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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 July 14, 2002
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 (Primary Standard (I.R.S.
of incorporation Industrial Employer
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 August 26, 2002)
LUIGINO'S, INC AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 14, 2002 (Unaudited)
and December 30, 2001 ........................................ 3
Consolidated Statements of Operations for the second fiscal
quarter and 28 weeks ended July 14, 2002 (Unaudited) and
July 15, 2001 (Unaudited) .................................... 4
Consolidated Statements of Cash Flows for 28 weeks ended
July 14, 2002 (Unaudited) and July 15, 2001 (Unaudited) ...... 5
Notes to Financial Statements (Unaudited) .................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ... 15
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .......... 15
Item 5. Other Information ............................................ 16
Item 6. Exhibits and Reports on Form 8-K ............................. 16
2
LUIGINO'S, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
(Unaudited)
July 14, December 30,
2002 2001
--------- ------------
ASSETS
Current Assets:
Cash and cash equivalents .......................................... $ 933 $ 3,440
Receivables, net of allowance for doubtful accounts of $146 and $146 23,551 29,007
Inventories ........................................................ 20,030 19,571
Prepaid expenses and other ......................................... 2,933 2,939
--------- ---------
Total current assets ............................................. 47,447 54,957
--------- ---------
Property, Plant and Equipment:
Land ............................................................... 22 22
Buildings and improvements ......................................... 16,918 16,878
Machinery and equipment ............................................ 116,790 116,636
Office equipment and leasehold improvements ........................ 5,932 5,855
Construction in progress ........................................... 15,371 7,486
Less -- Accumulated depreciation ................................... (63,720) (57,644)
--------- ---------
Net property, plant and equipment ................................ 91,313 89,233
--------- ---------
Other Assets:
Receivables from stockholder ....................................... 4,472 4,722
Deferred costs, principally debt issuance costs .................... 4,857 6,323
Restricted cash .................................................... 46 44
Goodwill ........................................................... 39,648 39,648
Other intangibles, net of amort of $8,576 and $5,884 ............... 26,074 28,766
--------- ---------
Total other assets ............................................... 75,097 79,503
--------- ---------
Total Assets ......................................................... $ 213,857 $ 223,693
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ............................... $ 12,076 $ 10,451
Accounts payable ................................................... 15,175 20,557
Accrued expenses --
Accrued payroll and benefits ..................................... 5,016 5,889
Accrued interest ................................................. 4,947 4,557
Accrued promotions and other ..................................... 8,333 6,142
Declared shareholder tax distributions ........................... - 7,655
--------- ---------
Total current liabilities ........................................ 45,547 55,251
Long-Term Debt, less current maturities .............................. 149,284 151,995
Deferred Taxes ....................................................... 9,066 9,600
--------- ---------
Total liabilities ................................................ 203,897 216,846
--------- ---------
Commitments and Contingencies
Stockholders' Equity:
Common stock --
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 shareholder tax distributions ............................. - (8,074)
Retained earnings .................................................. 9,304 14,265
--------- ---------
Total stockholders' equity ....................................... 9,960 6,847
--------- ---------
Total Liabilities and Stockholders' Equity ........................... $ 213,857 $ 223,693
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
3
LUIGINO'S, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In Thousands)
(Unaudited)
Second Fiscal Quarter Ended 28 Weeks Ended
----------------------------- ------------------------------
July 14, 2002 July 15, 2001 July 14, 2002 July 15, 2001
------------- ------------- ------------- -------------
Net Sales ................................... $ 68,836 $ 70,349 $ 149,708 $ 150,350
Cost of Goods Sold .......................... 46,203 49,679 106,034 110,204
--------- --------- --------- ---------
Gross profit .............................. 22,633 20,670 43,674 40,146
--------- --------- --------- ---------
Operating Expenses:
Selling and marketing expenses ............ 5,681 5,179 14,194 10,885
