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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 April 20, 2003
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 by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes___ No X
---
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 June 2, 2003)
LUIGINO'S, INC AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of April 20, 2003 (Unaudited) and
December 29, 2002 ....................................................... 3
Consolidated Statements of Operations for 16 weeks ended
April 20, 2003 (Unaudited) and April 21, 2002 (Unaudited) ............... 4
Consolidated Statements of Cash Flows for 16 weeks ended April 20,
2003 (Unaudited) and April 21, 2002 (Unaudited) ......................... 5
Notes to Financial Statements (Unaudited) ............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............. 12
Item 4. Controls and Procedures ................................................. 13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ........................... 13
Item 5. Other Information ............................................................. 13
Item 6. Exhibits and Reports on Form 8-K .............................................. 14
Signatures ............................................................................ 15
Sarbanes-Oxley Section 302 Certifications of Chief Executive Officer and
Chief Financial Officer ............................................................... 16
2
LUIGINO'S, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
April 20, December 29,
2003 2002
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ................................. $ 2,036 $ 2,870
Receivables, net of allowance for doubtful accounts of
$861 and $146 ............................................ 24,987 28,955
Inventories ............................................... 23,184 22,469
Prepaid expenses and other ................................ 3,254 2,946
------------ ------------
Total current assets .................................. 53,461 57,240
------------ ------------
Property, Plant and Equipment:
Land ...................................................... 22 22
Buildings and improvements ................................ 21,110 20,866
Machinery and equipment ................................... 125,755 123,671
Office equipment and leasehold improvements ............... 6,727 6,727
Construction in progress .................................. 9,601 8,956
Less - - Accumulated depreciation ......................... (74,260) (69,543)
------------ ------------
Net property, plant and equipment ..................... 88,955 90,699
------------ ------------
Other Assets:
Receivables from stockholder .............................. 4,222 4,472
Deferred costs, principally debt issuance costs ........... 3,843 3,946
Restricted cash ........................................... 47 48
Goodwill .................................................. 39,648 39,648
Other intangibles, net of amort of $13,197 and $12,813 .... 23,382 23,766
------------ ------------
Total other assets .................................... 71,142 71,880
------------ ------------
Total Assets ................................................ $ 213,558 $ 219,819
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ...................... $ 11,352 $ 10,723
Accounts payable .......................................... 20,390 19,885
Accrued expenses:
Accrued payroll and benefits ............................ 4,640 6,671
Accrued interest ........................................ 2,452 4,333
Accrued promotions and other ............................ 7,392 4,457
Declared stockholder tax distributions .................. -- 4,647
------------ ------------
Total current liabilities ............................... 46,226 50,716
Long-Term Debt, less current maturities ..................... 146,225 145,298
Deferred Taxes .............................................. 9,066 9,066
------------ ------------
Total liabilities ....................................... 201,517 205,080
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Common stocks:
Voting, $1 stated par value, 600 shares authorized;
100 shares issued and outstanding ...................... -- --
Nonvoting, $1 stated par value, 900 shares authorized;
900 shares issued and outstanding ...................... 1 1
Additional paid-in capital ................................ 655 655
Declared stockholder tax distributions .................... -- (4,647)
Accumulated other comprehensive loss ...................... (392) (548)
Retained earnings ......................................... 11,777 19,278
------------ ------------
Total stockholders' equity .............................. 12,041 14,739
------------ ------------
Total Liabilities and Stockholders' Equity .................. $ 213,558 $ 219,819
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
LUIGINO'S, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In Thousands)
First 16 Weeks Ended
------------------ ------------------
April 20, 2003 April 21, 2002
------------------ ------------------
Net Sales ............................... $ 82,109 $ 80,872
Cost of Goods Sold ...................... 59,151 59,791
------------------ ------------------
Gross profit .......................... 22,958 21,081
------------------ ------------------
Operating Expenses:
Selling and marketing expenses ........ 10,652 8,553
General and administrative expenses ... 10,758 9,985
------------------ ------------------
Total operating expenses .............. 21,410 18,538
------------------ ------------------
Operating income ...................... 1,548 2,543
Other Income (Expense):
Interest expense ...................... (4,239) (5,300)
Interest income ....................... 67 76
Other, net ............................ (51) 194
------------------ ------------------
