<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 333-50681
AURORA FOODS INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-3303521
--------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
456 Montgomery Street, Suite 2200
San Francisco, CA 94104
(Address of Principal Executive Office, Including Zip Code)
(415) 982-3019
(Registrant's Telephone Number, Including Area Code)
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 X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Shares Outstanding
August 5, 1999
Common stock, $0.01 par value 67,030,666
<PAGE>
PART I
------
FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
See pages 2 through 13.
1
<PAGE>
AURORA FOODS INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- ----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,422 $ 354
Accounts receivable (net of $728 and $670 allowance, respectively) 113,288 86,539
Inventories (Note 3) 89,858 76,674
Prepaid expenses and other assets 11,411 6,517
Current deferred tax assets 22,149 8,251
---------- ----------
Total current assets 238,128 178,335
Property, plant and equipment, net 165,624 153,167
Goodwill and other intangible assets, net 1,122,681 1,072,760
Other assets 31,113 29,620
---------- ----------
Total assets $1,557,546 $1,433,882
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of senior secured term debt $ 20,283 $ 20,000
Senior secured revolving debt facility 93,350 85,850
Accounts payable 52,258 59,078
Accrued liabilities 46,592 49,836
---------- ----------
Total current liabilities 212,483 214,764
Non-current deferred tax liabilities 23,921 649
Other liabilities 11,801 12,372
Senior secured term debt 287,116 200,000
Senior subordinated notes 402,149 402,242
---------- ----------
Total liabilities 937,470 830,027
---------- ----------
Stockholders' equity:
Preferred stock, $0.01 par value; 25,000,000 shares
authorized; no shares issued or outstanding - -
Common stock, $0.01 par value; 250,000,000
shares authorized; 67,030,666 and 67,016,173,
respectively, shares issued and outstanding 670 670
Paid-in capital 648,104 647,889
Promissory notes (339) (562)
Accumulated deficit (Note 4) (28,359) (44,142)
---------- ----------
Total stockholders' equity 620,076 603,855
---------- ----------
Total liabilities and stockholders' equity $1,557,546 $1,433,882
========== ==========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Net sales $221,711 $199,813
Cost of goods sold 87,369 81,743
--------------- ---------------
Gross profit 134,342 118,070
--------------- ---------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 22,031 18,857
Trade promotions 47,004 45,302
Consumer marketing 15,930 13,497
--------------- ---------------
Total brokerage, distribution and marketing expenses 84,965 77,656
Amortization of goodwill and other intangibles 9,082 8,189
Selling, general and administrative expenses 7,795 7,558
Incentive plan credit (Note 4) - (3,417)
Transition expenses (Note 5) 3,071 2,522
--------------- ---------------
Total operating expenses 104,913 92,508
--------------- ---------------
Operating income 29,429 25,562
Interest expense, net 15,748 21,363
Amortization of deferred financing expense 485 587
Other bank and financing expenses 50 89
--------------- ---------------
Income before income taxes 13,146 3,523
Income tax expense 5,193 293
--------------- ---------------
Net income $ 7,953 $ 3,230
=============== ===============
Basic and diluted earnings per share $ 0.12 $ 0.06
=============== ===============
Weighted average number of shares outstanding 67,016 51,981
=============== ===============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Net sales $482,761 $289,198
Cost of goods sold 191,497 119,477
-------------- --------------
Gross profit 291,264 169,721
-------------- --------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 46,665 28,213
Trade promotions 108,377 60,870
Consumer marketing 38,488 21,495
-------------- --------------
Total brokerage, distribution and marketing expenses 193,530 110,578
Amortization of goodwill and other intangibles 17,854 12,786
Selling, general and administrative expenses 15,138 9,904
Incentive plan expense (Note 4) - 56,583
Transition expenses (Note 5) 7,342 4,447
-------------- --------------
Total operating expenses 233,864 194,298
-------------- --------------
Operating income (loss) 57,400 (24,577)
Interest expense, net 30,328 33,977
Amortization of deferred financing expense 882 1,099
Other bank and financing expenses 102 140
-------------- --------------
Income (loss) before income taxes and extraordinary item 26,088 (59,793)
Income tax expense (benefit) 10,305 (67)
-------------- --------------
Net income (loss) before extraordinary item 15,783 (59,726)
Extraordinary loss on early extinguishment of debt,
net of tax of $1,184 - 1,876
-------------- --------------
Net income (loss) $ 15,783 $(61,602)
============== ==============
Basic and diluted earnings (loss) per share before extraordinary item $ 0.24 $ (1.47)
Extraordinary loss item per share - 0.05
-------------- --------------
Basic and diluted earnings (loss) per share $ 0.24 $ (1.52)
============== ==============
Weighted average number of shares outstanding 67,016 40,580
============== ==============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
AURORA FOODS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-in Promissory Accumulated
Shares Amount Capital Notes Deficit Total
------------ ------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 67,016 $670 $647,889 $(562) $(44,142) $603,855
Payments on officer promissory notes - - - 223 - 223
Employee stock purchases 15 - 215 - - 215
Net income - - - - 15,783 15,783
------------ ------- ----------- ----------- ------------ ----------
Balance at June 30, 1999 67,031 $670 $648,104 $(339) $(28,359) $620,076
============ ======= =========== =========== ============ ==========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 15,783 $(61,602)
Early extinguishment of debt, net of tax of $1,184 - 1,876
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation and amortization 25,265 17,742
Deferred income taxes 10,305 (67)
Loss on disposition of fixed asset 11 -
Incentive plan expense (Note 4) - 56,583
Change in assets and liabilities, net of effects of businesses
acquired:
Increase in accounts receivable (19,135) (28,178)
Increase in inventories (2,005) (29,817)
Increase in prepaid expenses and other assets (4,780) (5,020)
(Decrease) increase in accounts payable (16,036) 29,464
(Decrease) increase in accrued liabilities (7,006) 21,723
--------------------- ---------------------
Net cash provided by operating activities 2,402 2,704
--------------------- ---------------------
Cash flows from investing activities:
Additions to property, plant and equipment (15,348) (7,391)
Changes to other non-current assets and liabilities (3,874) (1,467)
Proceeds from sale of assets - 28,012
Payment for acquisition of businesses (75,128) (463,762)
--------------------- ---------------------
Net cash used in investing activities (94,350) (444,608)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from senior secured revolving and term debt 229,651 473,000
Repayment of borrowings (134,750) (114,000)
Capital contributions, net of officer promissory notes 438 93,806
Debt issuance and equity raising costs (2,323) (12,501)
--------------------- ---------------------
Net cash provided by financing activities 93,016 440,305
--------------------- ---------------------
Increase (decrease) in cash and cash equivalents 1,068 (1,599)
Cash and cash equivalents, beginning of period 354 4,717
--------------------- ---------------------
Cash and cash equivalents, end of period $ 1,422 $ 3,118
===================== =====================
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
AURORA FOODS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
- -------------------------------
INTERIM FINANCIAL STATEMENTS
The interim financial statements of Aurora Foods 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.
For further information, reference should be made to the financial statements of
the Company and notes thereto included in the annual report on Form 10-K of
Aurora Foods Inc. for the year ended December 31, 1998.
THE COMPANY, ITS BUSINESS AND OWNERSHIP
The Company was incorporated in Delaware on June 19, 1998, as the successor to
Aurora Foods Holdings Inc. ("Holdings") and its subsidiary, AurFoods Operating
Co., Inc. (formerly known as Aurora Foods Inc.) ("AurFoods"), both of which were
incorporated in Delaware in December 1996. AurFoods was wholly-owned by
Holdings, which in turn was wholly-owned by MBW Investors LLC ("MBW LLC").
AurFoods was formed for the purpose of acquiring the Mrs. Butterworth's(R) syrup
business from Conopco, Inc., a subsidiary of Unilever United States, Inc.
AurFoods subsequently acquired the Log Cabin(R) syrup business from Kraft Foods,
Inc. in July 1997 and the Duncan Hines(R) baking mix business ("DH") from The
Procter & Gamble Company ("P&G") in January 1998.
