<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 2000
COMMISSION 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 55802
DULUTH, MINNESOTA (Zip Code)
(Address of principal executive offices)
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 [ ]
As of March 15, 1999, the registrant had outstanding 1,000 shares of voting
and non-voting common stock, par value $1.00 per share, which is the
registrant's only class of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form
10-K. [X]
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Part I
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 brand is the third most popular brand in 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 a 38.6% market share based on unit
volume. In Canada, the Company's Michelina's brand is the market share leader in
the frozen entree category, with a 36.1% market share. Luigino's produces over
100 different entrees, which it differentiates from its competition at all price
points based on superior quality, freshness and value.
The frozen entree category is a $3.2 billion U.S. market and is one of the
largest product categories in the U.S. frozen prepared food industry. For the 52
weeks ended January 2, 2000, total U.S. frozen entree unit sales increased 8.1%
and sales revenues increased 16.3% compared to the same period in the prior
year. Luigino's believes that such growth will continue, based on the relativity
low current level of penetration of frozen entrees in U.S. consumer households
and trends in U.S. lifestyle toward two-earner households and emphasis on
leisure time, with a resulting need for value and convenience in meal solutions.
The U.S. frozen entree category is generally divided into three segments:
Popular (31.4%), Healthy (30.6%) and Premium (26.8%); the remaining 11.2% is
made up of various small regional and private label brands. The Popular segment
is comprised of traditional, non-diet products priced below $2.00. The Healthy
segment is comprised of all products at all price points that are low-fat or
reduced-calorie, most of which are priced over $2.00. The Premium segment is
comprised of traditional, non-diet products priced over $2.00.
Luigino's has marketed its Michelina's brand products under four distinct
"Labels" or product lines. During the fourth quarter of 1999, Blue Label was
combined with Green Label. Each label has unique attributes and retail price
points, as set forth below:
<TABLE>
<CAPTION>
% of Net Sales
(Year Ended
Label Brand Price Point Recipe January 2, 2000)
- ----- ----- ----------- ------ ----------------
<S> <C> <C> <C> <C>
Green Michelina's $1.25-$1.59 Traditional 55.0%
Red Michelina's Below $1.00 Pasta & Sauce 14.2%
Signature Michelina's Signature $1.99-$2.29 Premium 13.3%
Black Michelina's Yu Sing $1.25-$1.59 Oriental 11.3%
</TABLE>
The balance of Luigino's net sales are derived from the frozen pizza and
snack business, which serves the frozen appetizer/snack rolls and frozen pizza
categories. Luigino's currently produces egg rolls, Pizza Snack Rolls, Pizza
Bagels and single serve pizzas. Sales in the frozen pizza and snack business
contributed 6.2% to net sales in the year ended January 2, 2000.
Since its incorporation in 1990, Luigino's has elected to be taxed as a
corporation under Subchapter S of the IRS code. The Company has made, and
intends to continue to make, distributions to
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its shareholders to pay their income tax obligations as a result of the
Company's status as an S corporation.
Competitive Strengths
Leading Market Positions. Luigino's primarily competes in the Popular price
segment of the U.S. frozen entree market, where it has a 38.6% share based on
unit volume. Luigino's has a 13.5% market share, based on unit volume, of the
overall U.S. frozen entree market. The Company produced 25 of the top 200 frozen
entrees measured on total unit volume and 44 of the top 200 frozen entrees
measured by unit sales per point of distribution for the twelve weeks ended
January 2, 2000. In 1992, the Company entered the Canadian market, where the
Company had eight of the top ten and 18 of the top 25 best selling frozen
entrees for the 52-week period ended January 1, 2000.
High Quality Products. Luigino's production process focuses on quality by
starting with the freshest ingredients and by preparing its sauces from scratch
based on its own recipes. Quality is continuously monitored by employee and
management samplings, and employees are empowered to stop production if product
quality is not being maintained. The Company's highly flexible production lines
enable it to quickly shift production among different products, essentially
producing products to customer orders, which eliminates the need for substantial
inventories, shortens the time between manufacture and consumption, and promotes
higher quality product at the retail point of sale.
Efficient Operations. Luigino's frozen entrees are produced at a
state-of-the-art food processing plant located in Jackson, Ohio, where labor
costs are relatively low. The Jackson plant operates 14 highly efficient and
flexible production lines, manufacturing approximately one million entrees per
day. The Company's practices of manufacturing product in line with customer
orders and shipping primarily in truckload quantities also contribute to the
efficiency of operations.
Strategic Distributions. The location of the Jackson, Ohio plant is key to
the distribution system, since approximately 50.0% of the U.S. population lives
within a 500 mile radius of Jackson. This enables the Company to quickly and
cost effectively distribute its products. The strategic location of the plant
also enables the Company to distribute products without outside warehousing,
which eliminates expenses from spoilage and boosts inventory turnover. The
Company currently turns its finished goods inventory approximately 20 times per
year. Luigino's products are sold in the U.S. to retail grocery accounts through
a national broker sales network of approximately 30 independent broker groups,
who act as the direct link between Luigino's and the retail trade. The broker
network is managed by an experienced internal sales force.
Experienced and Motivated Management Team. Luigino's 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, President and Chief Operating Officer, who has
managed production of Luigino's products since its inception, is a veteran with
more than 30 years in the food industry, and has held senior management
positions at The Pillsbury Co. and Jeno's Inc. A portion of senior management
incentive compensation is linked to growth in EBITDA. Under management's
stewardship, the Company has grown substantially since Luigino's was founded in
1990. Net sales have grown from $124.2 million in the fiscal year ended January
2, 1994 to $256.8 million in the fiscal year ended January 2, 2000, with a
compound annual growth rate of 12.9%.
Business Strategy
Build Brand Awareness: Luigino's has developed a formal strategy to build
awareness of the Michelina's brand name which incorporates media spending,
tie-ins with merchandising events and overall category management. Historically,
the Company has been able to gain significant market share in the frozen entree
business, despite relatively low brand awareness, based on high repeat purchases
by a
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loyal customer following. The Company believes, based on recent experience in
marketing the Michelina's brand in Canada, that its new strategy can result in
significant increases in U.S. sales. See "-Marketing, Sales and Distribution."
Increased Product Penetration. Product penetration is measured by all
commodity volume, which measures the percentage distribution in U.S.
supermarkets with annual sales exceeding $2.0 million. Although Michelina's
products have a broad based national distribution represented by an 89.0% 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 Green Label products is 56.0%. Accordingly, the Company
believes it can significantly increase sales by increasing the penetration
levels of Michelina's "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. In addition, the Company has expanded sales to include
club membership stores, which the Company believes will be a receptive market
for multi-entree packaging of family-size entrees.
Introduce New Product Lines. Luigino's has a proven ability to successfully
identify new market segments and create products and line extensions to fill
these niches. The Company introduced the Michelina's Signature brand, which
competes in the $2.00 price range between the Popular and Premium segments. The
Signature product line was developed as a value-priced alternative in the
Premium market. The Company has experienced favorable acceptance of the product
line. For the year ended January 2, 2000, Signature generated net sales of
approximately $34.2 million, or 13.3% of net sales. During 2000, the Company
expects to introduce a line of Michelina's Kids entrees, which is a value-priced
line targeted to kids aged six to twelve. The Company also selectively evaluates
strategic acquisitions in the ongoing course of its business.
Develop Pizza and Snacks Business. Luigino's recently 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 Chief Executive Officer, was a pioneer of the frozen hot
snacks concept, and his company, Jeno's, Inc., was a market share leader in the
frozen pizza category and manufactured and marketed the pizza roll, which is
still the leading single product in the appetizers and snack roll category. The
company has developed and been granted a patent on a unique crisp microwavable
pizza crust concept. The Jackson, Ohio facility is fully equipped to manufacture
frozen pizza and snack products.
Expand International Sales. Luigino's has successfully utilized joint
marketing arrangements in Canada and Australia in its strategy to increase
international sales while reducing the time and risk associated with entering
international markets. In addition, the Company expanded the joint marketing
arrangements to include New Zealand. The Company also markets and distributes
its products in the United Kingdom, Europe, the Pacific Rim and several
countries in South America. Luigino's believes it can use existing joint
marketing arrangements as a model for the expansion of its international
distribution system. See "-Marketing, Sales and Distribution - International
Marketing."
Industry Overview
The U.S. food industry is relatively stable with growth based on modest
price and population increases. Over the last ten years, there has been industry
consolidation and food companies have been divesting non-core business lines and
making strategic acquisitions.
The frozen entree category is one of the largest product categories in the
U.S. frozen prepared food industry. The frozen entree market is a $3.2 billion
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.
Luigino's primarily competes in the Popular segment of the U.S. frozen entree
market.
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Products
Entrees. Luigino's has marketed its Michelina's brand frozen entree
products under four distinct "Labels" or product lines.
The Green Label is targeted at quality-oriented, value-conscious consumers.
The products are comprised of a variety of popular recipes using high-quality
pasta and sauce and are usually accompanied by beef, chicken or seafood. During
the fourth quarter of 1999, the most-popular Blue Label items within each market
were repackaged and consolidated into the Green Label because of changes in
consumer preferences towards full-flavored entrees. The Green Label products
contributed approximately 55.0% of the net sales for the year ended January 2,
2000. These products are priced between $1.25 and $1.59, placing them in the
Popular segment. The following is a listing of typical Green Label products
available in the United States:
Macaroni & Cheese Macaroni & Beef
Chicken Primavera Chicken Pesto
Glazed Chicken Fettuccine Creamy Pesto
Penne Pasta w/Mushroom Black Bean Chili
Noodles Romanoff Teriyaki Chicken
Honey BBQ Chicken Vegetable & Chicken Stir Fry
Layered Lasagna w/Meat Sauce Layered Lasagna w/Vegetables
Fettuccine Alfredo Linguini with Clams & Sauce
Spaghetti Bolognese Penne Pollo
Penne Primavera Lasagna Pollo
Lasagna with Meat Sauce Lasagna with Vegetables
Lasagna Alfredo Spaghetti & Meatballs
Fettuccine Alfredo w/Broccoli & Chicken Macaroni & Cheese w/Ham
Macaroni & Sharp Cheddar Cheese Fettuccine Primavera w/Chicken
Chicken Tetrazzini Pepper Steak
Salisbury Steak Four-Cheese Lasagna
Meatloaf Roasted Sirloin Supreme
Layered Lasagna Pomodoro Fettuccine & Meatballs in Wine Sauce
Stuffed Cheese Rigatoni Noodles Stroganoff
Shaved, Cured Beef Swedish Meatballs
Risotto Parmigiano Noodles w/Chicken, Peas & Carrots
Chicken a la King Cheese Ravioli
The Red Label products contributed approximately 14.2% of the net sales for
the year ended January 2, 2000. These products are priced below $1.00, placing
them in the Popular segment. The products are generally comprised of pasta and
sauce entrees. The Red Label is targeted to working singles and children. The
following is a listing of typical Red Label products available in the United
States:
Fettuccine Carbonara Spaghetti Marinara
Rigatoni Pomodoro Macaroni & Cheese
Shells & Cheese w/Jalapeno Vegetable Stir Fry
Egg Noodles Alfredo Penne w/Mushroom Sauce
Macaroni & Beef Wheels & Cheese
Lasagna Primavera Spicy Spirals
Spaghetti w/Tomato & Basil Eggplant Parmigiano
Italian Sausage Chili-Mac
Noodles `N Alfredo Noodles `N Marinara
Noodles `N Chicken Noodles `N Vegetable w/Beef
Noodles `N Alfredo w/Pepperoni Noodles `N Cheese w/Pepperoni
4
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The Signature products contributed approximately 13.3% of the net sales for
the year ended January 2, 2000. The Signature product line is designed to be a
value-priced, premium product. These products are restaurant-style recipes
priced between $1.99 and $2.29. The following is a list of typical Signature
products available in the United States:
Glazed Chicken Fillets with Rice Chicken Parmesan w/Linguini
Chicken Piccata w/Rice Chicken Marsala w/Garlic Mashed Potatoes
Chicken Sorrentino w/Linguini Layered Lasagna with Meat Sauce
Layered Lasagna Alfredo Sirloin Beef Peppercorn w/Egg Noodles
Roasted Sirloin Supreme w/Egg Noodles Beef Burgundy w/Garlic Mashed Potatoes
Beef Pot Roast w/Mashed Potatoes Shrimp Alfredo with Fettuccine
Cheddar Broccoli Potatoes Jumbo Cheese Ravioli with Red Sauce
Grilled Chicken Alfredo Herb Roasted Chicken
Meatloaf & Gravy w/Sour Cream Potatoes Salisbury Steak & Gravy w/Shells & Cheese
The Black Label products contributed approximately 11.3% of the net sales
for the year ended January 2, 2000. These products are priced between $1.25 and
$1.59, placing them in the Popular segment. The products are Oriental entrees
marketed under the Yu Sing sub-brand. The following is a listing of typical
Black Label products available in the United States:
Pepper Steak Sweet & Sour Chicken
Oriental Beef & Peppers Chicken Lo Mein
Chicken & Almonds Shrimp Lo Mein
Chicken Chow Mein Teriyaki Beef
Garlic Chicken Chicken Fried Rice
Shrimp Fried Rice Pork Fried Rice
Pork & Shrimp Fried Rice
Snacks. Luigino's currently produces egg rolls, Pizza Snack Rolls, Pizza
Bagels, single serve pizza and pizza snacks, and is developing and test
marketing additional snack products. Sales in the frozen pizza and snacks
business contributed 6.2% to net sales for the year ended January 2, 2000.