General and administrative expenses ....... 7,743 8,869 17,728 18,807
--------- --------- --------- ---------
Total operating expenses .................. 13,424 14,048 31,922 29,692
--------- --------- --------- ---------
Operating income .......................... 9,209 6,622 11,752 10,454
Other Income (Expense):
Interest expense .......................... (3,499) (3,772) (8,800) (9,288)
Interest income ........................... 54 92 130 223
Other, net ................................ (97) (178) 98 (310)
--------- --------- --------- ---------
Total other expense ....................... (3,542) (3,858) (8,572) (9,375)
--------- --------- --------- ---------
Net Income .................................. $ 5,667 $ 2,764 $ 3,180 $ 1,079
========= ========= ========= =========
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)
(Unaudited)
28 Weeks Ended
-----------------------------
July 14, 2002 July 15, 2001
------------- -------------
Operating Activities:
Net Income $ 3,180 $ 1,079
Adjustments to Net Income provided by (used in)
operating activites -
Depreciation and amortization .................................. 10,415 11,264
Deferred income taxes .......................................... (534) -
Changes in operating assets and liabilities:
Receivables .................................................. 5,456 2,848
Inventories .................................................. (459) (488)
Prepaid expenses and other ................................... 6 (24)
Accounts payable and accrued expenses ........................ (3,675) 3,319
-------- --------
Net cash provided by operating activities .................. 14,389 17,998
-------- --------
Investing Activities:
Purchases of property, plant and equipment ....................... (8,156) (3,800)
Payments for deferred costs ...................................... (181) (685)
Business acquisition ............................................. - (66,581)
-------- --------
Net cash used in investing activities ...................... (8,337) (71,066)
-------- --------
Financing Activities:
Borrowings on revolving credit agreement ......................... 53,600 49,112
Payments on revolving credit agreement ........................... (39,700) (49,900)
Proceeds from debt ............................................... - 60,000
Repayments of debt ............................................... (14,987) (4,041)
Increase in deferred financing costs ............................. - (1,905)
Increase/Decrease in restricted cash ............................. (2) 37
Decrease in notes receivable ..................................... 250 500
Distributions to stockholders .................................... (7,720) -
-------- --------
Net cash provided by (used in) financing activities ........ (8,559) 53,803
-------- --------
Decrease/Increase in cash and cash equivalents ..................... (2,507) 735
Cash and cash equivalents, beginning of period ..................... 3,440 313
-------- --------
Cash and cash equivalents, end of period ........................... $ 933 $ 1,048
======== ========
Supplemental Information:
Interest paid .................................................... 7,214 8,709
======== =========
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 is sourced through a co-pack
agreement with Heinz Frozen Food Company (HFF) and internal production in
Minnesota and Ohio. 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 28 weeks ended July 14, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 29, 2002. 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.
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
30, 2001, filed on March 19, 2002 with the Securities and Exchange Commission.
3. Recent Accounting Pronouncements:
Effective with the first quarter of 2002, the Company adopted the provisions of
Emerging Issues Task Force (EITF) Issues 00-14,"Accounting for Certain Sales
Incentives" and 00-25,"Vendor Income Statement Characterization of Consideration
from a Vendor to a Retailer." These EITF Issues provide that certain sales
incentives and consideration paid by the Company to a retailer, such as new item
placement fees, coupon redemption costs, feature price discounts, in-store
display incentive and cooperative advertising, are reductions of net sales.
Prior to adoption, the Company recognized these expenditures as selling
expenses. To conform to current year presentation, prior year amounts have been
appropriately reclassified. The result of these adoptions was a reclassification
between selling expenses and net sales with no impact on net income. The amounts
of reclassification of these promotional expenses for the second quarter 2002
and 2001 are $10,061 and $10,915, respectively, and for the 28 weeks ended July
14, 2002 and July 15, 2001 are $32,544 and $33,782, respectively.
On June 29, 2001, the Financial Accounting Standards Board (FASB) approved for
issuance Statement of Financial Accounting Standards (SFAS) 141, "Business
Combinations," and SFAS 142, "Goodwill and Intangible Assets." These statements
change the accounting for business combinations, goodwill and intangible assts.