Total other expense ................... (4,223) (5,030)
------------------ ------------------
Net Loss ................................ $ (2,675) $ (2,487)
================== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
4
LUIGINO'S, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In Thousands)
First 16 Weeks Ended
---------------- ----------------
April 20, 2003 April 21, 2002
---------------- ----------------
Operating Activities:
Net loss .......................................... $ (2,675) $ (2,487)
Adjustments to net loss provided by (used in)
operating activites -
Depreciation and amortization .................... 5,638 6,119
Deferred income taxes ............................ -- (534)
Changes in operating assets and liabilities:
Receivables ..................................... 3,239 8,728
Inventories ..................................... (715) (1,380)
Prepaid expenses and other ...................... (308) (10)
Accounts payable and accrued expenses ........... (317) (7,169)
---------------- ----------------
Net cash provided by operating activities ...... 4,862 3,267
---------------- ----------------
Investing Activities:
Purchases of property, plant and equipment ........ (2,972) (4,318)
Purchases of other assets ......................... (435) (113)
---------------- ----------------
Net cash used in investing activities .......... (3,407) (4,431)
---------------- ----------------
Financing Activities:
Borrowings on revolving credit agreement .......... 37,000 38,400
Payments on revolving credit agreement ............ (32,700) (19,500)
Proceeds from debt ................................ 729 --
Repayments of debt ................................ (2,744) (12,375)
Decrease in restricted cash ....................... 1 1
Decrease in notes receivable ...................... 250 250
Distributions to stockholders ..................... (4,825) (7,720)
---------------- ----------------
Net cash used in financing activities .......... (2,289) (944)
---------------- ----------------
Decrease in cash and cash equivalents .............. (834) (2,108)
Cash and cash equivalents, beginning of period ..... 2,870 3,440
---------------- ----------------
Cash and cash equivalents, end of period ........... $ 2,036 $ 1,332
================ ================
Supplemental Information:
Interest paid ................................... $ 5,868 $ 6,288
================ ================
The accompanying notes are an integral part of these consolidated
financial statements.
5
LUIGINO'S, INC. AND SUBSIDIARY
Notes to Financial Statements
(Dollars in Thousands)
(Unaudited)
1. Operations:
Luigino's, Inc. and Subsidiary (the "Company"), a Minnesota corporation, markets
food products primarily under the Michelina's and Budget Gourmet name brands.
The Michelina's label is manufactured at production facilities located in
Minnesota and Ohio. The Budget Gourmet label was sourced through a co-pack
agreement with Heinz Frozen Food Company (HFF) until February 2003 and
subsequent to this date is produced internally in our Minnesota and Ohio
facilities. The Company's 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 consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
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 accounting principles generally accepted
in the United States 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 16 weeks ended April 20, 2003 are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 4, 2004. Certain amounts in the financial statements for the prior
quarter have been reclassified to conform with the current period's
presentation. Those reclassifications had no effect on stockholders' equity or
net income (loss).
For further information, refer to the audited financial statements and footnotes
thereto included in the Company's Form 10-K for the fiscal year ended December
29, 2002, filed on March 25, 2003 with the Securities and Exchange Commission.
3. Recent Accounting Pronouncements:
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 require the Company to record the fair value of an
asset retirement obligation as a liability in the period in which the Company
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development, and/or
normal use of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company adopted SFAS No. 143 effective
first quarter 2003. The adoption of SFAS No. 143 did not have an impact on the
Company's financial condition or results of operations.
In July 2002, FASB issued SFAS 146, "Accounting for Costs Associated with Exit
or Disposal Activities." The statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS 146 requires that a liability for costs associated
with an exit or disposal activity be recognized when a liability is incurred.
Under Issue 94-3, a liability for an exit cost as generally defined in Issue
94-3 was recognized at the date of an entity's commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of SFAS 146 did not have a
material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. The Statement is
6
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. We do not anticipate that this Standard will have
an impact on our consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, and interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and did not
have a material impact on the Company's consolidated financial statements. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This Interpretation requires a company to consider
variable interest entities ("VIE") if the entity is a primary beneficiary (holds
a majority of the variable interest) of the VIE and the VIE possesses specific
characteristics. It also requires additional disclosure for parties involved
with VIEs. The provisions of the Interpretation became effective for the Company
in the first quarter of 2003 and did not have a material effect on our
consolidated financial statements.
