<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 333-50681
----------------
AURORA FOODS INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-3303521
-------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
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
November 10, 2000
------------------
Common stock, $0.01 par value.................... 73,893,108
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
See pages 2 through 14.
1
<PAGE>
AURORA FOODS INC.
BALANCE SHEETS
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................... $ 2,596 $ 315
Accounts receivable (net of $782 and $1,311 allowance,
respectively)............................................. 78,658 96,332
Inventories................................................. 112,490 123,967
Prepaid expenses and other assets........................... 9,523 21,876
Current deferred tax assets................................. 25,790 17,338
---------- ----------
Total current assets...................................... 229,057 259,828
Property, plant and equipment, net.......................... 247,113 257,443
Deferred tax asset.......................................... 28,134 2,357
Goodwill and other intangible assets, net................... 1,274,569 1,294,995
Asset held for sale......................................... - 800
Other assets................................................ 35,871 35,693
---------- ----------
Total assets.............................................. $1,814,744 $1,851,116
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Senior secured term debt.................................... $ - $ 543,591
Senior secured revolving debt facility...................... - 105,600
Senior subordinated notes................................... - 402,049
Current portion of senior secured term debt................. 32,926 27,980
Accounts payable............................................ 51,177 87,942
Accrued liabilities......................................... 84,460 105,192
---------- ----------
Total current liabilities................................. 168,563 1,272,354
Senior secured term debt...................................... 518,896 -
Senior secured revolving debt facility........................ 170,600 -
Senior subordinated notes..................................... 401,901 -
Other liabilities............................................. 5,004 2,504
---------- ----------
Total liabilities......................................... $1,264,964 $1,274,858
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 25,000,000 shares
authorized; 3,750,000 shares, Series A Convertible
Cumulative, issued and outstanding, with a liquidation
preference value of $15,033............................... 37 -
Common stock, $0.01 par value; 250,000,000 shares
authorized; 73,893,108 and 67,049,811 shares issued and
outstanding, respectively................................. 739 670
Paid-in capital............................................. 684,498 648,254
Promissory notes............................................ (281) (323)
Accumulated deficit......................................... (135,213) (72,343)
---------- ----------
Total stockholders' equity................................ 549,780 576,258
---------- ----------
Total liabilities and stockholders' equity................ $1,814,744 $1,851,116
========== ==========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
AURORA FOODS INC.
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
September 30, September 30,
2000 1999
------------- -------------
(as restated)
<S> <C> <C>
Net sales...................................... $ 227,722 $ 207,496
Cost of goods sold............................. (117,326) (101,536)
----------- ------------
Gross profit............................. 110,396 105,960
----------- ------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution.................. (26,461) (23,535)
Trade promotions............................ (30,181) (28,211)
Consumer marketing.......................... (7,664) (11,574)
----------- ------------
Total brokerage, distribution and
marketing expenses........................... (64,306) (63,320)
Amortization of goodwill and other intangibles. (10,663) (9,600)
Selling, general and administrative expenses... (8,239) (8,377)
Other financial, legal and accounting expenses. (23,227) -
Transition expenses............................ (698) (1,697)
----------- ------------
Total operating expenses....................... (107,133) (82,994)
----------- ------------
Operating income............................ 3,263 22,966
Interest expense, net.......................... (29,579) (16,874)
Amortization of deferred financing expense..... (735) (498)
Other bank and financing expenses.............. (100) (48)
----------- ------------
Income (loss) before income taxes........... (27,151) 5,546
Income tax (expense) benefit................... 11,857 (1,719)
----------- ------------
Net income (loss)........................... (15,294) 3,827
Preferred dividends......................... (33) -
----------- ------------
Net income (loss) available to
common stockholders........................ $ (15,327) $ 3,827
=========== ============
Basic and diluted earnings (loss) per share.... $ (0.22) $ 0.06
=========== ============
Weighted average number of shares outstanding.. 67,925 67,030
=========== ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
AURORA FOODS INC.
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 30, September 30,
2000 1999
------------- --------------
(as restated)
<S> <C> <C>
Net sales.................................................. $ 724,451 $ 615,628
Cost of goods sold......................................... (357,186) (297,469)
----------- ------------
Gross profit............................................ 367,265 318,159
=========== ============
Brokerage, distribution and marketing expenses:
Brokerage and distribution.............................. (85,845) (69,100)
Trade promotions........................................ (126,388) (100,894)
Consumer marketing...................................... (37,624) (37,563)
----------- ------------
Total brokerage, distribution and marketing expenses....... (249,857) (207,557)
Amortization of goodwill and other intangibles............. (32,143) (27,764)
Selling, general and administrative expenses............... (30,908) (24,170)
Other financial, legal and accounting expenses............. (41,315) -
Columbus consolidation costs............................... (6,550) -
Transition expenses........................................ (2,082) (9,095)
----------- ------------
Total operating expenses................................... (362,855) (268,586)
----------- ------------
Operating income........................................ 4,410 49,573
Interest expense, net...................................... (81,126) (47,202)
Amortization of deferred financing expense................. (2,178) (1,380)
Other bank and financing expenses.......................... (288) (151)
----------- ------------
Income (loss) before income taxes and cumulative
effect of change in accounting........................ (79,182) 840
Income tax (expense) benefit............................... 28,506 (261)
----------- ------------
Income (loss) before cumulative effect of change in
accounting............................................ (50,676) 579
Cumulative effect of change in accounting, net of tax... (12,161) -
----------- ------------
Net income (loss)....................................... (62,837) 579
Preferred dividends..................................... (33) -
----------- ------------
Net income (loss) available to common stockholders...... $ (62,870) $ 579
=========== ============
Basic and diluted earnings (loss) per share:
Income (loss) before cumulative effect of change in
accounting............................................ $ (0.75) $ 0.01
Cumulative effect of change in accounting, net of tax... (0.18) -
----------- ------------
Net income (loss)....................................... $ (0.93) $ 0.01
=========== ============
Pro forma amounts assuming the change in accounting was
applied retroactively:
Net loss................................................ $ (50,676) $ (3,964)
=========== ============
Basic and diluted loss per share........................ $ (0.75) $ (0.06)
=========== ============
Weighted average number of shares outstanding.............. 67,344 67,021
=========== ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
AURORA FOODS INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
Preferred ----------------- Paid-in Promissory Accumulated
Stock Shares Amount Capital Notes Deficit Total
--------- ------ ------ ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999.......... $ - 67,050 $ 670 $648,254 $ (323) $ (72,343) $576,258
Issuance of preferred stock........... 37 - - 14,963 - - 15,000
Cumulative preferred dividends........ - - - - - (33) (33)
Common stock issued to senior
subordinated noteholders...... - 6,778 68 21,062 - - 21,130
Employee stock purchases.............. - 65 1 219 - - 220
Payment on officer promissory notes... - - - - 42 - 42
Net loss.............................. - - - - - (62,837) (62,837)
Balance at September 30, 2000......... $ 37 73,893 $ 739 $684,498 $ (281) $ (135,213) $549,780
======== ======== ===== ======== ======== ========== ========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
AURORA FOODS INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
September 30, September 30,
2000 1999
------------- -------------
(as restated)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................... $(62,837) $ 579
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization............................................. 52,807 39,448
Deferred income taxes..................................................... (28,506) 261
Non-cash restructuring cost............................................... 3,050 -
Non-cash other financial, legal and accounting expense.................... 17,130 -
Cumulative effect of change in accounting................................. 12,161 -
(Gain) loss on sale of assets............................................. (303) 14
Change in assets and liabilities, net of effects of businesses acquired:
Increase in accounts receivable......................................... (19,916) (25,443)
Accounts receivable sold................................................ 37,591 -
(Increase) decrease in inventories...................................... 11,210 (5,306)
(Increase) decrease in prepaid expenses and other assets................ 12,183 (8,361)
Increase (decrease) in accounts payable................................. (36,821) 4,026
Decrease in accrued liabilities......................................... (35,417) (22,501)
Increase in other noncurrent assets and liabilities..................... (1,338) (17,022)
-------- ---------
Net cash used in operating activities................................. (39,006) (34,305)
-------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment.................................. (12,285) (15,816)
Proceeds from asset sales................................................... 1,175 11
Payment for acquisition of business......................................... (7,984) (76,756)
-------- ---------
Net cash used in investing activities................................. (19,094) (92,561)
-------- ---------
Cash flows from financing activities:
Proceeds from senior secured revolving and term debt........................ 65,000 308,150
Repayment of borrowings..................................................... (19,749) (179,321)
Issuance of preferred stock................................................. 15,000 -
Capital contributions, net of officer promissory notes...................... 262 452
Debt issuance and equity raising costs...................................... (132) (2,323)
-------- ---------
Net cash provided by financing activities............................. 60,381 126,958
-------- ---------
Increase in cash and cash equivalents......................................... 2,281 92
Cash and cash equivalents, beginning of period................................ 315 354
-------- ---------
Cash and cash equivalents, end of period...................................... $ 2,596 $ 446
======== =========
</TABLE>
See accompanying notes to financial statements.