Marketing, Sales and Distribution
United States. Luigino's markets its products through a network of
approximately 30 independent broker groups managed by an internal sales force
organized by regional territories. The brokers are responsible for local
execution of new item introductions, trade promotions and on-shelf
merchandising. The Company's territory managers are responsible for working with
the broker network to develop trade promotion and merchandising strategies and
are individually responsible for achieving new item penetration, sales growth
and performance of the promotion and merchandising strategies.
Luigino's has broad-based national presence, with Michelina's products
selling in approximately 89.0% 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. Historically, the Company
has not conducted any significant advertising in the United States. However,
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in Canada, where the Company has conducted significant advertising, the
Michelina's brand awareness increased from 18.0% to 63.0% as a result of the
media advertising campaign conducted in mid 1997 and early 1998 for the entire
market.
International Marketing. Luigino's has successfully utilized joint
marketing arrangements in Canada and Australia. The joint marketing arrangement
in Canada is with J.M. Schneider, Inc., one of the largest and most prominent
Canadian food producers. Luigino's also has a significant sales presence in
Australia, where its products are marketed under the co-brand Watties under a
joint marketing arrangement and exclusive distribution agreement with H.J. Heinz
Company-Australia Limited, under which the Company supplies products to Heinz
Australia at cost plus adjustments for administration, production variance and
freight costs. As a result of the great success in Australia, where Luigino's
has a market share of 8.7%, this joint marketing arrangement was expanded to
include New Zealand. The Company also markets and distributes its products in
the United Kingdom, Europe, the Pacific Rim and several countries in South
America. The Company is evaluating the possibility of expanding 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) and H.J. Heinz Co.
(Weight Watchers and Budget Gourmet). 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.'s Uncle Ben's Rice Bowls which commenced sales of frozen entrees in 1999.
Luigino's primarily competes in the Popular price segment of the frozen
entree market, where the Michelina's brand is the market share leader with a
38.6% share based on unit volume. Luigino's has 13.5% market share of the
overall frozen entree market while competing with much larger companies, such as
Nestle, H.J. Heinz and ConAgra.
Raw Materials
Luigino's uses large quantities of ingredients in its frozen entrees,
including principally beef, chicken, cheese, tomatoes and flour, which are
generally sourced from the U.S. commodity market. The Company also produces
meatballs and pasta and grows bean sprouts for some of its entrees. In some
cases, the Company enters into one to three year supply contracts that fix the
price for raw materials, but such contracts do not cover all of its ingredients.
Luigino's manages the cost of production by growing and producing some of its
own ingredients, by entering into long-term contracts and also by the
customization of shipments in order to reduce warehousing time and space.
Luigino's also utilizes significant quantities of plastic and cardboard for its
packaging requirements. Supplies of raw materials and packaging requirements are
readily available from a number of sources.
Trademarks and Patents
Luigino's registered trademarks include Michelina's(R), Signature(R) and Yu
Sing (R). The Company has several other trademarks in connection with various
product lines. The registrations for trademarks expire from time to time and are
renewed in the ordinary course of business before the expiration dates.
Luigino's has registered patents for some of the processes used in its
production lines.
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.
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Employees
Luigino's has approximately 1,486 employees, of whom 200 are engaged in
production and distribution in Duluth, 1,049 are engaged in production and
distribution in Jackson, and 237 are involved in management, administration and
field support. As of January 2, 2000, approximately 1,250 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 November 2002. Although Luigino's considers employee relations
generally to be good and has not experienced any strikes or work stoppages in
the past, a prolonged work stoppage or strike at any facility with union
employees could have a material adverse effect on the Company's business. The
Company cannot be certain that when the existing collective bargaining
agreements expire, new agreements will be reached without union action or that
any new agreements will be on terms satisfactory to the Company.
Government Regulation
Luigino's production facilities and products are subject to extensive
regulation regarding, among other things, the processing, packaging, storage,
distribution, advertising and labeling of its products, and environmental
compliance. The material regulations to which Luigino's is subject include
regulations promulgated under the Federal Food, Drug and Cosmetic Act, the
Nutrition Labeling and Education Act, the Federal Trade Commission Act and the
Occupational Safety and Health Act, each as amended. Luigino's manufacturing
facilities and products are subject to periodic inspection by federal, state and
local authorities. Compliance with existing federal, state and local laws and
regulations is not expected to have a material adverse effect on Luigino's.
However, the Company cannot predict the effect, if any, of laws and regulations
that may be enacted in the future, or of changes in the enforcement of existing
laws and regulations that are subject to extensive regulatory discretion.
Luigino's may need to incur expenses or liabilities to comply with these laws
and regulations in the future, including those resulting from changes in health
laws and regulations, that may have a material adverse effect on Luigino's. As
required by law, U.S. Department of Agriculture employees are stationed at the
Duluth and Jackson facilities to inspect all meat and poultry products processed
by Luigino's. The Duluth and Jackson facilities are also subject to federal,
state and local regulation regarding work place health and safety. Difficulties
with or failures to obtain any governmental approval of products or plant
working conditions could have a material adverse effect on Luigino's.
Environmental Matters
Luigino's ownership and operation of real property are subject to extensive
and changing regulation by various federal, state and local authorities. As a
result, the Company may be involved from time to time in administrative and
judicial proceedings and inquiries relating to environmental matters. Luigino's
cannot predict what environmental legislation or regulations will be enacted in
the future, how existing or future laws or regulations will be administered or
interpreted or what environmental conditions may be found to exist. Compliance
with more stringent laws or regulations, stricter interpretation of existing
laws or discovery of unknown conditions may require additional expenditures by
Luigino's, some of which may be material. Luigino's believes that it is
currently in material compliance with all known material and applicable
environmental regulations, but there is a risk that additional environmental
issues relating to presently known matters or identified sites or to other
matters or sites will require additional, currently unanticipated investigation,
assessment, or expenditures.
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Item 2. Properties
The Company maintains office and production facilities as follows: (a)
approximately 29,607 feet of office space is leased by the Company in Duluth,
Minnesota; (b) approximately 80,000 feet of production, storage and office space
is owned by the Company in Duluth, Minnesota; (c) approximately 35,000 feet of
warehouse space is owned by the Company in Duluth, Minnesota; (d) approximately
375,000 feet of production and storage space is leased by the Company in
Jackson, Ohio; (e) approximately 52,000 square feet of freezer space is owned by
the Company and is located on property partially owned by the Company and
partially leased from the City of Jackson; (f) approximately 6,000 square feet
of office space is leased by the Company in Sanford, Florida; and (g)
approximately 3,600 square feet of office space is leased by the Company in
Minneapolis, Minnesota.
On June 25, 1999, the Company announced that the State of West Virginia
agreed to construct and lease to the Company a 250,000 square foot production
facility in Parkersburg, West Virginia, located approximately 75 miles from
Jackson, Ohio. The facility will provide the Company with increased production
capacity. The Company expects operations at the new facility to begin in 2001.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
There is no established public trading market for the Company's common
stock. The Company's 10% Senior Subordinated Notes Due 2006 (the "Notes") have
been registered pursuant to the Securities Act of 1933. The Notes are not listed
on a securities exchange nor quoted on an automated quotation system. The
Company has made dividend distributions to its stockholders of $15.0 million and
$13.2 million for the fiscal years ended January 2, 2000 and January 3, 1999,
respectively.
Item 6. Selected Financial Data
The following selected financial information should be read in conjunction
with the Financial Statements and related Notes to Financial Statements on pages
F-1 through F-7 of this report. The income statement data and balance sheet data
presented below as of and for the fiscal years ended January 2, 2000, January 3,
1999, January 4, 1998, December 29, 1996 and December 31, 1995 have been derived
from the financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants.
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------------------------------------------------
January 2, 2000 January 3, 1999 January 4, 1998 December 29, 1996 December 31, 1995
---------------- -------------- --------------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 256,750 $ 214,975 $ 211,405 $ 199,590 $ 189,139
Costs of goods sold 148,097 118,334 116,820 117,636 118,213
--------- --------- --------- --------- ---------
Gross profit 108,653 96,641 94,585 81,954 70,926
Selling and promotional expenses 75,783 51,524 51,582 55,371 57,257
General and administrative expenses 24,536 21,272 20,490 15,479 16,033
Reserve for plant impairment (a) (776) 5,172 - - -
Distribution contract termination - - - 1,675 -
--------- --------- --------- --------- ---------
Total operating expenses 99,543 77,968 72,072 72,525 73,290
--------- --------- --------- --------- ---------
Operating income (loss) 9,110 18,673 22,513 9,429 (2,364)
Interest expense (12,323) (6,509) (6,476) (6,006) (6,217)
Interest income 379 436 786 772 742
Other income (expense), net 168 235 180 (156) 387
--------- --------- --------- --------- ---------
Net income (loss) $ (2,666) $ 12,835 $ 17,003 $ 4,039 $ (7,452)
========= ========= ========= ========= =========
Balance Sheet Data:
Working Capital $ 4,067 $ (493) $ 5,604 $ (1,418) $ (8,470)
Total assets 152,608 124,521 101,377 93,331 93,358
Total debt 120,427 85,534 66,764 68,913 66,989
Stockholders' equity (deficit) $ (7,403) $ 10,263 $ 10,627 $ (2,928) $ (6,967)
</TABLE>
(a) Represents a non-cash charge of $4,722 and potential future cash
expenditures of $450 incurred in connection with the impairment of assets
related to a potential plant facility located in Hibbing, Minnesota. In
1999, the Company received a cash settlement of $776.
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Item 7. Management's Discussion and Analysis
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.
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------------
January 2, 2000 January 3, 1999 January 4, 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Sales.................................... 100.0% 100.0% 100.0%
Cost of Goods Sold........................... 57.7 55.0 55.3
-------- -------- --------
Gross Profit........................... 42.3 45.0 44.7
Operating (Income) Expenses:
Selling and promotional................ 29.4 24.0 24.4
General and administrative............. 9.6 9.9 9.7
Hibbing Settlement..................... (0.3) 2.4 -
-------- -------- --------
Total operating expenses............... 38.7 36.3 34.1
Operating income....................... 3.6 8.7 10.6
Other Income (Expense):
Interest expense....................... (4.8) (3.0) (3.1)
Interest income........................ 0.1 0.2 0.4
Other, net............................. 0.1 0.1 0.1
-------- -------- --------
Total other expense............... (4.6) (2.7) (2.6)
-------- -------- --------
Net Income (Loss)............................ (1.0)% 6.0% 8.0%
======== ======== ========
</TABLE>
Fiscal Year 1999 compared to Fiscal Year 1998
Net Sales. The following table shows Luigino's net sales by product line
and the percentage change from the prior year. During the fourth quarter of
1999, Blue Label was combined with the Green Label.
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------- Percentage
January 2, 2000 January 3, 1999 Change
--------------- --------------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Green Label......................... $141,142 $ 142,094 (0.7)%
Red Label........................... 36,336 34,638 4.9
Signature........................... 34,221 1,541 2120.7
Black Label......................... 29,143 27,726 5.1
Snacks.............................. 15,908 7,970 99.6
Co-pack............................. - 1,006 (100.0)
-------- --------- -------
$256,750 $ 214,975 19.4%
======== ========= =======
</TABLE>
10
<PAGE>
Total net sales for 1999 increased 19.4% or $41.8 million, to $256.8
million from $215.0 million in 1998. Excluding the co-pack agreement with
Pillsbury for the manufacture of pizza rolls, net sales for 1999 increased 20.0%
or $42.8 million to $256.8 million from $214.0 million in 1998. The Signature
product line was launched in December 1998 resulting in an increase in net sales
of $32.7 million in 1999. Red Label net sales increased $1.7 million due to
product line expansion and continued growth in product line net sales. Black
Label net sales increased $1.4 million due to marketing efforts to reposition
this product line. Snacks net sales increased $7.9 million due to new product
introductions. These increases were partially offset by the elimination of
co-pack and a decrease in Green Label as a result of distribution losses of the
previous Blue Label, partially offset by increases in family size net sales and
continued growth in both Canada and the U.S. During the fourth quarter of 1999,
the most popular Blue Label items within each market were repackaged and
consolidated into the Green Label because of changes in consumer preferences
towards full flavored entrees.
Canadian sales contributed $30.0 million, or 11.7% to net sales for fiscal
1999 compared to $24.1 million, or 11.2% for fiscal 1998. Canadian sales have
benefited from overall growth in the frozen entree market, new product
introduction and continued advertising.
Volume increases were recorded in Green Label, Red Label, Signature, Black
Label and Snacks. These increases were partially offset by a volume decrease in
co-pack. Price decreases were recorded in Green Label, Red Label and Black
Label. These decreases were partially offset by a price increase in Snacks.
The table below shows the percentage change in sales attributable to the
change in selling prices and the change in volume by product line.