4. Goodwill and Intangible Assets
Carrying amounts for other intangible assets and goodwill, net of accumulated
amortization, as of April 20, 2003 and December 29, 2002, respectively, are
$63,030 and $63,414.
Intangible assets as of April 20, 2003 consisted of the following:
Gross
Carrying Accumulated
(In thousands) Amount Amortization
--------------------------------------------------------------------------
Amortized intangible assets:
Restricted Convenant $ 10,000 $ 10,000
Transitional Agreement 150 150
-------------------------
10,150 10,150
=========================
Unamortized intangible assets:
Trademarks 22,893
Patent Sublicense 489
----------
23,382
==========
Amortization of intangibles for the 16 weeks
ended April 20, 2003 $ 386
==========
Those intangible assets that were being amortized are fully amortized as of
April 20, 2003 and therefore future amortization expense will be $0.
5. Fiscal Year:
The Company has elected a 52/53 week fiscal year which ends on the Sunday
closest to December 31. The Company's fiscal year includes a 16-week first
fiscal quarter, 12-week second and third fiscal quarters and a 12- or 13-week
fourth fiscal quarter.
6. Inventories:
Inventories are stated at the lower of first-in, first-out cost or market and
consisted of the following:
April 20, 2003 December 29, 2002
--------------------- ---------------------
Raw materials............ $ 8,737 $ 7,509
Finished goods........... 10,762 12,348
Packaging supplies....... 3,685 2,612
--------------------- ---------------------
$ 23,184 $ 22,469
===================== =====================
7
7. Debt:
On September 27, 2002, the Company entered into a new $75,000 credit facility to
replace the $100,000 credit facility used to fund the Company's acquisition of
The All American Gourmet Company from Heinz Frozen Foods Company and to fund the
Company's revolving credit. The new credit facility includes (a) a $42,500 term
loan with maturities for each of the five years subsequent to December 31, 2001
of $5,000, $10,000, $12,500, $11,250, and $3,750, and (b) a $32,500 revolving
credit facility maturing on January 4, 2006, subject to certain borrowing base
limitations. At April 20, 2003, the Company had outstanding balances of $14,200,
on the revolving line of credit.
On February 4, 1999, the Company issued $100,000 of 10% Senior Subordinated
Notes due February 1, 2006, pursuant to an Indenture 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 entered into two fixed interest rate swaps in February 2002 totaling
$30,000. One is a $20,000 swap at an interest rate of 3.49%, plus the current
margin spread of 2.00% maturing on December 31, 2003 and the other is a $10,000
swap at an interest rate of 3.07%, plus the current margin spread of 2.00% of
which $2,500 matured on December 31, 2002 and March 31, 2003, respectively and
$2,500 will mature on June 30, 2003 and September 30, 2003, respectively.
The swap agreements were entered into to fix the rate of interest on the
floating rate senior credit facility. The swaps are accounted for as cash flow
hedges and their total fair market value as of April 20, 2003 is a liability of
$392 which is reflected on our Consolidated Balance Sheets as accumulated other
comprehensive loss.
Based on a total leverage ratio calculated on a quarterly basis, borrowings
under the term loan and revolving credit facility bear interest either at 1.75%
to 2.25% over the rate offered to major banks in the London Interbank Eurodollar
market ("Eurodollar Rate"), or at 0% to 0.5% over Alternative Base Rate, which
is the larger of the Prime Rate or the Federal Funds Rate plus 0.5%. Advances
through October 6, 2002 bore interest at the Eurodollar Rate plus 2.00% and
Prime Rate plus 0.25% with a weighted-average interest rate of 3.49% at April
20, 2003. The Company also pays a fee of 0.25% to 0.50% on the unused daily
balance of the revolver based on a leverage ratio calculated on a quarterly
basis.
