<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 September 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
November 4, 1999
Common stock, $0.01 par value 67,030,440
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<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>
September 30, December 31,
1999 1998
-------------------- --------------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 376 $ 354
Accounts receivable (net of $603 and $670 allowance, respectively) 154,978 86,539
Inventories (Note 2) 96,862 76,674
Prepaid expenses and other assets 16,746 6,517
Current deferred tax assets 25,755 8,251
-------------------- --------------------
Total current assets 294,717 178,335
Property, plant and equipment, net 166,183 153,167
Goodwill and other intangible assets, net 1,121,598 1,072,760
Other assets 31,299 29,620
-------------------- --------------------
Total assets $1,613,797 $1,433,882
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of senior secured term debt $ 22,756 $ 20,000
Senior secured revolving debt facility 132,350 85,850
Accounts payable 72,051 59,078
Accrued liabilities 33,656 49,836
-------------------- --------------------
Total current liabilities 260,813 214,764
Non-current deferred tax liabilities 40,055 649
Other liabilities - 12,372
Senior secured term debt 279,573 200,000
Senior subordinated notes 402,099 402,242
-------------------- --------------------
Total liabilities 982,540 830,027
-------------------- --------------------
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; 67,030,440 and 67,016,173,
respectively, shares issued and outstanding 670 670
Paid-in capital 648,100 647,889
Promissory notes (322) (562)
Accumulated deficit (17,191) (44,142)
-------------------- --------------------
Total stockholders' equity 631,257 603,855
-------------------- --------------------
Total liabilities and stockholders' equity $1,613,797 $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 September 30,
--------------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Net sales $238,275 $220,368
Cost of goods sold 100,970 89,264
----------------- -----------------
Gross profit 137,305 131,104
----------------- -----------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 22,625 20,767
Trade promotions 44,310 49,102
Consumer marketing 15,551 15,928
----------------- -----------------
Total brokerage, distribution and marketing expenses 82,486 85,797
Amortization of goodwill and other intangibles 9,042 8,623
Selling, general and administrative expenses 8,176 7,200
Transition expenses (Note 4) 2,136 1,269
----------------- -----------------
Total operating expenses 101,840 102,889
----------------- -----------------
Operating income 35,465 28,215
Interest expense, net 16,802 15,554
Amortization of deferred financing expense 498 372
Other bank and financing expenses 120 54
----------------- -----------------
Income before income taxes and extraordinary loss 18,045 12,235
Income tax expense 6,877 4,132
----------------- -----------------
Net income before extraordinary loss 11,168 8,103
Extraordinary loss on early extinguishment of debt
net of tax of $4,520 - (7,449)
----------------- -----------------
Net income $ 11,168 $ 654
================= =================
Basic and diluted earnings per share before extraordinary loss $0.17 $0.12
Extraordinary loss per share 0.00 (0.11)
----------------- -----------------
Basic and diluted earnings per share $0.17 $0.01
================= =================
Weighted average number of shares outstanding 67,030 67,000
================= =================
</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>
Nine Months Ended September 30,
--------------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Net sales $721,036 $509,566
Cost of goods sold 292,467 208,741
----------------- -----------------
Gross profit 428,569 300,825
----------------- -----------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 69,289 48,980
Trade promotions 152,687 109,972
Consumer marketing 54,039 37,423
----------------- -----------------
Total brokerage, distribution and marketing expenses 276,015 196,375
Amortization of goodwill and other intangibles 26,896 21,409
Selling, general and administrative expenses 23,315 17,104
Incentive plan expense (Note 3) - 56,583
Transition expenses (Note 4) 9,478 5,716
----------------- -----------------
Total operating expenses 335,704 297,187
----------------- -----------------
Operating income 92,865 3,638
Interest expense, net 47,130 49,531
Amortization of deferred financing expense 1,380 1,472
Other bank and financing expenses 222 194
----------------- -----------------
Income (loss) before income taxes and extraordinary loss 44,133 (47,559)
Income tax expense 17,182 4,065
----------------- -----------------