SFAS 141 eliminates the pooling-of-interests method of accounting for business
combinations and further clarifies the criteria for recognizing intangible
assets separate from goodwill. SFAS 142 provides that goodwill and other
indefinite-lived intangible assets are no longer amortized but are reviewed
annually, or more frequently if necessary, for impairment. Separable intangible
assets that are deemed to have a definite life will continue to be amortized
over their useful lives.
6
The Company adopted the provisions of SFAS 141 and SFAS 142 in the first quarter
of 2002 and has discontinued the amortization of its goodwill and
indefinite-lived intangible assets.
"Adjusted Earnings" - SFAS 142 Transitional Disclosure
For comparability, the table below reconciles the Company's reported earnings
for the second quarter, third quarter, and fiscal year end to "adjusted"
earnings for the 28 weeks ended July 15, 2001, the 40 weeks ended October 7,
2001 and the year ended December 30, 2001, which exclude goodwill amortization.
There was no goodwill to amortize prior to 2001.
July 15, 2001 October 7, 2001 December 30, 2001
-------------------- --------------------- ---------------------
2nd Fiscal 28 Weeks 3rd Fiscal 40 Weeks 4th Fiscal 52 Weeks
Qtr Ended Ended Qtr Ended Ended Qtr Ended Ended
---------- -------- ---------- -------- ---------- --------
NET INCOME
Reported net income $2,764 $1,079 $5,858 $6,937 $8,732 $15,669
Goodwill amortization, net of tax 1,350 1,674 762 2,436 762 3,198
------------------------------------------------------------------------
Adjusted net income $4,114 $2,753 $6,620 $9,373 $9,494 $18,867
------------------------------------------------------------------------
Carrying amounts for other intangible assets and goodwill, net of accumulated
amortization, as of July 14, 2002 and July 15, 2001, respectively, are $65,722
and $74,270.
The Company has completed the transitional impairment testing. The Company has
one segment for goodwill and financial reporting purposes. The transitional
analyses resulted in no impairment charges.
Intangible assets as of July 14, 2002 consisted of the following:
Gross
Carrying Accumulated
(In thousands) Amount Amortization
- ----------------------------------------------------------------------------
Amortized intangible assets:
Restricted Convenant $ 10,000 $ 7,306
Transitional Agreement 150 150
--------------------------
10,150 7,456
==========================
Unamortized intangible assets:
Trademarks 22,892
Patent Sublicense 488
----------
23,380
==========
Amortization of intangibles for the
28 weeks ended July 14, 2002 $ 2,692
==========
Estimated amortization expense of the amortized intangible assets will be $2,308
in 2002, $386 in 2003, and $0 for 2004, 2005 and 2006.
In August 2001, the FASB issued Statements of Financial Accounting Standards No.
144 ("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived
Assets". This statement supersedes Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and amends other guidance related to the accounting
and reporting of long-lived assets. The Company adopted SFAS 144 effective first
quarter 2002. The adoption of SFAS 144 did not have an impact on the Company's
financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS 145 will require gains and losses on extinguishments of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS 4. SFAS 145 also amends
SFAS 13 to require certain modifications to capital leases be treated as a
sale-leaseback and modifies the accounting for sub-leases when the original
lessee remains a secondary obligor or guarantor. Accordingly, most gains or
losses from extinguishments of debt for fiscal years beginning after May 15,
2002 shall not be reported as extraordinary. Upon adoption, any gain or loss on
extinguishment of debt previously classified as an extraordinary item in prior
periods presented be reclassified to conform with the provisions of SFAS 145.
SFAS 145's amendment and technical correction to SFAS 13 is effective for all
transactions occurring after May 15, 2002. The Company adopted SFAS 145 in the
second quarter of 2002. The adoption of SFAS 145 did not have a material impact
on our financial statements.
7
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. We do not expect a material impact on our
financial statements upon adoption of SFAS 146.
4. 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.
