SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): May 3, 2000
SPIGADORO, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 001-15617 13-3920210
- ---------------------------- ----------- ----------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
70 East 55th Street, New York, New York 10022
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 754-4271
-----------------------------------------------------------
Former name or former address, if changed since last report
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS.
Financial Statements of Business Acquired (Pastificio Gazzola S.p.A.)
INDEX TO FINANCIAL STATEMENTS
Pro Forma Financial Information Financial Page No.
------------------
Unaudited Pro Forma Condensed Consolidated
Balance Sheet at December 31, 1999 F-2
Unaudited Pro Form Condensed Consolidated Statement
of Operations for the Year Ended December 31, 1999 F-3
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statement F-4
Financial Statements of Business Acquired
Report of Independent Auditors' F-6
Balance Sheets at December 31, 1999 and 1998 F-7
Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 F-9
Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 F-10
Statements of Shareholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997 F-11
Notes to Financial Statements F-12
-2-
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet
information has been prepared based upon the audited historical condensed
consolidated balance sheet of Spigadoro Inc. (Spigadoro) as of December 31, 1999
and the audited historical condensed balance sheet of Pastificio Gazzola S.p.A.
(Gazzola) as of December 31, 1999 giving effect (i) to the consummation of the
acquisition of Gazzola by Petrini S.p.A. a wholly-owned subsidiary of Spigadoro,
(ii) immediately following such consummation, the issuance of 583,334 shares of
Common Stock of Spigadoro to Starfood Italia S.r.l., for $1,750,000 and (iii)
the issuance of 2,125,000 shares of Common Stock put in escrow as a guarantee to
secure Petrini's potential payment of up to Lire 10,000 million representing the
deferred portion of the purchase price, due subject to certain conditions
pursuant the agreement, as if such transactions had occurred on December 31,
1999. The following Unaudited Pro Forma Condensed Consolidated Statement of
Operations information for the year ended December 31, 1999 has been prepared
based upon the audited historical consolidated statement of operations for the
year ended December 31, 1999 of Spigadoro and the audited historical statement
of operations for the year ended December 31, 1999 of Gazzola and sets forth pro
forma statements of operations information giving effect to the acquisition of
Gazzola by Petrini and the cash proceeds from the issuance of 583,334 shares of
Common Stock by Spigadoro as if such transactions had occured on January 1,
1999.
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet
information and Unaudited Pro Forma Condensed Consolidated Statement of
Operations information are not necessarily indicative of the actual financial
position or results of operations that would have been reported if the events
described above had occurred as of December 31, 1999 or January 1, 1999, nor do
they purport to indicate the results of the Company's future operations.
Furthermore, the pro forma results do not give effect to all cost savings, or
incremental costs that may occur as a result of the integration and
consolidation of Gazzola. In the opinion of management, all adjustments
necessary to present fairly such pro forma financial information have been made.
The allocation of the purchase price is preliminary, but is not expected to
differ materially from the purchase price allocation reflected herein.
F-1
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999
Adjustments
Gazzola
Spigadoro Gazzola US-GAAP Pro forma Pro forma
--------- ------- --------------------- ---------- -------------
(millions of Lire) (millions (thousands
of Lire) of Dollars)(1)
ASSETS
Current assets:
Cash and cash equivalents 15,999 4,591 3,831 (B) 24,421 $ 11,818
Accounts receivable trade, net 50,937 19,751 70,688 34,206
Securities held for sale 5,794 5,794 2,804
Taxes receivable 13,895 452 14,347 6,943
Inventories 21,789 10,939 32,728 15,837
Deferred income taxes 6,080 6,080 2,942
Due from insurance company 3,003 3,003 1,453
Other current assets 2,397 2,558 4,955 2,398
------- ------- --------------------- ---------- ------------
Total current assets 116,891 41,294 3,831 162,016 78,401
Property, equipment and improvements, net 70,584 63,814 (1,042) 11,547 (A) 144,903 70,120
Other assets:
Intangible assets, at amortized cost 19,205 2,422 (1,557) 20,070 9,712
Excess of cost over net assets acquired 15,642 (A) 15,642 7,569
Other assets 6,728 3,291 (1,204) 8,815 4,266
Assets held for disposition 3,837 3,837 1,857
------- ------- --------------------- ---------- ------------
217,245 110,821 (3,803) 31,020 355,283 $ 171,925
======= ======= ===================== ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings 72,395 31,411 103,806 $ 50,233
Current portion of long-term debt 3,589 3,741 7,330 3,547
Accounts payable 32,429 30,741 63,170 30,569
Income taxes payable 886 727 1,613 780
Accrued payroll and social contributions 5,949 1,474 7,423 3,592
Other current liabilities 5,039 470 482 300 (A) 6,291 3,044
------- ------- --------------------- ---------- ------------
Total current liabilities 120,287 68,564 482 300 189,633 91,765
Long-term debt, less current portion 13,479 28,913 26,805 (A) 69,197 33,485
Long-term liabilities 1,127 4,535 (A) 5,662 2,740
Employees and agents termination indemnities 15,328 3,253 18,581 8,992
Deferred income taxes 4,963 4,763 (A) 9,726 4,707
Social contributions and income taxes payable 4,781 4,781 2,313
------- ------- --------------------- ---------- ------------
Total liabilities 158,838 100,730 1,609 36,403 297,580 144,002
------- ------- --------------------- ---------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock
Common stock 1,174 12,350 (717) (11,581)(A-B) 1,226 593
Capital in excess of par value 56,781 10,856 (11,612)(A-B) 56,025 27,111
Retained earnings (accumulated deficit) 754 (2,259) (15,551) 17,810 (A) 754 365
Accumulated other comprehensive income 95 95 46
Less treasury stock (397) (397) (192)
------- ------- --------------------- ---------- ------------
Total stockholders' equity 58,407 10,091 (5,412) (5,383) 57,703 27,923
------- ------- --------------------- ---------- ------------
217,245 110,821 (3,803) 31,020 355,283 $ 171,925
======= ======= ===================== ========== ============
(1) Exchange rate: Lire 2,066.50 = U.S. $1 as of June 23, 2000, unaudited and
presented for convenience purposes only.
