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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 29, 2002
COMMISION FILE NUMBER: 333-76569
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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
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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 [ ]
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]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of July 14, 2002, the aggregate value of the voting and non-voting
common equity held by non-affiliates was $0.
As of March 21, 2003, 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.
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 fourth and fifth most popular
brands in the United States, respectively, and together represent 18.9% 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 88.7% 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 41.8% 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 29,
2002.
The frozen food market accounts for $27 billion of the entire
supermarket industry. The frozen dinners and entrees category accounts for $4.9
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
67.1% of that segment.
According to A. C. Nielsen, frozen dinners and entrees remains one of
the largest and fastest growing segments in the entire supermarket industry,
growing 8.5% from $4.7 billion in 2000 to $5.1 billion in 2001 and 3.9% from
2001 to $5.3 billion in 2002. 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 $338.8 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 $1.3 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 88.7% 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 29, December 30, December 31,
Product Line Brand Price Point Recipe 2002 2001 2000
- ------------ ----- ----------- ------ ----------------------------------------
Popular..........Michelina's, Budget Gourmet, $1.39-$1.89 Traditional, Oriental 56.2% 60.9% 68.2%
Michelina's Yu Sing
Economy..........Michelina's, Budget Gourmet $0.90-$1.67 Pasta & Sauce 27.3% 27.0% 12.9%
Signature........Michelina's $1.36-$2.39 Premium 5.5% 7.3% 12.7%
Snacks...........Michelina's $1.00-$2.50 Pizza & Appetizers 3.6% 4.4% 6.2%
Bowls............Michelina's $1.27-$2.50 Traditional, Oriental 7.4% 0.4% 0.0%
In November 1999, the Company entered into certain agreements with Self
Serve Foods, Inc. ("SSFI"), an affiliated company, whereby SSFI 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 two-year co-pack agreement
entered into on the same date between the Company and Heinz. This agreement
expired on February 9, 2003 with all products being produced by the Company
subsequent to this date. 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.
Luigino's was incorporated in 1990. Since its incorporation, Luigino's
has elected to be taxed as a corporation under Subchapter S of the U.S. Internal
Revenue Code. The Company has made, and intends to continue to make,
distributions to its stockholders 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 is 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 88.7% share
based on unit volume. Luigino's has an 18.9% market share, based on unit volume,
of the overall U.S. frozen entree market. The Company produced 69 of the top 200
frozen entrees measured by unit sales per point of distribution for the twelve
weeks ended December 29, 2002. In the Canadian market, the Company had nine 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 October
25, 2002.
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.
Efficient Operations and Flexible Production. Luigino's frozen entrees
are produced at a state-of-the-art food processing plant located in Jackson,
Ohio, and at a food processing plant in Duluth,
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Minnesota, where labor costs are relatively low, but locally competitive for
both sites. 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. The Company's production lines are also highly flexible, enabling
the Company 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.
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.
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.
With the Michelina's and Budget Gourmet brands, Luigino's now has a complete
offering in the Value segment, meeting consumer needs for high quality, value
priced frozen entrees.
The Company has 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 Healthy
segment. The healthy segment makes up 42% of Entree Category sales and is
growing faster than Premium or Value with unit sales up 3.6% and dollars up 7.4%
from a year a go. In January 2003, Luigino's launched a line of healthy entrees
under the "Lean Gourmet" brand name. 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.
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, has more
than 30 years of experience 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 (earnings before interest,
taxes, depreciation and amortization). Under management's stewardship, the
Company has grown substantially since Luigino's was founded in 1990. Net sales
have grown from $176.4 million in the fiscal year ended January 3, 1999 to
$295.6 million in the fiscal year ended December 29, 2002, with a compound
annual growth rate of 13.8%.
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 93.0% 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 38.0%. 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.
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 applied for 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. In January 2003, the Company launched a full size value priced
pizza utilizing this unique, patented crispy crust formulated for either oven or
microwave. This product has met a high degree of acceptance from the trade.
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,
Luigino's further developed relationships in Japan and Mexico in pursuit of
launching the Michelina's brand. Japan and Mexico (with a combined population
greater than 220 million), are two large markets 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 $27
billion of the entire supermarket industry. Frozen dinners and entrees is the
single largest product category within the frozen food market growing 3.4% from
$5.1 billion in 2001 to $5.3 billion in 2002. 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 represented under
the sub-brands of Authentico, Yu Sing, and Premium, is targeted at
quality-oriented, value-conscious consumers. The
4
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 Yu Sing sub-brand. The Popular products
contributed approximately 56.2% to the Company's net sales for the year ended
December 29, 2002. These products are priced between $1.39 and $1.89, placing
them in the Value segment. The following is a listing of typical Popular
products available in the United States:
Macaroni & Cheese
Chicken Primavera
Glazed Chicken
Penne Pasta with Mushroom
Noodles Romanoff
Italian Sausage
Layered Lasagna w/Meat Sauce
Fettuccine Alfredo
Spaghetti Bolognese
Penne Primavera
Lasagna with Meat Sauce
Lasagna Alfredo
Fettuccine Alfredo w/Broccoli & Chicken
Macaroni & Sharp Cheddar Cheese
Eggplant Parmigiano
Salisbury Steak
Meatloaf
Layered Lasagna Pomodoro
Stuffed Cheese Rigatoni
Shaved, Cured Beef
Risotto Parmigiano
Chicken a la King
Macaroni & Beef
Chicken Pesto
Fettuccine Creamy Pesto
Black Bean Chili
Teriyaki Chicken
Vegetable & Chicken Stir Fry
Layered Lasagna with Vegetables
Linguini with Clams & Sauce
Penne Pollo
Lasagna Pollo
Lasagna with Vegetables
Spaghetti & Meatballs
Macaroni & Cheese with Ham
Fettuccine Primavera with Chicken
Pepper Steak
Four-Cheese Lasagna
Roasted Sirloin Supreme
Fettuccine & Meatballs in Wine Sauce
Noodles Stroganoff
Swedish Meatballs
Noodles with Chicken, Peas & Carrots
Cheese Ravioli
Pepper Steak
Oriental Beef & Peppers
Chicken & Almonds
Chicken Chow Mein
Garlic Chicken
Shrimp Fried Rice
Pork & Shrimp Fried Rice
Sweet & Sour Chicken
Chicken Lo Mein
Shrimp Lo Mein
Teriyaki Beef
Chicken Fried Rice
Pork Fried Rice
Beef Stroganoff
Cheese Manicotti with Marinara Sauce
Beef Pepper Steak with Rice
French Recipe Chicken
Three Cheese Lasagna
Glazed Turkey LF
Roast Beef Supreme
Fettuccini & Meatballs in Wine Sauce
Beef Cheddar Melt
Pasta, Wine & Mushroom Sauce w/ Chicken
Chicken Nuggets & French Fries
Corn Dogs & French Fries
Poppin' Chicken and Potato Nuggets
5
The Economy products, currently represented under the sub-brands
Zap'ems and Classics, contributed approximately 27.3% to the Company's net sales
for the year ended December 29, 2002. These products are priced between $0.90
and $1.67, placing them in the Value segment. The products are generally
comprised of pasta and sauce entrees. The Economy line is targeted to active,
working singles and children. The following is a listing of typical Economy
products available in the United States:
Fettuccine Carbonara
Rigatoni Pomodoro
Shells & Cheese with Jalapeno
Egg Noodles Alfredo
Macaroni & Beef
Spaghetti with Tomato & Basil
Noodles `N Chicken
Spaghetti Marinara
Macaroni & Cheese
Vegetable Stir Fry
Penne with Mushroom Sauce
Wheels & Cheese
Spicy Spirals
Chili-Mac
Ziti Parmesan
Rigatoni Cr. Sauce w/ Broccoli & Chicken
4 Cheese Fettucini Alfredo
Chinese Vegetable & White Chicken
Szechwan Vegetable & Chicken
Angel Hair Pasta w/ Tom. & Meat Sauce
Lasagna Alfredo with Broccoli
Pasta Primavera Parmesan
Lasagna Mozzarella
Penne Pasta with Tomatoes & Sausage
Escalloped Noodles & Turkey
Lasagna with Meat Sauce
Italian Vegetable & White Chicken with Rice
Wild Rice Pilaf with Vegetables
The Signature products contributed approximately 5.5% to the Company's
net sales for the year ended December 29, 2002. The Signature product line is
designed to be a value-priced, premium product. These products are
restaurant-style recipes priced between $1.36 and $2.39. The following is a
listing of typical Signature products available in the United States:
Chicken Marsala w/Garlic Mashed Potatoes
Sirloin Beef Peppercorn w/Egg Noodles
Beef Pot Roast w/Roasted Potatoes
Salisbury Steak & Gravy w/Shells & Cheese
Layered Lasagna with Meat Sauce
Beef Burgundy with Garlic Mashed Potatoes
Shrimp Alfredo with Fettuccine
Grilled Chicken Alfredo
Meatloaf & Gravy w/ Sour Cream Potatoes
The Snack products contributed approximately 3.6% to the Company's net
sales for the year ended December 29, 2002. 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
- -----------
Cheese
Hamburger
Pepperoni
Combination
Four Meat
Egg Rolls
- ---------
Shrimp
Chicken
Pork & Shrimp
Sweet & Sour Pork
Szechwan Chicken
Single-Serve Pizzas
- -------------------
Cheese
Pepperoni & Cheese
Combination
Supreme
6
The Bowl products contributed approximately 7.4% to the Company's net sales for
the year ended December 29, 2002. These products are priced between $1.27 and
$2.50, placing them in the Value segment. The product line is targeted to
consumers who desire a value priced bowl option. The following is a listing of
typical Bowl products available in the United States:
Homestyle Bowls
- ---------------
Chicken Alfredo with Broccoli
Chicken & Noodles
Potato Topped Baked Chicken
Chicken Wild Rice Casserole
Shrimp Alfredo
Shrimp & Vegetable Alfredo
Vegetable & Beef Stew
Yu Sing Bowls
- -------------
Teriyaki Chicken
Spicy Beef & Broccoli
Shrimp Fried Rice
Honey Ginger Chicken
Teriyaki Steak
Spicy Peanut Chicken
Sesame Chicken
Sweet & Sour Chicken
Chicken & Vegetables
Budget Gourmet Bowls
- --------------------
Sweet & Sour Chicken
Teriyaki Chicken
Vegetables & Chicken
Shrimp Fried Rice
Potato Topped Baked Chicken
Vegetables & Beef Stew
Spicy Beef & Broccoli
Shrimp & Vegetables Alfredo
Honey Ginger Chicken
Chicken & Noodles
Grilled Chicken Caesar
Stuffed Rigatoni
Homestyle Chili
Lasagna w/ Meat Sauce
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 regional managers are responsible for working with
the broker network to develop trade promotion and merchandising strategies. The
regional managers 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 93.0% of the U.S. supermarkets
with annual sales exceeding $2.0 million. 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. Luigino's began
television advertising the Michelina's brand in 2002 in five test markets. The
advertising was very successful on all measures and drove a 30% gain in overall
Michelina's sales in the test markets
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while awareness grew from 46% to 69%. Results are similar to those in Canada,
where the Company has conducted significant television advertising during the
past 5 1/2 years with Michelina's brand awareness increasing from 18% in 1997 to
84% in 2002.