Net income (loss) before extraordinary loss 26,951 (51,624)
Extraordinary loss on early extinguishment of debt,
net of tax of $5,704 - (9,325)
----------------- -----------------
Net income (loss) $ 26,951 $(60,949)
================= =================
Basic and diluted earnings (loss) per share before
extraordinary loss $0.40 $(1.05)
Extraordinary loss per share 0.00 (0.19)
----------------- -----------------
Basic and diluted earnings (loss) per share $0.40 $(1.24)
================= =================
Weighted average number of shares outstanding 67,021 49,159
================= =================
</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 - - - 240 - 240
Employee stock purchases 14 - 211 - - 211
Net income - - - - 26,951 26,951
------------ ------ ---------- ---------- --------- ---------
Balance at September 30, 1999 67,030 $670 $648,100 $(322) $(17,191) $631,257
============ ====== ========== ========== ========= =========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 26,951 $ (60,949)
Early extinguishment of debt, net of tax of $5,704 - 9,325
Adjustments to reconcile net income (loss) to cash used in operating
activities:
Depreciation and amortization 38,484 29,587
Deferred income taxes 17,182 4,065
Loss on disposition of fixed asset 13 -
Incentive plan expense (Note 3) - 56,583
Change in assets and liabilities, net of effects of businesses
acquired:
Increase in accounts receivable (60,826) (40,611)
Increase in inventories (9,010) (41,636)
Increase in prepaid expenses and other assets (10,114) (6,755)
Increase in accounts payable 3,754 35,016
(Decrease) increase in accrued liabilities (19,795) 8,549
-------------- -------------
Net cash used in operating activities (13,361) (6,826)
-------------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment (19,655) (21,652)
Changes to other non-current assets and liabilities (17,164) (2,653)
Proceeds from sale of assets - 28,035
Payment for acquisition of businesses (76,756) (458,748)
-------------- -------------
Net cash used in investing activities (113,575) (455,018)
-------------- -------------
Cash flows from financing activities:
Proceeds from senior secured revolving and term debt 308,150 844,750
Proceeds from senior subordinated notes - 200,000
Repayment of borrowings (179,321) (892,759)
Payment of redemption premium (Note 1) - (14,500)
Proceeds from initial public offering - 254,831
Capital contributions, net of officer promissory notes 452 93,848
Debt issuance and equity raising costs (2,323) (27,130)
-------------- -------------
Net cash provided by financing activities 126,958 459,040
-------------- -------------
Increase (decrease) in cash and cash equivalents 22 (2,804)
Cash and cash equivalents, beginning of period 354 4,717
-------------- -------------
Cash and cash equivalents, end of period $ 376 $ 1,913
============== =============
</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 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.
7
<PAGE>
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.
As a consequence of the IPO, no additional incentive plan expense will be
recorded under the Aurora Plan (See Note 3 - 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.
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 wholly-owned subsidiary
Seacoast.
NOTE 2 - INVENTORIES
- --------------------
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ------------
<S> <C> <C>
Raw materials $29,530 $17,982
Work in process 843 271
Finished goods 60,383 54,640
Packaging and other supplies 6,106 3,781
-------------- ------------
$96,862 $76,674
============== ============
</TABLE>
NOTE 3 - 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
8
<PAGE>
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.
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.
9
<PAGE>
VDK LLC (or the Company as described below) distributed 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 provided 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 incurred an $11.8 million
liability for the 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
distributed on 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 and satisfied the associated tax gross-up liability. The
issuance of such shares (the "MC Shares") did not increase the number of
outstanding shares of Common Stock because the Company's obligations to issue
the MC Shares was 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 received a contribution of an
equal number of shares from VDK LLC. VDK LLC was obligated to contribute such
shares to the Company after the closing of the Equity 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.
NOTE 4 - 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 5 - 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").
