<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, 2000
OR
[X] 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)
1000 Union Station, Suite 300
St. Louis, MO 63103
(Address of Principal Executive Office, Including Zip Code)
(314) 241-0303
(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 11, 2000
-----------------------
Common stock, $0.01 par value 67,114,531
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
See pages 2 through 17.
2
<PAGE>
AURORA FOODS INC.
BALANCE SHEETS
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents............................................................................... $ 5,623 $ 315
Accounts receivable (net of $830 and $1,311 allowance, respectively).................................... 59,915 96,332
Inventories ............................................................................................ 124,360 123,967
Prepaid expenses and other assets....................................................................... 12,476 21,876
Current deferred tax assets............................................................................. 17,338 17,338
---------- ----------
Total current assets................................................................................... 219,712 259,828
Property, plant and equipment, net....................................................................... 252,044 257,443
Deferred tax asset....................................................................................... 24,729 2,357
Goodwill and other intangible assets, net................................................................ 1,285,861 1,294,995
Asset held for sale...................................................................................... - 800
Other assets............................................................................................. 35,201 35,693
---------- ----------
Total assets........................................................................................... $1,817,547 $1,851,116
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Senior secured term debt................................................................................ $ 560,053 $ 571,571
Senior secured revolving debt facility.................................................................. 170,600 105,600
Senior subordinated notes............................................................................... 401,951 402,049
Accounts payable........................................................................................ 55,178 87,942
Accrued liabilities..................................................................................... 98,796 105,192
---------- ----------
Total current liabilities.............................................................................. 1,286,578 1,272,354
Other liabilities....................................................................................... 2,016 2,504
---------- ----------
Total liabilities...................................................................................... 1,288,594 1,274,858
---------- ----------
Commitments and contingencies
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; 67,114,531 and 67,049,811 shares issued
and outstanding, respectively.......................................................................... 671 670
Paid-in capital......................................................................................... 648,474 648,254
Promissory notes........................................................................................ (306) (323)
Accumulated deficit..................................................................................... (119,886) (72,343)
---------- ----------
Total stockholders' equity............................................................................. 528,953 576,258
---------- ----------
Total liabilities and stockholders' equity............................................................. $1,817,547 $1,851,116
========== ==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
AURORA FOODS INC.
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
June 30, June 30,
2000 1999
-------- --------
(as restated)
<S> <C> <C>
Gross sales........................................... $239,507 $215,514
Coupons, returns and allowances....................... (24,786) (28,648)
-------- --------
Net sales............................................. 214,721 186,866
Cost of goods sold.................................... 101,458 91,230
-------- --------
Gross profit......................................... 113,263 95,636
-------- --------
Brokerage, distribution and marketing expenses:
Brokerage and distribution........................... 25,045 23,635
Trade promotions..................................... 41,806 30,224
Consumer marketing................................... 9,849 10,261
-------- --------
Total brokerage, distribution and marketing expenses.. 76,700 64,120
Amortization of goodwill and other intangibles........ 10,729 9,292
Selling, general and administrative expenses.......... 10,608 8,225
Other financial, legal and accounting expenses........ 8,487 -
Columbus consolidation costs.......................... 6,550 -
Transition expenses................................... 19 3,121
-------- --------
Total operating expenses.............................. 113,093 84,758
-------- --------
Operating income..................................... 170 10,878
Interest expense, net................................. 27,176 15,746
Amortization of deferred financing expense............ 735 486
Other bank and financing expenses..................... 101 51
-------- --------
Loss before income taxes............................. (27,842) (5,405)
Income tax expense (benefit).......................... (8,909) (1,675)
-------- --------
Net loss............................................. $(18,933) $ (3,730)
======== ========
Basic and diluted loss per share...................... $ (0.28) $ (0.06)
======== ========
Weighted average number of shares outstanding 67,050 67,016
======== ========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
AURORA FOODS INC.
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
June 30, June 30,
2000 1999
-------- --------
(as restated)
<S> <C> <C>
Gross sales........................................................ $565,554 $472,175
Coupons, returns and allowances.................................... (68,825) (64,043)
-------- --------
Net sales.......................................................... 496,729 408,132
Cost of goods sold................................................. 239,860 195,933
-------- --------
Gross profit..................................................... 256,869 212,199
-------- --------
Brokerage, distribution and marketing expenses:
Brokerage and distribution....................................... 59,384 45,565
Trade promotions................................................. 96,207 72,683
Consumer marketing............................................... 29,960 25,989
-------- --------
Total brokerage, distribution and marketing expenses............... 185,551 144,237
Amortization of goodwill and other intangibles..................... 21,480 18,164
Selling, general and administrative expenses....................... 22,669 15,793
Other financial, legal and accounting expenses..................... 18,088 -
Columbus consolidation costs....................................... 6,550 -
Transition expenses................................................ 1,384 7,398
-------- --------
Total operating expenses........................................... 255,722 185,592
-------- --------
Operating income................................................. 1,147 26,607
Interest expense, net.............................................. 51,547 30,328
Amortization of deferred financing expense......................... 1,443 882
Other bank and financing expenses.................................. 188 103
-------- --------
Loss before income taxes and cumulative effect of
change in accounting............................................. (52,031) (4,706)
Income tax expense (benefit)....................................... (16,649) (1,458)
-------- --------
Loss before cumulative effect of change in accounting............ (35,382) (3,248)
Cumulative effect of change in accounting, net of tax.............. (12,161) -
-------- --------
Net loss......................................................... $(47,543) $ (3,248)
======== ========
Basic and diluted loss per share:
Loss before cumulative effect of change on accounting............. $ (0.53) $ (0.05)
Cumulative effect of change in accounting, net of tax............. (0.18) -
-------- --------
Net loss......................................................... $ (0.71) $ (0.05)
======== ========
Pro forma amounts assuming the change in accounting was
applied retroactively:
Net loss.......................................................... $(35,382) $ (3,152)
======== ========
Basic and diluted loss per share:................................. $ (0.53) $ (0.05)
======== ========
Weighted average number of shares outstanding...................... 67,050 67,016
======== ========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
AURORA FOODS INC.
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
March 31, March 31,
2000 1999
-------- --------
(as restated) (as restated)
<S> <C> <C>
Gross sales........................................................ $326,047 $256,661
Coupons, returns and allowances.................................... (44,039) (35,395)
-------- --------
Net sales.......................................................... 282,008 221,266
Cost of goods sold................................................. 138,402 104,703
-------- --------
Gross profit..................................................... 143,606 116,563
-------- --------
Brokerage, distribution and marketing expenses:
Brokerage and distribution....................................... 34,339 21,930
Trade promotions................................................. 54,401 42,459
Consumer marketing............................................... 20,111 15,728
-------- --------
Total brokerage, distribution and marketing expenses............... 108,851 80,117
Amortization of goodwill and other intangibles..................... 10,751 8,872
Selling, general and administrative expenses....................... 12,061 7,568
Other financial, legal and accounting expenses..................... 9,601 -
Transition expenses................................................ 1,365 4,277
-------- --------
Total operating expenses........................................... 142,629 100,834
-------- --------
Operating income................................................. 977 15,729
Interest expense, net.............................................. 24,371 14,582
Amortization of deferred financing expense......................... 708 396
Other bank and financing expenses.................................. 87 52
-------- --------
Income (loss) before income taxes and cumulative effect
of change in accounting.......................................... (24,189) 699
Income tax expense (benefit)....................................... (7,740) 217
-------- --------
Income (loss) before cumulative effect of change in accounting.... (16,449) 482
Cumulative effect of change in accounting, net of tax.............. (12,161) -
-------- --------
Net income (loss)................................................ $(28,610) $ 482
======== ========
Basic and diluted earnings (loss) per share:
Income (loss) before cumulative effect of change on accounting.... $ (0.25) $ 0.01
Cumulative effect of change in accounting, net of tax............. (0.18) -
-------- --------
Net income (loss)................................................ $ (0.43) $ 0.01
======== ========
Pro forma amounts assuming the change in accounting was
applied retroactively:
Net loss.......................................................... $(16,449) $ (1,969)
======== ========
Basic and diluted loss per share:................................. $ (0.25) $ (0.03)
======== ========
Weighted average number of shares outstanding...................... 67,050 67,016
======== ========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
AURORA FOODS INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Promissory Accumulated
--------------
Shares Amount Capital Notes Deficit Total
------ ------ ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999......... 67,050 $ 670 $ 648,254 $ (323) $ (72,343) $576,258
Employee Stock purchases............. 65 1 220 - - 221
Payment on officer promissory notes.. - - - 17 - 17
Net loss............................. - - - - (47,543) (47,543)
------ ------ ---------- ---------- ----------- --------
Balance at June 30, 2000............. 67,115 $ 671 $ 648,474 $ (306) $ (119,886) $528,953
====== ====== ========== ========== =========== ========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
AURORA FOODS INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
June 30, June 30,
2000 1999
----------- -------------
(as restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................................................... $(47,543) $ (3,248)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization................................................................ 35,357 25,606
Deferred income taxes........................................................................ (16,649) (1,457)
Non-cash restructuring cost.................................................................. 3,050 -
Cumulative effect of change in accounting.................................................... 12,161 -
Change in assets and liabilities, net of effects of businesses acquired:
(Increase) decrease in accounts receivable.................................................. 15,999 8,675
Accounts receivable sold.................................................................... 20,418 -
Increase in inventories..................................................................... (659) (842)
(Increase) decrease in prepaid expenses and other assets.................................... 9,261 (4,803)
Increase (decrease) in accounts payable..................................................... (32,764) (16,013)
Decrease in accrued liabilities............................................................. (30,143) (8,484)
Decrease in other noncurrent liabilities.................................................... (489) -
-------- ---------
Net cash used in operating activities.......................................................... (32,001) (566)
-------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment.................................................... (6,973) (12,972)
Proceeds from asset sales..................................................................... 1,175 11
Changes to other non-current assets and liabilities........................................... (2,497) (3,474)
Payment for acquisition of business........................................................... (7,984) (75,128)
-------- ---------
Net cash used in investing activities.......................................................... (16,279) (91,563)
-------- ---------
Cash flows from financing activities:
Proceeds from senior secured revolving and term debt.......................................... 65,000 229,651
Repayment of borrowings....................................................................... (11,517) (134,750)
Capital contributions, net of officer promissory notes........................................ 237 438
Debt issuance and equity raising costs........................................................ (132) (2,323)
-------- ---------
Net cash provided by financing activities...................................................... 53,588 93,016
-------- ---------
Increase in cash and cash equivalents.......................................................... 5,308 887
Cash and cash equivalents, beginning of period................................................. 315 354
-------- ---------
Cash and cash equivalents, end of period....................................................... $ 5,623 $ 1,241
======== =========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
AURORA FOODS INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Restatements
Prior to the issuance of the Aurora Foods Inc. (the "Company") financial
statements as of and for the year ended December 31, 1999, it was determined
that the results reported in the Company's Form 10-K as of and for the year
ended December 31, 1998 as well as the interim results reported in the Company's
Forms 10-Q as of and for the periods ended September 30, 1998, March 31, 1999,
June 30, 1999 and September 30, 1999 were misstated. Upon further
investigation, it was determined that liabilities that existed for certain trade
promotion and marketing activities and other expenses (primarily sales returns
and allowances, distribution and consumer marketing) were not properly
recognized as liabilities and that certain assets were overstated (primarily
accounts receivable, inventories and fixed assets). In addition, certain
activities were improperly recognized as sales. As a result, the financial
statements as of and for the year ended December 31, 1998 as well as the
quarterly financial data as of and for the interim periods ended September 30,
1998, March 31, 1999, June 30, 1999 and September 30, 1999 have been restated.
