<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 33-97752
VAN DE KAMP'S, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 43-1721518
-------- ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation of Organization) Identification No.)
1000 St. Louis Union Station
St. Louis, Missouri 63103
(Address of Principal Executive Office, Including Zip Code)
(314) 241-0303
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant (1) has 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 ___ No X
---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Shares Outstanding
May 8, 1998
Common stock, no par value 200
===============================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1: FINANCIAL STATEMENTS
- - -----------------------------
See pages 2 through 8.
1
<PAGE>
VAN DE KAMP'S, INC.
BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
----------- --------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 53 $ 308
Accounts receivable (net of $420 and $416 allowance, respectively) 43,350 33,020
Inventories (Note 2) 35,825 33,535
Prepaid expenses 1,459 1,208
Current deferred tax assets 11,989 8,260
------- --------
Total current assets 92,676 76,331
Property, plant and equipment, net 88,240 86,394
Non-current deferred tax assets 7,171 -
Goodwill and other intangible assets, net 322,550 331,013
Other assets 16,434 15,853
-------- --------
Total assets $527,071 $509,591
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long term debt $ 16,978 $ 13,097
Senior secured revolving debt facility 15,000 5,000
Accounts payable 13,577 13,791
Accrued liabilities 31,607 24,619
-------- --------
Total current liabilities 77,162 56,507
Deferred tax liabilities - 10,404
Other liabilities (Note 3) 15,000 -
Senior secured term debt 177,781 194,759
Senior subordinated notes 100,000 100,000
-------- --------
Total liabilities 369,943 361,670
-------- --------
Stockholder's equity:
Common stock, no par value - -
Paid-in capital 198,635 144,420
Promissory notes (107) (213)
(Accumulated deficit) retained earnings (Note 3) (41,400) 3,714
-------- --------
Total stockholder's equity 157,128 147,921
-------- --------
Total liabilities and stockholder's equity $527,071 $509,591
======== ========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
VAN DE KAMP'S, INC.
STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $148,959 $151,067 $348,288 $344,113
Cost of goods sold 56,202 59,941 135,777 143,522
-------- -------- -------- --------
Gross profit 92,757 91,126 212,511 200,591
-------- -------- -------- --------
Selling, distribution and marketing expenses:
Selling and distribution 14,001 14,181 33,765 37,005
Trade promotions 43,194 36,863 101,534 83,908
Consumer marketing 12,705 13,857 25,151 23,897
-------- -------- -------- --------
Total selling, distribution and marketing expenses 69,900 64,901 160,450 144,810
Amortization of goodwill and other intangibles 3,402 3,222 10,194 9,982
General and administrative expenses 4,594 3,744 13,968 9,825
Compensation plan expense (Note 3) 69,000 - 69,000 -
Transition related costs (Note 4) - 480 - 2,073
-------- -------- -------- --------
Total operating expenses 146,896 72,347 253,612 166,690
-------- -------- -------- --------
Operating (loss) income (54,139) 18,779 (41,101) 33,901
Interest income (30) (307) (60) (939)
Interest expense 7,795 8,159 23,634 24,762
Amortization of deferred financing expense 532 526 1,612 1,573
Other bank and financing expenses 44 83 131 215
-------- -------- -------- --------
(Loss) income before income taxes (62,480) 10,318 (66,418) 8,290
Income tax (benefit) provision (19,865) 4,127 (21,304) 3,316
-------- -------- -------- --------
Net (loss) income $(42,615) $ 6,191 $(45,114) $ 4,974
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
VAN DE KAMP'S, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Retained
Common Additional Earnings
Stock Paid-in Promissory (Accumulated
Shares Capital Notes Deficit) Total
-------- ---------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 200 $144,420 $ (213) $ 3,714 $147,921
Capital contribution - 215 - - 215
Payments on officer promissory notes - - 106 - 106
Compensation plan expense (Note 3) - 54,000 - - 54,000
Net loss - - - (45,114) (45,114)
------ -------- --------- -------- --------
Balance at March 31, 1998 200 $198,635 $ (107) $(41,400) $157,128
====== ======== ========= ======== ========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
VAN DE KAMP'S, INC.
STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended
March 31,
-------------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (45,114) $ 4,974
Adjustments to reconcile net (loss) income to cash provided
by operating activities:
Depreciation and amortization 17,483 16,772
Deferred income taxes (21,304) 1,808
Compensation plan expense 69,000 -
Change in assets and liabilities, net of effects of business
acquired:
Increase in accounts receivable (10,330) (27,950)
Increase in inventories (2,290) (2,748)
Increase in prepaid expenses (251) (256)
(Decrease) increase in accounts payable (214) 2,273
Increase in accrued liabilities 6,988 10,895
Increase in income taxes payable - 1,456
Increase in other assets (1,296) (484)
-------------- -------------
Net cash provided by operating activities 12,672 6,740
-------------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment (7,524) (12,717)
Additions to other non-current assets (2,627) (1,267)
Payment for acquisition of business - (190,222)
Proceeds from sale of assets - 6,192
-------------- -------------
Net cash used in investing activities (10,151) (198,014)
-------------- -------------
Cash flows from financing activities:
Proceeds from senior secured revolving and term debt 31,000 188,000
Repayment of borrowings (34,097) (54,894)
Capital contributions from Holdings 321 60,092
Debt issuance costs - (5,631)
-------------- -------------
Net cash (used in) provided by financing activities (2,776) 187,567
-------------- -------------
Decrease in cash and cash equivalents (255) (3,707)
Cash and cash equivalents, beginning of period 308 4,040
-------------- -------------
Cash and cash equivalents, end of period $ 53 $ 333
============== =============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
Notes to the Financial Statements
(dollars in thousands)
NOTE 1 - BASIS OF PRESENTATION
- - ------------------------------
The interim financial statements of Van de Kamp's, Inc. (the "Company"),
included herein, have not been audited by independent accountants. The
statements include all adjustments, such as normal recurring accruals, which
management considers necessary for a fair presentation of the financial position
and operating results of the Company for the periods presented. The statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
conformity with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The operating results for
interim periods are not necessarily indicative of results to be expected for an
entire year. Certain prior period amounts have been reclassified to conform
to the current period's presentation.
For further information, reference should be made to the financial statements
for the period ended June 30, 1997 and notes thereto included in the Company's
Annual Report on Form 10-K on file at the Securities and Exchange Commission.
NOTE 2 - INVENTORIES
- - --------------------
Inventories are stated at the lower of cost (determined by the first-in, first-
out method) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
--------- --------
<S> <C> <C>
Raw materials $11,687 $12,556
Packaging 4,477 3,178
Finished goods 19,661 17,801
------- -------
$35,825 $33,535
======= =======
</TABLE>
NOTE 3 - COMPENSATION PLAN EXPENSE
- - ----------------------------------
For the quarter ended March 31, 1998, the Company recorded non-cash compensation
plan expense of $69.0 million based on the estimated current valuation of the
Company and in accordance with the compensation arrangement ("VDK Plan")
contained in the Limited Liability Company Agreement of VDK Foods LLC
("Agreement"). Valuations prior to the current quarter did not result in
compensation expense under the VDK Plan. Included in compensation plan expense
was a tax gross up amount of $15.0 million, which relates to certain
distributions as provided for in the VDK Plan. The expense has been recorded as
a liability of VDK Foods LLC as the sponsor to the VDK Plan. However, because
the VDK Plan is for the benefit of key personnel (as defined in the Agreement)
of the Company, expense recognized under the VDK Plan has been pushed down to
the Company, and has been recorded by the Company as
6
<PAGE>
compensation plan expense and as additional paid in capital from its parent.
Because the Company will receive the tax benefit associated with the payments
under the VDK Plan, including the tax gross up amount, and because the tax
benefit will at least exceed the amount of the tax gross up payments to be made,
the Company will bear and has recorded the liability for such tax gross up
payments. Should the Company appreciate further in value, additional
compensation plan expense would be recorded in future periods.