F-2
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
Adjustments
Gazzola
Spigadoro Gazzola US-GAAP Pro forma Pro forma
--------- ------- --------------------- ---------------------------
(millions of Lire) (millions (thousands
except per share amounts) of Lire) of Dollars)
except per except per
share share
amounts) amounts)(1)
Net sales 261,565 90,671 352,236 $ 170,450
Cost of sales 189,124 75,710 (881) 1,155 (C) 265,108 128,288
------- ------- --------------------- -------- ------------
Gross profit 72,441 14,961 881 (1,155) 87,128 42,162
------- ------- --------------------- -------- ------------
Operating expenses:
Selling expenses 48,931 8,550 (10) 57,471 27,811
General and administrative expenses 13,840 4,677 127 3,050 (C/F) 21,694 10,498
------- ------- --------------------- -------- ------------
62,771 13,227 117 3,050 79,165 38,309
------- ------- --------------------- -------- ------------
Income from operations 9,670 1,734 764 (4,205) 7,963 3,853
------- ------- --------------------- -------- ------------
Other income (expense):
Interest expense, net (2,906) (3,268) (1,375)(D) (7,549) (3,653)
Other, net (49) 848 799 387
------- ------- --------------------- -------- ------------
(2,955) (2,420) 0 (1,375) (6,750) (3,266)
------- ------- --------------------- -------- ------------
Income (loss)
before income taxes 6,715 (686) 764 (5,580) 1,213 587
Income taxes (4,420) (620) 476 (E) (4,564) (2,209)
------- ------- --------------------- -------- ------------
Net income (loss) 2,295 (1,306) 764 (5,104) (3,351) $ (1,622)
======= ======= ===================== ======== ============
Basic and diluted earnings (loss) per
share of common stock: 40 (57) $ (0.03)
======= ======== ============
Weighted average number of common
shares outstanding (in thousand)
- Basic and diluted 58,095 58,678 58,678
======= ======== ============
(1) Exchange rate: Lire 2,066.50 = U.S. $1 as of June 23, 2000, unaudited and
presented for convenience purposes only.
F-3
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts included within the notes to the Unaudited Pro Forma Condensed
Consolidated Financial Statements are reflected in millions of Lire in order to
comply with the presentation of the accompanying Pro Forma Financial Statements.
(A) The Unaudited Pro Forma Condensed Consolidated Financial Statements give
effect to the acquisition of Gazzola as if it had occurred on December 31,
1999 for the purposes of the unaudited pro forma condensed consolidated
balance sheet and on January 1,1999 for purposes of the unaudited pro
forma condensed consolidated statements of operations. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the
aggregate consideration to be paid in connection with the proposed
acquisition of Gazzola will be allocated to assets purchased and
liabilities assumed based on their fair market values and any excess will
be treated as goodwill. The purchase price was paid with Lire 26,805
million of long-term debt and Lire 300 million of accrued acquisition
costs and is allocated as follows:
millions of Lire
----------------
Purchase price including
acquisition costs 27,105
Gazzola liabilities assumed 102,339
----------------
129,444
----------------
Allocated to assets and liabilities
as follows:
December 31, 1999
----------------------------------------------------
FMV Historical Adjustment
----------- ----------- ----------
(millions of Lire)
Current assets 41,294 41,294
Property, equipment, improvements 74,319 62,772 11,547
Other assets 2,952 2,952
Deferred tax liability (4,763) (4,763)
Goodwill 15,642 15,642
----------- ----------- ----------
129,444 107,018 22,426
----------- ----------- ----------
In addition, the unaudited pro forma condensed consolidated balance sheet
also reflects (i) the reclassification of Gazzola's equity accounts to
capital in excess of par value (ii) the issuance of 2,125,000 shares of
Common Stock put in escrow as a guarantee to secure Petrini's potential
payment of up to Lire 10,000 million representing the deferred portion of
the purchase price due to certain conditions pursuant the agreement and
(iii) a long term liability of Lire 4,535 million (face value Lire 5,000
million) due to Dino Gazzola at the second anniversary of the Closing,
subject to certain conditions.
(B) Represents the cash proceeds from the issuance of 583,334 shares of Common
Stock to Starfood Italia, S.r.l. at $3.00 per share, pursuant to the
purchase agreement between Petrini, Dino Gazzola and Starfood Italia
S.r.l.
F-4
(C) The purchase accounting for the acquisition of Gazzola by Petrini resulted
in an increase in the basis of property, equipment and improvements of
Lire 11,547 million as well as the recording of Lire 15,642 million of
goodwill. The increase in the basis of assets acquired is being
depreciated and amortized over the estimated useful lives at an average of
ten years. The goodwill is being amortized over twenty years. The
Unaudited Pro Forma Condensed Consolidated Statements of Operations
reflect depreciation and amortization expense recorded in cost of sales
and general and administrative expenses for the year ended December 31,
1999 of Lire 1,155 million and Lire 782 million respectively.
(D) Interest expense in the Unaudited Pro Forma Condensed Consolidated
Statements of Operations has been adjusted to reflect the increase in
interest relating to additional debt incurred in the acquisition, reduced
by cash received for the issuance of shares of Common Stock to Dino
Gazzola as if it occurred on January 1, 1999. The amount of interest
expense recorded for the year ended December 31, 1999 was Lire 1,375
million.
(E) Income taxes in the Pro Forma Condensed Consolidated Statements of
Operations have been adjusted to reflect the tax effect of the pro forma
adjustments relating to the additional depreciation and amortization on
purchase accounting adjustments made to fixed assets using the Company's
effective tax rate of 41.25%.
(F) Represents 50% of the deferred portion of the purchase price of Lire 4,535
million (face value Lire 5,000 million) to be paid to Dino Gazzola at the
second anniversary of the Closing, provided that Dino Gazzola will not
voluntarily resign from the office of Managing Director of Gazzola up to
the second anniversary of the Closing date.
F-5
Report of independent auditors
To the Board of Directors and Shareholders of
Pastificio Gazzola S.p.A.
We have audited the accompanying balance sheets of Pastificio Gazzola S.p.A. as
of December 31, 1999 and 1998 and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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 of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 Pastificio Gazzola S.p.A. as of
December 31, 1999 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with Italian accounting principles, which differ in certain respects from those
followed in the United States of America (see Note 18 of the Notes to Financial
Statements).
Reconta Ernst & Young S.p.A.