The restated financial statements as of and for the three and six month periods
ended June 30, 1999, have been included in the condensed consolidated financial
statements included herein.
For the three months ended June 30, 1999, these misstatements primarily
understated trade promotions expense by $3.6 million, overstated net sales by
$7.7 million, understated brokerage and distribution expense by $1.6 million,
understated consumer marketing expense by $1.1 million and understated cost of
goods sold by $3.9 million. After adjusting for the misstatements, the Company
recalculated its income tax provision reducing income tax expense by $6.9
million, recording a tax benefit of $1.7 million.
For the six months ended June 30, 1999, these misstatements primarily
understated trade promotions expense by $11.7 million, overstated net sales by
$14.5 million, overstated brokerage and distribution expense by $1.1 million,
understated consumer marketing expense by $0.2 million and understated cost of
goods sold by $4.4 million. After adjusting for the misstatements, the Company
restated its income tax provision, reducing income tax expense by $11.8 million,
recording a tax benefit of $1.5 million.
A summary of the effects of the restatement to the balance sheet is set forth in
Note 9.
The restatements are a result of an investigation conducted by a special
committee "(the "Special Committee") formed by the Company's Board of Directors.
The Special Committee retained legal counsel, which retained an independent
accounting firm to assist in the investigation. The Board of Directors has
determined that the Special Committee's role in the investigation has been
concluded. All further matters related to this investigation will be addressed
by the Board of Directors. The company has been incurring, and continues to
incur, charges in connection with this investigation. In addition, as a result
of the restatements, the Company was in default of a number of provisions of its
credit agreement and is in default under its senior subordinated notes
indentures (see Note 5). The Company has been incurring, and continues to
incur, financial, legal and accounting expenses, charges to obtain waivers on
its defaults and other charges related to amending its financing facilities.
These charges are expensed when incurred and reflected in the Company's
statements of operations.
9
<PAGE>
Accounting Change
During the three month period ended June 30, 2000, effective as of January 1,
2000, the Company adopted the consensus reached in EITF 00-14, Accounting for
Certain Sales Incentives. This change in accounting principle, required to be
adopted by most companies no later than the fourth quarter of 2000, has the
effect of accelerating the recognition of certain marketing expense as well as
requiring that certain items previously classified as distribution, promotion
and marketing expenses now be classified as reductions of revenue. After
adopting EITF 00-14 the Company now expenses all estimated costs associated with
redemption of consumer coupons at the time they are distributed, rather than
reflecting them as expense over the expected redemption period. In addition,
the estimated coupon redemption costs along with certain other allowances
typically given to retailers and others to facilitate certain promotions and
distribution have been reclassified from expense to Coupons, returns and
allowances in the accompanying Statement of Operations, as a component of Net
Sales. The similar expense items in prior year comparable periods have been
reclassified to conform to the current period's presentation.
As a result of this change in accounting, results for the three months ended
March 31, 2000 have been restated to reflect the change effective as of January
1, 2000 and the cumulative after tax effect of the change on prior years (to
December 31, 1999) of $12,161,000 has been recognized as expense in the restated
Statement of Operations for the three months ended March 31, 2000 and the
Statement of Operations for the six months ended June 30, 2000.
If this change been applied retroactively in 1999, the pro forma impact on the
results of operations for the three months ended March 31, 1999 would have been
a decrease in net sales and gross profit of $2,156,000 and a decrease in
operating income of $3,551,000. The pro forma impact on the three month period
ended June 30 ,1999 would have been an increase in net sales and gross profit of
$2,618,000 and an increase in operating income of $3,689,000. For the six
months ended June 30, 1999, the pro forma impact of retroactive application of
the accounting change would have been an increase in net sales and gross profit
of $462,000 and an increase in operating income of $138,000. The above pro
forma effects are reflected in the pro forma information contained in Note 3.
Interim Financial Statements
The interim financial statements of the Company included herein, have not been
audited by independent accountants. The statements include all adjustments,
such as normal recurring accruals, which management considers necessary for a
fair presentation of the financial position and operating results of the
Company for the periods presented. The statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in conformity with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The operating results for interim periods are not necessarily
indicative of results to be expected for an entire year. Certain prior period
amounts have been reclassified to conform to the current period's presentation.
For further information, reference should be made to the financial statements 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, 1999.
10
<PAGE>
The Company
The Company has acquired premium, well recognized brands with strong brand
equity that have been undermarketed and undermanaged in recent years and have
become non-core businesses to their corporate parents. The Company's objective
is to renew the growth of its brands by giving them the focus, strategic
direction, marketing resources and dedicated sales and marketing organization
they have lacked in recent years. The Company then sustains the growth of the
brands with high levels of marketing support directed towards consumer
promotions, new products and new packaging. Each of the Company's brands is a
leading national brand with significant market share and strong consumer
awareness. The Company competes in two segments of the food industry, dry
grocery and frozen food, and sells its products nationwide to supermarkets and
other retail channels. The Company sells its products through food brokers to
wholesale and retail grocery accounts. The products are distributed either
directly to the customer or through independent wholesalers. The Company also
sells its syrup and frozen food products in the foodservice distribution
channel. Foodservice customers include military bases, restaurant chains and
business/industry.
The company groups its brands into two general divisions: dry grocery division
and frozen food division. The dry grocery division includes Duncan Hines(R)
brand baking mix products and Mrs. Butterworth's(R) and Log Cabin(R) brand
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, Chef's Choice(R) frozen skillet meals and
Lender's(R) bagel products.
NOTE 2 - COLUMBUS OFFICE CONSOLIDATION
During the second quarter of 2000, the Company announced its intention to
consolidate its administrative offices and functions in St. Louis, Missouri and
close its office in Columbus, Ohio. The Columbus office had been responsible
for administration of the Company's Dry Grocery Segment. A reserve and charge
to expense of $6,550,000 has been recorded in the second quarter for costs
associated with this closing and has been presented separately as Columbus
consolidation costs in the accompanying Statements of Operations. The primary
components of the charge were amounts for the involuntary termination of
approximately 50 sales, marketing, finance, information systems, purchasing and
customer service employees of $2.9 million, a non-cash charge for leasehold
improvements and capitalized software that will no longer be used of $3.1
million, and estimated unrecovered office lease costs after consolidation and
other items of $0.6 million. The consolidation began during the second quarter
and is expected to be substantially complete by September 30, 2000 except for
the payment of certain benefits associated with severance of the affected
employees and office lease costs.
NOTE 3 - ACQUISITIONS
The Company acquired 100% of the common stock of Seacoast on April 1, 1999 and
the Lender's assets on November 1, 1999. During the three month period ended
June 30, 2000, amounts due pursuant to an "earn-out" clause of the Seacoast
acquisition agreement were finalized and the Company paid an additional $7.9
million in purchase price which was recorded as additional goodwill.
11
<PAGE>
Had the Lender's and Seacoast acquisitions and related financings taken place
January 1, 1999, and had the change in accounting described in Note 1 been
applied retroactively to 1999, the unaudited pro forma results of operations for
the three and six month periods ended June 30, 1999 as compared to the similar
periods in 2000 would have been as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------
2000 1999
-------- -----------
(actual) (pro forma)
<S> <C> <C>
Net sales $214,721 $232,859
======== ========
Gross profit $113,263 $120,224
======== ========
Operating income $ 170 $ 19,483
======== ========
<CAPTION>
Six Months Ended June 30,
----------------------------
2000 1999
-------- -----------
(actual) (pro forma)
<S> <C> <C>
Net sales $496,729 $517,936
======== ========
Gross profit $256,869 $266,573
======== ========
Operating income $ 1,147 $ 35,895
======== ========
</TABLE>
The unaudited pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations had the
acquisitions and accounting change taken place at the beginning of the fiscal
periods presented or of future results of operations.
NOTE 4 - INVENTORIES
--------------------
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Raw materials $ 26,666 $ 29,187
Work in process 430 1,262
Finished goods 87,494 83,900
Packaging and other supplies 9,770 9,618
-------- --------
$124,360 $123,967
======== ========
</TABLE>
12
<PAGE>
NOTE 5 - DEBT
Senior Secured Debt
As a result of the adjustments to the Company's unaudited interim financial
results for the first, second and third quarters of 1999 and the third quarter
of 1998, and adjustments to its audited financial results for the year ended
December 1998, the Company was in default of a number of provisions of the
agreement covering its senior secured debt. The Company and the lenders amended
this agreement to provide:
. for the sale by the Company of accounts receivable;
. amended financial covenants;
. waiver of certain existing defaults of covenants and breaches of
representations and warranties;
. until the defaults are cured or waived, a forbearance from exercising
remedies that are available as a result of the Company's defaults under the
Indentures governing the senior subordinated debt until September 30, 2000;
or, if earlier, in the event that the senior subordinated debt would be
accelerated; and
. the interest rate on borrowings made pursuant to the facility.