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 in Canada have more than
quadrupled in the past five years, exceeding $110 million (Canadian) in 2002.
With a 41.8% share of market, Michelina's is the number one selling brand of
frozen entrees in Canada.
Luigino's also markets and distributes its products in Central America
and the Pacific Rim. In 2003, 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), Specialty
Products (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 88.7% share based on unit volume. Luigino's has 18.9%
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. Luigino's manages the cost of
production by producing some of its own ingredients, by entering into long-term
contracts and by the customization of shipments in order to reduce warehousing
time and space. For example the Company produces meatballs and pasta for some of
its entrees. The Company also, in some cases, enters into one to three year
supply contracts that fix the price for raw materials. These contracts, however,
do not cover all of the ingredients for the Company's products. 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.
8
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 1,385 employees, of whom 207 are engaged in
production and distribution in Duluth, 937 are engaged in production and
distribution in Jackson, and 241 are involved in management, administration and
field support. As of December 29, 2002, approximately 1,144 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. This regulation covers, among other things, the processing,
packaging, storage, distribution, advertising and labeling of the Company's
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 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
9
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 72,000 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. Certain leases are with related
parties. See "Item 13 - Certain Relationships and Related Transactions."
On June 25, 1999, the Company announced that the State of West Virginia
intends to construct and lease to the Company an approximately 200,000 square
foot production facility in West Virginia. This project is currently on hold.
The Company has sufficient capacity while this project remains on hold to meet
its current and anticipated production needs.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for the Company's common
stock. There are twelve holders of 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 dividend
distributions to its stockholders of $10.7 million in 2002, consisting of $10.3
million in cash and $0.4 million in state tax credits from previous years, $8.1
million to cover stockholders' tax liabilities for fiscal 2001, and $2.6 million
as partial payment of tax liabilities for fiscal 2002. In January 2003, the
Company made additional dividend distribution to the stockholders of $4.6
million to cover the remaining stockholders' tax liabilities for fiscal 2002.
The Company made no dividend distributions to its stockholders in 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-19 of this report. The statement of operations
data and balance sheet data presented below as of and for the fiscal years ended
December 29, 2002, December 30, 2001, December 31, 2000, January 2, 2000 and
January 3, 1999 have been derived from the financial statements, which have been
audited by KPMG LLP for fiscal 2002 and Arthur Andersen LLP, independent public
accountants, for prior fiscal years.
LUIGINO'S INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In Thousands)
(Unaudited)
Fiscal Years Ended
December 29, December 30, December 31, January 2, January 3,
2002 2001 2000 2000 1999
------------ ------------ ------------ ---------- ----------
Net Sales.................................... $295,615 $ 295,578 $ 225,847 $ 201,430 $ 176,433
Cost of Goods Sold........................... 200,619 205,943 160,453 148,097 118,334
-------- -------- ------- -------- --------
Gross profit............................ 94,996 89,635 65,394 53,333 58,099
-------- -------- ------- -------- --------
Operating Expenses:
Selling and marketing expenses.......... 28,667 20,813 20,295 20,463 12,982
General and administrative expenses..... 34,495 36,847 26,061 24,536 21,272
Reserve for plant impairment (a) ....... - - - (776) 5,172
-------- -------- ------- -------- --------
Total operating expenses................ 63,162 57,660 46,356 44,223 39,426
-------- -------- ------- -------- --------
Operating income........................ 31,834 31,975 19,038 9,110 18,673
Other Income (Expense):
Interest expense........................ (15,370) (16,634) (13,299) (12,323) (6,509)
Extinguishment of debt.................. (1,160) - - 379 436
Interest income......................... 233 435 373 168 235
Other, net.............................. 225 (107) 543 - -
-------- -------- ------- -------- --------
Net Income (Loss)............................ $ 15,762 $ 15,669 $ 6,655 $ (2,666) $ 12,835
======== ======== ======= ======== ========
(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 fiscal
1999, the Company received a cash settlement of $776.
11
Certain amounts in the selected financial data for fiscal years 2001,
2000, 1999 and 1998 have been reclassified to conform with the fiscal year 2002
presentation. These reclassifications had no effect on stockholders' equity
(deficit) or net income (loss).
Item 7. Management's Discussion and Analysis
Critical 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.
Management believes the following critical accounting policies reflect its more
significant judgements and estimates used in the preparation of the Company's
consolidated financial statements.
Revenue Recognition, Promotional Expenses and Promotional Accruals. 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 adopted the accounting guidelines of Emerging Issues Task
Force (EITF) Issue No. 01-09 in the first quarter of fiscal 2002. This Issue
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, be
classified as a reduction of sales rather than as marketing expenses. Prior
period amounts have also been reclassified, with no effect on the Company's
previously reported earnings. Promotional accruals are recorded, either as a
lump sum or rate per case, based on specific programs which are in effect for a
particular customer at time of shipment.
Depreciable Lives and Impairment of Long-lived Assets. 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 29,
2002, the Company had $39.6 million of goodwill and $23.8 million of other
intangible assets, accounting for approximately 29% of the Company's total
assets. The Company annually evaluates goodwill and other unamoritized
intangibles for impairment. Future events could cause the Company to conclude
that the goodwill and other intangible assets are impaired. Any resulting
impairment loss could have a material adverse impact on the Company's financial
condition and operational performance.
12
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.
LUIGINO'S, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In Thousands)
(Unaudited)
Fiscal Years Ended
------------------------------------------
December 29, December 30, December 31,
2002 2001 2000
------------ ------------ ------------
Net Sales....................................... 100.0 % 100.0 % 100.0 %
Cost of Goods Sold.............................. 67.9 69.7 71.0
------ ----- -----
Gross profit............................... 32.1 30.3 29.0
------ ----- -----
Operating Expenses:
Selling and marketing expenses............. 9.7 7.0 9.0
General and administrative expenses........ 11.7 12.5 11.6
------ ----- -----
Total operating expenses................... 21.4 19.5 20.6
------ ----- -----
Operating income........................... 10.7 10.8 8.4
Other Income (Expense):
Interest expense........................... (5.2) (5.6) (5.9)
Extinguishment of debt..................... (0.4) - -
Interest income............................ 0.1 0.1 0.2
Other, net................................. 0.1 - 0.2
------ ----- -----
Total other expense........................ (5.4) (5.5) (5.5)
------ ----- -----
Net Income...................................... 5.3 % 5.3 % 2.9 %
====== ===== =====
Fiscal Year 2002 compared to Fiscal Year 2001
Net Sales. The following table reflects the Company's net sales by
product line and the percentage change from prior year.
Fiscal Years Ended
-----------------------------
December 29, December 30, Percentage
2002 2001 Change
------------ ------------ ----------
(Dollars in thousands)
Popular .............. $166,281 $179,956 (7.6)%
Economy .............. 80,651 79,881 1.0
Signature ............ 16,291 21,697 (24.9)
Snacks ............... 10,638 13,013 (18.3)
Bowls ................ 21,754 1,031 2,010.0
-------- -------- -------
$295,615 $295,578 0.0 %
======== ======== =======
13
Total net sales were flat at $295.6 million for both 2002 and 2001. Net sales in
the Popular product line decreased $13.7 million or 7.6% due to a shift of
retailers to a one-value-brand strategy. Net sales for the Economy product line
increased $0.8 million or 1.0% due primarily to the acquisition of The All
American Gourmet Company. Signature and Snacks net sales declined $5.4 million
and $2.4 million respectively due to decreased distribution. The Bowl product
line, which was launched in late 2001 in the U.S., recorded a $20.7 million
increase in net sales in 2002.
