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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q/A
(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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 333-50681
AURORA FOODS INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 94-3303521
-------- ----------
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)
</TABLE>
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 6, 1998
Common stock, $0.01 par value 67,000,000
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This amendment on Form 10-Q/A amends Items 1 and 2 of Part I and Items 1 and 6
of Part II of the Quarterly Report of Aurora Foods Inc. (the "Company") on Form
10-Q previously filed for the quarter ended September 30, 1998. This Quarterly
Report on Form 10-Q/A is filed in connection with the Company's restatement of
its financial statements for the quarters ended September 30, 1998, March 31,
1999, June 30, 1999 and September 30, 1999 as well as for the year ended
December 31, 1998. Financial statement information and related disclosures
included in this amended filing reflect, where appropriate, changes as a result
of the restatements. The financial information in this Form 10-Q/A is consistent
with such information as it was presented on a restated basis in the Company's
Form 10-K for the year ended December 31, 1999. All other information contained
in this Quarterly Report on Form 10-Q/A is as of the date of the original
filing.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
Item Page
---- ----
<S> <C>
1. Financial Statements.............................................................................. 2
2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 20
PART II
1. Legal Proceedings................................................................................. 35
6. Exhibits and Reports on Form 8-K.................................................................. 35
(Only those exhibits which have been revised have been included herein.)
</TABLE>
1
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
See pages 3 through 19.
2
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AURORA FOODS INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- ------------------
(as restated)
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,913 $ 4,717
Accounts receivable (net of $940 and $140 allowance, respectively) 85,055 12,362
Accounts receivable - other 7,049 1,474
Inventories 83,389 6,902
Prepaid expenses and other assets 7,437 1,955
Current deferred tax assets 31,736 2,966
---------------- ------------------
Total current assets 216,579 30,376
Property, plant and equipment, net 137,453 14,075
Goodwill and other intangible assets, net 1,072,611 315,241
Asset held for sale 3,000 --
Other assets 25,330 13,047
---------------- ------------------
Total assets $ 1,454,973 $ 372,739
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of senior secured term debt $ 20,000 $ 4,375
Senior secured revolving debt facility 50,250 --
Accounts payable 50,811 6,443
Accrued liabilities 68,150 17,409
---------------- ------------------
Total current liabilities 189,211 28,227
Non-current deferred tax liabilities 5,047 3,745
Other liabilities 12,372 --
Senior secured revolving debt facility 65,500 37,500
Senior secured term debt 205,000 35,625
Senior subordinated notes 402,287 202,419
---------------- ------------------
Total liabilities 879,417 307,516
---------------- ------------------
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 and 87,159,000
shares authorized, respectively; 67,000,000 and 29,053,000
shares issued and outstanding, respectively 670 291
Paid in capital 648,001 63,912
Promissory notes (630) (215)
(Accumulated deficit) retained earnings (72,485) 1,235
---------------- ------------------
Total stockholders' equity 575,556 65,223
---------------- ------------------
Total liabilities and stockholders' equity $ 1,454,973 $ 372,739
================ ==================
</TABLE>
See accompanying notes to financial statements.
3
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AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
September 30, September 27,
1998 1997
------------- --------------
(as restated)
<S> <C> <C>
Net sales $ 218,768 $ 49,125
Cost of goods sold 89,974 15,229
--------- ---------
Gross profit 128,794 33,896
--------- ---------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 22,677 5,701
Trade promotions 61,638 8,734
Consumer marketing 15,928 4,889
--------- ---------
Total brokerage, distribution and marketing expenses 100,243 19,324
Amortization of goodwill and other intangibles 8,623 2,170
Selling, general and administrative expenses 7,510 1,267
Transition expenses 1,269 989
--------- ---------
Total operating expenses 117,645 23,750
--------- ---------
Operating income 11,149 10,146
Interest income (123) (5)
Interest expense 15,682 6,624
Amortization of deferred financing expense 372 293
Other bank and financing expenses 49 29
--------- ---------
(Loss) income before income taxes and extraordinary item (4,831) 3,205
Income tax (benefit) expense (163) 1,282
--------- ---------
Net (loss) income before extraordinary item (4,668) 1,923
Extraordinary loss on early extinguishment of debt,
net of tax of $4,520 7,449 -
--------- ---------
Net (loss) income $ (12,117) $ 1,923
========= =========
Basic and diluted (loss) earnings per share before
extraordinary item $ (0.07) $ 0.07
Extraordinary item per share 0.11 -
--------- ---------
Basic and diluted (loss) earnings per share $ (0.18) $ 0.07
========= =========
Weighted average number of shares outstanding 67,000 29,053
========= =========
</TABLE>
See accompanying notes to financial statements.
4
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AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Nine months Ended
---------------------------------------
September 30, September 27,
1998 1997
---------------- ------------------
(as restated)
<S> <C> <C>
Net sales $ 507,966 $ 92,016
Cost of goods sold 209,451 29,500
--------- ---------
Gross profit 298,515 62,516
--------- ---------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 50,890 10,400
Trade promotions 122,508 15,807
Consumer marketing 37,423 9,256
--------- ---------
Total brokerage, distribution and marketing expenses 210,821 35,463
Amortization of goodwill and other intangibles 21,409 3,828
Selling, general and administrative expenses 17,414 3,594
Incentive plan expense 56,583 --
Transition expenses 5,716 1,313
--------- ---------
Total operating expenses 311,943 44,198
--------- ---------
Operating (loss) income (13,428) 18,318
Interest income (544) (86)
Interest expense 50,080 11,800
Amortization of deferred financing expense 1,472 2,771
Other bank and financing expenses 187 53
--------- ---------
(Loss) income before income taxes and extraordinary item (64,625) 3,780
Income tax (benefit) expense (230) 1,512
--------- ---------
Net (loss) income before extraordinary item (64,395) 2,268
Extraordinary loss on early extinguishment of debt,
net of tax of $5,704 9,325 --
--------- ---------
Net (loss) income $ (73,720) $ 2,268
========= =========
Basic and diluted (loss) earnings per share before
extraordinary item $ (1.31) $ 0.08
Extraordinary item per share 0.19 --
--------- ---------
Basic and diluted (loss) earnings per share $ (1.50) $ 0.08
========= =========
Weighted average number of shares outstanding 49,159 29,053
========= =========
</TABLE>
See accompanying notes to financial statements.
5
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AURORA FOODS INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock Paid-In Promissory (Accumulated
-----------------------
Shares Amount Capital Notes Deficit) Total
---------- ---------- ------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 27,
1997 29,053 $ 291 $ 63,912 $ (215) $ 1,235 $ 65,223
Capital contribution - - 94,263 (473) - 93,790
Shares issued for
acquisition of business 25,038 250 183,219 - - 183,469
Shares issued 12,909 129 254,702 254,831
Equity offering costs - - (4,678) - - (4,678)
Payments on officer
promissory notes - - - 58 - 58
Incentive plan expense - - 56,583 - - 56,583
Net loss (as restated) - - - - (73,720) (73,720)
--------- ---------- ------------- ------------- --------------- ------------
Balance at September 30,
1998 (as restated) 67,000 $ 670 $ 648,001 $ (630) $ (72,485) $ 575,556
========= ========== ============= ============= =============== ============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months Ended
----------------------------------------
September 30, September 27,
1998 1997
----------------- ------------------
(as restated)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (73,720) $ 2,268
Early extinguishment of debt, net of tax of $5,704 9,325 -
Adjustments to reconcile net (loss) income to cash provided
by operating activities:
Depreciation and amortization 29,587 7,180
Deferred income taxes (229) 1,317
Incentive plan expense 56,583 -
Change in assets and liabilities, net of effects of
businesses acquired:
Increase in accounts receivable (40,516) (19,935)
Decrease in accounts receivable - other 633 -
Increase in inventories (43,291) (5,435)
Increase in prepaid expenses and other assets (4,321) (76)
Increase in accounts payable 35,016 6,030
Increase in accrued liabilities 24,107 9,447
----------------- ------------------
Net cash (used in) provided by operating activities (6,826) 11,666
----------------- ------------------
Cash flows from investing activities:
Additions to property, plant and equipment (21,652) (2,793)
Changes to other non-current assets and liabilities (2,653) 441
Proceeds from sale of assets 28,035 -
Payment for acquisition of businesses (458,748) (224,655)
----------------- ------------------
Net cash used in investing activities (455,018) (227,007)
----------------- ------------------
Cash flows from financing activities:
Proceeds from senior secured revolving and term debt 844,750 90,000
Proceeds from senior subordinated notes 200,000 202,500
Repayment of borrowings (892,759) (98,000)
Payment of redemption premium (14,500) -
Proceeds from initial public offering 254,831 -
Capital contributions, net of officer promissory notes 93,848 28,480
Debt issuance and equity raising costs (27,130) (11,964)
----------------- ------------------
Net cash provided by financing activities 459,040 211,016
----------------- ------------------
Decrease in cash and cash equivalents (2,804) (4,325)
Cash and cash equivalents, beginning of period 4,717 8,666
----------------- ------------------
Cash and cash equivalents, end of period $ 1,913 $ 4,341
================= ==================
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
AURORA FOODS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
------------------------------
RESTATEMENTS
Prior to 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 Form
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 months ended September 30, 1998, have been
included in the condensed consolidated financial statements included herein.
For the three and nine months ended September 30, 1998, these misstatements
primarily understated trade promotions expense by $12.5 million, overstated net
sales by $1.6 million, understated brokerage and distribution expense by $1.9
million, understated cost of goods sold by $0.7 million and understated selling
general and administrative expenses by $0.3. After adjusting for the
misstatements, the Company recalculated its income tax provision reducing income
tax expense by $4.3 million.
