ("SSCI"), a corporation in which the Jeno F. Paulucci Revocable Trust and the Lois Mae Paulucci Revocable Trust hold voting and non-voting shares. Pursuant to a vending management agreement as currently amended, SSCI manages the Company's vending business at the rate of 25.0% of all sales of the Company's products sold through vending machines managed by SSCI for the Company per each four week period. The Company paid SSCI $574, $679 and $0 in fiscal years 2001, 2000 and 1999, respectively, for management fees. The arrangement commenced on January 3, 2000, and extends until either party terminates the agreement upon 60 days prior written notice. Pursuant to a custom packing agreement with SSCI, the Company packs certain products for SSCI; the arrangement commenced on January 1, 2000 and extends until December 31, 2004. The agreement can be extended for an additional term of up to five years. SSCI has the right to terminate this agreement at any time upon 60 days prior written notice to the Company. The Company is paid 105% of the Company's manufacturing cost for each product purchased by SSCI. In addition, the Company has agreed to provide to SSCI certain support services, including accounting, order taking, warehousing, shipping and clerical support. SSCI will pay to the Company a quarterly fee of 1% of SSCI's total retail sales, not including sales of products under the Michelina's or other labels of the Company. During fiscal 2001, no amount was paid the Company under this agreement. 6. Capital Stock: The Company has 1,500 authorized shares of common stock, of which 600 are entitled to vote and 900 are nonvoting. The 100 shares of voting stock currently issued and outstanding are beneficially owned by the Chairman of the Company. F-13 7. Commitments and Contingencies: The Company has entered into supply contracts with various tomato vendors to insure supply and establish a fixed price for fiscal 2002 and 2003. The aggregate commitments are $1,859 and $2,548 for 2002 and 2003, respectively. The Company leases warehouse and office space, equipment and certain other items under noncancelable operating leases. Total lease expense was $962, $843, and $754 for the fiscal years ended 2001, 2000, and 1999, respectively. Minimum annual rental commitments for periods subsequent to December 30, 2001 under noncancelable operating leases are as follows: 2002 658 2003 228 2004 109 2005 86 2006 75 Thereafter 61 ------ $1,217 ====== The Company has guaranteed a $2,000 note payable in connection with a building in Jackson, Ohio, which the Company currently occupies under a 15-year sublease agreement. Consulting and Employment Agreements The Company and Paulucci International are parties to a Consulting Agreement, dated January 1, 1999 (the Consulting Agreement), pursuant to which Paulucci International provides certain consulting services to the Company through fiscal 2005. Under the terms of the Consulting Agreement, Paulucci International was paid in fiscal 2001 a fee of $4,054 and was reimbursed for its actual out-of-pocket expenses incurred in rendering such services. If the Consulting Agreement is terminated by the Company, a termination fee is payable to Paulucci International equal to the prior twelve months consulting fee if the termination is in the third or fourth year of the agreement, 75.0% of such amount in the fifth year and 50.0% of such amount in the sixth year. Defined Contribution Plan The Company sponsors a 401(k) plan which is available to all full-time salaried employees over the age of 21. The Company provided discretionary matching contributions of $315, $328, and $324 to eligible employees based upon their contributions to the plan for fiscal years 2001, 2000, and 1999, respectively. Executive Compensation Plans The Company's President and Chief Executive Officer is party to an employment agreement which was extended by the Company in 2001 and is in effect until December 2003, subject to early termination or extensions thereunder. The employment agreement covers base salary and annual bonus, and provides for an 18-month noncompetition covenant upon termination of the agreement. The executive also received additional incentive-based compensation of $1,300 for each of the fiscal years ended 2001, 2000, and 1999, respectively. The Company is also committed to pay $1,300 for fiscal year 2002. F-14 Certain other members of management of the Company are also party to incentive agreements that link a portion of their future compensation to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The compensation expense was $100, $200, and $0, for the fiscal years ended 2001, 2000, and 1999, respectively. 8. Foreign and Product Line Sales: The Company had foreign export sales amounting to 11.8%, 13.5%, and 12.9% of net sales for fiscal years 2001, 2000, and 1999, respectively. The following table presents the details of net sales: Fiscal Year 2001 Fiscal Year 2000 Fiscal Year 1999 ----------------- ----------------- ---------------- December 30, 2001 December 31, 2000 January 2, 2000 ----------------- ----------------- ---------------- United States ... $311,538 88.2% $234,556 86.5% $219,519 87.1% Canada .......... 