<TABLE>
<CAPTION>
Fiscal Years Ended
January 2, 2000 compared to January 3, 1999
--------------------------------------------------------
Percentage Percentage
Increase (Decrease) Increase (Decrease) Percentage
in Sales due to in Sales due to Change
Volume Change Price Change in Sales
------------------- ------------------- -----------
<S> <C> <C> <C>
Green Label........................ 0.7 % (1.4)% (0.7)%
Red Label.......................... 6.7 (1.8) 4.9
Signature.......................... 2246.1 (125.4) 2120.7
Black Label........................ 9.1 (4.0) 5.1
Snacks............................. 83.6 16.0 99.6
Co-Pack............................ (100.0) - (100.0)
------ ------ ------
21.4 % (2.0)% 19.4 %
====== ====== ======
</TABLE>
Gross Profit. Gross profit in 1999 increased 12.4% or $12.0 million from
$96.6 million in 1998. The increase in gross profit is a result of the increase
in overall sales levels. The gross margin in 1999 decreased to 42.3% of net
sales from 45.0% in 1998. The decrease resulted from lower gross margins related
to Signature net sales and the Canadian sales.
Selling and Promotional Expenses. Selling and promotional expenses for 1999
increased 47.1%, or $24.3 million, to $75.8 million from $51.5 million in 1998.
The increase resulted primarily from an $11.1 million increase in slotting
spending, a $5.0 million increase in advertising, a $4.9 million increase in
trade promotion and a $1.4 million increase in freight expense.
General and Administrative Expenses. General and administrative expenses
for 1999 increased 15.3%, or $3.2 million, to $24.5 million from $21.3 million
in 1998. The increase was primarily a result of increased salaries and related
costs of $1.4 million, increased travel expenses of $0.4 million, increased
consulting and professional fees of $0.7 million, increased outside finished
goods storage of $0.3 million, increased marketing costs of $0.2 million and
increased depreciation and amortization costs of $0.2 million. These increases
were necessary to support the increase in production, sales and the installation
of the enterprise resource planning software to replace the Company's previous
financial software.
11
<PAGE>
Reserve for Plant Impairment. During 1996, the Company entered into an
agreement with the Office of the Commissioner of the Iron Range Resources
Rehabilitation Boards (IRRRB) for the construction of a manufacturing facility
in Hibbing, Minnesota. In the third quarter of 1998, the Company recorded a
$5.2 million charge for the impairment of assets incurred in connection with
the potential plant facility. The total reserve of $5.2 million represented a
non-cash charge of $4.7 million for asset impairment and $0.5 million for
potential future liquidated damages and other costs. On April 27, 1999 the
IRRRB and Luigino's entered into a settlement agreement under which Luigino's
agreed to convey the property to the IRRRB, and the IRRRB agreed to pay
Luigino's $0.5 million and release the claims against Luigino's for payment of
liquidated damages of $0.4 million. This income was partially offset by
additional expenses of $0.1 million required to settle the claim.
Operating Income. Operating income for 1999 decreased 51.2% or $9.6
million, to $9.1 million from $18.7 million in 1998. As a percentage of net
sales, operating income decreased to 3.6% of net sales in 1999 compared to 8.7%
in 1998. The decrease resulted from the $27.5 million increase in selling and
general administrative expenses and the $5.9 million decrease in the reserve for
plant impairment, partially offset by the $12.0 million increase in gross
profit.
Interest Expense. Interest expense for 1999 increased 89.3%, or $5.8
million, to $12.3 million from $6.5 million in 1998. The increase was a result
of subordinated debt interest of $9.1 million, partially offset by the decrease
in interest related to the debt extinguished by the offering proceeds.
Interest Income. Interest income was $0.4 million for 1999 and 1998.
Other Income. Other income was $0.2 million for 1999 and 1998.
Net Income (Loss). For the reasons stated above, net loss for 1999
decreased 120.8%, or $15.5 million, to $2.7 million as compared to net income of
$12.8 million for 1998. As a percentage of net sales, net loss decreased to 1.0%
of net sales in 1999 compared to net income of 6.0% in 1998.
Fiscal Year 1998 compared to Fiscal Year 1997
Net Sales. The following table shows Luigino's net sales by product line
and the percentage change from the prior year.
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------- Percentage
January 3, 1999 January 4, 1998 Change
--------------- --------------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Green Label........................... $ 142,094 $ 135,720 4.7 %
Red Label............................. 34,638 29,597 17.0
Signature............................. 1,541 - 100.0
Black Label........................... 27,726 28,598 (3.0)
Snacks................................ 7,970 9,096 (12.4)
Co-Pack............................... 1,006 8,394 (88.0)
--------- --------- ------
$ 214,975 $ 211,405 1.7 %
========= ========= ======
</TABLE>
Total net sales for 1998 increased 1.7% or $3.6 million, to $215.0 million
from $211.4 million in 1997. Excluding the co-pack agreement with Pillsbury for
the manufacture of pizza rolls, net sales for 1998 increased 5.4%, or $11.0
million to $214.0 million from $203.0 million in 1997. This co-pack agreement
expired in the first quarter of 1998 and the Company is now producing Pizza
Snack Rolls under the Michelina's brand. Green and Red Label net sales increased
$6.4 million and $5.0 million, respectively, offset by a decrease in co-pack and
Snack net sales and a small decrease in Black Label net
12
<PAGE>
sales. Signature was launched in December 1998 and resulted in a $1.5 million
increase in net sales. Green and Red Label product sales increased due to
product line expansion. During the fourth quarter of 1999, the most popular Blue
Label items within each market were repackaged and consolidated into Green
Label.
Canadian sales contributed $24.1 million, or 11.2% to net sales for fiscal
1998 compared to $14.7 million, or 7.0% for fiscal 1998. Canadian sales have
benefited from overall growth in the frozen entree market, new product
introduction and continued advertising.
Volume increases were recorded in Green Label, Red Label and Signature.
These increases were partially offset by volume decreases in Black Label, Snacks
and co-pack. Price decreases were recorded in Green Label, Red Label, Black
Label, Snacks and co-pack. The table below shows the percentage change in sales
attributable to the change in selling prices and the change in volume by
product line:
<TABLE>
<CAPTION>
Fiscal Years Ended
January 3, 1999 compared to January 4, 1998
---------------------------------------------------------
Percentage Percentage
Increase (Decrease) Increase (Decrease) Percentage
in Sales due to in Sales due to Change
Volume Change Price Change in Sales
------------------- ------------------- ----------
<S> <C> <C> <C>
Green Label............... 7.3 % (2.6)% 4.7 %
Red Label................. 21.9 (4.9) 17.0
Signature................. 100.0 - 100.0
Black Label............... (2.1) (0.9) (3.0)
Snacks.................... (10.5) (1.9) (12.4)
Co-Pack................... (78.2) (9.8) (88.0)
----- ---- -----
4.7 % (3.0)% 1.7 %
===== ==== =====
</TABLE>
Gross Profit. Gross profit in 1998 increased 2.2% or $2.1 million from
$94.6 million in 1997. The increase in gross profit is a result of the increase
in overall sales levels. The gross margin in 1998 increased to 45.0% of net
sales from 44.7% in 1997. The increase resulted from the decrease in co-pack
volume as a percentage of total sales.
Selling and Promotional Expenses. Selling and promotional expenses for 1998
decreased 0.1%, or $0.1 million, to $51.5 million from $51.6 million in 1997.
The decrease resulted from a $4.8 million decrease in slotting spending compared
to 1997 offset by a $4.7 million increase in trade promotion and advertising
expenses. Slotting expenditures are paid to retailers to obtain shelf space for
additional items.
General and Administrative Expenses. General and administrative expenses
for 1998 increased 3.8%, or $0.8 million, to $21.3 million from $20.5 million in
1997. The increase was a result of increased salaries and related expenses for
sales and marketing of $0.2 million, increased consulting and other professional
fees of $0.2 million, increased management information services expense of $0.2
million, and increased bonus accrual of $0.7 million, partially offset by a
decrease in amortization and bad debt expense of $0.5 million. Increased sales
and marketing expenses have resulted in better controls over external selling
expenses, particularly in spending related to new product introductions.
Increased MIS spending was used to upgrade the computer hardware and to begin
installation of enterprise resource planning software to replace current
financial software.
Reserve for Plant Impairment. During 1996, Luigino's entered into an
agreement with the Office of the Commissioner of the Iron Range Resources
Rehabilitation Boards (IRRRB) for the construction of a manufacturing facility
in Hibbing, Minnesota. In 1998, Luigino's recorded a $5.2 million charge for the
impairment of assets incurred in connection with the potential plant facility.
The total reserve of $5.2 million represented a non-cash charge of $4.7 million
for asset impairment and $0.5 million for potential future liquidated damages
and other costs. There was no similar expense in 1997. On April 27,1999, the
IRRRB and Luigino's entered into a settlement agreement under which Luigino's
agreed to convey the
13
<PAGE>
property to the IRRRB and the IRRRB agreed to pay Luigino's $0.5 million and
release the claims against Luigino's for payment of liquidated damages of $0.4
million. This income was partially offset by additional expenses of $0.1 million
required to settle the claim.
Operating lncome. Operating income for 1998 decreased 17.1% or $3.8
million, to $18.7 million from $22.5 million in 1997. As a percentage of net
sales, operating income decreased to 8.7% of net sales in 1998 compared to 10.6%
in 1997. The decrease resulted from the $5.2 million charge for plant
impairment, and the $0.7 million increase in selling and general administrative
expenses, partially offset by the $2.1 million increase in gross profit.
Interest Expense. Interest expense was $6.5 million for 1998 and 1997.
Interest Income. Interest income for 1998 decreased 44.5%, or $0.4 million,
to $0.4 million from $0.8 million in 1997. Substantially all interest income
resulted from the notes receivable from stockholders, which bears interest at
the short-term applicable federal rates. The decrease resulted from a $2.6
million decrease in outstanding balances in August 1997 and lower interest rates
in 1998.
Other Income (Expense). Other income was $0.2 million for 1998 and 1997.
Net Income. For the reasons stated above, net income for 1998 decreased
24.5%, or $4.2 million, to $12.8 million from $17.0 million in 1997. As a
percentage of net sales, net income decreased to 6.0% of net sales in 1998
compared to 8.0% in 1997.
Liquidity and Capital Resources
Fiscal Year 1999 compared to Fiscal Year 1998. Luigino's generated $8.7
million of cash from operating activities during 1999, compared to $24.3 million
in 1998. The decrease resulted primarily from decreased net income in 1999.
Investing activities used $29.8 million of cash in 1999 and $34.2 million
in 1998. Fiscal year 1999 included the purchase of $5.9 million of equipment
under operating leases and $23.0 million in machinery and equipment purchases.
Financing activities generated $20.1 million of cash in 1999 compared to
$5.9 million of cash in 1998. Fiscal year 1999 includes a $100.0 million
increase in debt related to the senior subordinated notes, offset by a $87.1
million reduction in other debt, and a $3.3 million increase in note receivable
collections, partially offset by a $1.8 million increase in distributions to
stockholders.
Fiscal Year 1998 compared to Fiscal Year 1997. Luigino's generated $24.3
million of cash from operating activities during 1998, compared to $24.9 million
in 1997. The decrease resulted from increased working capital requirements in
1998.
Investing activities used $34.2 million of cash in 1998 and $14.2 million
in 1997. Fiscal year 1998 included $24.2 million in buyouts of equipment under
operating leases.
Financing activities generated $5.9 million in 1998 compared to using $5.8
million of cash in 1997. The difference is due to $20.9 million in increased
borrowings to finance the equipment lease buyouts, offset by a $2.2 million
reduction in stockholder notes receivable collections and a $7.1 million
increase in distribution to stockholders primarily related to Subchapter S tax
liabilities. As of January 3, 1999, the Company did not comply with the minimum
net worth covenant under the Ohio bonds, which required a minimum net worth of
$15.0 million, however, the Company obtained a waiver of the default for fiscal
year 1998. The net worth covenant was amended for fiscal year 1999 resulting in
a change of the definition of net worth to include all subordinated debt and to
require a minimum net worth of $85.0 million.
2000 Planned Expenditures. As a part of the Company's strategic growth
plan, the Company is budgeting approximately $9.7 million in slotting expenses
in 2000 to introduce new products and increase
14
<PAGE>
product penetration. The Company estimates that its overall capital expenditures
in 2000 will be approximately $10.0 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.
Luigino's ability to make scheduled payments of principal of, or to pay the
interest or premiums, if any, on, or to refinance, its indebtedness or to fund
planned capital expenditures will depend on future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond the Company's control.
Based upon the current level of operations, the Company believes that cash flow
from operations and available cash, together with available borrowings under the
credit agreement, will be adequate to meet the future liquidity needs for at
least the next several years. The Company may, however, need to refinance all or
a portion of the principal of the senior subordinated notes on or before
maturity. There can be no assurance that the business will generate sufficient
cash flow from operations, or that future borrowings will be available under the
credit agreement in an amount sufficient to enable the Company to service
indebtedness or to fund other liquidity needs. In addition, there can be no
assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all.
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 enters into hedging transactions to mitigate these risks as deemed
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's percentage of fixed rate debt to total debt was 100.0% and 58.4% at
January 2, 2000 and January 3, 1999, respectively. The Company had an interest
rate swap agreement that effectively converted $25.0 million of variable rate
debt to fixed rate debt for both years.
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.