Genoa, Italy,
June 21, 2000
F-6
PASTIFICIO GAZZOLA S.p.A
BALANCE SHEETS
As of December 31, 1999 and 1998
ASSETS
1999 1999 1998
-------------- ------------- --------------
(thousands (millions of Lire)
of dollars) (1)
CURRENT ASSETS
Cash 2,245 4,591 14,540
Accounts receivable trade, net of allowance for
doubtful accounts of Lire 475 million in 1999 and
Lire 998 million in 1998 9,660 19,751 20,098
Taxes receivable (Note 3) 221 452 560
Inventories (Note 4) 5,350 10,939 11,618
Due from insurance company (Note 5) 1,469 3,003 3,263
Prepaid expenses 787 1,609 1,577
Other current assets (Note 6) 465 949 1,004
-------------- ------------- --------------
Total current assets 20,197 41,294 52,660
PROPERTY, PLANT AND EQUIPMENT
Land 1,964 4,016 3,182
Buildings 7,897 16,146 15,719
Machinery, equipment and other 37,596 76,870 74,713
-------------- ------------- --------------
47,457 97,032 93,614
Accumulated depreciation (16,247) (33,218) (29,144)
-------------- ------------- --------------
Property, plant and equipment, net 31,210 63,814 64,470
INTANGIBLE ASSETS, at amortized cost (Note 7) 1,185 2,422 3,272
OTHER ASSETS (Note 8) 1,610 3,291 2,081
-------------- ------------- --------------
TOTAL ASSETS 54,202 110,821 122,483
============== ============= ==============
- ---------------------------
(1) Exchange rate: Lire 2,044.64 = U.S. $ 1 as of June 21, 2000
See accompanying notes
F-7
PASTIFICIO GAZZOLA S.p.A
BALANCE SHEETS
As of December 31, 1999 and 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1999 1998
---------------- -------------- -------------
(thousands (millions of Lire)
of dollars) (1)
CURRENT LIABILITIES
Short-term borrowings (Note 9) 15,363 31,411 38,754
Current portion of long-term debt (Note 10) 1,830 3,741 3,691
Accounts payable trade 15,035 30,741 30,216
Taxes payable 356 727 758
Accrued payroll and social contributions 721 1,474 1,522
Accrued expenses 75 154 143
Other current liabilities 155 316 363
---------------- -------------- -------------
Total current liabilities 33,535 68,564 75,447
LONG-TERM DEBT, less current portion (Note 10) 14,141 28,913 32,673
EMPLOYEES AND AGENTS TERMINATION INDEMNITIES (Note 11) 1,591 3,253 2,966
SHAREHOLDERS' EQUITY (Note 12):
Share capital 123.5 thousand ordinary
shares, authorized, issued and outstanding, par value
Lire one hundred thousand per share 6,040 12,350 12,350
Accumulated deficit (1,105) (2,259) (953)
---------------- -------------- -------------
Total shareholders' equity 4,935 10,091 11,397
---------------- -------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 54,202 110,821 122,483
================ ============== =============
- ---------------------
(1) Exchange rate: Lire 2,044.64 = U.S. $ 1 as of June 21, 2000
See accompanying notes
F-8
PASTIFICIO GAZZOLA S.p.A
STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
1999 1999 1998 1997
---------------- --------------- ---------------- ---------------
(thousands (millions of Lire)
of dollars) (1)
NET SALES (Note 13) 44,346 90,671 104,696 90,246
COST OF SALES 37,029 75,710 87,418 76,930
---------------- --------------- ---------------- ---------------
GROSS PROFIT 7,317 14,961 17,278 13,316
OPERATING COSTS AND EXPENSES
Selling expenses 4,182 8,550 8,380 8,298
General and administrative expenses 2,287 4,677 4,422 4,003
---------------- --------------- ---------------- ---------------
6,469 13,227 12,802 12,301
---------------- --------------- ---------------- ---------------
INCOME FROM OPERATIONS 848 1,734 4,476 1,015
OTHER INCOME (EXPENSES)
Net interest expense (1,598) (3,268) (4,092) (4,464)
Other, net 414 848 (97) 65
---------------- --------------- ---------------- ---------------
(1,184) (2,420) (4,189) (4,399)
---------------- --------------- ---------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES (336) (686) 287 (3,384)
INCOME TAXES (Note 3) 303 620 636 -
---------------- --------------- ---------------- ---------------
NET LOSS (639) (1,306) (349) (3,384)
================ =============== ================ ===============
- -------------------
(1) Exchange rate: Lire 2,044.64 = U.S. $ 1 as of June 21, 2000
See accompanying notes
F-9
PASTIFICIO GAZZOLA S.p.A
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
1999 1999 1998 1997
----------------- -------------- ------------ -----------
(thousands of (millions of Lire)
dollars) (1)
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS (639) (1,306) (349) (3,384)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,415 4,938 4,826 4,402
Amortization 655 1,340 1,439 1,393
Provision for employees termination indemnities 291 596 573 584
Provision for doubtful accounts 98 200 170 100
Other non cash items, net 32 65 (222) 2,429
Payment of employees and agent termination indemnities (152) (310) (310) (468)
Changes in operating assets and liabilities:
Accounts receivable trade 72 147 1,147 (1,369)
Inventories 332 679 (1,749) 2,629
Due from insurance company 127 260 3,631 (6,894)
Accounts payable trade (279) (570) 2,798 4,110
Accrued payroll and social contributions (23) (48) (177) (110)
Other, net (591) (1,209) 113 5,305
----------------- -------------- ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,340 4,782 11,890 8,727
CASH FLOWS FROM INVESTING ACTIVITIES
Cash disbursements for additions to property, plant and equipment (2,469) (5,048) (3,885) (13,289)
Proceeds from disposal of property, plant and equipment 308 629 368 1,112
Additions to intangible assets (240) (491) (1,440) (2,075)
----------------- -------------- ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (2,401) (4,910) (4,957) (14,252)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - - 20,000 4,681
Payments of long-term debt (1,228) (2,511) (5,499) (4,380)
Net change in short-term borrowings (3,575) (7,310) (8,460) 2,848
----------------- -------------- ------------ -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,803) (9,821) 6,041 3,149
----------------- -------------- ------------ -----------
NET INCREASE (DECREASE) IN CASH (4,866) (9,949) 12,974 (2,376)
CASH AT BEGINNING OF YEAR 7,111 14,540 1,566 3,942
----------------- -------------- ------------ -----------
CASH AT END OF YEAR 2,245 4,591 14,540 1,566
================= ============== ============ ===========
- ---------------------------
(1) Exchange rate: Lire 2,044.64 = U.S. $ 1 as of June 21, 2000
Supplemental information:
- Interest paid 1,614 3,300 4,049 4,443
================= ============== ============ ===========
- Income taxes paid 303 620 636 -
================= ============== ============ ===========
Cash disbursements for additions to property, plant and equipment in 1999 were
Lire 136 higher than the additions of the period, in 1998 and in 1997 were Lire
602 and Lire 224, respectively, lower than the additions, due to the time delay
between the recording of the addition and the related payment.
See accompanying notes
F-10
PASTIFICIO GAZZOLA S.p.A
STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
(in millions of Lire, except as otherwise indicated)
Accumulated deficit
------------------------------------------
Additional Other Total
Share paid-in Legal accumulated Sub- shareholders'
capital capital reserve (deficit) total equity
-------------- --------------- ----------- ------------- ------------- ---------------
BALANCE AT JANUARY 1, 1997 10,500 4,067 68 (4,505) (4,437) 10,130
CAPITAL CONTRIBUTION 1,850 3,150 5,000
TRANSFER (4,067) (68) 4,135 4,067 -
NET LOSS 1997 (3,384) (3,384) (3,384)
-------------- --------------- ----------- ------------- ------------- ---------------
BALANCE AT DECEMBER 31, 1997 12,350 3,150 - (3,754) (3,754) 11,746
TRANSFER (3,150) 3,150 3,150 -
NET LOSS 1998 (349) (349) (349)
-------------- --------------- ----------- ------------- ------------- ---------------
BALANCE AT DECEMBER 31, 1998 12,350 - - (953) (953) 11,397
NET LOSS 1999 (1,306) (1,306) (1,306)
-------------- --------------- ----------- ------------- ------------- ---------------
BALANCE AT DECEMBER 31, 1999 12,350 - - (2,259) (2,259) 10,091
============== =============== =========== ============= ============= ===============
BALANCE AT DECEMBER 31, 1999
in thousands of dollars (1) 6,040 - - (1,105) (1,105) 4,935
============== =============== =========== ============= ============= ===============
- --------------------------
(1) Exchange rate: Lire 2,044.64 = U.S. $ 1 as of June 21, 2000
See accompanying notes
F-11
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
1. ORGANIZATION AND BUSINESS
Pastificio Gazzola S.p.A. (the "Company"), was established in 1971. The Company
at December 31, 1999 was a subsidiary of Starfood Italia S.p.A., a company owned
by the Gazzola family in Italy. The Company produces and sells pasta and
cous-cous principally for the private label market, but also under its own
trademarks. It sells its products in Italy and abroad. Foreign sales accounted
for approximately 80% of total revenues in the years 1999, 1998 and 1997 as
detailed in Note 13. The production facilities are located in Mondovi, Piedmont,
Italy.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company is a legal entity incorporated under the laws of Italy and its books
and records are based on Italian legal and statutory requirements, which are in
conformity with accounting principles issued by the Italian Accounting
Profession (Consiglio Nazionale dei Dottori Commercialisti e dei Ragionieri) or,
in the absence thereof, those issued by the International Accounting Standards
Committee ("Italian accounting principles").