Senior Subordinated Debt
As a result of the adjustments to the Company's unaudited interim financial
results for the first, second and third quarters of 1999 and the third quarter
of 1998, and adjustments to its audited financial results for the year ended
December 1998, the Company was in default under its indentures. The Company has
initiated discussions with the senior subordinated debtholders to obtain
consents for amendments to the indentures and waivers of past defaults
thereunder.
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").
As none of the currently outstanding stock options have a potentially dilutive
effect, the income or loss amounts and the weighted averages shares outstanding
contained in the Statements of Operations were used to compute both the basic
and diluted earnings (loss) per share.
13
<PAGE>
NOTE 7- SEGMENT INFORMATION
The Company groups its business 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, Chef's Choice(R) frozen skillet meals and Lender's(R)
bagel products.
The following table presents a summary of operations by segment (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(as restated) (as restated)
<S> <C> <C> <C> <C>
Net sales:
Dry grocery $ 73,827 $ 91,607 $ 166,657 $ 176,898
Frozen food 140,894 95,259 330,072 231,234
------------ ------------ ------------ ------------
Total $ 214,721 $ 186,866 $ 496,729 $ 408,132
============ ============ ============ ============
Operating income (loss):
Dry grocery $ (8,374) $ 9,044 $ (6,332) $ 17,857
Frozen food 8,544 1,834 7,479 8,750
------------ ------------ ------------ ------------
Total $ 170 $ 10,878 $ 1,147 $ 26,607
============ ============ ============ ============
Total assets:
Dry grocery $ 832,864 $ 863,137 $ 832,864 $ 863,137
Frozen food 984,683 658,705 984,683 658,705
------------ ------------ ------------ ------------
Total $ 1,817,547 $ 1,521,842 $ 1,817,547 $ 1,521,842
============ ============ ============ ============
Depreciation and amortization:
Dry grocery $ 7,519 $ 6,629 $ 14,579 $ 12,780
Frozen food 11,012 7,179 20,778 12,826
------------ ------------ ------------ ------------
Total $ 18,531 $ 13,808 $ 35,357 $ 25,606
============ ============ ============ ============
Capital expenditures:
Dry grocery $ 904 $ 4,295 $ 1,804 $ 7,696
Frozen food 2,533 2,273 5,169 5,276
------------ ------------ ------------ ------------
Total $ 3,437 $ 6,568 $ 6,973 $ 12,972
============ ============ ============ ============
</TABLE>
14
<PAGE>
NOTE 8 - CONTINGENCIES
As of May 10, 2000, the Company has been served with eighteen complaints in
purported class action lawsuits filed in the United States District Court for
the Northern District of California. The complaints received by the Company
allege that, among other things, as a result of accounting irregularities, the
Company's previously issued financial statements were materially false and
misleading and thus constituted violations of federal securities laws by the
Company and the directors and officers who resigned on February 17, 2000 (Ian R.
Wilson, James B. Ardrey, Ray Chung and M. Laurie Cummings). The actions allege
that the defendants violated Sections 10(b) and/or Section 20(a) of the
Securities Exchange Act and Rule 10b-5 promulgated thereunder (the "Securities
Actions"). The Securities Actions complaints seek damages in unspecified
amounts. These Securities Actions purport to be brought on behalf of purchasers
of the Company's securities during various periods, all of which fall between
October 28, 1998 and April 2, 2000. The Company believes that additional
purported class action lawsuits similar to those described above have been or
may be filed. The Company is currently evaluating these claims and possible
defenses thereto and intends to defend these suits vigorously.
On April 14, 2000, certain of the Company's current and former directors were
named as defendants in a derivative lawsuit filed in the Superior Court of the
State of California, in the County of San Francisco, alleging breach of
fiduciary duty, mismanagement and related causes of action based upon the
Company's restatement of its financial statements. The Company believes that the
litigation is procedurally defective, in light of the plaintiffs' failure to
make prior demand on the Board to investigate the claims in question. The
Company therefore intends to move to dismiss these claims. If the case proceeds,
the Company may be obligated to indemnify and advance the defense costs of the
directors named in the suit, pending a final determination of the action.
While it is not feasible to predict or determine the final outcome of these
actions or similar actions, including any governmental proceedings, that could
arise, or to estimate the amounts or potential range of loss or liabilities with
respect to these matters, management believes that an adverse outcome with
respect to such proceedings could have a material adverse impact on the
Company's financial position, results of operations and cash flow.
Pursuant to the Company's articles of incorporation, and certain of its
contractual obligations, the Company has agreed to indemnify its officers and
directors and certain other employees under certain circumstances against claims
and expenses arising from such proceedings. The Company may be obligated to
indemnify certain of its officers and directors for the costs they may incur as
a result of these proceedings.
The Company is also subject to litigation in the ordinary course of business.
In the opinion of management, the ultimate outcome of any existing litigation,
other than the Securities Actions described above, would not have a material
adverse effect on the Company's financial condition or results of operations.
15
<PAGE>
NOTE 9 - RESTATEMENT
As described in Note 1, the June 30, 1999 financial statements have been
restated and the Statements of Operations have been presented, as restated. A
summary of the effects of the restatement of the June 30, 1999 Consolidated
Balance Sheet follows (in thousands, except share and per share data):
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
June 30, 1999
---------------------------------
As Previously
Reported As Restated
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 1,422 $ 1,241
Accounts receivable, net......................................... 113,288 81,032
Inventories...................................................... 89,858 91,002
Prepaid expenses and other assets................................ 11,411 11,767
Current deferred tax assets..................................... 22,149 21,815
---------- ----------
Total current assets............................................ 238,128 206,857
Property, plant and equipment, net................................ 165,624 162,135
Deferred tax asset................................................ - 2,696
Goodwill and other intangible assets, net......................... 1,122,681 1,119,303
Asset held for sale............................................... - 800
Other assets...................................................... 31,113 30,051
---------- ----------
Total assets.................................................... $1,557,546 $1,521,842
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of senior secured term debt...................... $ 20,283 $ 20,283
Senior secured revolving debt facility........................... 93,350 93,350
Accounts payable................................................. 52,258 52,597
Accrued liabilities.............................................. 46,592 77,253
---------- ----------
Total current liabilities....................................... 212,483 243,483
Non-current deferred tax liabilities............................. 23,921 -
Other liabilities................................................ 11,801 11,801
Senior secured term debt......................................... 287,116 287,116
Senior subordinated notes........................................ 402,149 402,149
---------- ----------
Total liabilities............................................... 937,470 944,549
---------- ----------
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;
67,016,173 shares issued and outstanding........................ 670 670
Paid-in capital.................................................. 648,104 648,104
Promissory notes................................................. (339) (339)
Accumulated deficit.............................................. (28,359) (71,142)
---------- ----------
Total stockholders' equity..................................... 620,076 577,293
---------- ----------
Total liabilities and stockholders' equity..................... $1,557,546 $1,521,842
========== ==========
</TABLE>
16
<PAGE>
NOTE 10 - SALE OF ACCOUNTS RECEIVABLE
In April 2000, the Company entered into a one-year agreement to sell on a
periodic basis, specified accounts receivable in amounts up to $60 million. The
use of any proceeds from the sale of such specified receivables is restricted to
payments for the purchase of assets and repayment of debt. As of June 30, the
Company had received a net $20.4 million from the sale of accounts receivable.
17
<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,
1999.
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the historical
financial information included in the Financial Statements and notes to the
financial statements in Item I included herein. Unless otherwise noted, years
(2000 and 1999) in this discussion refer to the Company's three month and six
month periods ending on June 30.
Restatements
Prior to the issuance of the Company's financial statements as of and for the
year ended December 31, 1999, it was determined that the results reported in the
Company's Form 10-K as of and for the year ended December 31, 1998 as well as
the interim results reported in the Company's Forms 10-Q as of and for the
periods ended September 30, 1998, March 31, 1999, June 30, 1999 and September
30, 1999 were misstated. Upon examination, it was determined that liabilities
that existed for certain trade promotion and marketing activities and other
expenses (primarily sales returns and allowances, distribution and consumer
marketing) were improperly deferred into future periods and that certain assets
were overstated (primarily accounts receivable, inventories and fixed assets).
In addition, certain activities were improperly recognized as sales. As a
result, the financial statements as of and for the year ended December 31, 1998
as well as the quarterly financial data as of and for the interim periods ended
September 30, 1998, March 31, 1999, June 30, 1999 and September 30, 1999 have
been restated. The restated financial statements as of and for the three and
six month periods ended June 30, 1999 have been included in the condensed
consolidated financial statements included herein.
For the three months ended June 30, 1999, these misstatements primarily
understated trade promotions expense by $3.6 million, overstated net sales by
$7.7 million, understated brokerage and distribution expense by $1.6 million,
understated consumer marketing expense by $1.1 million and understated cost of
goods sold by $3.9 million. After adjusting for the misstatements, the Company
recalculated its income tax provision reducing income tax expense by $6.9
million, recording a tax benefit of $1.7 million.
For the six months ended June 30, 1999, these misstatements primarily
understated trade promotions expense by $11.7 million, overstated net sales by
$14.5 million, overstated brokerage and distribution expense by $1.1 million,
understated consumer marketing expense by $0.2 million and understated cost of
goods sold by $4.4 million. After adjusting for the misstatements, the Company
restated its income tax provision, reducing income tax expense by $11.8 million,
recording a tax benefit of $1.5 million.
18
<PAGE>
Results of Operations Three Months Ended June 30
The following table sets forth the historical and pro forma results of
operations for the periods indicated as well as the percentage which the
historical and pro forma items in the Statements of Operations bear to net
sales. The statements include a presentation of the pro forma results of
operations as if the Lender's and Seacoast acquisitions and related financings
had taken place January 1, 1999 and as if EITF 00-14, Accounting for Certain
Sales Incentives, had been adopted as of January 1, 1999. Certain amounts from
prior years, including amounts related to the adoption of EITF 00-14, Accounting
for Certain Sales Incentives, have been reclassified to conform to the Company's
current year presentation, and financial information for the three months ended
June 30, 1999 has been restated as discussed above.
AURORA FOODS INC.