Foreign Exchange Rates. The Company has some exposure to foreign exchange
rate fluctuations in Canada, Australia and the United Kingdom. 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 foreign exchange rate risk on United Kingdom net
sales was not significant for fiscal year 1999 or 1998.
Resolution of Year 2000. The Company did not incur any significant
unanticipated expenses nor any disruption of business operations as a result of
the transition to Year 2000. The Company's final cost to modify its systems for
the Year 2000, including equipment, software, consulting and training, was
approximately $2.0 million, which was funded through operating cash flows.
15
<PAGE>
Item 8. Financial statements and supplementary data
The following financial statements are filed as part of this report.
Report of Independent Public Accountants..........................F-2
Balance Sheets as of January 2, 2000 and January 3, 1999..........F-3
Statements of Operations for the Fiscal Years Ended
January 2, 2000, January 3, 1999 and January 4, 1998...........F-4
Statements of Cash Flows for the Fiscal Years Ended
January 2, 2000, January 3, 1999 and January 4, 1998...........F-5
Statements of Stockholder's Equity (Deficit) for the
Fiscal Years Ended January 2, 2000, January 3, 1999
and January 4, 1998............................................F-6
Notes to Financial Statements.....................................F-7
Item 9. Changes in and Disagreements with Accountants
None.
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
---- --- -----
Jeno F. Paulucci......... 81 Chairman of the Board, Chief
Executive Officer and Director
Ronald O. Bubar.......... 58 President, Chief Operating Officer
and Director
Danette R. Bucsko........ 34 Chief Financial Officer (1)
Joel Conner.............. 48 Senior Executive Vice President of
Marketing and International Sales
Charles W. Pountney...... 40 Executive Vice President of Sales
Jeffrey T. Wilson........ 55 Executive Vice President of
Operations
David Webber............. 53 Vice President of National
Accounts
Robert L. Peterson....... 67 Vice Chairman and Director
Anthony Luiso............ 55 Director
Jack Helms............... 47 Director
Lois M. Paulucci......... 77 Director
Larry W. Nelson.......... 49 Director
William H. Hippee, Jr.... 53 Director
(1) As of March 20, 2000, Joel Kozlak resigned as Chief Financial Officer and
Danette Bucsko was named Chief Financial Officer.
16
<PAGE>
Jeno F. Paulucci is the founder of Luigino's. He has been Luigino's
Chairman of the Board and Chief Executive Officer since Luigino's inception in
April 1990, and was the President of Luigino's from 1990 until 1996. 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.
Ronald O. Bubar has been the President and Chief Operating Officer of
Luigino's since 1996. Mr. Bubar has been a director of Luigino's since November
1999. Mr. Bubar served as 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.
Danette R. Bucsko joined Luigino's in July 1999 and has served as the Chief
Financial Officer since March 2000. From 1998 to 1999, she was a partner in the
financial consulting firm of Growth Financial Services. From 1996 to 1998, she
was Controller for Video Update, Inc., and from 1987 to 1996 she held various
positions, including Controller for MEI Diversified/MEI Salons.
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.
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.
Jeffrey T. Wilson joined Luigino's in July 1999 as Executive Vice President
of Operations. Before joining Luigino's, Mr. Wilson served for five years with
the Hunt Food Company, most recently as General Manager of Hunt's processing
facilities in Perrysburg, Ohio. From 1988 to 1994, he served as Plant Manager
for National Biscuit Company (Nabisco) facilities in Philadelphia and in Buena
Park, California. He began his career with Del Monte Corporation in 1969.
David Webber joined Luigino's in July 1997 as Executive Vice President of
Sales-East Region and has been Vice President of National Accounts since
December 1998. Before joining Luigino's, Mr. Webber was Vice President of Sales
and Marketing for The Vegetable Company, Green Bay, Wisconsin, a division of
Dean Foods, from 1992 to 1997. From 1981 to 1992, he was employed in various
capacities with The Pillsbury Company, including Group Marketing Manager-Canada,
Director of Marketing-Green Giant Division, Director of Marketing-Desserts
Division and Vice President, Pizza Division.
Robert L. Peterson has been a director of Luigino's since January 1999 and
Vice Chairman of Luigino's since August 1999. Mr. Peterson is Chairman of the
Board and Chief Executive Officer of IBP, Inc. He was named President and Chief
Operating Officer of IBP in July 1977 and assumed the duties of Chairman of the
Board and Chief Executive Officer in March 1980. Mr. Peterson has over 40 years
of experience in the livestock and meat processing industry.
Anthony Luiso has been a director of Luigino's since January 1999. Since
1996, Mr. Luiso has been an independent consultant, and provides consulting
services to Luigino's. Mr. Luiso was Chairman, President and Chief Executive
Officer of International Multifoods Corporation from 1989 to 1996.
17
<PAGE>
Jack Helms has been a director of Luigino's since January 1999. 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.
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.
William H. Hippee, Jr. has been a director of Luigino's since January 1999.
He has been a partner in the Minneapolis law firm of Dorsey & Whitney LLP since
1978. Mr. Hippee 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.
Item 11. Executive Compensation
The following table shows the cash compensation paid in the last fiscal
year to or accrued for the Chief Executive Officer and the four highest paid
executive officers of Luigino's whose salary and bonus earned in 1999 exceeded
$100,000.
<TABLE>
<CAPTION>
Annual Compensation
------------------------
Other
Annual All Other
Year Salary Bonus Compensation Compensation
---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jeno F. Paulucci 1999 $ ---- $ ---- $250,000 (1) $ ----
Chairman and Chief Executive Officer 1998 $ ---- $ ---- $320,000 (1) $ ----
Ronald O. Bubar 1999 $322,596 $300,000 $ 4,800 (2) $1,300,000 (3)
President and Chief Operating Officer 1998 $300,000 $300,000 $ 4,800 (2) $1,000,000 (3)
Joel C. Kozlak 1999 $200,000 $150,000 $ 4,800 (2) $ ----
Chief Financial Officer 1998 $190,385 $150,000 $ 4,800 (2) $ ----
Joel Conner 1999 $209,616 $200,000 $ 4,800 (2) $ ----
Senior Executive Vice President of 1998 $165,385 $150,000 $ 4,800 (2) $ ----
Marketing and International Sales
David Webber 1999 $150,000 $ 60,000 $ 4,500 (2) $ ----
Vice President of National Accounts 1998 $174,423 $ 50,000 $ 5,233 (2) $ ----
</TABLE>
(1) Includes $250,000 paid by Paulucci International Ltd., Inc., a Subchapter S
corporation wholly owned by Mr. Paulucci, for consulting services provided
to Luigino's in 1999. Includes $70,000 paid by Luigino's for consulting
services and $250,000 paid by Paulucci International, Ltd., Inc. for
consulting services provided to Luigino's in 1998. Mr. Paulucci also
receives Subchapter S distributions from Paulucci International. 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 Luigino's phantom stock plan. See "Consulting and Employment
Agreements."
18
<PAGE>
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
$3.3 million and is reimbursed for its actual out-of-pocket expenses incurred in
rendering these services. The Company paid Paulucci International $3.0 million
under the consulting agreement in 1999 and $2.6 million under a similar
consulting agreement in 1998. Paulucci International distributed $2,225,585 and
$1,422,585 to Mr. Paulucci in his capacity as sole shareholder of Paulucci
International in 1999 and 1998, respectively. The current consulting agreement
has a seven-year term, but may be terminated by either party after two years
upon 90 days notice. If the consulting agreement is terminated by Luigino's, a
termination fee is payable to Paulucci International equal to the prior twelve
month's consulting fee if termination is in the third or fourth year of the
agreement, 75.0% of such amount in the fifth year and 50.0% of such amount in
the sixth year.
Paulucci International provides the following services to Luigino's under
the terms of the consulting agreement:
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 shareholders.
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.
19
<PAGE>
Mr. Bubar serves as President and Chief Operating Officer of Luigino's
under an employment agreement which was extended by Luigino's in 1999 and is in
effect until December 2001, subject to early termination or extensions
thereunder. Mr. Bubar receives an annual salary of $360,000 during the term of
the agreement and receives a bonus in the amount of 75.0% to 100.0% of his base
salary based on earnings criteria. The employment agreement provides for an
18-month non-competition covenant upon termination of the agreement. In
addition, Mr. Bubar is paid compensation under Luigino's phantom stock plan,
which is described in the paragraph below. The other officers of Luigino's are
also party to incentive agreements that link a portion of their future
compensation to EBITDA.
The Luigino's Phantom Stock Plan was established in November 1992 with a
term extending until December 31, 1996. The plan provided for the award from
time to time of a maximum of two phantom shares to key employees at the
discretion of the board of directors. Phantom shares are the unfunded and
unsecured promise of Luigino's to provide a bonus award under the plan in the
future. Shares granted under the plan vest 50% at the time of the grant and then
12 1/2% on each remaining December 31st. The bonus award is a minimum of
$500,000, payable in equal monthly installments, and additional amounts if the
stock value of Luigino's is more than $100,000,000. Mr. Bubar was awarded one
phantom share under the plan, subject to phantom stock plan bonus award and
agreements and receives payments under this agreement.
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, Chairman of the Board and Chief Executive Officer of Luigino's. The 900
shares of non-voting stock, all of which are issued and outstanding, are
beneficially owned by Mr. Paulucci, 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:
20
<PAGE>
Non-voting Shares
Beneficially Owned
------------------
Shareholders Number Percent
- ------------ ------ -------
Jeno F. Paulucci..................................... 300 33
Trusts for the benefit of............................ 120 13
Mr. and Mrs. Paulucci and their adult children (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)
c/o Paulucci International, Inc.
201 West First Street
Sanford, Florida 32771
- ---------------
(1) Each of these trusts has two trustees, and the trustees share investment
power. William Hippee is one of the trustees of each of these trusts. The
other trustee is one of Larry Nelson, Larry Scanlon or Larry Johnson.
(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.
Item 13. Certain Relationships and Related Transactions
Shareholder Control Agreement
The holders of the common stock of Luigino's have executed a shareholder
control agreement which removes from the board of directors of Luigino's, and
vests in the holders of its voting common stock, presently Mr. Paulucci, the
sole power to make decisions with respect to the management and affairs of
Luigino's that would normally be made by the board of directors. The agreement
does not remove from the board of directors its authority to accept or reject
any agreements between Luigino's and any of its shareholders and other
affiliates that are not entered into on arms-length terms. Luigino's may not
take any of the actions listed below without the approval of Mr. Paulucci,
notwithstanding that no vote may be required, or that a lesser percentage vote
may be specified by law, by the articles of incorporation or bylaws of
Luigino's:
o amend its articles of incorporation, bylaws or any other charter
document;
21
<PAGE>
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;
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.
22
<PAGE>
The provisions listed above are a summary of the terms of the shareholder
control agreement filed as an exhibit to the Company's S-4 Registration
Statement. 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, 2001. Of this amount, $5.7 million was outstanding at January 2,
2000. Amounts due under the shareholder note bear interest at the minimum rate
necessary to avoid original issue discount or the imputation of interest for
federal income tax purposes payable quarterly with annual amortization of a
portion of principal. The minimum rate was 5.7% at January 2, 2000. Luigino's is
not obligated to make additional advances under the shareholder note.
Luigino's leases its executive offices in Duluth, Minnesota from Etor
Properties Limited Partnership. The general partners of Etor Properties are Jeno
F. Paulucci and Michael J. Paulucci, and the limited partners are Michael J.
Paulucci, Cynthia J. Soderstrom and Gina J. Paulucci, and trusts for their
respective benefit. Michael J. Paulucci, Cynthia J. Soderstrom and Gina J.
Paulucci are the children of Jeno F. Paulucci. When the interests of each of
these children are aggregated with their respective trust interests, the
ownership interests of the partners in Etor Properties are divided as follows:
Michael J. Paulucci, approximately 60.0%; Cynthia J. Soderstrom, approximately
20.0%; and Gina J. Paulucci, approximately 20.0%. Jeno F. Paulucci has less than
a 1.0% ownership interest in Etor Properties. The lease under which the Duluth
office facility is currently occupied became effective on January 1, 2000 for a
three-year initial term. Luigino's has an option to extend the lease for an
additional two years, provided that Luigino's is not in default upon expiration
of the initial term. The annual rent payments under the lease were $252,025 in
1999, $219,195 in 1998 and $204,392 in 1997 and will be $293,249 in 2000,
payable in monthly installments. If the lease is extended at Luigino's option,
the initial rental rate will be adjusted by the percentage change in the
consumer price index from the effective date of the lease to a date 90 days
before the expiration date of the initial lease term.
As described above in Item 11 under the heading "Consulting and Employment
Agreements," during fiscal 1999, 1998 and 1997 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 1999, 1998 and 1997 were $3,168,225, $2,558,085 and
$2,422,392 respectively.
Mr. Paulucci and his wife, Lois Paulucci, have personally guaranteed the
payment of some of the Company's debt, of which a balance of $9.3 million was
outstanding as of January 2, 2000. 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 $265,000, $210,000 and
$210,000 for such use in fiscal 1999, 1998 and 1997, respectively.
From time to time Goldsmith, Agio, Helms and Company, of which Jack Helms
is a principal, has been retained by Luigino's to perform investment banking and
related services for Luigino's.