The credit facility and Indenture contain various restrictive covenants. The
Credit Agreement among other matters, requires the Company to maintain a minimum
debt service coverage ratio, a maximum total leverage ratio, a maximum senior
leverage ratio and a minimum tangible net worth, all as defined in the credit
agreement. The credit agreement also limits additional indebtedness, capital
expenditures and cash dividends. At April 20, 2003, the Company was in
compliance with all covenants in the credit agreement and Indenture.
8
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. and Subsidiary (the "Company" or "Luigino's") should be read in
conjunction with the Company's Consolidated 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:
First Fiscal Quarter Ended
----------------------------------
April 20, 2003 April 21, 2002
---------------- ----------------
Net Sales ....................................... 100.0 % 100.0 %
Cost of Goods Sold .............................. 72.0 73.9
---------------- ----------------
Gross profit .......................... 28.0 26.1
Operating Expenses:
Selling and marketing ................. 13.0 10.6
General and administrative ............ 13.1 12.4
---------------- ----------------
Total operating expenses .............. 26.1 23.0
Operating income ...................... 1.9 3.1
Other Income (Expense):
Interest expense ...................... (5.2) (6.5)
Interest income ....................... 0.1 0.1
Other, net ............................ (0.1) 0.2
---------------- ----------------
Total other expense ....... (5.2) (6.2)
---------------- ----------------
Net Loss ........................................ (3.3)% (3.1)%
================ ================
First Fiscal Quarter 2003 compared to First Fiscal Quarter 2002
Net Sales. The following table sets forth the Company's
net sales by product line and the percentage change from the prior period:
First Fiscal Quarter Ended Percentage
-------------------------------------
April 20, 2003 April 21, 2002 Change
---------------- ---------------- --------------
(Dollars in thousands)
Popular ........ $ 43,111 $ 48,177 (10.5)%
Economy ........ 20,854 23,272 (10.4)
Signature ...... 4,695 5,936 (20.9)
Snacks ......... 3,796 3,065 23.8
Bowls .......... 7,780 422 1743.6
Co-Pack ........ 1,873 -- --
---------------- ---------------- --------------
$ 82,109 $ 80,872 1.5 %
================ ================ ==============
9
Total Company net sales for the first fiscal quarter ended April 20, 2003
increased $1.2 million or 1.5% to $82.1 million from $80.9 million for the
comparable quarter in 2002. Unit volume decreased 3.3%, while trade promotional
spending decreased $6.9 million over the comparable period last year due to
timing of incurring slotting expenses (promotional costs incurred to introduce
new products) and the overall shift of spending from trade promotions to TV
advertising.
Net sales in the Popular and Economy product lines were down $5.1 million and
$2.4 million respectively due to the continued shift of retailers to a
one-value-brand strategy. Signature net sales were down $1.2 million due to
declining distribution. Snack net sales increased $0.7 million, led by the
introduction of the 12" baked pizza. Net sales in the Bowls product line
increased $7.4 million as slotting spending on this 2002 new product
introduction, which is a reduction from net sales, was down $6.4 million from
the comparable quarter last year. The Company had $1.9 million in Co-pack
product sales to an affiliate in the first quarter of fiscal 2003.
Canadian net sales contributed 19.1% or $15.7 million of net sales for the first
quarter of 2003 compared to 18.1% or $14.6 million for the first quarter 2002.
This increase is the combined result of the growth of the frozen entree market
in Canada and the volume impact from the continued use of advertising.
Gross Profit. Gross profit in the first fiscal quarter of 2003 increased $1.9
million or 8.9% to $23.0 million from $21.1 million in the comparable quarter
last year. The gross margin increased to 28.0% of net sales from 26.1%. The
gross profit and margin improvement is due to lower trade promotion spending.
Selling and Marketing Expenses. Selling and marketing expenses for the first
quarter of 2003 increased $2.1 million to $10.7 million due primarily to
increased TV advertising.
General and Administrative Expenses. General and administrative expenses were
$10.8 million in the first quarter of 2003, as compared to $10.0 million for the
first quarter 2002. This increase is due primarily to a write-off of Fleming's
trade receivables as a result of the Company filing for bankruptcy protection.
