<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended July 18, 1999
or
[_] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ___ to ___
Commission file number: 333-76569
Luigino's, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 59-3015985
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2038
(Primary Standard Industrial Classification Code)
525 Lake Avenue South
Duluth, MN 55802
(218) 723-5555
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices.)
Check whether the registrant: (1) 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 _____
On August 20, 1999, the registrant had 1,000 outstanding share of common
stock, $.01 par value.
<PAGE>
LUIGINO'S, INC.
Index
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements (Unaudited)
Balance Sheets as of January 3, 1999 and July 18, 1999
(Unaudited)............................................ 3
Statements of Operations for the second fiscal quarter ended
and year to date ended July 19, 1998 and July 18,
1999 (Unaudited)....................................... 4
Statements of Cash Flows for year to date ended July 19, 1998
and July 18, 1999 (Unaudited).......................... 5
Notes to Financial Statements (Unaudited)....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 14
PART II - OTHER INFORMATION
Item 5. Other Information............................................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 14
2
<PAGE>
Part 1 - Financial Information
Item 1. Financial Statements
LUIGINO'S, INC.
Balance Sheets
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
January 3, July 18,
1999 1999
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................. $ 1,193 $ 903
Receivables, net of allowance for doubtful accounts
of $150 and $145, respectively .......................... 19,709 18,128
Inventories ............................................... 15,548 19,454
Prepaid expenses and other ................................ 1,179 1,730
--------- ---------
Total current assets ................................. 37,629 40,215
--------- ---------
Property, Plant and Equipment:
Land ...................................................... 22 22
Buildings and improvements ................................ 16,720 16,755
Machinery and equipment ................................... 77,510 93,831
Office equipment and leasehold improvements ............... 2,705 3,731
Construction in progress .................................. 2,916 26
Less - - Accumulated depreciation ......................... (24,491) (29,985)
--------- ---------
Net property, plant and equipment .................... 75,382 84,380
--------- ---------
Other Assets:
Notes receivable from principal stockholder ............... 8,809 5,471
Restricted cash ........................................... 745 717
Other ..................................................... 1,956 5,334
--------- ---------
Total other assets ................................... 11,510 11,522
--------- ---------
Total Assets .................................................... $ 124,521 $ 136,117
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt ...................... $ 9,398 $ 3,109
Accounts payable .......................................... 16,942 14,021
Accrued expenses - -
Accrued payroll and benefits ......................... 5,118 3,137
Accrued promotions and other ......................... 6,437 5,320
Accrued interest ..................................... 227 4,650
--------- ---------
Total current liabilities ............................ 38,122 30,237
Long-Term Debt, less current maturities ......................... 76,136 117,464
--------- ---------
Total liabilities .................................... 114,258 147,701
--------- ---------
Commitments and Contingencies
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) ............................... 9,607 (12,240)
--------- ---------
Total stockholders' equity (deficit) ................. 10,263 (11,584)
--------- ---------
Total Liabilities and Stockholders' Equity (Deficit) ............ $ 124,521 $ 136,117
========= =========
</TABLE>
Note: The balance sheet at January 3, 1999 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
3
<PAGE>
LUIGINO'S, INC.
Statements of Operations
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Second Fiscal Quarter Ended Year to Date Ended
--------------------------------- ---------------------------------
July 19, 1998 July 18, 1999 July 19, 1998 July 18, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales ......................... $ 49,363 $ 59,237 $ 112,320 $ 134,883
Cost of Goods Sold ................ 27,747 33,379 63,919 77,970
--------- --------- --------- ---------
Gross profit ................ 21,616 25,858 48,401 56,913
--------- --------- --------- ---------
Operating (Income) Expenses:
Selling and promotional ..... 11,627 20,426 24,710 46,004
General and administrative 4,882 5,400 11,269 12,493
Hibbing Settlement (Note 6).. -- (776) -- (776)
--------- --------- --------- ---------
Total operating expenses .... 16,509 25,050 35,979 57,721
--------- --------- --------- ---------
Operating income (loss) ..... 5,107 808 12,422 (808)
Other Income (Expense):
Interest expense ............ (1,489) (2,958) (3,332) (6,428)
Interest income ............. 135 76 285 231
Other, net .................. (37) 22 32 159
--------- --------- --------- ---------
Total other expense ......... (1,391) (2,860) (3,015) (6,038)
--------- --------- --------- ---------
Net Income (Loss) ................. $ 3,716 $ (2,052) $ 9,407 $ (6,846)
========= ========= ========= =========
</TABLE>
See accompanying notes
4
<PAGE>
LUIGINO'S, INC.
Statements of Cash Flows
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Year to Date Ended
----------------------------------
July 19, 1998 July 18, 1999
------------- -------------
<S> <C> <C>
Operating Activities:
Net income (loss) ............................................... $ 9,407 $ (6,846)
Adjustments to net income (loss) provided
by (used in) operating activities -
Depreciation and amortization ............................... 3,932 6,092
Changes in operating assets and liabilities:
Receivables ............................................ 2,622 1,581
Inventories ............................................ (480) (3,906)
Prepaid expenses and other ............................. (96) (551)
Accounts payable and accrued expenses .................. (889) (1,597)
--------- ---------
Net cash provided by (used in) operating activities.. 14,496 (5,227)
--------- ---------
Investing Activities:
Purchases of property, plant and equipment ...................... (25,087) (14,491)
Purchases of other assets ....................................... (474) (396)
--------- ---------
Net cash used in investing activities ............... (25,561) (14,887)
--------- ---------
Financing Activities:
Borrowings on revolving credit agreement ........................ 25,600 30,600
Payments on revolving credit agreement .......................... (16,900) (41,800)
Proceeds from debt .............................................. 11,719 100,000
Repayments of debt .............................................. (4,299) (53,762)
Increase in deferred financing costs ............................ (15) (3,580)
Decrease in restricted cash ..................................... 269 28
Decrease (increase) of notes receivable ......................... (266) 3,338
Distributions to stockholders ................................... (9,433) (15,000)
--------- ---------
Net cash provided by financing activities ........... 6,675 19,824
--------- ---------
Decrease in cash and cash equivalents ................................ (4,390) (290)
Cash and cash equivalents, beginning of period ....................... 5,157 1,193
--------- ---------
Cash and cash equivalents, end of period ............................. $ 767 $ 903
========= =========
Supplemental Information:
Interest paid ................................................... $ 4,060 $ 2,006
========= =========
</TABLE>
See accompanying notes
5
<PAGE>
LUIGINO'S, INC.