A summary of the effects of the restatement is set forth in Note 9.
The restatements are a result of an investigation conducted by a special
committee (the "Special Committee") formed by the Company's Board of Directors.
The Special Committee retained legal counsel, which retained an independent
accounting firm to assist in the investigation. The Board of Directors has
determined that the Special Committee's role in the investigation has been
concluded. All further matters related to this investigation will be addressed
by the Board of Directors.
As a result of the restatements, 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 in 2000 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;
8
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. 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 of 2000, 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.
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.
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.
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 announced on January 16, 2001 that it reached a preliminary
agreement to settle the securities class action and derivative lawsuits pending
against the Company and its former management team in the US District Court in
the Northern District of California, pending court approval of a definitive
agreement and related matters.
Under terms of the agreement, Aurora will pay the class members $26 million in
cash and $10 million in common stock. Separately, the Company has entered into
a preliminary agreement with certain members of former management to transfer
between approximately 3 million and 3.6 million shares of Aurora common stock to
the Company, in consideration for a resolution of any civil claims that the
Company may have, and partially conditioned upon future events and
circumstances.
The Company expects that the cash component of the settlement with the Company's
shareholders will be funded entirely by the Company's insurance. With respect
to the stock component of the settlement, the stock received from former
management would be sufficient, at current share prices, to satisfy Aurora's
obligation without issuing additional shares. The actual number of shares needed
to fund the stock component of the settlement will be based on average share
prices determined at later dates.
The terms of the agreement call for the Company to continue to implement certain
remedial measures, including the adoption of an audit committee charter, the
reorganization of its finance department, the establishment of an internal audit
function and the institution of a compliance program, as consideration for
resolution of the derivative litigation.
9
<PAGE>
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.
ACCOUNTING CHANGES
During the second quarter of 2000, effective January 1, 2000, the Company
adopted the consensus reached in EITF 00-14, Accounting for Certain Sales
Incentives. This change in accounting principle had the effect of accelerating
the recognition of certain expenses as well as requiring that certain items
previously classified as distribution, promotion and marketing expenses now be
classified as reductions of revenue.
The financial statements included in this amended Form 10-Q do not reflect the
adoption of EITF 00-14, in order to provide more consistent and comparable
information. The accompanying financial statements consistently present the
Company's accounting policies in 1999 and 1998 prior to the accounting change in
2000. The information necessary to reclassify the presentations of expense for
periods prior to 1999 is not available and the accompanying financial statements
do not include any periods subsequent to the change on January 1, 2000.
Reference is made to the financial statements included in the Company's Form
10-Q for the period ended June 30, 2000 for further information on this change
in accounting.
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
10
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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
Aurora Foods Holdings Inc. and notes thereto included in the Registration
Statement on Form S-1, as amended, of Aurora Foods Inc., effective as of June
25, 1998 relating to the Company's initial public offering of equity securities
(defined in The Company, Its Business and Ownership).
THE COMPANY, ITS BUSINESS AND OWNERSHIP
The Company was incorporated in Delaware on June 19, 1998, as the successor to
Aurora Foods Holdings Inc. ("Holdings") and its subsidiary, AurFoods Operating
Co., Inc. (formerly known as Aurora Foods Inc.) ("AurFoods"), both of which were
incorporated in Delaware in December 1996. AurFoods was wholly-owned by
Holdings, which in turn was wholly-owned by MBW Investors LLC ("MBW LLC").
AurFoods was formed for the purpose of acquiring the Mrs. Butterworth's(R) syrup
business from Conopco, Inc., a subsidiary of Unilever United States, Inc.
("Conopco"). AurFoods subsequently acquired the Log Cabin(R) syrup business
("LC") from Kraft Foods, Inc. ("Kraft") in July 1997 and the Duncan Hines(R)
baking mix business ("DH") from The Procter & Gamble Company ("P&G") in January
1998.
Van de Kamp's, Inc. ("VDK") was a wholly-owned subsidiary of VDK Holdings, Inc.,
a Delaware corporation ("VDK Holdings") and was incorporated in Delaware in July
1995 for the purpose of acquiring the Van de Kamp's(R) frozen seafood and frozen
dessert businesses from The Pillsbury Company in September 1995. VDK then
acquired the Mrs. Paul's(R) frozen seafood business from the Campbell Soup
Company in May 1996 and the Aunt Jemima(R) frozen breakfast and Celeste(R)
frozen pizza businesses from The Quaker Oats Company in July 1996. VDK Holdings
was wholly-owned by VDK Foods LLC ("VDK LLC").
The Company groups its brands into two general divisions: dry grocery division
and frozen food division. The dry grocery division includes Duncan Hines(R)
brand baking mix products and Mrs. Butterworth's(R) and Log Cabin(R) brand syrup
products. The frozen food division includes the frozen food brands acquired as
part of the VDK Holdings acquisition (See Note 2 -Acquisitions).
On April 8, 1998, MBW LLC and VDK LLC formed Aurora/VDK LLC ("New LLC"). MBW LLC
contributed all of the capital stock of Holdings and VDK LLC contributed all of
the capital stock of VDK Holdings to New LLC (the "Contribution"). In return for
these contributions, MBW LLC was issued 55.5% of the interests in New LLC plus a
right to receive a special $8.5 million priority distribution from New LLC, and
VDK LLC was issued 44.5% of the interests in New LLC plus a right to receive a
special $42.4 million priority distribution from New LLC. The amount and source
of consideration used by MBW LLC and VDK LLC for their acquisition of interests
in New LLC was their equity in Holdings and VDK Holdings, respectively.
11
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Prior to its dissolution in connection with the IPO (defined below), New LLC was
a majority-owned subsidiary of MBW LLC. New LLC accounted for the contribution
of the ownership of Holdings at MBW LLC's historical cost and the contribution
of the ownership of VDK Holdings was accounted for as an acquisition using the
purchase method of accounting at New LLC's cost. After giving effect to the
Contribution, New LLC directly held 100% of Holdings' capital stock and Holdings
continued to hold directly 100% of AurFoods capital stock, and New LLC directly
held 100% of VDK Holdings' capital stock and VDK Holdings continued to hold
directly 100% of VDK's capital stock. On June 25, 1998, New LLC contributed to
the Company all the issued and outstanding stock of Holdings and VDK Holdings.
Therefore, the Company's financial statements, as it is the successor to
Holdings, includes the historical financial information of Holdings from its
inception.
On July 1, 1998, Holdings, AurFoods, VDK Holdings and VDK merged with and into
the Company and the initial public offering (the "IPO") of 12,909,372 shares of
Common Stock of the Company and 1,590,628 shares of the Company's Common Stock
sold by New LLC was consummated at an initial public offering price of $21.00
per share. Also, concurrently with the IPO, the Company issued $200.0 million
aggregate principal amount of 8 3/4% senior subordinated notes due 2008 (the
"Notes Offering" or "New Notes") and borrowed $225.0 million of senior secured
term debt and $99.0 million out of the total available of $175.0 million of
senior secured revolving debt under the Third Amended and Restated Credit
Agreement, dated as of July 1, 1998, among the Company, as borrower, the lenders
listed therein, The Chase Manhattan Bank, as Administrative Agent, The National
Westminster Bank PLC, as Syndication Agent and Swiss Bank Corporation, as
Documentation Agent (the "New Senior Bank Facilities").
The Company used the net proceeds from the IPO, the Notes Offering and the New
Senior Bank Facilities to (i) repay $180.8 million of senior secured bank debt
under the VDK Senior Bank Facilities (as defined in Note 8), (ii) repay $467.0
million under the Aurora Senior Bank Facilities (as defined in Note 2), (iii)
redeem the 12% Senior Subordinated Notes due 2005 issued under an Indenture
dated as of September 15, 1995, between VDK and Harris Trust and Savings Bank,
as Trustee (the "VDK Notes") (redemption completed on July 31, 1998) in the
principal amount of $100.0 million, and (iv) pay the $14.5 million redemption
premium associated with the VDK Notes. As a result of the early extinguishment
of the Aurora Senior Bank Facilities, the Company recorded in the quarter ended
September 30, 1998 an extraordinary charge of $7.4 million, net of income tax of
$4.5 million, for the write off of deferred financing charges.
As a consequence of the IPO, no additional incentive plan expense will be
recorded under the Aurora Plan (See Note 5 - Incentive Plan Expense). MBW LLC
satisfied its liability under the Aurora Plan by distributing shares of the
Company's common stock in connection with the liquidation of MBW LLC.
12
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NOTE 2 - ACQUISITIONS
---------------------
DUNCAN HINES
On January 16, 1998, the Company acquired all the assets of DH from P&G. The
assets acquired by the Company include (i) the Duncan Hines(R) brand and
associated trademarks, (ii) substantially all of the equipment for the
manufacture of Duncan Hines(R) products currently located in P&G's Jackson,
Tennessee facility, (iii) proprietary formulations for Duncan Hines(R) products,
(iv) other product specifications and customer lists and (v) rights under
certain contracts, licenses, purchase orders and other arrangements and permits.
The Company is using the acquired assets in its operations of DH. The purchase
price of approximately $445.0 million was based on arms length negotiations
between the Company and P&G. The acquisition was accounted for by using the
purchase method of accounting. The allocation of purchase price has not been
finalized; however, any changes are not expected to be material.