10
<PAGE>
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 Nine Months Ended
September 30, September 30,
------------------------------------- -----------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- --------------------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before extraordinary loss $11,168 $ 8,103 $26,951 $(51,624)
Extraordinary loss, net of tax - (7,449) - (9,325)
---------------- ---------------- ---------------- --------------------
Net income (loss) $11,168 $ 654 $26,951 $(60,949)
================ ================ ================ ====================
Denominator:
Weighted average number of basic shares 67,030 67,000 67,021 49,159
Effect of dilutive securities - - - -
---------------- ---------------- ---------------- --------------------
Weighted average number of diluted shares 67,030 67,000 67,021 49,159
================ ================ ================ ====================
Basic and diluted earnings (loss) per share
before extraordinary loss $ 0.17 $ 0.12 $ 0.40 $ (1.05)
Extraordinary loss per share 0.00 (0.11) 0.00 (0.19)
---------------- ---------------- ---------------- --------------------
Basic and diluted earnings (loss) per share $ 0.17 $ 0.01 $ 0.40 $ (1.24)
================ ================ ================ ====================
</TABLE>
11
<PAGE>
NOTE 6 - 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 September 30, Nine Months Ended September 30,
------------------------------------------ -----------------------------------------
1999 1998 1999 1998
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Net sales
Dry grocery $ 131,525 $ 133,571 $ 341,547 $ 339,854
Frozen food 106,750 86,797 379,489 169,712
------------------ ------------------ ----------------- ------------------
Total $ 238,275 $ 220,368 $ 721,036 $ 509,566
================== ================== ================= ==================
Operating income
Dry grocery $ 27,424 $ 25,745 $ 70,023 $ 54,148
Frozen food 10,177 3,739 32,320 11,790
Other (2,136) (1,269) (9,478) (62,300)
------------------ ------------------ ----------------- ------------------
Total $ 35,465 $ 28,215 $ 92,865 $ 3,638
================== ================== ================= ==================
Total assets
Dry grocery $1,020,362 $ 977,475 $1,020,362 $ 977,475
Frozen food 593,435 479,793 593,435 479,793
------------------ ------------------ ----------------- ------------------
Total $1,613,797 $1,457,268 $1,613,797 $1,457,268
================== ================== ================= ==================
Depreciation and amortization
Dry grocery $ 7,404 $ 6,982 $ 20,864 $ 19,929
Frozen food 5,814 4,863 17,620 9,658
------------------ ------------------ ----------------- ------------------
Total $ 13,218 $ 11,845 $ 38,484 $ 29,587
================== ================== ================= ==================
Capital expenditures
Dry grocery $ 1,520 $ 8,182 $ 11,592 $ 10,735
Frozen food 2,787 6,079 8,063 10,917
------------------ ------------------ ----------------- ------------------
Total $ 4,307 $ 14,261 $ 19,655 $ 21,652
================== ================== ================= ==================
</TABLE>
The Other line item in operating income is comprised of one-time expenses
related to incentive plan expense (See Note 3 - Incentive Plan Expense) and
transition expenses (See Note 4 - Transition Expenses) that were incurred in the
respective periods.
NOTE 7 - SUBSEQUENT EVENT
- -------------------------
On November 1, 1999, the Company acquired substantially all of the assets and
liabilities of the Lender's Bagel ("Lender's") business from The Eggo Company, a
subsidiary of the Kellogg Company ("Kellogg's"). The assets acquired by the
Company include (i) Lender's(R) brand and associated trademarks, (ii)
manufacturing facilities located in Mattoon, Illinois and West Seneca, New York,
plus substantially all the equipment for the manufacture of Lender's(R) products
currently located in Kellogg's West Haven, Connecticut facility, (iii)
12
<PAGE>
proprietary formulations for Lender's(R) products, (iv) other product
specification and customer lists, and (v) rights under certain contracts,
licenses, purchase orders and other arrangements and permits. The purchase price
of approximately $275.0 million was based on an arms' length negotiation between
the Company and Kellogg's. The acquisition was accounted for by using the
purchase method of accounting. The allocation of the purchase price has not been
finalized; however, any changes are not expected to be material.