6
<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 nine month periods ended September 30, 1999, have been
included in the condensed consolidated financial statements included herein.
For the three months ended September 30, 1999, these misstatements
primarily understated trade promotions expense by $3.5 million, overstated net
sales by $6.4 million, understated brokerage and distribution expense by $0.9
million, understated consumer marketing expense by $0.8 million and understated
cost of goods sold by $0.6 million. After adjusting for the misstatements, the
Company recalculated its income tax provision reducing income tax expense by
$5.2 million.
For the nine months ended September 30, 1999, these misstatements primarily
understated trade promotions expense by $15.2 million, overstated net sales by
$20.8 million, overstated brokerage and distribution expense by $0.2 million,
understated consumer marketing expense by $1.1 million, understated cost of
goods sold by $5.0 million and understated other operating expenses by $1.3
million. After adjusting for the misstatements, the Company restated its income
tax provision, reducing income tax expense by $16.9 million.
A summary of the effects of the restatement to the balance sheet is set
forth in Note 12.
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 the restatements and related investigations
and proceedings. In addition, as a result of the restatements, the Company was
in default of a number of provisions of its credit agreement earlier this year
and its senior subordinated notes indentures which were resolved in September,
2000 (see Note 5). The Company has been incurring, and continues to incur,
financial, legal and accounting expenses relating to these matters, and 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.
Accounting Change
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 expenses 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
7
<PAGE>
other allowances typically given to retailers and others to facilitate certain
promotions and distribution have been reclassified from expense to Net Sales in
the accompanying Statement of Operations. 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, the cumulative after tax effect
of the change on prior years (to December 31, 1999) of $12,161,000 has been
recognized as an expense in the Statement of Operations for the nine months
ended September 30, 2000.
If this change had been applied retroactively in 1999, the pro forma impact
on the results of operations for the three month period ended September 30, 1999
would have been a decrease in net sales and gross profit of $5,495,000 and a
decrease in operating income of $6,720,000. For the nine months ended September
30, 1999, the pro forma impact of retroactive application of the accounting
change would have been a decrease in net sales and gross profit of $5,033,000
and a decrease in operating income of $6,583,000. 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.
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 segments, which prior to the
consolidation of the Columbus operations into St. Louis, had operated as two
separate 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
8
<PAGE>
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. Substantially all of the employee terminations were
completed prior to September 30, 2000, with $1.4 million of termination benefits
paid and charged to the established reserve. Additional amounts charged to the
reserve were $2.3 million of capitalized software and $0.2 million other costs.
No adjustments were made to the previously recorded expense or reserve during
the three month period ended September 30, 2000.
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.
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 nine month periods ended September 30, 1999 as compared to the
similar periods in 2000 would have been as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- ----------- --------- -----------
(actual) (pro forma) (actual) (pro forma)
<S> <C> <C> <C> <C>
Net sales........................... $227,722 $246,373 $724,451 $764,309
======== ======== ======== ========
Gross profit........................ $110,396 $124,094 $367,265 $390,667
======== ======== ======== ========
Operating income.................... $ 3,263 $ 22,620 $ 4,410 $ 58,515
======== ======== ======== ========
</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>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Raw materials......................... $ 28,119 $ 29,187
Work in process....................... 181 1,262
Finished goods........................ 75,234 83,900
Packaging and other supplies.......... 8,956 9,618
-------- --------
$112,490 $123,967
======== ========
</TABLE>
9
<PAGE>
NOTE 5 - 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
agreements covering its senior secured debt and senior subordinated debt. The
Company and the lenders party to the senior secured debt 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.
During the third quarter, the Company solicited and received sufficient
consents from holders of its senior subordinated notes to amend certain
provisions and waive certain events of default under the respective indentures.
Pursuant to the terms of the consent solicitation, the Company issued, effective
September 20, 2000, an aggregate of 6,778,577 shares of common stock to the
senior subordinated note holders who participated in the consent solicitation.
The common stock issued in connection with the consent solicitation noted
above has been valued by the Company at the closing market price on September
20, 2000, less a 12.5% discount to reflect that the shares are subject to
transfer restrictions under the securities laws. The total increase to common
stock and paid-in-capital of $21,130,000 was allocated to other assets as
deferred financing costs ($4 million), with the balance ($17.1 million) recorded
as other financial, legal and accounting expense in the accompanying Statement
of Operations.
In addition, as a result of the amendments and waivers on the senior
subordinated notes, the remaining contingencies associated with the Company's
senior secured debt were resolved. Therefore, the Company has classified its
senior secured and senior subordinated debt as long-term in the accompanying
balance sheet as of September 30, 2000.
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") and
convertible preferred stock.
As none of the currently outstanding stock options and convertible
preferred stock 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.
NOTE 7- SEGMENT INFORMATION
The Company groups its business in two operating segments: dry grocery
division and frozen food division. 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.
10
<PAGE>
The following table presents a summary of operations by segment (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ --------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- --------------
(as restated) (as restated)
<S> <C> <C> <C> <C>
Net sales:
Dry grocery.............................. $ 86,518 $ 116,256 $ 253,175 $ 293,154
Frozen food.............................. 141,204 91,240 471,276 322,474
---------- ---------- ---------- ----------
Total.................................... $ 227,722 $ 207,496 $ 724,451 $ 615,628
========== ========== ========== ==========
Operating income (loss):
Dry grocery.............................. $ 14,911 $ 20,730 $ 14,728 $ 38,587
Frozen food.............................. 11,579 2,236 30,997 10,986
Other(1)................................. (23,227) -- (41,315) --
---------- ---------- ---------- ----------
Total.................................... $ 3,263 $ 22,966 $ 4,410 $ 49,573
========== ========== ========== ==========
Total assets:
Dry grocery.............................. $ 824,347 $ 886,017 $ 824,347 $ 886,017
Frozen food.............................. 990,397 667,302 990,397 667,302
---------- ---------- ---------- ----------
Total.................................... $1,814,744 $1,553,319 $1,814,744 $1,553,319
========== ========== ========== ==========
Depreciation and amortization:
Dry grocery.............................. $ 7,072 $ 6,908 $ 21,651 $ 19,688
Frozen food.............................. 10,378 6,934 31,156 19,760
---------- ---------- ---------- ----------
Total.................................... $ 17,450 $ 13,842 $ 52,807 $ 39,448
========== ========== ========== ==========
Capital expenditures:
Dry grocery.............................. $ 1,030 $ 46 $ 2,834 $ 7,742
Frozen food.............................. 4,282 2,787 9,451 8,074
---------- ---------- ---------- ----------
Total.................................... $ 5,312 $ 2,833 $ 12,285 $ 15,816
========== ========== ========== ==========
</TABLE>
------------
(1) Other represents the other financial, legal and accounting expenses, which
have not been allocated to the operating segments.