Statements of Operations
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Pro Forma Three
Actual Three Months Ended Months Ended
---------------------- ---------------------- ---------------------
June 30, 2000 June 30, 1999 June 30, 1999
---------------------- ---------------------- ---------------------
(as restated) (1) (as restated) (1)
<S> <C> <C> <C> <C> <C> <C>
Gross Sales $239,507 111.5 % $215,514 115.3 % $265,348 114.0 %
Coupons, returns and allowances (24,786) (11.5) (28,648) (15.3) (32,489) (14.0)
-------- ----- -------- ----- -------- -----
Net Sales 214,721 100.0 186,866 100.0 232,859 100.0
Cost of goods sold 101,458 47.3 91,230 48.8 112,635 48.4
-------- ----- -------- ----- -------- -----
Gross Profit 113,263 52.7 95,636 51.2 120,224 51.6
-------- ----- -------- ----- -------- -----
Brokerage, distribution and
marketing expenses:
Brokerage and distribution 25,045 11.6 23,635 12.6 30,831 13.2
Trade promotions 41,806 19.5 30,224 16.2 34,858 15.0
Consumer marketing 9,849 4.6 10,261 5.5 10,285 4.4
-------- ----- -------- ----- -------- -----
Total brokerage, distribution and
marketing expenses: 76,700 35.7 64,120 34.3 75,974 32.6
Amortization of goodwill and
other intangibles 10,729 5.0 9,292 5.0 10,442 4.5
Selling, general and administrative
expenses 10,608 4.9 8,225 4.4 11,205 4.8
Other financial, legal and
accounting expenses 8,487 4.0 - 0.0 - 0.0
Columbus consolidation costs 6,550 3.1 - 0.0 - 0.0
Transition expenses 19 0.0 3,121 1.7 3,120 1.3
-------- ----- -------- ----- -------- -----
Total operating expenses 113,093 52.7 84,758 45.4 100,741 43.2
-------- ----- -------- ----- -------- -----
Operating income 170 (0.0) 10,878 5.8 19,483 8.3
Interest and other financing
expenses, net 28,012 13.0 16,283 8.7 22,460 9.6
-------- ----- -------- ----- -------- -----
Income (loss) before income taxes (27,842) (13.0) (5,405) (2.9) (2,977) (1.3)
Income tax expense (benefit) (8,909) (4.2) (1,675) (0.9) (1,523) (0.7)
-------- ----- -------- ----- -------- -----
Net income (loss) $(18,933) (8.8) $ (3,730) (2.0) $ (1,454) (0.6)
======== ===== ======== ===== ======== =====
Earnings per share $ (0.28) N/A $ (0.06) N/A $ (0.02) N/A
======== ===== ======== ===== ======== =====
EBITDA (2) $ 17,301 8.1 % $ 23,899 12.8 % $ 35,153 15.1 %
======== ===== ======== ===== ======== =====
Adjusted EBITDA (3) $ 32,356 15.1 % $ 26,464 14.2 % $ 42,063 18.1 %
======== ===== ======== ===== ======== =====
Adjusted EPS (4) $ (0.13) N/A $ (0.02) N/A $ - N/A
======== ===== ======== ===== ======== =====
</TABLE>
(1) As restated. See "--Restatements" and Notes 1 and 9 to the condensed
consolidated financial statements.
(2) EBITDA is defined as net income (loss) plus income tax expense (benefit),
interest expense, amortization of deferred financing expense, other bank and
financing expenses, depreciation and amortization of goodwill and other
intangibles. The Company believes EBITDA provides additional information for
determining its ability to meet debt service requirements. EBITDA does not
represent and should not be considered an alternative to net income or cash
flow from operations as determined by generally accepted accounting
principles. EBITDA does not necessarily indicate whether cash flow will be
sufficient for cash requirements and should not be deemed to represent funds
available to the Company. The calculation of EBITDA does not include the
commitments of the Company for capital expenditures and payment of debt.
EBITDA, as presented, may not be comparable to similarly titled measures of
other companies.
(3) Adjusted EBITDA is defined as EBITDA plus other financial, legal and
accounting expenses, Columbus consolidation costs and transition expenses.
In addition, for pro forma purposes in each of the first two quarters of
1999, adjusted EBITDA excludes $4,789 of charges made by Kellogg's to the
Lender's business to reflect an allocation of Kellogg's corporate selling,
general and administrative expenses and to reflect overhead on a Lender's
facility that was not purchased by the Company. These costs will not be
incurred by the Company on an ongoing basis. The Company has included $1,000
as incremental selling, general and administrative expenses in each of the
first two quarters of 1999 as its estimate of the incremental expenses
associated with operating the Lender's business.
(4) Adjusted EPS is defined as earnings (loss) per share plus the per share
after tax effect of other financial, legal and accounting expenses, Columbus
consolidation costs and transition expenses.
The Company manages its business in two operating segments, the frozen food
division and the dry grocery division. The separate financial information of
each segment is presented consistently with the manner in which results are
evaluated by the chief operating decision-maker in deciding how to allocate
resources and in assessing performance.
The frozen foods division has six brands, Van de Kamp's(R) and Mrs.
Paul's(R) seafood products, Aunt Jemima(R) frozen breakfast products and
Celeste(R) frozen pizza products and the 1999 additions--Chef's Choice(R) frozen
skillet meal products and Lender's(R) bagel products. The dry grocery division
consists of three brands, Mrs. Buttersworth(R) and Log Cabin(R) syrup products
and Duncan Hines(R) baking mix products, which was acquired in 1998.
19
<PAGE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
(as restated)
The following table sets forth certain historical results of operations data
by division for the three months ended June 30, 2000 and 1999 (as restated):
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------------
2000 1999
------------------- -----------------
Frozen Dry Frozen Dry
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales $140,894 $73,827 $95,259 $91,607
Cost of Goods Sold 66,785 34,673 50,085 41,145
Gross Profit -------- ------- ------- -------
74,109 39,154 45,174 50,462
-------- ------- ------- -------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 16,117 8,928 12,044 11,590
Trade promotions 24,942 16,864 15,702 14,523
Consumer marketing 5,420 4,429 5,297 4,964
-------- ------- ------- -------
Total brokerage, distribution and marketing expenses 46,479 30,221 33,043 31,077
Amortization of goodwill and other intangibles 5,265 5,464 4,104 5,188
Selling, general and administrative expenses 8,233 2,375 6,127 2,098
Other financial, legal and accounting expenses (1) 5,569 2,918 0 0
Columbus consolidation costs 0 6,550 0 0
Transition expenses 19 0 66 3,055
-------- ------- ------- -------
Total operating expenses 65,565 47,528 43,340 41,418
-------- ------- ------- -------
Operating income (loss) $ 8,544 $(8,374) $ 1,834 $ 9,044
======== ======= ======= =======
</TABLE>
(1) Other financial, legal and accounting expenses were allocated to each
division based on the percentage of each division's net sales to total net
sales.
Net Sales. Net sales increased from $186.9 million in 1999 to $214.7
million in 2000, or 14.9%, due to increased net sales in the frozen foods
division partially offset by lower net sales in the dry grocery division.
Frozen Foods. Frozen foods division net sales increased from $95.3
million in 1999 to $140.9 million in 2000, or 47.8%, due primarily to the
acquisition of Lender's(R) in November 1999 and reduced coupons and
allowances, partly resulting from the inconsistency in accounting for the
recognition of coupon expense in 1999, following adoption of the change in
accounting required by EITF 00-14. These were offset in part by the Company's
decision to terminate the practice of heavy quarter-end trade loading and to
drive down the excessive trade inventories that had accumulated as a result of
these practices.
Dry Grocery. Dry grocery division net sales decreased from $91.6 million
in 1999 to $73.8 million in 2000, or 19.4%, principally because of the
Company's decision to terminate the practice of heavy quarter-end trade
loading and to drive down the excessive trade inventories that had accumulated
as a result of these practices.
Gross Profit. Gross profit increased from $95.6 million in 1999 to $113.3
million in 2000, an increase of 18.4%, due to increased gross profit in the
frozen foods division partially offset by lower gross profit in the dry grocery
division. As a percentage of net sales, gross profit increased from 51.2% in
1999 to 52.7% in 2000. The increase in gross profit as a percentage of net sales
was driven primarily by an increase in the frozen foods division.
Frozen Foods. Gross profit increased from $45.2 million in 1999 to $74.1
million in 2000, an increase of 64% due primarily to the acquisition of
Lender's(R) in November 1999. As a percentage of net sales, gross profit
increased from 47.4% in 1999 to 52.6% in 2000. This increase in gross profit
as a percentage of net sales was due to lower coupons and allowances, partly
resulting from the inconsistency in accounting for the recoginition of coupon
expense in 1999, following adoption of the change in accounting required by
EITF 00-14 and a result of eliminating the discounting associated with heavy
quarter-end loading in prior periods. In addition, the Lenders volume
(acquired in November, 1999) has a higher than average gross margin.
Dry Grocery. Gross profit decreased from $50.5 million in 1999 to $39.2
million in 2000, a decrease of 22.4% due primarily to the decrease in net
sales. As a percentage of net sales, gross profit decreased from 55.1% in 1999
to 53.0% in 2000. The decrease in gross profit as a percentage of net sales
was due primarily to an unfavorable sales mix, as the sales decline was more
pronounced in the higher margin breakfast products.
20
<PAGE>
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses increased from $64.1 million in 1999 to $76.7 million in
2000, or 19.6%. As a percentage of net sales, brokerage, distribution and
marketing expenses increased from 34.3% of net sales in 1999 to 35.7% of net
sales in 2000 due primarily to increases as a percentage of net sales in the dry
grocery division that were partially offset by decreases in the frozen foods
division. Brokerage and distribution costs, which include broker commissions,
freight, warehousing and term discounts, decreased from 12.6% of net sales in
1999 to 11.6% of net sales in 2000 due primarily to lower term discounts in the
frozen division. Trade promotions expense, which consists of incentives offered
to food retailers to carry and promote Aurora products, increased from 16.2% of
net sales in 1999 to 19.5% of net sales in 2000 due to increased slotting fees
amortization expense resulting from prior year spending being amortized over
contract periods in the dry grocery division.
Frozen Foods. Brokerage, distribution and marketing expenses increased
from $33.0 million in 1999 to $46.5 million in 2000, an increase of 40.7%, due
primarily to the acquisition of Lender's(R) in November 1999. As a percentage
of net sales, brokerage, distribution and marketing expenses decreased from
34.7% of net sales in 1999 to 33.0% of net sales in 2000. Trade promotions
expense increased from 16.5% of net sales in 1999 to 17.7% of net sales in
2000. The increase in trade promotions as a percentage of net sales is due
primarily to increased focus on performance based trade promotions. Brokerage
and distribution expenses decreased from 12.6% of net sales 1999 to 11.4% of
net sales in 2000. This decrease is due primarily to reduced term discounts
and the appointment of Marketing Specialists as the national broker for retail
accounts, thereby reducing overall brokerage costs.