To finance the acquisition of the Lender's business and related costs, the
Company added $275.0 million of senior secured term debt to its existing senior
bank facilities under the Fifth Amended and Restated Credit Agreement dated
November 1, 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 AG, Stamford Branch, as Documentation Agent
("Fifth Senior Bank Facilities").
The cost to acquire the Lender's business has been allocated to tangible and
intangible assets acquired as follows (in thousands):
<TABLE>
<S> <C>
Cash paid to acquire assets $273,591
Other acquisition costs 5,000
--------------
278,591
Costs assigned to tangible assets (92,817)
--------------
Costs attributable to intangible assets $185,774
==============
</TABLE>
Had the Lender's acquisition taken place July 1, 1999 and 1998 and January 1,
1999 and 1998 and had the Duncan Hines(R) brand and Van de Kamp's, Inc.
acquisitions taken place January 1, 1998 the unaudited pro forma results of
operations for the three months and nine months ended September 30, 1999 and
1998, respectively, would have been as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales $287,925 $271,443 $869,986 $820,582
============= ============== ============= ==============
Gross profit $161,680 $157,829 $501,703 $478,530
============= ============== ============= ==============
Operating income (loss) $ 37,534 $ 32,050 $ 99,082 $(34,192)
============= ============== ============= ==============
</TABLE>
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 September-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
statement for the nine month period includes a presentation of the pro forma
results of the Company, which include 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 SEPTEMBER 30, 1999
AND SEPTEMBER 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Actual
----------------------------------------------------
(in thousands except September 30, 1999 September 30, 1998
per share amounts) ------------------------ ---------------------
<S> <C> <C> <C> <C>
Net sales $238,275 100.0% $220,368 100.0%
Cost of goods sold 100,970 42.4 89,264 40.5
----------- ------ ---------- ------
Gross profit 137,305 57.6 131,104 59.5
----------- ------ ---------- ------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 22,625 9.5 20,767 9.4
Trade promotions 44,310 18.6 49,102 22.3
Consumer marketing 15,551 6.5 15,928 7.2
----------- ------ ---------- ------
Total brokerage, distribution and marketing expenses 82,486 34.6 85,797 38.9
Amortization of goodwill and other intangibles 9,042 3.8 8,623 3.9
Selling, general and administrative expenses 8,176 3.4 7,200 3.3
Transition expenses 2,136 0.9 1,269 0.6
----------- ------ ---------- ------
Total operating expenses 101,840 42.7 102,889 46.7
----------- ------ ---------- ------
Operating income 35,465 14.9 28,215 12.8
Interest expense, net 16,802 7.1 15,554 7.0
Amortization of deferred financing expense 498 0.2 372 0.2
Other bank and financing expenses 120 0.0 54 0.0
----------- ------ ---------- ------
Net income before taxes and
extraordinary loss 18,045 7.6 12,235 5.6
Income tax expense 6,877 2.9 4,132 1.9
----------- ------ ---------- ------
Net income before
extraordinary loss 11,168 4.7 8,103 3.7
Extraordinary loss on early extinguishment of debt
net of tax $4,520 - 0.0 (7,449) (3.4)
----------- ------ ---------- ------
Net income $ 11,168 4.7% $ 654 0.3%
=========== ====== ========== ======
Earnings per share $0.17 $0.01
=========== ==========
Adjusted EBITDA (1) $ 50,371 $ 41,354
=========== ==========
Adjusted EPS (2) $0.19 $0.12
=========== ==========
Cash EPS (3) $0.26 $0.20
=========== ==========
</TABLE>
(1) Adjusted EBITDA is defined as operating income before 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 transition expenses and extraordinary loss.
(3) Cash EPS is defined as Adjusted EPS plus the per share after tax effect
of deductible goodwill and other intangibles amortization expense.