5. Inventories:
Inventories are stated at the lower of first-in, first-out cost or market and
consisted of the following:
July 14, 2002 December 30, 2001
------------- -----------------
Finished Goods .............. $ 9,801 $ 8,974
Raw Materials ............... 7,429 7,748
Packaging Supplies .......... 2,800 2,849
-------- --------
$ 20,030 $ 19,571
======== ========
6. Acquisition of The All American Gourmet Company:
On February 9, 2001, the Company acquired all of the outstanding capital stock
of The All-American Gourmet Company, a Delaware Corporation (AAG) pursuant to a
Purchase Agreement by and between the Company and HFF, a Delaware Corporation
and the parent of AAG. At the date of closing, the only assets owned by AAG were
intangible assets consisting of trademarks, logos, patent licenses, product
formulas, quality specifications, customer lists, and marketing materials. The
aggregate consideration for the acquisition of AAG was $66.6 million in cash.
The Company also agreed to purchase certain finished goods inventory from the
former parent HFF, over a six-month period following closing. The Company
entered into a two-year co-pack agreement with HFF, whereby the Company has
agreed to purchase a minimum of 8 million and 6 million cases in fiscal years
2001 and 2002, respectively.
The Company's acquisition was accounted for by using the purchase method. The
purchase price was allocated to the acquired assets and assumed liabilities
based on a determination of the fair values of the assets purchased and
liabilities assumed. The purchase price and related acquisition costs exceeded
the fair values assigned to tangible assets by approximately $66,627. Except for
the amortization on the $10,000 of restrictive covenant, effective first quarter
of 2002, the Company has discontinued the amortization of goodwill and
indefinite-lived intangible assets.
The following unaudited pro forma condensed results of operations for the
periods ended July 14, 2002 and July 15, 2001 have been prepared as if the
transaction occurred on January 1, 2001.
8
For the 28 Weeks Ended
Pro Forma
July 14, 2002 July 15, 2001
------------- -------------
Net Sales ................. $149,708 $159,071
Income from Operations .... 11,752 12,399
Net Income ................ 3,180 2,347
The financial information does not purport to represent results which would have
been obtained if the acquisition had been in effect on January 1, 2001 or any
future results which may in fact be realized.
The Company is organized as a Subchapter S corporation. Accordingly, all tax
liabilities are the responsibility of individual shareholders. Deferred tax
assets and liabilities become the responsibility of the Company if and when the
Subchapter S corporation structure is converted to a C-Corporation. The
Company's subsidiary, AAG, is a C-Corporation. As such, AAG will be responsible
for federal, state and foreign taxes. As a part of the acquisition of
AAG, the Company recorded a $9,600 deferred tax liability and corresponding
increase to goodwill due to financial reporting and tax reporting basis
differences.
At July 14, 2002, AAG has approximately $200 of federal net operating loss
carryforwards. The losses are available to offset future federal taxable income
through fiscal year 2021. Further, AAG may be classified as a personal holding
company ("PHC") for federal income tax purposes. AAG, as a personal holding
company ("PHC"), may be assessed a tax (in addition to the regular corporate
federal income tax) on its undistributed PHC income. For the period ended July
14, 2002, AAG does not have any undistributed PHC income.
7. Debt:
The Company funded the purchase price of the AAG acquisition through a $100,000
credit facility which replaced its existing revolving credit facility. The
credit facility includes (a) a $60,000 term loan with maturities for each of the
five years subsequent to December 31, 2000 of $7,500, $10,000, $13,250, $13,250
and $16,000, and (b) a $40,000 revolving credit facility expiring on December
31, 2005, subject to certain borrowing base limitations. At July 14, 2002, the
Company had outstanding balances of $13,900, on the revolving line of credit.
The initial net proceeds of the credit facility were used to finance the
acquisition of AAG, refinance the existing bank indebtedness of the Company, and
pay related fees and expenses.
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 2.75% 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 2.75% with
$2,500 maturing on December 31, 2002, March 31, 2003, 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 fair values are not material to the financial statements.