Canadian net sales contributed $47.5 million or 16.1% to net sales in 2002
compared to $40.0 million or 13.5% for 2001. The increase in Canadian sales is
the combined result of the continued growth of the frozen entree market in
Canada, the introduction of the Bowls product line in 2002, and the volume
impact from the continued use of advertising.
Volume increases were recorded in the Economy and Bowl product lines due to the
acquisition of AAG and the introduction of the new bowl line in late 2001,
respectively. The increases were partially offset by volume decreases in Popular
due to retailers adopting a one-value-brand strategy and in Signature and Snacks
due to decreasing distribution. Price increases were recorded in Popular and
Snacks, while Signature had a decrease.
Fiscal Years Ended
December 29, 2002 compared to December 30, 2001
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 % (7.6)%
Economy ............. 1.0 - 1.0
Signature ........... (22.7) (2.2) (24.9)
Snacks .............. (23.1) 4.8 (18.3)
Bowls ............... 2010.0 - 2010.0
------ ----- ------
0.4 % (0.4)% 0.0 %
====== ===== ======
Gross Profit. Gross profit in 2002 increased $5.4 million to $95.0
million, while the gross margin improved to 32.1% of net sales as compared to
30.3% in 2001. The gross profit and margin improvement are primarily the result
of realizing the full year impact on the May 2001 price increases on the Budget
Gourmet brand, improved operating efficiencies, and lower commodity costs.
Selling and Marketing Expenses. Selling and marketing expenses
increased $7.8 million to $28.7 million in 2002. The increase was primarily the
result of higher advertising costs of $6.6 million, increased distribution
expense of $0.5 million, and increased reclamation of $0.4 million.
General and Administrative Expenses. General and administrative
expenses were $34.5 million in 2002 as compared to $36.8 million in 2001. This
decrease of $2.3 million is the net result of a $2.9 million decrease in
amortization expense due to the discontinuance of goodwill amortization,
partially offset by a $0.6 million or a 2.0% increase in general spending.
Operating Income. Operating income for fiscal 2002 was $31.8 million, a
decrease of $0.1 million from prior year. The decrease is the net result of
higher selling and marketing expenses partially offset by increased gross profit
and elimination of goodwill amortization.
14
Interest Expense. Interest expense for 2002 was $15.3 million as
compared to $16.6 million for 2001. The $1.3 million decrease is the combined
result of lower levels of senior debt and lower interest rates.
Extinguishment of Debt. On September 27, 2002 the Company refinanced
the senior bank debt resulting in a $1.1 million write off of deferred financing
costs associated with the previous senior bank debt facility.
Interest Income. Interest income was $0.2 million in 2002 and $0.4
million in 2001.
Other Income (Expense). Other income for 2002 was $0.2 million as
compared to other expenses of $0.1 million in 2001.
Net Income. For the reasons stated above, the net income for 2002 was
$15.8 million, an increase of $0.1 million from 2001. As a percentage of net
sales, the net income was 5.3% for both years.
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
-----------------------------
December 30, December 31, Percentage
2001 2000 Change
------------ ------------ ----------
(Dollars in thousands)
Popular .............. $ 179,956 $ 153,971 16.9 %
Economy .............. 79,881 29,231 173.3
Signature ............ 21,697 28,674 (24.3)
Snacks ............... 13,013 13,971 (6.9)
Bowls ................ 1,031 - N/A
--------- --------- -----
$ 295,578 $ 225,847 30.9 %
========= ========= =====
In conjunction with adoption of EITF Issue 01-09, the Company has
reclassified certain promotional expenses of $57,641 and $45,296 for fiscal 2001
and 2000, respectively between selling expenses and net sales.
Total net sales increased 30.9% or $69.8 million to $295.6 million in
2001 from $225.8 million in 2000. Net sales in the Popular and Economy product
lines increased $26.0 million and $50.7 million respectively, due primarily to
the acquisition of AAG. Signature and Snacks net sales decreased $7.0 million
and $0.9 million respectively, due to decreased distribution. Net sales in the
Bowls product line increased $1.0 million as this product began its first
shipments in late 2001.
Canadian sales contributed $40.0 million or 13.5% to net sales for
fiscal 2001 compared to $34.6 million or 15.3% for fiscal 2000. This increase in
net sales is the result of the continued growth of all product lines in Canada.
Volume increases were recorded in the Popular and Economy product
lines, primarily due to the acquisition of AAG and in the Bowls 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,
Signature and Bowls product lines. The following table reflects the percentage
change in sales attributable to the changes in volume and the change in selling
price by product line.
15
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 ............. 12.7 % 4.2 % 16.9 %
Economy ............. 158.8 14.5 173.3
Signature ........... (28.1) 3.8 (24.3)
Snacks .............. (8.1) 1.2 (6.9)
Bowls ............... N/A N/A N/A
----- ----- -----
30.0 % 0.9 % 30.9 %
===== ===== =====
Gross Profit. Gross profit in 2001 increased 37.1% or $24.2 million to
$89.6 million. This increase in gross profit is primarily the result of the
acquisition of AAG. The gross margin increased to 30.3% of net sales in fiscal
2001 as compared to 29.0% in fiscal 2000. The margin improvement is primarily
the result of the price increase implemented in January 2001.
Selling and Promotional Expense. Selling and marketing expenses
increased $0.5 million to $20.8 million in 2001 from $20.3 million in 2000. The
increase is primarily related to spending on product lines associated with the
acquisition of AAG.
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 amortization of $7.8 million of 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 10.8% of net sales in 2001, as compared to 8.4% 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 their income of $0.5 million in 2000.
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
5.3% in 2001 compared to 2.9% of net sales in 2000.
16
Liquidity and Capital Resources
On September 27, 2002 the Company refinanced its then existing senior
bank debt with a $75.0 million credit facility with LaSalle Bank, N.A. The
credit facility includes (a) a $42.5 million term loan with maturities of $5.0
million, $10.0 million, $12.5 million, $11.25 million and $3.75 million
respectively in fiscal years 2002 to 2006, and (b) a $32.5 million revolving
credit facility expiring on January 4, 2006, subject to certain borrowing base
limitations.
As of December 29, 2002, the Company had an outstanding amount of $9.9
million on a $32.5 million line of senior revolving credit with LaSalle Bank,
N.A. The cash balance as of December 29, 2002 was $2.9 million compared to $3.4
million as of December 30, 2001.
The Company's 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 $32.5 million revolving credit facility with LaSalle Bank, N.A.
that expires in January, 2006.
Under the 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 29, 2002, the Company was in compliance
with all such covenants.
Fiscal year 2002 compared to Fiscal Year 2001
Operating Activities. The Company generated $30.7 million of cash flow
from operating activities during 2002, compared to $40.0 million in 2001. The
$9.3 million decrease in cash flow from operations is net result of a $0.4
million decrease in depreciation and amortization, due primarily to the
discontinuance of goodwill amortization and a $9.0 million decrease in cash
provided by working capital, offset partially by a $0.1 million increase in net
income.
Investing Activities. Investing activities used $14.2 million of cash
in 2002 primarily for the purchase of machinery and equipment, as compared to
$79.7 million in 2001. The primary cause for the decrease was the acquisition of
AAG on February 6, 2001 for $66.6 million.
Financing Activities. Financing activities used $17.1 million of cash
in 2002 as compared to $42.8 million in 2001. The Company paid $10.7 million in
cash distributions to stockholders in 2002, $7.7 million to cover their tax
liability related to 2001 operating results and $2.6 million as partial payment
of their 2002 tax liability. On February 9, 2001, the Company obtained $66.6
million of cash primarily for the acquisition of AAG through borrowings under a
$100.0 million credit facility which replaced its then existing revolving credit
facility. On September 27, 2002, the Company refinanced this $100.0 million
credit facility with a $75.0 million credit facility with LaSalle Bank, N.A.,
drawing a total of $56.2 million, comprised of $42.5 million of term and $13.7
million of revolver to pay off the former credit facility and cover related fees
and expenses.
17
2003 Planned Expenditures
As a part of the Company's strategic growth plan, the Company is
budgeting approximately $9.0 million in slotting expenses in 2003 to introduce
new products and increase product penetration. The Company estimates that its
overall capital expenditures in 2003 will be approximately $12.0 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 is
responsible for payment of 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 on February 1, 2006. 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 5 to
the consolidated financial statements. These debt commitments include 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 non-cancelable leases.
The Company also entered into purchase commitments on various
ingredients to secure stable prices in 2003. All current commitments expire in
fiscal 2003.
As a part of the acquisition of AAG, the Company entered into a
two-year co-pack agreement with Heinz Frozen Food Company. The agreement expired
on February 9, 2003.