15
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to
Three Months Ended September 30, 1998
Net Sales. Net sales for the quarter ended September 30, 1999 were $238.3
million, which was an 8.1% increase as compared to net sales in the prior year
quarter of $220.4 million. Sales growth was driven by Chef's Choice(R) skillet
meals, which contributed $17.0 million in sales, and sales growth of frozen
seafood, pizza and syrup products.
Frozen food sales, excluding Chef's Choice(R), increased 3.4% to $89.7 million
versus $86.8 million in the prior year period due to sales growth of 5.9% in
frozen seafood and 5.0% in Celeste(R) frozen pizza. The growth in frozen seafood
was due to increased sales with Wal-Mart and other mass merchandisers. Sales of
Aunt Jemima(R) frozen breakfast products declined 1.9%, as expected, because of
the conversion of the frozen waffle package size from 8 waffles per package to
10. The package size was changed in response to a similar increase by Eggo.
Sales of $131.5 million for the dry grocery division were off 1.5% from the
prior year period. Syrup sales increased 5.9% over the prior year period as a
result of the introduction of Mrs. Butterworth's(R) flavored syrup for children,
the switch to plastic from glass bottles on Mrs. Butterworth's syrup and the
launch of new premium Log Cabin syrups in the Northeast markets. Baking mix
sales decreased 6.2% compared to the prior year due to lower trade promotional
spending. Trade promotions were higher last year in order to support the launch
of the reformulated brownie product and to mitigate the price increase taken in
the June quarter of 1998 on cake and frosting products.
Gross Profit. Gross profit was 57.6% of net sales, which was 1.9 percentage
points lower than the gross profit in the 1998 quarter of 59.5%. The decrease
was primarily due to the inclusion of Chef's Choice(R) brand products and
increased frozen food sales to the mass merchandiser and food service channels.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses for the quarter decreased $3.3 million as compared to the
prior year. As a percentage of net sales, brokerage, distribution and marketing
expenses were 34.6%, which was 4.3 percentage points lower than the prior year
of 38.9%. Marketing expenses were 25.1% of net sales, which was 4.4 percentage
points lower than the prior year of 29.5%. The decrease in marketing expenses
was due to the prior year's higher trade support on Duncan Hines(R) products and
reduced trade promotions in the seasonally slow third quarter.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles increased to $9.0 million from $8.6 million in the 1998
quarter. The increase of $0.4 million was due to the additional amortization
expense generated by the goodwill recorded in connection with the acquisition of
the Chef's Choice(R) brand in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $8.2 million were $1.0 million higher than the prior
year expense of $7.2 million. The increase
16
<PAGE>
was due primarily to the inclusion of the Chef's Choice(R) business. Selling,
general and administrative expenses were 3.4% of net sales, which was flat
compared to the prior quarter.
Transition Expenses. Transition expenses were $2.1 million as compared to $1.3
million recorded in the prior year and represent one-time costs incurred to
integrate the acquired businesses. The expenses were due to the acquisitions of
the Duncan Hines(R) and Chef's Choice(R) brands.
Operating Income. Operating income was $35.5 million as compared to an
operating income in the prior year of $28.2 million. Excluding the effect of
transition expenses, operating income increased 27.5% to $37.6 million in the
quarter versus $29.5 million in the prior year. The increase was due to higher
sales 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 $17.3
million was $1.4 million greater than the prior year amount of $15.9 million.
The increase in interest expense was due primarily to increased debt in 1999 due
to the acquisition of Chef's Choice(R).
Income Tax Expense. The income tax expense recorded for the quarter was $6.9
million, which represents an effective tax rate of 38.1%. The effective tax rate
was less than the anticipated rate of 39.5% due to state tax credits taken in
the current quarter. Income tax expense of $4.1 million was recorded in the
prior year quarter. The prior year effective tax rate of 33.8% was less than the
current quarter due to adjustments to reflect an increase in state tax rates.