Based on a total leverage ratio calculated on a quarterly basis, borrowings
under the term loan and revolving credit facility bear interest either at 2.25%
to 3.25% over the rate offered to major banks in the London Interbank Eurodollar
market ("Eurodollar Rate"), or at 1% to 2% over Alternative Base Rate, which is
the larger of the Prime Rate or the Federal Funds Rate plus 1/2 %. Advances
through July 14, 2002 bore interest at the Eurodollar Rate plus 2.75% and Prime
Rate plus 1.50% with a weighted-average interest rate of 5.20% at July 14, 2002.
The Company also pays a fee of 0.375% to 0.50% on the unused daily balance of
the revolver based on a leverage ratio calculated on a quarterly basis.
The credit facility contains various restrictive covenants, which among other
matters, requires the Company to maintain a minimum fixed charge coverage ratio,
a maximum total leverage ratio, a maximum senior leverage ratio and a minimum
EBITDA, all as defined in the credit agreement. The credit agreement also limits
additional indebtedness, capital expenditures and cash dividends. At July 14,
2002, the Company was in compliance with all covenants in the credit agreement.
9
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:
Second Fiscal Quarter Ended 28 Weeks Ended
------------------------------- ------------------------------
July 14, 2002 July 15, 2001 July 14, 2002 July 15, 2001
------------- ------------- ------------- -------------
Net Sales ............................ 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold ................... 67.1 70.6 70.8 73.3
-------- -------- -------- --------
Gross profit ....................... 32.9 29.4 29.2 26.7
Operating Expenses:
Selling and marketing .............. 8.3 7.4 9.5 7.2
General and administrative ......... 11.2 12.6 11.8 12.5
-------- -------- -------- --------
Total operating expenses ........... 19.5 20.0 21.3 19.7
Operating income ................... 13.4 9.4 7.9 7.0
Other Income (Expense):
Interest expense ................... (5.1) (5.4) (5.9) (6.2)
Interest income .................... 0.0 0.1 0.1 0.1
Other, net ......................... (0.1) (0.2) 0.0 (0.2)
-------- -------- -------- --------
Total other expense .............. (5.2) (5.5) (5.8) (6.3)
-------- -------- -------- --------
Net Income ........................... 8.2% 3.9% 2.1% 0.7%
-------- -------- -------- --------
Second Fiscal Quarter 2002 compared to Second Fiscal Quarter 2001
Net Sales. The following table sets forth the Company's net sales by product
line and the percentage change from the prior period:
Second Fiscal Quarter Ended
----------------------------- Percentage
July 14, 2002 July 15, 2001 Change
------------- ------------- ----------
(Dollars in thousands)
Popular .................. $38,262 $40,874 (6.4)%
Economy .................. 18,658 20,429 (8.7)
Signature ................ 3,617 5,411 (33.2)
Snacks ................... 2,293 3,635 (36.9)
Bowls .................... 6,006 - -
------- ------- -----
$68,836 $70,349 (2.2)%
------- ------- -----
10
Total net sales for the second fiscal quarter ended July 14, 2002 decreased $1.5
million or 2.2% to $68.8 million from $70.3 million for the comparable quarter
in 2001. Unit volume declined 4.1%. Net sales in the Popular and Economy product
line decreased 6.4% and 8.7% respectively, as retailers continue to shift to a
one-value-brand strategy. Signatures and Snack product lines reported a 33.2%
and 36.9% decline respectively resulting from decreasing distribution. Bowl
products, which were launched in the first quarter of 2002, reported net sales
of $6.0 in the second fiscal quarter ended July 14, 2002.
Canadian net sales contributed 15.3% or $10.6 million to net sales for the
second fiscal quarter of 2002 as compared to 13.8% or $9.7 million in the second
quarter of 2001. This increase is due primarily to the launch of the new Bowl
product line.
Gross Profit. Gross profit in the second fiscal quarter of 2002 increased $1.9
million to $22.6 million from $20.7 million for the comparable quarter in 2001.
