<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 October 10, 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 2038 59-3015985
(State of other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common 1,000
- ------------------------------------ ----------------------------------
(Class) (Outstanding at November 12, 1999)
<PAGE>
LUIGINO'S, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements (Unaudited)
Balance Sheets as of October 10, 1999 (Unaudited) and January 3,
1999............................................................ 3
Statements of Operations for the third fiscal quarter ended and
year to date ended October 10, 1999 and October 11, 1998
(Unaudited)..................................................... 4
Statements of Cash Flows for year to date ended October 10, 1999
and October 11, 1998 (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 4. Submission of Matters to a Vote of Security Holders................ 14
Item 5. Other Information.................................................. 14
Item 6. Exhibits and Reports on Form 8-K................................... 15
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>
October 10, January 3,
1999 1999
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 617 $ 1,193
Receivables, net of allowance for doubtful accounts
of $150 and $145, respectively.......................... 21,473 19,709
Inventories............................................... 20,296 15,548
Prepaid expenses and other................................ 1,766 1,179
--------- ---------
Total current assets................................. 44,152 37,629
--------- ---------
Property, Plant and Equipment:
Land...................................................... 22 22
Buildings and improvements................................ 17,206 16,720
Machinery and equipment................................... 96,319 77,510
Office equipment and leasehold improvements............... 4,415 2,705
Construction in progress.................................. 1,040 2,916
Less - - Accumulated depreciation......................... (32,158) (24,491)
--------- ---------
Net property, plant and equipment.................... 86,844 75,382
--------- ---------
Other Assets:
Notes receivable from principal stockholder............... 5,472 8,809
Restricted cash........................................... 717 745
Other..................................................... 5,309 1,956
--------- ---------
Total other assets................................... 11,498 11,510
--------- ---------
Total Assets.................................................... $ 142,494 $ 124,521
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt...................... $ 2,697 $ 9,398
Accounts payable.......................................... 14,396 16,942
Accrued expenses - -
Accrued payroll and benefits......................... 2,851 5,118
Accrued promotions and other......................... 4,038 6,437
Accrued interest..................................... 2,109 227
--------- ---------
Total current liabilities............................ 26,091 38,122
Long-Term Debt, less current maturities......................... 127,032 76,136
--------- ---------
Total liabilities.................................... 153,123 114,258
--------- ---------
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;
900 shares issued and outstanding.................. 1 1
Additional paid-in capital................................ 655 655
Retained earnings (deficit)............................... (11,285) 9,607
--------- ---------
Total stockholders' equity (deficit)................. (10,629) 10,263
--------- ---------
Total Liabilities and Stockholders' Equity (Deficit)............ $ 142,494 $ 124,521
========= =========
</TABLE>
See accompanying notes
3
<PAGE>
LUIGINO'S, INC.
Statements of Operations
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Third Fiscal Quarter Ended Year to Date Ended
---------------------------------- ----------------------------------
October 10, 1999 October 11, 1998 October 10, 1999 October 11, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Sales......................... $ 59,741 $ 44,466 $ 194,624 $ 156,786
Cost of Goods Sold................ 35,352 23,388 113,322 87,307
--------- --------- --------- ---------
Gross profit................ 24,389 21,078 81,302 69,479
--------- --------- --------- ---------
Operating (Income) Expenses:
Selling and promotional..... 15,105 12,208 61,109 36,918
General and administrative.. 5,344 4,891 17,837 16,160
Hibbing Settlement.......... -- 5,172 (776) 5,172
--------- --------- --------- ---------
Total operating expenses.... 20,449 22,271 78,170 58,250
--------- --------- --------- ---------
Operating income (loss)..... 3,940 (1,193) 3,132 11,229
Other Income (Expense):
Interest expense............ (3,104) (1,637) (9,532) (4,968)
Interest Income............. 72 117 303 402
Other, net.................. 46 (202) 205 (171)
--------- --------- --------- ---------
Total other expense......... (2,986) (1,722) (9,024) (4,737)
--------- --------- --------- ---------
Net Income (Loss)................. $ 954 $ (2,915) $ (5,892) $ 6,492
========= ========= ========= =========
</TABLE>
See accompanying notes
4
<PAGE>
LUIGINO'S, INC.