VDK Foods LLC will satisfy its liability under the VDK Plan by distributing
equity securities to vested key personnel according to the Agreement and similar
to the type of equity securities distributed to investors in VDK Foods LLC.
NOTE 4 - TRANSITION RELATED COSTS
- - ---------------------------------
Transition related costs consist of what management believes are one-time costs
incurred to establish operations and integrate the businesses acquired,
including relocation expenses, recruiting fees, sales training, computer systems
conversion, and other one-time transitional expenses.
NOTE 5 - CHANGE IN CONTROL
- - --------------------------
Prior to April 8, 1998, 100% of the Company's capital stock was directly held by
VDK Holdings, Inc. ("VDK Holdings"), a Delaware corporation, and 100% of VDK
Holdings' capital stock was directly held by VDK Foods LLC ("VDK LLC"), a
Delaware limited liability company. Accordingly, 100% of the Company's capital
stock was indirectly held by VDK LLC. As of the Change in Control Event
(defined below), Aurora/VDK LLC ("New LLC"), a Delaware limited liability
company, directly holds 100% of the VDK Holdings' voting securities, VDK
Holdings continues to hold directly 100% of the Company's capital stock, and
7
<PAGE>
MBW Investors LLC ("MBW LLC"), a Delaware limited liability company, and VDK LLC
directly hold 55.5% and 44.5%, respectively, of the interests in New LLC and
therefore, indirectly hold 55.5% and 44.5%, respectively, of the Company's
capital stock.
On April 8, 1998, MBW LLC and VDK LLC formed New LLC. MBW LLC contributed all
of the stock of Aurora Foods Holdings Inc. and VDK LLC contributed all of the
capital stock of VDK Holdings to New LLC (the "Contribution"). In return for
these contributions, MBW LLC was issued 55.5% of the interests in New LLC plus a
right to receive a special $8.5 million priority distribution from New LLC, and
VDK LLC was issued 44.5% of the interests in New LLC plus a right to receive a
special $42.4 million priority distribution from New LLC (the "Change in Control
Event"). The amount and source of consideration used by MBW LLC and VDK LLC for
their acquisition of interests in New LLC were their equity in Aurora Foods
Holdings Inc. and VDK Holdings, respectively.
The Change in Control Event constitutes a Change of Control under the Company's
12% Senior Subordinated Notes due 2005 (the "VDK Notes"). The terms of the VDK
Notes provide, inter alia, that within 30 days after a Change of Control, the
Company is required to offer to purchase (the "Buyback") the VDK Notes at 101%
of their principal amount plus accrued interest.
Accordingly, in connection with the Buyback, the Company has made arrangements
pursuant to a Commitment Letter dated April 8, 1998 between the Chase Manhattan
Bank, Chase Securities, Inc. and the Company for a standby credit facility with
respect to VDK Notes to provide funding for the Buyback.
NOTE 6 - SUBSEQUENT EVENT
- - -------------------------
On May 1, 1998, the Company completed the sale of its frozen desserts product
line ("Desserts Sale") to Mrs. Smith's Bakeries, Inc., a subsidiary of Flowers,
Inc. The Company received approximately $26.0 million from the sale of machinery
and equipment, contracts, the Pet Ritz(R) and Oronoque Orchards(R) trademarks,
intellectual property and goodwill. The Company also received approximately $2.0
million from the sale of finished goods inventory. The Company sold the
machinery and equipment related to the frozen desserts product line physically
located at the Chambersburg, Pennsylvania manufacturing facility, and announced
a restructuring program, which will include the closure of the Chambersburg
facility, and relocation of machinery and equipment related to the production of
certain frozen seafood and vegetable products to the Company's Erie,
Pennsylvania and Jackson, Tennessee manufacturing facilities. The impact of the
Desserts Sale on the Company's annual results is not expected to be material and
management believes the Desserts Sale will not significantly impact future
results. The net proceeds from the Desserts Sale were used to repay $25.0
million of the Company's senior secured term debt.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - --------------------------------------------------------------------------------
OF OPERATIONS
- - -------------
Reference is made to Notes to Financial Statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations presented in the
Registrant's 1997 Form 10-K for the period ended June 30, 1997.