The gross margin increased to 32.9% of net sales from 29.4% for the comparable
quarter in 2001. The improvement in gross profit and gross margin is primarily
the result of improved operating efficiencies, lower commodity costs and the
full quarter effect of the May, 2001 Budget Gourmet brands price increase in the
Popular and Economy product lines.
Selling and Marketing Expenses. Selling and marketing expenses for the second
fiscal quarter of 2002 increased $0.5 million to $5.7 million due primarily to
advertising and higher reclamation expenses.
General and Administrative Expenses. General and administrative expenses for the
second fiscal quarter declined $1.1 million to $7.7 million in 2002. General
spending was up $0.2 million or 3.1% offset by a $1.3 million decline in
amortization expenses due to the discontinuance of goodwill amortization.
Operating Income. Operating income for the second fiscal quarter ended July 14,
2002 was $9.2 million as compared to $6.6 million for the comparable quarter in
2001. This increase is due primarily to the improved gross profit and
discontinuance of goodwill amortization.
Interest Expense. Interest expense for the second fiscal quarter of 2002 was
$3.5 million compared to $3.8 million for the second quarter of 2001. The
reduction is primarily the result of lower interest rates associated with the
senior bank debt of the Company.
Interest Income. Interest income was $0.1 million for both the second fiscal
quarter of 2002 and 2001.
Other, Net. Other expense was $0.1 million in the second fiscal quarter of 2002,
as compared to $0.2 million in 2001.
Net Income. For the reasons stated above, net income for the second fiscal
quarter ended July 14, 2002 was $5.7 million compared to $2.8 million in the
second quarter of 2001.
The 28 Weeks Ended July 14, 2002 compared to the 28 weeks ended July 15, 2001
Net Sales. The following table sets forth the Company's net sales by product
line and the percentage change from prior period.
28 Weeks Ended
----------------------------- Percentage
July 14, 2002 July 15, 2001 Change
------------- ------------- ----------
(Dollars in thousands)
Popular .................. $ 86,439 $ 90,370 (4.3)%
Economy .................. 41,930 39,714 5.6
Signature ................ 9,553 12,488 (23.5)
Snacks ................... 5,358 7,778 (31.1)
Bowls .................... 6,428 - -
-------- -------- -----
$149,708 $150,350 (0.4)%
-------- -------- -----
11
Total net sales for the 28 weeks ended July 14, 2002 decreased $0.6 million or
0.4% to $149.7 million from $150.3 million in 2001. Unit volume decreased 0.9%.
Net sales in the Popular product line decreased $3.9 million or 4.4% due to
distribution loss resulting from the trade shift to a one brand strategy.
Economy net sales increased $2.2 million or 5.6% due primarily to acquisition of
AAG. Both Signature and Snack product lines reported a decline in net sales of
$2.9 and $2.4 million respectively, due to decreased distribution. The Bowl
product line, which was introduced in the first quarter of 2002, reported net
sales of $6.4 million.
Canadian net sales contributed $25.2 or 16.8% of net sales for the 28 weeks
ended July 14, 2002, compared to $22.8 or 15.2% for the comparable period in
2001. The increase is primarily due to the introduction of the new Bowl product
line.
Gross Profit. Gross profit for the 28 weeks ended July 14, 2002 increased $3.6
million or 8.8% to $43.7 million from $40.1 million in the comparable period
last year. Gross margin improved to 29.2% of net sales from 26.7%. The gross
profit and margin improvements are primarily the result of the 2001 price
increases, improved operating efficiencies, and lower commodity costs.
Selling and Marketing Expenses. Selling and marketing expenses for the 28 weeks
ended July 14, 2002 were $14.2 million as compared to $10.9 million in the
comparable time from last year. This increase is attributed primarily to expense
related to a new advertising campaign in the 2002 first quarter.
General and Administration Expense. General and administrative expenses for the
28 weeks ended July 14, 2002 decreased $1.1 million to $17.7 million from the
comparable period in 2001. The decrease is the net effect of the discontinuance
of good will amortization of $1.6 million, partially offset by a $0.5 million or
3.5% increase in general spending.