Statements of Cash Flows
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Year to Date Ended
------------------------------------
October 10, 1999 October 11, 1998
---------------- ----------------
<S> <C> <C>
Operating Activities:
Net income (loss) ............................................. $ (5,892) $ 6,492
Adjustments to net income (loss) provided
by (used in) operating activities -
Depreciation and amortization ............................. 8,600 5,906
Changes in operating assets and liabilities:
Receivables .......................................... (1,764) 3,104
Inventories .......................................... (4,748) (2,199)
Prepaid expenses and other ........................... (587) 40
Accounts payable and accrued expenses ................ (5,330) (1,696)
--------- ---------
Net cash provided by (used in) operating activities (9,721) 11,647
--------- ---------
Investing Activities:
Purchases of property, plant and equipment .................... (19,127) (21,765)
Purchases of other assets ..................................... (630) (619)
--------- ---------
Net cash used in investing activities ............. (19,757) (22,384)
--------- ---------
Financing Activities:
Borrowings on revolving credit agreement ...................... 60,600 40,900
Payments on revolving credit agreement ........................ (61,600) (25,500)
Proceeds from debt ............................................ 100,000 11,719
Repayments of debt ............................................ (54,805) (6,231)
Increase in deferred financing costs .......................... (3,658) (18)
Decrease in restricted cash ................................... 28 269
Decrease (increase) of notes receivable ....................... 3,337 (33)
Distributions to stockholders ................................. (15,000) (13,199)
--------- ---------
Net cash provided by financing activities ......... 28,902 7,907
--------- ---------
Decrease in cash and cash equivalents .............................. (576) (2,830)
Cash and cash equivalents, beginning of period ..................... 1,193 5,157
--------- ---------
Cash and cash equivalents, end of period ........................... $ 617 $ 2,327
========= =========
Supplemental Information:
Interest paid ........................................ $ 7,137 $ 5,602
========= =========
</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 October 10, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending January 2, 2000. Certain amounts in the financial statements for prior
quarters have been reclassified to conform with the current period's
presentation. Those reclassifications had no effect on stockholders' equity or
net income.
For further information, refer to the audited financial statements and footnotes
thereto included in the Company's Form S-4 as amended, filed on April 19, 1999
with the Securities and Exchange Commission.
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:
October 10, 1999 January 3, 1999
---------------- ---------------
Raw Materials ...... $ 9,907 $ 7,266
Finished Goods ..... 6,789 6,249
Packaging Supplies.. 3,600 2,033
------- -------
$20,296 $15,548
======= =======
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 Rehabilitation Board (IRRRB) for the
construction of a manufacturing facility in Hibbing, Minnesota. In the third
quarter of 1998, the Company recorded a $5.2 million charge for the impairment
of assets incurred in connection with the potential plant facility. The total
reserve of $5.2 million represented a non-cash charge of $4.7 million for asset
impairment and $0.5 million for potential future liquidated damages and other
costs. On April 27, 1999 the IRRRB and Luigino's entered into a settlement
agreement under which Luigino's agreed to convey the property to the IRRRB, and
the IRRRB agreed to pay Luigino's $0.5 million and release the claims against
Luigino's for payment of liquidated damages of $0.4 million. This income was
partially offset by additional expenses of $0.1 million required to settle the
claim.