The accompanying financial statements are derived from the financial statements
presented for the Italian legal and statutory purposes, reclassified in order to
present them in a format that follows international practice. The
reclassification, however, does not affect result of operations and
shareholders' equity in any of the years presented. In addition, the notes to
the consolidated financial statements include a level of detail in the note
disclosure as is customary for international reporting.
Significant Accounting Policies
Use of estimates - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
Receivables - Receivables are stated at their estimated net realisable value.
Inventories - Inventories are stated at the lower of the purchase or production
cost and market. Purchase cost of raw materials, packaging materials and
production cost of finished goods, including raw materials, labor and other
production costs, are computed using the FIFO method.
F-12
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant and Equipment - Property, plant and equipment is stated at cost,
or revalued amounts in accordance with the enacted laws or voluntary
revaluations, including accessory costs, net of accumulated depreciation. Cost
includes capitalization of certain interest as part of the historical cost of
the asset. The amount capitalized is an allocation of the interest costs
incurred during periods of construction of such assets. Cost also includes
internal direct costs, principally labour, for the construction of property,
plant and equipment, for the improvement of their efficiency and capacity and
for the extension of their useful lives.
Depreciation - Depreciation is computed on the cost or revalued amounts of the
assets using the straight-line method over the estimated useful lives of the
assets, as follows:
Buildings 66 years
Machinery and equipment and other 5-25 years
Financial Leases - Certain leases entered into by the Company for production
facilities qualify as capital leases. As permitted by Italian accounting
principles, they are accounted for as operating leases, in order to maintain the
tax benefit of deducting the lease instalments which would otherwise not be
deductible. The disclosures on the effects of capitalizing the leases, as
required by Italian accounting principles, are described in Note 14.
Intangible Assets - Intangible assets are recorded at cost and amortised on a
straight-line basis over their expected useful lives. Intangibles include
trademarks, while other intangible assets are primarily represented by patents,
software costs, research and development expenses (including internal
capitalised expenses) and advertising costs which are amortised over their
respective lives, not longer than five years as follows:
Deferred charges 5 years
Research and development expenses 5 years
Advertising costs 3 years
Industrial patents and intellectual property
rights 5 years
Licenses, trademarks and similar rights 5 years
Other intangible assets 5 years
F-13
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments - Investments in certain unconsolidated not significant operating
subsidiaries and affiliates (equity investees in which participation is between
20-50%) are accounted for by the cost method. Provisions for impairments are
recorded when there is a decline, other than temporary, in the value of a
long-term investment to recognise the decline.
Income taxes -. Income taxes are provided for on the basis of the estimated
taxable income of the Company. Deferred income taxes are accounted for under the
liability method and reflect the tax effects of significant differences between
the tax basis of assets and liabilities and their reported amount in the
financial statements, except that deferred tax assets are recognised only if
there exists evidence that the assets will be realised with reasonable
certainty.
Revenue Recognition - Revenue from sale of products is recorded when ownership
is transferred to the customers, which is when shipment is made. It is not the
Company's policy to accept returns; in specific cases returns are accepted,
however the Company has not experienced any significant amounts related to such
returns. Revenue is presented net of returns and other discounts.
Foreign Currency Transactions - Monetary assets and liabilities denominated in
foreign currencies have been recorded at the exchange rate in effect at the date
of the transaction and at balance sheet date such assets and liabilities
remained recorded at historical rates except for those expressed in a currency
of a country belonging to the European Monetary Unit ("EMU") that, at December
31, 1998, were updated at the fixed exchange rates at that date. At balance
sheet date non EMU monetary assets and liabilities denominated in foreign
currencies are remeasured on the basis of a rate that approximates the current
exchange rate and the resulting gain or loss on current monetary assets and
liabilities and losses on non-current monetary assets and liabilities is
reported in the line items other assets and other liabilities in the balance
sheet and is recognised in the statement of operations.
Derivative Products - The Company uses derivative products to manage exposure to
fluctuations in foreign currency exchange rates. To hedge against exposures to
changes in foreign currency exchange rates on certain assets and liabilities
denominated in foreing currencies, the Company enters into currency forward
contracts. The forward contracts are denominated in the same foreign currencies
in which the assets and liabilities are denominated (French Francs, U.S. dollars
and G.B. pounds). Discounts or premiums on forward contracts (the difference
between the current spot exchange rate and the forward exchange rate at the
inception of the contract) are amortized to expense over the contract lives
using the straight line method.
F-14
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The effects of movements in currency exchange rates on these instruments are
recognized when the related operating revenue is recognized. Realized gains and
losses on foreign currency forward contracts are included in other assets and
liabilities and recognized in earnings when the future sales occur or at the
time a sale is no longer expected to occur. The Company does not hold or issue
derivative products for trading purposes.
Statements of Cash Flows - The Company's short-term borrowings arise primarily
through short-term credit facilities. The short-term borrowings are normally
payable on demand. The cash flows from these items are included under the
caption "Net change in short-term borrowings" in the Statements of Cash Flows.
Information expressed in U.S. Dollars - The financial statements are stated in
Italian Lire, the currency of the country in which the Company is incorporated
and operates. Translation of Lire amounts into U.S. Dollar amounts is included
solely for the convenience of the readers and has been made at the rate of Lire
2,044.64 to U.S.$ 1, the Noon Buying Rate of the Federal Reserve Bank of New
York as of June 21, 2000. Such translation should not be construed as a
representation that the Lire amounts could be converted into U.S. Dollars at
that or any other rate.
3. TAXES
V.A.T. Taxes
Taxes receivable of Lire 452 at December 31, 1999, Lire 560 at December 31, 1998
and Lire 291 at December 31, 1997 relate principally to Value Added Taxes
("V.A.T.") for which the Company periodically receives reimbursement from the
V.A.T. office.