To finance the acquisition of DH and related costs, the Company refinanced its
previously existing senior bank facilities with $450.0 million of senior secured
term debt under the Second Amended and Restated Credit Agreement, dated as of
January 16, 1998 by and among Holdings, the Company, the lenders listed therein,
The Chase Manhattan Bank, The National Westminster Bank PLC, and Swiss Bank
Corporation (the "Aurora Senior Bank Facilities"), and received a capital
contribution from Holdings of $93.8 million. As a result of the new bank
borrowings under the Aurora Senior Bank Facilities, the Company incurred an
early extinguishment of its pre-DH senior secured bank debt and the write-off of
the associated deferred financing charges was recorded in the quarter ended
March 28, 1998 as an extraordinary charge of $1.9 million, net of income taxes
of $1.2 million.
The cost to acquire DH has been allocated to tangible and intangible assets
acquired as follows (in thousands):
Cash paid to acquire assets $ 445,000
Other acquisition costs 5,193
---------
450,193
Cost assigned to tangible assets (40,884)
---------
Cost attributable to intangible assets $ 409,309
=========
VDK HOLDINGS, INC.
On April 8, 1998, New LLC completed a stock purchase of VDK Holdings (See Note 1
- Basis of Presentation). The Company acquired all the capital stock of VDK
Holdings in exchange for $183.5 million of the Company's equity. The acquisition
was accounted for using the purchase method of accounting. The allocation of
purchase price has not been finalized; however, any changes are not expected to
be material.
13
<PAGE>
The cost to acquire VDK Holdings has been allocated to tangible and intangible
assets acquired as follows (in thousands):
Value of stock used to acquire VDK Holdings $ 183,469
Liabilities assumed 376,733
Other acquisition costs 8,431
---------
568,633
Cost assigned to tangible assets (201,238)
---------
Cost attributable to intangible assets $ 367,395
=========
Had the VDK Holdings and DH acquisitions taken place July 1, 1997 and January 1,
1998, and had the VDK Holdings, LC and DH acquisitions taken place January 1,
1997 the unaudited pro forma results of operations for the three month period
ended September 27, 1997 and the unaudited pro forma results of operations for
the nine-month periods ended September 30, 1998 and September 27, 1997,
respectively, would have been as follows (in thousands):
<TABLE>
<CAPTION>
-------------------------------- ---------------------------------
Three Months Ended Nine months Ended
-------------------------------- ---------------------------------
September 30, September 27, September 30, September 27,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(actual) (pro forma) (pro forma) (pro forma)
<S> <C> <C> <C> <C>
Net sales $ 218,768 $ 198,608 $ 665,757 $ 632,534
=============== =============== =============== ===============
Gross profit $ 128,794 $ 114,065 $ 396,084 $ 363,727
=============== =============== =============== ===============
Operating income (loss) $ 11,149 $ 21,860 $ (59,308) $ 77,063
=============== =============== =============== ===============
</TABLE>
NOTE 3 - ACCOUNTS RECEIVABLE - OTHER
------------------------------------
Accounts receivable - other consist of the following (in thousands):
September 30, December 27,
1998 1997
--------------- --------------
Conopco $ - $ 111
Kraft 843 1,057
P&G 5,949 -
Other 257 306
--------------- -------------
$ 7,049 $ 1,474
=============== =============
The balances due as of December 27, 1997 from Conopco and Kraft were comprised
of accounts receivable collected by them on behalf of the Company. The balance
due as of September 30, 1998 from P&G was the amount reimbursable from the
relocation of acquired equipment to the Company's contract manufacturers'
facilities and the balance due from Kraft was comprised of reimbursable
operating expenses.
14
<PAGE>
NOTE 4 - INVENTORIES
--------------------
Inventories consist of the following (in thousands):
September 30, December 27,
1998 1997
--------------- --------------
Raw materials $ 15,779 $ 270
Work in process 371 -
Finished goods 63,125 6,632
Packaging and other supplies 4,114 -
--------------- --------------
$ 83,389 $ 6,902
=============== ==============
NOTE 5 - INCENTIVE PLAN EXPENSE
-------------------------------
During the quarter ended June 30, 1998, the Company recorded non-cash incentive
plan expense of $56.6 million based on the valuation of the Company as of June
30, 1998 and in accordance with the Company's compensation agreement (the
"Aurora Plan") contained in the Amended and Restated Limited Liability Company
Agreement of MBW LLC (the "Agreement"). In accordance with the Aurora Plan, the
previously estimated valuation of the Company as of December 27, 1997 resulted
in recording $2.3 million of incentive plan expense. The valuation of the
Company increased significantly from December 27, 1997 through June 30, 1998 and
resulted in significant incentive plan expense in the current year. In
accordance with the Aurora Plan, all rights under the Aurora Plan were fully
vested as a consequence of the IPO and no additional incentive plan expense will
be recorded. The expense was recorded as a liability of MBW LLC as the sponsor
of the Aurora Plan. However, because the Aurora Plan is for the benefit of
employees of the Company, expense recognized under the Aurora Plan was pushed
down to the Company, and was recorded by the Company as incentive plan expense
and as additional paid-in capital from its parent. MBW LLC satisfied its
liability under the Aurora Plan by distributing shares of the Company's common
stock in connection with the liquidation of MBW LLC (See Note 1 - Basis of
Presentation).
NOTE 6 - TRANSITION EXPENSES
----------------------------
Transition expenses consist of one-time costs incurred to establish the
Company's operations and integrate the acquired businesses, including relocation
expenses, recruiting fees, sales support and other unique transitional expenses.
NOTE 7 - EARNINGS (LOSS) 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
15
<PAGE>
period while also giving effect to all potentially dilutive common shares
that were outstanding during the period. Potentially dilutive common shares
consist of stock options (the dilutive impact is calculated by applying the
"treasury stock method").
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands except per share amounts):
<TABLE>
<CAPTION>
---------------------- ---------------------
Three Months Ended Nine months Ended
---------------------- ---------------------
September September September September
30, 1998 27, 1997 30, 1998 27, 1997
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Numerator:
Earnings (loss) before extraordinary item $ (4,668) $ 1,923 $(64,395) $ 2,268
Extraordinary item, net of tax 7,449 -- 9,325 --
-------- -------- -------- --------
Earnings (loss) $(12,117) $ 1,923 $(73,720) $ 2,268
======== ======== ======== ========
Denominator:
Weighted average number of basic shares 67,000 29,053 49,159 29,053
Effect of dilutive securities -- -- -- --
-------- -------- -------- --------
Weighted average number of diluted shares 67,000 29,053 49,159 29,053
======== ======== ======== ========
Basic and diluted earnings (loss) per share
before extraordinary item $ (0.07) $ 0.07 $ (1.31) $ 0.08
Extraordinary item per share 0.11 -- 0.19 --
-------- -------- -------- --------
Basic and diluted earnings (loss) per share $ (0.18) $ 0.07 $ (1.50) $ 0.08
======== ======== ======== ========
</TABLE>
NOTE 8 - SALE OF ASSETS
-----------------------
On May 1, 1998, VDK completed the sale of its frozen desserts product line
("Desserts Sale") to Mrs. Smith's Bakeries, Inc., a subsidiary of Flowers,
Inc. VDK received approximately $28.0 million from the sale of certain
assets of the frozen desserts product line. The net proceeds from the
Desserts Sale were used to repay $25.0 million in indebtedness under the
Second Amended and Restated Credit and Guarantee Agreement, dated as of
July 9, 1996, among VDK Holdings, VDK, the banks and other financial
institutions parties thereto and The Chase Manhattan Bank, as agent, as
amended (the "VDK Senior Bank Facilities"). Because VDK Holdings was
acquired by the Company shortly before the Desserts Sale, the Company did
not recognize any gain or loss as a result of the sale.
In conjunction with the sale, the Company eliminated certain corporate and
administrative positions related to the desserts business. The Company also
closed the Chambersburg, Pennsylvania facility where the frozen desserts
product line was manufactured. Machinery and equipment related to the
production of certain frozen seafood and vegetable products, which were
located at the Chambersburg facility, were relocated to the Company's Erie,
Pennsylvania and Jackson, Tennessee manufacturing facilities. The Company
has recorded to the balance sheet as an asset held for sale the expected
proceeds from the future sale of the Chambersburg manufacturing facility.
The Company sold this facility in June of 2000.