Payments Due By Period
(in millions)
Contractual Less Than After
Cash Obligations Amount 1 year 1-3 years 4-5 years 5 years
- ----------------------- -------- --------- --------- --------- -------
Long-term debt......... $156.0 $10.7 $26.1 $115.1 $4.1
Operating leases....... 1.9 0.6 0.8 0.2 0.3
Purchase obligations... 8.9 8.9 - - -
Co-pack contract....... 0.5 0.5 - - -
------ ----- ----- ------ ----
$167.3 $20.7 $26.9 $115.3 $4.4
====== ===== ===== ====== ====
18
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.
Recently Issued Accounting Pronouncements
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS No.
143 on December 30, 2002. The adoption of SFAS No. 143 is not expected to have a
material effect on the Company's consolidated financial statements.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS 145 will require gains and losses on extinguishments of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS 4. SFAS 145 also amends
SFAS 13 to require certain modifications to capital leases be treated as
sale-leaseback and modifies the accounting for sub-leases when the original
lessee remains a secondary obligor or guarantor. Upon adoption, any gain or loss
on extinguishment of debt previously classified as an extraordinary item in
prior periods presented be reclassified to conform with the provisions of SFAS
145. SFAS 145's amendment and technical correction to SFAS 13 is effective for
all transactions occurring after May 15, 2002. The Company adopted SFAS 145
effective for the third quarter of 2002. The adoption of SFAS 145 resulted in a
one-time expense of $1,160 due to the extinguishment of debt being recorded as
other expense in the third quarter of 2002.
In June 2002, FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit on Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for
costs associated with an exit or disposal activity be recognized when a
liability is incurred. Under Issue 94-3, a liability for an exit cost as
generally defined in Issue 94-3 was recognized at the date of an entity's
commitment to an exit plan. The provisions of this Statement are effective for
exit or disposal activities that are initiated after December 31, 2002. We do
not expect the adoption of SFAS 146 to have a material impact on our
consolidated financial statements.
In November 2002, FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, interpretation of FASB Statements No. 5,
57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize at
inception of a guarantee a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
consolidated financial statements. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002.
19
Related Party Transactions
See "Item 13 - Certain Relationships and Related Transactions."
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 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. The
Company entered into two fixed interest rate swaps in February 2002 totaling
$30.0 million. One is a $20.0 million swap at an interest rate of 3.49%, plus
the current margin spread of 2.00% maturing on December 31, 2003 and the other
is a $10.0 million swap at an interest rate of 3.07%, plus the current margin
spread of 2.00% with $2.5 million maturing on December 31, 2002, March 31, 2003,
June 30, 2003 and September 30, 2003, respectively. The swap agreements were
entered into to fix the rate of interest on the floating rate senior credit
facility. The swaps are accounted for as cash flow hedges and their total fair
market value as of December 29, 2002 is a liability of $0.5 million. The
Company's percentage of fixed rate debt to total debt was 88.8% at December 29,
2002. A 1% change in variable interest rates would have caused a $0.2 million
increase in interest expense associated with variable debt in fiscal 2002.
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 poultry products, would have resulted in higher cost of
goods sold of $0.4 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.
20
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
Independent Auditors' Report ................................F-2
Prior Years' Independent Auditors' Report ...................F-3
Consolidated Balance Sheets as of December 29, 2002 and
December 30, 2001........................................F-4
Consolidated Statements of Operations for the Fiscal
Years Ended December 29, 2002, December 30, 2001
and December 31, 2000 ...................................F-5
Consolidated Statements of Cash Flows for the Fiscal
Years Ended December 29, 2002, December 30, 2001
and December 31, 2000 ...................................F-6
Consolidated Statements of Stockholders' Equity (Deficit)
for the Fiscal Years Ended December 29, 2002,
December 30, 2001 and December 31, 2000 .................F-7
Notes to Consolidated Financial Statements ..................F-8
Item 9. Changes in and Disagreements with Accountants
Arthur Andersen LLP was previously the principal accountant for
Luigino's, Inc. and subsidiary (the "Company"). On April 9, 2002, that firm's
appointment as principal accountant was terminated. The Company has asked KPMG
LLP to accept engagement as the Company's principal accountant. The decision to
change accountants was approved by the audit committee and the board of
directors. KPMG LLP accepted the engagement on May 10, 2002.
In connection with the audits of the two fiscal years ended December
30, 2001 and December 31, 2000, and during the subsequent interim period through
April 9, 2002, there were no disagreements with Arthur Andersen LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to their
satisfaction would have caused them to make reference to the subject matter of
the disagreement in connection with their report.
The audit reports of Arthur Andersen LLP on the consolidated financial
statements of Luigino's, Inc. and subsidiary as of and for the years ended
December 30, 2001 and December 30, 2000 did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. A letter from Arthur Andersen LLP to the
Securities and Exchange Commission is attached as Exhibit 4.1.
During the two fiscal years ended December 30, 2001 and December 31,
2000, and the subsequent interim period through April 9, 2002, the Company did
not consult with KPMG LLP regarding the application of generally accepted
accounting principles to a specific transaction, either proposed or completed,
or the type of audit opinion that might be rendered on the Company's
consolidated financial statements.
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 ......... 61 President, Chief Executive Officer
and Director
Thomas W. Knuesel ....... 55 Chief Financial Officer
Joel Conner ............. 51 Senior Executive Vice President of
Marketing and International Sales
Charles W. Pountney ..... 43 Executive Vice President of Sales
James C. Reed ........... 50 Executive Vice President of
Operations
Jeno F. Paulucci ........ 84 Chairman of the Board
Nicholas A. Pope ........ 54 Director
Joe C. Hall ............. 53 Director
Lois M. Paulucci ........ 80 Director
Larry W. Nelson ......... 52 Director
Jack H. Helms ........... 50 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 1982 to 1990, he was Vice President of
Marketing for ServiceMaster Industries.
22
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 2002 exceeded $100,000.
Annual Compensation
-----------------------------------------------------------
Other
Annual All Other
Year Salary Bonus Compensation Compensation
---- ------ ----- ------------ ------------
Jeno F. Paulucci 2002 $ ---- $ ---- $250,000(1) $ ----
Chairman 2001 $ ---- $ ---- $250,000(1) $ ----
2000 $ ---- $ ---- $250,000(1) $ ----
Ronald O. Bubar 2002 $518,750 $500,000 $ 6,000(2) $1,300,000(3)
President and Chief 2001 $474,231 $400,000 $ 5,100(2) $1,300,000(3)
Executive Officer 2000 $359,327 $360,000 $ 5,100(2) $1,300,000(3)
Joel Conner 2002 $260,097 $250,000 $ 6,000(2) $ ----
Senior Executive Vice 2001 $244,039 $240,000 $ 5,100(2) $ ----
President of Marketing 2000 $231,088 $225,000 $ 5,100(2) $ ----
and International Sales
Charles W. Pountney 2002 $242,981 $175,000 $ 6,000(2) $ ----
Executive Vice President 2001 $225,289 $230,000 $ 5,100(2) $ ----
of Sales 2000 $187,481 $150,000 $ 5,100(2) $32,759(4)
Thomas W. Knuesel 2002 $181,923 $180,000 $ 5,458(2) $ ----
Chief Financial Officer 2001 $161,923 $160,000 $ 4,858(2) $ ----
2000 $ 15,385 $ ---- $ ---- $ ----
(1) Payments by Paulucci International Ltd., Inc., a Subchapter S
Corporation wholly owned by Mr. Paulucci, for consulting services
provided to Luigino's in 2002, 2001 and 2000. 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
$4.9 million and is reimbursed for its actual out-of-pocket expenses incurred in
rendering these services. The Company paid Paulucci International $4.5 million
under the consulting agreement in 2002 and $4.1 million under a similar
consulting agreement in
24
2001. Paulucci International distributed $3.0 million to Mr. Paulucci in his
capacity as sole stockholder of Paulucci International in both 2002 and 2001.
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:
o Prepare marketing and advertising strategies for building
brand awareness.
o Establish and maintain relationships with major customers of
Luigino's.
o Identify new market opportunities in frozen foods and related
food segments of the industry.
o Create new product ideas or lines and assist in researching
and developing them.
o Develop strategies for increasing the penetration /
distribution of existing products.
o Services relating to international expansion, including:
o Product and packaging identification, production and
distribution;
o Negotiate agreements with third parties for
production, marketing and distribution;
o Examine potential plant sites and related financing
options.
o Services relating to expansion of existing domestic plants or
identification of potential new plant sites and related
financing options.
o Monitor product quality.
o Formulate organizational structure for all departments
including, administrative, operations, international and sales
and marketing.
o Services relating to corporate transactions including legal,
tax, financing and others that may affect the company's
stockholders.
o Services relating to corporate aircraft acquisitions,
maintenance and staffing.
o 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 received an annual salary of $518,750 in 2002 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 termination of the
25
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 2002 and fiscal 2001. The other officers of Luigino's are also party to
incentive agreements that link a portion of their future compensation to EBITDA.
Director Compensation
Directors Nicholas A. Pope, Joe C. Hall, Lois M. Paulucci and Jack H.
Helms each receive $5,000 annually plus $750 per meeting and reimbursement for
travel expenses. Directors Jeno F. Paulucci, Ronald O. Bubar and Larry W. Nelson
receive no additional compensation as board members.