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>
Third Fiscal Quarter Ended Year to Date Ended
------------------------------------ ------------------------------------
October 10, 1999 October 11, 1998 October 10, 1999 October 11, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Sales......................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of Goods Sold................ 59.2 52.6 58.2 55.7
----- ----- ----- -----
Gross profit................ 40.8 47.4 41.8 44.3
Operating (Income) Expenses:
Selling and promotional..... 25.3 27.5 31.4 23.6
General and administrative.. 8.9 11.0 9.2 10.3
Hibbing Settlement.......... 0.0 11.6 (0.4) 3.3
----- ----- ----- -----
Total operating expenses.... 34.2 50.1 40.2 37.2
Operating income (loss)..... 6.6 (2.7) 1.6 7.1
Other Income (Expense):
Interest expense............ (5.2) (3.7) (4.9) (3.2)
Interest income............. 0.1 0.3 0.2 0.3
Other, net.................. 0.1 (0.5) 0.1 (0.1)
----- ----- ----- -----
Total other expense.... (5.0) (3.9) (4.6) (3.0)
----- ----- ----- -----
Net Income (Loss)................. 1.6 % (6.6)% (3.0)% 4.1 %
===== ===== ===== =====
</TABLE>
Third Fiscal Quarter 1999 compared to Third 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:
Third Fiscal Quarter Ended
----------------------------------- Percentage
October 10, 1999 October 11, 1998 Change
---------------- ---------------- ------
(Dollars in thousands)
Green Label...... $26,630 $24,220 10.0 %
Red Label........ 9,186 7,201 27.6
Signature........ 8,474 -- 100.0
Black Label...... 6,453 6,205 4.0
Blue Label....... 5,351 5,570 (3.9)
Snacks........... 3,647 1,270 187.2
------- ------- -----
$59,741 $44,466 34.4 %
======= ======= =====
Total net sales for the third quarter of 1999 increased 34.4% or $15.2
million, to $59.7 million from $44.5 million in the third quarter of 1998. The
Signature product line was launched in December 1998 resulting in an increase in
net sales of $8.5 million in the third quarter of 1999. Green Label net sales
increased $2.4 million due to an increase in family size net sales and continued
growth in both Canada and U.S. product line net sales. Red Label net sales
increased $2.0 million due to product line expansion and continued growth in
product line net sales. Black Label net sales increased $0.2 million. Snacks net
sales increased $2.4 million due to new product introductions. These increases
were partially offset by a decrease in Blue Label net sales of $0.2 million.
8
<PAGE>
Canadian net sales contributed 11.2%, or $6.7 million, to net sales for the
third quarter of 1999 compared to 10.2%, or $4.6 million, for the third 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 for all product lines. 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:
<TABLE>
<CAPTION>
Third Fiscal Quarter Ended
October 10, 1999 compared to October 11, 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 ........................ 11.6 % (1.6)% 10.0 %
Red Label .......................... 32.5 (4.9) 27.6
Signature .......................... 100.0 0.0 100.0
Black Label ........................ 8.3 (4.3) 4.0
Blue Label ......................... 2.6 (6.5) (3.9)
Snacks ............................. 174.6 12.6 187.2
----- ---- -----
37.1 % (2.7)% 34.4 %
===== ==== =====
</TABLE>
Gross Profit. Gross profit in the third quarter of 1999 increased 15.7%, or
$3.3 million, from $21.1 million in the third quarter of 1998. The increase in
gross profit is a result of the increase in overall sales levels. The gross
margin in the third quarter of 1999 decreased to 40.8% of net sales from 47.4%
in the third quarter of 1998. The decrease in gross margin is primarily due to a
decrease in selling prices which is offset by a decrease in trade promotions as
a percentage of net sales.
Selling and Promotional Expenses. Selling and promotional expenses for the
third quarter of 1999 increased 23.7%, or $2.9 million, to $15.1 million from
$12.2 million in the third quarter of 1998. The increase resulted primarily from
a $0.5 million increase in freight expense, a $0.3 million increase in brokerage
expense and a $1.8 million increase in trade promotion.
General and Administrative Expenses. General and administrative expenses
for the third quarter of 1999 increased 9.3%, or $0.4 million, to $5.3 million
from $4.9 million in the third quarter of 1998. The increase was a result of
increased salaries and related costs of $0.4 million, increased outside finished
goods storage of $0.2 million and increased amortization and depreciation
expense of $0.1 million, partially offset by a decrease in the bonus accrual of
$0.2 million.