16
<PAGE>
NOTE 9 - RESTATEMENT
--------------------
As described in Note 1, the September 30, 1998 financial statements have
been restated. A summary of the effects of the restatement follows (in
thousands, except share and per share data):
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, 1998
------------------------------
(As Previously
ASSETS Reported) (As Restated)
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,913 $ 1,913
Accounts receivable 85,623 85,055
Accounts receivable - other 7,209 7,049
Inventories 81,734 83,389
Prepaid expenses and other assets 9,871 7,437
Asset held for sale 3,000 --
Current deferred tax assets 32,523 31,736
-------------- -------------
Total current assets 221,873 216,579
Property, plant and equipment, net 137,453 137,453
Goodwill and other intangible assets, net 1,072,611 1,072,611
Asset held for sale -- 3,000
Other assets 25,331 25,330
-------------- -------------
Total assets $ 1,457,268 $ 1,454,973
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of senior secured term debt $ 20,000 $ 20,000
Senior secured revolving debt facility 50,250 50,250
Accounts payable 50,811 50,811
Accrued liabilities 52,593 68,150
-------------- -------------
Total current liabilities 173,654 189,211
Non-current deferred tax liabilities 10,128 5,047
Other liabilities 12,372 12,372
Senior secured revolving debt facility 65,500 65,500
Senior secured term debt 205,000 205,000
Senior subordinated notes 402,287 402,287
-------------- -------------
Total liabilities 868,941 879,417
-------------- -------------
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; 67,000,000 shares issued and outstanding 670 670
Paid in capital 648,001 648,001
Promissory notes (630) (630)
Accumulated deficit (59,714) (72,485)
-------------- -------------
Total stockholders' equity 588,327 575,556
-------------- -------------
Total liabilities and stockholders' equity $ 1,457,268 $ 1,454,973
============== =============
</TABLE>
17
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1998
----------------------------------------
(As Previously
Reported) (As Restated)
----------------- ------------------
<S> <C> <C>
Net sales $ 220,368 $ 218,768
Cost of goods sold 89,264 89,974
--------- ---------
Gross profit 131,104 128,794
--------- ---------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 20,767 22,677
Trade promotions 49,102 61,638
Consumer marketing 15,928 15,928
--------- ---------
Total brokerage, distribution and marketing expenses 85,797 100,243
Amortization of goodwill and other intangibles 8,623 8,623
Selling, general and administrative expenses 7,200 7,510
Transition expenses 1,269 1,269
--------- ---------
Total operating expenses 102,889 117,645
--------- ---------
Operating income 28,215 11,149
Interest income (123) (123)
Interest expense 15,677 15,682
Amortization of deferred financing expense 372 372
Other bank and financing expenses 54 49
--------- ---------
Income (loss) before income taxes and extraordinary item 12,235 (4,831)
Income tax expense (benefit) 4,132 (163)
--------- ---------
Net income (loss) before extraordinary item 8,103 (4,668)
Extraordinary loss on early extinguishment of debt,
net of tax of $4,520 7,449 7,449
--------- ---------
Net income (loss) $ 654 $ (12,117)
========= =========
Basic and diluted earnings (loss) per share before
extraordinary item $ 0.12 $ (0.07)
Extraordinary item per share 0.11 0.11
--------- ---------
Basic and diluted earnings (loss) per share $ 0.01 $ (0.18)
========= =========
Weighted average number of shares outstanding 67,000 67,000
========= =========
</TABLE>
18
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Nine months Ended
September 30, 1998
----------------------------------------
(As Previously
Reported) (As Restated)
----------------- ------------------
<S> <C> <C>
Net sales $ 509,566 $ 507,966
Cost of goods sold 208,741 209,451
--------- ---------
Gross profit 300,825 298,515
--------- ---------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 48,980 50,890
Trade promotions 109,972 122,508
Consumer marketing 37,423 37,423
--------- ---------
Total brokerage, distribution and marketing expenses 196,375 210,821
Amortization of goodwill and other intangibles 21,409 21,409
Selling, general and administrative expenses 17,104 17,414
Incentive plan expense 56,583 56,583
Transition expenses 5,716 5,716
--------- ---------
Total operating expenses 297,187 311,943
--------- ---------
Operating income (loss) 3,638 (13,428)
Interest income (544) (544)
Interest expense 50,075 50,099
Amortization of deferred financing expense 1,472 1,472
Other bank and financing expenses 194 170
--------- ---------
Loss before income taxes and extraordinary item (47,559) (64,625)
Income tax expense (benefit) 4,065 (230)
--------- ---------
Net loss before extraordinary item (51,624) (64,395)
Extraordinary loss on early extinguishment of debt,
net of tax of $5,704 9,325 9,325
--------- ---------
Net loss $ (60,949) $ (73,720)
========= =========
Basic and diluted loss per share before
extraordinary item $ (1.05) $ (1.31)
Extraordinary item per share 0.19 0.19
--------- ---------
Basic and diluted loss per share $ (1.24) $ (1.50)
========= =========
Weighted average number of shares outstanding 49,159 49,159
========= =========
</TABLE>
19
<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
Registration Statement on the Form S-1, as amended, of Aurora Foods Inc.,
effective as of June 25, 1998 relating to the Company's initial public offering
of equity securities.
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the historical
financial information included in the Financial Statements and notes to the
financial statements. Unless otherwise noted, years (1998 and 1997) in this
discussion refer to the Company's September-ending quarter.
Restatements
Prior to 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 Form
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 and
related footnotes as of and for the three and nine months ended September 30,
1998, have been included in the condensed consolidated financial statements
included herein.
For the three and nine months ended September 30, 1998, these misstatements
primarily understated trade promotions expense by $12.5 million, overstated net
sales by $1.6 million, understated brokerage and distribution expense by $1.9
million, understated cost of goods sold by $0.7 million and understated selling
general and administrative expenses by $0.3 million. After adjusting for the
misstatements, the Company recalculated its income tax provision reducing income
tax expense by $4.3 million. A summary of the effect of the restated is set
forth in Note 9 to the Condensed Financial Statements.
Trade promotions expense includes the costs paid to retailers to promote the
Company's products. Such costs include amounts paid to customers for space in
the retailers' stores ("slotting fees"), amounts paid to provide samples of the
Company's products to consumers, and amounts paid to obtain favorable display
positions in the retailers' stores. These promotions are offered to customers in
lump sum payments and as rate per unit allowances as dictated by industry norms.
The Company expenses slotting fees when incurred or, when under a contact, over
a period not to exceed 12 months and expenses other trade promotions in the
period during which the deals occur. Customers collect payment from the Company
for trade promotion expenses utilizing one of two primary methods. In some
cases, the Company includes a separate line on the face of the invoice that
reduces the net amount
20
<PAGE>
invoiced. This is typically referred to as an "off-invoice" amount. The Company
records the sale to the customer at the list price of its product when the
product is shipped and records the cost of the off-invoice amount as an expense
in the appropriate period in accordance with Company's policy. In order to
collect money from the Company for trade promotion deals that are not provided
in an "off-invoice" form, customers deduct specified deal costs from their
payments on other invoices. The Company records the sale to the customer at the
list price product when the product is shipped. In this case, however, the
Company estimates the amount of trade promotion expense and accrues it at the
time of shipment. As customers take deductions from their invoices upon payment,
the Company charges these deductions against the accrual.
Forward-Looking Statements
Certain statements contained in this report, 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 actions of the Company's competitors; general
economic and business conditions; industry trends; demographics; raw material
costs; the continued success of management's strategy; integration of acquired
businesses into the Company; terms and development of capital; and changes in,
or the failure or inability to comply with, governmental rules and regulations,
including, without limitation, FDA and environmental rules and regulations.
Given these uncertainties undue reliance should not be placed on such forward
looking statements. The Company disclaims an obligation to update any such
factors or to publicly announce the results of any revisions to any other
forward-looking statements contained herein to reflect future events or
developments.
Year 2000 Compliance
The dates on which the Company believes Year 2000 compliance will be completed
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, or that there will not be
a delay in, or increased costs associated with, the implementation of Year 2000
compliance. Specific factors that might cause differences between the estimates
and actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer code, timely responses to and corrections by third-parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-parties and the interconnection
of global businesses, the Company cannot ensure its ability to timely and
cost-effectively resolve problems associated with the Year 2000 issue that may
affect its operations and business, or expose it to third-party liability.
21
<PAGE>
Results of Operations
The following tables have been restated as discussed above and set forth on an
actual and pro forma basis, for the periods indicated, the percentage, which the
items in the Statement of Operations bear to net sales.
22
<PAGE>
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Actual Three Months Ended
---------------------------------------------
September 30, 1998 September 27, 1997
-------------------- -------------------
(as restated) (1)
<S> <C> <C> <C> <C>
Net sales $218,768 100.0% $49,125 100.0%
Cost of goods sold 89,974 41.1 15,229 31.0
-------- ----- ------- -----
Gross profit 128,794 58.9 33,896 69.0
-------- ----- ------- -----
Brokerage, distribution and
marketing expenses
Brokerage and distribution 22,677 10.4 5,701 11.6
Trade promotions 61,638 28.2 8,734 17.8
Consumer marketing 15,928 7.3 4,889 9.9
-------- ----- ------- -----
Total brokerage, distribution
and marketing expenses 100,243 45.8 19,324 39.3
Amortization of goodwill and
other intangibles 8,623 3.9 2,170 4.4
Selling, general and
administrative expenses 7,510 3.4 1,267 2.6
Transition expenses 1,269 0.6 989 2.0
-------- ----- ------- -----
Total operating expenses 117,645 53.8 23,750 48.3
-------- ----- ------- -----
Operating income 11,149 5.1 10,146 20.7
Interest income (123) (0.1) (5) 0.0
Interest expense 15,682 7.2 6,624 13.5
Amortization of deferred
financing expense 372 0.2 293 0.6
Other bank and financing expenses
49 0.0 29 0.1
-------- ----- ------- -----
(Loss) income before income
taxes and extraordinary item (4,831) (2.2) 3,205 6.5
Income tax (benefit) expense (163) (0.1) 1,282 2.6
-------- ----- ------- -----
Net (loss) income before
extraordinary item (4,668) (2.1) 1,923 3.9
Extraordinary loss on early
extinguishment of debt, net of
tax of $4,520 7,449 3.4 - 0.0
-------- ----- ------- -----
Net (loss) income $(12,117) (5.5)% $ 1,923 3.9%
======== ===== ======= =====
Basic and diluted (loss)
earnings per share before
extraordinary item $ (0.07) $ 0.07
Extraordinary item per share 0.11 -
-------- -------
Basic and diluted (loss)
earnings per share $ (0.18) $ 0.07
======== =======
Weighted average number of
shares outstanding 67,000 29,053
======== =======
</TABLE>
(1) As restated. See "-Restatements" and Note 9 to the condensed financial
statements.