Operating Income. Operating income for the first fiscal quarter ended April 20,
2003 was $1.5 million as compared to $2.5 million for the comparable period last
year. This reduction in operating income is primarily the result of increase in
advertising expense and bad debt expense, offset partially by the gross profit
improvement.
Interest Expense. Interest expense for the first fiscal quarter ended April 20,
2003 decreased $1.1 million to $4.2 million. The reduction is the result of the
combination of lower interest rates, a lower debt level and lower amortization
of deferred financing costs as the result of the Company refinancing its senior
bank debt on September 27, 2002.
Interest Income. Interest income was $0.1 million for the first fiscal quarter
for both 2003 and 2002.
Other, Net. The first quarter 2003 had expense of $0.1 million, as compared to
other income of $0.2 million in the first quarter 2002.
Net Loss. For the reasons stated above, the net loss for the first quarter ended
April 20, 2003 was $2.7 million as compared to a net loss of $2.5 million for
the first quarter 2002.
Liquidity and Capital Resources
At April 20, 2003, the Company had $14.2 million outstanding on a $32.5 million
line of senior revolving credit with LaSalle Bank, N.A. The cash and cash
equivalent balance as of April 20, 2003 was $2.0 million as compared to $1.3
million as of April 21, 2002. As of April 20, 2003, the Company was in
compliance with all covenants of its senior credit agreement with LaSalle Bank.
Operating activities provided $4.9 million of cash in the first 16 weeks of 2003
as compared to $3.3 million for the first 16 weeks of 2002. This $1.6 million
improvement in cash provided by operating activities is the result of $1.7
million decrease in working capital requirements and a $0.5 million increase in
deferred income taxes, offset by a $0.2 million decrease in net income, a $0.4
million decrease in depreciation and amortization.
10
Investing activities used $3.4 million of cash for the 16 weeks of 2003, as
compared to $4.4 million for the comparable period in 2002. The reduction of $1
million is primarily attributed to decreased capital spending.
Financing activities used $2.3 million of cash in the first 16 weeks ended April
20, 2003 as compared to $0.9 million used in the first 16 weeks of 2002. The
Company paid $4.8 million in distribution to stockholders in the first 16 weeks
of 2003 to cover their tax liability related to 2002 operating results.
As a part of the Company's strategic growth plan, the Company incurred
approximately $4.5 million for slotting expenses for the first 16 weeks of 2003.
The Company plans to spend an additional $7.3 million in slotting expenses in
2003 to introduce new products and increase product penetration. The Company
incurred $4.5 million in TV advertising in the first fiscal quarter 2003, and
plans to spend an additional $1.5 million for the balance of 2003. The Company
also plans on spending approximately $12.0 million on plant and equipment
purchases in 2003, primarily to increase the production capacity at its Jackson,
Ohio plant.
The Company anticipates continuing to elect Subchapter S treatment under the
U.S. Internal Revenue Code. Consequently, the Company will continue to make
quarterly distributions to the stockholders based upon their estimated tax
liabilities. The Company's subsidiary, AAG, is a C-Corporation. As such, AAG
will be responsible for all tax liabilities including deferred taxes.
Of the $157.6 million of total indebtedness on April 20, 2003, $100.0 million
consisted of 10% senior subordinated notes issued pursuant to an Indenture dated
February 4, 1999 between the Company and U.S. Bank Trust National Association as
trustee. Interest on the senior subordinated notes is payable semi-annually in
arrears on February 1 and August 1 of each year. The senior subordinated notes
are due February 1, 2006, but may be redeemed by the Company for a premium after
March 1, 2003. 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, including payment requirements on the senior subordinated
notes, 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 obtain any such
refinancing on commercially reasonable terms or at all. The Company'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.
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.
New Accounting Pronouncements
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 require the Company to record the fair value of an
asset retirement obligation as a liability in the period in which the Company
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development, and/or
normal use of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company adopted SFAS No. 143 effective
first quarter 2003. The adoption of SFAS No. 143 did not have an impact on the
Company's financial condition or results of operations.