Luigino's has entered into a Tax Distribution Agreement with each of its
shareholders relating to federal and state income tax matters involving
Luigino's and its shareholders. This agreement generally provides that for so
long as Luigino's is an S corporation or a substantially similar pass-through
entity for federal income tax purposes, the Company may make quarterly
distributions to the shareholders for their income tax obligations resulting
from income of Luigino's being subject to tax at the shareholder level.
23
<PAGE>
In November 1999, the Company entered into two agreements with Self Serve
Centers, Inc. ("SSCI"), a corporation which the Jeno F. Paulucci Revocable Trust
and the Lois Mae Paulucci Revocable Trust hold voting and and non-voting shares.
Pursuant to a vending management agreement, SSCI will manage the Company's
vending business for the sum of $50,000 or 7.5% of all sales of the Company's
products sold through vending machines managed by SSCI for the Company,
whichever is greater, per each four week period, commencing as of January 3,
2000, and extending until either party terminates the agreement upon 60 days
prior written notice. Pursuant to a custom packing agreement with SSCI, the
Company will pack certain products for SSCI, commencing as of January 1, 2000
and extending until December 31, 2004. The agreement can be extended for an
additional term of up to five years. SCCI has the right to terminate this
agreement at any time upon 60 days prior written notice to Luigino's. The
Company will be paid 105% of the Company's manufacturing cost for each product
manufactured. In addition, the Company has agreed to provide to SSCI certain
support services, including accounting, order taking, warehousing, shipping and
clerical support. SSCI will pay a quarterly fee of 1% of SSCI's total retail
sales, not including sales of products under the Michelina's or other labels of
the Company.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
All financial statements of the Company as set forth under Item 8
of this report.
(2) Financial Statement Schedules
All supplemental financial schedules omitted as not applicable or
not required under the rules of Regulation S-X or the information
presented in the financial statements or notes thereto.
(3) Exhibits
The following exhibits are filed herewith:
Number Description
------ -----------
3.1 Articles of Incorporation of the Company, as amended
(filed as 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).
24
<PAGE>
10.1 Amended and Restated Credit Agreement, dated February
4, 1999, between and among the Company, The First
National Bank of Chicago, as Agent and the lenders
named therein (incorporated by reference to Exhibit
10.1 to the Company's Form S-4, as amended, filed April
19, 1999, file number 333-76569).
10.2 Amendment No. 1 to Amended and Restated Credit
Agreement, dated March 12, 1999, by and among the
Company and The First National Bank of Chicago, as
Agent, and the lenders named therein (incorporated by
reference to Exhibit 10.2 to the Company's Form S-4, as
amended, filed April 19, 1999, file number 333-76569).
10.4 Consulting Agreement, dated January 1, 1999, between
the Company and Paulucci International Ltd., Inc.
(incorporated by reference to Exhibit 10.4 to the
Company's Form S-4, as amended, filed April 19, 1999,
file number 333-76569).
10.5 Tax Distribution Agreement, dated February 4, 1999,
among the Company and all of its shareholders named
therein (incorporated by reference to Exhibit 10.5 to
the Company's Form S-4, as amended, filed April 19,
1999, file number 333-76569).
10.6 Twentieth Supplemental Trust Agreement, dated as of
September 1, 1991, between the State of Ohio and the
Provident Bank, as Trustee, relating to $6,715,000
State of Ohio Economic Development Revenue Bonds,
Series 1991-10 (incorporated by reference to Exhibit
10.6 to the Company's Form S-4, as amended, filed April
19, 1999, file number 333-76569).
10.7 Lease, dated as of September 1, 1991, between the
Director of Development of the State of Ohio and the
Company (incorporated by reference to Exhibit 10.7 to
the Company's Form S-4, as amended, filed April 19,
1999, file number 333-76569).
10.8 Thirty-Eighth Supplemental Trust Agreement, dated as of
September 1, 1991, between the State of Ohio and the
Provident Bank, as Trustee, relating to $8,100,000
State of Ohio Economic Development Revenue Bonds,
Series 1993-5 (Foremost Mgmt., Inc. Project)
(incorporated by reference to Exhibit 10.8 to the
Company's Form S-4, as amended, filed April 19, 1999,
file number 333-76569).
10.9 Lease, dated as of September 21, 1993, between the
Director of Development of the State of Ohio and
Foremost Mgmt., Inc. (incorporated by reference to
Exhibit 10.9 to the Company's Form S-4, as amended,
filed April 19, 1999, file number 333-76569).
10.10 Sublease, dated as of September 21, 1993, between
Foremost Mgmt., Inc. and the Company (incorporated by
reference to Exhibit 10.10 to the Company's Form S-4,
as amended, filed April 19, 1999, file number
333-76569).
25
<PAGE>
10.11 Amendment and Waiver, dated as of December 22, 1998,
between the Company and Department of Development of
the State of Ohio (incorporated by reference to Exhibit
10.11 to the Company's Form S-4, as amended, filed
April 19, 1999, file number 333-76569).
10.12 Shareholder Control Agreement, dated February 4, 1999,
among the Company and its shareholders (incorporated by
reference to Exhibit 10.12 to the Company's Form S-4,
as amended, filed April 19, 1999, file number
333-76569).
10.13 Amendment No. 2 to Amended and Restated Credit
Agreement, dated March 12, 1999, by and among the
Company and The First National Bank of Chicago, as
Agent, and the lenders named therein. (incorporated by
reference to Exhibit 10.13 to the Company's Form S-4,
as amended, filed April 19, 1999, file number
333-76569).
10.14 Amendment No. 3 to Amended and Restated Credit
Agreement, dated July 16, 1999, by and among the
Company and The First National Bank of Chicago, as
Agent, and the lenders named therein (incorporated by
reference to Exhibit 10.1 to the Company's Form 10Q
filed August 25, 1999).
10.15 Amendment No. 4 to Amended and Restated Credit
Agreement, dated July 17, 1999, by and among the
Company and The First National Bank of Chicago, as
Agent, and the lenders named therein (incorporated by
reference to Exhibit 10.2 to the Company's Form 10Q
filed August 25, 1999).
*10.16 Amendment No. 5 to Amended and Restated Credit
Agreement, dated November 16, 1999, by and among the
Company and Bank One, N/A (f/k/a The First National
Bank of Chicago), as Agent, and the lenders named
therein.
*12.1 Statement of computation of ratios.
*24.1 Power of attorney.
*27.1 Financial Data Schedule.
*99.1 Cautionary Statements
* Filed herewith.
(b) Reports on Form 8-K
None.
26
<PAGE>
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/ Jeno F. Paulucci
------------------------------------
Jeno F. Paulucci
Chief Executive 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Jeno F. Paulucci Chief Executive Officer March 24, 2000
- ------------------------------------ and Director (Principal Executive Officer)
Jeno F. Paulucci
/s/ Danette R. Bucsko Chief Financial Officer March 24, 2000
- ------------------------------------ (Principal Financial and Accounting Officer)
Danette R. Bucsko
/s/ Ronald O. Bubar President, Chief Operating Officer and Director March 24, 2000
- ------------------------------------
Ronald O. Bubar
* Vice Chairman and Director March 22, 2000
- ------------------------------------
Robert L. Peterson
* Director March 24, 2000
- ------------------------------------
Anthony Luiso
* Director March 24, 2000
- ------------------------------------
Jack Helms
* Director March 22, 2000
- ------------------------------------
Lois M. Paulucci
* Director March 22, 2000
- ------------------------------------
William H. Hippee, Jr.
* Director March 22, 2000
- ------------------------------------
Larry W. Nelson
*By: /s/ Jeno F. Paulucci
--------------------------------
Jeno F. Paulucci
Attorney-in-Fact
</TABLE>
27
<PAGE>
LUIGINO'S, INC.
Index to Financial Statements
Page
----
Report of Independent Public Accountants....................................F-2
Balance Sheets as of January 2, 2000 and January 3, 1999....................F-3
Statements of Operations for the Fiscal Years Ended January 2, 2000,
January 3, 1999 and January 4, 1998................................F-4
Statements of Cash Flows for the Fiscal Years Ended January 2, 2000,
January 3, 1999 and January 4, 1998................................F-5
Statements of Stockholders' Equity (Deficit) for the Fiscal Years Ended
January 2, 2000, January 3, 1999 and January 4, 1998...............F-6
Note to Financial Statements................................................F-7
<PAGE>
Report of Independent Public Accountants
To Luigino's, Inc:
We have audited the accompanying balance sheets of Luigino's, Inc. (a Minnesota
Corporation) as of January 2, 2000 and January 3, 1999, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended January 2, 2000. 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. as of January
2, 2000 and January 3, 1999, and the results of its operations and its cash
flows for each of the three years in the period ended January 2, 2000 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 2, 2000
F-2
<PAGE>
LUIGINO'S, INC.
Balance Sheets
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
January 2, January 3,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................. $ 105 $ 1,193
Receivables, net of allowance for doubtful accounts
of $145 and $150, respectively .......................... 22,059 19,709
Inventories ............................................... 22,420 15,548
Prepaid expenses and other ................................ 1,797 1,179
--------- ---------
Total current assets ................................. 46,381 37,629
--------- ---------
Property, Plant and Equipment:
Land ...................................................... 22 22
Buildings and improvements ................................ 16,783 16,720
Machinery and equipment ................................... 98,159 77,510
Office equipment and leasehold improvements ............... 5,022 2,705
Construction in progress .................................. 8,835 2,916
Less - - Accumulated depreciation ......................... (34,211) (24,491)
--------- ---------
Net property, plant and equipment .................... 94,610 75,382
--------- ---------
Other Assets:
Note receivable from principal stockholder ................ 5,472 8,809
Deferred costs, principally debt issuable costs ........... 5,398 1,956
Restricted cash ........................................... 747 745
--------- ---------
Total other assets ................................... 11,617 11,510
--------- ---------
Total Assets .................................................... $ 152,608 $ 124,521
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt ...................... $ 2,729 $ 9,398
Accounts payable .......................................... 25,422 16,942
Accrued expenses - -
Accrued payroll and benefits ......................... 4,817 5,118
Accrued interest ..................................... 4,430 227
Accrued promotion and other .......................... 4,915 6,437
--------- ---------
Total current liabilities ............................ 42,313 38,122
Long-Term Debt, less current maturities ......................... 117,698 76,136
--------- ---------
Total liabilities .................................... 160,011 114,258
--------- ---------
Commitments and Contingencies (Notes 2, 4 and 6)
Stockholders' Equity (Deficit):
Common stocks - -
Voting, $1 stated par value, 600 shares authorized;
100 shares issued and outstanding .................. -- --
Nonvoting, $1 stated par value, 900 shares authorized; 1 1
900 shares issued and outstanding
Additional paid-in capital ................................ 655 655
Retained earnings (deficit) ............................... (8,059) 9,607
--------- ---------
Total stockholders' equity (deficit) ................. (7,403) 10,263
--------- ---------
Total Liabilities and Stockholders' Equity (Deficit) ............ $ 152,608 $ 124,521
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LUIGINO'S, INC.
Statements of Operations
(In Thousands)
For the Fiscal Years Ended
--------------------------------------
January 2, January 3, January 4,
2000 1999 1998
---------- ---------- ----------
Net Sales ...................... $ 256,750 $ 214,975 $ 211,405
Cost of Goods Sold ............. 148,097 118,334 116,820
--------- --------- ---------
Gross profit ............. 108,653 96,641 94,585
--------- --------- ---------
Operating (Income) Expenses:
Selling and promotional .. 75,783 51,524 51,582
General and administrative 24,536 21,272 20,490
Hibbing Settlement ....... (776) 5,172 -
--------- --------- ---------
Total operating expenses . 99,543 77,968 72,072
--------- --------- ---------
Operating income ......... 9,110 18,673 22,513
Other Income (Expense):
Interest expense ......... (12,323) (6,509) (6,476)
Interest income .......... 379 436 786
Other, net ............... 168 235 180
--------- --------- ---------
Total other expense ...... (11,776) (5,838) (5,510)
--------- --------- ---------
Net Income (Loss) .............. $ (2,666) $ 12,835 $ 17,003
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
LUIGINO'S, INC.
Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
For the Fiscal Years Ended
--------------------------------------
January 2, January 3, January 4,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) ............................................. $ (2,666) $ 12,835 $ 17,003
Adjustments to reconcile net income (loss) to net
cash provided by operating activities -
Depreciation and amortization ............................. 10,305 7,388 5,925
Noncash portion of plant impairment ....................... -- 4,722 --
Changes in operating assets and liabilities:
Receivables .......................................... (2,350) (1,139) 3,464
Inventories .......................................... (6,873) (4,128) (1,236)
Prepaid expenses and other ........................... (618) (134) 716
Accounts payable and accrued expenses ................ 10,860 4,738 (931)
--------- --------- ---------
Net cash provided by operating activities ......... 8,658 24,282 24,941
--------- --------- ---------
Investing Activities:
Purchases of property, plant and equipment .................... (28,959) (33,098) (10,202)
Purchases of other assets ..................................... (869) (1,053) (4,011)
--------- --------- ---------
Net cash used in investing activities ............. (29,828) (34,151) (14,213)
--------- --------- ---------
Financing Activities:
Borrowings on revolving credit agreement ...................... 76,600 53,900 49,250
Payments on revolving credit agreement ........................ (86,400) (38,800) (68,750)
Proceeds from debt ............................................ 100,000 11,670 60,364
Repayments of debt ............................................ (55,307) (8,000) (43,013)
Decrease (increase) in deffered financing costs ............... (3,146) 113 302
Decrease (increase) in restricted cash ........................ (2) 222 --
Decrease (increase) of note receivable ........................ 3,337 (1) 2,151
Distributions to stockholders ................................. (15,000) (13,199) (6,108)
--------- --------- ---------
Net cash provided by (used in) financing activities 20,082 5,905 (5,804)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ................... (1,088) (3,964) 4,924
Cash and cash equivalents, beginning of year ....................... 1,193 5,157 233
--------- --------- ---------
Cash and cash equivalents, end of year ............................. $ 105 $ 1,193 $ 5,157
========= ========= =========
Supplemental Information:
Interest paid ........................................ $ 8,120 $ 6,505 $ 7,253
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
LUIGINO'S, INC.
