10-Q 1 d10q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q [x] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended October 5, 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 (I.R.S. Employer incorporation or organization) Industrial Classification Identification No.) Code) 525 Lake Avenue South Duluth, MN 55802 (218) 723-5555 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices.) ---------- Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] 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 November 17, 2003) ================================================================================ LUIGINO'S, INC AND SUBSIDIARY INDEX PART I - FINANCIAL INFORMATION PAGE NO. -------- Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets as of October 5, 2003 (Unaudited) and December 29, 2002 ............................ 3 Consolidated Statements of Operations for the 12 and 40 weeks ended October 5, 2003 (Unaudited) and October 6, 2002 (Unaudited)............................... 4 Consolidated Statements of Cash Flows for 40 weeks ended October 5, 2003 (Unaudited) and October 6, 2002 (Unaudited)............................... 5 Notes to Consolidated 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................................................... 14 Item 4. Controls and Procedures....................................... 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................. 15 Item 5. Other Information............................................. 16 Item 6. Exhibits and Reports on Form 8-K.............................. 16 Signatures.............................................................. 17 Exhibit Index........................................................... 18 2 LUIGINO'S, INC. AND SUBSIDIARY Consolidated Balance Sheets (In Thousands, Except Share and Per Share Data) (Unaudited) October 5, December 29, 2003 2002 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents....................... $ 2,556 $ 2,870 Receivables, net of allowance for doubtful accounts of $150 and $146...................... 27,824 28,955 Inventories..................................... 22,594 22,469 Prepaid expenses and other...................... 3,362 2,946 ------------ ------------ Total current assets......................... 56,336 57,240 ------------ ------------ Property, Plant and Equipment: Land............................................ 22 22 Buildings and improvements...................... 21,802 20,866 Machinery and equipment......................... 130,131 123,671 Office equipment and leasehold improvements..... 6,924 6,727 Construction in progress........................ 10,032 8,956 Less - - Accumulated depreciation............... (81,107) (69,543) ------------ ------------ Net property, plant and equipment............ 87,804 90,699 ------------ ------------ Other Assets: Receivables from stockholder.................... 4,222 4,472 Deferred costs, principally debt issuance and package design, net............................. 3,627 3,946 Restricted cash................................. 51 48 Goodwill........................................ 39,648 39,648 Other intangibles, net of amort of $11,269 and $10,884......................................... 23,382 23,766 ------------ ------------ Total other assets........................... 70,930 71,880 ------------ ------------ Total Assets....................................... $ 215,070 $ 219,819 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt............ $ 13,554 $ 10,723 Accounts payable................................ 25,821 19,885 Accrued expenses: Accrued payroll and benefits................. 5,561 6,671 Accrued interest............................. 1,984 4,333 Accrued promotions and other................. 4,350 4,457 Declared shareholder tax distributions....... -- 4,647 ------------ ------------ Total current liabilities.................... 51,270 50,716 Long-Term Debt, less current maturities............ 136,466 145,298 Deferred Taxes..................................... 9,066 9,066 ------------ ------------ Total liabilities............................ 196,802 205,080 ------------ ------------ 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 ........... (344) (548) Retained earnings............................... 17,956 19,278 ------------ ------------ Total stockholders' equity................... 18,268 14,739 ------------ ------------ Total Liabilities and Stockholders' Equity......... $ 215,070 $ 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) (Unaudited) Third Fiscal Quarter Ended 40 Weeks Ended ---------------------- ---------------------- October 5, October 6, October 5, October 6, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net Sales ..................... $ 70,551 $ 70,980 $ 224,711 $ 220,688 Cost of Goods Sold ............ 48,506 47,284 157,759 153,318 ---------- ---------- ---------- ---------- Gross profit ............... 22,045 23,696 66,952 67,370 ---------- ---------- ---------- ---------- Operating Expenses: Selling and marketing expenses .................. 5,204 6,563 22,585 20,757 General and administrative expenses .................. 6,370 7,522 24,861 25,250 ---------- ---------- ---------- ---------- Total operating expenses ... 11,574 14,085 47,446 46,007 ---------- ---------- ---------- ---------- Operating income ........... 