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
----------------------
Stockholders 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
26
- ---------------
(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.
(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
Stockholder Control Agreement
The holders of the common stock of Luigino's have executed a
stockholder 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 stockholders 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:
o amend its articles of incorporation, bylaws or any other
charter document;
o issue any equity security, including any security convertible
into or exercisable or exchangeable for any equity security;
o redeem or otherwise acquire shares of its capital stock or
warrants or options for its capital stock;
o declare dividends or make other distributions on its capital
stock except dividends and distributions from or to a
wholly-owned subsidiary of Luigino's;
o 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;
o 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;
o 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;
27
o voluntarily dissolve or liquidate;
o have a subsidiary which is not wholly-owned by Luigino's;
o change its business in any material respect;
o 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;
o acquire any securities or assets of any other person, except
for acquisitions of supplies and equipment in the ordinary
course of business;
o 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;
o enter into joint ventures or partnerships;
o 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;
o adopt any employee benefit or incentive plan;
o enter proceedings under Title 11 of the United States Code or
any other federal or state bankruptcy or similar law;
o 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
stockholder 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, $4.7 million was outstanding at
December 29, 2002. Amounts due under the stockholder note bear interest at the
prime rate payable quarterly with annual amortization of $250,000 with remaining
principal and unpaid interest accrual due on maturity. The prime rate was 4.25%
at December 29, 2002. Luigino's is not obligated to make additional advances
under the stockholder 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.
28
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 expires on December 31, 2004. The annual rent payments
under the lease were $333,530 in 2002, $313,390 in 2001and $289,649 in 2000 and
will be approximately $335,000 in 2003, payable in monthly installments.
As described above in Item 11 under the heading "Consulting and
Employment Agreements," during fiscal 2002, 2001 and 2000 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 2002, 2001 and 2000 were $4,459,000,
$4,054,000 and $3,616,666, respectively.
Mr. Paulucci and his wife, Lois Paulucci, have personally guaranteed
the payment of a portion of the Company's debt, of which a balance of $7.0
million was outstanding as of December 29, 2002. 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,
$280,000 and $260,000, for such use in fiscal 2002, 2001, and 2000,
respectively.
Luigino's has entered into a Tax Distribution Agreement with each of
its stockholders relating to federal and state income tax matters involving
Luigino's and its stockholders. 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 stockholders for their income tax obligations resulting
from income of Luigino's being subject to tax at the stockholder level.
The Company's subsidiary, AAG, is a C corporation. As such, AAG is
responsible for payment of federal, state and foreign taxes.
In November 1999, the Company entered into two agreements with Self
Serve Centers, Inc. ("SSCI"), whose name changed in 2002 to Self Serve Foods,
Inc. ("SSFI"), 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, SSFI manages
the Company's vending business at the rate of 30.0% of all sales of the
Company's products sold through vending machines managed by SSFI for the Company
per each four week period. The Company paid SSFI $0.6 million in the year ended
December 29, 2002 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 SSFI, the Company
packs certain products for SSFI; 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. SSFI 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 SSFI certain
support services, including accounting, order taking, warehousing, shipping and
clerical support. SSFI will pay to the Company a quarterly fee of 1% of SSFI's
total retail sales, not including sales of products under the Michelina's or
other labels of the Company. During fiscal 2002 and 2001, no amount was paid the
Company under this agreement.
In May 2002, the Company entered into two agreements with Arden
International, LLC, ("Arden") a limited liability company in which Jeno F.
Paulucci is the managing member and the Jeno Michael Paulucci Irrevocable Trust,
the Angela Nocelli Paulucci Irrevocable Trust, the Tiffany Hope Soderstrom
Irrevocable Trust and the Brittany Ann Soderstrom Irrevocable Trust are members.
Pursuant
29
to a services agreement, the Company provides general administrative services,
technical advice and other general business and operations support as requested
for a fee of 2% of Arden's net sales plus reimbursement for out of pocket
expenses. The arrangement commenced on May 6, 2002 for a three-year term and may
be extended for additional terms of one year each thereafter by mutual consent.
Arden has the right to terminate this agreement upon 30 days prior written
notice. Pursuant to a supply and contract packing agreement, the Company will
supply certain raw materials and ingredients to Arden at cost. Arden packs
certain products for the Company and is reimbursed at 105% of Arden's
manufacturing cost for each product manufactured. In addition, the Company has
agreed to pay Arden an amount equal to 2% of retail sales on a quarterly basis
for such products. The arrangement commenced on May 6, 2002 for a three-year
period. The agreement may be extended for an additional term up to five years.
Arden has the right to terminate this agreement at any time with 60 days prior
written notice
Item 14. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer
(collectively, the "Certifying Officers") are responsible for establishing and
maintaining disclosure controls and procedures for the Company. The Certifying
Officers have concluded (based upon their evaluation of these controls and
procedures as of a date within 90 days of the filing of this report) that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in this report is
accumulated and communicated to the Company's management, including its
principal executive officers as appropriate, to allow timely decisions regarding
required disclosure. The Certifying Officers also have indicated that there were
no significant changes in the Company's internal controls or other factors that
could significantly affect such controls subsequent to the date of their
evaluation, and there were no corrective actions with regard to significant
deficiencies and material weaknesses.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements
All consolidated financial statements of the Company as set
forth under Item 8 of this report.
(2) Consolidated 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).
30
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 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).
10.2 Tax Distribution Agreement, dated February
4, 1999, among the Company and all of its
stockholders 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 Sublease, dated as of September 21, 1993,
between Foremost Mgmt., Inc. and the Company
(incorporated by reference to Exhibit 10.10
to the
31
Company's Form S-4, as amended, filed April
19, 1999, file number 333-76569).
10.8 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).
10.9 Stockholder Control Agreement, dated
February 4, 1999, among the Company and its
stockholders (incorporated by reference to
Exhibit 10.12 to the Company's Form S-4, as
amended, filed April 19, 1999, file number
333-76569).
10.10 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).
10.11 Credit Agreement, dated as of September 27,
2002, among the Company and the banks party
thereto and LaSalle Bank, NA in the capacity
as agent for said banks (incorporated by
reference to Exhibit 10.1 to the Company's
Form 8-K, filed October 3, 2002).
*12.1 Statement of computation of ratios.
*24.1 Power of attorney.
*99.1 Cautionary Statements
*99.2 Certification pursuant to 18 U.S. C. Section
1350, as adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief
Executive Officer)
*99.3 Certification pursuant to 18 U.S. C. Section
1350, as adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief
Financial Officer)
* Filed herewith.
(b) Reports on Form 8-K
The Company filed a Form 8-K relating to the termination of Arthur
Andersen LLP as the Company's principal accountant on April 16, 2002.
The Company filed a Form 8-K relating to the engagement of KPMG LLP as
the Company's principal accountant on May 14, 2002.
The Company filed a Form 8-K relating to the new senior credit
agreement among the Company, the banks party thereto, and LaSalle Bank, NA as
agent for such banks on October 3, 2002.
32
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 March 21, 2003
- -------------------------- Officer and Director
Ronald O. Bubar
/s/ Thomas W. Knuesel Chief Financial Officer March 21, 2003
- -------------------------- (Principal Financial and
Thomas W. Knuesel Accounting Officer)
* Chairman and Director March 21, 2003
- --------------------------
Jeno F. Paulucci
* Director March 21, 2003
- --------------------------
Jack H. Helms
* Director March 21, 2003
- --------------------------
Joseph C. Hall
* Director March 21, 2003
- --------------------------
Lois M. Paulucci
* Director March 21, 2003
- --------------------------
Nicholas A. Pope
* Director March 21, 2003
- --------------------------
Larry W. Nelson
*By: /s/ Ronald O. Bubar
-------------------------
Ronald O. Bubar
Chief Executive Officer
33
SARBANES-OXLEY SECTION 302 CERTIFICATION
I, Ronald O. Bubar, certify that:
1. I have reviewed this annual report on Form 10-K of Luigino's
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function);
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003
By /s/ Ronald O. Bubar
---------------------------------------
Ronald O. Bubar
Chief Executive Officer
34
SARBANES-OXLEY SECTION 302 CERTIFICATION
I, Thomas W. Knuesel, certify that:
1. I have reviewed this annual report on Form 10-K of Luigino's
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
d) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
e) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
f) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function);
c) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
d) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003
By /s/ Thomas W. Knuesel
---------------------------------------
Thomas W. Knuesel
Chief Financial Officer
35
LUIGINO'S, INC. AND SUBSIDIARY
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report ..............................................F-2
Prior Years' Independent Auditors' Report .................................F-3
Consolidated Balance Sheets as of December 29, 2002 and
December 30, 2001 .......................................................F-4
Consolidated Statements of Operations for the Fiscal Years Ended
December 29, 2002, December 30, 2001, and December 31, 2000 .............F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 29, 2002, December 30, 2001, and December 31, 2000 .............F-6
Consolidated Statements of Stockholders' Equity (Deficit) for the
Fiscal Years Ended December 29, 2002, December 30, 2001, and
December 31, 2000 .......................................................F-7
Notes to Consolidated Financial Statements ................................F-8
F-1
Independent Auditors' Report
The Board of Directors of Luigino's, Inc.:
We have audited the accompanying consolidated balance sheet of Luigino's, Inc.