Van de Kamp's, Inc. ("VDK") was a wholly-owned subsidiary of VDK Holdings, Inc.,
a Delaware corporation ("VDK Holdings") and was incorporated in Delaware in July
1995 for the purpose of acquiring the Van de Kamp's(R) frozen seafood and frozen
dessert businesses from The Pillsbury Company in September 1995. VDK then
acquired the Mrs. Paul's(R) frozen seafood business from the Campbell Soup
Company in May 1996 and the Aunt Jemima(R) frozen breakfast and Celeste(R)
frozen pizza businesses from The Quaker Oats Company in July 1996. VDK Holdings
was wholly-owned by VDK Foods LLC ("VDK LLC").
On April 8, 1998, MBW LLC and VDK LLC formed Aurora/VDK LLC ("New LLC"). MBW
LLC contributed all of the capital stock of Holdings 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
7
<PAGE>
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 amount and source of consideration used by MBW
LLC and VDK LLC for their acquisition of interests in New LLC was their equity
in Holdings and VDK Holdings, respectively. New LLC accounted for the
contribution of the ownership of Holdings at MBW LLC's historical cost and the
contribution of the ownership of VDK Holdings was accounted for as an
acquisition using the purchase method of accounting at New LLC's cost. After
giving effect to the Contribution, New LLC directly held 100% of Holdings'
capital stock and Holdings continued to hold directly 100% of AurFoods capital
stock and New LLC directly held 100% of VDK Holdings' capital stock and VDK
Holdings continued to hold directly 100% of VDK's capital stock. On June 25,
1998, New LLC contributed to the Company all the issued and outstanding stock of
Holdings and VDK Holdings. Therefore, the Company's financial statements, as it
is the successor to Holdings, includes the historical financial information of
Holdings from its inception. New LLC was then dissolved in connection with the
IPO (defined below).
On July 1, 1998, Holdings, AurFoods, VDK Holdings and VDK merged with and into
the Company and the initial public offering (the "IPO" or "Equity Offerings") of
12,909,372 shares of Common Stock of the Company and 1,590,628 shares of the
Company's Common Stock sold by New LLC was consummated at an initial public
offering price of $21.00 per share. Also, concurrently with the IPO, the Company
issued $200.0 million aggregate principal amount of 8.75% senior subordinated
notes due 2008 (the "Notes Offering" or "New Notes") and borrowed $225.0 million
of senior secured term debt and $99.0 million out of the total available of
$175.0 million of senior secured revolving debt under the Third Amended and
Restated Credit Agreement, dated as of July 1, 1998, among the Company, as
borrower, the lenders listed therein, The Chase Manhattan Bank, as
Administrative Agent, The National Westminster Bank PLC, as Syndication Agent
and Swiss Bank Corporation, as Documentation Agent (the "New Senior Bank
Facilities").
The Company used the net proceeds from the IPO, the Notes Offering and the New
Senior Bank Facilities to (i) repay $180.8 million of senior secured bank debt
under the Second Amended and Restated Credit and Guarantee Agreement, dated as
of July 9, 1996, among VDK Holdings, VDK, the banks and other financial
institutions parties thereto and the Chase Manhattan Bank, as agent, as amended,
(ii) repay $467.0 million under the Second Amended and Restated Credit
Agreement, dated January 16, 1998 by and among Holdings, the Company, the
lenders listed therein, the Chase Manhattan Bank, the National Westminster Bank
PLC, and Swiss Bank Corporation (the "Senior Bank Facilities"), (iii) redeem the
12% Senior Subordinated Notes due 2005 issued under an Indenture dated as of
September 15, 1995, between VDK and Harris Trust and Savings Bank, as Trustee
(the "VDK Notes") (redemption completed on July 31, 1998) in the principal
amount of $100.0 million and (iv) pay the $14.5 million redemption premium
associated with the VDK Notes. As a result of the early extinguishment of the
Senior Bank Facilities, the Company recorded in the year ended December 31, 1998
an extraordinary charge of $7.3 million, net of income tax of $4.4 million, for
the write off of deferred financing charges.
As a consequence of the IPO, no additional incentive plan expense will be
recorded under the Aurora Plan (See Note 4 - Incentive Plan Expense). MBW LLC
satisfied its liability under the Aurora Plan by distributing shares of the
Company's common stock in connection with the liquidation of MBW LLC.
8
<PAGE>
On April 1, 1999, the Company acquired 100% of the stock in Sea Coast Foods,
Inc. ("Seacoast") from Galando Investment Limited Partnership, Carey-On Limited
Partnership, Joseph A. Galando, Barbara J. Galando, Stanley J. Carey and Mary K.
Carey for a purchase price of $51.2 million. The consolidated financial
statements include the accounts of the Company and its 100% owned subsidiary
Seacoast.
NOTE 2 -- VDK HOLDINGS, INC. ACQUISITION
- ----------------------------------------
On April 8, 1998, New LLC completed a stock purchase of VDK Holdings (See Note 1
- - Basis of Presentation). The Company acquired all the capital stock of VDK
Holdings in exchange for $183.5 million of the Company's equity. The
acquisition was accounted for using the purchase method of accounting.
The cost to acquire VDK Holdings has been allocated to tangible and intangible
assets acquired as follows (in thousands):
<TABLE>
<S> <C>
Value of stock used to acquire VDK Holdings $ 183,469
Liabilities assumed 383,063
Other acquisition costs 9,700
-------------
576,232
Cost assigned to tangible assets (200,214)
-------------
Cost attributable to intangible assets $ 376,018
=============
</TABLE>
Had the VDK Holdings and DH acquisitions taken place January 1, 1998, the
unaudited pro forma results of operations for the three and six months periods
ended June 30, 1998 would have been as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------ ------------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
(actual) (pro forma) (actual) (pro forma)
<S> <C> <C> <C> <C>
Net sales $221,711 $206,652 $482,761 $446,989
================= ================= ================= =================
Gross profit $134,342 $122,064 $291,264 $267,290
================= ================= ================= =================
Operating income (loss) $ 29,429 $ 25,346 $ 57,400 $(73,873)
================= ================= ================= =================
</TABLE>
9
<PAGE>
NOTE 3 -- INVENTORIES
- ---------------------
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Raw materials $26,507 $17,982
Work in process 670 271
Finished goods 57,855 54,640
Packaging and other supplies 4,826 3,781
------------ ------------
$89,858 $76,674
============ ============
</TABLE>
NOTE 4 -- INCENTIVE PLAN EXPENSE
- --------------------------------
AURORA INCENTIVE PLAN
The Amended and Restated Limited Liability Company Agreement of MBW LLC
contained an incentive plan (the "Aurora Plan") as a means by which certain key
employees and other specifically designated persons ("Aurora Covered Employees")
of AurFoods and/or affiliated with AurFoods, were given an opportunity to
benefit from appreciation in the value of AurFoods. Under the Aurora Plan,
Aurora Covered Employees were issued a specific class of limited liability
company member units ("Management Units"), at a nominal value, as a means to
participate in the appreciation of the equity value of AurFoods. The Management
Units were subject to vesting requirements based on terms of employment or other
factors.
Prior to the closing of the Equity Offerings, the final value of all classes of
Management Units were determined based on the valuation of the Common Stock held
indirectly by MBW LLC, and upon the closing of the Equity Offerings all unvested
Management Units became fully vested. The aggregate value of all Management
Units was $58.9 million. Through December 27, 1997, the Company had recorded
estimated incentive plan expense of $2.3 million based on the estimated
valuation of the Company at that time. Additional incentive plan expense of
$56.6 million was recorded in the first and second quarters of 1998.
The incentive plan expense was recorded as a liability of MBW LLC as sponsor of
the Aurora Plan. However, because the Aurora Plan was for the benefit of Aurora
Covered Employees, expense recognized under the Aurora Plan was pushed down to
the Company as incentive plan expense and as additional paid-in capital from its
parent. No additional incentive plan expense will be recorded under the Aurora
Plan.