Hibbing Settlement. During 1996, the Company entered into an agreement with
the Office of the Commissioner of the Iron Range Resources Rehabilitation Boards
(IRRRB) for the construction of a manufacturing facility in Hibbing, Minnesota.
In the third quarter of 1998, the Company recorded a $5.2 million charge for the
impairment of assets incurred in connection with the potential plant facility.
The total reserve of $5.2 million represented a non-cash charge of $4.7 million
for asset impairment and $.0.5 for potential future liquidated damages and other
costs. On April 27, 1999 the IRRRB and Luigino's entered into a settlement
agreement under which Luigino's agreed to convey the property to the IRRRB, and
the IRRRB agreed to pay Luigino's $0.5 million and release the claims against
Luigino's for payment of liquidated damages of $0.4 million. This income was
partially offset by additional expenses of $0.1 million required to settle the
claim.
9
<PAGE>
Operating Income (Loss). Operating income for the third quarter of 1999
increased 430.3%, or $5.1 million, to $3.9 million as compared to operating loss
of ($1.2) million in the third quarter of 1998. As a percentage of net sales,
operating income (loss) increased to 6.6% of net sales in the third quarter of
1999 compared to a loss of (2.7%) in the third quarter of 1998. The increase
resulted from the $3.3 million increase in gross profit and the increase related
to the positive impact of the Hibbing Settlement of $5.2 million, offset by the
$2.9 million increase in selling and promotional expenses, and the $0.5 million
increase in general and administrative expenses.
Interest Expense. Interest expense for the third quarter of 1999 increased
89.6%, or $1.5 million, to $3.1 million from $1.6 million in the third 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 third quarter of
1999 and the third quarter of 1998.
Other Income. Other income was $0.1 million for the third quarter of 1999
as compared to other expense of $0.2 million for the third quarter of 1998.
Net Income (Loss). For the reasons stated above, net income for the third
quarter of 1999 increased 132.7%, or $3.9 million, to $1.0 million as compared
to net loss of $2.9 million in the third quarter of 1998. As a percentage of net
sales, net income (loss) increased to 1.6% of net sales in the third quarter of
1999 compared to (6.6)% in the third quarter of 1998.
Forty weeks ended October 10, 1999 compared to the forty weeks ended October 11,
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
October 10, 1999 October 11, 1998 Change
---------------- ---------------- -------------
(Dollars in thousands)
Green Label .. $ 87,648 $ 81,344 7.8 %
Red Label .... 28,356 26,209 8.2
Signature .... 26,066 -- 100.0
Black Label .. 21,947 20,030 9.6
Blue Label ... 19,264 22,155 (13.0)
Snacks ....... 11,343 6,042 87.7
Co-Pack ...... -- 1,006 (100.0)
-------- -------- ------
$194,624 $156,786 24.1 %
======== ======== ======
Total net sales for the forty weeks ended October 10, 1999 increased 24.1%,
or $37.8 million, to $194.6 million from $156.8 million for the forty weeks
ended October 11, 1998. The Signature product line was launched in December 1998
resulting in an increase in net sales of $26.1 million for the forty weeks ended
October 10, 1999. Green Label net sales increased $6.3 million due to an
increase in family size products net sales and continued growth in both Canada
and the U.S. Red Label net sales increased $2.1 million due to product line
expansion and continued growth in product line net sales. Black Label net sales
increased $1.9 million due to marketing efforts to reposition this product line.
Snack net sales increased $5.3 million due to new product introductions. These
increases were partially offset by a decrease in Blue Label net sales of $2.9
million due to 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 the co-pack agreement with Pillsbury in the first quarter of 1998.
10
<PAGE>
Canadian net sales contributed 11.1%, or $21.7 million, to net sales for
the forty weeks ended October 10, 1999 compared to 10.2%, or $15.9 million, for
the forty weeks ended October 11, 1998. Canadian sales have benefited from
overall growth in the frozen entree market, new product introduction and
continued advertising.