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the historical
financial information included in the Financial Statements and notes to the
financial statements. Unless otherwise noted, years (1998 and 1997) in this
discussion refer to the Company's March-ending quarters.
The following tables set forth, for the periods indicated, the percentage which
the items in the Statement of Operations bear to net sales. A summary of the
period to period increases (decreases) in the components of operations is shown
on the pages that follow.
9
<PAGE>
Comparative Results: Three Months Ended March 31, 1998 and March 31, 1997
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Period to
Three Months Ended Period
----------------------------------------------------- Increase
March 31, 1998 March 31, 1997 (Decrease)
----------------------- ----------------------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $148,959 100.0% $151,067 100.0% (1.4%)
Cost of goods sold 56,202 37.7 59,941 39.7 (6.2)
-------- ----- -------- -----
Gross profit 92,757 62.3 91,126 60.3 1.8
-------- ----- -------- -----
Selling, distribution and
marketing expenses:
Selling and distribution 14,001 9.4 14,181 9.4 (1.3)
Trade promotions 43,194 29.0 36,863 24.4 17.2
Consumer marketing 12,705 8.5 13,857 9.2 (8.3)
-------- ----- -------- -----
Total selling, distribution and
marketing expenses 69,900 46.9 64,901 43.0 7.7
Amortization of goodwill and
other intangibles 3,402 2.3 3,222 2.1 5.6
General and administrative
expenses 4,594 3.1 3,744 2.5 22.7
Compensation plan expense 69,000 46.3 - 0.0 100.0
Transition related costs - 0.0 480 0.3 (100.0)
-------- ----- -------- -----
Total operating expenses 146,896 98.6 72,347 47.9 103.0
-------- ----- -------- -----
Operating (loss) income (54,139) (36.3) 18,779 12.4 (388.3)
Interest income (30) (0.0) (307) (0.2) (90.2)
Interest expense 7,795 5.2 8,159 5.4 (4.5)
Amortization of deferred
financing expense 532 0.4 526 0.3 1.1
Other bank and financing expenses 44 0.0 83 0.1 (47.0)
-------- ----- -------- -----
(Loss) income before income taxes (62,480) (41.9) 10,318 6.8 (705.5)
Income tax (benefit) provision (19,865) (13.3) 4,127 2.7 (581.3)
-------- ----- -------- -----
Net (loss) income $(42,615) (28.6%) $ 6,191 4.1% (788.3%)
======== ===== ======== =====
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS
- - ---------------------
Three Months Ended March 31, 1998 Compared to
Three Months Ended March 31, 1997
Net Sales. Net sales for the quarter were $149.0 million, which was 1.4% lower
than sales during the prior year quarter of $151.1 million. Excluding the impact
in both years of (i) sales of the dessert product line, which was divested on
May 1, 1998, and (ii) sales of the whipped topping product line, which was
divested in February 1997, sales were unchanged from the prior year. Aunt
Jemima(R) sales increased by $0.3 million, or 1.1%, versus the prior year. Unit
volume increased 6.5% versus the prior year, which was partially offset by a
unit price reduction effective January 1998 on selected items to achieve
improved consumer price points. Pizza sales increased $1.0 million, or 5.0%,
versus the prior year due to the introduction of Mama Celeste(TM) Fresh Baked
Rising Crust Pizza in the fall of 1997. Frozen seafood sales decreased 1.9%
versus the same quarter last year primarily because the current quarter included
two fewer weeks of high volume Lenten season sales compared to the prior year
period (Lent began on February 25 in 1998 compared to February 12 in 1997),
which affected the Company's sales as well as overall seafood category volume.
Foodservice sales increased 4.8% due to increased unit sales of frozen breakfast
products and a price increase of approximately 3.0% taken in July 1997.
Gross Profit. Gross profit increased from 60.3% as a percentage of net sales in
1997 to 62.3% in 1998. Lower seafood manufacturing costs, favorable packaging
and raw material costs, and the divestiture of the less profitable whipped
topping product line in February 1997 accounted for the gross profit
improvement.