Net Income. The Company recorded net income of $11.2 million as compared to $0.7
million in the prior year. Excluding the effect of transition expenses in 1999
and 1998, and excluding the extraordinary loss from the early extinguishment of
debt in 1998, net income would have been $13.3 million in the current quarter
versus $9.4 million in the prior year quarter.
17
<PAGE>
COMPARATIVE RESULTS: NINE MONTHS ENDED SEPTEMBER 30, 1999
AND SEPTEMBER 30, 1998 (unaudited)
<TABLE>
<CAPTION>
(in thousands except Actual Pro Forma
per share amounts) ----------------------------------------- ------------------
September 30, 1999 September 30, 1998 September 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $721,036 100.0% $509,566 100.0% $ 667,357 100.0%
Cost of goods sold 292,467 40.6 208,741 41.0 268,963 40.3
-------- ------ -------- ----- ---------- -----
Gross profit 428,569 59.4 300,825 59.0 398,394 59.7
-------- ------ -------- ----- ---------- -----
Brokerage, distribution and
marketing expenses:
Brokerage and distribution 69,289 9.6 48,980 9.6 63,894 9.6
Trade promotions 152,687 21.2 109,972 21.6 154,365 23.1
Consumer marketing 54,039 7.5 37,423 7.3 50,902 7.6
-------- ------ -------- ----- ---------- -----
Total brokerage,
distribution and
marketing expenses 276,015 38.3 196,375 38.5 269,161 40.3
Amortization of goodwill
and other intangibles 26,896 3.7 21,409 4.2 25,466 3.8
Selling, general and
administrative expenses 23,315 3.2 17,104 3.4 22,386 3.4
Incentive plan expense - 0.0 56,583 11.1 121,323 18.2
Transition expenses 9,478 1.3 5,716 1.1 5,716 0.9
-------- ------ -------- ----- ---------- -----
Total operating expenses 335,704 46.5 297,187 58.3 444,052 66.6
-------- ------ -------- ----- ---------- -----
Operating income (loss) 92,865 12.9 3,638 0.7 (45,658) (6.9)
Interest expense, net 47,130 6.5 49,531 9.7 43,779 6.5
Amortization of deferred
financing expense 1,380 0.2 1,472 0.3 1,117 0.2
Other bank and financing
expenses 222 0.1 194 0.0 244 0.0
-------- ------ -------- ----- ---------- -----
Income (loss) before
income taxes and
extraordinary loss 44,133 6.1 (47,559) (9.3) (90,798) (13.6)
Income tax expense (benefit) 17,182 2.4 4,065 0.8 (5,631) (0.8)
-------- ------ -------- ----- ---------- -----
Net income (loss)
before extraordinary loss 26,951 3.7 (51,624) (10.1) (85,167) (12.8)
Extraordinary loss on early
extinguishment of debt,
net of tax of $5,704 - 0.0 (9,325) (1.8) (9,325) (1.4)
-------- ------ -------- ----- ---------- -----
Net income (loss) $ 26,951 3.7% $(60,949) (11.9)% $(94,492) (14.2)%
======== ====== ======== ===== ========== =====
Earnings (loss) per share $0.40 $(1.24) $(1.41)
======== ======== ==========
Adjusted EBITDA (1) $139,590 $ 94,184 $116,306
======== ======== ==========
Adjusted EPS (2) $0.50 $0.18 $0.33
======== ======== ==========
Cash EPS (3) $0.73 $0.43 $0.55
======== ======== ==========
</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
loss.
(3) Cash EPS is defined as Adjusted EPS plus the per share after tax effect of
deductible goodwill and other intangibles amortization expense.
18
<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 Compared to
Nine Months Ended September 30, 1998
Net Sales. Net sales for the nine months ended September 30, 1999 of $721.0
million were $211.4 million greater than the prior year period of $509.6
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 nine month period increased 8.0% as
compared to pro forma net sales of $667.4 million for the prior year period
(which reflect the acquisitions of the Duncan Hines(R) brand and Van de
Kamp's, Inc. as if they had occurred on January 1, 1998). Sales growth in the
nine month period was led by sales growth of frozen food products and the
addition of $37.1 million of sales from Chef's Choice(R), which was acquired
in April 1999.