40,039 11.3% 34,617 12.8% 30,012 11.9% Other ........... 1,642 0.5% 1,970 0.7% 2,445 1.0% -------- ----- -------- ----- -------- ----- $353,219 100.0% $271,143 100.0% $251,976 100.0% ======== ===== ======== ===== ======== ===== The Company operates in one business segment. The following table sets forth the Company's net sales by product line: Fiscal Year 2001 Fiscal Year 2000 Fiscal Year 1999 ------------------ ----------------- ----------------- December 30, 2001 December 31, 2000 January 2, 2000 ----------------- ----------------- ----------------- Popular ......... $218,516 61.9% $188,305 69.4% $167,319 66.4% Economy ......... 81,879 23.2% 32,449 12.0% 35,562 14.1% Signature ....... 19,548 5.5% 27,039 10.0% 33,486 13.3% Snacks .......... 12,517 3.5% 14,475 5.3% 15,609 6.2% Kids ............ 20,759 5.9% 8,875 3.3% -- -- -------- ----- -------- ----- -------- ----- $353,219 100.0% $271,143 100.0% $251,976 100.0% ======== ===== ======== ===== ======== ===== 9. Quarterly Financial Data (Unaudited): First Second Third Fourth Quarter Quarter Quarter Quarter -------- ------- ------- ------- Fiscal Year 2001 Net Sales $103,723 $80,409 $80,761 $88,326 Gross Profit 43,198 30,730 35,594 37,754 Net Income (Loss) (1,685) 2,763 5,858 8,733 Fiscal Year 2000 Net Sales $ 80,283 $57,542 $62,093 $71,225 Gross Profit 31,133 24,108 25,702 29,747 Net Income (Loss) (465) 393 2,359 4,368 The first quarter is a 16-week period, while the second through fourth quarters are 12-week periods. F-15 EXHIBIT INDEX The following exhibits are filed herewith: Number Description - ------ ----------- 2.1 Purchase Agreement, dated February 9, 2001, by and among the Company and Heinz Frozen Food Company (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K, filed February 22, 2001). 3.1 Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 4.1 Indenture, dated February 4, 1999, between the Company and U.S. Bank Trust National Association with respect to the Company's 10% Senior Subordinated Notes due 2006 (incorporated by reference to Exhibit 4.1 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 4.2 Form of the Company's Note Certificate for New Notes (incorporated by reference to Exhibit 4.2 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.1 Amended and Restated Credit Agreement, dated February 4, 1999, between and among the Company, The First National Bank of Chicago, as Agent and the lenders named therein (incorporated by reference to Exhibit 10.1 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.2 Amendment No. 1 to Amended and Restated Credit Agreement, dated March 12, 1999, by and among the Company and The First National Bank of Chicago, as Agent, and the lenders named therein (incorporated by reference to Exhibit 10.2 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.4 Consulting Agreement, dated January 1, 1999, between the Company and Paulucci International Ltd., Inc. (incorporated by reference to Exhibit 10.4 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.5 Tax Distribution Agreement, dated February 4, 1999, among the Company and all of its shareholders named therein (incorporated by reference to Exhibit 10.5 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.6 Twentieth Supplemental Trust Agreement, dated as of September 1, 1991, between the State of Ohio and the Provident Bank, as Trustee, relating to $6,715,000 State of Ohio Economic Development Revenue Bonds, Series 1991-10 (incorporated by reference to Exhibit 10.6 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.7 Lease, dated as of September 1, 1991, between the Director of Development of the State of Ohio and the Company (incorporated by reference to Exhibit 10.7 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.8 Thirty-Eighth Supplemental Trust Agreement, dated as of September 1, 1991, between the State of Ohio and the Provident Bank, as Trustee, relating to $8,100,000 State of Ohio Economic Development Revenue Bonds, Series 1993-5 (Foremost Mgmt., Inc. Project) (incorporated by reference to Exhibit 10.8 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.9 Lease, dated as of September 21, 1993, between the Director of Development of the State of Ohio and Foremost Mgmt., Inc. (incorporated by reference to Exhibit 10.9 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.10 Sublease, dated as of September 21, 1993, between Foremost Mgmt., Inc. and the Company (incorporated by reference to Exhibit 10.10 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.11 Amendment and Waiver, dated as of December 22, 1998, between the Company and Department of Development of the State of Ohio (incorporated by reference to Exhibit 10.11 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.12 Shareholder Control Agreement, dated February 4, 1999, among the Company and its shareholders (incorporated by reference to Exhibit 10.12 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.13 Amendment No. 2 to Amended and Restated Credit Agreement, dated March 12, 1999, by and among the Company and The First National Bank of Chicago, as Agent, and the lenders named therein. (incorporated by reference to Exhibit 10.13 to the Company's Form S-4, as amended, filed April 19, 1999, file number 333-76569). 