10,471 9,611 19,506 21,363 Other Income (Expense): Interest expense ........... (3,090) (3,422) (10,475) (12,221) Extinguishment of Debt ..... -- (1,160) -- (1,160) Interest income ............ 49 54 176 183 Other, net ................. (26) (94) (164) 3 ---------- ---------- ---------- ---------- Total other expense ........ (3,067) (4,622) (10,463) (13,195) ---------- ---------- ---------- ---------- Net Income .................... $ 7,404 $ 4,989 $ 9,043 $ 8,168 ========== ========== ========== ========== 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) 40 Weeks Ended -------------------------------- October 5, 2003 October 6, 2002 --------------- --------------- Operating Activities: Net Income ............................... $ 9,043 $ 8,168 Adjustments to net income provided by (used in) Operating Activities - Depreciation and amortization ......... 13,274 16,223 Changes in operating assets and liabilities: Receivables ........................... 403 5,861 Inventories ........................... (125) (1,672) Prepaid expenses and other ............ (416) 240 Accounts payable and accrued expenses ............................. 2,574 (6,740) --------------- --------------- Net cash provided by operating activities ........................ 24,753 22,080 --------------- --------------- Investing Activities: Purchases of property, plant and equipment ............................... (8,669) (10,967) Purchases of other assets ................ (1,008) (310) --------------- --------------- Net cash used in investing activities ........................ (9,677) (11,277) --------------- --------------- Financing Activities: Borrowings on revolving credit agreement ............................... 93,400 77,700 Payments on revolving credit agreement ... (91,300) (63,966) Proceeds from debt ....................... 729 56,234 Repayments of debt ....................... (8,101) (71,611) Increase in deferred financing costs ..... -- (584) Increase in restricted cash .............. (3) (3) Decrease in notes receivable ............. 250 250 Distributions to stockholders ............ (10,365) (10,329) --------------- --------------- Net cash used in financing activities ........................ (15,390) (12,309) --------------- --------------- Decrease in cash and cash equivalents ....... (314) (1,506) Cash and cash equivalents, beginning of period ..................................... 2,870 3,440 --------------- --------------- Cash and cash equivalents, end of period .... $ 2,556 $ 1,934 =============== =============== Supplemental Information: Interest paid ......................... $ 12,207 $ 13,303 =============== =============== The accompanying notes are an integral part of these consolidated financial statements. 5 LUIGINO'S, INC. AND SUBSIDIARY Notes to Consolidated 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 40 weeks ended October 5, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending January 4, 2004. For further information, refer to the audited Consolidated 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 requires 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 an impact on the Company's 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 Company does not have any financial instruments outstanding to which the provision of SFAS No. 150 apply, therefore SFAS No. 150 did not have an impact on the Company's Consolidated Financial Statements. 6 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 an impact on the Company's Consolidated Financial Statements. In January 2003, the FASB issued Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 states that companies that have exposure to economic risks and potential rewards from another entity's assets and activities have a controlling financial interest in a variable interest entity and should consolidate the entity, despite the absence of clear control through a voting equity interest. The consolidation requirements apply to all variable interest entities created after January 31, 2003. For variable interest entities that existed prior to February 1, 2003, FASB Staff Position No. 46-6 delayed the consolidation requirements until annual or interim periods ending after December 15, 2003. Disclosure of significant variable interest entities is required in all financial statements issued after January 31, 2003, regardless of when the variable interest was created. FIN No. 46 did not have an impact on the company's Consolidated Financial Statements. In December 2002, the EITF reached a consensus on EITF No. 00-21, "Revenue Arrangements with Multiple Deliveries" ("EITF 00-21"). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. It also establishes three principles: revenue arrangements with multiple deliverables should be divided into separate units of accounting, arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, and revenue recognition criteria should be considered separately for separate units of accounting. The provisions of EITF 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company believes that its current accounting is consistent with the provisions of EITF 00-21 and therefore the application of the provisions of EITF did not have an impact on the Company's Consolidated Financial Statements. In November 2002, the EITF reached a consensus on EITF No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16 addresses how a reseller of a vendor's products should account for cash consideration received from a vendor and how to measure that consideration in its income statement. EITF 02-16 presumes that cash received from a vendor represents a reduction of the prices of the vendor's products or services, unless the cash received represents a payment for assets or services provided to the vendor or a reimbursement of costs incurred by the customer to sell the vendor's products. Certain provisions of EITF 02-16 were effective November 22, 2002 and other provisions were effective after December 31, 2002. The provisions of EITF 02-16 did not have an impact on the Company's Consolidated Financial Statements. 4. Goodwill and Intangible Assets The carrying amount for goodwill, as of October 5, 2003 and December 29, 2002 was $39,648. Intangible assets as of October 5, 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 40 weeks ended October 5, 2003 $ 385 ============ 7 Those intangible assets that were being amortized are fully amortized as of October 5, 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: October 5, 2003 December 29, 2002 --------------- ----------------- Raw materials .......................... $ 9,399 $ 7,509 Finished goods ......................... 10,161 12,348 Packaging supplies ..................... 3,034 2,612 --------------- ----------------- $ 22,594 $ 22,469 =============== ================= 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 (AAG) 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 October 5, 2003, and at December 29, 2002, the Company had outstanding balances of $12,000 and $9,900, respectively, 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 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, 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 total fair market value as of October 5, 2003 is a liability of $162 which is reflected on the Company's 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 5, 2003 bore interest at the Eurodollar Rate plus 2.00% and Prime Rate plus 0.25% with a weighted-average interest rate of 3.12% at October 5, 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 October 5, 2003, the Company was in compliance with all covenants of its senior credit agreement with LaSalle Bank, except for the Total Leverage Ratio. Subsequent to October 5, 2003, the Company received an amendment to the senior credit agreement related to the covenant and is currently in compliance. 8 8. Foreign Currency Risks While transactions with international customers are entered into in U.S. dollars, distributions received from our foreign distributors are paid in local currency. In July 2003, the Company entered into a cash flow hedge on $10,100 Canadian dollars relating to future anticipated distributions to be received from our Canadian distributor between August 6, 2003 and June 11, 2004 of which $2,700 was received on August 15, 2003. The average rate for the remaining cash flow hedge is $1.4011 Canadian dollars for each U.S. dollar. At October 5, 2003, the fair market value of the hedge was a liability of $182 which is reflected on the Company's Consolidated Balance Sheets as accumulated other comprehensive loss. 9. Comprehensive Income

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:

9 Third Fiscal Quarter 2003 compared to Third 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: Third Fiscal Quarter Ended --------------------------------- Percentage October 5, 2003 October 6, 2002 Change --------------- --------------- ------------ (Dollars in thousands) Popular ................. $ 39,499 $ 38,652 2.2% Economy ................. 16,536 18,743 (11.8) Signature ............... 3,065 3,646 (15.9) Snacks .................. 4,479 2,433 84.1 Bowls ................... 4,976 7,506 (33.7) Co-Pack ................. 1,996 -- -- --------------- --------------- ------------ $ 70,551 $ 70,980 (0.6)% =============== =============== ============ Total Company net sales for the third fiscal quarter ended October 5, 2003 decreased $0.4 million or 0.6% to $70.6 million from $71.0 million for the comparable quarter in 2002. Unit volume increased 1.4%, while trade promotion spending increased $4.4 million over the comparable period last year due primarily to the new lower every day pricing strategy and increased slotting expense associated with the launching of Lean Gourmet, a healthy product in the value segment. According to AC Nielsen the single serve frozen entree category in the U.S. declined 7.7% during the 12 week period ended October 5, 2003 from the comparable period in 2002. Net sales in the Popular product line increased $0.8 million or 2.2% due primarily to the introduction of Lean Gourmet. The Economy product line net sales were down $2.2 million or 11.8% which is slightly greater than the category decrease as reported AC Nielsen. Signature net sales decreased $0.6 million due to declining distribution. Snacks net sales increased by $2.1 million due to distribution gains and the introduction of the 12" oven bake pizza. Bowls net sales declined by $2.5 million over the comparable quarter last year due to category decline and distribution loss. The