Frozen food sales, excluding Chef's Choice(R), increased 6.4% to $342.4
million versus $321.8 million in the prior year period due to sales growth of
9.0% in frozen seafood, 6.2% in Celeste(R) frozen pizza, and 1.0% in frozen
breakfast products. Sales for the dry grocery division were $341.5 million as
compared to $345.5 million in the prior pro forma year period. Syrup sales
were up 1.1% and sales of Duncan Hines(R) products were down 2.9%.
Gross Profit. Gross profit was 59.4% of net sales, which was 0.4 percentage
points greater than the gross profit in the 1998 period of 59.0%. The increase
was primarily due to the cost savings from outsourcing the production of dry
grocery products.
Pro Forma Gross Profit. Gross profit of 59.4% for the nine month period was
0.3 percentage points lower than the pro forma gross profit of 59.7% for the
prior year period due to the inclusion of Chef's Choice(R) sales, which have
lower gross margins.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses for the nine month period increased $79.6 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
38.3% as compared to the prior year of 38.5%.
Pro Forma Brokerage, Distribution and Marketing Expenses. On a pro forma
basis, brokerage, distribution and marketing expenses for the period were $6.9
million higher than the pro forma prior year period, but declined as a
percentage of net sales to 38.3% versus 40.3% in the prior year. Brokerage and
distribution expenses increased $5.4 million over last year and were flat as a
percentage of net sales to the prior year. Marketing expenses were 28.7% of
net sales, which was 2.0 percentage points lower than the prior year of 30.7%.
Trade promotions were higher last year in order 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 $26.9 million from $21.4 million in the 1998
period. The increase of $5.5 million
19
<PAGE>
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
Chef's Choice(R) in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $23.3 million were $6.2 million higher than the prior
year period of $17.1 million. The increase was due to the inclusion of Van de
Kamp's, Inc. Selling, general and administrative expenses were 3.2% of net
sales, which was 0.2 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 3
- - Incentive Plan Expense).
Transition Expenses. Transition expenses were $9.5 million as compared to $5.7
million recorded in the prior year and represent one-time costs incurred to
integrate the acquired businesses. The expenses were due to the acquisitions of
the Duncan Hines(R) and Chef's Choice(R) brands.
Operating Income. Operating income was $92.9 million as compared to $3.6
million in the prior year period. Excluding the effects of the incentive plan
expense and transition expenses, operating income increased 55.2% to $102.3
million for the nine month period as compared to $65.9 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 $45.7 million. Excluding the effects of the
incentive plan expense and transition expenses, the Company's operating income
in the 1998 period would have been $81.4 million as compared to $102.3 million
for the current period, which represented an increase of 25.8% over the prior
year period and was the result of higher sales 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 $48.5
million in the nine month period was lower than the prior year amount of $51.0
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 (Benefit). The income tax expense recorded for the period
was $17.2 million, which represents an effective tax rate of 38.9%, while income
tax of $4.1 million was recorded in the prior year period, which represents an
effective tax rate of 38.0%. The effective tax rate was less than the
anticipated 39.5% in the current and prior year period due primarily to state
tax credits taken in the current period and the effect of the non-deductible
incentive plan expense in the prior year.
Net Income (Loss). The Company recorded net income of $27.0 million as compared
to a net loss for the prior year of $60.9 million. Excluding the effect of
transition expenses in 1999 and 1998, and excluding the extraordinary loss from
early extinguishment of debt and incentive plan
20
<PAGE>
expense in 1998, net income would have been $36.4 million in the current period
versus $10.7 million in the prior period.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, net income plus non-cash charges
provided $82.6 million of operating cash flow. From December 31, 1998, net
working capital, excluding cash, current deferred tax assets, and current
maturities of senior secured debt, increased $96.0 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, and (3) an
increase in inventories of seafood and baking mix products in advance of the
seasonally heavy December quarter.