MBW LLC satisfied its liability under the Aurora Plan by distributing 4,152,417
shares of Common Stock of the Company based on the valuation of the Management
Units at the initial public offering price of the Company's Common Stock on the
dissolution of MBW Investors LLC.
10
<PAGE>
VDK INCENTIVE PLAN
VDK LLC provided a compensation arrangement (the "VDK Plan") as a means by which
certain key employees, and other specifically designated persons ("VDK Covered
Employees") of VDK and/or affiliated with VDK, were given an opportunity to
benefit from appreciation in the equity value of VDK. Under the VDK Plan, VDK
Covered Employees were issued a specific class of limited liability company
member units and/or performance-based units (collectively, "VDK Management
Units"), at a nominal value, as a means to participate in the appreciation of
the equity value of VDK. The VDK Management Units were subject to vesting
requirements based on terms of employment or other factors.
Prior to the closing of the Equity Offerings, the final value of all classes of
VDK Management Units were determined based on the valuation of the shares of the
Company held indirectly by VDK LLC, and upon the closing of the Equity Offerings
all unvested VDK Management Units became fully vested. The aggregate value of
all VDK Management Units was $66.7 million. Through December 31, 1997, no
incentive plan expense had been recorded by VDK based on the estimated valuation
of VDK at that time. Incentive plan expense of $66.7 million was recorded in
the first and second quarters of 1998. The incentive plan expense was recorded
as a liability of VDK LLC as sponsor of the VDK Plan. However, because the VDK
Plan was for the benefit of VDK Covered Employees, expense recognized under the
VDK Plan was pushed down to VDK as incentive plan expense and as additional
paid-in capital from its parent. No additional incentive plan expense will be
recorded under the VDK Plan.
VDK LLC (or the Company as described below) will distribute a fixed number of
shares of Common Stock of the Company upon the dissolution of VDK LLC, based on
the valuation of the VDK Management Units at the initial public offering price
of the Company's Common Stock.
The VDK Plan provides for tax gross-up payments on certain distributions.
Because the Company will receive the tax benefit of such distributions and
related tax gross-up payments, and because the tax benefit is expected to exceed
the amount of the tax gross-up payments, the Company will bear the $11.8 million
liability for any such tax gross-up payments due. The tax benefit of the tax
gross-up payment and related distributions of $17.3 million, which more than
offsets the gross-up payments, has been recorded to income tax expense and as a
deferred tax asset.
To facilitate payment of the tax gross-up obligation and recognition of related
tax benefits, VDK adopted a new incentive plan (the "New VDK Plan" and together
with the VDK Plan, the "VDK Plans"), which was assumed by the Company in
connection with the Contribution. Under the New VDK Plan, the Company is
obligated to distribute no later than July 1, 1999 1,801,769 shares of the
Company's Common Stock to VDK Covered Employees who were granted certain types
of VDK Management Units under the VDK Plan. The issuance of such shares (the
"MC Shares") will not increase the number of outstanding shares of Common Stock
because the Company's obligations to issue the MC Shares is contingent upon the
Company's receiving from VDK LLC, as a contribution, a number of shares of the
Company's Common Stock owned by VDK LLC equal to the number of MC Shares. The
Company will have no obligation to issue MC Shares unless it receives a
contribution of an equal number of shares from VDK LLC. VDK LLC is obligated to
contribute such shares to the Company after the closing of the Equity
11
<PAGE>
Offerings. The Company's obligation to make the tax gross-up payments referred
to above is subject to the Company being allowed a deduction for federal income
tax purposes with respect to the payment of the MC Shares and tax gross-up
payment.
On July 1, 1999, the Company satisfied its liability under the VDK Plans by
distributing shares of the Company's Common Stock and paying the associated tax
gross-up liability.
NOTE 5 -- TRANSITION EXPENSES
- -----------------------------
Transition expenses consist of one-time costs incurred to integrate the acquired
businesses, including relocation expenses, recruiting fees, sales support,
production transition and other unique transitional expenses.
NOTE 6 -- EARNINGS PER SHARE
- ----------------------------
Basic earnings per share represents the income available to common stockholders
divided by the weighted average number of common shares outstanding during the
measurement period. Diluted earnings per share represents the income available
to common stockholders divided by the weighted average number of common shares
outstanding during the measurement period while also giving effect to all
potentially dilutive common shares that were outstanding during the period.
Potentially dilutive common shares consist of stock options (the dilutive impact
is calculated by applying the "treasury stock method").
The table below summarizes the numerator and denominator for the basic and
diluted earnings (loss) per share calculations (in thousands except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -----------------------------
1999 1998 1999 1998
----------------- -------- --------------- -----------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item $ 7,953 $ 3,230 $15,783 $(59,726)
Extraordinary loss item, net of tax - - - 1,876
----------------- -------- --------------- -----------
Net income (loss) $ 7,953 $ 3,230 $15,783 $(61,602)
================= ======== =============== ===========
Denominator:
Weighted average number of basic shares 67,016 51,981 67,016 40,580
Effect of dilutive securities - - - -
----------------- -------- --------------- -----------
Weighted average number of diluted shares 67,016 51,981 67,016 40,580
================= ======== =============== ===========
Basic and diluted earnings (loss) per share
before extraordinary item $ 0.12 $ 0.06 $ 0.24 $ (1.47)
Extraordinary loss item per share - - - 0.05
----------------- -------- --------------- -----------
Basic and diluted earnings (loss) per share $ 0.12 $ 0.06 $ 0.24 $ (1.52)
================= ======== =============== ===========
</TABLE>
12
<PAGE>
NOTE 7 -- SEGMENT INFORMATION
- -----------------------------
The Company groups its businesses in two operating segments: dry grocery
division and frozen food division. The operating segments are managed as
strategic units due to their distinct manufacturing methodologies, distribution
channels and dedicated segment management teams. The dry grocery division
includes Duncan Hines(R) baking mix products, and Mrs. Butterworth's(R) and Log
Cabin(R) syrup products. The frozen food division includes Van de Kamp's(R) and
Mrs. Paul's(R) frozen seafood products, Aunt Jemima(R) frozen breakfast
products, Celeste(R) frozen pizza products and Chef's Choice(R) skillet meal
products.
The following table presents a summary of operations by segment (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales
Dry grocery $ 109,012 $ 116,898 $ 210,022 $ 206,283
Frozen food 112,699 82,915 272,739 82,915
----------- ----------- ----------- ----------
Total $ 221,711 $ 199,813 $ 482,761 $ 289,198
=========== =========== =========== ==========
Operating income (loss)
Dry grocery $ 25,721 $ 16,616 $ 42,599 $ 28,403
Frozen food 6,779 8,051 22,143 8,051
Other (3,071) 895 (7,342) (61,031)
----------- ----------- ----------- ----------
Total $ 29,429 $ 25,562 $ 57,400 $ (24,577)
=========== =========== =========== ==========
Total assets
Dry grocery $ 982,669 $ 956,661 $ 982,669 $ 956,661
Frozen food 574,877 468,772 574,877 468,772
----------- ----------- ----------- ----------
Total $1,557,546 $1,425,433 $1,557,546 $1,425,433
=========== =========== =========== ==========
Depreciation and amortization
Dry grocery $ 6,952 $ 6,849 $ 13,459 $ 12,947
Frozen food 6,259 4,795 11,806 4,795
----------- ----------- ----------- ----------
Total $ 13,211 $ 11,644 $ 25,265 $ 17,742
=========== =========== =========== ==========
Capital expenditures
Dry grocery $ 6,531 $ 1,041 $ 10,072 $ 2,553
Frozen food 2,273 4,838 5,276 4,838
----------- ----------- ----------- ----------
Total $ 8,804 $ 5,879 $ 15,348 $ 7,391
=========== =========== =========== ==========
</TABLE>
The Other line item in operating income (loss) is comprised of one-time expenses
related to incentive plan expense (See Note 4 -- Incentive Plan Expense) and
transition expenses (See Note 5 -- Transition Expenses) that were incurred in
the respective periods.