Volume increases in Green Label, Red Label, Signature, Black Label and
Snacks 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
October 10, 1999 compared to October 11, 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 .... 8.2 % (0.4)% 7.8 %
Red Label ...... 9.5 (1.3) 8.2
Signature ...... 100.0 0.0 100.0
Black Label .... 14.0 (4.4) 9.6
Blue Label ..... (8.0) (5.0) (13.0)
Snacks ......... 69.3 18.4 87.7
Co-Pack ........ (100.0) 0.0 (100.0)
------ ---- ------
25.1 % (1.0)% 24.1 %
====== ==== ======
Gross Profit. Gross profit for the forty weeks ended October 10, 1999
increased 17.0%, or $11.8 million, from $69.5 million for the forty weeks ended
October 11, 1998. The increase in gross profit is a result of the increase in
overall sales levels. The gross margin in the forty weeks ended October 10, 1999
decreased to 41.8% of net sales from 44.3% for the forty weeks ended October 11,
1998. The decrease in gross margin is primarily due to a decrease in selling
prices which is offset by a decrease in trade promotions as a percentage of net
sales.
Selling and Promotional Expenses. Selling and promotional expenses for the
forty weeks ended October 10, 1999 increased 65.5%, or $24.2 million, to $61.1
million from $36.9 million for the forty weeks ended October 11, 1998. The
increase resulted primarily from a $11.9 million increase in slotting spending
related to Signature and Snack product line introductions, a $4.3 million
increase in advertising expenses and a $5.8 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 forty weeks ended October 10, 1999 increased 10.4%, or $1.6 million, to
$17.8 million from $16.2 million for the forty weeks ended October 11, 1998. The
increase was a result of increased salaries and related costs of $1.2 million,
increased travel and related expenses of $0.3 million, increased outside
finished goods storage of $0.4 million, increased marketing research and
professional fees of $0.2 million and increased amortization and depreciation
expense of $0.3 million, partially offset by a decrease in the bonus accrual of
$1.0 million.
Hibbing Settlement. During 1996, the Company entered into an agreement
with the IRRRB for the construction of a manufacturing facility in Hibbing
Minnesota. In the third quarter of 1998, the Company recorded a $5.2 million
charge for the impairment of assets incurred in connection with the potential
plant facility. The total reserve of $5.2 million represented a non-cash charge
of $4.7 million for asset impairment and $.0.5 for potential future liquidated
damages and other costs. On April 27, 1999 the IRRRB and Luigino's entered into
a settlement agreement under which Luigino's agreed to convey the property to
the IRRRB, and the IRRRB agreed to pay Luigino's $0.5 million and release the
claims against Luigino's for payment of liquidated damages of $0.4 million. This
income was partially offset by additional expenses of $0.1 million required to
settle the claim.
11
<PAGE>
Operating Income. Operating income for the forty weeks ended October 10,
1999 decreased 72.1%, or $8.1 million, to $3.1 million from $11.2 million for
the forty weeks ended October 11, 1998. As a percentage of net sales, operating
income decreased to 1.6% of net sales for the forty weeks ended October 10, 1999
compared to 7.1% for the forty weeks ended October 11, 1998. The decrease
resulted from the $24.2 million increase in selling and promotional expenses and
the $1.6 million increase in general and administrative expenses, offset by the
$11.8 million increase in gross profit and the positive impact of the Hibbing
Settlement of $5.9 million.
Interest Expense. Interest expense for the forty weeks ended October 10,
1999 increased 91.9%, or $4.5 million, to $9.5 million from $5.0 million for the
forty weeks ended October 11, 1998. The increase was a result of the senior debt
offering interest of $6.8 million, partially offset by the decrease in the
interest related to the debt extinguished by the offering proceeds.
Interest Income. Interest income was $0.3 million for the forty weeks ended
October 10, 1999 and $0.4 million for the forty weeks ended October 11, 1998.