In July 2002, FASB issued SFAS 146, "Accounting for Costs Associated with Exit
or Disposal Activities." The statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS 146 requires that a liability for costs associated
with an exit or disposal activity be recognized when a
11
liability is incurred. Under Issue 94-3, a liability for an exit cost as
generally defined in Issue 94-3 was recognized at the date of an entity's
commitment to an exit plan. The provisions of this Statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of SFAS 146 did not have a material impact on our consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. The Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. We do not anticipate that this Standard will have an impact on our
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, and interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and did not
have a material impact on the Company's consolidated financial statements. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation requires a company to consider
variable interest entities ("VIE") if the entity is a primary beneficiary (holds
a majority of the variable interest) of the VIE and the VIE possesses specific
characteristics. It also requires additional disclosure for parties involved
with VIEs. The provisions of the Interpretation became effective for the Company
in the first quarter of 2003 and did not have a material effect on our
consolidated financial statements.
Cautionary Statement
This Form 10-Q contains forward-looking statements within the meaning of federal
securities laws. These statements include statements regarding continued
adequate cash flow, introduction of new products, investment in new capacity,
and expectations of increased product penetration, as well as other indications
of 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 99.1 to this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 its
investment strategy, it 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
12
J.M. Schneider Corporation in Canada, which accounted for 19.1% of net sales for
the 16 weeks ended April 20, 2003. The Company does not currently foresee a
credit risk with this distributor.
Interest Rate Risk. The Company uses financial instruments, including fixed and
variable rate debt, as well as interest rate swaps, to finance operations and to
hedge interest rate expenses. The swap contracts are entered into for periods
consistent with relative underlying exposures, and do not constitute position
independent of those exposures. The Company does not enter into contract for
speculative purposes. There has been no material change in the Company's market
risks associated with debt and interest rate swap obligations during its first
fiscal quarter ended April 20, 2003.
The Company entered into two fixed interest rate swaps in February 2002 totaling
$30,000. A $20,000 swap at an interest rate of 3.49%, plus the current margin
spread of 2.0% maturing on December 31, 2003 and a $10,000 swap at an interest
rate of 3.07%, plus the current margin spread of 2.0% of which $2,500 matured on
December 31, 2002 and March 31, 2003, respectively, and $2,500 will mature on
June 30, 2003 and September 30, 2003, respectively.
The swap agreements were entered into to fix the rate of interest on the
floating rate senior credit facility. The swaps were accounted for as cash flow
hedges and their fair values are reflected in the financial statements under the
Stockholders' Equity section of the Consolidated Balance Sheet.
Other Market Risks. The Company has no history of, and does not anticipate in
the future, investing in derivative commodity instruments or other such
financial instruments. Transactions with international customers are entered
into in U.S. dollars, precluding the need for foreign currency hedges. As a
result, the exposure to market risk is not material.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer (collectively,
the "Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for the Company. The Certifying Officers have
concluded (based upon their evaluation of these controls and procedures as of a
date within 90 days of the filing of this report) that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in this report is accumulated and communicated to the
Company's management, including its principal executive officers as appropriate,
to allow timely decisions regarding required disclosure. The Certifying Officers
also have indicated that there were no significant changes in the Company's
internal controls or other factors that could significantly affect such controls
subsequent to the date of the evaluation, and there were no corrective actions
with regard to significant deficiencies and material weaknesses.
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 99.1 to this report.
13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
99.1 Cautionary Statements for Purposes of the "Safe
Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
(b) Reports on Form 8-K
None.
14
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: June 2, 2003 By: /s/ Thomas W. Knuesel
----------------------------------------
Thomas W. Knuesel
Chief Financial Officer (principal financial
and accounting officer)
15
SARBANES-OXLEY SECTION 302 CERTIFICATION
I, Ronald O. Bubar, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Luigino's, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 2, 2003
By /s/ Ronald O. Bubar
--------------------------------------
Ronald O. Bubar
Chief Executive Officer
16
SARBANES-OXLEY SECTION 302 CERTIFICATION
I, Thomas W. Knuesel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Luigino's, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 2, 2003
By /s/ Thomas W. Knuesel
--------------------------------------
Thomas W. Knuesel
Chief Financial Officer
17
EXHIBIT INDEX
Number Description
99.1 Cautionary Statements for Purposes of the "Safe
Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
18