Statements of Stockholders' Equity (Deficit)
For the Fiscal Years Ended January 2, 2000, January 3, 1999 and January 4, 1998
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Common Stock
--------------------------------------- Notes Total
Voting Nonvoting Additional Receivable Retained Stockholders'
----------------- ------------------- Paid-In From Earnings Equity
Shares Amount Shares Amount Capital Stockholders (Deficit) (Deficit)
-------- ------ -------- -------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 29, 1996 . 100 $-- 900 $ 1 $ 655 $ (2,660) $ (924) $ (2,928)
Collection of notes receivable
from stockholders ...... -- -- -- -- -- 2,660 -- 2,660
Distributions to stockholders -- -- -- -- -- -- (6,108) (6,108)
Net income ................... -- -- -- -- -- -- 17,003 17,003
-------- --- -------- -------- -------- -------- -------- --------
Balance at January 4, 1998 ... 100 -- 900 1 655 -- 9,971 10,627
Distributions to stockholders -- -- -- -- -- -- (13,199) (13,199)
Net income ................... -- -- -- -- -- -- 12,835 12,835
-------- --- -------- -------- -------- -------- -------- --------
Balance at January 3, 1999 ... 100 -- 900 1 655 -- 9,607 10,263
Distributions to stockholders -- -- -- -- -- -- (15,000) (15,000)
Net loss ..................... -- -- -- -- -- -- (2,666) (2,666)
-------- --- -------- -------- -------- -------- -------- --------
Balance at January 2, 2000 ... 100 $-- 900 $ 1 $ 655 $ -- $ (8,059) $ (7,403)
======== === ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
Luigino's, Inc.
Notes to Financial Statements
(Dollars In Thousands, Except Share Data)
1. Operations:
Luigino's, Inc. (the Company), a Minnesota corporation, manufactures food
products primarily under the Michelina's and Yu Sing labels at production
facilities located in Minnesota and Ohio. Its products are distributed
predominately in the North American market and are sold through independent and
chain store retail grocery outlets.
2. Summary of Significant Accounting Policies:
Fiscal Year
The Company has elected a 52/53-week fiscal year which ends on the Sunday
closest to December 31. The years ended January 2, 2000 (fiscal year 1999) and
January 3, 1999 (fiscal year 1998) were 52-week fiscal years. The year ended
January 4, 1998 (fiscal year 1997) was a 53-week fiscal year.
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. The fair value of cash and cash equivalents approximates
carrying value because of the short maturity of the investments.
Restricted Cash
Restricted cash includes cash restricted for foreign duty bonds and debt
retirement.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market and
consisted of the following:
January 2, January 3,
2000 1999
---------- ----------
Raw materials $ 9,804 $ 7,266
Finished goods 9,226 6,249
Packaging supplies 3,390 2,033
------- -------
$22,420 $15,548
======= =======
F-7
<PAGE>
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 improvements, 5 to 10 years for machinery and equipment
and 3 to 10 years for office equipment and leasehold improvements.
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.
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 January 2, 2000 the carrying value of the Company's
fixed rate debt was approximately $6,300 greater than its fair value. All other
financial instruments' carrying values approximated fair value.
Revenue Recognition
Revenues are recognized as products are shipped, and promotions are accrued as
commitments are made and related products are shipped. The Company records sales
net of "off invoice" promotional discounts, which were $25,851, $19,651 and
$22,350 for the fiscal years 1999, 1998 and 1997, respectively.
The Company had a co-pack agreement to manufacture certain food products for a
third party that began in mid-1992 and expired the first quarter of the 1998
fiscal year. Net sales includes revenues related to the contract packing
agreement of $0, $1,006 and $8,394 for fiscal years 1999, 1998 and 1997,
respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
Concentration of credit risk with respect to trade accounts receivable is
limited due to the large number of customers and their dispersion across many
geographic areas. The Company does not currently foresee a credit risk
associated with these receivables.
The Company has an exclusive distribution agreement with a Canadian company to
distribute the Company's products in Canada. The distributor accounted for 11.7%
and 11.2% of net sales in fiscal years 1999 and 1998, respectively. During
fiscal year 1997, no individual customer exceeded 10% of the Company's net
sales.
Product Related Costs
Expenditures for research and development, advertising, sales promotion, new
item placement and other product related costs are expensed as incurred.
F-8
<PAGE>
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 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.
Derivative Financial Instruments
The Company uses interest rate swap agreements to manage exposure to interest
rate fluctuations. The Company does not use derivative instruments for
speculative purposes. The differential paid or received on interest rate swap
agreements is recognized as an adjustment to interest expense in the period
incurred or earned.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
ultimate results could differ from those estimates.
Reclassifications
Certain amounts in the financial statements for fiscal years 1998 and 1997 have
been reclassified to conform with the fiscal year 1999 presentation. Those
reclassifications had no effect on stockholders' equity (deficit) or net income
(loss).
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of SFAS No. 133 will have a significant effect on
the financial position or the results of operations of the Company.
F-9
<PAGE>
3. Long-Term Debt:
The Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
January 2, January 3,
2000 1999
---------- ----------
<S> <C> <C>
Senior subordinated notes; principal due February 1, 2006; interest at 10.0% $ 100,000 $ -
payable semi-annually
Notes payable to government bodies; varying maturity dates through 2013; 9,341 10,465
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 through 2003; interest at 8.1%; 5,786 13,874
collateralized by certain equipment
Notes payable to banks under revolving credit agreement; interest at 9.6% 5,300 15,100
Notes payable to banks repaid in February 1999 - 45,500
Other - 595
--------- --------
120,427 85,534
Less- Current maturities (2,729) (9,398)
--------- --------
$ 117,698 $ 76,136
========= ========
</TABLE>
On February 4, 1999, the Company amended and restated its existing senior credit
facility with a group of banks to provide for a $50,000 revolving line of credit
due January 31, 2004, and issued $100,000 10.0% Senior Subordinated Notes due
February 1, 2006. The Company used the proceeds of the Senior Subordinated Notes
to retire the outstanding debt under the existing 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.
The amended and restated credit facility provides for floating rate loans and
Eurodollar rate loans of one, two, three, or six months in duration, plus a
margin determined by the Company's cash flow leverage ratio, and a 0.5%
commitment fee related to the unused portion of the revolving line of credit.
Borrowings under the agreement are collateralized by substantially all assets of
the Company and a pledge of the Company's stock by its principal stockholder.
The Company entered into a three-year interest rate swap agreement with a
commercial bank in order to manage the relationship of its fixed rate versus
floating rate debt. Income and expense associated with the swap transaction are
accrued over the periods prescribed by the contract. The agreement, which
relates to the notional amount of $25,000, effectively increased the Company's
interest rate on the debt,
F-10
<PAGE>
from the effective date, September 26, 1997, by approximately 0.48%. The fair
value of the interest rate swap agreement as of January 2, 2000 was not
significant.
Under terms of the debt agreements, the Company must meet certain financial and
nonfinancial covenants, including maintaining certain levels of net worth and
meeting or exceeding certain financial ratios. Certain covenants also require
minimum employment levels at specified locations by specified dates, require
certain reporting and place limitations on stock ownership and the movement of
assets and operations. As of January 2, 2000, 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 1999 are $2,729, $2,449, $2,307, $1,141, $6,736 and $105,065
thereafter.
4. Related-Party Transactions:
The Company maintains a bank account with a bank related to the Company through
common ownership. The Company and related entities also incur costs on behalf of
one another and reimburse each other for such costs. The Company leases its
executive offices in Duluth, Minnesota, and certain other facilities from
related parties. The Company's principal stockholder and Paulucci International
Ltd., Inc. (Paulucci International), a corporation wholly owned by the principal
stockholder, provide the Company with various consulting and administrative
support services. The Company reimburses these parties for such expenses. The
combined payments by Luigino's to Mr. Paulucci and Paulucci International for
such services in fiscal 1999, 1998 and 1997 were $3,168, $2,558 and $2,422
respectively. Management believes such transactions with and reimbursements to
related parties are at cost or at terms approximating fair value.
As of January 2, 2000, the Company had a note receivable of $5,722 due from its
principal stockholder, of which $250 was classified as current. The note bears
interest at the Short Term Applicable Federal Rate (5.7% at January 2, 2000) and
is due on or before January 15, 2001. Quarterly interest payments and annual
principal payments commenced on April 15, 1998 and December 31, 1998,
respectively. The intended sources of repayment of this note are personal assets
and future cash flows of the principal stockholder. Interest income includes
interest earned on stockholder notes of approximately $299, $472 and $583 for
the fiscal years ended 1999, 1998 and 1997, respectively.
In November 1999, the Company entered into two agreements with Self Serve
Centers, Inc. ("SSCI"), a corporation which the Jeno F. Paulucci Revocable Trust
and the Lois Mae Paulucci Revocable Trust hold voting and and non-voting shares.
Pursuant to a vending management agreement, SSCI will manage the Company's
vending business for the sum of $50 or 7.5% of all sales of the Company's
products sold through vending machines managed by SSCI for the Company,
whichever is greater, per each four week period, commencing as of January 3,
2000, and extending until either party terminates the agreement upon 60 days
prior written notice. Pursuant to a custom packing agreement with SSCI, the
Company will pack certain products for SSCI, commencing as of January 1, 2000
and extending until December 31, 2004. The agreement can be extended for an
additional term of up to five years. SCCI has the right to terminate this
agreement at any time upon 60 days prior written notice to Luigino's. The
Company will be paid 105% of the Company's manufacturing cost for each product
manufactured. In addition, the Company has agreed to provide to SSCI certain
support services, including accounting, order taking, warehousing, shipping and
clerical support. SSCI will pay a quarterly fee of 1% of SSCI's total retail
sales, not including sales of products under the Michelina's or other labels of
the Company
F-11
<PAGE>
5. 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 and CEO of the
Company.
6. Commitments and Contingencies:
Lease Commitments
The Company leases warehouse and office space, equipment and certain other items
under noncancelable operating leases. Total lease expense was $754, $5,596 and
$11,038 for the fiscal years ended 1999, 1998 and 1997, respectively.
Minimum annual rental commitments for periods subsequent to January 2, 2000
under noncancelable operating leases were as follows:
2000 $ 678
2001 475
2002 403
2003 42
2004 16
Thereafter 48
------
$1,662
======
Guarantee
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. Under the
terms of the Consulting Agreement, Paulucci International was paid an annual fee
of $3,000 and was reimbursed for its actual out-of-pocket expenses incurred in
rendering such services. If the Consulting Agreement is terminated by the
Company, a termination fee is payable to Paulucci International equal to the
prior twelve months consulting fee if 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.
The Company's President and Chief Operating Officer is party to an employment
agreement which was extended by Luigino's in 1999 and is in effect until
December 2001, subject to early termination or extensions thereunder. The
employment agreement covers base salary and annual bonus, and provides for an
18-month noncompetition covenant upon termination of the agreement. Certain
other members of management of the Company are also party to incentive
agreements that link a portion of their future compensation to EBITDA. No
amounts have been earned under this agreement for fiscal years 1999, 1998 and
1997, respectively.
F-12
<PAGE>
Litigation
In November 1997, Luigino's commenced an action against The Stouffer Corporation
(Stouffer) in the United States District Court, District of Minnesota seeking a
judgment declaring that the Company's Michelina's Lean `n Tasty trademark does
not infringe or dilute Stouffer's LEAN CUISINE trademark. Stouffer
counterclaimed, alleging willful and bad faith infringement and dilution of its
trademark and seeking damages, including an accounting for profits resulting to
Luigino's from any illegal use. In March 1998, the District Court granted
summary judgment in favor of Luigino's on all claims and Stouffer appealed the
matter to the United States Court of Appeals for the Eighth Circuit. In March
1999, the Court of Appeals affirmed the decision of the District Court in favor
of Luigino's on all claims and counterclaims.
The Company is also a party to other litigation in the normal course of
business. In the opinion of management, the resolution of these matters will not
have a material adverse effect on the Company's financial position or results of
operations.
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 $324, $241 and $174 to eligible employees based upon their
contributions to the plan for fiscal years 1999, 1998 and 1997, respectively.
Phantom Stock Plan
The Company sponsored a phantom stock plan which terminated December 31, 1996
and has issued one unit to a key employee. The provisions of the plan include
minimum payments of $500 to the participant and additional amounts if the
Company's stock value is in excess of $100,000. The Company recognizes
compensation expense annually for the related amount based on the minimum
payment due plus the additional amounts due based on stock appreciation, if any.