(a Minnesota corporation) and Subsidiary as of December 29, 2002, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the period ended December 29, 2002. 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 audit. The consolidated financial statements of Luigino's, Inc. and
Subsidiary as of December 30, 2001 and the two years in the period then ended
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements,
before the revision described in note 4 and the restatement described in note 9
to the consolidated financial statements, in their report dated February 21,
2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Luigino's, Inc. and
Subsidiary as of December 29, 2002 and the results of their operations and their
cash flows in the period ended December 29, 2002 in conformity with accounting
principles generally accepted in the United States of America.
As discussed above, the consolidated financial statements of Luigino's, Inc. and
Subsidiary as of December 30, 2001 and for the two years in the period then
ended were audited by other auditors who have ceased operations. As described in
note 4, these consolidated financial statements have been revised to include the
transitional disclosures required by Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company
as of December 31, 2001. As described in note 9, these consolidated financial
statements have also been restated. We audited the adjustments described in note
9 that were applied to restate the 2001 and 2000 consolidated financial
statements. In our opinion, such disclosures and adjustments for 2001 and 2000
as described in notes 4 and 9 are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
2001 and 2000 consolidated financial statements of Luigino's, Inc. and
Subsidiary other than with respect to such disclosures and adjustments and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 and 2000 consolidated financial statements taken as a whole.
/s/ KPMG LLP
Minneapolis, Minnesota
March 14, 2003
F-2
The following report is a copy of a report previously issued by Arthur Andersen
LLP ("Andersen"). This report relates to prior years' financial statements and
has not been reissued by Andersen.
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-3
LUIGINO'S, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
December 29, December 30,
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ..................................... $ 2,870 $ 3,440
Receivables, net of allowance for doubtful accounts of $146.... 28,955 29,007
Inventories ................................................... 22,469 19,571
Prepaid expenses and other .................................... 2,946 2,939
--------- ---------
Total current assets ........................................ 57,240 54,957
--------- ---------
Property, Plant and Equipment:
Land .......................................................... 22 22
Buildings and improvements .................................... 20,866 16,878
Machinery and equipment ....................................... 123,671 116,636
Office equipment and leasehold improvements ................... 6,727 5,855
Construction in progress ...................................... 8,956 7,486
Less--Accumulated depreciation ................................ (69,543) (57,644)
--------- ---------
Net property, plant and equipment ........................... 90,699 89,233
--------- ---------
Other Assets:
Receivables from stockholders ................................. 4,472 4,722
Deferred costs, principally debt issuance costs ............... 3,946 6,323
Restricted cash ............................................... 48 44
Goodwill ...................................................... 39,648 39,648
Other intangibles, net of amortization of $12,813 and $7,813 .. 23,766 28,766
--------- ---------
Total other assets .......................................... 71,880 79,503
--------- ---------
Total Assets ...................................................... $ 219,819 $ 223,693
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt .......................... $ 10,723 $ 10,451
Accounts payable .............................................. 19,885 20,557
Accrued expenses--
Accrued payroll and benefits ................................ 6,671 5,889
Accrued interest ............................................ 4,333 4,557
Accrued promotions and other ................................ 4,457 6,142
Declared stockholder tax distributions ...................... 4,647 7,655
--------- ---------
Total current liabilities ................................... 50,716 55,251
Long-Term Debt, less current maturities ........................... 145,298 151,995
Deferred Taxes .................................................... 9,066 9,600
--------- ---------
Total Liabilities ........................................... 205,080 216,846
--------- ---------
Commitments and Contingencies
Stockholders' Equity:
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
Declared stockholder tax distributions ........................ (4,647) (8,074)
Accumulated other comprehensive loss .......................... (548) --
Retained earnings ............................................. 19,278 14,265
--------- ---------
Total stockholders' equity .................................. 14,739 6,847
--------- ---------
Total Liabilities and Stockholders' Equity ........................ $ 219,819 $ 223,693
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
LUIGINO'S, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In Thousands)
52 Weeks Ended
--------------------------------------------
December 29, December 30, December 31,
2002 2001 2000
------------ ------------ ------------
Net Sales ................................. $ 295,615 $ 295,578 $ 225,847
Cost of Goods Sold ........................ 200,619 205,943 160,453
--------- --------- ---------
Gross profit ......................... 94,996 89,635 65,394
--------- --------- ---------
Operating Expenses:
Selling and marketing expenses ....... 28,667 20,813 20,295
General and administrative expenses... 34,495 36,847 26,061
--------- --------- ---------
Total operating expenses ............. 63,162 57,660 46,356
--------- --------- ---------
Operating income ..................... 31,834 31,975 19,038
Other Income (Expense):
Interest expense ..................... (15,370) (16,634) (13,299)
Extinguishment of debt ............... (1,160) -- --
Interest income ...................... 233 435 373
Other, net ........................... 225 (107) 543
--------- --------- ---------
Total other expense .................. (16,072) (16,306) (12,383)
--------- --------- ---------
Net Income ................................ $ 15,762 $ 15,669 $ 6,655
========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
LUIGINO'S, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In Thousands)
52 Weeks Ended
--------------------------------------------
December 29, December 30, December 31,
2002 2001 2000
------------ ------------ ------------
Operating Activities:
Net Income ........................................... $ 15,762 $ 15,669 $ 6,655
Adjustments to net income provided by (used in)
operating activites-
Depreciation and amortization ....................... 20,672 21,089 12,489
Changes in operating assets and liabilities:
Receivables ........................................ 52 (2,566) (4,382)
Inventories ........................................ (2,899) (505) 3,354
Prepaid expenses and other ......................... (8) (912) (366)
Accounts payable and accrued expenses .............. (2,881) 7,270 (9,266)
--------- --------- ---------
Net cash provided by operating activities ......... 30,698 40,045 8,484
--------- --------- ---------
Investing Activities:
Purchases of property, plant and equipment ........... (13,369) (11,633) (6,527)
Purchases of other assets ............................ (790) (1,445) (988)
Business acquisition ................................. -- (66,627) --
--------- --------- ---------
Net cash used in investing activities ............. (14,159) (79,705) (7,515)
--------- --------- ---------
Financing Activities:
Borrowings on revolving credit agreement ............. 101,800 72,712 64,200
Payments on revolving credit agreement ............... (91,900) (79,712) (62,500)
Proceeds from debt ................................... 57,135 60,000 --
Repayments of debt ................................... (73,461) (9,954) (2,729)
Distributions to stockholders ........................ (10,329) -- --
Other ................................................ (354) (259) 268
--------- --------- ---------
Net cash provided by (used in) financing activities (17,109) 42,787 (761)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents ........ (570) 3,127 208
Cash and cash equivalents, beginning of year ............ 3,440 313 105
--------- --------- ---------
Cash and cash equivalents, end of year .................. $ 2,870 $ 3,440 $ 313
========= ========= =========
Supplemental Information:
Interest paid ...................................... 13,954 15,424 13,264
========= ========= =========
Income taxes paid .................................. -- -- --
========= ========= =========
Non-Cash Transactions
Declared tax distribution .......................... 4,647 8,074 --
========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
LUIGINO'S INC. and SUBSIDIARY
Statements of Stockholders' Equity (Deficit)
For the Fiscal Years Ended December 29, 2002,
December 30, 2001 and December 31, 2000
(In Thousands, Except Share Data)
Common Stock
------------------------------ Accumulated Total
Voting Nonvoting Additional Retained Declared Other Stockholders'
-------------- -------------- Paid-In Earnings Stockholder Tax Comprehensive Equity
Shares Amount Shares Amount Capital (Deficit) Distributions Loss (Deficit)
------ ------ ------ ------ ---------- --------- --------------- ------------- -------------
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 Stockholder Tax
Distributions - (8,074) - (8,074)
Net income - - - - - 15,669 - - 15,669
--- --- --- --- ----- -------- -------- ------ --------
Balance at December 30, 2001 100 - 900 1 655 14,265 (8,074) - 6,847
Declared Stockholder Tax
Distributions - (7,322) - (7,322)
Tax Distributions Paid to
Stockholders (10,749) 10,749 - -
Other Comprehensive Loss - - (548) (548)
Net income - - - - - 15,762 - - 15,762
--- --- --- --- ----- -------- -------- ------ --------
Balance at December 29, 2002 100 $ - 900 $ 1 $ 655 $ 19,278 $ (4,647) $ (548) $ 14,739
=== === === === ===== ======== ======== ====== ========
The accompanying notes are an integral part of these financial statements.
F-7
Luigino's, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 29, 2002 and December 30, 2001
(Dollars In Thousands, Except Share Data)
1. Operations:
Luigino's, Inc., a Minnesota Corporation, and its subsidiary The All American
Gourmet Company, a Delaware corporation, (together the "Company"), market 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 produced internally and 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. All 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 29, 2002 (fiscal year 2002),
December 30, 2001 (fiscal year 2001), and December 31, 2000 (fiscal year 2000)
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.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market and
consisted of the following:
December 29, 2002 December 30, 2001
----------------- -----------------
Raw materials.......... $ 7,509 $ 7,748
Finished goods......... 12,348 8,974
Packaging supplies..... 2,612 2,849
------- -------
$22,469 $19,571
======= =======
F-8
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 $11,903, $12,199 and $11,339 for fiscal 2002, 2001, and
2000, respectively.