Notes to Financial Statements
(Unaudited)
(Dollars in Thousands)
1. Operations:
Luigino's, Inc. (the "Company"), a Minnesota corporation, manufactures food
products primarily under the Michelina's label at production facilities located
in Minnesota and Ohio. Its products, distributed predominately in the North
American market, are sold through independent and chain store retail grocery
outlets.
2. Basis of Presentation:
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments consisting solely of normal
recurring items considered necessary for a fair presentation have been included.
Operating results for the year to date period ended July 18, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending January 2, 2000.
For further information, refer to the audited financial statements and footnotes
thereto included in the Company's Form S-4 for the year ended January 3, 1999.
3. Fiscal Year:
The Company has elected a 52/53 week fiscal year which ends on the Sunday
closest to December 31 and a 16-week first fiscal quarter, 12-week second and
third fiscal quarters and a 12 or 13 week fourth fiscal quarter.
4. Inventories:
Inventories are stated at the lower of first-in, first-out cost or market and
consisted of the following:
January 3, 1999 July 18, 1999
--------------- -------------
Raw Materials........... $ 7,266 $ 8,501
Finished Goods.......... 6,249 7,658
Packaging Supplies...... 2,033 3,295
------- -------
$15,548 $19,454
======= =======
5. Long-Term Debt:
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 amended
and restated credit facility requires the Company to meet certain financial and
non-financial covenants under substantially the same terms and conditions as
required by the previous credit facility.
6
<PAGE>
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.
6. Hibbing Settlement:
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 the 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
convey the property to the IRRRB and pay liquidated 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 non-cash charge of $4,722 for the
impaired assets and $450 for potential liquidated damages and other costs. On
April 27, 1999, the IRRRB and the Company entered into a settlement agreement
under which the Company agreed to convey the property to the IRRRB, and the
IRRRB agreed to pay the Company $550 and release the claims against the Company
for payment of $350 in liquidated damages. This income was partially offset by
additional expenses of $100 required to settle the claim. The Company has
reflected the adjustments to this reserve as Hibbing Settlement on the Statement
of Operations.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion of the financial condition and results of
operations of Luigino's, Inc. (the "Company" or "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
net sales:
<TABLE>
<CAPTION>
Second Fiscal Quarter Ended Year to Date Ended
----------------------------- -----------------------------
July 19, 1998 July 18, 1999 July 19, 1998 July 18, 1999
------------- ------------- ------------- -------------
<S> <C>
Net Sales......................... 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold................ 56.2 56.3 56.9 57.8
----- ----- ----- -----
Gross profit................ 43.8 43.7 43.1 42.2
Operating (Income) Expenses:
Selling and promotional..... 23.6 34.5 22.0 34.1
General and administrative.. 9.9 9.1 10.0 9.3
Hibbing Settlement.......... 0.0 (1.3) 0.0 (0.6)
----- ----- ----- -----
Total operating expenses.... 33.5 42.3 32.0 42.8
Operating income (loss)..... 10.3 1.4 11.1 (0.6)
Other Income (Expense):
Interest expense............ (3.0) (5.0) (3.0) (4.8)
Interest income............. 0.3 0.1 0.3 0.2
Other, net.................. (0.1) 0.0 0.0 0.1
----- ----- ----- -----
Total other expense.... (2.8) (4.9) (2.7) (4.5)
----- ----- ----- -----
Net Income (Loss) ................ 7.5% (3.5)% 8.4% (5.1)%
===== ===== ===== =====
</TABLE>
Second Fiscal Quarter 1999 compared to Second Fiscal Quarter 1998
Net Sales. The following table sets forth Luigino's net sales by product
line and the percentage change from the prior period:
<TABLE>
<CAPTION>
Second Fiscal Quarter Ended
--------------------------------- Percentage
July 19, 1998 July 18, 1999 Change
------------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Green Label........................... $26,345 $25,836 (1.9)%
Red Label............................. 7,338 7,787 6.1
Signature............................. - 9,444 100.0
Black Label........................... 6,395 6,926 8.3
Blue Label............................ 7,312 5,550 (24.1)
Snacks................................ 1,705 3,694 116.7
Co-Pack............................... 268 - (100.0)
------- ------- ------
$49,363 $59,237 20.0%
======= ======= ======
</TABLE>
8
<PAGE>
Total net sales for the second quarter of 1999 increased 20.0% or $9.8
million, to $59.2 million from $49.4 million in the second quarter of 1998. The
Signature product line was launched in December 1998 resulting in an increase in
net sales of $9.4 million in the second quarter of 1999. Red Label and Black
Label net sales both increased $0.5 million. Snacks net sales increased $2.0
million as a result of new product introductions. These increases were partially
offset by a decrease in Green Label net sales of $0.5 million, a decrease in
Blue Label net sales of $1.8 million as a result of distribution losses on the
west coast and the elimination of co-pack sales. The elimination of co-pack
sales was a result of the expiration of our co-pack agreement with Pillsbury in
the first quarter of 1998.
Canadian net sales contributed 8.8%, or $5.2 million, to our net sales for
the second quarter of 1999 compared to 9.8%, or $4.8 million, for the second
quarter of 1998. Canadian sales have benefited from overall growth in the frozen
entree market, new product introduction and continued advertising.
Volume increases were recorded in Red Label, Black Label and Snacks and
through introduction of the Signature line. These increases were partially
offset by volume decreases in Green Label, Blue Label and co-pack. Price
increases in Green Label and Snacks were partially offset by price decreases in
Green Label, Red Label, Black Label and Blue Label. 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>
Second Fiscal Quarter Ended
July 18, 1999 compared to July 19, 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.......................... (2.4)% 0.5% (1.9)%
Red Label............................ 8.5 (2.4) 6.1
Signature............................ 100.0 0.0 100.0
Black Label.......................... 11.2 (2.9) 8.3
Blue Label........................... (21.7) (2.4) (24.1)
Snacks............................... 84.1 32.6 116.7
Co-Pack.............................. (100.0) 0.0 (100.0)
------ ---- ------
19.7% 0.3% 20.0%
====== ==== ======
</TABLE>
Gross Profit. Gross profit in the second quarter of 1999 increased 19.6%,
or $4.3 million, from $21.6 million in the second quarter of 1998. The increase
in gross profit is a result of the increase in overall sales levels. The gross
margin in the second quarter of 1999 decreased to 43.7% of net sales from 43.8%
in the second quarter of 1998.