Net cash used in investing activities was $113.6 million for the nine month
period. Cash used during the period included $51.2 million for the acquisition
of Chef's Choice(R) and $19.7 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
operating cash flow.
During the period, financing activities provided cash of $127.0 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 AG, 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 $17.7 million in principal on its Amended New
Senior Bank Facilities and borrowed on the revolving facility to fund working
capital requirements.
At September 30, 1999, the Company had $0.4 million of cash and cash equivalents
and an unused commitment of $42.7 million on senior secured revolving debt
facility under the Amended New 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
21
<PAGE>
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 is currently Year 2000 compliant and does not anticipate any material
disruption of its operations as a result of any failure by the Company to be
Year 2000 compliant. Given the uncertainty of the Year 2000 issue, however, to
the extent the Company experiences any Year 2000 non-compliance problems, 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 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. Internal non-mission-critical
systems and applications have also been analyzed and have been deemed to be
compliant.
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
22
<PAGE>
manufacturers, customers or freight carriers which could have a materially
adverse effect 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 $0.5 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 $0.1 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 September 30, 1999, the Company was party
to an interest rate collar agreement. 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%.
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%. The applicable rate is set quarterly with the
next reset date on December 17, 1999.
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 next reset date on January 1, 2000. 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
23
<PAGE>
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.
24
<PAGE>
PART II
-------
OTHER INFORMATION
-----------------
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
Number Exhibit
- ------- -------
2.1 Asset Purchase Agreement, dated as of September 24, 1999, by and among
the Company and The Eggo Company. (Incorporated by reference to
Exhibit 2.1 to Aurora Foods Inc.'s Form 8-K filed November 10, 1999
("8-K")).
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).
10.1 Fifth Amended and Restated Credit Agreement, dated as of November 1,
1999, among Aurora Foods Inc., as Borrower, the Lender listed therein,
the Chase Manhattan Bank, as Administrative Agent, National
Westminster Bank PLC, as Syndication Agent and UBS AG, Stamford
Branch, as Documentation Agent. (Incorporated by reference to Exhibit
10.1 to the 8-K).
27.1 Financial Data Schedule for the period ended September 30, 1999
submitted to the Securities and Exchange Commission in electronic
format.
(b) Report on Form 8-K
None.
25
<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: November 12, 1999 By: /s/ M. Laurie Cummings
----------------------------
M. Laurie Cummings
Chief Financial Officer
(Duly Authorized Officer,
Principal Financial Officer and
Principal Accounting Officer)
26
<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> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 DEC-28-1997
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 376 1,913
<SECURITIES> 0 0
<RECEIVABLES> 155,581 93,772
<ALLOWANCES> 603 940
<INVENTORY> 96,862 81,734
<CURRENT-ASSETS> 294,717 221,873
<PP&E> 187,513 145,539
<DEPRECIATION> 21,330 8,086
<TOTAL-ASSETS> 1,613,797 1,457,268
<CURRENT-LIABILITIES> 260,813 173,654
<BONDS> 402,099 402,287
647,778 647,371
0 0
<COMMON> 670 670
<OTHER-SE> (17,191) (59,714)
<TOTAL-LIABILITY-AND-EQUITY> 1,613,797 1,457,268
<SALES> 721,036 509,566
<TOTAL-REVENUES> 721,036 509,566
<CGS> 292,467 208,741
<TOTAL-COSTS> 568,482 405,116
<OTHER-EXPENSES> 60,602 100,994
<LOSS-PROVISION> 603 940
<INTEREST-EXPENSE> 47,216 50,075
<INCOME-PRETAX> 44,133 (47,559)
<INCOME-TAX> 17,182 4,065
<INCOME-CONTINUING> 26,951 (51,624)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (9,325)
<CHANGES> 0 0
<NET-INCOME> 26,951 (60,949)
<EPS-BASIC> 0.40 (1.24)
<EPS-DILUTED> 0.40 (1.24)
</TABLE>