Company had $2.0 million in Co-Pack sales to an affiliate in the third quarter ended October 5, 2003. Canadian net sales contributed 15.0% or $10.6 million of net sales for the third quarter of 2003, which compares with the 15.2% and $10.8 million for the same quarter last year. Gross Profit. Gross profit in the third quarter ended October 5, 2003 decreased $1.7 million or 7.0% to $22.0 million from $23.7 million for the comparable quarter in 2002. The gross margin decreased to 31.2% of net sales from 33.4% for the comparable quarter last year. The gross profit and gross margin decline is due to higher trade promotional spending. Selling and Marketing Expenses. Selling and marketing expenses for the third quarter of 2003 decreased $1.4 million to $5.2 million due primarily to timing of the TV advertising. General and Administrative Expenses. General and administrative expenses were down $1.2 million to $6.4 million due primarily to the drop in amortization resulted from the expiration of a non-compete agreement in February 2003. Operating Income. Operating income for the third quarter ended October 5, 2003 was $10.5 million as compared to $9.6 million for the same quarter in 2002. This $0.9 million increase in operating income is the net result of the decrease in selling and marketing expenses ($1.4 million), primarily TV advertising and the decrease in general and administrative expenses, ($1.2 million) primarily amortization, offset partially by the decline in gross profit ($1.7 million). Interest Expense. Interest expenses for the third quarter ended October 5, 2003 decreased $0.3 million to $3.1 million. This reduction is the result of lower interest rates, a lower debt level and less amortization of deferred financing costs due to the Company refinancing its senior bank debt on September 27, 2002. 10 Extinguishment of Debt. Extinguishment of debt was zero in the third quarter 2003 as comparable to $1.2 million in the third quarter of 2002. On September 27, 2002 the Company refinanced the senior bank debt resulting in a $1.2 million write-off of deferred financing costs associated with the previous senior bank debt facility. Interest Income. Interest income was consistent for the third fiscal quarter of both 2003 and 2002. Net Income. For the reasons stated above, the net income for the third quarter ended October 5, 2003 was $7.4 million as compared to a net income of $5.0 million for the third quarter 2002. The 40 weeks Ended October 5, 2003 as Compared to the 40 weeks Ended October 6,2002 Net Sales. The following table sets forth the Company's net sales by product line and the percentage change from the prior period. 40 Weeks Ended --------------------------------- Percentage October 5, 2003 October 6, 2002 Change --------------- --------------- ------------ (Dollars in thousands) Popular ................. $ 122,254 $ 125,092 (2.3)% Economy ................. 54,831 60,672 (9.6) Signature ............... 10,678 13,199 (19.1) Snacks .................. 12,447 7,791 59.8 Bowls ................... 18,652 13,934 33.9 Co-Pack ................. 5,849 -- -- --------------- --------------- ------------ $ 224,711 $ 220,688 1.8% =============== =============== ============ Total net sales for the 40 weeks ended October 5, 2003 increased $4.0 million or 1.8% to $224.7 million as compared to $220.7 million in 2002. Unit volume increased 1.5%, while trade promotion spending decreased $0.1 million over the comparable period last year. According to AC Nielsen, the single serve frozen entree category in the U.S. declined 7.6% during the first 40 weeks of 2003 from the comparable period in 2002. Net sales in the Popular product line declined $2.8 million or 2.3% for the 40 weeks ended October 5, 2003 due primarily to higher trade spending, as unit volume increased 2.5%. Economy net sales declined $5.8 million or 9.6% for the 40 week period ended October 5, 2003 which is slightly greater than the category drop of 7.6%. Signature net sales were down $2.5 million due to declining distribution. Snacks net sales increased $4.6 million due primarily to the introduction of the 12" oven baked pizza. Net sales in the Bowls product line increased $4.7 million due to reduced trade spending. The Company had $5.8 million in Co-Pack product sales to an affiliate during the 40 week period ended October 5, 2003. Canadian net sales for the 40 week period ended October 5, 2003 were $40.2 million or 17.9% of total net sales, as compared to $36.0 million or 16.3% for the same 40 weeks in 2002. Gross Profit. Gross profit for the 40 weeks ended October 5, 2003 decreased $0.4 million or 0.6% to $67.0 million from $67.4 million for the comparable period in 2002. The gross margin also decreased to 29.8% from 30.5% in 2002. Gross profit and gross margin declines were due to product mix, with a higher concentration of lower margin foreign sales. Selling and Marketing Expenses. Selling and marketing expenses for the 40 weeks ended October 5, 2003 were $22.6 million, an increase of $1.8 million from the comparable period in 2002. The increase is due primarily to increased TV advertising. General and Administrative Expenses. General and administrative expenses decreased $0.3 million to $24.9 million for the 40 weeks ending October 5, 2003. The decrease is the