NOTE 8 - 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. As
of September 30, the Company had received a net $37.6 million from the sale of
accounts receivable.
NOTE 9 - PREFERRED STOCK
In September, 2000, the Company issued to certain investors affiliated with
current shareholders, in exchange for $15 million, 3,750,000 shares of Series A
Convertible Cumulative Preferred Stock ("Series A Preferred Stock"), as part of
the agreement with the senior subordinated noteholders (see Note 5). The shares
have a par value of $0.01 per share, pay a cumulative dividend in arrears of 8%
and have a liquidation preference value of the greater of (i) $4.00 per share,
plus any unpaid dividends and (ii) the amount payable with respect to the number
of shares of Common Stock into which the shares of Preferred Stock plus any
unpaid dividends could be converted (assuming the conversion of all outstanding
shares of Preferred Stock immediately prior to the liquidation). The Series A
Preferred Stock is convertible into Common Stock at a price of $3.35 (the
"Conversion Price"), or approximately 1.19 shares of Common Stock per share of
Series A Preferred Stock, subject to adjustment for issuances less than the
Conversion Price. The Series A Preferred Stock converts at the Company's option
into shares of Common Stock in the event the Common Stock trades for 10
consecutive days at a price that is in excess of 200% of the Conversion Price.
11
<PAGE>
NOTE 10 - STOCK OPTIONS
During the second quarter of 2000, the Board of Directors approved the 2000
Equity Incentive Plan (the "Plan") and the shareholders approved the Board's
adoption of the Plan. The Plan provides for the grant of up to 7 million
options, stock appreciation rights, restricted stock, unrestricted stock,
deferred stock or performance awards or combination thereof. Pursuant to the
Plan, 3,002,125 incentive stock options were granted to key employees in August,
2000, at an option price of $3.875 per share (fair market value at date of
grant), vesting ratably over a three year period. During the first half of 2000,
2,050,000 stock options were granted pursuant to the Plan with a weighted
average exercise price of $4.16 per share.
NOTE 11 - CONTINGENCIES
As of November 9, 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 Section 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 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 case has been removed to
federal court in San Francisco. 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 has been informed that the staff of the Securities and Exchange
Commission (the "SEC") and the Department of Justice (the "DOJ") are conducting
investigations relating to the events that resulted in the restatement of the
Company's financial statements for prior periods ("Prior Events"). The SEC and
DOJ have requested that the Company provide certain documents relating to the
Company's historical financial statements. On September 5, 2000, the Company
received a subpoena from the SEC to produce documents in connection with the
Prior Events. The SEC also requested certain information regarding some of the
Company's former officers and employees, correspondence with the Company's
auditors and documents related to financial statements, accounting policies and
certain transactions and business arrangements.
12
<PAGE>
The Company is cooperating with the SEC and the DOJ in connection with both
investigations. The Company cannot predict the outcome of either governmental
investigation. An adverse outcome in either proceeding may have a material
adverse effect on the Company.
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.
13
<PAGE>
NOTE 12 - RESTATEMENT
As described in Note 1, the September 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 September 30, 1999
Consolidated Balance Sheet follows (in thousands, except share and per share
data):
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, 1999
--------------------------
As Previously
Reported As Restated
------------- -----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents......................................... $ 376 $ 446
Accounts receivable, net.......................................... 154,978 115,149
Inventories....................................................... 96,862 95,465
Prepaid expenses and other assets................................. 16,746 15,326
Current deferred tax assets....................................... 25,755 15,090
---------- ----------
Total current assets............................................ 294,717 241,476
Property, plant and equipment, net.................................. 166,183 161,343
Deferred tax asset.................................................. - 2,051
Goodwill and other intangible assets, net........................... 1,121,598 1,117,902
Asset held for sale................................................. - 800
Other assets........................................................ 31,299 29,747
---------- ----------
Total assets.................................................... $1,613,797 $1,553,319
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of senior secured term debt....................... $ 22,756 $ 22,756
Senior secured revolving debt facility............................ 132,350 132,350
Accounts payable.................................................. 72,051 72,640
Accrued liabilities............................................... 33,656 62,768
---------- ----------
Total current liabilities....................................... 260,813 290,514
Non-current deferred tax liabilities.............................. 40,055 -
Senior secured term debt.......................................... 279,573 279,573
Senior subordinated notes......................................... 402,099 402,099
---------- ----------
Total liabilities............................................... 982,540 972,186
---------- ----------
Stockholders' equity:
Preferred stock, $0.01 par value; 25,000,000 shares authorized;
no shares issued or outstanding................................. - -
Common stock, $0.01 par value; 250,000,000 shares authorized;
67,030,440 shares issued and outstanding........................ 670 670
Paid-in capital................................................... 648,100 648,100
Promissory notes.................................................. (322) (322)
Accumulated deficit............................................... (17,191) (67,315)
---------- ----------
Total stockholders' equity...................................... 631,257 581,133
---------- ----------
Total liabilities and stockholders' equity...................... $1,613,797 $1,553,319
========== ==========
</TABLE>
14
<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 nine
month periods ending on September 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
nine month periods ended September 30, 1999 have been included in the condensed
consolidated financial statements included herein.
For the three months ended September 30, 1999, these misstatements
primarily understated trade promotions expense by $3.5 million, overstated net
sales by $6.4 million, understated brokerage and distribution expense by $0.9
million, understated consumer marketing expense by $0.8 million and understated
cost of goods sold by $0.6 million. After adjusting for the misstatements, the
Company recalculated its income tax provision reducing income tax expense by
$5.2 million.
For the nine months ended September 30, 1999, these misstatements primarily
understated trade promotions expense by $15.2 million, overstated net sales by
$20.8 million, overstated brokerage and distribution expense by $0.2 million,
understated consumer marketing expense by $1.1 million, understated cost of
goods sold by $5.0 million and understated other operating expenses by $1.3
million. After adjusting for the misstatements, the Company restated its income
tax provision, reducing income tax expense by $16.9 million.
Results of Operations Three Months Ended September 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
September 30, 1999 has been restated as discussed above.
15
<PAGE>
AURORA FOODS INC.
Statements of Operations
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Pro Forma Three
Actual Three Months Ended Months Ended
--------------------------------------------------- --------------------------
September 30, 2000 September 30, 1999 September 30, 1999
----------------------- ----------------------- --------------------------
(as restated) (1) (as restated) (1)
<S> <C> <C> <C> <C> <C> <C>
Net sales.............................. $ 227,722 100.0% $ 207,496 100.0% $ 246,373 100.0%
Cost of goods sold..................... (117,326) (51.5) (101,536) (48.9) (122,279) (49.6)
--------- ----- --------- ----- --------- -----
Gross Profit...................... 110,396 48.5 105,960 51.1 124,094 50.4
--------- ----- --------- ----- --------- -----
Brokerage, distribution and
marketing expenses:
Brokerage and distribution........ (26,461) (11.6) (23,535) (11.3) (29,210) (11.8)
Trade promotions.................. (30,181) (13.3) (28,211) (13.6) (35,015) (14.2)
Consumer marketing................ (7,664) (3.4) (11,574) (5.6) (13,446) (5.5)
--------- ----- --------- ----- --------- -----
Total brokerage, distribution and
marketing expenses................ (64,306) (28.3) (63,320) (30.5) (77,671) (31.5)
Amortization of goodwill and
other intangibles................. (10,663) (4.7) (9,600) (4.6) (10,750) (4.4)
Selling, general and administrative
expenses.......................... (8,239) (3.6) (8,377) (4.1) (11,356) (4.6)
Other financial, legal and
accounting expenses............... (23,227) (10.2) - 0.0 - 0.0
Transition expenses.................... (698) (0.3) (1,697) (0.8) (1,697) (0.7)
--------- ----- --------- ----- --------- -----
Total operating expenses............... (107,133) (47.1) (82,994) (40.0) (101,474) (41.2)
--------- ----- --------- ----- --------- -----
Operating income....................... 3,263 1.4 22,966 11.1 22,620 9.2
Interest and other financing
expenses, net....................... (30,414) (13.3) (17,420) (8.4) (23,598) (9.6)
--------- ----- --------- ----- --------- -----
Income (loss) before income taxes...... (27,151) (11.9) 5,546 2.7 (978) (0.4)
Income tax (expense) benefit........... 11,857 5.2 (1,719) (0.9) (214) (0.1)
--------- ----- --------- ----- --------- -----
Net income (loss)...................... $ (15,294) (6.7)% $ 3,827 1.8% $ (1,192) (0.5)%
========= ===== ========= ===== ========= ======
Earnings (loss) per share.............. $ (0.22) N/A $ 0.06 N/A $ (0.02) N/A
========= ===== ========= ===== ========= ======
EBITDA (2) ............................ $ 19,999 8.8% $ 36,171 17.4% $ 38,475 15.6%
========= ===== ========= ===== ========= ======
Adjusted EBITDA (3) ................... $ 43,925 19.3% $ 37,868 18.2% $ 43,961 17.8%
========= ===== ========= ===== ========= ======
Adjusted EPS (4) ...................... $ - N/A $ 0.07 N/A $ - N/A
========= ===== ========= ===== ========= ======
</TABLE>
(1) As restated. See "--Restatements" and Notes 1 and 12 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.