Dry Grocery. Brokerage, distribution and marketing expenses decreased
from $31.1 million in 1999 to $30.2 million in 2000, a decrease of 2.8%. As a
percentage of net sales, brokerage, distribution and marketing expenses
increased from 33.9% in 1999 to 40.9% in 2000. This increase was driven
primarily by increases in trade promotions. Trade promotions expense
increased from 15.9% of net sales in 1999 to 22.8% of net sales in 2000. This
increase is due primarily to slotting fee amortization expense noted above and
a sales mix shift to products with higher than average promotion spending.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles increased from $9.3 million in 1999 to $10.6 million in 2000
due to the impact of the acquisition of the Lender's(R) business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $8.2 million in 1999 to $10.6 million in
2000, or 29.0%, due primarily to the incremental costs necessary to manage the
acquired Lender's(R) business, the costs related to the employment of new
management and other compensation related costs.
Other Financial, Legal and Accounting Expenses. As a result of the
investigation into the Company's accounting practices, the resulting restatement
of its financial statements, litigation and similar proceedings, defaults under
its loan agreements and related matters (see --"Restatements"), the Company
has incurred, and continues to incur financial, legal and accounting expenses,
charges to obtain waivers on its events of default and charges related to
amending its financing facilities. Such costs, which totaled $8.5 million for
the three months ended June 30, 2000, are expensed when incurred by the Company.
21
<PAGE>
Columbus Consolidation Costs. During the second quarter of 2000, the Company
announced its intention to consolidate its administrative office and functions
in St. Louis, Missouri and close its office in Columbus, Ohio. The charge in
the quarter of $6.6 million primarily represents the estimated costs of employee
severance, the non-cash write-off of leasehold improvements and capitalized
software that will no longer be used and estimated unrecovered office lease
costs. The consolidation is expected to be substantially completed by September
30, 2000 with the exception of the payment of certain employee severance related
costs and office lease costs.
Transition Expenses. The Company incurred $3.1 million in transition
expenses in 1999 primarily due to the integration of the Duncan Hines business.
These expenses represent one-time costs incurred to integrate acquired
businesses and were not significant in 2000.
Operating Income. Operating income decreased from $10.9 million in 1999 to
$0.2 million in 2000. Operating income in 2000 was affected by the $8.5 million
of other financial, legal and accounting expenses and $6.6 million of Columbus
consolidaton costs and by transition expenses in 1999. Before giving effect to
other financial, legal and accounting expenses and transition expenses,
operating income increased from $14.0 million in 1999 to $15.2 million in 2000.
Interest and Other Financing Expenses. The aggregate of net interest income
and expense, amortization of loan fees and other bank and financing expenses
increased from $16.3 million in 1999 to $28.0 million in 2000, or 72.0%. The
increase was due primarily to the additional debt associated with the
acquisition of Lender's(R) in November 1999. In addition, higher interest rates
and an increased debt level in 2000 contributed to higher interest expense.
Net (Loss). The Company incurred a net loss of $3.7 million in 1999 compared
to a net loss of $18.9 million in 2000. The loss in 2000 included the other
financial, legal and accounting expenses along with Columbus consolidation costs
and transition expenses and was impacted by the overall decline in operating
income described above.
22
<PAGE>
Three Months Ended June 30, 2000 Compared to the Pro Forma Three Months Ended
June 30, 1999 (as restated)
The following table sets forth results of operations data by division for the
three months ended June 30, 2000 and the pro forma results for the three months
ended June 30, 1999 (as restated) as if the Chef's Choice(R) and Lender's(R)
acquisitions and related financings had taken place January 1, 1999 and as if
EITF 00-14 had been adopted January 1, 1999:
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------------
2000 1999 (Pro forma)
------------------- -----------------
Frozen Dry Frozen Dry
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales $140,894 $73,827 $141,006 $91,853
Cost of Goods Sold 66,785 34,673 71,490 41,145
-------- ------- ------- -------
Gross Profit 74,109 39,154 69,516 50,708
-------- ------- -------- -------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 16,117 8,928 19,241 11,590
Trade promotions 24,942 16,864 20,336 14,523
Consumer marketing 5,420 4,429 5,489 4,796
-------- ------- -------- -------
Total brokerage, distribution and marketing expenses 46,479 30,221 45,065 30,909
Amortization of goodwill and other intangibles 5,265 5,464 5,254 5,188
Selling, general and administrative expenses 8,233 2,375 9,107 2,098
Other financial, legal and accounting expenses (1) 5,569 2,918 0 0
Columbus consolidation costs 0 6,550 0 0
Transition expenses 19 0 66 3,054
-------- ------- -------- -------
Total operating expenses 65,565 47,528 54,492 41,249
-------- ------- -------- -------
Operating income (loss) $ 8,544 $(8,374) $ 10,024 $ 9,459
======== ======= ======== =======
</TABLE>
(1) Other financial, legal and accounting expenses were allocated to each
division based on the percentage of each division's net sales to total net
sales.
Pro Forma Net Sales. On a pro forma basis, net sales decreased from $232.9
million in 1999 to $214.7 million in 2000, or 7.8%. The decline in net sales was
attributable primarily to the decline in the dry grocery division.
Frozen Foods. On a pro forma basis, frozen foods division net sales
decreased from $141.0 million in 1999 to $140.9 million in 2000 due to the
Company's decision to terminate the practice of heavy quarter-end trade
loading and to drive down the excessive trade inventories that had accumulated
as a result of these practices, partially offset by reduced coupons and
allowances.
Dry Grocery. On a pro forma basis, dry grocery division net sales
decreased from $91.9 million in 1999 to $73.8 million in 2000, or 19.6%,
principally because of the Company's decision to terminate the practice of
heavy quarter-end trade loading and to drive down the excessive trade
inventories that had accumulated as a result of these practices.
Pro Forma Gross Profit. On a pro forma basis, gross profit decreased from
$120.2 million in 1999 to $113.3 million in 2000, or 5.8%. As a percentage of
net sales, pro forma gross profit increased from 51.6% in 1999 to 52.7% in 2000.
Frozen Foods. On a pro forma basis, frozen foods division gross profit
increased from $69.5 million in 1999 to $74.1 million in 2000. The increase
was primarily due to lower coupons and allowances, the elimination of the
discounting associated with heavy quarter-end loading in prior years.
Dry Grocery. Gross profit decreased from $50.7 million in 1999 to $39.2
million in 2000, a decrease of 22.8% due primarily to the decrease in net
sales. As a percentage of net sales, gross profit decreased from 55.2% in 1999
to 53.0% in 2000. The decrease in gross profit as a percentage of net sales
was due primarily to unfavorable sales mix, as the sales decline was more
pronounced in the higher margin breakfast products.
Pro Forma Brokerage, Distribution and Marketing Expenses. On a pro forma
basis, brokerage, distribution and marketing expenses increased from $76.0
million in 1999 to $76.7 million in 2000, an increase of 1.0%. As a percentage
of net sales, pro forma brokerage, distribution and marketing expenses increased
from 32.6% of net sales in 1999 to 35.7% of net sales in 2000.
23
<PAGE>
Frozen Foods. On a pro forma basis, brokerage, distribution and marketing
expenses increased from $45.1 million in 1999 to $46.5 million in 2000, or
3.1%. As a percentage of net sales, brokerage, distribution and marketing
expenses increased from 32.0% in 1999 to 33.0% in 2000 due to an increase in
trade promotions as a percent of sales offset in part by a decrease in
brokerage and distribution as a percent of net sales. The decrease in
brokerage and distribution results from reduced term discounts and the
appointment of Marketing Specialists as the national broker for retail
accounts, thereby reducing overall brokerage costs. The increased trade
promotion results from increased focus on performance based trade promotions.
Dry Grocery. On a pro forma basis, brokerage, distribution and marketing
expenses decreased from $30.9 million in 1999 to $30.2 million in 2000, or
2.2%. As a percentage of net sales, brokerage, distribution and marketing
expenses increased from 33.7% in 1999 to 40.9% in 2000. This increase was
driven primarily by increases in trade promotions, which increased primarily
due to slotting amortization expense and a sales mix shift to products with
higher than average promotion spending.
Pro Forma Other Financial, Legal and Accounting Expenses. As a result of the
investigation into the Company's accounting practices, the resulting restatement
of its financial statements, litigation and similar proceedings, defaults under
its loan agreements and related matters (see--"Restatements"), the Company has
incurred, and continues to incur, financial, legal and accounting expenses,
charges to obtain waivers on its events of default and charges related to
amending its financing facilities. Such costs, which totaled $8.5 million for
the three months ended June 30, 2000, are expensed when incurred by the Company.
Pro Forma Columbus Consolidation Costs. During the second quarter of 2000,
the Company announced its intention to consolidate its administrative office and
functions in St. Louis, Missouri and close its office in Columbus, Ohio. The
charge in the quarter of $6.6 million primarily represents the estimated costs
of employee severance, the non-cash write-off of leasehold improvements and
capitalized software that will no longer be used and estimated unrecovered
office lease costs. The consolidation is expected to be substantially completed
by September 30, 2000 with the exception of the payment of certain employee
severance related costs and office lease costs.
Pro Forma Transition Expenses. The Company incurred $3.1 million in
transition expenses in 1999 primarily due to the integration of the Duncan Hines
business. These expenses represent one-time costs incurred to integrate
acquired business and were not significant in 2000.
Pro Forma Operating (Loss) Income. On a pro forma basis, operating income
decreased from $19.5 million in 1999 to $0.2 million in 2000. Excluding the
effects of the other financial, legal and accounting expenses, Columbus
consolidation costs and transition expenses in both years, operating income
decreased from $19.8 million in 1999 to $15.2 million in 2000, a decrease of
23.1%.
Pro Forma Interest and Other Financing Expenses. On a pro forma basis, the
aggregate of net interest income and expense, amortization of loan fees and
other bank and financing expenses increased from $22.5 million in 1999 to $28.0
million in 2000. This increase is due to higher interest rates on the floating
rate debt and an increased debt level in 2000.