Selling and Promotional Expenses. Selling and promotional expenses for the
second quarter of 1999 increased 75.9%, or $8.8 million, to $20.4 million from
$11.6 million in the second quarter of 1998. The increase resulted primarily
from a $2.4 million increase in slotting spending related to Signature and Snack
product line introductions, a $3.7 million increase in advertising and a $2.7
million increase in trade promotion. Slotting expenditures are paid to retailers
to obtain shelf space for additional items.
General and Administrative Expenses. General and administrative expenses
for the second quarter of 1999 increased 10.6%, or $0.5 million, to $5.4 million
from $4.9 million in the second quarter of 1998. The increase was a result of
increased salaries and related costs of $0.4 million, increased travel and
related expenses of $0.1 million, increased market research and professional
fees of $0.3 million, increased outside finished goods storage of $0.1 million
and increased amortization and depreciation expense of $0.1 million, partially
offset by a decrease in the bonus accrual of $0.5 million.
Hibbing Settlement. During the second quarter of 1999, we reversed charges
of $0.8 million recorded in fiscal year 1998 related to the November 1998 claim
made by the Iron Range Resources and
9
<PAGE>
Rehabilitation Board (IRRRB). 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
was partially offset by additional expenses of $0.1 million required to settle
the claim.
Operating Income. Operating income for the second quarter of 1999 decreased
84.3%, or $4.3 million, to $0.8 million from $5.1 million in the second quarter
of 1998. As a percentage of net sales, operating income decreased to 1.4% of net
sales in the second quarter of 1999 compared to 10.3% in the second quarter of
1998. The decrease resulted from the $8.8 million increase in selling and
promotional expenses, and the $0.5 million increase in general and
administrative expenses, offset by the $4.2 million increase in gross profit and
the $0.8 million income from the Hibbing settlement.
Interest Expense. Interest expense for the second quarter of 1999 increased
98.7%, or $1.5 million, to $3.0 million from $1.5 million in the second quarter
of 1998. The increase was a result of the senior debt offering interest of $2.3
million, partially offset by the decrease in the interest related to the debt
extinguished by the offering proceeds.
Interest Income. Interest income was $0.1 million for the second quarter of
1999 and the second quarter of 1998.
Net Income (Loss). For the reasons stated above, net loss for the second
quarter of 1999 decreased 155.2%, or $5.8 million, to $(2.1) million as compared
to net income of $3.7 million in the second quarter of 1998. As a percentage of
net sales, net income (loss) decreased to (3.5)% of net sales in the second
quarter of 1999 compared to 7.5% in the first quarter of 1998.
Twenty-eight weeks ended July 18, 1999 compared to the twenty-eight weeks ended
July 19, 1998
Net Sales. The following table sets forth Luigino's net sales by product
line and the percentage change from the prior period:
Year to Date Ended
--------------------------------- Percentage
July 19, 1998 July 18, 1999 Change
------------- ------------- ----------
(Dollars in thousands)
Green Label.... $ 57,124 $ 61,019 6.8%
Red Label...... 19,008 19,169 0.8
Signature...... - 17,592 100.0
Black Label.... 13,824 15,495 12.1
Blue Label..... 16,586 13,913 (16.1)
Snacks......... 4,772 7,695 61.3
Co-Pack........ 1,006 - (100.0)
-------- -------- ------
$112,320 $134,883 20.1%
======== ======== ======
Total net sales for the twenty-eight weeks ended July 18, 1999 increased
20.1%, or $22.6 million, to $134.9 million from $112.3 million for the
twenty-eight weeks ended July 19, 1998. The Signature product line was launched
in December 1998 resulting in an increase in net sales of $17.6 for the
twenty-eight weeks ended July 18, 1999. Green Label net sales increased $3.9
million due to an increase in family size products net sales and continued
growth in both Canada and the U.S. Black Label net sales increased $1.7 million
as a result of marketing efforts to reposition this product line. Snack net
sales increased $2.9 million as a result of new product introductions. These
increases were partially offset by a decrease in Blue Label net sales of $2.7
million as a result of distribution losses on the west coast and the elimination
of co-pack sales. The elimination of co-pack sales was a result of the
expiration of our co-pack agreement with Pillsbury in the first quarter of 1998.
Canadian net sales contributed 11.1%, or $15.0 million, to our net sales
for the twenty-eight weeks ended July 18, 1999 compared to 10.1%, or $11.4
million, for the twenty-eight weeks ended July 19, 1998. Canadian sales
10
<PAGE>
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, Black Label and
Snacks and through introduction of the Signature line. These increases were
partially offset by volume decreases in Blue Label and co-pack. Price decreases
in Green Label, Red Label, Black Label and Blue Label 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:
Year to Date Ended
July 18, 1999 compared to July 19, 1998
------------------------------------------------------------
Percentage Percentage
Increase (Decrease) Increase (Decrease) Percentage
in Sales due to in Sales due to Change
Volume Change Price Change in Sales
------------------- ------------------- -----------
Green Label..... 6.9% (0.1)% 6.8%
Red Label....... 0.9 (0.1) 0.8
Signature....... 100.0 0.0 100.0
Black Label..... 16.6 (4.5) 12.1
Blue Label...... (11.6) (4.5) (16.1)
Snacks.......... 39.3 22.0 61.3
Co-Pack......... (100.0) 0.0 (100.0)
------ ---- ------
20.4% (0.3)% 20.1%
====== ==== ======
Gross Profit. Gross profit for the twenty-eight weeks ended July 18, 1999
increased 17.6%, or $8.5 million, from $48.4 million for the twenty-eight weeks
ended July 19, 1998. The increase in gross profit is a result of the increase in
overall sales levels. The gross margin in the twenty-eight weeks ended July 18,
1999 decreased to 42.2% of net sales from 43.1% for the twenty-eight weeks ended
July 19, 1998.