Income taxes
Income (loss) before income taxes and the provision for income taxes consisted
of the following for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
------------ ----------- -------------
Income (loss) before income taxes (686) 287 (3,384)
Provision for income taxes:
Current (620) (636) -
Deferred - - -
------------ ----------- -------------
Total taxes (620) (636)
============ =========== =============
Net (loss) (1,306) (349) (3,384)
============ =========== =============
F-15
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
3. TAXES (CONTINUED)
Reconciliation between the Italian statutory tax rate and the effective tax rate
is as follows:
1999 1998 1997
--------------------- --------------------- -------------------
Amount % Amount % Amount %
---------- --------- --------- ---------- --------- ---------
Tax provision applying the Italian
statutory rate of 41.25% in 1998 and 1999
and of 53.2% in 1997 (283) 41.25 118 41.25 (1,800) 53.20
Tax loss carryforwards not considered
recoverable 35 (5.10) 1,161 (34.30)
- - Recognition of tax loss carryforwards
not considered recoverable in prior years (714) (247.92)
Permanent differences for non deductible
expenses:
- for IRPEG (and ILOR in 1997) 258 (36.15) 596 206.67 539 18.90
- for IRAP (primarily on salaries and
interest) 620 (110.65) 636 220.83 - -
-
---------- --------- --------- ---------- --------- ---------
Tax provision and effective tax rate 620 (110.65) 636 220.83 - -
========== ========= ========= ========== ========= =========
Current income taxes on income in 1999 and 1998 consist solely of the Regional
Tax on Productive Activities ("IRAP").
A tax law to introduce IRAP was enacted in December 1997 which eliminated the
ILOR tax (at a statutory rate of 16.2%) and other indirect taxes and replaced
them with IRAP, at a statutory rate of 4.25%, on a higher taxable income
(principally excluding labor costs and interest), starting on January 1, 1998.
The Italian statutory rate for 1999 and 1998 was 41.25% comprised of 37% IRPEG
and 4.25% IRAP.
Components of deferred income tax assets and liabilities as of December 31,
1999, and 1998 are:
1999 1998
---- ----
Total deferred tax assets (consisting of NOLs) 6,793 8,000
Valuation allowance (6,793) (8,000)
---------- ---------
Net assets - -
Total deferred tax liabilities - -
---------- ---------
Net deferred taxes - -
========== =========
F-16
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
3. TAXES (CONTINUED)
Tax years for the Company are open from 1994 and are subject to review pursuant
to Italian law.
At December 31, 1999 the Company had net operating loss carry-forwards ("NOL's")
of approximately Lire 18,000 for income tax purposes of which approximately Lire
9,500 expire in the year 2000 and the remaining in the years 2001-2004.
Utilization of these NOL's is limited to future taxable earnings of the Company
for IRPEG purposes only, at the rate of 37%. For financial reporting purposes a
full valuation allowance has been recognized on NOL's because management is not
reasonably certain that such NOL's will be recovered.
4. INVENTORIES
Inventories consisted of:
December 31, December 31,
1999 1998
------------------- ------------------
Raw materials and consumables 5,479 5,261
Work-in-process 256 142
Finished goods 5,204 6,215
------------------- ------------------
10,939 11,618
=================== ==================
5. DUE FROM INSURANCE COMPANY
The amount receivable from insurance company of Lire 3,003 and Lire 3,263,
respectively, at December 31, 1999 and 1998 relates to the reimbursements to be
received for the losses sustained by the Company following a fire at a warehouse
on consignment in November 1997. Such amounts, which include the reimbursements
for direct damages for loss of assets (inventory and fixed assets) and indirect
damages for loss of operating margin were recognized in 1997 for Lire 6,894 and
in 1998 for Lire 670. The receivable of Lire 3,003 at December 31, 1999 is net
of an allowance of Lire 400. The Company is currently involved in a legal
dispute with the insurance company for the collection of the outstanding amount,
principally in relation to certain formalities required by the insurance policy.
Management believes, based on the advice of its legal counsels, that the amount
of Lire 3,003 will be entirely recovered. The formal procedure for the request
and documentation of the indirect damages for approximately Lire 1,350 has been
completed by the Company in early 2000.
F-17
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
6. OTHER CURRENT ASSETS
Other current assets consisted of:
December 31, 1999 December 31, 1998
----------------- ------------------
Receivables 178 245
Advances to personnel 106 106
Advances to suppliers 118 434
Taxes receivable 342 164
Other 206 55
================= ==================
Total 949 1,004
================= ==================
7. INTANGIBLE ASSETS
Intangible assets consisted of:
December 31, December 31,
1999 1998
----------------- ----------------
Deferred charges 525 525
Less: accumulated amortization (414) (346)
----------------- ----------------
111 179
Research and development expenses 5,767 5,692
Less: accumulated amortization (4,449) (3,609)
----------------- ----------------
1,318 2,083
Industrial patents and intellectual property rights 1,557 1,392
Less: accumulated amortization (1,190) (1,030)
----------------- ----------------
367 362
Licenses, trademark and similar rights 1,751 1,500
Less: accumulated amortization (1,225) (997)
----------------- ----------------
526 503
Advertising costs 30 30
Less: accumulated amortization (30) (20)
----------------- ----------------
- 10
Other intangible assets, net 100 135
----------------- ----------------
Total, net of accumulated amortization 2,422 3,272
================= ================
F-18
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
8. OTHER ASSETS
Other assets consisted of:
December 31, 1999 December 31, 1998
------------------- ------------------
Investments 56 54
Long-term financial receivable from Gazzola France S.a.r.l. 1,361 1,361
Advances on employees termination indemnities 265 257
Other receivable 1,609 409
------------------- ------------------
Total 3,291 2,081
=================== ==================
At December 31, 1999 and 1998 investments of Lire 56 include for Lire 53 the
99.8% owned subsidiary Gazzola France S.a.r.l., ("Gazzola France") that acts as
the Company's sales distributor and representative in France. Due to the
immateriality of the investment in the subsidiary and the subsidiary's operating
results and financial position to the consolidated group, the Company has not
prepared consolidated financial statements (in 1999 and 1998), as permitted by
the Italian Civil Code.
During 1998, the Company sold its 33% interest in its affiliate Gazzola Carozzi
North America Inc., realizing a gain of Lire 240, after having reduced in 1997
its interest in the Company from 50% (with a carrying value of Lire 155) to 33%,
because the Company did not subscribe to a capital increase of the affiliate.
During 1997 year, the Company sold an investment in Seamar for Lire 167 to other
shareholders. The residual amount of the receivable, amounting to Lire 132,
which included in other receivables is covered by a bank guarantee.
The long-term financial receivable from Gazzola France S.a.r.l. relates to a non
interest bearing loan whose repayment term has not been fixed. The loan was
granted for the acquisition of a clients' list in order to start the French
operations of the subsidiary.
The advance on employees' termination indemnities relate to taxes paid in
advance on the employee termination indemnities as required by a law enacted in
1997.
Included in other receivables at December 31, 1999 is a receivable of Lire 1,190
with respect to a machinery sold to co-operative workers as a part of an
outsourcing project regarding the packaging of specialty foodstuffs. The Company
has the right to exercise a lien on the machinery in the event of non-payment.
The Company recognized a gain on disposal of Lire 812 in 1999. The receivable,
net of an advance payment of approximately Lire 500, will be paid in 20
quarterly equal installments starting October 1, 2000.