10.14 Amendment No. 3 to Amended and Restated Credit Agreement, dated July 16, 1999, by and among the Company and The First National Bank of Chicago, as Agent, and the lenders named therein (incorporated by reference to Exhibit 10.1 to the Company's Form 10Q filed August 25, 1999). 10.15 Amendment No. 4 to Amended and Restated Credit Agreement, dated July 17, 1999, by and among the Company and The First National Bank of Chicago, as Agent, and the lenders named therein (incorporated by reference to Exhibit 10.2 to the Company's Form 10Q filed August 25, 1999). 10.16 Amendment No. 5 to Amended and Restated Credit Agreement, dated November 16, 1999, by and among the Company and Bank One, N/A (f/k/a The First National Bank of Chicago), as Agent, and the lenders named therein. 10.17 Amendment No. 6 and Waiver to Amended and Restated Credit Agreement, dated November 16, 1999, by and among the Company and Bank One, N/A (f/k/a The First National Bank of Chicago), as Agent and the Lenders named therein (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed November 21, 2000). 10.18 Co-Pack Agreement, dated February 9, 2001, by and between Heinz Frozen Food Company and the Company (incorporated by reference to Exhibit 2.2 to the Company's Form 8-K, filed February 22, 2001). 10.19 Credit Agreement, dated as of February 9, 2001, among the Company, the Lenders named therein and Bank One NA as LC Issuer and as Agent, and U.S. Bank National Association, as Swing Line Lender (incorporated by reference to Exhibit 99.1 to the Company's Form 8-K, filed February 22, 2001). 2 *12.1 Statement of computation of ratios. *24.1 Power of attorney. *99.1 Cautionary Statements. *Filed herewith. 3 EX-12.1 3 dex121.txt STATEMENT OF COMPUTATION OR RATIOS Exhibit 12.1
Fiscal Year Ended December 30, December 31, January 2, January 3, January 4, 2001 2000 2000 1999 1998 ------------ ------------ ---------- ---------- ---------- (dollars in thousands) DETERMINATION OF RATIO OF EARNINGS TO FIXED CHARGES: Net income (loss) before taxes $15,669 $ 6,555 $ (2,666) $12,835 $17,003 Pro Forma - net income for Budget Gourmet acquisition Fixed Charges Interest expense 15,974 12,650 11,777 6,296 5,532 Amortization of deferred financing costs 660 649 546 213 944 Interest component of rent 307 260 290 1,332 3,004 ------- ------- -------- ------- ------- Earnings before fixed charges 32,610 20,114 9,947 20,676 26,483 ======= ======= ======== ======= ======= Fixed Charges Interest expense 15,974 12,650 11,777 6,296 5,532 Amortization of deferred financing costs 660 649 546 213 944 Interest component of rent 307 260 290 1,332 3,004 ------- ------- -------- ------- ------- Total fixed charges 16,941 13,559 12,613 7,841 9,480 ======= ======= ======== ======= ======= Ratio of earnings to fixed charges (a) 1.9x 1.5x 0.8x 2.6x 2.8x ======= ======= ======== ======= =======
(a) For purposes of computing the ratio of earnings to fixed charges, "earnings" are defined as net income before fixed charges. Fixed charges are defined as interest expense, amortization of deferred financing costs, and the portion of rent expense representing interest. Earnings were inadequate to cover fixed charges by $2.7 million for the year ended January 2, 2000. EX-24 4 dex24.txt POWER OF ATTORNEY Exhibit 24 ---------- POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Ronald O. Bubar and Thomas W. Knuesel, and each of them, his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign an Annual Report on Form 10-K of LUIGINO'S, INC., and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Signature Title Date - --------- ----- ---- /s/ Jeno F. Paulucci Chairman of the Board and March 14, 2002 - ------------------------------ Jeno F. Paulucci Director /s/ Jack H. Helms - ------------------------------ Director March 15, 2002 Jack H. Helms /s/ Joseph C. Hall - ------------------------------ Director March 15, 2002 Joseph C. Hall /s/ Lois M. Paulucci - ------------------------------ Director March 14, 2002 Lois M. Paulucci /s/ Nicholas A. Pope - ------------------------------ Director March 15, 2002 Nicholas A. Pope /s/ Larry W. Nelson - ------------------------------ Director March 14, 2002 Larry W. Nelson EX-99.1 5 dex991.txt CAUTIONARY STATEMENTS EXHIBIT 99.1 LUIGINO'S, INC. Report on Form 10-K March 15, 2002 Cautionary Statements for Purposes of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995 The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statement. The Company desires to take advantage of these "safe harbor" provisions