Impairment of Long-lived Assets
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets, provides a single accounting model
for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria
for classifying an asset as held for sale, and broadens the scope of businesses
to be disposed of that qualify for reporting as discontinued operations and
changes the timing of recognizing losses on such operations. The Company adopted
SFAS No. 144 on December 31, 2001. The adoption of SFAS No. 144 did not affect
the Company's consolidated financial statements.
In accordance with SFAS No. 144, long-lived assets, such as property, plant and
equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized in the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of.
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, as of December 31, 2001. Goodwill and intangible assets
acquired in a purchase business combination and determined to have an indefinite
useful life are not amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144.
In connection with SFAS No. 142's transitional goodwill impairment evaluation,
the Statement required the Company to perform an assessment of whether there was
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company was required to identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of December 31, 2001. The Company was required to determine
the fair value of each reporting unit and compare it to the carrying amount of
the reporting unit within six months of December 31, 2001. To the extent the
carrying amount of a reporting unit exceeded the fair value of the reporting
unit, the Company would be required to perform the second step of the
transitional
F-9
impairment test, as this is an indication that the reporting unit goodwill may
be impaired. No indicators of impairment were identified and further assessment
was not required.
Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line
basis over the expected periods to be benefited, 20 years, and assessed for
recoverability by determining whether the amortization of the goodwill balance
over its remaining life could be recovered through undiscounted future operating
cash flows of the acquired operation. All other intangible assets were amortized
on a straight-line basis from 1 to 20 years.
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 29, 2002 and December 30, 2001 the carrying
value of the Company's fixed rate debt was approximately $18,000 and $15,000,
less than its fair value, respectively. All other financial instruments'
carrying values approximated fair value.
Derivative Instruments and Hedging Activities
The Company has only limited involvement with derivative financial instruments
and uses them only to manage well-defined interest rate risks. The Company does
not use financial instruments or derivatives for any trading or other
speculative purposes.
The Company entered into two fixed interest rate swaps in February 2002 totaling
$30,000. One is a $20,000 swap at an interest rate of 3.49%, plus the current
margin spread of 2.00% maturing on December 31, 2003 and the other is a $10,000
swap at an interest rate of 3.07%, plus the current margin spread of 2.00% with
$2,500 maturing on December 31, 2002, March 31, 2003, June 30, 2003 and
September 30, 2003, respectively.
The swap agreements were entered into to fix the rate of interest on the
floating rate senior credit facility. The swaps are accounted for as cash flow
hedges and their total fair market value as of December 29, 2002 is a liability
of $548 and reflected as other comprehensive loss, a component of stockholders'
equity.
F-10
Revenue Recognition
Revenue on product sales is recognized at the time the product is shipped to
customers. Receivables are reviewed regularly to determine collectability and
allowances for bad debts are established based upon historical losses and
existing economic and industry factors.
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 significant credit
risks associated with these receivables.
The Company has one customer, whose net sales accounted for 18.2%, 14.2% and
10.9% of net sales in fiscal years 2002, 2001 and 2000 respectively.
The Company has an exclusive distribution agreement with a Canadian company to
distribute the Company's products in Canada. The distributor accounted for
16.1%, 13.5% and 15.3% of net sales in fiscal years 2002, 2001 and 2000,
respectively.
Advertising
Advertising expenses are charged to expense in the period incurred. Advertising
expenses were $6,656, $1, and $2,871 for 2002, 2001 and 2000 respectively.
Product Related Costs
Expenditures for research and development, advertising 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 29, 2002, there were no other significant
deferred tax items. There was no tax provision recorded for AAG in 2002.
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
stockholders relating to federal and state income tax matters involving the
Company and its stockholders. 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 stockholders for their income tax obligations resulting
from income of the Company being subject to tax at the stockholder level.
F-11
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 liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Principal estimates for the Company include estimation of depreciable lives,
certain accruals and recoverability of goodwill. The ultimate results could
differ from those estimates.
Reclassification
Certain amounts in the financial statements for the fiscal years 2000 and 2001
have been reclassified to conform with the fiscal year 2002 presentation. Those
reclassifications had no effect on stockholders' equity (deficit) or net income.
Recently Issued Accounting Pronouncements
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS No.
143 on December 30, 2002. The adoption of SFAS No. 143 is not expected to have a
material effect on the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS will require gains and losses on extinguishments of debt to be classified
as income or loss from continuing operations rather than as extraordinary items
as previously required under SFAS 4. SFAS 145 also amends SFAS 13 to require
certain modifications to capital leases be treated as a sale-leaseback and
modifies the accounting for sub-leases when the original lessee remains a
secondary obligor or guarantor. Upon adoption, any gain or loss on
extinguishment of debt previously classified as an extraordinary item in prior
periods presented be reclassified to conform with the provisions of SFAS 145.
SFAS 145's amendment and technical correction to SFAS 13 is effective for all
transactions occurring after May 15, 2002. The Company adopted SFAS 145
effective for the third quarter of 2002. The adoption of SFAS 145 resulted in a
one-time expense of $1,160 due to the extinguishment of debt being recorded as
other expense in the third quarter of 2002.
In June 2002, FASB issued SFAS 146, "Accounting for Costs Associated with Exit
or Disposal Activities." The statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit on Activity (including Certain Costs Incurred
in a Restructuring)." SFAS 146 requires that a liability for costs associated
with an exit or disposal activity be recognized when a liability is incurred.
Under Issue 94-3, a liability for an exit cost as generally defined in Issue
94-3 was recognized at the date of an entity's commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. We do not expect the adoption of SFAS 146
to have a material impact on our consolidated financial statements.
F-12
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, and interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect of the Company's consolidated financial
statements. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002.
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 net tangible assets by $66,627, of which
$31,977 represented goodwill, and $34,650 represented other intangible assets
consisting primarily of a covenant not to compete, and trademarks.
The results of AAG have been included in its consolidated financial statements
since the date of acquisition. The following unaudited pro forma condensed
results of operations for fiscal years ended December 29, 2002 and December 30,
2001 have been prepared as if the transaction occurred on January 1, 2001.
52 Weeks Ended
Pro Forma December 29, 2002 December 30, 2001
------------------------- ----------------- ------------------
Net Sales................ $ 295,615 $ 304,298
Income from Operations... 31,834 33,920
Net Income............... 15,762 16,938
F-13
4. Goodwill and Other Intangible Assets:
For comparability, the table below reconciles the Company's reported earnings
for the fiscal year end to "adjusted" earnings for the years ended December 29,
2002 and December 30, 2001, which exclude goodwill amortization. There was no
goodwill to amortize prior to 2001.
Year ended
-------------------------------
December 29, December 30,
2002 2001
-------------------------------
Reported net income $ 15,762 $ 15,669
Goodwill amortization, net of tax - 3,199
-------------------------------
Adjusted net income $ 15,762 $ 18,868
===============================
Goodwill, net of accumulated amortization, was $39,648 as of December 29, 2002
and December 30, 2001.
Intangible assets as of December 29, 2002 consisted of the following:
Gross
Carrying Accumulated
(In thousands) Amount Amortization
- --------------------------------------------------------------------------
Amortized intangible assets:
Restricted covenant $10,000 $ 9,615
Transitional agreement 150 150
------------------------
10,150 9,765
========================
Unamortized intangible assets:
Trademarks 22,892
Patent sublicense 488
--------
23,380
========
Amortization of intangibles for the
52 weeks ended December 29, 2002 $ 5,000
========
Estimated amortization expense of the amortized intangible assets will be $385
in 2003 and $0 thereafter.
F-14
5. Long-Term Debt:
The Company's long-term debt consisted of the following:
December 29, 2002 December 30, 2001
----------------- -----------------
Senior subordinated notes; principal due $ 100,000 $ 100,000
February 1, 2006; interest at 10.0% payable semi-annually
Notes payable to government bodies; varying 6,991 7,446
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; due in monthly installments 1,630 -
through 2008; interest at 5.0%; collateralized by certain equipment
Notes payable to banks under revolving credit 9,900 -
agreement; interest at prime + .25% (4.5%) or libor + 2.0% (3.4%)
Notes payable to bank under term credit 37,500 55,000
agreement, interest at libor + 2.0% (3.4%)
--------- ---------
156,021 162,446
Less: Current maturities (10,723) (10,451)
--------- ---------
$ 145,298 $ 151,995
========= =========
On September 27, 2002, the Company entered into a new $75,000 credit facility to
replace the $100,000 credit facility used to fund the AAG acquisition and to
fund the Company's revolving credit needs. The new credit facility includes (a)
a $42,500 term loan with maturities for each of the five years subsequent to
December 31, 2001 of $5,000, $10,000, $12,500, $11,250, and $3,750, and (b) a
$32,500 revolving credit facility maturing on January 4, 2006, subject to
certain borrowing base limitations. At December 29, 2002, the Company had
outstanding balances of $9,900 on the revolving line of credit. As a result of
entering into the new credit facility, the Company wrote off $1,160 of deferred
financing costs associated with the previous senior bank debt facility.