Other Income. Other income was $0.2 million for the forty weeks ended
October 10, 1999 as compared to other expense of $0.2 million for the forty
weeks ended October 11, 1998.
Net Income (Loss). For the reasons stated above, net income (loss) for the
forty weeks ended October 10, 1999 decreased 190.8%, or $12.4 million, to a loss
of $(5.9) million as compared to net income of $6.5 million for the forty weeks
ended October 11, 1998. As a percentage of net sales, net income (loss)
decreased to (3.0)% of net sales for the forty weeks ended October 10, 1999
compared to 4.1% for the forty weeks ended October 11, 1998.
Liquidity and Capital Resources
Operating activities used $9.7 million of cash for the forty weeks ended
October 10, 1999 compared to generating $11.6 million for the forty weeks ended
October 11, 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 $19.8 million of cash for the forty weeks ended
October 10, 1999 and $22.4 million for the forty weeks ended October 11, 1998.
The forty weeks ended October 10, 1999 included the purchase of $5.9 million of
equipment under operating leases and $13.2 million in machinery and equipment
purchases.
Financing activities generated $28.9 million of cash for the forty weeks
ended October 10, 1999 compared to $7.9 million for the forty weeks ended
October 11, 1998. The forty weeks ended October 10, 1999 includes a $100.0
million increase in debt related to the senior subordinated notes, offset by a
$55.8 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 distribution of earnings previously taxed to the shareholders.
1999 Planned Expenditures and Purchases of Operating Leases. As a part of
the Company's strategic growth plan, the Company incurred approximately $5.1
million for advertising to build brand awareness and $17.7 million for slotting
expenses for the forty weeks ended October 10, 1999. Management has discretion
on the amount and timing of advertising expenditures and whether to continue
them. The Company plans to incur approximately $1.2 million in additional
slotting expenses in 1999 to introduce new products and increase product
penetration. The Company intends to finance these expenditures through
internally generated funds and borrowings under the revolving credit agreement.
The Company anticipates continuing to elect Subchapter S treatment under
the U.S. Internal Revenue Code. Consequently, the Company will continue to make
quarterly distributions to the shareholders based upon their estimated tax
liabilities.
12
<PAGE>
Luigino's ability to make scheduled payments of principal of, or to pay the
interest or premiums, if any, on, or to refinance, its indebtedness or to fund
planned capital expenditures will depend on future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond the Company's control.
Based upon the current level of operations, the Company believes that cash flow
from operations and available cash, together with available borrowings under the
credit agreement, will be adequate to meet the future liquidity needs for at
least the next several years. The Company may, however, need to refinance all or
a portion of the principal of the senior subordinated notes on or before
maturity. There can be no assurance that the business will generate sufficient
cash flow from operations, or that future borrowings will be available under the
credit agreement in an amount sufficient to enable the Company to service
indebtedness or to fund other liquidity needs. In addition, there can be no
assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all.
Year 2000 Issues
State of Readiness. Luigino's has a Year 2000 project team comprised of key
members of the management information systems department and key management
personnel. The project team has analyzed the computer systems for Year 2000
compliance, and as a result of that analysis, the Company has installed a state
of the art Enterprise Resource Planning ("ERP") software package to replace the
previous financial accounting package, which was not Year 2000 compliant. The
new software provides us with integration of capabilities which was not
available on the prior system in an integrated package, including production
planning and manufacturing control, materials management, logistics and
distribution, plant maintenance, and treasury management and international
accounting capabilities.
The Company has completed the review of non-information systems, such as
manufacturing and storage systems, which rely on embedded chips or similar
devices. The Company has worked with key suppliers to ensure that equipment and
systems used in the delivery of products and services 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. It is possible
that computer systems or software products of 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 the Company may become subject as a result of date-handling
problems of suppliers and customers, and remedying problems that are discovered,
cannot be estimated at this time to any degree of accuracy. The Company does not
expect to incur any material additional costs related to Year 2000 issues.