F-19
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
9. SHORT-TERM BORROWINGS
At December 31, 1999 and 1998 the Company had unsecured short-term lines of
credit aggregating approximately Lire 36,800 and Lire 40,900, respectively, from
banks, of which approximately Lire 13,252 in 1999 and Lire 11,910 in 1998 were
available for further borrowing. Amounts outstanding under these lines of
credits are payable upon demand.
At December 31, 1999 and 1998 the weighted average interest rates for these
lines of credit were 6.38%, and 6.42%, respectively.
Bank borrowings at December 31, 1999 and 1998 are represented by overdrafts for
Lire 23,548 and Lire 28,990 and by lines of credit for the discounting of
"agriculture" drafts (a technical form of borrowing applicable to the sector in
which the Company operates, which is based on the discounting of drafts) for
Lire 500 and Lire 1,500, respectively, at December 31, 1999 and 1998 and other
advances amounting to Lire 631 in 1998.
Included in the short-term borrowings is also the liability to the factoring
agency for an amount of Lire 7,363 and Lire 7,633, respectively, at December 31,
1999 and 1998, respectively. The Company executes contracts with a factoring
agency for the sale with recourse of trade receivables. Pursuant to the
contract, the Company obtain from the factoring agency advances on such
receivables sold with recourse.
F-20
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
10. LONG-TERM DEBT
Long-term debt consisted of:
December December
31, 1999 31, 1998
------------- ----------------
- Lire 250, due January 1, 2000, fixed annual interest rate
14.80%. - 18
- Lire 1,010, due June 28, 2006, fixed annual interest rate
8.7%. 783 862
- Lire 4,000, due March 15, 2005, variable interest rate based on annual
interest rate of the European Bank of Investments ("EBI"). 2,750 3,250
- Lire 2,000, due September 15, 2005, variable interest rate based on annual
interest rate of EBI.
1,500 1,750
- Lire 6,000, due March 15, 2004, fixed annual interest rate 11.35% 3,731 4,430
- Lire 20,000, due December 1, 2008, variable interest rate based on 6 months
RIBOR plus 1.2 (fixed interest rate 4.49% until June 1, 1999). 20,000 20,000
- Long-term drafts for capital expenditures in machinery and equipment (1) 3,890 6,054
------------- ----------------
Total long-term debt 32,654 36,364
Less current portion (3,741) (3,691)
------------- ----------------
Long-term debt, less current portion 28,913 32,673
============= ================
(1) A portion of the long-term draft for Lire 2,717, Lire 3,706 and Lire 4,711,
respectively, at December 31, 1999, 1998 and 1997 relate to assets
purchased in accordance with the Sabatini law which provides for certain
privileged interest at the annual interest rate of approximately 7%.
F-21
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
10. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows:
Year Amount
------------ -----------
2000 3,741
2001 5,122
2002 4,928
2003 4,253
2004 3,838
Thereafter 10,772
-----------
Total 32,654
===========
Guarantees given at December 31, 1999 are represented by mortgages on the
Company's real estate and by liens on plant and machinery for Lire 27,981 in
favour of Banca Mediocredito and a pool of six other banks. Other guarantees in
favour of Istituto di Credito Fondiario for Lire 250, related to loans fully
reimbursed at December 31, 1999, are currently in progress to be cancelled.
Long-term drafts are secured by a specific guarantee on machinery being acquired
under the Sabatini law.
11. EMPLOYEES AND AGENTS TERMINATION INDEMNITIES
The liability for termination indemnities relates principally to the Company's
employees. In accordance with Italian severance pay statutes, an employee
benefit is accrued for service to date and is payable immediately upon
termination of employment. The termination indemnity liability is calculated in
accordance with local civil and labor laws based on each employee's length of
service, employment category and remuneration. The termination liability is
unfunded and is adjusted annually by a cost-of-living index provided by the
Italian Government. There is no vesting period or funding requirement associated
with the liability.
The liability recorded in the December 31, 1999 and 1998 balance sheets is the
amount to which the employee would be entitled if terminated as of the balance
sheet date. No agents termination indemnity has been accrued.
F-22
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
11. EMPLOYEES AND AGENTS TERMINATION INDEMNITIES (CONTINUED)
Changes in the liability for employees and agents termination indemnities
follow:
Employees Agents Total
---------------- -------------- ----------------
Balance January 1, 1997 2,560 27 2,587
Provision 584 - 584
Payments (441) (27) (468)
---------------- -------------- ----------------
Balance December 31, 1997 2,703 - 2,703
Provision 573 - 573
Payments (310) - (310)
---------------- -------------- ----------------
Balance December 31, 1998 2,966 - 2,966
Provision 596 - 596
Payments (310) - (310)
---------------- -------------- ----------------
Balance December 31, 1999 3,253 - 3,253
================ ============== ================
12. SHAREHOLDERS' EQUITY
Italian law requires that 5% of a company's net income be retained as a legal
reserve, until such reserve equals 20% of the share capital. This reserve is not
available for distribution.
The revaluation surplus deriving from certain laws issued in 1975 and in 1983
was recorded in a shareholders' equity and was subsequently utilized for a
capital increase in 1984.
The revaluation surplus reported in application of law enacted in 1991 was
utilized to cover the losses at 31 December 1995. Following the use of such
surplus of Lire 1,409, certain legal provisions became applicable, which
requires the reserve to be re-established before the distribution of any
profits.
The amount arising from a voluntary revaluation in 1995 was subsequently
utilized to cover the losses at 31 December 1996.
The Company has capitalized certain start-up, expansion, research, development
and advertising costs. According to the Civil Code dividends cannot be
distributed until the equity reserves are higher than the unamortized amount of
such capitalized costs that at December 31, 1999 amounted to Lire 1,429.
F-23
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
13. REVENUE BY GEOGRAPHICAL AREA
Gross revenues from sales of pasta and cous-cous may be analyzed by geographical
area as follows:
December December December
31, 1999 31, 1998 31, 1997
--------------------- --------------------- -------------------
Italy 17,950 19% 25,124 24% 18,075 20%
France 54,429 58% 54,747 52% 46,586 51%
Rest of the world 20,970 23% 25,641 24% 26,638 29%
Gross sales 93,349 100% 105,512 100% 91,299 100%
Less discounts (2,678) (816) (1,053)
----------- ----------- -----------
Net Sales 90,671 104,696 90,246
=========== =========== ===========
14. LEASES
The Company acquired fixed assets under lease agreements which qualify as
capital leases. Future minimum rental payments as of December 31, 1999 are as
follows:
2000 516
2001 489
2002 505
2003 217
2004 75
-------------
Total minimum lease payments 1,802
Amount representing interest (193)
-------------
Present value of net minimum capital
Lease payment 1,609
=============
Such lease agreements have been accounted for as operating leases, as permitted
by Italian accounting principles, in order to maintain the tax benefit of
deducting the lease installments which would otherwise not be deductible. The
effect of capitalizing the leases would be to increase net income by Lire 212,
Lire 218 and Lire 8, respectively, in 1999, 1998 and 1997 and to increase
shareholders' equity by Lire 444 and Lire 232, respectively, at December 31,
1999 and 1998.