16
<PAGE>
(3) Adjusted EBITDA is defined as EBITDA plus other financial, legal and
accounting expenses and transition expenses. In addition, for pro forma
purposes in each of the first three 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 three
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 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. Butterworth's(R) and Log Cabin(R) syrup products
and Duncan Hines(R) baking mix products.
17
<PAGE>
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999 (as restated)
The following table sets forth certain historical results of operations
data by division for the three months ended September 30, 2000 and 1999 (as
restated):
<TABLE>
<CAPTION>
-------------------- -------------------
2000 1999
-------------------- -------------------
Frozen Dry Frozen Dry
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales.................................................. $141,204 $ 86,518 $ 91,240 $116,256
Cost of Goods Sold......................................... (77,368) (39,958) (49,659) (51,877)
-------- -------- -------- --------
Gross Profit............................................. 63,836 46,560 41,581 64,379
-------- -------- -------- --------
Brokerage, distribution and marketing expenses:
Brokerage and distribution............................... (16,156) (10,305) (10,350) (13,185)
Trade promotions......................................... (22,977) (7,204) (11,796) (16,415)
Consumer marketing....................................... (2,907) (4,757) (5,692) (5,882)
-------- -------- -------- --------
Total brokerage, distribution and marketing expenses....... (42,040) (22,266) (27,838) (35,482)
Amortization of goodwill and other intangibles............. (5,287) (5,376) (4,198) (5,402)
Selling, general and administrative expenses (1)........... (5,109) (3,130) (6,155) (2,222)
Other financial, legal and accounting expenses (2)......... - - - -
Transition expenses........................................ 179 (877) (1,154) (543)
-------- -------- -------- --------
Total operating expenses............................... (52,257) (31,649) (39,345) (43,649)
-------- -------- -------- --------
Operating income (loss).................................... $ 11,579 $ 14,911 $ 2,236 $ 20,730
======== ======== ======== ========
</TABLE>
(1) Selling, general and administrative expenses were allocated to each division
based on the percentage of each division's net sales to total net sales in 2000.
(2) Other financial, legal and accounting expenses have not been allocated to
the operating divisions.
Net Sales. Net sales increased from $207.5 million in 1999 to $227.7
million in 2000, or 9.7%, 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 $91.2
million in 1999 to $141.2 million in 2000, or 54.8%, due primarily to the
acquisition of Lender's(R) in November 1999 and increased revenues from the
seafood, breakfast, pizza and food service businesses.
Dry Grocery. Dry grocery division net sales decreased from $116.3
million in 1999 to $86.5 million in 2000, or 25.6%, 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.
Gross Profit. Gross profit increased from $106.0 million in 1999 to $110.4
million in 2000, an increase of 4.2%, 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 decreased from 51.1% in
1999 to 48.5% in 2000. The decrease in gross profit as a percentage of net sales
was driven primarily by a significant shift in the mix of product sales as a
result of the lower dry grocery division sales with higher margins and increased
frozen revenues, primarily from the Lender's(R) acquisition, with lower than
average margins.
Frozen Foods. Gross profit increased from $41.6 million in 1999 to
$63.8 million in 2000, an increase of 53.5%, due primarily to the
acquisition of Lender's(R) in November 1999, with the percentage of net
sales essentially unchanged.
18
<PAGE>
Dry Grocery. Gross profit decreased from $64.4 million in 1999 to
$46.6 million in 2000, a decrease of 27.7% due primarily to the decrease in
net sales. As a percentage of net sales, gross profit decreased from 55.4%
in 1999 to 53.8% 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 syrup products.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses increased from $63.3 million in 1999 to $64.3 million in
2000, or 1.6%. As a percentage of net sales, brokerage, distribution and
marketing expenses decreased from 30.5% of net sales in 1999 to 28.3% of net
sales in 2000 due primarily to decreases as a percentage of net sales in the dry
grocery division. Brokerage and distribution costs, which include broker
commissions, freight, warehousing and term discounts, increased from 11.3% of
net sales in 1999 to 11.6% of net sales in 2000 due primarily to higher dry
grocery distribution costs. Trade promotions expense, which consists of
incentives offered to food retailers to carry and promote Aurora products,
decreased from 13.6% of net sales in 1999 to 13.3% of net sales in 2000 due to
reduced dry grocery spending, which in the prior year had been used to promote
trade inventory loading. Consumer marketing decreased as a percent of net sales
from 5.6% in 1999 to 3.4% in 2000 primarily due to a reduction in the frozen
division.
Frozen Foods. Brokerage, distribution and marketing expenses
increased from $27.8 million in 1999 to $42.0 million in 2000, an increase
of 51.0%, 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 30.5% of net sales in 1999 to 29.8% of net sales in
2000. Trade promotions expense increased from 12.9% of net sales in 1999 to
16.3% 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 as well as on increase in slotting expense for new
seafood and bagel products. Consumer marketing decreased as a percentage of
net sales from 6.2% in 1999 to 2.1% in 2000. The 1999 period included
higher levels of support relative to product and packaging changes.
Dry Grocery. Brokerage, distribution and marketing expenses decreased
from $35.5 million in 1999 to $22.3 million in 2000, a decrease of 37.2%.
As a percentage of net sales, brokerage, distribution and marketing
expenses decreased from 30.5% in 1999 to 25.7% in 2000. This decrease was
driven primarily by reduced trade promotions. Trade promotions expense
decreased from 14.1% of net sales in 1999 to 8.3% of net sales in 2000.
This decrease is due primarily to higher spending in 1999 to support heavy
quarter-end trade loading, which has been discontinued in 2000 partially
offset by carryover amortization in 2000 of slotting fees incurred in 1999.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles increased from $9.6 million in 1999 to $10.7 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 decreased from $8.4 million in 1999 to $8.2 million in
2000 primarily due to the reduction in expense for certain performance based
incentive programs and due to cost reductions associated with closing the
Columbus, Ohio and San Francisco, California administrative offices during the
third and first quarters of 2000, respectively, offset in part by the
incremental costs necessary to manage the acquired Lender's(R) business.
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, governmental 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 $23.2 million
for the three months ended September 30, 2000, are expensed when incurred by the
Company. The costs during the period included a non-cash $17.1 million charge
associated with the issuance of common stock to certain holders of the Company's
senior subordinated debt as discussed in Note 5 to the financial statements.
Management believes that cash expenditures for such financial, legal and
accounting expenses in connection with the investigation, the restatement of
financial results and related matters will materially decrease in future
periods.