and is filing this Exhibit 99 in order to do so. Accordingly, the Company hereby identifies the following important factors which could cause the Company's actual results to differ materially from any such results which may be projected, forecast, estimated or budgeted by the Company in forward-looking statements made by the Company from time to time in reports, registration statements and other written communications, or in oral forward-looking statements made from time to time by the Company's officers and agents. Luigino's has substantial indebtedness other than its senior subordinated notes, which may affect its ability to make scheduled payments on those notes, to redeem them if the Company is required to do so, and to pay the principal amounts of the notes when due. Luigino's is highly leveraged. After giving effect to the sale of the senior subordinated notes sold in a private offering and subsequently registered in an exchange offer under 144A of the Securities Act, the initial borrowings under the new credit facility and the application of the proceeds from those transactions, the Company had total indebtedness of approximately $162.4 million and shareholders' equity of $6.8 million as of December 30, 2001. Of the $162.4 million of total indebtedness, $100.0 million consisted of the senior subordinated notes. In addition, the Company may incur additional indebtedness in the future. The degree to which the Company is leveraged could prevent it from repurchasing all of the senior subordinated notes holders tender upon the occurrence of a change of control of Luigino's. The Company's ability to make scheduled payments of principal of, or to pay the interest and any other payments on, or to refinance, its indebtedness, including the senior subordinated notes, or to fund its planned capital expenditures will depend on its future performance, which, to some extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. The Company may also need to refinance all or a portion of the principal amount of the notes on or before maturity. There is a risk that the Company's business will not generate sufficient cash flow from operations, or that the Company will not have sufficient credit available in the future, to enable it to service its indebtedness, including the senior subordinated notes, or to fund its other liquidity needs. In addition, there is a risk that the Company will not be able to refinance its debt on commercially reasonable terms, or at all. The degree to which Luigino's will continue to be leveraged in the future could have important consequences to the holders of the senior subordinated notes. The following effects on Luigino's could affect the holders: the Company may have more difficulty satisfying its obligations on the notes, the Company will be increasingly vulnerable to general adverse economic and industry conditions, the Company may have more difficulty obtaining additional financing to fund future working capital, capital expenditures and other general corporate requirements, the Company may need to dedicate a substantial portion of its cash flow from operations to the payment of principal of, and interest on, its indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, research and development or other general corporate purposes, the Company may have less flexibility in planning for, or reacting to, changes in its business and the industry, and the Company may be at competitive disadvantage vis-a-vis less leveraged competitors. In addition, the indenture relating to the senior subordinated notes and the bank credit facility contain financial and other restrictive covenants that limit the Company's ability to, among other things, borrow additional funds. If the Company does not comply with these covenants, it would be in default, and if the default is not cured or waived, the Company's business could be adversely affected. The senior subordinated notes are subordinated to other indebtedness, which also may affect the Company's ability to make payments on the notes. The notes are and will be subordinated in right of payment to all of the Company's current and future senior debt. However, the indenture prohibits the Company from incurring or otherwise becoming liable for any indebtedness that is subordinate or junior in right of payment to any senior debt and senior in right of payment to the notes. Upon any distribution to the Company's creditors in a liquidation or dissolution of Luigino's or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to Luigino's or its property, the holders of the Company's senior debt will be entitled to be paid in full in cash before any payment may be made on the notes. In addition, the subordination provisions of the indenture will provide that payments with respect to the notes will be blocked in the event of a payment default on the Company's senior debt and may be blocked for up to 179 days each year in the event of nonpayment defaults on that debt. In the