Selling and Promotional Expenses. Selling and promotional expenses for the
twenty-eight weeks ended July 18, 1999 increased 86.2%, or $21.3 million, to
$46.0 million from $24.7 million for the twenty-eight weeks ended July 19, 1998.
The increase resulted primarily from a $11.4 million increase in slotting
spending related to Signature and Snack product line introductions, a $4.1
million increase in advertising expenses and a $4.1 million increase in trade
promotion.
General and Administrative Expenses. General and administrative expenses
for the twenty-eight weeks ended July 18, 1999 increased 10.9%, or $1.2 million,
to $12.5 million from $11.3 million for the twenty-eight weeks ended July 19,
1998. The increase was a result of increased salaries and related costs of $0.8
million, increased travel and related expenses of $0.3 million, increased
outside finished goods storage of $0.2 million, increased marketing research and
professional fees of $0.4 million and increased amortization and depreciation
expense of $0.2 million, partially offset by a decrease in the bonus accrual of
$0.8 million.
Hibbing Settlement. During the second quarter of 1999, we reversed charges
of $0.8 million recorded in fiscal year 1998 related to the November 1998 claim
made by the IRRRB. 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 (Loss). Operating loss for the twenty-eight weeks ended
July 18, 1999 decreased 106.5%, or $13.2 million, to ($0.8) million as compared
to operating income of $12.4 million for the twenty-eight weeks ended July 19,
1998. As a percentage of net sales, operating income (loss)
11
<PAGE>
decreased to (0.6)% of net sales for the twenty-eight weeks ended July 18, 1999
compared to 11.1% for the twenty-eight weeks ended July 19, 1998. The decrease
resulted from the $21.3 million increase in selling and promotional expenses,
and the $1.2 million increase in general and administrative expenses, offset by
the $8.5 million increase in gross profit and the $0.8 million income from the
Hibbing Settlement.
Interest Expense. Interest expense for the twenty-eight weeks ended July
18, 1999 increased 92.9%, or $3.1 million, to $6.4 million from $3.3 million for
the twenty-eight weeks ended July 19, 1998. The increase was a result of the
senior debt offering interest of $4.5 million, partially offset by the decrease
in the interest related to the debt extinguished by the offering proceeds.
Interest Income. Interest income was $0.2 million for the twenty-eight
weeks ended July 18, 1999 and $0.3 million for the twenty-eight weeks ended July
19, 1998.
Other Income. Other income was $0.2 million for the twenty-eight weeks
ended July 18, 1999 and $0.1 million for the twenty-eight weeks ended July 19,
1998. Other income resulted from cash discounts earned from vendors offset by
miscellaneous state franchise and Canadian taxes.
Net Income (Loss). For the reasons stated above, net loss for the
twenty-eight weeks ended July 18, 1999 decreased 172.8%, or $16.2 million, to
$(6.8) million as compared to net income of $9.4 million for the twenty-eight
weeks ended July 19, 1998. As a percentage of net sales, net income (loss)
decreased to (5.1)% of net sales for the twenty-eight weeks ended July 18, 1999
compared to 8.4% for the twenty-eight weeks ended July 19, 1998.
Liquidity and Capital Resources
We used $5.2 million of cash from operating activities for the twenty-eight
weeks ended July 18, 1999 compared to generating $14.5 million for the
twenty-eight weeks ended July 19, 1998. The increase in cash used resulted from
decreased net earnings due to slotting expenses related to new product
introductions, higher interest expense and to increased working capital
requirements for 1999.
Investing activities used $14.9 million of cash for the twenty-eight weeks
ended July 18, 1999 and $25.6 million for the twenty-eight weeks ended July 19,
1998. The twenty-eight weeks ended July 18, 1999 included $5.9 million in
buyouts of equipment under operating leases and $8.6 million in machinery and
equipment purchases.
Financing activities generated $19.8 million of cash for the twenty-eight
weeks ended July 18, 1999 compared to $6.7 million for the twenty-eight weeks
ended July 19, 1998. The twenty-eight weeks ended July 18, 1999 includes a
$100.0 million increase in debt related to the senior subordinated notes, offset
by a $65.0 million reduction in other debt, a $3.6 million increase in deferred
financing costs, a $3.3 million shareholder notes receivable collection and a
$15.0 million increase in distribution of earnings previously taxed to the
shareholders.
1999 Planned Expenditures and Buyout of Operating Leases. As a part of our
strategic growth plan, we incurred approximately $4.5 million for advertising to
build brand awareness and $14.9 million for slotting expenses for the
twenty-eight weeks ended July 18, 1999. Our management has discretion on the
amount and timing of advertising expenditures and whether to continue them. We
are planning to incur approximately $3.1 million in additional slotting expenses
in 1999 to introduce new products and increase product penetration. We intend to
finance these expenditures through internally generated funds and borrowings
under our revolving credit agreement.
We anticipate continuing to elect Subchapter S treatment under the U.S.
Internal Revenue Code. Consequently, we will continue to make quarterly
distributions to our shareholders 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 our future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. Based
upon the current level of operations, we believe that cash flow from operations
and available cash, together with available borrowings under our
12
<PAGE>
credit agreement, will be adequate to meet our future liquidity needs for at
least the next several years. We 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 our 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 us to service our indebtedness,
or to fund our other liquidity needs. In addition, there can be no assurance
that we will be able to effect any such refinancing on commercially reasonable
terms or at all.
Year 2000 Issues
State of Readiness. Luigino's has a Year 2000 project team comprised of key
members of our management information systems department and key management
personnel. The project team has analyzed our computer systems for Year 2000
compliance, and as a result of that analysis, we have installed a state of the
art Enterprise Resource Planning ("ERP") software package to replace our current
financial accounting package, which is not Year 2000 compliant. The new software
will also provide us with integration of capabilities currently available on our
system but not in an integrated package, including production planning and
manufacturing control, materials management, logistics and distribution, plant
maintenance, and treasury management and international accounting capabilities.
We have completed our review of non-information systems, such as
manufacturing and storage systems, which rely on embedded chips or similar
devices. We are working with our key suppliers to ensure that equipment and
systems used in the delivery of products and services to us are Year 2000
compliant and that they are identifying and addressing all issues with their
equipment and systems to ensure that they properly function for the year 2000.