Transition Expenses. The Company incurred a net $0.7 million in transition
expenses in 2000 primarily due to the integration of the dry grocery
administrative operations. The 1999 costs were associated with the Duncan
19
<PAGE>
Hines(R) and Chef's Choice(R) businesses. These expenses represent one-time
costs incurred to integrate acquired businesses and operations.
Operating Income. Operating income decreased from $23.0 million in 1999 to
$3.3 million in 2000. Operating income in 2000 was affected by the $23.2 million
of other financial, legal and accounting expenses. Before giving effect to other
financial, legal and accounting expenses, and transition expenses, operating
income increased from $24.7 million in 1999 to $27.2 million in 2000 due in
large part to the Lenders(R) acquisition, offset in part by reduced sales in the
dry grocery division due to the Company's decision to terminate in 2000 the
prior practice of heavy quarter-end trade loading.
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 $17.4 million in 1999 to $30.4 million in 2000. 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,
costs associated with the accounts receivable sale facility and increased debt
levels in 2000 contributed to higher interest expense.
Income Taxes. The income tax benefit recorded in 2000 of $11.9 million or
43.7% reflects an adjustment during the quarter to bring the year-to-date
effective rate to 36%, the anticipated rate for the year.
20
<PAGE>
Three Months Ended September 30, 2000 Compared to the Pro Forma Three Months
Ended September 30, 1999 (as restated)
The following table sets forth results of operations data by division for
the three months ended September 30, 2000 and the pro forma results for the
three months ended September 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 September 30
--------------------------------------------
2000 1999 (Pro forma)
-------------------- ---------------------
Frozen Dry Frozen Dry
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net Sales.............................................. $141,204 $ 86,518 $135,028 $111,345
Cost of Goods Sold..................................... (77,368) (39,958) (70,402) (51,877)
-------- --------- -------- --------
Gross Profit........................................... 63,836 46,560 64,626 59,468
-------- --------- -------- --------
Brokerage, distribution and marketing expenses:
Brokerage and distribution........................ (16,156) (10,305) (16,025) (13,185)
Trade promotions.................................. (22,977) (7,204) (18,600) (16,415)
Consumer marketing................................ (2,907) (4,757) (6,199) (7,247)
-------- --------- -------- --------
Total brokerage, distribution and marketing expenses... (42,040) (22,266) (40,824) (36,847)
Amortization of goodwill and other intangibles......... (5,287) (5,376) (5,348) (5,402)
Selling, general and administrative expenses (1)....... (5,109) (3,130) (9,134) (2,222)
Other financial, legal and accounting expenses (2)..... - - - -
Transition expenses.................................... 179 (877) (1,154) (543)
-------- --------- -------- --------
Total operating expenses........................ (52,257) (31,649) (56,460) (45,014)
-------- --------- -------- --------
Operating income (loss) ............................... $ 11,579 $ 14,911 $ 8,166 $ 14,454
======== ========= ======== ========
</TABLE>
(1) Selling, general and administrative expenses were allocated to each division
based on the percentage of each division's net sales to total net sales in 2000.
(2) Other financial, legal and accounting expenses have not been allocated to
the operating divisions.
Pro Forma Net Sales. On a pro forma basis, net sales decreased from $246.4
million in 1999 to $227.7 million in 2000, or 7.6%. The decline in net sales was
attributable primarily to the decline in the dry grocery division, offset in
part by an increase in frozen food sales.
Frozen Foods. On a pro forma basis, frozen foods division net sales
increased from $135.0 million in 1999 to $141.2 million in 2000 due
primarily to increased overall per unit price increases in late 1999 on
selected seafood items and reduced coupon expense, offset in part by a
decrease in sales of Lenders(R) products.
Dry Grocery. On a pro forma basis, dry grocery division net sales
decreased from $111.3 million in 1999 to $86.6 million in 2000, or 22.3%,
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, offset in
part by lower coupon costs.
Pro Forma Gross Profit. On a pro forma basis, gross profit decreased from
$124.1 million in 1999 to $110.4 million in 2000, or 11.0%. As a percentage of
net sales, pro forma gross profit decreased from 50.4% in 1999 to 48.5% in 2000.
Frozen Foods. On a pro forma basis, frozen foods division gross
profit decreased from $64.6 million in 1999 to $63.8 million in 2000. The
decrease was primarily due to lower sales of Lenders(R) products and
unrecovered higher raw material costs associated with the Chef's Choice(R)
products.
21
<PAGE>
Dry Grocery. Gross profit decreased from $59.5 million in 1999 to
$46.6 million in 2000, a decrease of 21.7% due primarily to the decrease in
net sales. As a percentage of net sales, gross profit increased from 53.4%
in 1999 to 53.8% in 2000. The increase in gross profit as a percentage of
net sales was due primarily to lower coupon costs.
Pro Forma Brokerage, Distribution and Marketing Expenses. On a pro forma
basis, brokerage, distribution and marketing expenses decreased from $77.7
million in 1999 to $64.3 million in 2000, a decrease of 17.2%. As a percentage
of net sales, pro forma brokerage, distribution and marketing expenses decreased
from 31.5% of net sales in 1999 to 28.3% of net sales in 2000.
Frozen Foods. On a pro forma basis, brokerage, distribution and
marketing expenses increased from $40.8 million in 1999 to $42.0 million in
2000, or 3.0%. As a percentage of net sales, brokerage, distribution and
marketing expenses decreased from 30.2% in 1999 to 29.8% in 2000 due to a
decrease in consumer marketing as a percent of sales offset in part by an
increase in trade promotions as a percent of net sales. The 1999 consumer
marketing expenses included higher levels of support related to certain
product and package changes. The increased trade promotion results from
increased focus on performance based trade promotions as well as increased
slotting costs for new seafood and bagel products.
Dry Grocery. On a pro forma basis, brokerage, distribution and
marketing expenses decreased from $36.8 million in 1999 to $22.3 million in
2000, or 39.6%. As a percentage of net sales, brokerage, distribution and
marketing expenses decreased from 33.1% in 1999 to 25.7% in 2000. This
decrease was driven by decreases in trade promotions, primarily due to
higher spending in 1999 to support heavy quarter-end trade loading, which
has been discontinued in 2000, offset in part by higher slotting expense
amortization from amounts incurred in 1999.
Pro Forma Selling, General and Administrative Expenses. Selling, general
and administrative costs on a pro forma basis, decreased $3.1 million in 2000
from 1999 due to the reduction in expense for certain performance based
incentive programs and as a result of cost reductions associated with closing
the Columbus, Ohio and San Francisco, California administrative offices during
the third and first quarter of 2000, respectively.
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, governmental 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
$23.2 million for the three months ended September 30, 2000, are expensed when
incurred by the Company. The costs during the period included a non-cash $17.1
million charge associated with the issuance of common stock to certain holders
of the Company's senior subordinated debt as described in Note 5 to the
financial statements. Management believes that cash expenditures for such
financial, legal and accounting expenses in connection with the investigation,
the restatement of financial results and related matters will materially
decrease in future periods.
Pro Forma Transition Expenses. The Company incurred a net $0.7 million in
transition expenses in 2000 primarily due to the integration of the dry grocery
administrative operations. The 1999 costs were associated with the Duncan
Hines(R) and Chef's Choice(R) businesses. These expenses represent one-time
costs incurred to integrate acquired businesses and operations.
Pro Forma Operating (Loss) Income. On a pro forma basis, operating income
decreased from $22.6 million in 1999 to $3.3 million in 2000. Excluding the
effects of the other financial, legal and accounting expenses and transition
expenses in both years, operating income increased from $24.3 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 $23.6 million in 1999 to $30.4
million in 2000. This increase is due to higher interest rates on the floating
rate debt, costs associated with the accounts receivable sale facility and an
increased debt level in 2000.
22
<PAGE>
Pro Forma Income Tax Expense. The income tax benefit recorded in 2000 of
$11.9 million or 43.7% reflects an adjustment during the quarter to bring the
year-to-date tax benefits to 36.0%, the anticipated rate for the year.