Operating Income. Operating income for the 28 weeks ended July 14, 2002 was
$11.8 million, an increase of $1.3 from the same period in 2001. The increase in
operating income is primarily the net result of the year-to-date profit
improvement coupled with decreased amortization and offset somewhat by higher
advertising.
Interest Expense. Interest expense for the 28 weeks ended July 14, 2002 was $8.8
million as compared to $9.3 million for the same period in 2001. This $0.5
million improvement is the combined result of lower interest rates and lower
debt levels.
Interest Income. Interest income was $0.1 million for the 28 weeks ended July
14, 2002 compared to $0.2 million for the 28 weeks ended July 15, 2001.
Other Net. Other income was $0.1 million for the 28 weeks ended July 14, 2002 as
compared to other expenses of $0.3 million for the comparable period in 2001.
Net Income. For the reasons stated above, the net income for the 28 weeks under
July 14, 2002 was $3.2 million as compared to $1.1 million in 2001.
Liquidity and Capital Resources
At July 14, 2002, the Company had $13.9 million outstanding on a $40.0 million
line of senior revolving credit with Bank One, NA. The cash and cash equivalents
were $0.9 million as of July 14, 2002 as compared to $3.4 million as of December
30, 2001. As of July 14, 2002, the Company was in compliance with all covenants
of its senior credit agreement with Bank One.
Operating activities provided $14.4 million of cash in the first 28 weeks of
2002, as compared to $18.0 million for the 28 weeks of 2001. This $3.6 million
decrease in cash provided by operating activities is the result of $4.3 million
reduction in working capital, a $0.9 million reduction in depreciation and
amortization, and a $0.5 million reduction in deferred income taxes, offset by a
$2.1 million increase in net income.
12
Investing activities used $8.3 million for the 28 weeks ending July 14, 2002, as
compared to $71.1 million for the comparable period in 2001. In the first
quarter of 2001, the Company used $66.6 million to acquire the All American
Gourmet Company.
Financing activities used $8.6 million of cash in the first 28 weeks ended July
14, 2002, compared to $53.8 million provided in the first 28 weeks of 2001. The
Company paid $7.7 million in distribution to shareholders in 2002 to cover their
tax liability related to 2001 operating results. On February 9, 2001, the
Company obtained $66.6 million of cash primarily for the acquisition of AAG
through borrowings under the credit facility. The Company funded the purchase
price of the AAG acquisition through a $100.0 million credit facility which
replaced its existing revolving credit facility. The credit facility includes
(a) a $60.0 million term loan with maturity for each of the five years
subsequent to December 31, 2000 of $7.5 million, $10.0 million, $13.25 million,
$13.25 million and $16.0 million, and (b) a $40.0 million revolving credit
facility expiring on December 31, 2005, subject to certain borrowing base
limitations.
As a part of the Company's strategic growth plan, the Company incurred
approximately $9.5 million for new item placement expenses for the first 28
weeks of 2002 to introduce new products and increase product penetration. The
Company plans on spending approximately $12.0 million on plant and equipment
purchases in 2002, of which $8.2 has been incurred as of July 14, 2002,
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 shareholders 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 $161.9 million of total indebtedness on July 14, 2002, $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 effect 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
Effective with the first quarter of 2002, the Company adopted the provisions of
Emerging Issues Task Force (EITF) Issues 00-14,"Accounting for Certain Sales
Incentives" and 00-25,"Vendor Income Statement Characterization of Consideration
from a Vendor to a Retailer." These EITF Issues provide that certain sales
incentives and consideration paid by the Company to a retailer, such as new item
placement fees, coupon redemption costs, feature price discounts, in-store
display incentive and cooperative advertising, are reductions of net sales.
Prior to adoption, the Company recognized these expenditures as selling
expenses. To conform to current year presentation, prior year amounts have been
appropriately reclassified. The result of these adoptions was a reclassification
between selling expenses and net sales with no impact on net loss. The amounts
of reclassification of these promotional expenses for the second quarter 2002
and 2001 are $10,061 and $10,915, respectively, and for the 28 weeks ended July
14, 2002 and July 15, 2001 are $32,544 and $33,782, respectively.