Currently, we have received adequate assurances from suppliers representing
approximately 67% of our purchases that their equipment and systems used in the
delivery of products and services to us are Year 2000 compliant. It is possible
that computer systems or software products of our suppliers may not accept input
of, store, manipulate and output dates before the Year 2000 or thereafter
without error or interruption.
Costs Associated with Year 2000 Compliance. The total cost of conversion to
the new ERP system, including equipment, software, consulting and training, was
$2.0 million, which was funded through operating cash flows. The expenses and
liabilities to which we may become subject as a result of date-handling problems
of our suppliers and customers, and remedying problems that are discovered,
cannot be estimated at this time to any degree of accuracy.
Risks Associated with Year 2000 Issues. We believe our exposure with
respect to the Year 2000 issues of our suppliers and customers is minimal. There
can be no assurance, however, that we will identify all date-handling problems
of our suppliers and customers in advance of their occurrence, or that we will
be able to successfully remedy problems that are discovered, and our efforts to
identify and address such problems, or the expenses or liabilities to which we
may become subject as a result of such problems, could have a material adverse
effect on Luigino's.
Contingency Plans. We have completed installation of the enterprise
resource planning system. We intend to work with non-compliant current vendors
and suppliers as necessary to prevent interruption of our business, and to
identify alternate vendors and service providers where necessary.
Cautionary Statement
This Form 10-Q contains forward-looking statements within the meaning of
federal securities laws. These statements include statements regarding intent,
belief or current expectations of the Company and its management. These
forward-looking statements are not guarantees of future performance and involve
a number of risks and uncertainties that may cause the Company's actual results
to differ materially from the results discussed in these statements. The
Company's forward-looking statements are subject to risks, uncertainties and
assumptions including, among other things: general economic and business
conditions; the Company's expectations and estimates concerning future financial
performance, financing plans and the impact of competition; anticipated trends
in the Company's industry; and other risks and uncertainties detailed from time
to time in the Company's filings with the Securities and Exchange Commission,
including Exhibit 99 to this Form 10-Q.
13
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Inflation
We believe that the relatively moderate rate of inflation over the past few
years has not had a significant impact on our sales or profitability.
Market Risk Considerations
Credit Risk. Financial instruments which potentially subject Luigino's to
significant concentrations of credit risk consist primarily of cash and trade
accounts receivable. We maintain cash and cash equivalents and other financial
instruments with various financial institutions. Our policy is to limit exposure
to any one institution. When we formulate our investment strategy we consider
our periodic evaluations of the relative credit standing of these financial
institutions. Our concentrations of credit risk for trade accounts receivable
are limited due to the large number of entities comprising our customer base. As
of July 18, 1999, we had an exclusive distribution agreement with J.M. Schneider
Corporation in Canada which accounted for 11.1% of our net sales for the twenty-
eight weeks ended July 18, 1999. We do not currently foresee a credit risk with
this distributor.
Interest Rate Swap. Interest rate swaps are entered into as a hedge of
underlying debt instruments to effectively change the characteristics of the
interest rate without actually changing the debt instrument. Our exposure to
market risk for change in interest rates relates primarily to our long-term debt
obligations. At July 18, 1999, the total notional amount of our interest rate
swap agreement was $25.0 million.
PART II - OTHER INFORMATION
Item 5. Other Information
In connection with the "safe harbor" provisions of the Private Securities
Litigation and Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in forward-looking statements of the
Company made by, or on behalf of the Company. See Exhibit 99 to this report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
10.1 Amendment No. 3 to Amended and Restated Credit
Agreement, dated July 16, 1999, The First National Bank
of Chicago, as Agent, and the lenders named therein.
10.2 Amendment No. 4 to Amended and Restated Credit
Agreement, dated July 17, 1999, The First National Bank
of Chicago, as Agent, and the lenders named therein.
27.1 Financial Data Schedule
99.1 Cautionary Statements for Purposes of the "Safe Harbor"
provisions of the Private Securities Litigation Reform
Act of 1995
(b) Reports of Form 8-K
There were no reports on Form 8-K filed for the twenty-eight weeks
ended July 18, 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Date: August 25, 1999 By: /s/ Joel Kozlak
---------------------------------
Joel C. Kozlak
Chief Financial Officer (principal
financial and accounting officer)
15
<PAGE>
Exhibit 10.1
AMENDMENT NO. 3
This Amendment (this "Amendment") is made as of July 16, 1999 by and among
The First National Bank of Chicago, individually and as agent ("Agent"), the
other financial institutions signatory hereto and Luigino's, Inc., a Minnesota
corporation (the "Borrower").
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 and the undersigned Lenders wish to amend certain
provisions of the Credit Agreement 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 2
below:
(a) Section 6.27 of the Credit Agreement is amended in its
entirety to read as follows:
6.27. Financial Covenants. The Borrower shall not permit:
6.27.1 Cash Flow Leverage Ratio. As of any Quarterly
Measurement Date, the Cash Flow Leverage Ratio to be greater
than the ratio specified in the following table for any
Quarterly Measurement Date occurring in the specified
period:
Period Ratio
------ -----
First fiscal quarter of fiscal year 1999 4.80:1
Second fiscal quarter of fiscal year 1999 5.50:1
Third fiscal quarter of fiscal year 1999 5.75:1
Fourth fiscal quarter of fiscal year 1999 6.25:1
First fiscal quarter of fiscal year 2000 6.00:1
Second fiscal quarter of fiscal year 2000 5.50:1
<PAGE>
Third fiscal quarter of fiscal year 2000 5.00:1
Beginning of fourth fiscal quarter of Fiscal 4.25:1
year 2000 and all times thereafter
6.27.2 Interest Coverage Ratio. As of any Quarterly
Measurement Date, the Interest Coverage Ratio to be less
than the ratio specified in the following table for any
Quarterly Measurement Date occurring in the specified
period:
Period Ratio
------ -----
First fiscal quarter of fiscal year 1999 1.50:1
Beginning of second fiscal quarter of fiscal 1.00:1
year 1999 through third Quarterly Measurement
Date of fiscal year 1999
Fourth fiscal quarter of fiscal year 1999 0.50:1
First fiscal quarter of fiscal year 2000 0.75:1
Second fiscal quarter of fiscal year 2000 1.25:1
Third fiscal quarter of fiscal year 2000 1.75:1
Fourth fiscal quarter of fiscal year 2000 2.25:1
Beginning of first fiscal quarter of fiscal 2.50:1
year 2001 and all times thereafter
6.27.3 Fixed Charge Coverage Ratio. As of any Quarterly
Measurement Date, the Fixed Charge Coverage Ratio to be less
than the ratio specified in the following table for any
Quarterly Measurement Date occurring in the specified
period:
Period Ratio
------ -----
First fiscal quarter of fiscal year 1999 1.25:1
Beginning of second fiscal quarter of fiscal 1.00.1
year 1999 through first Quarterly Measurement
Date of fiscal year 2000
Beginning of second fiscal quarter of fiscal 1.25:1
year 2000 through third Quarterly
2
<PAGE>
Measurement Date of fiscal year 2000
Beginning of fourth fiscal quarter of fiscal 1.50:1
year 2000 and all times thereafter
(b) Schedule 1.1 of the Credit Agreement is amended in its
entirety to read as set forth on Schedule 1.1 hereto.