Results of Operations Nine Months Ended September 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 nine months ended
September 30, 1999 has been restated as discussed above.
23
<PAGE>
AURORA FOODS INC.
Statements of Operations
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Pro Forma Nine
Actual Nine Months Ended Months Ended
---------------------------------------------- ------------------
September 30, 2000 September 30, 1999 September 30, 1999
-------------------- ------------------ ------------------
(as restated) (1) (as restated) (1)
<S> <C> <C> <C> <C> <C> <C>
Net sales ................................... $ 724,451 100.0% $ 615,628 100.0% $ 764,309 100.0%
Cost of goods sold .......................... (357,186) (49.3) (297,469) (48.3) (373,642) (48.9)
--------- ----- --------- ----- --------- -----
Gross profit ................................ 367,265 50.7 318,159 51.7 390,667 51.1
--------- ----- --------- ----- --------- -----
Brokerage, distribution and
marketing expenses:
Brokerage and distribution ............... (85,845) (11.9) (69,100) (11.2) (91,773) (12.0)
Trade promotions ......................... (126,388) (17.4) (100,894) (16.4) (123,247) (16.1)
Consumer marketing ....................... (37,624) (5.2) (37,563) (6.1) (43,023) (5.6)
--------- ----- --------- ----- --------- -----
Total brokerage, distribution and
marketing expenses ....................... (249,857) (34.5) (207,557) (33.7) (258,043) (33.8)
Amortization of goodwill and
other intangibles ........................ (32,143) (4.4) (27,764) (4.5) (31,532) (4.1)
Selling, general and administrative
expenses ................................. (30,908) (4.3) (24,170) (3.9) (33,482) (4.3)
Other financial, legal and
accounting expenses ...................... (41,315) (5.7) - 0.0 - 0.0
Columbus consolidation costs ................ (6,550) (0.9) - 0.0 - 0.0
Transition expenses ......................... (2,082) (0.3) (9,095) (1.5) (9,095) (1.2)
--------- ----- --------- ----- --------- -----
Total operating expenses .................... (362,855) (50.1) (268,586) (43.6) (332,152) (43.4)
--------- ----- --------- ----- --------- -----
Operating income ............................ 4,410 0.6 49,573 8.1 58,515 7.7
Interest and other financing
expenses, net ............................ (83,592) (11.5) (48,733) (8.0) (68,277) (9.0)
--------- ----- --------- ----- --------- -----
Income (loss) before income taxes
and cumulative change in accounting ...... (79,182) (10.9) 840 0.1 (9,762) (1.3)
Income tax (expense) benefit ................ 28,506 3.9 (261) (0.0) 3,312 0.5
--------- ----- --------- ----- --------- -----
Income (loss) before cumulative effect
of change in accounting .................. (50,676) (7.0) 579 0.1 (6,450) (0.8)
Cumulative effect of change in
accounting, net of tax ................... (12,161) (1.7) - 0.0 - 0.0
--------- ----- --------- ----- --------- -----
Net income (loss) ........................... $ (62,837) (8.7)% $ 579 0.1% $ (6,450) (0.8)%
========= ===== ========= ===== ========= =====
Earnings (loss) per share ................... $ (0.93) N/A $ 0.01 N/A $ (0.10) N/A
========= ===== ========= ===== ========= =====
EBITDA (2) .................................. $ 55,103 7.5% $ 87,595 14.2% $ 104,806 13.7%
========= ===== ========= ===== ========= =====
Adjusted EBITDA (3) ......................... $ 105,050 14.4% $ 96,135 15.6% $ 125,269 16.4%
========= ===== ========= ===== ========= =====
Adjusted EPS (4) ............................ $ (0.26) N/A $ 0.09 N/A $ (0.01) N/A
========= ===== ========= ===== ========= =====
</TABLE>
24
<PAGE>
(1) As restated. See "--Restatements" and Notes 1 and 12 to the condensed
consolidated financial statements.
(2) EBITDA is defined as net income (loss) plus the cumulative effect of change
in accounting, 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 three 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 three 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 the cumulative effect of change in accounting, other
financial, legal and accounting expenses, Columbus consolidation costs and
transition expenses.
25
<PAGE>
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999 (as restated)
The following table sets forth certain historical results of operations
data by division for the nine months ended September 30, 2000 and 1999 (as
restated):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------
2000 1999
---------------------- -----------------------
Frozen Dry Frozen Dry
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales ................................................... $ 471,276 $ 253,175 $ 322,474 $ 293,154
Cost of Goods Sold .......................................... (242,200) (114,986) (167,040) (130,429)
--------- --------- --------- ---------
Gross Profit ................................................ 229,076 138,189 155,434 162,725
--------- --------- --------- ---------
Brokerage, distribution and marketing expenses:
Brokerage and distribution ............................. (52,898) (32,947) (37,229) (31,871)
Trade promotions ....................................... (82,497) (43,891) (54,304) (46,590)
Consumer marketing ..................................... (22,738) (14,886) (21,955) (15,608)
--------- --------- --------- ---------
Total brokerage, distribution and marketing expenses ........ (158,133) (91,724) (113,488) (94,069)
Amortization of goodwill and other intangibles .............. (15,905) (16,238) (12,027) (15,737)
Selling, general and administrative expenses ................ (22,836) (8,072) (17,620) (6,550)
Other financial, legal and accounting expenses (1) .......... - - - -
Columbus consolidation costs ................................ - (6,550) - -
Transition expenses ......................................... (1,205) (877) (1,313) (7,782)
--------- --------- --------- ---------
Total operating expenses ............................... (198,079) (123,461) (144,448) (124,138)
--------- --------- --------- ---------
Operating income (loss) ..................................... $ 30,997 $ 14,728 $ 10,986 $ 38,587
========= ========= ========= =========
</TABLE>
(1) Other financial, legal and accounting expenses have not been allocated to
the operating divisions.
Net Sales. Net sales increased from $615.6 million in 1999 to $724.5
million in 2000, or 17.7%, 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 $322.5
million in 1999 to $471.3 million in 2000, or 46.1%, 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 earlier this year to terminate the prior
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 $293.2
million in 1999 to $253.2 million in 2000, or 13.6%, principally because of
the Company's decision in 2000 to terminate the prior 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, coupon
costs are higher in 2000, partly resulting from the inconsistency in
accounting for the recognition of coupon expense in 1999, following the
adoption of the change in accounting required by EITF 00-14.
Gross Profit. Gross profit increased from $318.2 million in 1999 to $367.3
million in 2000, an increase of 15.4%, due to increased gross profit in the
frozen foods division partially offset by lower levels in the dry grocery
division.
Frozen Foods. Gross profit increased from $155.4 million in 1999 to
$229.1 in 2000, an increase of 47.4% due primarily to the acquisitions of
Chef's Choice(R) in April 1999 and Lender's(R) in November 1999, offset in
part by reduced gross profit associated with the sales reduction in other
products.
Dry Grocery. Gross profit decreased from $162.7 million in 1999 to
$138.2 million in 2000, or 15.1% due primarily to the decrease in net
sales, as gross profit as a percentage of net sales was 55.5% in
26
<PAGE>
1999 and 54.6% in 2000. The principal reason for the decrease as a percent
of net sales was due to higher coupon costs included in net sales resulting
from the inconsistency in accounting for the recognition of coupon expense
in 1999, following the adoption of the changes in accounting required by
EITF 00-14.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses increased from $207.6 million in 1999 to $249.9 million in
2000, an increase of 20.4%, as a result of increases in both divisions. As a
percentage of net sales, brokerage, distribution and marketing expenses
increased from 33.7% of net sales in 1999 to 34.5% 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 16.4% of net sales in 1999 to 17.4% 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, offset in part by reductions in breakfast and pizza support required in
the prior year.
Frozen Foods. Brokerage, distribution and marketing expenses increased
from $113.5 million in 1999 to $158.1 million in 2000, an increase of
39.3%, 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 11.5% of net sales in 1999 to 11.2% of net sales in 2000.