Selling, Distribution and Marketing Expenses. Selling, distribution and
marketing expenses increased from 43.0% as a percentage of net sales in 1997 to
46.9% in the current quarter. The increase was due to higher trade promotion
expense, which was partially offset by lower consumer marketing and selling and
distribution expenses.
Selling and distribution expenses remained flat as a percentage of net sales and
were 1.3% below last year on a dollar basis. Trade promotion spending increased
principally to fund new product introductions in the seafood and pizza product
lines. Consumer marketing expenses were lower in 1998 due to a shift in timing
of consumer events versus prior year.
Amortization of Goodwill and Other Intangibles. Amortization expense increased
slightly versus the same quarter in the prior year as a result of computer
software expenditures and the associated amortization.
General and Administrative Expenses. General and administrative expenses
increased to 3.1% as a percentage of net sales versus 2.5% in the prior year.
The increase reflected higher staffing levels required to support the acquired
businesses and the incremental cost of a foodservice sales organization. In the
prior year's quarter, The Quaker Oats Company ("Quaker") managed the Company's
foodservice sales function for a fee of $0.5 million, which was classified as a
selling and distribution expense.
11
<PAGE>
Compensation Plan Expense. Non-cash compensation plan expense of $69.0 million
was based on the estimated current valuation of the Company and in accordance
with the compensation agreement ("VDK Plan") contained in the Limited Liability
Company Agreement of VDK Foods LLC. Included in compensation plan expense was a
tax gross up amount of $15.0 million, which relates to certain distributions as
provided for in the VDK Plan. (See Note 3 to the interim financial statements.)
Operating (Loss) Income. Operating loss for the quarter was $54.1 million as
compared to operating income of $18.8 million for the prior year period.
Excluding the effect of the recognition of non-cash compensation plan expense of
$69.0 million, operating profit was $14.9 million, which was $3.9 million lower
than the prior year period. The Company's operating income margin, excluding
the effect of compensation plan expense, was 10.0% as a percentage of net sales
in the current quarter as compared to 12.4% in the prior year period. The
decrease in operating income, excluding the effect of compensation plan expense,
was primarily due to increased promotional spending in support of the Company's
new product offerings and higher general and administrative expenses.
Interest Expense (Income). Net interest expense was relatively unchanged as a
percentage of net sales for both the current quarter and the prior year's
quarter. Interest expense decreased $0.4 million versus the same quarter in the
prior year due to scheduled repayments of the Company's senior secured term
debt.
Income Tax (Benefit) Provision. The Company's combined effective federal and
state tax rate for the current quarter was approximately 31.8% as compared to
40.0% in the 1997 March quarter. The rate was lower than the rate experienced
in the same quarter last year because a portion of compensation plan expense was
not deductible, which generated a greater book loss than tax loss and a
commensurate lower income tax benefit for tax purposes.
Net (Loss) Income. The Company recorded a net loss of $42.6 million for the
quarter as compared to net income of $6.2 million for the same quarter last
year. Excluding the effect of non-cash compensation plan expense, the net
income of $3.8 million was lower than the net income incurred in the 1997 period
due to lower operating income.