2. Effective Time. This Amendment shall be deemed effective upon the
execution and delivery hereof by the Borrower, the Agent and the Required
Lenders (without respect to whether it has been executed and delivered by
all Lenders.).
3. 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
such counterparts shall constitute one and the same instrument.
4. 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.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
and year first above written.
THE FIRST NATIONAL BANK OF
CHICAGO, individually and as Agent
By: /s/ Lisa Whatley
-----------------------------------
Its: Vice President
-----------------------------------
3
<PAGE>
U.S. Bank National Association (f/k/a/
First Bank National Association)
By: /s/ William Umscheid
-----------------------------------
Its: Vice President
-----------------------------------
Luigino's, Inc.
By: /s/ Joel C Kozlak
-----------------------------------
Its: Chief Financial Officer
-----------------------------------
4
<PAGE>
SCHEDULE 1.1
MARGINS AND PERCENTAGES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Applicable Level Level Level Level Level Level Level Level Level
Margin I II III IV V VI VII VIII IX
Status Status Status Status Status Status Status Status Status
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Eurodollar 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00%
Rate
- -----------------------------------------------------------------------------------------------
Alternate 0.0% 0.0% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75%
Base Rate
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Applicable Level Level Level Level Level Level Level Level Level
Fee Rate I II III IV V VI VII VIII IX
Status Status Status Status Status Status Status Status Status
- -----------------------------------------------------------------------------------------------
Commitment 0.25% 0.30% 0.30% 0.375% 0.375% 0.50% 0.50% 0.50% 0.55%
Fee
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Applicable Level Level Level Level Level Level Level Level Level
Dividend I II III IV V VI VII VIII IX
Percentage Status Status Status Status Status Status Status Status Status
- -----------------------------------------------------------------------------------------------
Dividend 50% 40% 30% 25% 0% 0% 0% 0% 0%
Percentage
- -----------------------------------------------------------------------------------------------
</TABLE>
For the purposes of this Schedule, the following terms have the following
meanings, subject to the final paragraph of this Schedule:
"Level I Status" exists at any date if, as of the most recent Quarterly
Measurement Date (or, with respect to the determination of the Applicable
Dividend Percentage, as of the last day of the most recently ended fiscal year
of the Borrower for which an ADP Certificate has been received by the Agent),
the Cash Flow Leverage Ratio is less than 2.0 to 1.0.
"Level II Status" exists at any date if, as of the most recent Quarterly
Measurement Date (or, with respect to the determination of the Applicable
Dividend Percentage, as of the last day of the most recently ended fiscal year
of the Borrower for which an ADP Certificate has been received by the Agent),
(i) the Borrower has not qualified for Level I Status and (ii) the Cash Flow
Leverage Ratio is less than 2.5 to 1.0.
5
<PAGE>
"Level III Status" exists at any date if, as of the most recent Quarterly
Measurement Date (or, with respect to the determination of the Applicable
Dividend Percentage, as of the last day, of the most recently ended fiscal year
of the Borrower for which an ADP Certificate has been received by the Agent),
(i) the Borrower has not qualified for Level I Status or Level II Status and
(ii) the Cash Flow Leverage Ratio is less than 3.0 to 1.0.
"Level IV Status" exists at any date if, as of the most recent Quarterly
Measurement Date (or, with respect to the determination of the Applicable
Dividend Percentage, as of the last day of the most recently ended fiscal year
of the Borrower for which an ADP Certificate has been received by the Agent),
(i) the Borrower has not qualified for Level I Status, Level II Status or Level
III Status and (ii) the Cash Flow Leverage Ratio is less than 3.5 to 1.0.
"Level V Status" exists at any date if, as of the most recent Quarterly
Measurement Date (or, with respect to the determination of the Applicable
Dividend Percentage, as of the last day of the most recently ended fiscal year
of the Borrower for which an ADP Certificate has been received by the Agent),
(i) the Borrower has not qualified for Level I Status, Level II Status, Level
III Status or Level IV Status and (ii) the Cash Flow Leverage Ratio is less than
4.0 to 1.0.
"Level VI Status" exists at any date if, as of the most recent Quarterly
Measurement Date (or, with respect to the determination of the Applicable
Dividend Percentage, as of the last day of the most recent ended fiscal year of
the Borrower for which an ADP Certificate has been received by the Agent), (i)
the Borrower has not qualified for Level I Status, Level II Status, Level III
Status, Level IV Status or Level V Status and (ii) the Cash Flow Leverage Ratio
is less than 4.75 to 1.0.
"Level VII Status" exists at any date if, as of the most recent Quarterly
Measurement Date (or, with respect to the determination of the Applicable
Dividend Percentage, as of the last day of the most recently ended fiscal year
of the Borrower for which an ADP Certificate has been received by the Agent),
(i) the Borrower has not qualified for Level I Status, Level II Status, Level
III Status, Level IV Status, Level V Status or Level VI Status and (ii) the Cash
Flow Leverage Ratio is less than 5.25 to 1.0.