23
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 (AS RESTATED)
COMPARED TO THREE MONTHS ENDED SEPTEMBER 27, 1997
Net Sales. Net sales for the quarter were $218.8 million, which was an increase
of $169.6 million as compared to net sales in the prior year quarter of $49.1
million. The prior year quarter included sales of the Mrs. Butterworth's(R)
(acquired December 31, 1996) and Log Cabin(R) (acquired July 1, 1997) brands,
which were the only businesses owned by the Company at the time. Results for the
current quarter include the results of the Mrs. Butterworth's(R) brand, the Log
Cabin(R) brand, the Duncan Hines(R) brand (acquired January 16, 1998) and the
brands that comprise the Van de Kamp's, Inc. business (acquired April 8, 1998).
Pro Forma Net Sales. Net sales for the quarter ended September 30, 1998
were $218.8 million, which was a 10.2% increase over pro forma net
sales of $198.6 million in the 1997 quarter (which reflect all the
acquisitions noted as if they had occurred on January 1, 1997). The
sales increase in the quarter was the result of higher prices for the
Company's Duncan Hines(R) baking mix products, unit volume growth and
product mix shifts to higher priced items in the Company's frozen pizza
and frozen seafood segments.
Unit volumes increased 6.8% to 12.6 million cases from 11.8 million
cases in the prior year. Growth in case volume as compared to the prior
year quarter was driven by a 3.7% increase in frozen seafood products,
a 4.0% increase in Log Cabin(R) syrup products, a 36.7% increase in
Duncan Hines(R) brownie mixes, a 1.0% increase in frozen breakfast
volumes and an increase in the Company's foodservice volumes. Unit
sales of Duncan Hines(R) cake mixes, which were not promoted in the
September quarter, declined 1.0%, unit sales of Celeste(R) frozen pizza
declined 5.1% and unit sales of Mrs. Butterworth's(R) products declined
6.9%.
The Company's net sales growth included a 4.2% increase related to
pricing and product mix shifts to higher priced items. The competitive
price equalization program initiated on the Duncan Hines(R) brand in
March 1998, whereby the Company increased the list price on cake and
frosting products to parity with the competition, contributed
approximately $11.7 million in net sales during the current quarter.
This resulted in a dollar sales increase of 19.4% for Duncan Hines(R)
products in the quarter. The Company initiated a price increase,
effective July 1, 1998, on its retail syrup brands to offset an
increase in the cost of corn syrup. In addition, product mix shifts in
both the frozen pizza and frozen seafood product lines caused dollar
sales for those segments to increase at a higher rate than unit sales.
Sales of premium Mama Celeste Fresh-Baked Rising Crust frozen pizza
products, which sell at a higher list price per case than other
Celeste(R) frozen pizza products, contributed to increased dollar
sales. Similarly, sales of premium frozen fish fillets for the
Company's frozen seafood brands (Van de Kamp's(R) and Mrs. Paul's(R))
contributed to increased dollar sales for the frozen seafood business.
Product mix shifts to higher priced items and higher prices on baking
mix and syrup products were partially offset by lower average prices on
the Company's foodservice volumes.
24
<PAGE>
Gross Profit. Gross profit was 58.9% of net sales, which was lower than the
gross profit in the prior year quarter of 69.0%. The decline was due to the
inclusion of Duncan Hines(R) baking mix products and the Van de Kamp's, Inc.
business, both of which have lower gross profit margins than syrup products. As
noted previously, the Company has offset the increase in the cost of corn syrup
by a price increase on its syrup products effective July 1, 1998.
Pro Forma Gross Profit. On a pro forma basis, gross profit for the
quarter was 58.9% of net sales as compared to the prior year quarter of
57.4%. The increase was the result of the pricing action initiated on
the Duncan Hines(R) business, which elevated the gross margin on baking
mix products, and cost savings achieved from outsourcing the production
of Log Cabin(R) syrup products.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses for the quarter increased $80.9 million as compared to the
prior year quarter due to the inclusion of the acquired businesses and increased
support for the Log Cabin(R) business. As a percentage of net sales, brokerage,
distribution and marketing expenses were 45.8%, which was 6.5 percentage points
higher than the prior year quarter of 39.3%.
Pro Forma Brokerage, Distribution and Marketing Expenses. On a pro
forma basis, brokerage, distribution and marketing expenses increased
$25.3 million to 45.8% of net sales, which was above the prior year
quarter of 37.7%. Brokerage and distribution expenses increased
slightly compared to last year on a dollar basis, but remained
relatively constant as a percentage of net sales at 10.4% compared to
10.5% for the prior year period. Marketing expenses increased $23.5
million and were 35.4% of net sales, which was 8.2 percentage points
higher than the prior year quarter of 27.2%. The increase was primarily
attributable to trade and consumer-marketing programs executed on the
Duncan Hines(R) business to support the higher list pricing on cake and
frosting products. The prior owner, P&G, followed an every-day-low-
price strategy and, consequently, the prior year period included
comparatively little marketing support. The quarter also included
increased trade and advertising on the Log Cabin(R) business and
increased consumer promotion programs for frozen seafood and increased
trade merchandising and slotting expenses related to the launch of the
Company's new pizza product, Mama Celeste Fresh-Baked Rising Crust, in
California and Florida.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles increased to $8.6 million from $2.2 million in the prior year
quarter. The increase of $6.4 million was due to the additional amortization
expense generated by the goodwill recorded in connection with the brands
acquired by the Company over the past year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $7.5 million were $6.2 million higher than the prior
period expense of $1.3 million. The increase was due to the inclusion of the Van
de Kamp's, Inc. business and additional infrastructure and staffing required by
the dry grocery division to operate the Log Cabin(R) and Duncan Hines(R)
businesses.
Transition Expenses. Transition expenses were $1.3 million as compared to $1.0
million recorded in the prior year quarter and represent one-time costs incurred
to establish the
25
<PAGE>
Company's operations and integrate the acquired businesses. The increase was due
to the acquisitions of the Log Cabin(R) and Duncan Hines(R) brands.
Operating Income. Operating income of $11.1 million was $1.0 million higher than
the operating income last year of $10.1 million.
Pro Forma Operating Income. On a pro forma basis, operating income of
$11.1 million was 49.0% lower than the prior year quarter of $21.9
million. Operating income was 5.1% of net sales and 11.0% of net sales
for the current and prior year quarters, respectively. The decrease as
a percentage of net sales was due primarily to higher marketing
expenses as a percentage of net sales to support the future growth of
the brands and new products. Excluding the effects of transition
expenses, operating income for the quarter was $12.4 million compared
to operating income in the prior year quarter of $22.8 million.
Interest Expense and Amortization of Deferred Financing Expense. The aggregate
of net interest expense and amortization of deferred financing expense of $15.9
million was higher than the prior year quarter amount of $6.9 million. The
increase was due to the additional debt associated with the acquisitions over
the past year. Net interest expense in the current quarter includes
approximately $0.6 million of interest expense attributable to the VDK Notes,
which were redeemed on July 31, 1998 (See Note 1 -Basis of Presentation), and
the carrying cost of transitional Duncan Hines(R) inventories.
Income Tax Expense. Income taxes for the current year quarter were a benefit of
$0.2 million and were an expense of $1.3 million in the prior year quarter. The
effective tax rate on the current year quarter's benefit was 27.9% (including
the impact of the extraordinary item) compared to an effective tax rate of 40.0%
in 1997.
Net (Loss) Income. The net loss before the extraordinary charge in 1998 was $4.7
million compared to net income in the prior year quarter of $1.9 million. The
net loss for the quarter, after an extraordinary charge in the net of tax amount
of $7.4 million, was $12.1 million. The extraordinary charge was the write-off
of deferred financing costs associated with the Aurora Senior Bank Facilities,
which were repaid in connection with the refinancing consummated at the time of
the IPO (See Note 1 - Basis of Presentation).
26
<PAGE>
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Actual Nine Months Ended
-------------------------------------------------------
September 30, 1998 September 27, 1997
------------------------- ------------------------
(as restated) (1)
<S> <C> <C> <C> <C>
Net sales $ 507,966 100.0 % $ 92,016 100.0 %
Cost of goods sold 209,451 41.2 29,500 32.1
------------ ------- ----------- -------
Gross profit 298,515 58.8 62,516 67.9
------------ ------- ----------- -------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 50,890 10.0 10,400 11.3
Trade promotions 122,508 24.1 15,807 17.2
Consumer marketing 37,423 7.4 9,256 10.1
------------ ------- ----------- -------
Total brokerage, distribution and marketing
expenses 210,821 41.5 35,463 38.6
Amortization of goodwill and other intangibles 21,409 4.2 3,828 4.1
Selling, general and administrative expenses 17,414 3.4 3,594 3.9
Incentive plan expense 56,583 11.1 - 0.0
Transition expenses 5,716 1.1 1,313 1.4
------------ ------- ----------- -------
Total operating expenses 311,943 61.4 44,198 48.0
------------ ------- ----------- -------
Operating (loss) income (13,428) (2.6) 18,318 19.9
Interest income (544) (0.1) (86) 0.0
Interest expense 50,099 9.9 11,800 12.8
Amortization of deferred financing expense 1,472 0.3 2,771 3.0
Other bank and financing expenses 170 0.0 53 0.0
------------ ------- ----------- -------
(Loss) income before income
taxes and extraordinary item (64,625) (12.7) 3,780 4.1
Income tax (benefit) expense (230) (0.0) 1,512 1.6
------------ ------- ----------- -------
Net (loss) income before
extraordinary item (64,395) (12.7) 2,268 2.5
Extraordinary loss on early extinguishment
of debt, net of tax of $5,704 9,325 1.8 - 0.0
------------ ------- ----------- -------
Net (loss) income $ (73,720) (14.5)% $ 2,268 2.5 %
============ ======= =========== =======
Basic and diluted (loss) earnings per
share before extraordinary item $ (1.31) $ 0.08
Extraordinary item per share 0.19 -
------------ -----------
Basic and diluted (loss) earnings per share $ (1.50) $ 0.08
============ ===========
Weighted average number of shares outstanding 49,159 29,053
============ ===========
</TABLE>
(1) As restated. See "-Restatements" and Note 9 to the condensed financial
statements.