Based on a total leverage ratio calculated on a quarterly basis, borrowings
under the term loan and revolving credit facility bear interest either at 1.75%
to 2.25% over the rate offered to major banks in the London Interbank Eurodollar
market ("Eurodollar Rate"), or at 0% to 0.5% over Alternative Base Rate, which
is the larger of the Prime Rate or the Federal Funds Rate plus 0.5%. Advances
through December 29, 2002 bore interest at the Eurodollar Rate plus 2.00% and
Prime Rate plus 0.25% with a weighted-average interest rate of 5.00% at December
29, 2002. The Company also pays a fee of 0.25% to 0.50% on the unused daily
balance of the revolver based on a leverage ratio calculated on a quarterly
basis.
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.
F-15
Under terms of the debt agreements, the Company must meet certain financial and
non-financial 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 29, 2002, the Company was in compliance
with all such covenants.
Aggregate maturities of long-term debt for each of the five years subsequent to
fiscal year 2002 are $10,723, $14,170, $11,939, $114,392, $795 and $4,001
thereafter.
6. Related-Party Transactions:
As of December 29, 2002 the Company had a note receivable from its chairman,
Jeno F. Paulucci, of $4,722. Amounts due under the stockholder note bear
interest at the prime rate in effect payable quarterly with annual amortization
of $250,000 in principal. The prime rate was 4.25% at December 29, 2002. The
note matures on January 15, 2006. The Company is not obligated to make
additional advances under the stockholder 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 stockholders of the Company. The lease under which the Duluth
office facility is currently occupied expires January 1, 2004. The annual rent
payments under the lease were $334 in 2002, $313 in 2001 and $290 in 2000, and
will be $335 in 2003, payable in monthly installments.
During fiscal 2002, 2001, and 2000, 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 2002, 2001, and 2000 were $4,459, $4,054, and $3,617, 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, $280, and $260 for
such use in fiscal 2002, 2001, and 2000, respectively.
In November 1999, the Company entered into two agreements with Self Serve
Centers, Inc. ("SSCI"), whose named changed in 2002 to Self Serve Foods, Inc
("SSFI"), 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, SSFI manages the Company's
vending business at a fee of 30.0% in 2002 and 25% in prior years of all sales
of the Company's products sold through vending machines managed by SSFI for the
Company per each four week period in 2002. The Company paid SSFI $693, $574 and
$679 in fiscal years 2002, 2001 and 2000, 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 SSFI, the Company packs certain products for SSFI; 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. SSFI
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 SSFI. In addition, the Company has agreed to
provide to SSFI certain support services, including accounting, order taking,
warehousing, shipping and clerical support. SSFI will pay to the Company a
quarterly fee of 1% of SSFI's total retail sales, not including sales of
products under the Michelina's or other labels of the Company. During fiscal
2002 and 2001, no amount was paid the Company under this agreement.
In May 2002, the Company entered into two agreements with Arden International,
LLC, ("Arden") a limited liability company in which Jeno F. Paulucci is the
managing member and the Jeno Michael Paulucci
F-16
Irrevocable Trust, the Angela Nocelli Paulucci Irrevocable Trust, the Tiffany
Hope Soderstrom Irrevocable Trust and the Brittany Ann Soderstrom Irrevocable
Trust are members. Pursuant to a services agreement, the Company provides
general administrative services, technical advice and other general business and
operations support as requested for a fee of 2% of net sales plus reimbursement
for out of pocket expenses. The arrangement commenced on May 6, 2002 for a
three-year term and may be extended for additional terms of one year each
thereafter by mutual consent. Arden has the right to terminate this agreement
upon 30 days prior written notice. Pursuant to a supply and contract packing
agreement, the Company will supply certain raw materials and ingredients to
Arden at cost. Arden packs certain products for the Company and is reimbursed at
105% of Arden's manufacturing cost for each product manufactured. In addition,
the Company has agreed to pay Arden an amount equal to 2% of retail sales on a
quarterly basis for such products. The arrangement commenced on May 6, 2002 for
a three-year period. The agreement may be extended for an additional term up to
five years. Arden has the right to terminate this agreement at any time with 60
days prior written notice.
7. 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.
8. Commitments and Contingencies:
The Company has entered into supply contracts in 2002 with various raw material
vendors to ensure availability and pricing. The aggregate total of these
contractual commitments is $8,850. All contracts expire in 2003 and there are no
contracts that extend into 2004 or beyond.
The Company leases warehouse and office space, equipment and certain other items
under non-cancelable operating leases. Total lease expense was $619, $962 and
$843 for the fiscal years ended 2002, 2001 and 2000 respectively.
Minimum annual rental commitments for periods subsequent to December 29, 2002
under non-cancelable operating leases are as follows:
2003 620
2004 514
2005 161
2006 154
2007 143
Thereafter 283
------
$1,875
======
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 2002, 2001 and 2000 a fee of $4,459, $4,054 and $3,617,
respectively 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
F-17
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 $327, $315 and $328 to eligible employees based upon their
contributions to the plan for fiscal years 2002, 2001, and 2000, 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 non-competition covenant upon termination of the agreement.
The executive also received additional incentive-based compensation of $1,300
for each of the fiscal years ended 2002, 2001, and 2000, respectively. The
Company is also committed to pay $1,300 for fiscal year 2003.
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, $100, and $200, for the fiscal years ended 2002, 2001, and
2000, respectively.
9. Prior Year Reclassifications
The Company adopted Emerging Issues Task Force (EITF) 01-9, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products), effective December 31, 2001. The adoption of EITF 01-9
required the Company to reclassify prior year's trade spending and certain other
marketing expenses from selling and marketing expense in 2001 and 2000 to a
reduction in net sales to conform to the 2002 presentation. The following table
details the reclassifications to the consolidated statements of operations.
2001
-----------------------------------------------
As previously
reported Reclassification As reported
------------- ---------------- ------------
Net Sales $ 353,219 (57,641) 295,578
Selling and marketing
expenses (78,454) 57,641 (20,813)
2000
-----------------------------------------------
As previously
reported Reclassification As reported
------------- ---------------- ------------
Net Sales $ 271,143 (45,296) 225,847
Selling and marketing
expenses $ (65,591) 45,296 (20,295)
F-18
10. Foreign and Product Line Sales:
The Company had foreign export sales amounting to 16.3%, 14.1%, and 16.2% of net
sales for fiscal years 2002, 2001, and 2000, respectively. The following table
presents the details of net sales:
Fiscal Year 2002 Fiscal Year 2001 Fiscal Year 2000
----------------------- ----------------------- -----------------------
December 29, 2002 December 30, 2001 December 31, 2000
----------------------- ----------------------- -----------------------
United States... $247,426 83.7% $253,897 85.9% $189,260 83.8%
Canada ......... 47,492 16.1% 40,039 13.5% 34,617 15.3%
Other .......... 697 0.2% 1,642 0.6% 1,970 0.9%
-------- ----- -------- ----- -------- -----
$295,615 100.0% $295,578 100.0% $225,847 100.0%
======== ===== ======== ===== ======== =====
The Company operates in one business segment. The following table sets forth the
Company's net sales by product line:
Fiscal Year 2002 Fiscal Year 2001 Fiscal Year 2000
-------------------- --------------------- ----------------------
December 29, 2002 December 30, 2001 December 31, 2000
-------------------- --------------------- ----------------------
Popular .... $166,281 56.2% $179,956 60.9% $153,971 68.2%
Economy .... 80,651 27.3% 79,881 27.0% 29,231 12.9%
Signature... 16,291 5.5% 21,697 7.3% 28,674 12.7%
Snacks ..... 10,638 3.6% 13,013 4.4% 13,971 6.2%
Bowls ...... 21,754 7.4% 1,031 0.3% -- 0.0%
-------- ----- -------- ----- -------- -----
$295,615 100.0% $295,578 100.0% $225,847 100.0%
======== ===== ======== ===== ======== =====
11. Quarterly Financial Data (Unaudited):
The first quarter is a 16-week period, while the second through fourth quarters
are 12-week periods.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal Year 2002
Net Sales $80,872 $68,836 $70,980 $74,927
Gross Profit 21,081 22,633 23,696 27,626
Net Income (Loss) (2,487) 5,667 4,989 7,593
Fiscal Year 2001
Net Sales $80,001 $70,349 $67,762 $77,465
Gross Profit 19,476 20,670 22,595 26,893
Net Income (Loss) (1,685) 2,763 5,858 8,733
F-19
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 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).
10.2 Tax Distribution Agreement, dated February 4, 1999, among the Company
and all of its stockholders 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 Stockholder Control Agreement, dated February 4, 1999, among the
Company and its stockholders (incorporated by reference to Exhibit
10.12 to the Company's Form S-4, as amended, filed April 19, 1999, file
number 333-76569).
10.10 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).
10.11 Credit Agreement, dated as of September 27, 2002, among the Company and
the banks party thereto and LaSalle Bank, NA in the capacity as agent
for said banks (incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K, filed October 3, 2002.)
* 12.1 Statement of computation of ratios.
* 24.1 Power of attorney.
* 99.1 Cautionary Statements
* 99.2 Certification pursuant to 18 U.S. C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
* 99.3 Certification pursuant to 18 U.S. C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
* Filed herewith.