This decrease is due primarily to a reduction in term discounts, offset in
part by increased freight and warehousing due to the acquisition of
Lender's(R) for which these costs are higher than the average for the
division. Trade promotions expense increased from 16.8% of net sales in
1999 to 17.5% of net sales in 2000. The increase in trade promotions as a
percentage of net sales is due primarily to the acquisition of Lender's(R)
which has higher trade promotion as a percent of net sales than the average
for this division. Consumer marketing expenses decreased from 6.8% of net
sales in 1999 to 4.8% 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 decreased
from $94.1 million in 1999 to $91.7 million in 2000, or 2.5%. As a
percentage of net sales, brokerage, distribution and marketing expenses
increased from 32.1% in 1999 to 36.2% 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 10.9% of net sales in 1999 to 13.0% 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
15.9% of net sales in 1999 to 17.3% of net sales in 2000. This increase is
due to carryover amortization in 2000 of slotting fees incurred in 1999.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles increased from $27.8 million in 1999 to $32.1 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 $24.2 million in 1999 to $30.9 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, governmental 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 $41.3 million
for the nine months ended September 30, 2000, are expensed when incurred by the
Company. Management believes that cash expenditures for such financial, legal
and accounting expenses in connection with the investigation, the restatement of
financial results and related matters will materially decrease in future
periods.
27
<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 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 December
31, 2000.
Transition Expenses. The Company incurred $9.1 million in transition
expenses in 1999 primarily due to the integration of the Duncan Hines(R)
business. During 2000, the Company incurred approximately $2.1 million primarily
related to the integration of the Chef's Choice(R) and Lender's(R) businesses
and the dry grocery administrative consolidation. These expenses represent one-
time costs incurred to integrate acquired businesses and operations.
Operating Income. Operating income decreased from $49.6 million in 1999 to
$4.4 million in 2000. Operating income in 2000 was affected by the $41.3 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
consolidation costs and transition expenses, operating income decreased from
$58.7 million in 1999 to $54.4 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 $48.7 million in 1999 to $83.6 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, costs associated with the accounts
receivable sale facility and an increased debt level in 2000 contributed to
higher interest expense.
Nine Months Ended September 30, 2000 Compared to the Pro Forma Nine Months Ended
September 30, 1999 (as restated)
The following table sets forth results of operations data by division for
the nine months ended September 30, 2000 and the pro forma results for the nine
months ended September 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>
Nine Months Ended September 30,
---------------------------------------------
2000 1999 (Pro forma)
--------------------- ---------------------
Frozen Dry Frozen Dry
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales ................................................ $ 471,276 $ 253,175 $ 476,130 $ 288,179
Cost of Goods Sold ....................................... (242,200) (114,986) (243,212) (130,430)
--------- --------- --------- ---------
Gross Profit ............................................. 229,076 138,189 232,918 157,749
--------- --------- --------- ---------
Brokerage, distribution and marketing expenses:
Brokerage and distribution .......................... (52,898) (32,947) (59,902) (31,871)
Trade promotions .................................... (82,497) (43,891) (76,657) (46,590)
Consumer marketing .................................. (22,738) (14,886) (25,595) (17,428)
--------- --------- --------- ---------
Total brokerage, distribution and marketing expenses ..... (158,133) (91,724) (162,154) (95,889)
Amortization of goodwill and other intangibles ........... (15,905) (16,238) (15,795) (15,737)
Selling, general and administrative expenses ............. (22,836) (8,072) (26,932) (6,550)
Other financial, legal and accounting expenses (1) ....... - - - -
Columbus consolidation costs ............................. - (6,550) - -
Transition expenses ...................................... (1,205) (877) (1,313) (7,782)
--------- --------- --------- ---------
Total operating expenses ............................ (198,079) (123,461) (206,194) (125,958)
--------- --------- --------- ---------
Operating income (loss) .................................. $ 30,997 $ 14,728 $ 26,724 $ 31,791
========= ========= ========= =========
</TABLE>
(1) Other financial, legal and accounting expenses have not been allocated to
the operating divisions.
28
<PAGE>
Pro Forma Net Sales. On a pro forma basis, net sales decreased from $764.3
million in 1999 to $724.5 million in 2000, or 5.2%, and was attributable to
declines in both divisions.
Frozen Foods. On a pro forma basis, frozen foods division net sales
decreased from $476.1 million in 1999 to $471.3 million in 2000, or 1.0%
due primarily to the Company's decision earlier this year to terminate the
prior 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 and certain price increases in late 1999 on
certain seafood items.
Dry Grocery. On a pro forma basis, dry grocery division net sales
decreased from $288.2 million in 1999 to $253.2 million in 2000, or 12.1%
principally because of the Company's decision to terminate in 2000 the
prior 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 $390.7
million in 1999 to $367.3 million in 2000, a decrease of 6.0%.
Frozen Foods. On a pro forma basis, frozen foods division gross profit
declined from $232.9 million in 1999 to $229.1 million in 2000, or 1.6%.
The decrease was primarily due to the lower net sales.
Dry Grocery. On a pro forma basis, gross profit decreased from $157.7
million in 1999 to $138.2 million in 2000, or 12.4%, due primarily to the
decrease in net sales.
Pro Forma Brokerage, Distribution and Marketing Expenses. On a pro forma basis,
brokerage, distribution and marketing expenses decreased from $258.0 million in
1999 to $249.9 million in 2000, a decrease of 3.2%. As a percentage of net
sales, pro forma brokerage, distribution and marketing expenses increased from
33.8% of net sales in 1999 to 34.5% of net sales.
Frozen Foods. On a pro forma basis, brokerage, distribution and
marketing expenses decreased from $162.2 million in 1999 to $158.1 million
in 2000, a 2.5% decline. This decrease was driven primarily by a reduction
of discount payment terms offered to customers, partially offset by an
increase in trade promotion spending as a percent of sales.
Dry Grocery. On a pro forma basis, brokerage, distribution and
marketing expenses decreased from $95.9 million in 1999 to $91.7 million in
2000. As a percentage of net sales, brokerage, distribution and marketing
expenses increased from 33.3% in 1999 to 36.2% in 2000. This increase was
driven primarily by increases in brokerage and distribution expenses and in
trade promotions. Brokerage and distribution expenses increased from 11.1%
of net sales in 1999 to 13.0% 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 16.2% of net sales in 1999
to 17.3% 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, governmental 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
$41.3 million for the nine months ended September 30, 2000, are expensed when
incurred by the Company. Management believes that cash expenditures for such
financial, legal and accounting expenses in connection with the investigation,
the restatement of financial results and related matters will materially
decrease in future periods.
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 December
31, 2000.
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Pro Forma Transition Expenses. The Company incurred $9.1 million in
transition expenses in 1999 primarily due to the integration of the Duncan
Hines(R) business. During 2000, the Company incurred approximately $2.1
million primarily related to the integration of the Chef's Choice(R) and
Lender's(R) businesses and the dry grocery administrative consolidation. These
expenses represent one-time costs incurred to integrate acquired businesses and
operations.
Pro Forma Operating (Loss) Income. On a pro forma basis, operating income
decreased from $58.5 million in 1999 to $4.4 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 $67.6 million in 1999 to $54.4 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 $68.3 million in 1999 to $83.6
million in 2000. This increase is due to higher interest rates on the floating
rate debt, costs associated with the accounts receivable sale facility and an
increased debt level in 2000.
Liquidity and Capital Resources
For the nine months ended September 30, 2000 the Company used $39.0 million
to fund operating activities compared to the nine months ended September 30,
1999, when $34.3 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
including $24.2 million of pretax cash expenses for other financial, legal and
accounting expenses, offset by funding from the sale of accounts receivable (see
Note 8 to the consolidated financial statements) and smaller amounts needed for
working capital. As of September 30, the Company had received a net $37.6
million from the sale of accounts receivable. The agreement to sell up to $60
million in accounts receivable has been used to provide needed cash.