27
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 (AS RESTATED)
COMPARED TO NINE MONTHS ENDED SEPTEMBER 27, 1997
Net Sales. Net sales for the nine-month period were $508.0 million, which was an
increase of $416.0 million compared to net sales in the comparable 1997 period
of $92.0 million. The prior year included sales of the Mrs. Butterworth's(R)
brand from January 1, 1997 and the Log Cabin(R) brand from July 1, 1997, which
were the only businesses owned by the Company at the time. Results for the
current year nine-month period include the results of the Mrs. Butterworth's(R)
brand, the Log Cabin(R) brand, the Duncan Hines(R) brand from January 16, 1998
and the Van de Kamp's, Inc. business from April 9, 1998.
Pro Forma Net Sales. Pro forma net sales (which reflect all the
acquisitions noted previously as if they had occurred on January 1,
1997) for the nine months ended September 30, 1998 were $665.8 million,
which was a 5.3% increase over net sales in the comparable 1997 period
of $632.5 million. Sales growth in the nine-month period was due
primarily to unit volume growth in the frozen food division and higher
prices for the Company's Duncan Hines(R) baking mix products.
Unit volumes increased 3.6% to 36.2 million cases from 34.9 million
cases in the prior year period. The frozen food division unit volumes
increased 9.0% versus last year, driven by a 4.1% increase in frozen
breakfast products, a 1.1% increase in Celeste(R) frozen pizza and an
increase in foodservice volumes compared to a relatively low sales base
in the 1997 period. Unit volumes for frozen seafood declined by 3.0%
due to difficult comparisons versus the prior year period, which
featured a number of new product introductions, as well as slower
category growth relative to 1997. Unit volumes for the dry grocery
division declined by 0.7% versus the prior year period. Unit volumes of
the Company's syrup brands increased 0.7% while volumes of Duncan
Hines(R) baking mix products declined 0.9%. Unit volumes for Duncan
Hines(R) were negatively impacted in the first half of 1998 by a
caseload into retail channels initiated by P&G in the latter part of
1997 prior to P&G's divestiture of the business.
The Company's net sales growth included a 1.9% increase related to
pricing, which was primarily attributable to the competitive price
equalization program initiated on the Duncan Hines(R) brand in March
1998, as previously discussed, whereby the Company increased the list
price on cake and frosting products to parity with the competition. The
price equalization program generated approximately $21.4 million in net
sales during the nine-month period. In addition, product mix shifts in
both the frozen pizza and frozen seafood product lines have caused
dollar sales for those segments to increase at a higher rate than unit
sales. Dollar sales increased for the Celeste(R) business due to sales
of premium Mama Celeste Fresh-Baked Rising Crust frozen pizza products,
which sell at a higher list price per case than other Celeste(R) frozen
pizza products. Sales of premium frozen fish fillets for the Company's
frozen seafood brands (Van de Kamp's(R) and Mrs. Paul's(R)) also
resulted in dollar sales outpacing volumes for the frozen seafood
business. Product mix shifts to higher priced items and higher prices
on baking mix and syrup products were partially offset by lower average
prices on the Company's foodservice volumes.
28
<PAGE>
Gross Profit. Gross profit was 58.8% of net sales, which was lower than the
gross profit in the comparable 1997 period of 67.9%. The decline was due to the
inclusion of Duncan Hines(R) baking mix products and the Van de Kamp's, Inc.
business, both of which have lower gross profit margins than syrup products.
Also, the cost of corn syrup increased over the 1997 period, which the Company
has offset with a price increase on its syrup products effective July 1, 1998.
Pro Forma Gross Profit. On a pro forma basis, gross profit was 59.5% of
net sales as compared to the prior year gross profit of 57.5%. The
increase was due to the pricing action initiated on the Duncan Hines(R)
business, which elevated the gross margin on baking mix products, and
cost savings achieved from outsourcing the production of syrup
products.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses for the nine-month period increased $175.4 million as
compared to the prior year period due to the inclusion of the acquired
businesses. As a percentage of net sales, brokerage, distribution and marketing
expenses were 41.5%, which was 2.9 percentage points higher than the prior year
period of 38.6%.
Pro Forma Brokerage, Distribution and Marketing Expenses. On a pro
forma basis, brokerage, distribution and marketing expenses increased
$50.5 million to 42.6% of net sales, which was above the comparable
1997 period of 36.9%. Brokerage and distribution expenses increased
$3.3 million over last year but remained flat as a percentage of net
sales at 9.9% for both years. Marketing expenses increased $47.2
million and were 32.7% of net sales, which was 5.7 percentage points
higher than the prior year period of 27.0%. The increase was primarily
attributable to trade and consumer marketing programs executed on the
Duncan Hines(R) business, as previously described to compensate for the
higher list pricing strategy initiated on cake and frosting products.
The balance of the increase was due to consumer promotions and media
support for the Log Cabin(R) brand where none existed in the prior
year, and consumer promotions and slotting expenses related to the
Company's new pizza product, Mama Celeste Fresh-Baked Rising Crust, and
new premium grilled frozen seafood products.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles increased to $21.4 million from $3.8 million in the comparable
prior year period. The increase of $17.6 million was due to the additional
amortization expense generated by the goodwill recorded in connection with the
brands acquired by the Company over the past year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $17.4 million were $13.8 million higher than the
prior year period expense of $3.6 million. The increase was due to the inclusion
of Van de Kamp's, Inc. and the additional infrastructure and staffing required
by the dry grocery division to operate the Log Cabin(R) and Duncan Hines(R)
businesses. Selling, general and administrative expenses were 3.4% of net sales,
which was 0.5 percentage points lower than the 3.9% experienced in the prior
year period. The decrease as a percentage of net sales reflects the efficiency
gained as the size of the Company has grown dramatically over the prior year.
29
<PAGE>
Incentive Plan Expense. For the nine months ended September 30, 1998, the
Company recorded non-cash incentive plan expense of $56.6 million based on the
current valuation of the Company and in accordance with the Aurora Plan
contained in the MBW LLC Agreement (See Note 5 -Incentive Plan Expense).
Transition Expenses. Transition expenses were $5.7 million as compared to $1.3
million recorded in the prior year period and represent one-time costs incurred
to establish the Company's operations and integrate the acquired businesses. The
increase was due to the acquisitions of the Log Cabin(R) and Duncan Hines(R)
brands.
Operating Income. The Company incurred an operating loss of $13.4 million in
1998 compared to operating income in the prior year period of $18.3 million.
Excluding the effects of the incentive plan expense and transition expenses, the
Company would have achieved operating income of $48.9 million in the nine-month
period versus operating income of $19.6 million in the prior year period. The
significant increase versus the prior year period was due to the inclusion of
operating income generated by the acquired businesses.
Pro Forma Operating (Loss) Income. On a pro forma basis, the Company
incurred an operating loss of $59.3 million compared to operating
income in the prior year period of $77.1 million. Excluding the effects
of the incentive plan expense and transition expenses, the Company
would have achieved operating income of $3.0 million in the nine-month
period versus the prior year period operating income of $78.4 million.
The decrease in operating income was primarily due to higher marketing
expenses that were increased to drive the Company's growth objectives.
Specifically, marketing spending was increased to establish media
programs where none existed in the past, support the change to a
high-low pricing strategy for Duncan Hines(R) so the brand would have
parity with its competition, and support the introduction of new
products in the frozen food division.
Interest Expense and Amortization of Deferred Financing Expense. The aggregate
of net interest expense and amortization of deferred financing expense in the
nine-month period of $51.0 million was higher than the prior year amount of
$14.5 million. The increase was due to the additional debt associated with the
acquisitions over the past year.
Income Tax Expense. Income taxes recorded for the current year nine-month period
were a benefit of $0.2 million and were an expense of $1.5 million in the prior
year. The effective tax rate on the benefit for the current nine-month period
was less than the anticipated rate due primarily to the effect of the
non-deductible incentive plan expense.
Net (Loss) Income. The Company incurred a net loss of $73.7 million as compared
to net income recorded for the prior year period of $2.3 million. In addition to
the incentive plan expense recorded in the current nine-month period, the
Company also incurred an extraordinary charge in the net of tax amount of $9.3
million as a result of the write-off of deferred financing charges associated
with the early extinguishment of debt facilities.