Pro Forma Income Tax Expense. On a pro forma basis, the income tax benefit
recorded increased from $1.5 million in 1999 to $8.9 million in 2000. The
effective tax rate for 1999 was 51.2%, which was impacted favorably by certain
state tax credits applied for by the Company that increase the pro forma income
tax benefit. The effective tax rate for 2000 was 32.0%.
24
<PAGE>
Results of Operations Six Months Ended June 30
The following table sets forth the historical and pro forma results of
operations for the periods indicated as well as the percentage which the
historical and pro forma items in the Statements of Operations bear to net
sales. The statements include a presentation of the pro forma results of
operations as if the Lender's and Seacoast acquisitions and related financings
had taken place January 1, 1999 and as if EITF 00-14, Accounting for Certain
Sales Incentives had been adopted as of January 1, 1999. Certain amounts from
prior years, including amounts related to the adoption of EITF 00-14, Accounting
for Certain Sales Incentives, have been reclassified to conform to the Company's
current year presentation, and financial information for the six months ended
June 30, 1999 has been restated as discussed above.
AURORA FOODS INC.
Statements of Operations
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Pro Forma Six
Actual Six Months Ended Months Ended
------------------------------------------------ --------------------
June 30, 2000 June 30, 1999 June 30, 1999
-------------------- ------------------- --------------------
(as restated) (1) (as restated) (1)
<S> <C> <C> <C> <C> <C> <C>
Gross Sales $565,554 113.9 % $472,175 115.7 % $599,845 115.8 %
Coupons, returns and allowances (68,825) (13.9) (64,043) (15.7) (81,909) (15.8)
-------- ----- -------- ----- -------- -----
Net Sales 496,729 100.0 408,132 100.0 517,936 100.0
Cost of goods sold 239,860 48.3 195,933 48.0 251,363 48.5
-------- ----- -------- ----- -------- -----
Gross Profit 256,869 51.7 212,199 52.0 266,573 51.5
-------- ----- -------- ----- -------- -----
Brokerage, distribution and
marketing expenses:
Brokerage and distribution 59,384 12.0 45,565 11.2 62,563 12.1
Trade promotions 96,207 19.4 72,683 17.8 88,232 17.0
Consumer marketing 29,960 6.0 25,989 6.3 29,577 5.7
-------- ----- -------- ----- -------- -----
Total brokerage, distribution and
marketing expenses: 185,551 37.4 144,237 35.3 180,372 34.8
Amortization of goodwill and
other intangibles 21,480 4.3 18,164 4.5 20,782 4.0
Selling, general and administrative
expenses 22,669 4.6 15,793 3.9 22,126 4.3
Other financial, legal and
accounting expenses 18,088 3.6 - 0.0 - 0.0
Columbus consolidation costs 6,550 1.3 - 0.0 - 0.0
Transition expenses 1,384 0.3 7,398 1.8 7,398 1.3
-------- ----- -------- ----- -------- -----
Total operating expenses 255,722 51.5 185,592 45.5 230,678 44.6
-------- ----- -------- ----- -------- -----
Operating income 1,147 0.2 26,607 6.5 35,895 6.9
Interest and other financing
expenses, net 53,178 10.7 31,313 7.7 44,679 8.6
-------- ----- -------- ----- -------- -----
Income (loss) before income taxes
and cumulative change in accounting (52,031) (4,706) (8,784)
(10.5) (1.2) (1.7)
Income tax expense (benefit) (16,649) (3.4) (1,458) (0.4) (3,526) (0.7)
-------- ----- -------- ----- -------- -----
Loss before cumulative effect of
change in accounting (35,382) (7.1) (3,248) (0.8) (5,258) (1.0)
Cumulative effect of change in
accounting, net of tax (12,161) (2.4) - 0.0 - 0.0
-------- ----- -------- ----- -------- -----
Net income (loss) $(47,543) (9.5) % $ (3,248) (0.8) % $ (5,258) (1.0) %
======== ===== ======== ===== ======== =====
Loss per share $(0.71) N/A $ (0.05) N/A $ (0.08) N/A
======== ===== ======== ===== ======== =====
EBITDA (2) $ 35,104 7.1 % $ 51,425 12.6 % $ 66,331 12.8 %
======== ===== ======== ===== ======== =====
Adjusted EBITDA (3) $ 61,125 12.3 % $ 58,823 14.4 % $ 81,308 15.7 %
======== ===== ======== ===== ======== =====
Adjusted EPS (4) $ (0.45) N/A $ 0.03 N/A $ (0.01) N/A
======== ===== ======== ===== ======== =====
</TABLE>
(1) As restated. See "--Restatements" and Notes 1 and 9 to the condensed
consolidated financial statements.
(2) EBITDA is defined as net income (loss) plus income tax expense (benefit),
interest expense, amortization of deferred financing expense, other bank and
financing expenses, depreciation and amortization of goodwill and other
intangibles. The Company believes EBITDA provides additional information for
determining its ability to meet debt service requirements. EBITDA does not
represent and should not be considered an alternative to net income or cash
flow from operations as determined by generally accepted accounting
principles. EBITDA does not necessarily indicate whether cash flow will be
sufficient for cash requirements and should not be deemed to represent funds
available to the Company. The calculation of EBITDA does not include the
commitments of the Company for capital expenditures and payment of debt.
EBITDA, as presented, may not be comparable to similarly titled measures of
other companies.
(3) Adjusted EBITDA is defined as EBITDA plus other financial, legal and
accounting expenses, Columbus consolidation costs and transition expenses.
In addition, for pro forma purposes in each of the first two quarters of
1999, adjusted EBITDA excludes $4,789 of charges made by Kellogg's to the
Lender's business to reflect an allocation of Kellogg's corporate selling,
general and administrative expenses and to reflect overhead on a Lender's
facility that was not purchased by the Company. These costs will not be
incurred by the Company on an ongoing basis. The Company has included $1,000
as incremental selling, general and administrative expenses in each of the
first two quarters of 1999 as its estimate of the incremental expenses
associated with operating the Lender's business.
(4) Adjusted EPS is defined as earnings (loss) per share plus the per share
after tax effect of other financial, legal and accounting expenses, Columbus
consolidation costs and transition expenses.
25
<PAGE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 (as
restated)
The following table sets forth certain historical results of operations data
by division for the six months ended June 30, 2000 and 1999 (as restated):
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------------
2000 1999
----------------------------------- ---------------------------------
Frozen Dry Frozen Dry
------------ ------------- ---------------- -----------
<S> <C> <C> <C> <C>
Net Sales $330,072 $166,657 $231,234 $176,898
Cost of Goods Sold 164,832 75,028 117,380 78,553
------------ ---------- ---------- ---------
Gross Profit 165,240 91,629 113,854 98,345
------------ ---------- ---------- ---------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 36,742 22,642 26,879 18,686
Trade promotions 59,521 36,686 42,509 30,174
Consumer marketing 19,831 10,129 16,263 9,726
------------ ---------- ---------- --------
Total brokerage, distribution and marketing expenses 116,094 69,457 85,651 58,586
Amortization of goodwill and other intangibles 10,618 10,862 7,829 10,335
Selling, general and administrative expenses 17,727 4,942 11,465 4,328
Other financial, legal and accounting expenses (1) 11,938 6,150 0 0
Columbus consolidation costs 0 6,550 0 0
Transition expenses 1,384 0 159 7,239
------------ ---------- ---------- ---------
Total operating expenses 157,761 97,961 105,104 80,488
------------ ---------- ---------- ---------
Operating income (loss) $ 7,479 $ (6,332) $ 8,750 $ 17,857
============ ========== ========== =========
</TABLE>
(1)Other financial, legal and accounting expenses were allocated to each
division based on the percentage of each division's net sales to total net
sales.
Net Sales. Net sales increased from $408.1 million in 1999 to $496.8 million
in 2000, or 21.7%, due to increased net sales in the frozen foods division
partially offset by lower net sales in the dry grocery division.
Frozen Foods. Frozen foods division net sales increased from $231.2 million in
1999 to $330.1 million in 2000, or 42.7%, due primarily to the acquisitions of
Chef's Choice(R) in April 1999 and Lender's(R) in November 1999. Net sales of
other frozen division products were down primarily because of the Company's
decision to terminate the practice of heavy quarter-end trade loading and to
drive down the excessive trade inventories that had accumulated as a result of
these practices.
Dry Grocery. Dry grocery division net sales decreased from $176.9 million in
1999 to $166.7 million in 2000, or 5.8%, principally because of the Company's
decision to terminate the practice of heavy quarter-end trade loading and to
drive down the excessive trade inventories that had accumulated as a result of
these practices.
Gross Profit. Gross profit increased from $212.2 million in 1999 to $256.9
million in 2000, an increase of 21.1%, due to incresed gross profit in the
frozen foods division parially offset by lower levels in the dry grocery
division.
Frozen Foods. Gross profit increased from $113.8 million in 1999 to $165.2 in
2000, an increase of 45.1% due primarily to the acquisitions of Chef's Choice(R)
in April 1999 and Lender's(R) in November 1999.
Dry Grocery. Gross profit decreased from $98.3 million in 1999 to $91.6
million in 2000, or 6.8% due primarily to the decrease in net sales, as gross
profit as a percentage of net sales was 55.6% in 1999 and 55.0% in 2000.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses increased from $144.2 million in 1999 to $185.6 million in
2000, an increase of 28.6%, as a result of increases in both divisions. As a
precentage of net sales, brokerage, distribution and marketing expenses
increased from 35.3% of net sales in 1999 to 37.4% of net sales in 2000 due
primarily to increases as a percentage of net sales in the dry grocery division
that were partially offset by decreases in the frozen foods division. Brokerage
and distribution costs, which include broker commissions, freight, warehousing
and term discounts, increased from 11.2% of net sales in 1999 to 11.9% of net
sales in 2000 due primarily to higher freight and warehousing expenditures as a
percentage of net sales in the dry grocery division. Trade promotions expense,
which consists of incentives offered to food retailers to carry and promote
Aurora products, increased from 17.8% of net sales in 1999 to 19.4% of net sales
in 2000 due to increased trade promotion spending in the dry grocery division.
Consumer marketing expenses, which include the costs of advertising and market
research, increased primarily due to the acquisition of Lender's(R) in November
1999.