F-24
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
15. COMMITMENTS AND CONTINGENCIES
Commitments
The Company in 1999 exercised the option with a supplier to increase its
automatic warehouse facilities which requires capital expenditures of
approximately Lire 2,600 to be made in the years 2001 and 2002.
In connection with the sale of machinery to co-operative workers at the end of
1999, as reported in Note 8, in April 2000 the Company entered into a two-year
agreement with the co-operative workers. The Company is committed to acquire a
minimum level of supplies totaling approximately Lire 80 for the year 2000 and
Lire 320 for the year 2001, to be paid in equal monthly installments.
The Company in 1997 entered into an other agreement with co-operative workers
for warehouse services of approximately Lire 320 per year through the year 2003.
The Company has given several guarantees in the normal course of business for
approximately Lire 2,100 at December 31, 1999.
Contingencies
There are a number of lawsuits and claims pending against the Company incidental
to its business. The Company provides for costs related to contingencies when a
loss is probable and the amount is reasonably determinable. It is the opinion of
management that the ultimate resolution of these matters, to the extent not
currently provided for, will not have a significant effect on the financial
conditions and results of operations of the Company.
F-25
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
16. RELATED PARTIES
In May 1999 a parcel of land surrounding the Company's production facilities was
acquired from the Parent company Starfood Italia S.p.A. for Lire 700. The
purchase price was based on an independent appraisal.
The Company, based on a sales commission agreement with Starfood France (which
held a minority interest in the Company's share capital through December 31,
1999) recognized and paid Lire 784, Lire 889 and Lire 819 commission fees,
respectively, in 1999, 1998 and 1997.
Relatives of a member of the Board of Directors provided professional services
to the Company for Lire 230, Lire 106 and Lire 82, respectively in 1999, 1998
and 1997.
In 1997 Fideos Carozzi, a shareholder of the Company through May 1997, provided
services relating to the implementation of the production planning system for
Lire 127.
In 1997 the subsidiary Gazzola France acquired a clients' list for use in the
French market for Lire 1,215 from a company owned by the Gazzola family. The
price paid was based on an independent appraisal. The acquisition was financed
through a non-bearing interest loan granted by the Company to Gazzola France, as
reported in Note 8. Gazzola France's entire revenue of Lire 459, Lire 370, and
Lire 266, respectively, in 1999, 1998 and 1997 relates to services provided to
the Company.
In 1997 the Company exercised the option to buy-back from Gazzola Carozzi North
America Inc. (a previously owned subsidiary) the trademark Monteregale for the
use in the US market, which the Company had sold in 1994 to the US entity. Both
transactions were entered into for the same amount of Lire 454. The Company's
sales of pasta to Gazzola Carozzi North America Inc. amounted to Lire 378 in
1997.
17. SUBSEQUENT EVENTS
On May 3, 2000, under a Stock Purchase Agreement, Petrini S.p.A. ("Petrini"), a
subsidiary of Spigadoro Inc., a company listed on the American Stock Exchange,
acquired 100% of the Company shares. After the acquisition, the acquirer granted
a loan of Lire 8,000 to the Company.
F-26
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
18. RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES
The Company's accounting policies for financial reporting in accordance with
Italian GAAP differ in certain respects from accounting principles generally
accepted in the United States ("US GAAP"). Significant differences which have an
effect on Net Loss and Shareholders' Equity are described below:
(a) Revaluations of property - Certain buildings were revalued by an Italian
subsidiary to amounts in excess of historical cost. These revaluations, which
were either authorized or required by Italian law, are permissible under Italian
accounting principles. The total net increase in property, plant and equipment
of approximately Lire 2,124 resulting from these revaluations was credited to
shareholders' equity. A deferred tax liability on the taxable portion of such
revaluation reserve of Lire 907 has not been provided. The amount of such
liability, not required to be accounted for according to Statement of Financial
Accounting Standard ("SFAS") 109 as related to years prior to 1992, is Lire 374.
Assets revalued under Italian accounting principles are depreciated over their
remaining useful lives based on their revalued basis. US GAAP does not permit
the revaluation of such assets. Accordingly, the increases in shareholders'
equity and the related increase in depreciation expense occurring as a result of
such revaluations have been reversed in the attached reconciliation for all
periods presented.
(b) Accounting for intangible assets and deferred charges - The Company has
capitalized and deferred various costs, principally research and development
expenses which should be expensed as incurred under US GAAP.
(c) Accounting for investments - Under Italian GAAP investments in certain
unconsolidated operating subsidiaries, which are not material, and in certain
affiliates (equity investees in which participation is between 20-50%) are
accounted for by the cost method. Under US GAAP the investments in affiliates
should be accounted for in accordance with the equity method of accounting,
while the investments in subsidiaries should have been consolidated. However,
taking into consideration that such subsidiaries are not material, in the
accompanying reconciliation they have also been accounted for in accordance with
the equity method of accounting.
(d) Accounting for transactions with common shareholders - The transactions
related to long-lived assets described in Note 8 that, under Italian GAAP have
been recorded as transactions with third parties, in the accompanying
reconciliation to U.S. GAAP they have been recorded at the lower of cost or
market. Therefore, the payments made for the acquisition of such assets in
excess of their historical costs have been accounted for as a decrease of
shareholders' equity and as a reimbursement to shareholders.
F-27
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
18. RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES (CONTINUED)
(e) Long-lived assets - In accordance with SFAS 121 impairments on long lived
assets are recognized when indicators of an other than a temporary impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Long-lived assets to be
disposed of are recorded at the lower of cost and net realizable value. The
amount of the impairment loss recognized as a charge to operations is measured
by the excess cost of the carrying value of the impaired asset over the fair
value of the impaired asset. Under Italian GAAP is permitted to not recognize an
impairment loss unless the current value is deemed not to be recoverable.
(f) Accounting for capital leases - The Company entered into lease contracts for
production equipment in Italy. The leases are accounted for as operating leases
in the Company's financial statements, as permitted by Italian accounting
principles. For U.S. financial reporting purposes, the leases qualify as capital
leases under the provisions of SFAS No. 13. Accordingly, the effects of
capitalizing the leases as explained in Note 14 above have been included in the
accompanying reconciliations.
(g) Accounting for income taxes - In the accompanying reconciliation the effects
of the recognition of deferred income taxes relate only to the US GAAP
adjustments that give rise to temporary differences between the reporting basis
for Italian GAAP and the reporting basis for US GAAP, because no significant
differences exist between the method of accounting for deferred income taxes
applied by the Group under Italian GAAP and US GAAP. The US GAAP adjustments
give rise to net deferred tax assets for which a valuation allowance has been
provided for because management believes that it is more likely than not that
such deferred assets will not be recovered.
Impact of Recently Issued Accounting Standards - In June 1998, the FASB issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The Company expects to adopt the new Statement effective January 1, 2001. The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. The Company does not anticipate that the adoption of this
Statement will have a significant effect on its results of operations or
financial position.
The following tables summarize the significant adjustments to the net loss and
shareholders' equity which would be required if US GAAP had been applied instead
of Italian accounting principles.