12
<PAGE>
Comparative Results: Nine Months Ended March 31, 1998 and March 31, 1997
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Period to
Nine Months Ended Period
----------------------------------------------------- Increase
March 31, 1998 March 31, 1997 (Decrease)
----------------------- ----------------------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $348,288 100.0% $344,113 100.0% 1.2%
Cost of goods sold 135,777 39.0 143,522 41.7 (5.4)
-------- ----- -------- -----
Gross profit 212,511 61.0 200,591 58.3 5.9
-------- ----- -------- -----
Selling, distribution and
marketing expenses:
Selling and distribution 33,765 9.7 37,005 10.8 (8.8)
Trade promotions 101,534 29.2 83,908 24.4 21.0
Consumer marketing 25,151 7.2 23,897 6.9 5.2
-------- ----- -------- -----
Total selling, distribution and
marketing expenses 160,450 46.1 144,810 42.1 10.8
Amortization of goodwill and
other intangibles 10,194 2.9 9,982 2.9 2.1
General and administrative
expenses 13,968 4.0 9,825 2.8 42.2
Compensation plan expense 69,000 19.8 - 0.0 100.0
Transition related costs - 0.0 2,073 0.6 (100.0)
-------- ----- -------- -----
Total operating expenses 253,612 72.8 166,690 48.4 52.1
-------- ----- -------- -----
Operating (loss) income (41,101) (11.8) 33,901 9.9 (221.2)
Interest income (60) (0.0) (939) (0.3) (93.6)
Interest expense 23,634 6.8 24,762 7.2 (4.6)
Amortization of deferred
financing expense 1,612 0.5 1,573 0.5 2.5
Other bank and financing expenses 131 0.0 215 0.1 (39.1)
-------- ----- -------- -----
(Loss) income before income taxes (66,418) (19.1) 8,290 2.4 (901.2)
Income tax (benefit) provision (21,304) (6.1) 3,316 1.0 (742.5)
-------- ----- -------- -----
Net (loss) income $(45,114) (13.0%) $ 4,974 1.4% (1,007.0%)
======== ===== ======== =====
</TABLE>
13
<PAGE>
Nine Months Ended March 31, 1998 Compared to
Nine Months Ended March 31, 1997
Net Sales. Net sales for the nine month period were $348.3 million, which was
1.2% higher than net sales during the prior nine month period of $344.1 million.
Excluding the impact in both years of (i) sales of the desserts product line
which was divested on May 1, 1998, and (ii) sales of the whipped topping product
line, which was divested in February 1997, sales increased $11.7 million, or
3.7%. Aunt Jemima(R) sales increased by $5.0 million, or 8.4%, as a result of
increased trade promotion spending and consumer marketing support. Celeste(R)
pizza sales increased by $5.9 million, or 10.6%, due to the introduction of Mama
Celeste(TM) Fresh-Baked Rising Crust Pizza and increased sales of Celeste(R)
Pizza-For-One products. Seafood sales decreased 0.8% versus the same period last
year as a result of two fewer weeks of high volume Lenten season sales compared
to the prior year period (Lent began on February 25 in 1998 compared to February
12 in 1997), which affected the Company's sales as well as overall seafood
category volume. Foodservice sales increased $2.2 million, or 9.1%, versus 1997
due to higher frozen breakfast volumes and a price increase of approximately
3.0% taken in July 1997.
Gross Profit. Gross profit increased from 58.3% as a percentage of net sales to
61.0%. The increase reflected favorable packaging and raw material costs,
improved manufacturing and distribution efficiencies, and the impact of the
divestiture of the less profitable whipped topping product line in February
1997.
Selling, Distribution and Marketing Expenses. Selling, distribution and
marketing expenses increased from 42.1% as a percentage of net sales in 1997 to
46.1% in the current period. Lower selling and distribution expenses were
offset by higher trade promotion and consumer marketing expenses.
Selling and distribution expenses declined as a percentage of net sales compared
to last year as a result of operational efficiencies within the Company's
distribution system and favorable freight rates. Trade promotion spending
increased to support the introduction of new products in the seafood and pizza
product lines and in response to competitive activity in the seafood and
breakfast categories. Increased coupon support and new media programs for the
Company's pizza and breakfast product lines resulted in higher consumer
marketing spending versus 1997.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
intangibles was unchanged as a percentage of net sales versus the same period in
the prior year.
General and Administrative Expenses. General and administrative expenses
increased $4.1 million to 4.0% as a percentage of net sales versus 2.8% in the
prior year. The increase reflected higher staffing levels required to support
the acquired businesses and the incremental cost of a foodservice sales
organization. In the prior year period, Quaker managed the Company's
foodservice sales function for a fee of $1.3 million, which was classified as a
selling and distribution expense.
Compensation Plan Expense. Non-cash compensation plan expense of $69.0 million
was based on the estimated current valuation of the Company and in accordance
with the compensation agreement ("VDK Plan") contained in the Limited Liability
Company Agreement of VDK Foods LLC. Included in compensation plan expense was a
tax gross up amount of $15.0 million, which
14
<PAGE>
relates to certain distributions as provided for in the VDK Plan. (See Note 3 to
the interim financial statements.)