26
<PAGE>
Frozen Foods. Brokerage, distribution and marketing expenses increased from
$85.7 million in 1999 to $116.1 million in 2000, an increase of 35.5%, due
primarily to the acquisitions of Chef's Choice(R) in April 1999 and Lender's(R)
in November 1999. Brokerage and distribution expenses decreased from 11.6% of
net sales 1999 to 11.1% of net sales in 2000. This decrease is due primarily to
a reduction in term discounts. Trade promotions expense decreased from 18.4% of
net sales in 1999 to 18.0% of net sales in 2000. The decrease in trade
promotions as a percentage of net sales is due primarily to the acquisitions of
Chef's Choice(R) and Lender's(R) which have lower trade promotion spending rates
than the other frozen foods division brands, offset in part by shifting more
promotion spending to performance based programs from pure price discounts to
retailers. Consumer marketing expenses decreased from 7.0% of net sales in 1999
to 6.0% of net sales in 2000. This decrease was due primarily to the inclusion
of the Lender's(R) and Chef's Choice(R) businesses in 2000, which experienced a
lower level of consumer spending as a percentage of net sales. Excluding the
impact of the Lender's(R) and Chef's Choice(R) acquisitions, consumer spending
as a percentage of net sales was comparable to 1999.
Dry Grocery. Brokerage, distribution and marketing expenses increased from
$58.6 million in 1999 to $69.5 million in 2000, or 18.6%. As a percentage of net
sales, brokerage, distribution and marketing expenses increased from 33.1% in
1999 to 41.7% in 2000. This increase as a percentage of net sales was driven
primarily by increases in brokerage and distribution expenses and trade
promotions. Brokerage and distribution expenses increased from 10.6% of net
sales in 1999 to 13.6% of net sales in 2000. This increase is primarily a result
of freight fuel surcharges and higher inventory storage costs. Trade promotions
expense increased from 17.1% of net sales in 1999 to 22.0% of net sales in 2000.
This increase is due to carryover amortization in 2000 of slotting fees paid in
1999.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles increased from $18.2 million in 1999 to $21.5 million in 2000
due to the impact of acquisitions of the Chef's Choice(R) and Lender's(R)
businesses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $15.8 million in 1999 to $22.7 million in
2000, due primarily to the incremental costs necessary to manage the acquired
Chef's Choice(R) and Lender's(R) businesses, the costs related to the employment
of new management and other compensation related costs.
Other Financial, Legal and Accounting Expenses. As a result of the
investigation into the Company's accounting practices, the resulting restatement
of its financial statements, litigation and similar proceedings, defaults under
its loan agreements and related matters (see - "Restatements"), the Company has
incurred, and continues to incur financial, legal and accounting expenses,
charges to obtain waivers on its events of default and charges related to
amending its financing facilities. Such costs, which totaled $18.1 million for
the six months ended June 30, 2000, are expensed when incurred by the Company.
Columbus Consolidation Costs. During the second quarter of 2000, the Company
announced its intention to consolidate its administrative office and functions
in St. Louis, Missouri and close its office in Columbus, Ohio. The charge of
$6.6 million primarily represents the estimated costs of employee severance, the
non-cash write-off of leasehold improvements and capitalized software that will
no longer be used and estimated unrecovered office lease costs. The
consolidation is expected to be substantially completed by September 30, 2000
with the exception of the payment of certain employee severance related costs
and office lease costs.
Transition Expenses. The Company incurred $7.4 million in transition expenses
in 1999 primarily due to the integration of the Duncan Hines business. During
2000, the Company incurred approxmately $1.4 million primarily related to the
integration of the Chef's Choice(R) and Lender's(R) businesses. These expenses
represent one-time costs incurred to integrate acquired businesses.
27
<PAGE>
Operating Income. Operating income decreased from $26.6 million in 1999 to
$1.1 million in 2000. Operating income in 2000 was affected by the $18.1 million
of other financial, legal and accounting expenses, $6.6 million in Columbus
consolidation costs and by transition expenses in both 1999 and 2000. Before
giving effect to other financial, legal and accounting expenses Columbus
consoldation costs and transition expenses, operating income decreased from
$34.0 million in 1999 to $27.2 million in 2000.
Interest and Other Financing Expenses. The aggregate of the net interest
income and expense, amortization of loan fees and other bank and financing
expenses increased from $31.3 million in 1999 to $53.2 million in 2000. The
increase was due primarily to the additional debt associated with the
acquisitions of Chef's Choice(R) in April 1999 and Lender's(R) in November 1999.
In addition, higher interest rates and an increased debt level in 2000
contributed to higher interest expense.
Six Months Ended June 30, 2000 Compared to the Pro Forma Six Months Ended June
30, 1999 (as restated)
The following table sets forth results of operations data by division for the
six months ended June 30, 2000 and the pro forma results for the six months
ended June 30, 1999 (as restated) as if the Chef's Choice(R) and Lender's(R)
acquisitions and related financings had taken place January 1, 1999 and as if
EITF 00-14 had been adopted in January 1, 1999.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------------------
2000 1999 (Pro Forma)
----------------------------- ------------------------------
Frozen Dry Frozen Dry
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Net Sales $330,072 $166,657 $341,102 $176,834
Cost of Goods Sold 164,832 75,028 172,810 78,553
---------- --------- --------- ---------
Gross Profit 165,240 91,629 168,292 98,281
---------- --------- --------- ---------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 36,742 22,642 43,877 18,686
Trade promotions 59,521 36,686 58,058 30,174
Consumer marketing 19,831 10,129 19,395 10,182
---------- --------- --------- ---------
Total brokerage, distribution and marketing expenses 116,094 69,457 121,330 59,042
Amortization of goodwill and other intangibles 10,618 10,862 10,447 10,335
Selling, general and administrative expenses 17,727 4,942 17,798 4,328
Other financial, legal and accounting expenses (1) 11,938 6,150 0 0
Columbus consolidation costs 0 6,550 0 0
Transition expenses 1,384 0 159 7,239
---------- --------- --------- ---------
Total operating expenses 157,761 97,961 149,734 80,944
---------- --------- --------- ---------
Operating income (loss) $ 7,479 $ (6,332) $ 18,558 $ 17,337
========== ========= ========= =========
</TABLE>
(1) Other financial, legal and accounting expenses were allocated to each
division based on the percentage of each division's net sales to total net
sales.
Pro Forma Net Sales. On a pro forma basis, net sales decreased from $517.9
million in 1999 to $496.7 million in 2000, or 4.1%, and was attributable to
declines in both divisions.
Frozen Foods. On a pro forma basis, frozen foods division net sales decreased
from $341.1 million in 1999 to $330.1 million in 2000, or 3.2% due primarily to
the Company's decision to terminate the practice of heavy quarter-end trade
loading and to drive down the excessive trade inventories that had accumulated
as a result of these practices. In addition, on a pro forma basis Lender's(R)
net sales declined as a result of consumption declines compared to prior year.
This decline was partially offset within the frozen division by the shift away
from price discounts to retailers.
Dry Grocery. On a pro forma basis, dry grocery division net sales decreased
from $176.0 million in 1999 to $166.7 million in 2000, or 5.8% principally
because of the Company's decision to terminate the practice of heavy quarter-end
trade loading and to drive down the excessive trade inventories that had
accumulated as a result of these practices.
Pro Forma Gross Profit. On a pro forma basis, gross profit decreased from
$266.6 million in 1999 to $256.9 million in 2000, a decrease of 3.6%.
Frozen Foods. On a pro forma basis, frozen foods division gross profit
declined from $168.3 million in 1999 to $165.2 million in 2000, or 1.8%. The
decrease was primarily due to the lower net sales.
Dry Grocery. On a pro forma basis, gross profit decreased from $98.3 million
in 1999 to $91.6 million in 2000, or 6.8%, due primarily to the decrease in net
sales.
28
<PAGE>
Pro Forma Brokerage, Distribution and Marketing Expenses. On a pro forma
basis, brokerage, distribution and marketing expenses increased from $180.4
million in 1999 to $185.5 million in 2000, an increase of 2.8%. As a percentage
of net sales, pro forma brokerage, distribution and marketing expenses increased
from 34.8% of net sales in 1999 to 37.4% of net sales in 2000 primarily the
result of increase in the dry grocery division, offset in part by lower spending
in the frozen foods division.
Frozen Foods. On a pro forma basis, brokerage, distribution and marketing
expenses decreased from $121.3 million in 1999 to $116.1 million in 2000, a 4.3%
decline. This decrease was driven primarily by a reduction of discount payment
terms offered to customers. This was partially offset by an increase in trade
promotion spending.
Dry Grocery. On a pro forma basis, brokerage, distribution and marketing
expenses increased from $59.0 million in 1999 to $69.5 million in 2000, an
increase of $10.5 million. As a percentage of net sales, brokerage, distribution
and marketing expnses increased from 33.4% in 1999 to 41.7% in 2000. This
increase was driven primarily by increases in brokerage and distribution
expenses and in trade promotions. Brokerage and distribution expenses increased
from 10.6% of net sales in 1999 to 13.6% of net sales in 2000. This increase is
primarily a result of freight fuel surcharges and higher inventory storage
costs. Trade promotions expense increased from 17.1% of net sales in 1999 to
22.0% of net sales in 2000. This increase is due to carryover amortization in
2000 of slotting fees paid in 1999.
Pro Forma Other Financial, Legal and Accounting Expenses. As a result of the
investigation into the Company's accounting practices, the resulting
restatements of its financial statements litigation and similar proceedings,
defaults under its loan agreements and related matters (see - "Restatements"),
the Company has incurred, and continues to incur, financial, legal and
accounting expenses, charges to obtain waivers on its events of default and
charges related to amending its financing facilities. Such costs, which totaled
$18.1 million for the six months ended June 30, 2000, are expensed when incurred
by the Company.
Columbus Consolidation Costs. During the second quarter of 2000, the Company
announced its intention to consolidate its administrative office and functions
in St. Louis, Missouri and close its office in Columbus, Ohio. The charge of
$6.6 million primarily represents the estimated costs of employee severance, the
non-cash write-off of leasehold improvements and capitalized software that will
no longer be used and estimated unrecovered office lease costs. The
consolidation is expected to be substantially completed by September 30, 2000
with the exception of the payment of certain employee severance related costs
and office lease costs.
Pro Forma Transition Expenses. The Company incurred $7.4 million in transition
expenses in 1999 primarily due to the integration of the Duncan Hines business.