The compensation expense was $1,300, $1,000 and $240 for fiscal years ended
1999, 1998 and 1997, respectively.
Plant Impairment
During 1996 the Company entered into an agreement with the Office of the
Commissioner of the Iron Range Resources and Rehabilitation Boards (IRRRB) with
respect to construction of a manufacturing facility in Hibbing, Minnesota. As of
January 3, 1999 the Company had invested $4,722 in the project.
In November 1998 the IRRRB made a claim that the Company had not commenced
construction as required by the 1996 agreement, and demanded that the Company
re-convey the property to the IRRRB and pay liquidation damages of $350. Because
of the uncertainty of the resolution of this matter, the Company established a
reserve of $5,172 in 1998, including a noncash charge of $4,722 for the impaired
assets and $450 for potential liquidated damages and other costs.
In May 1999 the Company reached a settlement with the IRRRB which resulted in
reversing $776 of the plant impairment reserve.
7. Foreign and Product Line Sales:
The Company had foreign export sales amounting to 12.6%, 12.7% and 8.0% of net
sales for fiscal years 1999, 1998 and 1997, respectively. The following table
presents the details of net sales:
F-13
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year 1999 Fiscal Year 1998 Fiscal Year 1997
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 224,292 87.4% $ 187,680 87.3% $ 194,696 92.0%
Canada 30,012 11.7 24,054 11.2 14,693 7.0
Other 2,446 0.9 3,241 1.5 2,016 1.0
--------- ----- --------- ----- --------- -----
Total $ 256,750 100.0% $ 214,975 100.0% $ 211,405 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
The following table sets forth the Company's net sales by product line:
<TABLE>
<CAPTION>
Fiscal Year 1999 Fiscal Year 1998 Fiscal Year 1997
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Green (Blue) Label $ 141,142 55.0% $ 142,094 66.1% $ 135,720 64.2%
Red Label 36,336 14.2 34,638 16.1 29,597 14.0
Signature 34,221 13.3 1,541 0.7 - -
Black Label 29,143 11.3 27,726 12.9 28,598 13.5
Snacks 15,908 6.2 7,970 3.7 9,096 4.3
Co-pack - - 1,006 0.5 8,394 4.0
--------- ----- --------- ----- --------- -----
Total $ 256,750 100.0% $ 214,975 100.0% $ 211,405 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
8. Quarterly Financial Data (Unaudited):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal Year 1999
Net sales $75,646 $59,237 $59,741 $62,126
Gross profit 31,055 25,858 24,389 27,351
Net income (loss) (4,794) (2,052) 954 3,226
Fiscal Year 1998
Net sales $62,958 $49,362 $44,466 $58,189
Gross profit 26,785 21,616 21,078 27,162
Net income (loss) 5,691 3,716 (2,915) 6,343
The first quarter is a 16-week period, while the second through fourth quarters
are 12-week periods.
The third quarter of 1998 includes a reserve for plant impairment of $5,172,
including a noncash charge of $4,722 for the impaired assets and $450 for
potential future liquidated damages and other related costs.
F-14
<PAGE>
EXHIBIT INDEX
The following exhibits are filed herewith:
Number Description
------ -----------
3.1 Articles of Incorporation of the Company, as amended (filed as Exhibit
3.1 to the Company's Form S-4, as amended, filed April 19, 1999, file
number 333-76569).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Form S-4, as amended, filed April 19, 1999, file number
333-76569).
4.1 Indenture, dated February 4, 1999, between the Company and U.S. Bank
Trust National Association with respect to the Company's 10% Senior
Subordinated Notes due 2006 (incorporated by reference to Exhibit 4.1
to the Company's Form S-4, as amended, filed April 19, 1999, file
number 333-76569).
4.2 Form of the Company's Note Certificate for New Notes (incorporated by
reference to Exhibit 4.2 to the Company's Form S-4, as amended, filed
April 19, 1999, file number 333-76569).
10.1 Amended and Restated Credit Agreement, dated February 4, 1999, between
and among the Company, The First National Bank of Chicago, as Agent
and the lenders named therein (incorporated by reference to Exhibit
10.1 to the Company's Form S-4, as amended, filed April 19, 1999, file
number 333-76569).
10.2 Amendment No. 1 to Amended and Restated Credit Agreement, dated March
12, 1999, by and among the Company and The First National Bank of
Chicago, as Agent, and the lenders named therein (incorporated by
reference to Exhibit 10.2 to the Company's Form S-4, as amended, filed
April 19, 1999, file number 333-76569).
10.4 Consulting Agreement, dated January 1, 1999, between the Company and
Paulucci International Ltd., Inc. (incorporated by reference to
Exhibit 10.4 to the Company's Form S-4, as amended, filed April 19,
1999, file number 333-76569).
10.5 Tax Distribution Agreement, dated February 4, 1999, among the Company
and all of its shareholders named therein (incorporated by reference
to Exhibit 10.5 to the Company's Form S-4, as amended, filed April 19,
1999, file number 333-76569).
10.6 Twentieth Supplemental Trust Agreement, dated as of September 1, 1991,
between the State of Ohio and the Provident Bank, as Trustee, relating
to $6,715,000 State of Ohio Economic Development Revenue Bonds, Series
1991-10 (incorporated by reference to Exhibit 10.6 to the Company's
Form S-4, as amended, filed April 19, 1999, file number 333-76569).
10.7 Lease, dated as of September 1, 1991, between the Director of
Development of the State of Ohio and the Company (incorporated by
reference to Exhibit 10.7 to the Company's Form S-4, as amended, filed
April 19, 1999, file number 333-76569).
10.8 Thirty-Eighth Supplemental Trust Agreement, dated as of September 1,
1991, between the State of Ohio and the Provident Bank, as Trustee,
relating to $8,100,000 State of Ohio Economic Development Revenue
Bonds, Series 1993-5 (Foremost Mgmt., Inc. Project) (incorporated by
reference to Exhibit 10.8 to the Company's Form S-4, as amended, filed
April 19, 1999, file number 333-76569).
<PAGE>
10.9 Lease, dated as of September 21, 1993, between the Director of
Development of the State of Ohio and Foremost Mgmt., Inc.
(incorporated by reference to Exhibit 10.9 to the Company's Form S-4,
as amended, filed April 19, 1999, file number 333-76569).
10.10 Sublease, dated as of September 21, 1993, between Foremost Mgmt.,
Inc. and the Company (incorporated by reference to Exhibit 10.10 to
the Company's Form S-4, as amended, filed April 19, 1999, file number
333-76569).
10.11 Amendment and Waiver, dated as of December 22, 1998, between the
Company and Department of Development of the State of Ohio
(incorporated by reference to Exhibit 10.11 to the Company's Form S-4,
as amended, filed April 19, 1999, file number 333-76569).
10.12 Shareholder Control Agreement, dated February 4, 1999, among the
Company and its shareholders (incorporated by reference to Exhibit
10.12 to the Company's Form S-4, as amended, filed April 19, 1999,
file number 333-76569).
10.13 Amendment No. 2 to Amended and Restated Credit Agreement, dated March
12, 1999, by and among the Company and The First National Bank of
Chicago, as Agent, and the lenders named therein. (incorporated by
reference to Exhibit 10.13 to the Company's Form S-4, as amended,
filed April 19, 1999, file number 333-76569).
10.14 Amendment No. 3 to Amended and Restated Credit Agreement, dated July
16, 1999, by and among the Company and The First National Bank of
Chicago, as Agent, and the lenders named therein (incorporated by
reference to Exhibit 10.1 to the Company's Form 10Q filed August 25,
1999).
10.15 Amendment No. 4 to Amended and Restated Credit Agreement, dated July
17, 1999, by and among the Company and The First National Bank of
Chicago, as Agent, and the lenders named therein (incorporated by
reference to Exhibit 10.2 to the Company's Form 10Q filed August 25,
1999).
*10.16 Amendment No. 5 to Amended and Restated Credit Agreement, dated
November 16, 1999, by and among the Company and Bank One, N/A (f/k/a
The First National Bank of Chicago), as Agent, and the lenders named
therein.
*12.1 Statement of computation of ratios.
*24.1 Power of attorney.
*27.1 Financial Data Schedule.
*99.1 Cautionary Statements.
* Filed herewith.
<PAGE>
Exhibit 10.16
AMENDMENT NO. 5 AND WAIVER TO AMENDED
AND RESTATED CREDIT AGREEMENT
This Amendment and Waiver (this "Amendment") is entered into as of November
16, 1999 by and among Luigino's, Inc., a Minnesota corporation (the "Borrower"),
Bank One, NA (f/k/a The First National Bank of Chicago), and individually and as
agent ("Agent"), and the other financial institutions signatory hereto (the
"Lenders").
RECITALS
A. The Borrower, the Agent and the Lenders are party to that certain credit
agreement dated as of February 4, 1999 (as amended, the "Credit Agreement").
Unless otherwise specified herein, capitalized terms used in this Amendment
shall have the meanings ascribed to them by the Credit Agreement.
B. The Borrower, the Agent and the Lenders wish to amend the Credit
Agreement and waive certain provisions thereof on the terms and conditions set
forth below.
Now, therefore, in consideration of the mutual execution hereof and other
good and valuable consideration, the parties hereto agree as follows:
1. Amendment. Upon the effectiveness hereof pursuant to Section 3
below, Section 6.19 of the Credit Agreement is amended in its entirety to
read as follows effective as of November 16, 1999:
6.19 Capital Expenditures. The Borrower will not, nor will it
permit any Subsidiary to, expend, or be committed to expend for,
Capital Expenditures (including, without limitation, for the
acquisition of fixed assets) on a non-cumulative basis in the
aggregate for the Borrower and its Subsidiaries more than (a) (i)
$10,000,000 in the aggregate for the first three quarters of the
Borrower's fiscal year 1999 or (ii) $23,000,000 in the aggregate for
the entirety of the Borrower's fiscal year 1999 (excluding, in either
case, Capital Expenditures made by the Borrower in connection with the
Borrower's buyback of that certain Lease Agreement (Equipment), dated
as of August 4, 1994, between FBS Business Finance Corporation, as
lessor, and the Borrower, as lessee), or (b) $12,000,000 in any fiscal
year of the Borrower occurring after fiscal year 1999.
2. Consent and Waiver. The Lenders hereby waive any breach of Section
6.19 of the Credit Agreement occurring in the third quarter of the
Borrower's fiscal year 1999.
3. Effective Date. This Amendment shall be deemed effective as of the
date hereof upon (a) the execution and delivery hereof by the Borrower, the
Agent and the Required
<PAGE>
Lenders (without respect to whether it has been executed and delivered by
all Lenders) and (b) the payment by the Borrower to the Agent for the
ratable (based upon Commitment) account of the Lenders of an amendment fee
in the aggregate amount of $25,000.
4. Miscellaneous.
(a) The execution, delivery and effectiveness of this Amendment
shall not operate as a waiver of any right, power or remedy of the
Agent or any Lender under the Credit Agreement or any Loan Document,
nor constitute a waiver of any provision of the Credit Agreement or
any Loan Document, except as specifically set forth herein.
(b) Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this
Amendment for any other purposes.
(c) This Amendment may be executed in any number of counterparts,
each of which when so executed shall be deemed an original but all
counterparts shall constitute one and the same instrument.
5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAWS
PROVISIONS) OF THE STATE OF ILLINOIS BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.
[signature page follows]
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
and year first above written.
LUIGINO'S, INC.
By: /s/ Joel C. Kozlak
----------------------------------
Its: Chief Financial Officer
----------------------------------
BANK ONE, NA (f/k/a THE FIRST NATIONAL
BANK OF CHICAGO), Individually and
as Agent
By: /s/ Lisa Whatley
----------------------------------
Its: Vice President
----------------------------------
U.S. BANK NATIONAL ASSOCIATION (f/k/a
FIRST BANK NATIONAL ASSOCIATION)
By: /s/ William Umscheid
----------------------------------
Its: Vice President
----------------------------------
-3-
<PAGE>
Exhibit 12.1
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------
January 2, January 3, January 4, December December
2000 1999 1998 29, 1996 31, 1995
---------- ---------- --------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
DETERMINATION OF RATIO OF EARNINGS
TO FIXED CHARGES:
Net income (loss) before taxes ............. $ (2,666) $ 12,835 $ 17,003 $ 4,039 $ (7,452)
Fixed Charges
Interest expense ....................... 11,777 6,296 5,532 5,646 5,915
Amortization of deferred financing costs 546 213 944 360 302
Interest component of rent ............. 290 1,332 3,004 3,730 3,555
-------- -------- -------- -------- --------
Earnings before fixed charges .............. 9,947 20,676 26,483 13,775 2,320
======== ======== ======== ======== ========
Fixed Charges
Interest expense ....................... 11,777 6,296 5,532 5,646 5,915
Amortization of deferred financing costs 546 213 944 360 302
Interest component of rent ............. 290 1,332 3,004 3,730 3,555
-------- -------- -------- -------- -------
Total fixed charges ........................ 12,613 7,841 9,480 9,736 9,772
======== ======== ======== ======== =======
Ratio of earnings to fixed charges (a) 2.6 x 2.8 x 1.4 x
======== ======== ======== ======== =======
</TABLE>
(a) For purposes of computing the ratio of earnings to fixed charges,
"earnings" are defined as net income before fixed charges. Fixed charges
are defined as interest expense, amortization of deferred financing costs,
and the portion of rent expense representing interest. Earnings were
inadequate to cover fixed charges by $2.7 million for the year ended
January 2, 2000 and $7.5 million for the for the year ended December 31,
1995.