"Level VIII Status" exists at any date if, as of the most recent Quarterly
Measurement Date (or, with respect to the determination of the Applicable
Dividend Percentage, as of the last day of the most recently ended fiscal year
of the Borrower for which an ADP Certificate has been received by the Agent),
(i) the Borrower has not qualified for Level I Status, Level II Status, Level
III Status, Level IV Status, Level V Status, Level VI Status or Level VII Status
and (ii) the Cash Flow Leverage Ratio is less than 5.75 to 1.0.
"Level IX Status" exists at any date if the Borrower has not qualified for
Level I Status, Level II Status, Level III Status, Level IV Status, Level V
Status, Level VI Status, Level VII Status or Level VIII Status.
"Status" means either Level I Status, Level II Status, Level III Status,
Level IV Status, Level V Status, Level VI Status, Level VII Status, Level VIII
Status or Level IX Status.
The Applicable Margin and the Applicable Fee Rate shall be determined in
accordance with the foregoing table based on the Borrower's Status as reflected
in the then most recent
6
<PAGE>
Compliance Certificate. Adjustments, if any, to the Applicable Margin or the
Applicable Fee Rate shall be effective five Business Days after the date on
which the Agent receives the applicable Compliance Certificate; provided, that
if such Compliance Certificate, together with the financial statements to which
such Compliance Certificate relates, is not delivered when due under Section
6.1(c), then the Applicable Margin and the Applicable Fee Rate shall be the
highest Applicable Margin and Applicable Fee Rate set forth in the foregoing
table from and after the date on which such Compliance Certificate became due
under Section 6.1(c) until five Business Days after such Compliance Certificate
and financial statements are so delivered.
The Applicable Dividend Percentage shall be determined in accordance with
the foregoing table based on the Borrower's Status as reflected in the then most
recent ADP Compliance Certificate. Adjustments, if any, to the Applicable
Dividend Percentage shall be effective five Business Days after the date on
which the Agent receives the applicable ADP Compliance Certificate; provided,
that if such ADP Compliance Certificate, together with the financial statements
to which such ADP Compliance Certificate relates, is not delivered when due
under Section 6. 1 (c), then the Applicable Dividend Percentage shall be 0% from
and after the date on which such ADP Compliance Certificate became due under
Section 6.1(c) until five Business Days after such ADP Compliance Certificate
and financial statements are so delivered.
7
<PAGE>
Exhibit 10.2
AMENDMENT NO. 4
This Amendment (this "Amendment") is made as of July 17, 1999 by and among
The First National Bank of Chicago, individually and as agent ("Agent"), the
other financial institutions signatory hereto and Luigino's, Inc., a Minnesota
corporation (the "Borrower").
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 and the undersigned Lenders wish to amend certain
provisions of the Credit Agreement 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 2 below,
Section 6.27.1 of the Credit Agreement is amended in its entirety to read as
follows effective as of July 17, 1999:
6.27. Financial Covenants. The Borrower shall not permit:
6.27.1 Cash Flow Leverage Ratio. As of any Quarterly Measurement
Date, the Cash Flow Leverage Ratio to be greater than the ratio
specified in the following table for any Quarterly Measurement Date
occurring in the specified period:
Period Ratio
------ -----
First fiscal quarter of fiscal year 1999 4.80:1
Second fiscal quarter of fiscal year 1999 6.25:1
Third fiscal quarter of fiscal year 1999 6.25:1
Fourth fiscal quarter of fiscal year 1999 6.25:1
First fiscal quarter of fiscal year 2000 6.00:1
Second fiscal quarter of fiscal year 2000 5.50:1
Third fiscal quarter of fiscal year 2000 5.00:1
<PAGE>
Beginning of fourth fiscal quarter of fiscal 4.25:1
year 2000 and all times thereafter
2. Effective Time. This Amendment shall be deemed effective as of the date
hereof upon the execution and delivery hereof by the Borrower, the Agent and the
Required Lenders (without respect to whether it has been executed and delivered
by all Lenders).
3. 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 such
counterparts shall constitute one and the same instrument.
4. 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.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
and year first above written.
THE FIRST NATIONAL BANK OF
CHICAGO, individually and as Agent
By: /s/ Lisa Whatley
----------------------------------
Its: Vice President
----------------------------------
2
<PAGE>
U.S. Bank National Association (f/k/a/
First Bank National Association)
By: /s/ William Umscheid
----------------------------------
Its: Vice President
----------------------------------
Luigino's, Inc.
By: /s/ Joel C Kozlak
----------------------------------
Its: Chief Financial Officer
----------------------------------
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TWENTY-EIGHT
WEEKS ENDED JULY 18, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> APR-26-1999
<PERIOD-END> JUL-18-1999
<CASH> 903
<SECURITIES> 0
<RECEIVABLES> 18,273
<ALLOWANCES> 145
<INVENTORY> 19,454
<CURRENT-ASSETS> 40,215
<PP&E> 114,365
<DEPRECIATION> 29,985
<TOTAL-ASSETS> 136,117
<CURRENT-LIABILITIES> 27,128
<BONDS> 120,573
0
0
<COMMON> 1
<OTHER-SE> (11,585)
<TOTAL-LIABILITY-AND-EQUITY> 136,117
<SALES> 134,883
<TOTAL-REVENUES> 134,883
<CGS> 77,970
<TOTAL-COSTS> 77,970
<OTHER-EXPENSES> 57,721
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,428
<INCOME-PRETAX> (6,846)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,846)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,846)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99
LUIGINO'S, INC.
Report on Form 10-Q
July 18, 1999
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.
We have substantial indebtedness other than our senior subordinated notes, which
may affect our ability to make scheduled payments on those notes, to redeem them
if we are required to do so, and to pay the principal amounts of the notes when
due.
Luigino's is highly leveraged. On July 18, 1999, after giving effect to the
sale of the senior subordinated notes we sold in a private offering ("Old
Notes"), the initial borrowings under our new credit facility and the
application of the proceeds from those transactions, we had total indebtedness
of approximately $120.6 million and a shareholders' deficit of $11.6 million as
of July 18, 1999. Of the $120.6 million of total indebtedness, $100.0 million
consisted of the Old Notes. In addition, we may incur additional indebtedness in
the future. The degree to which we are leveraged could prevent us from
repurchasing all of the senior subordinated notes holders tender to us upon the
occurrence of a change of control of Luigino's.