During 2000, the Company incurred approximately $1.4 million primarily related
to the integration of the Chef's Choice(R) and Lender's(R) businesses. These
expenses represent one-time costs incurred to integrate acquired businesses.
Pro Forma Operating (Loss) Income. On a pro forma basis, operating income
decreased from $35.9 million in 1999 to $1.1 million in 2000. Excluding the
effects of the other financial, legal and accounting expenses, Columbus
consolidation costs and transition expenses in both years, operating income
decreased from $43.3 million in 1999 to $27.2 million in 2000.
Pro Forma Interest and Other Financing Expenses. On a pro forma basis, the
aggregate of net interest income and expense, amortization of loan fees and
other bank and financing expenses increased from $44.7 million in 1999 to $53.2
million in 2000. This increase is due to higher interest rates on the floating
rate debt and an increased debt level in 2000.
29
<PAGE>
Pro Forma Income Tax Benefit. On a pro forma basis the effective tax rate for
1999 was 40.0%, which was impacted favorably by certain state tax credits
applied for by the Company that increase the pro forma income tax benefit. The
effective tax rate for 2000 was 32.0%.
Liquidity and Capital Resources
For the six months ended June 30, 2000 the Company used $32.0 million to fund
operating activities compared to the six months ended June 30, 1999, when $0.6
million of cash was used in operations. The increase in cash used in 2000 was
primarily a result of the net loss incurred during the period and an increase in
the cash necessary to fund reductions of accounts payable and accrued
liabilities. Funding was provided by the sale of accounts receivable (see Note
10 to the consolidated financial statement). As of June 30, the Company had
received a net $20.4 million from the sale of accounts receivable.
Net cash used in investing activities for the six months ended June 30, 2000,
was approximately $16.3 million compared to $91.6 million during the six months
ended June 30, 1999. Investing activities in 2000 consisted of additions to
fixed assets of $7.0 million and additions to other assets of $3.0 million. In
addition, $8.0 million was paid as additional purchase price for the Seacoast
acquisition (see Note 3 to the financial statement) and $1.2 million was
received from the sale of non-operating real estate. Investing activities in
1999 consisted of $12.9 million of additions to fixed assets and to other assets
of $3.5 million. In addition, in 1999 the Company purchased the common stock of
Seacoast on April 1 and invested in additional manufacturing frozen seafood
products capacity with the purchase of a production facility in Yuba City, CA.
During the six months ended June 30, 2000, financing activities provided cash
of $53.6 million. The Company repaid $11.5 million in principal on its senior
secured term debt and borrowed $65.0 million on the revolving facility to fund
its operations, capital expenditures, software and packaging design
expenditures, and its repayment of borrowings. In 1999 net cash from financing
activities of $93.0 million was used primarily to fund the business
acquisitions.
The agreement to sell up to $60 million in accounts receivable has been used
to provide needed cash, however use of these funds is restricted, on a full year
basis, to payments for purchase of assets and repayment of debt.
The Company's recent defaults and high level of debt have the potential to
limit the Company's ability to pay its obligations as they become due, to obtain
additional financing and to operate the business. The Company expects its
default under its senior subordinated indentures will be resolved, however, the
senior subordinated debtholders currently have the right to accelerate the
maturity thereof by notice to the Company. Upon such acceleration, $400 million
of principal and accrued and unpaid interest would be due and payable
immediately. In the event of such a declaration, the Company's senior lenders
would likely accelerate payment as well. In such an event, if the Company were
unable to supplement its operations with outside funding, the Company could be
forced to seek protection under the federal bankruptcy laws.
30
<PAGE>
Senior Secured Debt
As a result of the adjustments to the Company's unaudited interim financial
results for the first, second and third quarters of 1999 and the third quarter
of 1998, and adjustments to its audited financial results for the year ended
December 1998, the Company was in default of a number of provisions of the
agreement covering its senior secured debt. The Company and the lenders amended
this agreement to provide:
. for the sale by the Company of accounts receivable;
. amended financial covenants;
. waiver of certain existing defaults of covenants and breaches of
representations and warranties;
. until the defaults are cured or waived, a forbearance from exercising
remedies that are available as a result of the Company's defaults under the
Indentures governing the senior subordinated debt until September 30, 2000;
or earlier, in the event that the senior subordinated debt would be
accelerated; and
. the interest rate on borrowings made pursuant to the facility.
Senior Subordinated Debt
As a result of the adjustments to the Company's unaudited interim financial
results for the first, second and third quarters of 1999 and the third quarter
of 1998, and adjustments to its audited financial results for the year ended
December 1998, the Company was in default under its indentures. The Company has
initiated discussions with the senior subordinated debtholders to obtain
consents for amendments to the indentures and waivers of past defaults
thereunder.
Interest Rate Collar Agreements
At June 30, 2000, the Company was party to three interest rate swap
agreements. The Company entered into these agreements as a means of managing its
interest rate risk. 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.
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Forward-Looking Statements
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 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 availability of funding for operations; the
outcome of the Securities Actions and other current litigation and related
proceedings; the ability of the Company to service its high level of
indebtedness; the ability to attract and retain qualified management; the
ability of new management to implement a successful strategy; whether the
Company's lenders continue to forbear from accelerating the Company's senior
debt obligations; the Company's success in obtaining from its bondholders
waivers of defaults under its senior subordinated notes; the actions of the
Company's competitors; general economic and business conditions; industry
trends; demographics; raw material costs; integration of acquired businesses
into the Company; the ability to successfully consolidate its operations; 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." Given these uncertainties, undue reliance should not be placed on
such forward-looking statements. Unless otherwise required by law, 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.
ITEM 3: QUANTITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has 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.
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PART II--OTHER INFORMATION
ITEM I: LEGAL PROCEEDINGS
As of May 10, 2000, the Company has been served with eighteen complaints in
purported class action lawsuits filed in the United States District Court for
the Northern District of California. The complaints received by the Company
allege that, among other things, as a result of accounting irregularities, the
Company's previously issued financial statements were materially false and
misleading and thus constituted violations of federal securities laws by the
Company and the directors and officers who resigned on February 17, 2000 (Ian R.
Wilson, James B. Ardrey, Ray Chung and M. Laurie Cummings). The actions allege
that the defendants violated Sections 10(b) and/or Section 20(a) of the
Securities Exchange Act and Rule 10b-5 promulgated thereunder (the "Securities
Actions"). The Securities Actions complaints seek damages in unspecified
amounts. These Securities Actions purport to be brought on behalf of purchasers
of the Company's securities during various periods, all of which fall between
October 28, 1998 and April 2, 2000. The Company believes that additional
purported class action lawsuits similar to those described above have been or
may be filed. The Company is currently evaluating these claims and possible
defenses thereto and intends to defend these suits vigorously.
On April 14, 2000, certain of the Company's current and former directors were
named as defendants in a derivative lawsuit filed in the Superior Court of the
State of California, in the County of San Francisco, alleging breach of
fiduciary duty, mismanagement and related causes of action based upon the
Company's restatement of its financial statements. The Company believes that the
litigation is procedurally defective, in light of the plaintiffs' failure to
make prior demand on the Board to investigate the claims in question. The
Company therefore intends to move to dismiss these claims. If the case proceeds,
the Company may be obligated to indemnify and advance the defense costs of the
directors named in the suit, pending a final determination of the action.
While it is not feasible to predict or determine the final outcome of these
actions or similar actions, including any governmental proceedings, that could
arise, or to estimate the amounts or potential range of loss or liabilities with
respect to these matters, management believes that an adverse outcome with
respect to such proceedings could have a material adverse impact on the
company's financial position, results of operations and cash flow.
Pursuant to the Company's articles of incorporation, and certain of its
contractual obligations, the Company has agreed to indemnify its officers and
directors and certain other employees under certain circumstances against claims
and expenses arising from such proceedings. The Company may be obligated to
indemnify certain of its officers and directors for the costs they may incur as
a result of these proceedings.
The Company is also subject to litigation in the ordinary course of business.
In the opinion of management, the ultimate outcome of any existing litigation,
other than the Securities Actions described above, would not have a material
adverse effect on the Company's financial condition or results of operations.
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ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Senior Secured Debt
As a result of the adjustments to the Company's unaudited interim financial
results for the first, second and third quarters of 1999 and the third quarter
of 1998, and adjustments to its audited financial results for the year ended
December 1998, the Company was in default of a number of provisions of the
agreement covering its senior secured debt. The Company and the lenders amended
this agreement to provide:
. for the sale by the Company of accounts receivable;
. amended financial covenants;
. waiver of certain existing defaults of covenants and breaches of
representations and warranties;
. until the defaults are cured or waived, a forbearance from exercising
remedies that are available as a result of the Company's defaults under the
Indentures governing the senior subordinated debt until September 30, 2000;
or earlier, in the event that the senior subordinated debt would be
accelerated; and
. the interest rate on borrowings made pursuant to the facility.
Senior Subordinated Debt
As a result of the adjustments to the Company's unaudited interim financial
results for the first, second and third quarters of 1999 and the third quarter
of 1998, and adjustments to its audited financial results for the year ended
December 1998, the Company was in default under its indentures. The Company has
initiated discussions with the senior subordinated debtholders to obtain
consents for amendments to the indentures and waivers of past defaults
thereunder.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
-------
Number Exhibit
------ -------
3.2 Amended and Restated By-laws of Aurora Foods Inc.
27.1 Financial Data Schedules for (1) the six months
ended June 30, 2000 and restated June 30, 1999,
and (2) the restated three month periods ended
March 31, 2000 and 1999.
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(b) Reports on Form 8-K
Date Filed
April 4, 2000 Press release announcing new management and restatement of
financial results.
April 20, 2000 The Company's sale of certain accounts receivable and adjusted
EBITDA.
May 18, 2000 Press Release with respect to results for the first quarter
ended March 31, 2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused the report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AURORA FOODS INC.
/s/ Christopher T. Sortwell
By: Christopher T. Sortwell
Chief Financial Officer
(Duly Authorized Officer,
Principal Financial Officer and
Principal Accounting Officer)
Date: August 14, 2000
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<PAGE>
Exhibit Exhibit
------- -------
Number
------
3.2 Amended and Restated By-laws of Aurora Foods Inc.
27.1 Financial Data Schedules for (1) the six months
ended June 30, 2000 and restated June 30, 1999,
and (2) the restated three month periods ended
March 31, 2000 and 1999.
37