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Jeno F. Paulucci and Ronald O.
Bubar, and each of them, his true and lawful attorneys-in-fact and agents, each
acting alone, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign an Annual Report
on Form 10-K of LUIGINO'S, INC., and any and all amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert L. Peterson Vice Chairman and Director March 22, 2000
- ---------------------------------------
Robert L. Peterson
/s/ Anthony Luiso Director March 24, 2000
- ----------------------------------------
Anthony Luiso
/s/ Jack Helms Director March 24, 2000
- ------------------------------------------
Jack Helms
/s/ Lois M. Paulucci Director March 22, 2000
- ----------------------------------------
Lois M. Paulucci
/s/ William H. Hippee, Jr. Director March 22, 2000
- -------------------------------------
William H. Hippee, Jr.
/s/ Larry W. Nelson Director March 22, 2000
- ---------------------------------------
Larry W. Nelson
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> JAN-02-2000
<CASH> 105
<SECURITIES> 0
<RECEIVABLES> 27,676
<ALLOWANCES> (145)
<INVENTORY> 22,420
<CURRENT-ASSETS> 46,381
<PP&E> 128,821
<DEPRECIATION> (34,211)
<TOTAL-ASSETS> 152,608
<CURRENT-LIABILITIES> 42,314
<BONDS> 117,698
0
0
<COMMON> 1
<OTHER-SE> (7,403)
<TOTAL-LIABILITY-AND-EQUITY> 152,608
<SALES> 256,750
<TOTAL-REVENUES> 256,750
<CGS> 148,097
<TOTAL-COSTS> 99,543
<OTHER-EXPENSES> (547)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,323
<INCOME-PRETAX> (2,666)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,666)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,666)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99
LUIGINO'S, INC.
Report on Form 10-K
March 24, 2000
Cautionary Statements for Purposes of the "Safe Harbor" provisions of the
Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information without fear of litigation so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in the statement. The Company desires to
take advantage of these "safe harbor" provisions and is filing this Exhibit 99
in order to do so. Accordingly, the Company hereby identifies the following
important factors which could cause the Company's actual results to differ
materially from any such results which may be projected, forecast, estimated or
budgeted by the Company in forward-looking statements made by the Company from
time to time in reports, registration statements and other written
communications, or in oral forward-looking statements made from time to time by
the Company's officers and agents.
Luigino's has substantial indebtedness other than its senior subordinated notes,
which may affect its ability to make scheduled payments on those notes, to
redeem them if the Company is required to do so, and to pay the principal
amounts of the notes when due.
Luigino's is highly leveraged. After giving effect to the sale of the
senior subordinated notes sold in a private offering and subsequently registered
in an exchange offer under 144A of the Securities Act, the initial borrowings
under the new credit facility and the application of the proceeds from those
transactions, the Company had total indebtedness of approximately $120.4 million
and a shareholders' deficit of $7.4 million as of January 2, 2000. Of the $120.4
million of total indebtedness, $100.0 million consisted of the senior
subordinated notes. In addition, the Company may incur additional indebtedness
in the future. The degree to which the Company is leveraged could prevent it
from repurchasing all of the senior subordinated notes holders tender upon the
occurrence of a change of control of Luigino's.
The Company's ability to make scheduled payments of principal of, or to pay
the interest and any other payments on, or to refinance, its indebtedness,
including the senior subordinated notes, or to fund its planned capital
expenditures will depend on its future performance, which, to some extent, is
subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond its control. The Company may also need to
refinance all or a portion of the principal amount of the notes on or before
maturity. There is a risk that the Company's business will not generate
sufficient cash flow from operations, or that the Company will not have
sufficient credit available in the future, to enable it to service its
indebtedness, including the senior subordinated notes, or to fund its other
liquidity needs. In addition, there is a risk that the Company will not be able
to refinance its debt on commercially reasonable terms, or at all.
The degree to which Luigino's will continue to be leveraged in the future
could have important consequences to the holders of the senior subordinated
notes. The following effects on Luigino's could affect the holders:
the Company may have more difficulty satisfying its obligations on the
notes,
the Company will be increasingly vulnerable to general adverse economic and
industry conditions,
the Company may have more difficulty obtaining additional financing to fund
future working capital, capital expenditures and other general corporate
requirements,
<PAGE>
the Company may need to dedicate a substantial portion of its cash flow
from operations to the payment of principal of, and interest on, its
indebtedness, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures, research and development or other
general corporate purposes,
the Company may have less flexibility in planning for, or reacting to,
changes in its business and the industry, and
the Company may be at competitive disadvantage vis-a-vis less leveraged
competitors.
In addition, the indenture relating to the senior subordinated notes and the
bank credit facility contain financial and other restrictive covenants that
limit the Company's ability to, among other things, borrow additional funds. If
the Company does not comply with these covenants, it would be in default, and if
the default is not cured or waived, the Company's business could be adversely
affected.
The senior subordinated notes are subordinated to other indebtedness, which also
may affect the Company's ability to make payments on the notes.
The notes are and will be subordinated in right of payment to all of the
Company's current and future senior debt. However, the indenture prohibits the
Company from incurring or otherwise becoming liable for any indebtedness that is
subordinate or junior in right of payment to any senior debt and senior in right
of payment to the notes. Upon any distribution to the Company's creditors in a
liquidation or dissolution of Luigino's or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to Luigino's or its
property, the holders of the Company's senior debt will be entitled to be paid
in full in cash before any payment may be made on the notes. In addition, the
subordination provisions of the indenture will provide that payments with
respect to the notes will be blocked in the event of a payment default on the
Company's senior debt and may be blocked for up to 179 days each year in the
event of nonpayment defaults on that debt. In the event of a bankruptcy,
liquidation or reorganization of Luigino's, holders of the notes will
participate ratably with all holders of the Company's subordinated indebtedness
that is deemed to be of the same class as the notes, and potentially with all of
the Company's other general creditors, based upon the respective amounts owed to
each holder or creditor, in the remaining assets of Luigino's. In any of the
foregoing events, there is a risk that there would not be sufficient assets to
pay amounts due on the notes. As a result, holders of notes may receive less,
ratably, than the holders of the Company's senior debt.
Restrictions imposed under Luigino's bank credit facility also may affect the
Company's ability to make payments on the senior subordinated notes.
The Company's bank credit facility contains, among other things, financial
and other covenants, including covenants requiring the Company to maintain
specified financial ratios, restricting its ability to incur indebtedness or to
create or suffer to exist liens, and restricting the amount of capital
expenditures which it may incur in any fiscal year. Compliance with these
provisions may limit the Company's ability to expand its business, and its
ability to comply with these provisions and to repay or refinance the bank
credit facility may be affected by events beyond the Company's control. If the
Company fails to make any required payment under the bank credit facility or
fails to comply with any of the financial and operating covenants included in
the bank credit facility, it would result in an event of default, permitting the
lender to elect to accelerate the maturity of that indebtedness. Any such
acceleration could also result in the acceleration of any of the Company's other
indebtedness. In addition, the Company may be unable to make scheduled interest
payments or principal payments, if then due, on the notes during the existence
of a default under the bank credit facility or its other indebtedness. If the
lender under the bank credit facility accelerates the maturity of that
indebtedness, there is a risk that the Company will not have sufficient
resources to satisfy its obligations under the bank credit facility and its
other indebtedness, including the notes.
<PAGE>
Luigino's business is subject to the general risks of the food industry and to
significant competition from larger, well-established companies.
The Company is subject to the general risks of the food industry,
including:
the risk that a competitor gains a technological advantage;
evolving consumer preferences;
limited shelf life of food products;
nutritional and health-related concerns;
federal, state and local food processing controls;
consumer product liability claims;
the risk of product tampering;
mislabeling; and
the availability and expense of insurance.
In addition, the food products business is highly competitive. Numerous brands
and products compete for shelf space and sales, with competition based primarily
on brand recognition and loyalty, price, quality and convenience. The Company
competes with a number of established brands and companies, including larger and
more diversified companies. A number of these competitors have broader product
lines, substantially greater financial and other resources available to them,
lower fixed costs and longer operating histories than Luigino's. There is a risk
that the Company will not be able to compete successfully with these other
companies. Competitive pressure or other factors could cause the Company's
products to lose market share or result in significant price erosion, which
could have a material adverse effect on its business.
Fluctuations in the cost of Luigino's ingredients may adversely affect its
business.
The Company uses large quantities of ingredients and packaging materials in
its frozen entrees. As a result, the Company is significantly affected by
increases in the costs of these ingredients and materials. Due to extremely
competitive conditions in the frozen food industry, following increases in
ingredient costs, the Company may not be in a position to raise the prices of
its frozen food entrees sufficiently to pass all such costs on to the consumer.
In some cases, the Company enters into long-term supply contracts that fix the
price for raw materials, but such contracts do not cover all of its ingredients
and the Company may be exposed to cost increases after a contract expires. Any
future material increase in the price of ingredients for the Company's entrees
could have a material adverse effect on Luigino's.
Claims made against Luigino's based on product liability could have a material
adverse effect on its business.
As a producer and marketer of food products, the Company is subject to the
risk of claims for product liability. The Company maintains product liability
insurance, but there is a risk that its coverage will not be sufficient to
insure against all claims which may be brought against it, or that it will not
be able to maintain that coverage or obtain additional insurance covering
existing or new products. If someone successfully asserts a product liability
claim against the Company exceeding its insurance coverage, it could have a
material adverse effect on its business, and, even if a product liability claim
is not successful, the time, expense and negative publicity associated with
defending against such a claim could also have a similar effect.
<PAGE>
Luigino's makes its sales through independent food brokers, and its ability to
maintain these relationships is important to the Company's business.
The Company relies on non-affiliated food brokers to sell its products. The
success of the Company's business depends, in large part, upon the maintenance
of a strong distribution network. The Company grants food brokers revocable
rights to sell Luigino's products in exclusive territories and they receive as
compensation a dollar amount per case sold. If the Company were required to
obtain additional or alternative distribution and food brokerage agreements or
arrangements in the future, there can be no assurance it will be able to do so
on satisfactory terms or in a timely manner. Inability to enter into
satisfactory brokerage agreements may inhibit the Company's ability to implement
its business plan or to establish markets necessary to develop its products
successfully.
Luigino's is effectively controlled by one shareholder, who can make
substantially all decisions concerning the Company's business.
Jeno F. Paulucci, one of his children and trusts for the benefit of his
wife, all three of his children and their children own all of the outstanding
shares of Luigino's common stock. Of such outstanding shares, Mr. Paulucci owns
the only shares of common stock entitled to vote. Accordingly, Mr. Paulucci
elects the entire board of directors and otherwise controls the management of
Luigino's. In addition, the Company's shareholders are parties to a shareholder
control agreement that permits Mr. Paulucci to make decisions with respect to
the management and affairs of Luigino's that would normally be made by the board
of directors, such as to amend the Company's articles of incorporation or
bylaws, make capital expenditures over a specified dollar amount, or incur
indebtedness. There is a risk that Mr. Paulucci could make a decision regarding
the Company's affairs which is different than a decision made after full board
deliberation, and that his decision could have an adverse effect on investors.
Loss of Luigino's status as an S corporation for federal income tax purposes
could materially affect the Company's income.
Luigino's has elected to be an S corporation under the IRS code.
Accordingly, the Company's shareholders are directly subject to tax on their
respective proportionate shares of the Company's taxable income for federal and
some state income tax purposes. If someone successfully challenges the Company's
status as an S corporation, the Company could be required to pay federal and
state income taxes, plus interest and possibly penalties, on its past and future
taxable income. There is a risk that the payment of any such taxes, interest and
penalties will have a material adverse effect on Luigino's.
The loss of Luigino's founder or other key personnel could adversely affect the
Company's business.
The Company's success depends largely upon the continued services of its
executive officers and key management and other personnel. If the Company loses
the services of one or more of its current executive officers or other key
employees, it could have a material adverse effect on the Company's business,
results of operations and financial condition. In particular, the Company relies
on its founder, Jeno Paulucci, and its President and Chief Operating Officer,
Ronald Bubar. Mr. Paulucci and Mr. Bubar, and other executive officers, have
extensive experience in the food industry. Mr. Paulucci has over 50 years of
experience. He founded several successful food companies, including Chun King
Corporation, which he sold in 1967 to R.J. Reynolds Food Company, and Jeno's
Inc., which he sold in 1985 to The Pillsbury Co. Mr. Paulucci was the first
Chairman of the Board of R.J. Reynolds Food Company, now RJR Nabisco, Inc. Mr.
Bubar has more than 30 years in the food industry, and has held senior
management positions at The Pillsbury Co. and Jeno's, Inc. Mr. Paulucci does not
have an employment agreement with Luigino's but provides services to the Company
under a consulting agreement. Mr. Bubar has entered into an employment agreement
with Luigino's in effect until December 2001, subject to earlier termination or
future extensions. The Company maintains key-man insurance policies on both Mr.
Paulucci and Mr. Bubar, the proceeds of which are payable to Luigino's.