13
<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
annual report on Form 10-K of Aurora Foods Inc. for the year ended December 31,
1998.
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 Consolidated Financial Statements and
notes to the consolidated financial statements. Unless otherwise noted, years
(1999 and 1998) in this discussion refer to the Company's June-ending quarters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on behalf of the Company. The Company and
its representatives may from time to time make written or oral statements that
are "forward-looking" including statements contained in this report and other
filings with the Securities and Exchange Commission and in reports to the
Company's stockholders. Certain statements, including, without limitation,
statements containing the words "believes," "anticipates," "intends," "expects,"
"estimates" and words of similar import, and relating to Year 2000 remediation
efforts, constitute "forward-looking statements" and involve known and unknown
risk, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the actions of the Company's competitors; general economic and business
conditions; industry trends; demographics; raw material costs; the continued
success of management's strategy; integration of acquired businesses into the
Company; terms and development of capital; and changes in, or the failure or
inability to comply with, governmental rules and regulations, including, without
limitation, FDA and environmental rules and regulations. See "-- Liquidity and
Capital Resources -- Year 2000". Given these uncertainties, undue reliance
should not be placed on such forward looking statements. The Company disclaims
an obligation to update any such factors or to publicly announce the results of
any revisions to any forward-looking statements contained herein to reflect
future events or developments.
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
components of the Statements of Operations is shown on the following pages. The
statements include a presentation of the pro forma results of the Company for
the respective periods, which includes the acquisitions of the Duncan Hines(R)
brand and Van de Kamp's, Inc. business as if they had occurred on January 1,
1998.
14
<PAGE>
COMPARATIVE RESULTS: THREE MONTHS ENDED JUNE 30, 1999
AND JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
(in thousands except Actual Pro Forma
per share amounts) ------------------------------------------------- ---------------------
June 30, 1999 June 30, 1998 June 30, 1998
------------------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $221,711 100.0% $199,813 100.0% $206,652 100.0%
Cost of goods sold 87,369 39.4 81,743 40.9 84,588 40.9
------------- ----- ----------- ----- -------- -----
Gross profit 134,342 60.6 118,070 59.1 122,064 59.1
------------- ----- ----------- ----- -------- -----
Brokerage, distribution and
marketing expenses:
Brokerage and distribution 22,031 9.9 18,857 9.4 19,582 9.5
Trade promotions 47,004 21.2 45,302 22.7 47,526 23.0
Consumer marketing 15,930 7.2 13,497 6.8 13,916 6.7
------------- ----- ----------- ----- -------- -----
Total brokerage, distribution
and marketing expenses 84,965 38.3 77,656 38.9 81,024 39.2
Amortization of goodwill
and other intangibles 9,082 4.1 8,189 4.1 8,487 4.1
Selling, general and
administrative expenses 7,795 3.5 7,558 3.8 8,102 3.9
Incentive plan credit - 0.0 (3,417) (1.7) (3,417) (1.7)
Transition expenses 3,071 1.4 2,522 1.3 2,522 1.2
------------- ----- ----------- ----- -------- -----
Total operating expenses 104,913 47.3 92,508 46.4 96,718 46.7
------------- ----- ----------- ----- -------- -----
Operating income 29,429 13.3 25,562 12.7 25,346 12.4
Interest expense, net 15,748 7.1 21,363 10.7 14,434 7.0
Amortization of deferred
financing expense 485 0.2 587 0.3 373 0.2
Other bank and financing
expenses 50 0.0 89 0.0 95 0.0
------------- ----- ----------- ----- -------- -----
Income before taxes 13,146 6.0 3,523 1.7 10,444 5.2
Income tax expense 5,193 2.3 293 0.1 4,125 2.0
------------- ----- ----------- ----- -------- -----
Net income $ 7,953 3.7% $ 3,230 1.6% $ 6,319 3.2%
============= ===== =========== ===== ======== =====
Earnings per share $ 0.12 $ 0.06 $ 0.09
============= =========== ========
Adjusted EBITDA (1) $ 45,273 $ 35,770 $ 36,031
============= =========== ========
Adjusted EPS (2) $ 0.15 $ 0.03 $ 0.09
============= =========== ========
Cash EPS (3) $ 0.22 $ 0.12 $ 0.16
============= =========== ========
</TABLE>
(1) Adjusted EBITDA is defined as operating income before incentive plan
credit, transition expenses, depreciation and amortization of goodwill and
other intangibles.
(2) Adjusted EPS is defined as earnings per share plus the per share after tax
effect of incentive plan credit and transition expenses.
(3) Cash EPS is defined as Adjusted EPS plus the per share after tax effect of
deductible goodwill amortization expense.
15
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to
Three Months Ended June 30, 1998
Net Sales. Net sales for the quarter ended June 30, 1999 were $221.7 million,
which was an increase of $21.9 million as compared to net sales in the prior
year quarter of $199.8 million. The prior year quarter included the results of
the Mrs. Butterworth's(R), Log Cabin(R), and Duncan Hines(R) brands, and the Van
de Kamp's, Inc. business from April 9, 1998. The Van de Kamp's, Inc. business
was purchased on April 8, 1998 and is included in the pro forma results.
Pro Forma Net Sales. Net sales for the quarter increased 7.3% as compared to
pro forma net sales of $206.7 million for the prior year quarter (which
reflects the Van de Kamp's, Inc. acquisition as if it had occurred on April 1,
1998). Sales growth in the quarter was led by the addition of $20.0 million
of sales from Chef's Choice(R), which was acquired in April 1999. Net sales of
frozen food products increased 3.2% and net sales of dry grocery products
declined 6.7%.
Frozen food division sales, excluding Chef's Choice(R), increased to $92.7
million versus $89.7 million in the prior year quarter. Sales of frozen
seafood products increased 12% to $38.2 million, driven by increased sales to
club stores, while sales of Aunt Jemima(R) frozen breakfast products and
Celeste(R) frozen pizza were flat relative to the prior year at approximately
$22.0 million each. Sales for the dry grocery division decreased 6.7% to
$109.0 million versus $116.9 million in the prior year quarter, due to the
decrease in Duncan Hines(R) baking mix sales. The decrease in sales of Duncan
Hines(R) baking mix products was due to the timing of trade promotions. Such
promotions were heavier in the prior year quarter as a result of the launch of
a reformulated brownie mix and additional spending to support the list price
increase in cake and frosting products.
Gross Profit. Gross profit was 60.6% of net sales, which was 1.5 percentage
points higher than the gross profit in the 1998 quarter of 59.1%. The increase
was primarily due to cost savings from outsourcing the production of dry grocery
products and the price increase taken on syrup products in July 1998.
Pro Forma Gross Profit. Gross profit of 60.6% for the quarter was 1.5
percentage points higher than the pro forma gross profit of 59.1% for the
prior year quarter.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses for the quarter increased $7.3 million as compared to the
prior year due to the inclusion of the Van de Kamp's, Inc. and Chef's Choice(R)
businesses. As a percentage of net sales, brokerage, distribution and marketing
expenses were 38.3%, which was 0.6 percentage points lower than the prior year
of 38.9%.
16
<PAGE>
Pro Forma Brokerage, Distribution and Marketing Expenses. Brokerage,
distribution and marketing expenses for the quarter were $3.9 million higher
than the pro forma prior year quarter, but declined as a percentage of net
sales to 38.3% versus 39.2% in the prior year. Brokerage and distribution
expenses increased $2.4 million over last year and increased as a percentage
of net sales to 9.9% from 9.5% in the prior year. The increase as a percent of
net sales was the result of lower average brokerage commissions in the prior
year. Marketing expenses were 28.4% of net sales, which was 1.3 percentage
points lower than the prior year of 29.7%. The level of promotional activity
in the current quarter was lower than last year when trade promotions were
higher to support the launch of the reformulated brownie product and the price
increase on cake and frosting products.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles increased to $9.1 million from $8.2 million in the 1998
quarter. The increase of $0.9 million was due to the additional amortization
expense generated by the goodwill recorded in connection with the acquisitions
of Van de Kamp's, Inc. in 1998 and the Chef's Choice(R) brand in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $7.8 million were $0.2 million higher than the prior
year expense of $7.6 million. The increase was due to the inclusion of the Van
de Kamp's, Inc. and Chef's Choice(R) businesses. Selling, general and
administrative expenses were 3.5% of net sales, which was 0.3 percentage points
lower than 3.8% experienced in the prior year.