Operating (Loss) Income. Operating loss for the nine month period was $41.1
million as compared to operating income of $33.9 million for the prior year
period. Excluding the effect of the recognition of non-cash compensation plan
expense of $69.0 million, operating profit was $27.9 million, which was $6.0
million lower than the prior year period. The Company's operating income
margin, excluding the effect of compensation plan expense, was 8.0% as a
percentage of net sales in 1998 as compared to 9.9% during the same period in
1997. The decrease in operating income, excluding the effect of compensation
plan expense, was primarily due to increased promotional spending in support of
the Company's new product offerings and in response to competitive activity and
higher general and administrative expenses.
Interest Expense (Income). Interest expense decreased $1.1 million versus the
same period in the prior year due to scheduled repayments of the Company's
senior secured term debt. The decrease in interest expense was partially offset
by additional borrowings versus last year on the senior secured revolving debt
facility. Interest income decreased $0.9 million in the current nine month
period. In the prior year, the Company earned interest income on an escrow
account which held a $20.0 million senior secured convertible loan.
Income Tax (Benefit) Provision. The Company's combined effective federal and
state tax rate for the current period was approximately 32.1%. The rate was
lower than the rate experienced in the same period last year because a portion
of compensation plan expense was not deductible, which generated a greater book
loss than tax loss and a commensurate lower income tax benefit for tax purposes.
Net (Loss) Income. The Company incurred a net loss of $45.1 million for the
period as compared to net income of $5.0 million for the same period last year.
Excluding the effect of non-cash compensation plan expense, the net income of
$1.3 million was lower than the net income in the 1997 period due to lower
operating income.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
For the nine months ended March 31, 1998, net cash provided by operations was
$12.7 million. Net loss plus non-cash charges provided $20.1 million of
operating cash flow, which was offset by a use of $7.4 million in cash to fund
working capital requirements. Current assets, excluding cash and current
deferred tax assets, increased $12.9 million. An increase in accounts receivable
accounted for the majority of the increase. Accounts receivable balances are
higher in the March quarter due to the increased volume related to the Lenten
season. In addition, fish inventory quantities were increased to take advantage
of favorable prices in raw materials. The increase in current assets was
partially offset by a $7.0 million increase in accrued liabilities.
Net cash used in investing activities was $10.2 million for the nine months
ended March 31, 1998. Capital expenditures during the period were primarily
related to i) the installation of equipment necessary to produce internally the
Mama Celeste(TM) Fresh-Baked Rising Crust Pizza, ii) the expansion of production
capacity for frozen breakfast products, and iii) changes to the existing Erie
facility to allow for twenty-four hour per day operation. The Company expects
to spend approximately $15.0 million on capital expenditures in fiscal 1998. The
Company anticipates that these expenditures will be funded from internal sources
and available borrowing capacity.
15
<PAGE>
During the nine months ended March 31, 1998, cash used in financing activities
was $2.8 million. Payments on borrowings during the nine month period
were approximately $34.1 million and included $13.1 million in scheduled
principal payments on senior secured term debt and $21.0 million of periodic
repayments on the revolving debt facility, which was partially offset by
periodic draws on the revolving debt facility of $31.0 million.
Total debt at March 31, 1998 was $309.8 million, a decrease of $3.1 million from
June 30, 1997. The decrease in debt was the result of scheduled principal
payments on the senior secured term debt and was partially offset by net
borrowings on the revolving debt facility. The debt consisted of $209.8 million
of senior secured term and revolving debt and $100.0 million of senior
subordinated notes outstanding. The senior secured term debt, of which $13.1
million matured during fiscal 1998, bears interest at a spread to prime or
Eurodollar base rates. The weighted average interest rate at March 31, 1998 for
the senior secured term debt was 8.57%. The interest rate on the subordinated
notes is 12.0%, with semi-annual interest payments which commenced in March
1996. Interest is generally payable quarterly and principal payments are semi-
annual.