13
On June 29, 2001, the Financial Accounting Standards Board (FASB) approved for
issuance Statement of Financial Accounting Standards (SFAS) 141, "Business
Combinations," and SFAS 142, "Goodwill and Intangible Assets." These statements
change the accounting for business combinations, goodwill and intangible assts.
SFAS 141 eliminates the pooling-of-interests method of accounting for business
combinations and further clarifies the criteria for recognizing intangible
assets separate from goodwill. SFAS 142 provides that goodwill and other
indefinite-lived intangible assets are no longer amortized but are reviewed
annually, or more frequently if necessary, for impairment. Separable intangible
assets that are deemed to have a definite life will continue to be amortized
over their useful lives.
The Company adopted the provisions of SFAS 141 and SFAS 142 and has discontinued
the amortization of its goodwill and indefinite-lived intangible assets
effective December 31, 2001.
"Adjusted Earnings" - SFAS 142 Transitional Disclosure
For comparability, the table below reconciles the Company's reported earnings
for the second quarter, third quarter, and fiscal year end to "adjusted"
earnings for the 28 weeks ended July 15, 2001, the 40 weeks ended October 7,
2001 and the year ended December 30, 2001, which exclude goodwill amortization.
There was no goodwill to amortize prior to 2001.
July 15, 2001 October 7, 2001 December 30, 2001
-------------------- --------------------- ---------------------
2nd Fiscal 28 Weeks 3rd Fiscal 40 Weeks 4th Fiscal 52 Weeks
Qtr Ended Ended Qtr Ended Ended Qtr Ended Ended
---------- -------- ---------- -------- ---------- --------
NET INCOME
Reported net income $2,764 $1,079 $5,858 $6,937 $8,732 $15,669
Goodwill amortization, net of tax 1,350 1,674 762 2,436 762 3,198
------------------ ---------------- ------------------
Adjusted net income $4,114 $2,753 $6,620 $9,373 $9,494 $18,867
------------------ ---------------- ------------------
Carrying amounts for other intangible assets and goodwill, net of accumulated
amortization, as of July 14, 2002 and July 15, 2001, respectively, are $65,722
and $74,270.
Intangible assets as of July 14, 2002 consisted of the following:
Gross
Carrying Accumulated
(In thousands) Amount Amortization
- ----------------------------------------------------------------------------
Amortized intangible assets:
Restricted Convenant $ 10,000 $ 7,306
Transitional Agreement 150 150
--------------------------
10,150 7,456
==========================
Unamortized intangible assets:
Trademarks 22,892
Patent Sublicense 488
----------
23,380
==========
Amortization of intangibles for the
28 weeks ended July 14, 2002 $ 2,692
==========
Estimated amortization expense of the amortized intangible assets will be $2,308
in 2002, $386 in 2003, and $0 for 2004, 2005 and 2006.
The Company has completed the transitional impairment testing. The Company has
one segment for goodwill and financial reporting purpose. The transitional
analyses resulted in no impairment charges.
14
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, planned new product lines, 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 J.M. Schneider Corporation in Canada, which accounted for 16.8%
of net sales for the 28 weeks ended July 14, 2002. 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 ending July 14, 2002.
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 2.75% maturing on December 31, 2003 and a $10,000 swap at an interest
rate of 3.07%, plus the current margin spread of 2.75% with $2,500 maturing on
December 31, 2002, March 31, 2003, 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 not material to the financial statements.
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.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
None.
15
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.
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
The Company filed a Report on Form 8-K on May 14, 2002
appointing KPMG, LLP as the registrant's principal accountant.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LUIGINO'S, INC.
Date: August 26, 2002 By: /s/ Thomas W. Knuesel
----------------------------------
Thomas W. Knuesel
Chief Financial Officer (principal
financial and accounting 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