Incentive Plan Credit. In the prior year quarter, the Company recorded a non-
cash incentive plan credit of $3.4 million in accordance with the Aurora Plan
contained in the MBW LLC Agreement (See Notes to the Financial Statements Note
4 -- Incentive Plan Expense).
Transition Expenses. Transition expenses were $3.1 million as compared to $2.5
million recorded in the prior year and represent one-time costs incurred to
integrate the acquired businesses. The increase was due to the acquisitions of
the Duncan Hines(R) and Chef's Choice(R) brands.
Operating Income. Operating income was $29.4 million as compared to an
operating income in the prior year of $25.6 million. Excluding the effects of
the incentive plan credit and transition expenses, operating income increased
31.8% to $32.5 million in the quarter versus $24.7 million in the prior year.
The increase was due to higher sales and gross margins, and lower operating
expenses.
Pro Forma Operating Income. On a pro forma basis, operating income for the
prior year quarter was $25.3 million. Excluding the effects of the incentive
plan credit and transition expenses, the Company's operating income in the
1998 quarter would have been $24.5 million. Excluding the incentive plan
credit and transition expenses, operating income of $32.5 million for the
current quarter represented an increase of 32.9% over the prior year and was
the result of higher sales and gross margins, and lower marketing expenses.
Interest Expense and Amortization of Deferred Financing Expense. The aggregate
of net interest expense and amortization of deferred financing expense of $16.2
million was lower than the prior
17
<PAGE>
year amount of $22.0 million. The decrease in interest expense was due to a
lower debt balance following the reduction in debt from the net proceeds of the
initial public offering in July 1998.
Income Tax Expense. The income tax expense recorded for the quarter was $5.2
million, which represents an effective tax rate of 39.5%. Income tax expense of
$0.3 million was recorded in the prior year quarter. The effective tax rate for
the prior year was less than the anticipated rate of 39.5% due primarily to the
effect of the non-deductible incentive plan expense.
Net Income. The Company recorded net income of $8.0 million as compared to net
income for the prior year of $3.2 million. Excluding the effects of transition
expenses in 1999 and 1998, and excluding the extraordinary loss from early
extinguishment of debt and incentive plan credit in 1998, net income would have
been $9.8 million in the current quarter versus $2.7 million in the prior year
quarter.
18
<PAGE>
COMPARATIVE RESULTS: SIX MONTHS ENDED JUNE 30, 1999
AND JUNE 30, 1998 (unaudited)
<TABLE>
<CAPTION>
(in thousands except Actual Pro Forma
per share amounts) ------------------------------------------ --------------------
June 30, 1999 June 30, 1998 June 30, 1998
----------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $482,761 100.0% $289,198 100.0% $ 446,989 100.0%
Cost of goods sold 191,497 39.7 119,477 41.3 179,699 40.2
--------- ------ -------- ------- --------- ------
Gross profit 291,264 60.3 169,721 58.7 267,290 59.8
--------- ------ -------- ------- --------- ------
Brokerage, distribution and
marketing expenses:
Brokerage and
distribution 46,665 9.7 28,213 9.8 43,127 9.6
Trade promotions 108,377 22.4 60,870 21.0 105,262 23.5
Consumer marketing 38,488 8.0 21,495 7.4 34,975 7.8
--------- ------ -------- ------- --------- ------
Total brokerage, distribution
and marketing expenses 193,530 40.1 110,578 38.2 183,364 40.9
Amortization of goodwill
and other intangibles 17,854 3.7 12,786 4.4 16,843 3.8
Selling, general and
administrative expenses 15,138 3.1 9,904 3.4 15,186 3.4
Incentive plan expense - 0.0 56,583 19.6 121,323 27.1
Transition expenses 7,342 1.5 4,447 1.5 4,447 1.0
--------- ------ -------- ------- --------- ------
Total operating expenses 233,864 48.4 194,298 67.1 341,163 76.2
--------- ------ -------- ------- --------- ------
Operating income (loss) 57,400 11.9 (24,577) (8.4) (73,873) (16.4)
Interest expense, net 30,328 6.3 33,977 11.8 28,868 6.5
Amortization of deferred
financing expense 882 0.2 1,099 0.4 746 0.2
Other bank and financing
expenses 102 0.0 140 0.1 190 0.0
--------- ------ -------- ------- --------- ------
Income (loss) before income
taxes and extraordinary item 26,088 5.4 (59,793) (20.7) (103,677) (23.1)
Income tax expense (benefit) 10,305 2.1 (67) 0.0 (10,718) (2.4)
--------- ------ -------- ------- --------- ------
Net income (loss) before
extraordinary item 15,783 3.3 (59,726) (20.7) (92,959) (20.7)
Extraordinary loss on early
extinguishment of debt, net of
tax of $1,184 - 0.0 1,876 0.6 1,876 0.4
--------- ------ -------- ------- --------- ------
Net income (loss) $ 15,783 3.3% $(61,602) (21.3)% $ (94,835) (21.1)%
========= ====== ======== ======= ========= ======
Earnings per share $ 0.24 $ (1.52) $ (1.42)
========= ======== =========
Adjusted EBITDA (1) $ 89,218 $ 53,182 $ 74,952
========= ======== =========
Adjusted EPS (2) $ 0.31 $ 0.02 $ 0.20
========= ======== =========
Cash EPS (3) $ 0.47 $ 0.20 $ 0.34
========= ======== =========
</TABLE>
(1) Adjusted EBITDA is defined as operating income before incentive plan
expense, transition expenses, depreciation and amortization of goodwill and
other intangibles.
(2) Adjusted EPS is defined as earnings per share plus the per share after tax
effect of incentive plan expense, transition expenses and extraordinary
item.
(3) Cash EPS is defined as Adjusted EPS plus the per share after tax effect of
deductible goodwill amortization expense.
19
<PAGE>
RESULTS OF OPERATIONS
Six Months Ended June 30, 1999 Compared to
Six Months Ended June 30, 1998
Net Sales. Net sales for the six months ended June 30, 1999 of $482.8 million
were $193.6 million greater than the prior year period of $289.2 million. The
prior year period included the results of the Mrs. Butterworth's(R) and Log
Cabin(R) brands, the Duncan Hines(R) brand from January 16, 1998, and the Van de
Kamp's, Inc. business from April 9, 1998. The Van de Kamp's, Inc. business was
purchased on April 8, 1998 and is included in the pro forma results.
Pro Forma Net Sales. Net sales for the six month period increased 8.0% as
compared to pro forma net sales of $447.0 million for the prior year period
(which reflect the acquisitions of the Duncan Hines(R) brand and Van de
Kamp's, Inc. business as if they had occurred on January 1, 1998). Sales
growth in the six month period was led by the addition of $20.0 million of
sales from Chef's Choice(R), which was acquired in April 1999, and the sales
growth of frozen food products.
Frozen food sales, excluding Chef's Choice(R), increased 7.5% to $252.6
million versus $235.0 million in the prior year period due to increased sales
of 9.8% in frozen seafood, 6.8% in Celeste(R) frozen pizza, and 2.1% in frozen
breakfast products. Sales for the dry grocery division were flat relative to
$212.0 million in the prior year period. The new product introductions of Van
de Kamp's(R) and Mrs. Paul's(R) Crisp & Healthy and Tenders frozen seafood
products, and Aunt Jemima(R) french toast sticks and mini-pancakes contributed
to the increases in the frozen seafood and breakfast sales. Frozen pizza sales
increased due to an approximately 10% increase in consumption of the
Celeste(R) brand pizza from the prior year period.