The Company has a $25.0 million senior secured revolving debt facility, of which
$15.0 million was outstanding at March 31, 1998. The weighted average interest
rate on the revolving debt facility was 8.19% at March 31, 1998. The available
capacity under the revolving debt facility is subject to limitations based on
letters of credit.
At March 31, 1998, the Company had approximately $0.1 million of cash and cash
equivalents and an unused commitment of $9.9 million on its $25.0 million
revolving debt facility, net of reduction for outstanding letters of credit.
Cash provided by operations and borrowings under the revolving debt facility are
the primary sources of liquidity. Based on current estimates of cash flows and
operating expenses, the Company believes that the available borrowing capacity
under the revolving debt facility, combined with cash provided by operations,
will continue to provide the Company with the flexibility to fund future
operations as well as to meet existing obligations.
The merger of MBW Investors LLC and VDK LLC on April 8, 1998 (as described in
Note 5) constitutes a change of control under the terms of the Van de Kamp's,
Inc. Indenture, dated as of September 15, 1995, between the Company and Harris
Trust and Savings Bank as Trustee. As a result, the Company is required to offer
to purchase the VDK Notes at 101% of their principal amount plus accrued
interest at the repurchase date. The Company has entered into a commitment with
The Chase Manhattan Bank and Chase Securities Inc., whereby they have agreed to
provide the Company with a $101.0 million senior subordinated facility, the
proceeds of which will be used to purchase such VDK Notes. (See Note 5 to the
interim financial statements).
16
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1: LEGAL PROCEEDINGS
- - -------------------------
The Company is subject to litigation in the ordinary course of business. In the
opinion of management, the ultimate outcome of any existing litigation would not
have a material adverse effect on the Company's financial condition or results
of operations.
ITEM 2: CHANGES IN SECURITIES
- - -----------------------------
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
- - ---------------------------------------
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - -----------------------------------------------------------
Not applicable.
ITEM 5: OTHER INFORMATION
- - -------------------------
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
- - ----------------------------------------
(a) Exhibits
Exhibit
Number Exhibit
- - ------ -------
4.1 Securityholders Agreement, dated as of April 8, 1998, by and among
Aurora/VDK LLC, MBW Investors LLC, VDK Foods LLC and other parties
signatory thereto (incorporated by reference to Exhibit 4.1 of the
Company's Form 8-K filed on April 21, 1998 (the "Form 8-K")).
27.1 Financial Data Schedule for the period ended March 31, 1998 submitted
to the Securities and Exchange Commission in electronic format.
(b) Reports on Form 8-K
1. A report of Form 8-K, dated April 8, 1998, was filed on April 21, 1998
on which Item 1, 5 and 7 were reported. No financial statements were
filed with this filing.
2. A report on Form 8-K, dated April 22, 1998, as amended was filed April
30, 1998, on which Item 5 was reported. No financial statements were
filed with this filing.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VAN DE KAMP'S, INC.
Dated May 15, 1998 By: /s/ Timothy B. Andersen
---------------------------------- ------------------------------
Timothy B. Andersen
Chief Financial Officer and
Vice President, Administration
and duly authorized officer
18
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<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
balance sheets and statements of operations and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 53
<SECURITIES> 0
<RECEIVABLES> 43,770
<ALLOWANCES> (420)
<INVENTORY> 35,825
<CURRENT-ASSETS> 92,676
<PP&E> 103,251
<DEPRECIATION> (15,011)
<TOTAL-ASSETS> 527,071
<CURRENT-LIABILITIES> 77,162
<BONDS> 277,781
198,528
0
<COMMON> 0
<OTHER-SE> (41,400)
<TOTAL-LIABILITY-AND-EQUITY> 527,071
<SALES> 348,288
<TOTAL-REVENUES> 348,288
<CGS> 135,777
<TOTAL-COSTS> 296,227
<OTHER-EXPENSES> 94,665
<LOSS-PROVISION> 180
<INTEREST-EXPENSE> 23,634
<INCOME-PRETAX> (66,418)
<INCOME-TAX> (21,304)
<INCOME-CONTINUING> (45,114)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,114)
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