F-28
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
18. RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES (CONTINUED)
(Thousand
of US $)
(1) Lire millions
-----------------------------------
STATEMENT OF OPERATIONS 1999 1999 1998 1997
---------- --------- ---------- ------------
Loss as reported in the statement of operations (639) (1,306) (349) (3,384)
a) Elimination of depreciation on revaluations 6 13 13 13
b) Net effect of writing-off of research and development
costs and other capitalized costs 225 461 (96) (634)
c) Adjustments to account for the equity method of
investments (59) (121) (292) 157
d) Net effect of accounting for transactions with
common shareholders 59 120 120 120
e) Net effect of accounting for impairment of
long-lived assets 39 80 42 (65)
f) Net effect of capital leases 105 212 218 8
---------- --------- ---------- ------------
Net loss in accordance with accounting principles
generally accepted in the US (265) (542) (344) (3,785)
========== ========= ========== ============
(1) Exchange rate: Lire 2,044.64 = US $ 1 as of June 21, 2000
F-29
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
18. RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES (CONTINUED)
(Thousand
of US $) Lire millions
(1) -------------------------
1999 1999 1998
------------- -------- ----------
SHAREHOLDERS' EQUITY
Shareholders' equity as reported in the balance sheets 4,935 10,091 11,397
a) Elimination of revaluation, net of accumulated depreciation (1,045) (2,136) (2,149)
b) Write-off of research and development expenses
and other capitalized costs (762) (1,557) (2,016)
c) Net effect of application of equity method of accounting (171) (349) (229)
d) Net effect of accounting for transactions with common
shareholders (701) (1,434) (975)
e) Net effect of accounting for impairment of long lived (186) (380) (460)
assets
f) Net effect of capital leases 217 444 232
------------- -------- ----------
Shareholders' equity in accordance with US GAAP 2,287 4,679 5,800
============= ======== ==========
(1) Exchange rate: Lire 2,044.64 = US $1 as of June 21, 2000
F-30
18. RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES (CONTINUED)
SHAREHOLDERS' EQUITY AT DECEMBER 31, CONSISTED OF:
Italian GAAP (1) US GAAP
1999 Adjustments
------------- -------------- -----------
Share capital 12,350 (717) 11,633
Additional paid in capital - 10,856 10,856
Accumulated deficit (2,259) (15,551) (17,810)
------------- -------------- -----------
10,091 (5,412) 4,679
============= ============== ===========
1998
Share capital 12,350 (717) 11,633
Additional paid in capital - 11,435 11,435
Accumulated deficit (953) (16,315) (17,268)
------------- -------------- -----------
11,397 (6,176) 5,800
============= ============== ===========
(1) The coverage of losses under Italian GAAP utilizing paid-in capital has been
reversed because such accounting for the coverage of losses is not permitted
by US GAAP, as well as the capital increase made utilizing the revaluation
reserves.
Components of deferred income tax balances
Deferred income taxes reflect the net tax effect of temporary differences
between the tax basis of assets and liabilities and their reported amount in the
financial statements on a US GAAP basis. Principal items comprising net deferred
income tax assets arising from US GAAP adjustments as of December 31, 1999 and
1998 are as follows:
F-31
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
18. RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES (CONTINUED)
1999 1998
---- ----
Tax depreciation on building
revaluations 881 892
Capitalized costs 642 792
Net effect of equity method of accounting 145 -
Net effect of transactions with common
shareholders 592 402
Net effect of accounting for impairments 157 190
------------ -----------
Total assets 2,417 2,276
Valuation allowance (2,234) (2,244)
------------ -----------
Net deferred tax assets 183 32
Net effect of equity method of accounting - (26)
Net effect of capital leases (183) (6)
------------ -----------
Total liabilities (183) (32)
------------ -----------
Net deferred taxes - -
============ ===========
Off-balance sheet risks
At December 31, 1999 off-balance sheet risks relate to forward exchange
contracts. The Company has entered foreign currency forward contracts primarily
denominated in US Dollars and GB Pounds. As of December 31, 1999 the Company had
Lire 15,137 outstanding foreign currency forward contracts with banks. The
foreign currency forward contracts have maturities that do not exceed twelve
months. For the years ended December 31, 1999, 1998 and 1997, net realized gains
and losses associated with these types of instruments were Lire 45 gain in 1999,
Lire 181 loss in 1998 and Lire 192 gain in 1997. The net unrealized gains or
losses as of December 31, 1999, 1998 and 1997 were Lire 45 gain, Lire 40 loss
and Lire 108 gain.
Research and development
Research and development expenses under a US GAAP basis amounted to Lire 388 in
1999, Lire 785 in 1998 and Lire 1,094 in 1997.
Capitalized interest
Interest capitalized on fixed assets under construction amounted to Lire 225 in
1997.
F-32
PASTIFICIO GAZZOLA S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
18. RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES (CONTINUED)
Concentration of credit risk
In 1999 sales to four customers represented approximately 55% of gross revenues;
Sales to these four customers, all above 10% of total sales, were as follows:
Customer 1999 sales
-------- -----------
Barilla Alimentare S.p.A. 15,511
Promodes France 14,925
ALDI Group France 11,131
Erteco Group France 9,973
--------------
51,540
==============
The Company produces mainly based on contract orders (private lables) rather
than for inventory. It performs ongoing credit evaluations of its customers'
financial condition and may require customers to provide letters of credits as
collateral. Cash deposits are maintained with major banks in Italy.
At December 31, 1999 the Company has trade receivables of Lire 3,894 from its
major customer, Barilla Alimentare S.p.A., which approximates 20% of the total
receivables' balance, of Lire 2,076 from Erteco Group France and of Lire 1,917
from Promodes France, which approximate 10% of the total receivables' balance.
Financial instruments
Fair value of financial instruments - The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial
instruments:
- Cash: the carrying amount reported in the balance sheet for cash and banks
approximates its fair value due to the short duration of those investments.
- Bank borrowings and long-term debt: the carrying amounts of the Company's
borrowings under its short-term revolving credit arrangements approximate
their fair value due to the short-term nature of these instruments. The fair
values of the Company's long-term debt are estimated using discounted cash
flow analyses, based on the Company's current borrowing rates for similar
types of borrowing arrangements.
- Foreign currency exchange contracts: the carrying value approximates fair
value based on exchange rates at December 31, 1999 and 1997.
F-33
18. RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1999 and 1998 approximate their fair value.
Valuation and qualifying accounts
Balance at Charged to
beginning of costs and Balance at end
period expenses Deductions of period
---------------- -------------- -------------- ----------------
Year ended December 31, 1999:
Allowance for doubtful accounts 998 200 (723) 475
================ ============== ============== ================
Year ended December 31, 1998:
Allowance for doubtful accounts 828 170 - 998
================ ============== ============== ================
Year ended December 31, 1997:
Allowance for doubtful accounts 728 100 - 828
================ ============== ============== ================
F-34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this amended report to be signed on its
behalf by the undersigned thereunto duly authorized.
SPIGADORO, INC.
By: /s/ Klaus Grissemann
-----------------------
Klaus Grissemann
Chief Financial Officer
Date: July 17, 2000