Net cash used in investing activities for the nine months ended September
30, 2000, was approximately $19.1 million compared to $92.6 million during the
nine months ended September 30, 1999. Investing activities in 2000 consisted of
additions to fixed assets of $12.3 million, $8.0 million paid as additional
purchase price for the Seacoast acquisition (see Note 3 to the financial
statements) and $1.2 million was received from the sale of non-operating real
estate. Investing activities in 1999 consisted of $15.8 million of additions to
fixed assets and 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 nine months ended September 30, 2000, financing activities
provided cash of $60.4 million. The Company received $15 million from its
issuance of preferred stock in connection with the resolution of covenant
defaults on its senior subordinated debt. (See Notes 5 & 9 to the financial
statements.) The Company repaid $19.7 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
$127.0 million was used primarily to fund the business acquisitions.
The Company solicited the consent (the "Consent Solicitation") of the
holders of the Company's 8-3/4% Senior Subordinated Notes due 2008 and the
February and July issues of the Company's 9-7/8% Senior Subordinated Notes due
2007 (the "Notes"). The purpose of the Consent Solicitation was to amend certain
provisions of each Indenture (the "Indentures") governing the Notes, to waive
certain events of default under each Indenture and to receive a release of
certain claims.
The Consent Solicitation expired on September 20, 2000. Upon receiving the
required consents pursuant to the Company's Confidential Consent Solicitation
Statement dated as of August 31, 2000, as supplemented (the "Consent
Solicitation Statement"), the Company and the trustee under the Indentures
executed a Supplemental Indenture with respect to each Indenture to make the
amendments operative and binding on all holders of Notes.
The amendments will also allow the Company to incur up to $90 million of
additional senior indebtedness to replace an existing $60 million receivables
sale arrangement and increase the call premium on the outstanding Notes by 2%
starting in 2002 for the 9-7/8% Notes and 2003 for the 8-3/4% Notes.
In connection with the successful completion of the Consent Solicitation,
certain investors, including funds affiliated with existing stockholders,
purchased 3,750,000 shares of the Company's Series A Preferred Stock for an
aggregate purchase price of $15 million, that further enhances the Company's
liquidity.
As a result of the amendments and waivers on the senisubordinated notes,
the remaining contingencies associated with the Company's senior secured debt
were resolved. Therefore, the Company has classified its senior secured and
senior subordinated debt as long-term in the accompanying September 30, 2000
balance sheet.
Interest Rate Collar Agreements
At September 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; 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 November 9, 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 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 case has been removed to
federal court in San Francisco. 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 has been informed that the staff of the Securities and Exchange
Commission (the "SEC") and the Department of Justice (the "DOJ") are conducting
investigations relating to the events that resulted in the restatement of the
Company's financial statements for prior periods ("Prior Events"). The SEC and
DOJ have requested that the Company provide certain documents relating to the
Company's historical financial statements. On September 5, 2000, the Company
received a subpoena from the SEC to produce documents in connection with the
Prior Events. The SEC also requested certain information regarding some of the
Company's former officers and employees, correspondence with the Company's
auditors and documents related to financial statements, accounting policies and
certain transactions and business arrangements.
The Company is cooperating with the SEC and the DOJ in connection with both
investigations. The Company cannot predict the outcome of either governmental
investigation. An adverse outcome in either proceeding may have a material
adverse effect on the Company.
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 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
a) On September 20, 2000, the Company issued 3,750,000 shares of its Series A
Convertible Cumulative Preferred Stock ("Series A Preferred Stock") to
certain existing stockholders including funds affiliated with Fenway
Partners, Inc., McGown DeLeeuw & Co. and UBS Capital at a price of $4.00
per share for an aggregate offering price of $15,000,000. The transaction
was exempt under Rule 506 of the Securities Act of 1933 as amended (the
"Act") as a transaction by an issuer not involving a public offering. The
Series A Preferred Stock is convertible into Common Stock at a price of
$3.35 (the "Conversion Price"), or approximately 1.19 shares of Common
Stock per share of Series A Preferred Stock, subject to adjustment for
issuances less than the Conversion Price. The Series A Preferred Stock
converts at the Company's option into shares of Common Stock in the event
the Common Stock trades for 10 consecutive days at a price that is in
excess of 200% of the Conversion Price.
b) As of September 20, 2000 the Company issued 6,778,577 shares of its Common
Stock in connection with its Consent Solicitation (the "Consent
Solicitation") of the holders (the "Holders") of the Company's 8-3/4%
Senior Subordinated Notes due 2008 and the February and July issues of the
Company's 9-7/8% Senior Subordinated Notes due 2007 (collectively, the
"Notes"). The Holders received 17.71078 shares of Common Stock per $1,000
aggregate principal amount of Notes to which a Holder's consent related in
exchange for each Holder's consent to the amendment of certain provisions
of each Indenture (the "Indentures") governing the Notes, consent to the
waiver of certain events of default under each Indenture and a release of
certain claims. The transaction was exempt under Rule 506 of the Act as a
transaction by an issuer not involving a public offering.
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
agreements covering its senior secured debt and senior subordinated debt. The
Company and the lenders party to the senior secured debt 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.
During the third quarter, the defaults related to the senior secured debt
were cured or waived as a result of the cure or waiver of the defaults in the
senior subordinated debt. The defaults related to the senior subordinated debt
were cured or waived in connection with the consents obtained from the holders
of senior subordinated debt to amendments to the indentures and waivers of past
defaults thereunder on September 20, 2000.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
------- -------
2.17 Securities Purchase Agreement for Series A Preferred Stock
dated as of September 20, 2000 between the Company and the
Purchasers listed on the signature page thereto.
(Incorporated by reference to Exhibit 2.1 to the Aurora Foods
Inc. Form 8-K filed on September 21, 2000).
3.3 Certificate of Designation for the Company's Series A
Preferred Stock filed with the Secretary of State of Delaware
on September 7, 2000. (Incorporated by reference to Exhibit
3.1 to the Aurora Foods Inc. Form 8-K filed on September 21,
2000).
4.14 Amendment of Securityholders Agreement among Aurora Foods
Inc. and the parties listed on the signature page thereto.
10.40* Employment Agreement dated as of March 27, 2000, among Aurora
Foods Inc. and James T. Smith.
27.1 Financial Data Schedules for the nine months ended September
30, 2000 and restated September 30, 1999.
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(b) Reports on Form 8-K
Date Filed
August 18, 2000 Press release announcing agreement in principle with
holders of senior subordinated debt.
September 21, 2000 Press release announcing finalization of agreement with
senior subordinated noteholders, issuance of Series A
Preferred Stock in the aggregate amount of $15 million, and
amendments and waivers to debt agreements.
November 9, 2000 Press release with respect to results for the third quarter
ended September 30, 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.
By: /s/ Christopher T. Sortwell
------------------------------------
Christopher T. Sortwell
Chief Financial Officer
(Duly Authorized Officer,
Principal Financial Officer and
Principal Accounting Officer)
Date: November 14, 2000
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EXHIBIT INDEX
Exhibit
Number Exhibit
------- -------
2.17 Securities Purchase Agreement for Series A Preferred Stock
dated as of September 20, 2000 between the Company and the
Purchasers listed on the signature page thereto.
(Incorporated by reference to Exhibit 2.1 to the Aurora Foods
Inc. Form 8-K filed on September 21, 2000).
3.3 Certificate of Designation for the Company's Series A
Preferred Stock filed with the Secretary of State of Delaware
on September 7, 2000. (Incorporated by reference to Exhibit
3.1 to the Aurora Foods Inc. Form 8-K filed on September 21,
2000).
4.14 Amendment of Securityholders Agreement among Aurora Foods
Inc. and the parties listed on the signature page thereto.
10.40* Employment Agreement dated as of March 27, 2000, among Aurora
Foods Inc. and James T. Smith.
27.1 Financial Data Schedules for the nine months ended September
30, 2000 and restated September 30, 1999.