Our ability to make scheduled payments of principal of, or to pay the
interest and any other payments on, or to refinance, our indebtedness, including
the senior subordinated notes, or to fund our planned capital expenditures will
depend on our future performance, which, to some extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control. We 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 our
business will not generate sufficient cash flow from operations, or that we will
not have sufficient credit available in the future, to enable us to service our
indebtedness, including the senior subordinated notes, or to fund our other
liquidity needs. In addition, there is a risk that we will not be able to
refinance our 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:
we may have more difficulty satisfying our obligations on the notes,
we will be increasingly vulnerable to general adverse economic and industry
conditions,
we may be have more difficulty obtaining additional financing to fund
future working capital, capital expenditures and other general corporate
requirements,
we may need to dedicate a substantial portion of our cash flow from
operations to the payment of principal of, and interest on, our
indebtedness, thereby reducing the availability of such cash flow to
<PAGE>
fund working capital, capital expenditures, research and development or
other general corporate purposes,
we may have less flexibility in planning for, or reacting to, changes in
our business and the industry, and
we may be at competitive disadvantage vis-a-vis less leveraged competitors.
In addition, the indenture relating to the senior subordinated notes and our
bank credit facility contain financial and other restrictive covenants that
limit our ability to, among other things, borrow additional funds. If we do not
comply with these covenants, we would be in default, and if the default is not
cured or waived, our business could be adversely affected.
The senior subordinated notes are subordinated to our other indebtedness, which
also may affect our ability to make payments on the notes.
The notes are and will be subordinated in right of payment to all of our
current and future senior debt. However, the indenture prohibits us 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 our 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 our 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 our 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 our
subordinated indebtedness that is deemed to be of the same class as the notes,
and potentially with all of our 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 our senior debt.
Restrictions imposed under our bank credit facility also may affect our ability
to make payments on the senior subordinated notes.
Our bank credit facility contains, among other things, financial and other
covenants, including covenants requiring us to maintain specified financial
ratios, restricting our ability to incur indebtedness or to create or suffer to
exist liens, and restricting the amount of capital expenditures which we may
incur in any fiscal year. Compliance with these provisions may limit our ability
to expand our business, and our ability to comply with these provisions and to
repay or refinance the bank credit facility may be affected by events beyond our
control. If we fail to make any required payment under the bank credit facility
or fail 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 our other
indebtedness. In addition, we 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 our other indebtedness. If the lender
under the bank credit facility accelerates the maturity of that indebtedness,
there is a risk that we will not have sufficient resources to satisfy our
obligations under the bank credit facility and our other indebtedness, including
the notes.
<PAGE>
Our business is subject to the general risks of the food industry and to
significant competition from larger, well-established companies.
We are 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. We compete
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
we will not be able to compete successfully with these other companies.
Competitive pressure or other factors could cause our products to lose market
share or result in significant price erosion, which could have a material
adverse effect on our business.
Fluctuations in the cost of our ingredients may adversely affect our business.
We use large quantities of ingredients and packaging materials in our
frozen entrees. As a result, we are 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,
we may not be in a position to raise the prices of our frozen food entrees
sufficiently to pass all such costs on to the consumer. In some cases, we enter
into long-term supply contracts that fix the price for raw materials, but such
contracts do not cover all of our ingredients and we may be exposed to cost
increases after a contract expires. Any future material increase in the price of
ingredients for our entrees could have a material adverse effect on Luigino's.
Claims made against us based on product liability could have a material adverse
effect on our business.
As a producer and marketer of food products, we are subject to the risk of
claims for product liability. We maintain product liability insurance, but there
is a risk that our coverage will not be sufficient to insure against all claims
which may be brought against us, or that we 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 us exceeding our
insurance coverage, it could have a material adverse effect on our 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>
We make our sales through independent food brokers, and our ability to maintain
these relationships is important to our business.
We rely on non-affiliated food brokers to sell our products. The success of
our business depends, in large part, upon the maintenance of a strong
distribution network. We grant food brokers revocable rights to sell Luigino's
products in exclusive territories and they receive as compensation a dollar
amount per case sold. If we were required to obtain additional or alternative
distribution and food brokerage agreements or arrangements in the future, there
can be no assurance we will be able to do so on satisfactory terms or in a
timely manner. Inability to enter into satisfactory brokerage agreements may
inhibit our ability to implement our business plan or to establish markets
necessary to develop our products successfully. No single broker group accounts
for more than 10.0% of our sales.
Luigino's is effectively controlled by one shareholder, who can make
substantially all decisions concerning our 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, our 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 our 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 our status as an S corporation for federal income tax purposes could
materially affect our income.
Luigino's has elected to be an S corporation under the IRS code.
Accordingly, our shareholders are directly subject to tax on their respective
proportionate shares of our taxable income for federal and some state income tax
purposes. If someone successfully challenges our status as an S corporation, we
could be required to pay federal and state income taxes, plus interest and
possibly penalties, on our 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 our founder or other key personnel could adversely affect our
business.
Our success depends largely upon the continued services of our executive
officers and key management and other personnel. If we lose the services of one
or more of our current executive officers or other key employees, it could have
a material adverse effect on our business, results of operations and financial
condition. In particular, we rely on our founder, Jeno Paulucci, and our
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
1999, subject to earlier termination or future extensions. We maintain key-man
insurance policies on both Mr. Paulucci and Mr. Bubar, the proceeds of which are
payable to Luigino's.
<PAGE>
We are subject to risks related to Year 2000 issues.
The computer systems or software products of our suppliers and customers
may not accept input of, store, manipulate or output dates before the Year 2000
or thereafter without error or interruption. There is a risk that we will be
unable to identify all date-handling problems of our suppliers and customers in
advance of their occurrence, or that we will be unable to successfully remedy
problems that are discovered. We are requesting assurances from our significant
suppliers and customers that their systems are Year 2000 compliant or that they
are identifying and addressing problems in their computer systems to upgrade
them for the Year 2000. The expense of our efforts to identify and address such
problems, or the expenses or liabilities to which we may become subject as a
result of such problems, could have a material adverse effect on Luigino's.