30
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, the Company used $6.8 million of
cash to fund its operations. Net loss plus non-cash charges provided $21.5
million of operating cash flow. An increase in net working capital used $28.3
million of cash during the nine-month period. As compared to December 27, 1997,
current assets, excluding cash and current deferred tax assets, increased $159.9
million and current liabilities, excluding current maturities of senior secured
debt, increased $95.1 million. The increase in both current assets and current
liabilities was the result of four factors: (1) the inclusion of all items of
working capital related to the Log Cabin(R) and Duncan Hines(R) businesses,
which had previously been recorded on the prior owners' books in accordance with
the respective transition services agreements, (2) the inclusion of all items of
working capital related to the Van de Kamp's, Inc. business acquired on April 8,
1998, (3) increased inventory levels of certain Duncan Hines(R) products
produced by P&G in advance of relocating certain production equipment to the
Company's contract manufacturers' production facilities, and (4) increased
inventory of baking mix products prior to the December quarter, which is a high
seasonal index quarter for the sale of Duncan Hines(R) products. The increase in
current assets, primarily additional receivable balances and higher inventory
levels, was greater than the inclusion of current liability balances from the
respective acquisitions, which caused the use of cash for working capital needs
to be $28.3 million. Inventory balances are expected to remain near current
levels as the Company continues to carry Duncan Hines(R) transitional
inventories while production equipment is decommissioned and relocated to the
Company's contract manufacturers' production facilities over the next nine
months and as production of frozen seafood is increased to accommodate the high
seasonal index in the March quarter of 1999.
Net cash used in investing activities was $455.0 million for the nine months
ended September 30, 1998. The acquisitions of Duncan Hines(R) and VDK Holdings,
Inc. used cash of $450.2 million and $8.4 million, respectively. The Desserts
Sale (See Note 8 - Sale of Assets) generated net proceeds of $28.0 million.
During the nine months ended September 30, 1998, the Company spent $15.3 million
on capital expenditures, net of $6.4 million received from P&G as reimbursement
for costs incurred in connection with the relocation of manufacturing equipment
to the Company's contract manufacturers' production facilities. The Company
spent $10.9 million primarily to expand capacity for its frozen breakfast
products and establish internal production of its new rising crust frozen pizza
product and $4.4 million to relocate and install acquired manufacturing
equipment. The Company expects to spend approximately $22.0 million on capital
expenditures in 1998 and anticipates that these expenditures will be funded from
internal cash flow.
During the nine months ended September 30, 1998, financing activities provided
cash of $459.0 million. To finance the acquisition on January 16, 1998 of Duncan
Hines(R) and related expenses, the Company borrowed $450.0 million of senior
secured term debt under the Aurora Senior Bank Facilities and received a $93.8
million capital contribution from Holdings (See Note 2 - Acquisitions). The
Company repaid the senior secured term debt and senior secured revolving debt
facility that existed prior to the Aurora Senior Bank Facilities in the amount
of $77.5 million and incurred an extraordinary charge for the write-off of
deferred financing charges in connection with the early extinguishment of debt
in the net of tax amount of $1.9 million. The Company used the net proceeds from
the Desserts Sale to repay $25.0 million on the VDK Senior Bank Facilities.
31
<PAGE>
In conjunction with the consummation of the IPO on July 1, 1998 (See Note 1 -
Basis of Presentation), the Company used net proceeds from the sale of
12,909,372 of common equity securities in the amount of $254.8 million and
proceeds from the Company's New Senior Bank Facilities and New Notes in the
amount of $324.0 million and $200.0 million, respectively, to repay $647.8
million of senior secured debt and $114.5 million of senior subordinated notes,
including the associated redemption premium, and pay associated fees and
expenses. As a result of the early extinguishment of senior secured debt, the
Company recorded in the quarter ended September 30, 1998 an extraordinary charge
of $7.4 million, net of income tax of $4.5 million, for the write-off of
deferred financing charges. The remaining proceeds and repayments during the
nine-month period were periodic draws and repayments under the Company's senior
secured revolving debt facilities.
At September 30, 1998, the Company had $1.9 million of cash and cash equivalents
and an unused commitment of $59.3 million on its senior secured revolving debt
facility under the Company's New Senior Bank Facilities. The Company's primary
sources of liquidity are cash flows from operations and available borrowings
under the $175.0 million revolving debt facility. Management believes the
available borrowing capacity under the revolving debt facility combined with
cash provided by operations will provide the Company with sufficient cash to
fund operations as well as to meet existing obligations.
Subsequent Event
As a result of the restatements, 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 in 2000 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 of 2000, 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 Company solicited the consent (the "Consent Solicitation") of the
holders of the Company's 8 3/4% Senior Subordinated Notes due 2008 and
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 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 senior subordinated notes,
the remaining contingencies associated with the Company's senior secured debt
were resolved.
The Company is highly leveraged. At November 10, 2000, the Company has
outstanding approximately $1.1 billion in aggregate principal amount of
indebtedness for borrowed money. The degree to which the Company is leveraged
results in significant cash interest expense and principal repayment
obligations and such interest expense may increase with respect to its
revolving credit facility based upon changes in prevailing interest rates.
This leverage may, among other things, affect the ability of the Company to
obtain additional financing, or adjust to changing market conditions. In
addition, the Company is limited in its ability to pursue additional
acquisitions.
The Company believes that its cash flow from operations and, if necessary,
the proceeds from asset sales will be sufficient to meet its payment
obligations under its debt obligations and other operational requirements.
YEAR 2000
The Year 2000 issue, which is common to most corporations, concerns the
inability of information systems, including computer software programs as well
as non-information technology systems, to properly recognize and process
date-sensitive information related to the year 2000 and beyond. The Company
believes that it will be able to achieve Year 2000 compliance by the end of 1999
and does not currently anticipate any material disruption of its operations as a
result of any failure by the Company to be Year 2000 compliant. However, to the
extent the Company is unable to achieve Year 2000 compliance, the Company's
business and results of operations could be materially affected. This could be
caused by computer-related failures in a number of areas including, but not
limited to, the failure of the Company's financial systems or manufacturing and
inventory management systems.
Efforts to identify the risks associated with Year 2000 compliance began in 1997
by identifying the potential areas of exposure. The Company's information
technology was split into three areas of concern: internal mission-critical
systems and applications, internal non-mission-critical systems and applications
and external data sources and trading partners.
Compliance within internal mission-critical systems and applications is nearly
complete. Given the relatively recent incorporation of the Company, most systems
and applications have been purchased within the last year or two. All purchases
made were for systems that were Year 2000 compliant or for those that had
documented plans and dates for future compliance. Currently, the Warehouse
Management System in the frozen food division, which accesses a compliant
information database, is the only remaining mission-critical application to be
updated for compliance. Migration to the latest compliant version of the
application is scheduled for completion by March of 1999. Internal
non-mission-critical systems and applications are currently being analyzed and
are presently expected to be compliant by the middle of 1999.
32
<PAGE>
In addition to reviewing its internal systems, the Company has polled or is in
the process of polling its third-party vendors, customers and freight carriers
to determine whether they are Year 2000 compliant and to attempt to identify any
potential issues. If the Company's customers and vendors do not achieve Year
2000 compliance before the end of 1999, the Company may experience a variety of
problems which may have a material adverse effect on the Company. Among other
things, to the extent the Company's customers are not Year 2000 compliant by the
end of 1999, such customers may lose EDI capabilities at the beginning of the
year 2000. Where EDI communication would no longer be available, the Company
expects to utilize voice, facsimile and/or mail communications in order to
receive customer orders and process customer billings. To the extent the
Company's vendors or co-packers are not Year 2000 compliant by the end of 1999,
such vendors or co-packers may fail to deliver ordered materials and products to
the Company and may fail to bill the Company properly and promptly.
Consequently, the Company may not have the correct inventory to send to its
customers and may experience a shortage or surplus of inventory. Although the
Company does not currently have a plan for addressing these potential problems
with respect to its vendors, the Company has alternative sources of supply.
To date, the Company has incurred and expensed approximately $0.1 million
related to the assessment and development of the remediation plan and the
purchase of new compliant hardware and software. Management anticipates spending
and expensing an additional $0.8 million through the end of 1999 to implement
its entire Year 2000 plan. The costs of the project and the date on which the
Company plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived using numerous assumptions of future events
including the continued availability of certain resources, third-parties' Year
2000 readiness and other factors.
The Company expects to have contingency plans prepared by February of 1999 so
that the Company's critical business processes can be expected to continue to
function on January 1, 2000 and beyond. The Company's contingency plans will be
structured to address both remediation of systems and their components and
overall business operating risk. These plans are intended to mitigate both
internal risks as well as potential risks in the supply chain of the Company's
suppliers and customers.
IMPACT OF ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Company). FAS 133 requires that all derivatives be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Management of the Company
anticipates that, due to its limited use of derivative instruments, the adoption
of FAS 133 will not have a significant effect on the Company's results of
operations or its financial position.
The Company currently does not use derivative financial instruments for trading
or speculative purposes. In accordance with the New Senior Bank Facilities (as
defined in Note 1 - Basis of Presentation), the Company is required to enter
into interest rate protection
33
<PAGE>
agreements to the extent necessary to provide that, when combined with the
Company's senior subordinated notes, at least 50% of the Company's aggregate
indebtedness is subject to either a fixed interest rate or interest rate
protection agreements. Accordingly, the Company's interest rate agreements are
as follows:
Interest Rate Collar Agreements. At September 30, 1998, the Company was party to
two interest rate collar agreements. On August 22, 1996 the Company entered into
a three year interest rate collar agreement with a notional principal amount of
$70.0 million, a cap rate of 6.5% (plus the applicable margin) and a floor rate
of 5.75% (plus the applicable margin). On November 26, 1997, the Company entered
into a three year interest rate collar agreement with a notional principal
amount of $50.0 million, a cap rate of 7.5% (plus the applicable margin) and a
floor rate of 5.50% (plus the applicable margin).
Interest Rate Swap Agreement. The Company entered into an interest rate swap
agreement on March 17, 1998. The notional principal amount covered under the
interest rate swap agreement is $150.0 million and the term is three years. The
effective swap rate is 5.81%.
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.