Gross Profit. Gross profit was 60.3% of net sales, which was 1.6 percentage
points greater than the gross profit in the 1998 period of 58.7%. The increase
was primarily due to the cost savings from outsourcing the production of dry
grocery products and the price increase taken on syrup products in July 1998.
Pro Forma Gross Profit. Gross profit of 60.3% for the six month period was 0.5
percentage points higher than the pro forma gross profit of 59.8% for the
prior year period.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses for the six month period increased $83.0 million as compared
to the prior year period due to the inclusion of the acquired businesses. As a
percentage of net sales, brokerage, distribution and marketing expenses were
40.1%, which was 1.9 percentage points higher than the prior year of 38.2%.
Pro Forma Brokerage, Distribution and Marketing Expenses. Brokerage,
distribution and marketing expenses for the period were $10.2 million higher
than the pro forma prior year period, but declined as a percentage of net
sales to 40.1% versus 40.9% in the prior year.
20
<PAGE>
Brokerage and distribution expenses increased $3.5 million over last year and
increased as a percentage of net sales to 9.7% from 9.6% in the prior year.
Marketing expenses were 30.4% of net sales, which was 0.9 percentage points
lower than the prior year of 31.3%. The level of promotional activity in the
current period was lower than last year when trade promotions were higher to
support the launch of the reformulated brownie product and the price increase
on cake and frosting products.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles increased to $17.9 million from $12.8 million in the 1998
period. The increase of $5.1 million was due to the additional amortization
expense generated by the goodwill recorded in connection with the acquisitions
of Van de Kamp's, Inc. in 1998 and the Chef's Choice(R) brand in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $15.1 million were $5.2 million higher than the prior
year period expense of $9.9 million. The increase was due to the inclusion of
Van de Kamp's, Inc. and the additional infrastructure and staffing required by
the dry grocery division to operate the Duncan Hines(R) business, which was
being integrated during 1998. Selling, general and administrative expenses were
3.1% of net sales, which was 0.3 percentage points lower than 3.4% experienced
in the prior year.
Incentive Plan Expense. In the prior year period, the Company recorded a non-
cash incentive plan expense of $56.6 million in accordance with the Aurora Plan
contained in the MBW LLC Agreement (See Notes to the Financial Statements Note
4 -- Incentive Plan Expense).
Transition Expenses. Transition expenses were $7.3 million as compared to $4.4
million recorded in the prior year and represent one-time costs incurred to
integrate the acquired businesses. The increase was due to the acquisitions of
the Duncan Hines(R) and Chef's Choice(R) brands.
Operating Income (Loss). Operating income was $57.4 million as compared to an
operating loss in the prior year period of $24.6 million. Excluding the effects
of the incentive plan expense and transition expenses, operating income
increased 77.6% to $64.7 million for the six month period as compared to $36.5
million in the prior year period. The increase was due to the inclusion of
operating income generated by the acquired businesses, higher sales and gross
margins, and lower operating expenses.
Pro Forma Operating Income (Loss). On a pro forma basis, operating loss for
the prior year period was $73.9 million. Excluding the effects of the
incentive plan expense and transition expenses, the Company's operating income
in the 1998 period would have been $51.9 million. Excluding the incentive plan
expense and transition expenses, operating income of $64.7 million for the
current period represented an increase of 24.8% over the prior year period and
was the result of higher sales and gross margins, and lower operating
expenses.
Interest Expense and Amortization of Deferred Financing Expense. The aggregate
of net interest expense and amortization of deferred financing expense of $31.2
million in the six month period was lower than the prior year amount of $35.1
million. The decrease in interest expense was due to a lower debt balance
following the reduction in debt from the net proceeds of the initial public
offering in July 1998.
21
<PAGE>
Income Tax Expense (Benefit). The income tax expense recorded for the period
was $10.3 million, which represents an effective tax rate of 39.5%. Income tax
benefit of $0.1 million was recorded in the prior year period. The effective tax
rate for the prior year was less than the anticipated rate of 39.5% due
primarily to the effect of the non-deductible incentive plan expense.
Net Income (Loss). The Company recorded net income of $15.8 million as compared
to a net loss for the prior year of $61.6 million. Excluding the effects of
transition expenses in 1999 and 1998, and excluding the extraordinary loss from
early extinguishment of debt and incentive plan expense in 1998, net income
would have been $20.2 million in the current period versus the prior year period
net loss of $22.3 million.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999, net income plus non-cash charges
provided $51.4 million of operating cash flow. Net working capital, excluding
cash, current deferred tax assets, and current maturities of senior secured
debt, increased $49.0 million. The increase in net working capital was the
result of the following factors: (1) the acquisition of the Chef's Choice(R)
brand and the associated working capital, (2) the increase in inventories of new
products to support introduction activities, (3) an increase in seafood raw
materials in advance of building inventories for the December quarter, and (4)
increased inventory levels in certain Duncan Hines products produced by P&G in
advance of relocating certain production equipment to the Company's contract
manufacturers' production facilities.
Net cash used in investing activities was $94.4 million for the six month
period. Cash used during the period included $51.2 million for the acquisition
of the Chef's Choice(R) and $15.3 million on capital expenditures. In addition,
the Company invested in additional manufacturing capacity of frozen seafood
products with the purchase of a production facility and the associated working
capital. The Company expects to spend approximately $26.0 million on capital
expenditures for the year ended December 31, 1999. Capital expenditures were
funded from internal cash flow and borrowings on the senior secured revolving
debt facility under the Amended New Senior Bank Facilities (defined below).
During the period, financing activities provided cash of $93.0 million. To
finance the acquisition of the Chef's Choice(R) brand and related expenses, the
Company increased its existing senior bank facilities with $100.0 million of
senior secured term debt under the Company's Fourth Amended and Restated Credit
Agreement, dated as of March 31, 1999, among the Company, as borrower, the
lenders listed therein, The Chase Manhattan Bank, as Administrative Agent, The
National Westminster Bank PLC, as Syndication Agent and UBS AF, Stamford Branch,
as Documentation Agent ("Amended New Senior Bank Facilities"). The proceeds were
used to fund the acquisition of Chef's Choice(R) in April 1999 and reduce the
senior secured revolving debt facility under the Amended New Senior Bank
Facilities. The Company repaid $12.6 million in principal on its Amended New
Senior Bank Facilities and borrowed on the revolving facility to fund capital
expenditures and working capital requirements.
At June 30, 1999, the Company had $1.4 million of cash and cash equivalents and
an unused commitment of $79.5 million on senior secured revolving debt facility
under the Amended New
22
<PAGE>
Senior Bank Facilities. The Company's primary sources of liquidity are cash
flows from operations and available borrowings under the $175.0 million
revolving debt facility. Management believes the available borrowing capacity
under the revolving debt facility combined with cash provided by operations will
provide the Company with sufficient cash to fund operations as well as to meet
existing obligations.
Year 2000
The dates on which the Company believes Year 2000 compliance will be completed
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, or that there will not be
a delay in, or increased costs associated with, the implementation of Year 2000
compliance. Specific factors that might cause differences between the estimates
and actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer code, timely responses to and corrections by third-parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-parties, the Company cannot
ensure its ability to resolve problems associated with the Year 2000 issue that
may affect its operations and business, or expose it to third-party liability in
a timely and cost-effective manner.
The Year 2000 issue, which is common to most corporations, concerns the
inability of information systems, including computer software programs as well
as non-information technology systems, to properly recognize and process date-
sensitive information related to the Year 2000 and beyond. The Company believes
that it will be able to achieve Year 2000 compliance by the end of 1999 and does
not currently anticipate any material disruption of its operations as a result
of any failure by the Company to be Year 2000 compliant. However, to the extent
the Company is unable to achieve Year 2000 compliance, the Company's business
and results of operations could be materially affected. This could be caused by
computer-related failures in a number of areas including, but not limited to,
the failure of the Company's financial systems or manufacturing and inventory
management systems.