net result of the change in amortization expense due to the expiration of a non-compete agreement in February 2003, partially offset by bad debt write offs. Operating Income. Operating income for the 40 weeks ended October 5, 2003 was $19.5 million as compared to $21.4 million in 2002. The $1.9 million decrease in operating is primarily the net result of the 11 decrease in gross profit plus the increase in TV advertising partially offset by reduced general and administrative expenses. Interest Expense. Interest expense for the 40 weeks ended October 5, 2003 decreased $1.7 million to $10.5 million. The decline is the result of lower interest rates, lower debt level and less amortization of deferred financing costs as the result of the Company refinancing its senior bank debt on September 27, 2002. Extinguishment of Debt. Debt extinguishment expenses was zero in the 40 weeks ended October 5, 2003 as compared to the $1.2 million for the comparable 40 weeks in 2002. On September 27, 2002 the Company refinanced its senior bank debt resulting in a $1.2 million write off of deferred financing costs associated with the previous senior bank debt facility. Interest Income. Interest income was $0.2 million for both the 40 week periods in 2002 and 2003. Other, Net. The 40 weeks ended October 5, 2003 reflects an other expense of $0.2 million as compared to a nominal amount for the comparable period of time in 2002. Net Income. For the reasons stated above, the net income for the 40 weeks ended October 5, 2003 was $9.0 million or 4.0% of net sales, as compared to $8.2 million or 3.7% for the comparable 40 weeks in 2002. Liquidity and Capital Resources At October 5, 2003, the Company had $12.0 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 October 5, 2003 was $2.6 million as compared to $1.9 million as of October 6, 2002. As of October 5, 2003, the Company was in compliance with all covenants of its senior credit agreement with LaSalle Bank, except for the Total Leverage Ratio. Subsequent to October 5, 2003, the Company received an amendment to the senior credit agreement related to the covenant and is currently in compliance. Operating activities provided $24.8 million of cash in the first 40 weeks of 2003 as compared to $22.1 million for the first 40 weeks of 2002. This $2.7 million improvement in cash provided by operating activities is the result of a $0.8 million increase in net income and a $4.8 million decrease in working capital requirements offset partially by a decline of $2.9 million in depreciation and amortization. Investing activities used $9.7 million of cash for the 40 weeks of 2003, as compared to $11.3 million for the comparable period in 2002. The reduction of $1.6 million is primarily attributed to decreased capital spending. Financing activities used $15.4 million of cash in the first 40 weeks ended October 5, 2003 as compared to $12.3 million used in the first 40 weeks of 2002. The Company paid $6.4 million in distribution to stockholders in the first 40 weeks of 2003 to cover their tax liabilities and a $4.0 million dividend from excess cash from 2002 results. As a part of the Company's strategic growth plan, the Company incurred approximately $9.2 million for slotting expenses for the first 40 weeks of 2003. The Company plans to spend an additional $1.0 million in slotting expenses in 2003 to introduce new products and increase product penetration. The Company incurred $6.0 million in TV advertising in the first 40 weeks of 2003, and plans no additional expenditures for the balance of 2003. The Company also plans on spending approximately $3.3 million on plant and equipment purchases in the fourth quarter of 2003, primarily to increase the production capacity at its Jackson, Ohio plant. These equipment purchases will be funded with the Company's current line of credit. 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 $150.0 million of total indebtedness on October 5, 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 12 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 requires 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 an impact on the Company's 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 Company does not have any financial instruments outstanding to which the provision of SFAS No. 150 apply, therefore SFAS No. 150 did not have an impact on the Company's 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 an impact on the Company's Consolidated Financial Statements. In January 2003, the FASB issued Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 states that companies that have exposure to economic risks and potential rewards 13 from another entity's assets and activities have a controlling financial interest in a variable interest entity and should consolidate the entity, despite the absence of clear control through a voting equity interest. The consolidation requirements apply to all variable interest entities created after January 31, 2003. For variable interest entities that existed prior to February 1, 2003, FASB Staff Position No. 46-6 delayed the consolidation requirements until annual or interim periods ending after December 15, 2003. Disclosure of significant variable interest entities is required in all financial statements issued after January 31, 2003, regardless of when the variable interest was created. FIN No. 46 did not have an impact of the company's Consolidated Financial Statements. In December 2002, the EITF reached a consensus on EITF No. 00-21, "Revenue Arrangements with Multiple Deliveries" ("EITF 00-21"). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. It also establishes three principles: revenue arrangements with multiple deliverables should be divided into separate units of accounting, arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, and revenue recognition criteria should be considered separately for separate units of accounting. The provisions of EITF 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company believes that its current accounting is consistent with the provisions of EITF 00-21 and therefore the application of the provisions of EITF 00-21 did not have an impact on the Company's Consolidated Financial Statements. In November 2002, the EITF reached a consensus on EITF No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16 addresses how a reseller of a vendor's products should account for cash consideration received from a vendor and how to measure that consideration in its income statement. EITF 02-16 presumes that cash received from a vendor represents a reduction of the prices of the vendor's products or services, unless the cash received represents a payment for assets or services provided to the vendor or a reimbursement of costs incurred by the customer to sell the vendor's products. Certain provisions of EITF 02-16 were effective November 22, 2002 and other provisions were effective after December 31, 2002. The provisions of EITF 02-16 did not have an impact on the Company's 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 J.M. Schneider Corporation in Canada, which accounted for 17.9% of net sales for the 40 weeks ended October 5, 2003. At October 5, 2003, the Company's receivable balance due from this distributor was $3,645. The Company does not currently foresee a credit risk with this distributor. 14 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 positions independent of those exposures. The Company does not enter into contracts 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 40 weeks ended October 5, 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, 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 reflected on the Company's Consolidated Balance Sheets under accumulated other comprehensive loss. Foreign Currency Risks. While transactions with international customers are entered into in U.S. dollars, distributions received from our foreign distributors are paid in local currency. In July 2003, the Company entered into a cash flow hedge on $10,100 Canadian dollars relating to future anticipated distributions to be received from our Canadian distributor between August 6, 2003 and June 11, 2004 of which $2,700 was received on August 15, 2003. The average rate for the remaining cash flow hedge is $1.4011 Canadian dollars for each U.S. dollar. At October 5, 2003, the fair market value of the hedge was a liability of $182 which is reflected on the Company's Consolidated Balance Sheets as accumulated other comprehensive loss. Item 4. Controls and Procedures Evaluation of Disclosure Controls Procedures. As of the end of the period covered by this report, the Company conducted an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer regarding the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rules 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information that is required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities Exchange Commission. Changes in Internal Controls There were no changes in the Company's internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings On January 16, 2003, Weight Watchers International, Inc. ("Weight Watchers") commenced a lawsuit against the Company in United States District Court for the Southern District of New York. In the suit, Weight Watchers alleges that the Company's Michelina's Lean Gourmet frozen entrees infringe Weight Watchers' "Points" trademark. The Company has revised the manner in which it refers to "Points" in its packaging in accordance with a court ruling issued on June 30, 2003, and has exhausted its inventories of the packaging that was subject to the court's ruling. Weight Watchers also seeks unspecified monetary damages in the suit. To date, the Company believes it has successfully defended the case. 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 - See attached Exhibit Index following signature page. (b) Reports on Form 8-K A Form 8-K dated July 30, 2003 was filed regarding the commencement of a lawsuit against the Company by Weight Watchers International, Inc. and a waiver by the Company's bondholders in connection with the Company's incurrence of new capital lease obligations. 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: November 17, 2003 By: /s/ Thomas W. Knuesel ------------------------------------ Thomas W. Knuesel Chief Financial Officer (principal financial and accounting officer) 17 EXHIBIT INDEX Form 10-QSB Quarter ended October 5, 2003 Number Description ------ --------------------------------------------------------- 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995

LUIGINOS INC 10-Q