Risks Associated with Year 2000 Issues. The Company believes exposure with
respect to the Year 2000 issues of suppliers and customers is minimal. There can
be no assurance, however, that the Company will identify all date-handling
problems of suppliers and customers in advance of their occurrence, or that the
Company will be able to successfully remedy problems that are discovered, and
the efforts to identify and address such problems, or the expenses or
liabilities to which the Company may become subject as a result of such
problems, could have a material adverse effect on the Company.
Contingency Plans. The Company has completed installation of the ERP
system. The Company has worked with non-compliant current vendors and suppliers
as necessary to prevent interruption of the business, and to identify alternate
vendors and service providers where necessary. The most reasonably likely worst
case scenario that Luigino's currently anticipates with respect to Year 2000 is
the failure of some of its suppliers, including utilities suppliers, to be
ready. This could cause temporary interruption of materials or services that the
Company needs to make its products, which could result in delayed shipments to
customers and lost sales and profits to the Company.
The outcome of Luigino's Year 2000 plan is subject to a number of risks and
uncertainties, some of which (such as the availability of qualified computer
personnel and the Year 2000 responses of third parties) are beyond its control.
Therefore, there can be no assurances that the Company will not incur material
remediation costs beyond the above anticipated future costs, or that business,
financial condition, or results of operations will not be significantly impacted
if Year 2000 problems with its systems, or with the products or systems of other
parties with whom it does business, are not resolved in a timely manner.
13
<PAGE>
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Inflation
The Company believes that the relatively moderate rate of inflation over
the past few years has not had a significant impact on 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. The Company maintains cash and cash equivalents and other
financial instruments with various financial institutions. The Company's policy
is to limit exposure to any one institution. When the Company formulates the
investment strategy the Company considers periodic evaluations of the relative
credit standing of these financial institutions. The Company's concentrations of
credit risk for trade accounts receivable are limited due to the large number of
entities comprising the customer base. The Company has an exclusive distribution
agreement with J.M. Schneider Corporation in Canada, which accounted for 11.1%
of net sales for the forty weeks ended October 10, 1999. The Company does 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. The Company's
exposure to market risk for change in interest rates relates primarily to
long-term debt obligations. At October 10, 1999, the total notional amount of
the interest rate swap agreement was $25.0 million, with an interest rate of
5.97%.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
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 on Form 8-K
There were no reports on Form 8-K filed for the forty weeks ended
October 10, 1999.
15
<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: By: /s/ Joel C. Kozlak
-------------------------------
Joel C. Kozlak
Chief Financial Officer (principal
financial and accounting officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORTY WEEKS
ENDED OCTOBER 10, 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> JUL-19-1999
<PERIOD-END> OCT-10-1999
<CASH> 617
<SECURITIES> 0
<RECEIVABLES> 21,618
<ALLOWANCES> 145
<INVENTORY> 20,296
<CURRENT-ASSETS> 44,152
<PP&E> 119,002
<DEPRECIATION> 32,158
<TOTAL-ASSETS> 142,494
<CURRENT-LIABILITIES> 23,394
<BONDS> 129,729
0
0
<COMMON> 1
<OTHER-SE> (10,630)
<TOTAL-LIABILITY-AND-EQUITY> 142,494
<SALES> 194,624
<TOTAL-REVENUES> 194,624
<CGS> 113,322
<TOTAL-COSTS> 113,322
<OTHER-EXPENSES> 78,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,532
<INCOME-PRETAX> (5,892)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,892)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,892)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99
LUIGINO'S, INC.
Report on Form 10-Q
October 10, 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. After giving effect to the sale of the
senior subordinated notes we sold in a private offering and subsequently
registered in an exchange offer under 144A of the Securities Act, the initial
borrowings under our new credit facility and the application of the proceeds
from those transactions, we had total indebtedness of approximately $129.7
million and a shareholders' deficit of $10.6 million as of October 10, 1999. Of
the $129.7 million of total indebtedness, $100.0 million consisted of the senior
subordinated 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 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.
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.