34
<PAGE>
PART II
-------
OTHER INFORMATION
-----------------
ITEM 1: 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 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.
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 announced on January 16, 2001 that it reached a preliminary
agreement to settle the securities class action and derivative lawsuits pending
against the Company and its former management team in the US District Court in
the Northern District of California, pending court approval of a definitive
agreement and related matters.
Under terms of the agreement, Aurora will pay the class members $26 million in
cash and $10 million in common stock. Separately, the Company has entered into
a preliminary agreement with certain members of former management to transfer
between approximately 3 million and 3.6 million shares of Aurora common stock to
the Company, in consideration for a resolution of any civil claims that the
Company may have, and partially conditioned upon future events and
circumstances.
The Company expects that the cash component of the settlement with the Company's
shareholders will be funded entirely by the Company's insurance. With respect
to the stock component of the settlement, the stock received from former
management would be sufficient, at current share prices, to satisfy Aurora's
obligation without issuing additional shares. The actual number of shares needed
to fund the stock component of the settlement will be based on average share
prices determined at later dates.
The terms of the agreement call for the Company to continue to implement certain
remedial measures, including the adoption of an audit committee charter, the
reorganization of its finance department, the establishment of an internal audit
function and the institution of a compliance program, as consideration for
resolution of the derivative litigation.
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.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
------ -------
3.1 Certificate of Incorporation of A Foods Inc., filed with the Secretary
of State of the State of Delaware on June 19, 1998. (Incorporated by
reference to Exhibit 3.1 to Aurora Foods Inc.'s Form S-1 filed on
April 22, 1998, as amended (the "S-1")).
3.2 Amended and Restated By-laws of Aurora Foods Inc. (Incorporated by
reference to Exhibit 3.2 to the S-1).
4.1 Indenture dated as of July 1, 1998 by and between Aurora Foods Inc.
and Wilmington Trust Company (Incorporated by reference to Exhibit
4.13 to the S-1).
4.2 Specimen Certificate of 8 3/4% Senior Subordinated Notes due 2008.
(Included in Exhibit 4.1 hereto).
4.3 Specimen Certificate of the Common Stock. (Incorporated by reference
to Exhibit 4.1 to the S-1).
4.4 Registration Rights Agreement, dated July 1, 1998, between Aurora
Foods Inc. and Chase Securities Inc., Goldman, Sachs & Co. and Natwest
Capital Markets Limited (Incorporated by reference to Exhibit 4.15 to
the S-1).
10.1 Third Amended and Restated Credit Agreement, dated as of July 1, 1998,
among Aurora Foods Inc., as borrower, the Lenders listed therein, The
Chase Manhattan Bank, as Administrative Agent, National Westminster
Bank PLC, as Syndication Agent and Swiss Bank Corporation, as
Documentation Agent. (Incorporated by reference to Exhibit 10.20 to
the S-1).
10.2 1998 Incentive Plan. (Incorporated by reference to Exhibit 10.2 to the
S-1).
10.3 Employment Agreement between Ian R. Wilson and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.7 to the S-1).
10.4 Employment Agreement between James B. Ardrey and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.8 to the S-1).
10.5 Employment Agreement between Ray Chung and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.9 to the S-1).
35
<PAGE>
10.6 Employment Agreement between M. Laurie Cummings and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.10 to the S-1).
10.7 Expense Agreement, made as of July 1, 1998, between Aurora Foods Inc. and
Dartford Partnership L.L.C. (Incorporated by reference to Exhibit 10.32
to the S-1).
10.8 Indemnity Agreement, dated as of July 1, 1998, between Ian R. Wilson and
Aurora Foods Inc. (Incorporated by reference to Exhibit 10.46 to the
S-1).
10.9 Indemnity Agreement, dated as of July 1, 1998, between James B. Ardrey
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.49 to the
S-1).
10.10 Indemnity Agreement, dated as of July 1, 1998, between Clive A. Apsey and
Aurora Foods Inc. (Incorporated by reference to Exhibit 10.50 to the
S-1).
10.11 Indemnity Agreement, dated as of July 1, 1998, between Charles Ayres and
Aurora Foods Inc. (Incorporated by reference to Exhibit 10.51 to the
S-1).
10.12 Indemnity Agreement, dated as of July 1, 1998, between David E. De Leeuw
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.52 to the
S-1).
10.13 Indemnity Agreement, dated as of July 1, 1998, between Charles J. Delaney
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.53 to the
S-1).
10.14 Indemnity Agreement, dated as of July 1, 1998, between Richard C.
Dresdale and Aurora Foods Inc. (Incorporated by reference to Exhibit
10.54 to the S-1).
10.15 Indemnity Agreement, dated as of July 1, 1998, between Andrea Geisser and
Aurora Foods Inc. (Incorporated by reference to Exhibit 10.55 to the
S-1).
10.16 Indemnity Agreement, dated as of July 1, 1998, between Peter Lamm and
Aurora Foods Inc. (Incorporated by reference to Exhibit 10.56 to the
S-1).
10.17 Indemnity Agreement, dated as of July 1, 1998, between Tyler T. Zachem
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.57 to the
S-1).
10.18 1998 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit
10.47 to the S-1).
27.1 Financial Data Schedule
(b) Report on Form 8-K
A report on Form 8-K (Aurora Foods Inc.), dated July 1, 1998, was filed on July
10, 1998 on which Item 5 was reported. No financial statements were filed with
this report.
36
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AURORA FOODS INC.
Dated: January 17, 2001 By: /s/ Christopher T. Sortwell
----------------------------
Christopher T. Sortwell
Chief Financial Officer
(Duly Authorized Officer,
Principal Financial Officer and
Principal Accounting Officer)
37
<PAGE>
Exhibit
Number Exhibit
------ -------
3.1 Certificate of Incorporation of A Foods Inc., filed with the
Secretary of State of the State of Delaware on June 19, 1998.
(Incorporated by reference to Exhibit 3.1 to Aurora Foods Inc.'s Form
S-1 filed on April 22, 1998, as amended (the "S-1")).
3.2 Amended and Restated By-laws of Aurora Foods Inc. (Incorporated by
reference to Exhibit 3.2 to the S-1).
4.1 Indenture dated as of July 1, 1998 by and between Aurora Foods Inc.
and Wilmington Trust Company (Incorporated by reference to Exhibit
4.13 to the S-1).
4.2 Specimen Certificate of 8 3/4% Senior Subordinated Notes due 2008.
(Included in Exhibit 4.1 hereto).
4.3 Specimen Certificate of the Common Stock. (Incorporated by reference
to Exhibit 4.1 to the S-1).
4.4 Registration Rights Agreement, dated July 1, 1998, between Aurora
Foods Inc. and Chase Securities Inc., Goldman, Sachs & Co. and
Natwest Capital Markets Limited (Incorporated by reference to Exhibit
4.15 to the S-1).
10.1 Third Amended and Restated Credit Agreement, dated as of July 1,
1998, among Aurora Foods Inc., as borrower, the Lenders listed
therein, The Chase Manhattan Bank, as Administrative Agent, National
Westminster Bank PLC, as Syndication Agent and Swiss Bank
Corporation, as Documentation Agent. (Incorporated by reference to
Exhibit 10.20 to the S-1).
10.2 1998 Incentive Plan. (Incorporated by reference to Exhibit 10.2 to
the S-1).
10.3 Employment Agreement between Ian R. Wilson and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.7 to the S-1).
10.4 Employment Agreement between James B. Ardrey and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.8 to the S-1).
10.5 Employment Agreement between Ray Chung and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.9 to the S-1).
10.6 Employment Agreement between M. Laurie Cummings and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.10 to the S-1).
10.7 Expense Agreement, made as of July 1, 1998, between Aurora Foods Inc.
and Dartford Partnership L.L.C. (Incorporated by reference to Exhibit
10.32 to the S-1).
38
<PAGE>
Exhibit
Number Exhibit
------ -------
10.8 Indemnity Agreement, dated as of July 1, 1998, between Ian R. Wilson
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.46 to
the S-1).
10.9 Indemnity Agreement, dated as of July 1, 1998, between James B.
Ardrey and Aurora Foods Inc. (Incorporated by reference to Exhibit
10.49 to the S-1).
10.10 Indemnity Agreement, dated as of July 1, 1998, between Clive A. Apsey
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.50 to
the S-1).
10.11 Indemnity Agreement, dated as of July 1, 1998, between Charles Ayres
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.51 to
the S-1).
10.12 Indemnity Agreement, dated as of July 1, 1998, between David E. De
Leeuw and Aurora Foods Inc. (Incorporated by reference to Exhibit
10.52 to the S-1).
10.13 Indemnity Agreement, dated as of July 1, 1998, between Charles J.
Delaney and Aurora Foods Inc. (Incorporated by reference to Exhibit
10.53 to the S-1).
10.14 Indemnity Agreement, dated as of July 1, 1998, between Richard C.
Dresdale and Aurora Foods Inc. (Incorporated by reference to Exhibit
10.54 to the S-1).
10.15 Indemnity Agreement, dated as of July 1, 1998, between Andrea Geisser
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.55 to
the S-1).
10.16 Indemnity Agreement, dated as of July 1, 1998, between Peter Lamm and
Aurora Foods Inc. (Incorporated by reference to Exhibit 10.56 to the
S-1).
10.17 Indemnity Agreement, dated as of July 1, 1998, between Tyler T.
Zachem and Aurora Foods Inc. (Incorporated by reference to Exhibit
10.57 to the S-1).
10.18 1998 Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit 10.47 to the S-1).
27.1 Financial Data Schedule
39