event of a bankruptcy, liquidation or reorganization of Luigino's, holders of the notes will participate ratably with all holders of the Company's subordinated indebtedness that is deemed to be of the same class as the notes, and potentially with all of the Company's other general creditors, based upon the respective amounts owed to each holder or creditor, in the remaining assets of Luigino's. In any of the foregoing events, there is a risk that there would not be sufficient assets to pay amounts due on the notes. As a result, holders of notes may receive less, ratably, than the holders of the Company's senior debt. Restrictions imposed under Luigino's bank credit facility also may affect the Company's ability to make payments on the senior subordinated notes. On February 9, 2001, the Company entered into a new credit facility which replaced, on substantially the same terms, the Company's existing credit facility. This bank credit facility contains, among other things, financial and other covenants, including covenants requiring the Company to maintain specified financial ratios, restricting its ability to incur indebtedness or to create or suffer to exist liens, and restricting the amount of capital expenditures which it may incur in any fiscal year. Compliance with these provisions may limit the Company's ability to expand its business, and its ability to comply with these provisions and to repay or refinance the bank credit facility may be affected by events beyond the Company's control. If the Company fails to make any required payment under the bank credit facility or fails to comply with any of the financial and operating covenants included in the bank credit facility, it would result in an event of default, permitting the lender to elect to accelerate the maturity of that indebtedness. Any such acceleration could also result in the acceleration of any of the Company's other indebtedness. In addition, the Company may be unable to make scheduled interest payments or principal payments, if then due, on the notes during the existence of a default under the bank credit facility or its other indebtedness. If the lender under the bank credit facility accelerates the maturity of that indebtedness, there is a risk that the Company will not have sufficient resources to satisfy its obligations under the bank credit facility and its other indebtedness, including the notes. Luigino's business is subject to the general risks of the food industry and to significant competition from larger, well-established companies. The Company is subject to the general risks of the food industry, including: the risk that a competitor gains a technological advantage; evolving consumer preferences; limited shelf life of food products; nutritional and health-related concerns; federal, state and local food processing controls; consumer product liability claims; the risk of product tampering; mislabeling; and the availability and expense of insurance. In addition, the food products business is highly competitive. Numerous brands and products compete for shelf space and sales, with competition based primarily on brand recognition and loyalty, price, quality and convenience. The Company competes with a number of established brands and companies, including larger and more diversified companies. A number of these competitors have broader product lines, substantially greater financial and other resources available to them, lower fixed costs and longer operating histories than Luigino's. There is a risk that the Company will not be able to compete successfully with these other companies. Competitive pressure or other factors could cause the Company's products to lose market share or result in significant price erosion, which could have a material adverse effect on its business. Fluctuations in the cost of Luigino's ingredients may adversely affect its business. The Company uses large quantities of ingredients and packaging materials in its frozen entrees. As a result, the Company is significantly affected by increases in the costs of these ingredients and materials. Due to extremely competitive conditions in the frozen food industry, following increases in ingredient costs, the Company may not be in a position to raise the prices of its frozen food entrees sufficiently to pass all such costs on to the consumer. In some cases, the Company enters into long-term supply contracts that fix the price for raw materials, but such contracts do not cover all of its ingredients and the Company may be exposed to cost increases after a contract expires. Any future material increase in the price of ingredients for the Company's entrees could have a material adverse effect on Luigino's. Claims made against Luigino's based on product liability could have a material adverse effect on its business. As a producer and marketer of food products, the Company is subject to the risk of claims for product liability. The Company maintains product liability insurance, but