Efforts to identify the risks associated with Year 2000 compliance began in 1997
by identifying the potential areas of exposure. The Company's information
technology was split into three areas of concern: internal mission-critical
systems and applications, internal non-mission-critical systems and applications
and external data sources and trading partners.
Compliance with internal mission-critical systems and applications is nearly
complete. Given the relatively recent incorporation of the Company, most
systems and applications have been purchased within the last year or two. All
purchases made were for systems that were Year 2000 compliant or for those that
had documented plans and dates for future compliance. Currently, the Warehouse
Management System in the frozen food division, which accesses a compliant
information database, is the only remaining mission-critical application not
compliant. The Company has elected to upgrade the functionality of its current
Warehouse Management System and, therefore, will be replacing the entire system.
The new system has been selected and is
23
<PAGE>
scheduled to have installation and testing completed by September 1999. Internal
non-mission-critical systems and applications are currently being analyzed and
are presently expected to be compliant by September of 1999.
In addition to reviewing its internal systems, the Company has polled its third-
party vendors, customers, contract manufacturers and freight carriers to
determine whether they are Year 2000 compliant. If the Company's customers and
vendors do not achieve Year 2000 compliance before the end of 1999, the Company
may experience a variety of problems, which may have a material adverse effect
on the Company. Among other things, to the extent the Company's customers are
not Year 2000 compliant by the end of 1999, such customers may lose electronic
data interchange ("EDI") capabilities at the beginning of the Year 2000. Where
EDI communication would no longer be available, the Company expects to utilize
voice, facsimile and/or mail communications in order to receive customer orders
and process customer billings. To the extent the Company's vendors or contract
manufacturers are not Year 2000 compliant by the end of 1999, such vendors or
contract manufacturers may fail to deliver ordered materials and products to the
Company and may fail to bill the Company properly and promptly. Consequently,
the Company may not have the correct inventory to send to its customers and may
experience a shortage or surplus of inventory which could materially adversely
affect the Company's business and results of operations. Through its polling
efforts, the Company has not identified any potential Year 2000 issues with any
of its major third-party vendors, contract manufacturers, customers or freight
carriers which could have a materially adverse affect on the Company's business
or results of operations or which could not be investigated through alternate
sources of supply.
To date, the Company has incurred and expensed approximately $0.1 million
related to the assessment and development of the remediation plan and the
purchase of new compliant hardware and software. Management anticipates
spending and expensing an additional $0.5 million through the end of 1999 to
implement its entire Year 2000 plan. The costs of the project and the date on
which the Company plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived using numerous assumptions of
future events including the continued availability of certain resources, third-
parties' Year 2000 readiness and other factors.
The Company has developed contingency plans so that the Company's critical
business processes can be expected to continue to function on January 1, 2000
and beyond. The Company's contingency plans are structured to address both
remediation of systems and their components and overall business operating risk.
These plans were created to mitigate both internal risks as well as potential
risks in the supply chain of the Company's suppliers and customers.
Interest Rate Collar Agreements. At June 30, 1999, the Company was party to two
interest rate collar agreements. On August 22, 1996 the Company entered into a
three year interest rate collar agreement with a notional principal amount of
$70.0 million, a cap rate of 6.5% and a floor rate of 5.75%. On November 26,
1997, the Company entered into a three year interest rate collar agreement with
a notional principal amount of $50.0 million, a cap rate of 7.5% and a floor
rate of 5.50%.
24
<PAGE>
Interest Rate Swap Agreements. The Company is party to two interest rate swap
agreements. On March 17, 1998, the Company entered into an interest rate swap
agreement with a notional principal amount of $150.0 million and a term of three
years. The effective swap rate on March 17, 1998 was 5.81%. On November 30,
1998, the Company amended the existing interest agreement whereby the
counterparty received the option to extend the termination date to March 17,
2003. The new effective swap rate through the termination date of the interest
rate swap agreement is 5.37%.
On April 13, 1999, the Company entered into a three-year interest rate swap
agreement (the "Swap") with a notional principal amount of $200.0 million. The
Company entered into the Swap to achieve its objective of hedging approximately
60% of its debt against movements in interest rates. The applicable rate is set
quarterly with the first reset date on July 1, 1999. The counterparty to the
Company's Swap is a major financial institution.
Under the Swap, the Company would receive payments from the counterparty if the
three-month LIBOR plus a spread of 3.25% falls below a cap rate of 8.63%, but
not below 7.8%. There would be no payments made to either counterparty if the
three-month LIBOR plus a spread of 3.25% exceeds 8.63% and is less than 10.25%.
The Company would make payments to the counterparty if the three-month LIBOR
plus a spread of 3.25% exceeds 10.25%.
Risks associated with the interest rate swap and collar agreements include those
associated with changes in the market value and interest rates. Management
considers the potential loss in future earnings and cash flows attributable to
the interest rate swap and collar agreements to not be material.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -----------------------------------------------------------------
The Company entered into interest rate swap and collar agreements for non-
trading purposes. Risks associated with the interest rate swap and collar
agreements include those associated with changes in the market value and
interest rates. Management considers the potential loss in future earnings and
cash flows attributable to the interest rate swap and collar agreements not to
be material.
25
<PAGE>
PART II
-------
OTHER INFORMATION
-----------------
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
Number Exhibit
- ------- -------
2.1 Amendment No. 1 To Stock Purchase Agreement, dated as of April 1, 1999,
to the Stock Purchase Agreement dated March 10, 1999, by and among
Aurora Foods Inc., Sea Coast Foods, Inc., Galando Investments Limited
Partnership, Carey-On Limited Partnership, Joseph A. Galando, Barbara
J. Galando, Stanley J. Carey and Mary K. Carey
3.1 Certificate of Incorporation of A Foods Inc., filed with the Secretary
of State of the State of Delaware on June 19, 1998. (Incorporated by
reference to Exhibit 3.1 to Aurora Foods Inc.'s Form S-1 filed on April
22, 1998, as amended (the "S-1")).
3.2 Amended and Restated By-laws of Aurora Foods Inc. (Incorporated by
reference to Exhibit 3.2 to the S-1).
4.1 Indenture dated as of July 1, 1998 by and between Aurora Foods Inc. and
Wilmington Trust Company (Incorporated by reference to Exhibit 4.13 to
the S-1).
4.2 Specimen Certificate of 8 3/4% Senior Subordinated Notes due 2008.
(Included in Exhibit 4.1 hereto).
4.3 Specimen Certificate of the Common Stock (Incorporated by reference to
Exhibit 4.1 to the S-1.)
4.4 Registration Rights Agreement, dated July 1, 1998, between Aurora Foods
Inc. and Chase Securities Inc., Goldman, Sachs & Co. and Natwest
Capital Markets Limited (Incorporated by reference to Exhibit 4.15 to
the S-1).
27.1 Financial Data Schedule for the period ended June 30, 1999 submitted to
the Securities and Exchange Commission in electronic format.
Report on Form 8-K
1. A report on Form 8-K, dated April 1, 1998, was filed on April 8, 1999 on
which Items 5 and 7 were reported. No financial statements were filed with
this filing.
26
<PAGE>
SIGNATURE
- ---------
Pursuant to the requirements of Section 13 or 15(d) 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.
AURORA FOODS INC.
Dated: August 12, 1999 By: /s/ M. Laurie Cummings
---------------------------
M. Laurie Cummings
Chief Financial Officer
(Duly Authorized Officer,
Principal Financial Officer and
Principal Accounting Officer)
27
<PAGE>
Amendment No. 1 To Stock Purchase Agreement
-------------------------------------------
AMENDMENT NO.1, dated as of April 1, 1999, to the Stock Purchase
Agreement dated March 10, 1999 (the "Stock Purchase Agreement"), by and among
Aurora Foods Inc., a Delaware corporation ("Buyer"), Sea Coast Foods, Inc., a
Washington corporation (the "Company"), Galando Investments Limited Partnership,
a Washington limited partnership and Carey-On Limited Partnership, a Washington
limited partnership (individually, a "Shareholder" and collectively, the
"Shareholders"), and Joseph A. Galando, Barbara J. Galando, Stanley J. Carey and
Mary K. Carey, individually and as the general partners of the Shareholders
(individually, a "General Partner" and collectively, the "General Partners").
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to them in the Stock Purchase Agreement.
Buyer, the Company, the Shareholders and the General Partners desire
to amend the Stock Purchase Agreement as follows:
1. The following sections shall be added to the Stock Purchase
Agreement:
8.19. Tax Refund. The Company has filed and/or will file with the
Prior Tax Returns for refunds (the "Tax Refunds") of federal income taxes on
account of a number of matters. It is agreed that the amount of the Tax Refunds
that is included in the calculation of Working Capital for purposes of computing
the Purchase Price shall not exceed the amount of Taxes payable that are
included in such calculation (such Taxes payable being the "Tax Accrual"). In
the event that one or more Tax Refunds are received by the Company or the Buyer,
and the aggregate amount thereof exceeds the Tax Accrual, Buyer shall pay, or
shall cause the Company to pay, the amount of any such excess (together with any
interest applicable thereto which is received) to the Shareholders in accordance
with their Applicable Percentages. In the event that any claims for the Tax
Refunds are disallowed, then the Shareholders shall pay to the Buyer, in
accordance with their Applicable Percentages, (x) an amount equal to the excess,
if any, of the Tax Accrual over the amount, if any, of any Tax Refunds received
by the Company or the Buyer which the Company or the Buyer has retained pursuant
to the preceding sentence and (y) in the event that the Tax Refunds in respect
of which Buyer or Company has caused payment to the Shareholders pursuant to the
above provisions are subsequently disallowed, an amount equal to such
disallowance. The provisions of Section 8.13(a) will apply to the Company's
claims for Tax Refunds.
8.20. Arthur Andersen. The Shareholders and General Partners shall
indemnify the Company and the Buyer against any and all amounts due to, or
billed to the Company by, Arthur Andersen & Co. to the extent not accrued or
reserved against in the calculation of Working Capital for purposes of
adjustments to the Purchase Price. Such indemnification obligations shall not
be subject to Section 10.5 or 10.6 but shall be subject to Section 10.8.
8.21. Shrimp Supply Liabilities. Pursuant to Section 8.14 of the
Stock Purchase Agreement, the Company is distributing to a limited liability
company controlled by the Shareholders (the "Shareholders LLC") certain assets
and liabilities related to a seafood business (the "Seafood Business") which are
more particularly described on Exhibit A to the
<PAGE>
Bill of Transfer and Assignment attached hereto as Schedule 1. The Shareholders
and General Partners agree to indemnify the Company and Buyer against any and
all of the liabilities relating to the Seafood Business to the extent not
accrued or reserved against in the calculation of Working Capital for purposes
of adjustments to the Purchase Price. Such indemnification shall not be subject
to Section 10.5 or 10.6, but shall be subject to Section 10.8.
8.22. Use of Sea Coast Name. The Buyer and the Company hereby
consent that until June 30, 1999 the Shareholders LLC may use the name "Sea
Coast" in its company name and otherwise to carry on the Seafood Business. On
or prior to such date the Shareholders and General Partners shall cause the
Shareholders LLC to change its name so as not to include the words "Sea Coast".
In addition, after June 30, 1999 neither the Shareholders LLC, the Shareholders
or the General Partners shall use the name Sea Coast in the conduct of the
Seafood Business except as otherwise provided in the Stock Purchase Agreement.
2. Supplements. Pursuant to Section 6.2, the Shareholders and
-----------
General Partners supplement and amend Schedules 3.9, 3.23 and 8.14 to the Stock
Purchase Agreement as provided in Exhibit A hereto.
3. Miscellaneous. Except as herein expressly amended, all terms,
-------------
covenants and provisions of the Stock Purchase Agreement are and shall remain in
full force and effect and all references therein to such Stock Purchase
Agreement shall refer to the Stock Purchase Agreement as amended by this
Amendment. This Amendment may be executed by the parties hereto individually or
in combination, in one or more counterparts, each of which shall be an original
and all of which shall constitute one and the same Amendment. Delivery of an
executed counterpart of a signature page by telecopier shall be effective as
delivery of a manually executed counterpart.
[Remainder of page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, Buyer and the Company have caused this Amendment to be
executed by their respective and duly authorized officers, and the Shareholders
or their respective trustees have duly executed this Amendment, all as of the
date first written above.
BUYER: SHAREHOLDERS:
AURORA FOODS INC. GALANDO INVESTMENTS LIMITED
PARTNERSHIP
By /s/ Ray Chung By /s/ Joseph A. Galando
------------------------------------- --------------------------------
Ray Chung, Executive Vice President Joseph A. Galando,
General Partner
By /s/ Barbara J. Galando
--------------------------------
Barbara Galando, General Partner
COMPANY CAREY-ON LIMITED PARTNERSHIP
SEA COAST FOODS, INC.
By /s/ Stanley J. Carey
--------------------------------
Stanley J. Carey,
General Partner
By /s/ Joseph A. Galando
-------------------------------
Joseph A. Galando, President
By /s/ Mary K. Carey
--------------------------------
Mary K. Carey,
General Partner
GENERAL PARTNERS
/s/ Joseph A. Galando /s/ Stanley J. Carey
- --------------------------- ------------------------------
Joseph A. Galando Stanley J. Carey
/s/ Barbara J. Galando /s/ Mary K. Carey
- --------------------------- ------------------------------
Barbara J. Galando Mary K. Carey
<PAGE>
The following list briefly identifies the contents of the Schedules to Amendment
No. 1 Stock Purchase Agreement, dated as of April 1, 1999 among Aurora Foods
Inc., Sea Coast Foods, Inc., Galando Investments Limited Partnership, Carey-On
Limited Partnership and Joseph A. Galando, Barabara J. Galando, Stanley J.
Carey, and Mary K. Carey, individually and as general partners of the
Shareholders. (Terms used but not defined have the meanings assigned to them in
the Stock Purchase Agreement.) In accordance with Regulation S-K under the
Securities Act of 1933 the actual Schedules and Exhibits have not been filed
with the Securities and Exchange Commission (the "Commission"). The Company
hereby agrees to furnish supplementally a copy of any omitted Schedule to the
Commission upon request.
1. Schedule 3.9 -- Officer and Sole Director -- List of officers and sole
director of the Company.
2. Schedule 3.23 -- Insurance Policies -- List of the companies insurance
policies.
3. Schedule 8.14 -- Assets to be Distributed to Shareholders -- List of assets
distributed to the Company's shareholders.
<TABLE> <S> <C>
<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> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 DEC-28-1997
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 1,422 3,118
<SECURITIES> 0 0
<RECEIVABLES> 114,016 81,158
<ALLOWANCES> 728 759
<INVENTORY> 89,858 69,916
<CURRENT-ASSETS> 238,128 177,150
<PP&E> 183,241 131,353
<DEPRECIATION> 17,617 4,843
<TOTAL-ASSETS> 1,557,546 1,425,434
<CURRENT-LIABILITIES> 212,483 170,618
<BONDS> 402,149 302,333
647,765 397,305
0 0
<COMMON> 670 541
<OTHER-SE> (28,358) (60,367)
<TOTAL-LIABILITY-AND-EQUITY> 1,557,546 1,425,434
<SALES> 482,761 289,198
<TOTAL-REVENUES> 482,761 289,198
<CGS> 191,497 119,477
<TOTAL-COSTS> 385,027 230,055
<OTHER-EXPENSES> 40,540 83,779
<LOSS-PROVISION> 728 759
<INTEREST-EXPENSE> 30,378 34,398
<INCOME-PRETAX> 26,088 (59,793)
<INCOME-TAX> 10,305 (67)
<INCOME-CONTINUING> 15,783 (59,726)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 1,876
<CHANGES> 0 0
<NET-INCOME> 15,783 (61,602)
<EPS-BASIC> 0.24 (1.52)
<EPS-DILUTED> 0.24 (1.52)
</TABLE>