there is a risk that its coverage will not be sufficient to insure against all claims which may be brought against it, or that it will not be able to maintain that coverage or obtain additional insurance covering existing or new products. If someone successfully asserts a product liability claim against the Company exceeding its insurance coverage, it could have a material adverse effect on its business, and, even if a product liability claim is not successful, the time, expense and negative publicity associated with defending against such a claim could also have a similar effect. Luigino's makes its sales through independent food brokers, and its ability to maintain these relationships is important to the Company's business. The Company relies on non-affiliated food brokers to sell its products. The success of the Company's business depends, in large part, upon the maintenance of a strong distribution network. The Company grants food brokers revocable rights to sell Luigino's products in exclusive territories and they receive as compensation a dollar amount per case sold. If the Company were required to obtain additional or alternative distribution and food brokerage agreements or arrangements in the future, there can be no assurance it will be able to do so on satisfactory terms or in a timely manner. Inability to enter into satisfactory brokerage agreements may inhibit the Company's ability to implement its business plan or to establish markets necessary to develop its products successfully. Luigino's is effectively controlled by one shareholder, who can make substantially all decisions concerning the Company's business. Jeno F. Paulucci, one of his children and trusts for the benefit of his wife, all three of his children and their children own all of the outstanding shares of Luigino's common stock. Of such outstanding shares, Mr. Paulucci owns the only shares of common stock entitled to vote. Accordingly, Mr. Paulucci elects the entire board of directors and otherwise controls the management of Luigino's. In addition, the Company's shareholders are parties to a shareholder control agreement that permits Mr. Paulucci to make decisions with respect to the management and affairs of Luigino's that would normally be made by the board of directors, such as to amend the Company's articles of incorporation or bylaws, make capital expenditures over a specified dollar amount, or incur indebtedness. There is a risk that Mr. Paulucci could make a decision regarding the Company's affairs which is different than a decision made after full board deliberation, and that his decision could have an adverse effect on investors. Loss of Luigino's status as an S corporation for federal income tax purposes could materially affect the Company's income. Luigino's has elected to be an S corporation under the IRS code. Accordingly, the Company's shareholders are directly subject to tax on their respective proportionate shares of the Company's taxable income for federal and some state income tax purposes. If someone successfully challenges the Company's status as an S corporation, the Company could be required to pay federal and state income taxes, plus interest and possibly penalties, on its past and future taxable income. There is a risk that the payment of any such taxes, interest and penalties will have a material adverse effect on Luigino's. The loss of Luigino's founder or other key personnel could adversely affect the Company's business. The Company's success depends largely upon the continued services of its executive officers and key management and other personnel. If the Company loses the services of one or more of its current executive officers or other key employees, it could have a material adverse effect on the Company's business, results of operations and financial condition. In particular, the Company relies on its founder, Jeno Paulucci, and its President and Chief Executive Officer, Ronald Bubar. Mr. Paulucci and Mr. Bubar, and other executive officers, have extensive experience in the food industry. Mr. Paulucci has over 50 years of experience. He founded several successful food companies, including Chun King Corporation, which he sold in 1967 to R.J. Reynolds Food Company, and Jeno's Inc., which he sold in 1985 to The Pillsbury Co. Mr. Paulucci was the first Chairman of the Board of R.J. Reynolds Food Company, now RJR Nabisco, Inc. Mr. Bubar has more than 30 years in the food industry, and has held senior management positions at The Pillsbury Co. and Jeno's, Inc. Mr. Paulucci does not have an employment agreement with Luigino's but provides services to the Company under a consulting agreement. Mr. Bubar has entered into an employment agreement with Luigino's in effect until December 2003, subject to earlier termination or future extensions. The Company maintains key-man insurance policies on both Mr. Paulucci and Mr. Bubar, the proceeds of which are payable to Luigino's. -----END PRIVACY-ENHANCED MESSAGE-----