<PAGE>
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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 JUNE 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 333-50681
AURORA FOODS INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-3303521
-------- ----------
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
1000 Union Station; Suite 300
St. Louis, MO 63103
(Address of Principal Executive Office, Including Zip Code)
(314) 241-0303
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Shares Outstanding
August 5, 1999
Common stock, $0.01 par value 67,030,666
================================================================================
<PAGE>
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 June 30, 1999. 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.................................................................................. 32
6. Exhibits and Reports on Form 8-K................................................................... 32
(Only those exhibits which have been revised have been included herein.)
</TABLE>
1
<PAGE>
PART I
------
FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
See pages 3 through 19.
2
<PAGE>
AURORA FOODS INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- -----------------
(as restated) (as restated)
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,241 $ 354
Accounts receivable (net of $728 and $670 allowance,
respectively) 81,032 82,093
Inventories 91,002 77,331
Prepaid expenses and other assets 11,767 6,850
Current deferred tax assets 21,815 27,170
------------- --------------
Total current assets 206,857 193,798
Property, plant and equipment, net 162,135 152,085
Deferred tax asset 2,696 -
Goodwill and other intangible assets, net 1,119,303 1,072,759
Asset held for sale 800 3,000
Other assets 30,051 26,800
------------- --------------
Total assets $ 1,521,842 $ 1,448,442
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of senior secured term debt $ 20,283 $ 20,000
Senior secured revolving debt facility 93,350 85,850
Accounts payable 52,597 59,395
Accrued liabilities 77,253 83,433
------------- --------------
Total current liabilities 243,483 248,678
Non-current deferred tax liabilities - 5,047
Other liabilities 11,801 12,372
Senior secured term debt 287,116 200,000
Senior subordinated notes 402,149 402,242
------------- --------------
Total liabilities 944,549 868,339
------------- --------------
Stockholders' equity:
Preferred stock, $0.01 par value; 25,000,000 shares
authorized; no shares issued or outstanding - -
Common stock, $0.01 par value; 250,000,000
shares authorized; 67,030,440 shares
issued and outstanding 670 670
Paid in capital 648,104 647,889
Promissory notes (339) (562)
Accumulated deficit (71,142) (67,894)
------------- --------------
Total stockholders' equity 577,293 580,103
------------- --------------
Total liabilities and stockholders' equity $ 1,521,842 $ 1,448,442
============= ==============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------
1999 1998
---------------- ------------------
(as restated)
<S> <C> <C>
Net sales $ 214,034 $ 199,813
Cost of goods sold 91,230 81,743
--------------- -----------------
Gross profit 122,804 118,070
--------------- -----------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 23,634 18,857
Trade promotions 50,606 45,302
Consumer marketing 17,048 13,497
--------------- -----------------
Total brokerage, distribution and marketing expenses 91,288 77,656
Amortization of goodwill and other intangibles 9,292 8,189
Selling, general and administrative expenses 8,226 7,558
Incentive plan expense - (3,417)
Transition expenses 3,120 2,522
--------------- -----------------
Total operating expenses 111,926 92,508
--------------- -----------------
Operating income 10,878 25,562
Interest expense, net 15,748 21,363
Amortization of deferred financing expense 485 587
Other bank and financing expenses 50 89
--------------- -----------------
(Loss) income before income taxes (5,405) 3,523
Income tax (benefit) expense (1,675) 293
--------------- -----------------
Net (loss) income $ (3,730) $ 3,230
=============== =================
Basic and diluted earnings (loss) per share $ (0.06) $ 0.06
=============== =================
Weighted average number of shares outstanding 67,016 51,981
=============== =================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
1999 1998
--------------- --------------
(as restated)
<S> <C> <C>
Net sales $ 468,298 $ 289,198
Cost of goods sold 195,933 119,477
--------------- --------------
Gross profit 272,365 169,721
--------------- --------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 45,564 28,213
Trade promotions 120,114 60,870
Consumer marketing 38,725 21,495
--------------- --------------
Total brokerage, distribution and marketing expenses 204,403 110,578
Amortization of goodwill and other intangibles 18,164 12,786
Selling, general and administrative expenses 15,794 9,904
Incentive plan expense 56,583
-
Transition expenses 7,397 4,447
--------------- --------------
Total operating expenses 245,758 194,298
--------------- --------------
Operating income (loss) 26,607 (24,577)
Interest expense, net 30,330 33,977
Amortization of deferred financing expense 881 1,099
Other bank and financing expenses 102 140
--------------- --------------
Loss before income taxes and extraordinary item (4,706) (59,793)
Income tax benefit (1,458) (67)
--------------- --------------
Net loss before extraordinary item (3,248) (59,726)
Extraordinary loss on early extinguishment of debt,
net of tax of $1,184 - 1,876
--------------- --------------
Net loss $ (3,248) $ (61,602)
=============== ==============
Basic and diluted loss per share before
extraordinary item $ (0.05) $ (1.47)
Extraordinary loss item per share - 0.05
--------------- --------------
Basic and diluted loss per share $ (0.05) $ (1.52)
=============== ==============
Weighted average number of shares outstanding 67,016 40,580
=============== ==============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
AURORA FOODS INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Promissory Accumulated
-----------------------
Shares Amount Capital Notes Deficit Totals
----------- ---------- ------------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998 (as restated) 67,016 $ 670 $ 647,889 $ (562) $ (67,894) $ 580,103
Payments on officer
promissory notes - - - 223 - 223
Employee stock purchases 14 - 215 - - 215
Net loss (as restated) - - - - (3,248) (3,248)
----------- ---------- ------------- ------------ -------------- ----------
Balance at June 30, 1999
(as restated) 67,030 $ 670 $ 648,104 $ (339) $ (71,142) $ 577,293
=========== ========== ============= ============ ============== ==========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
1999 1998
------------- -------------
(as restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,248) $ (61,602)
Early extinguishment of debt, net of tax of $1,184 - 1,876
Adjustments to reconcile net loss to cash (used in) provided by
operating activities:
Depreciation and amortization 25,606 17,742
Deferred income taxes (1,457) (67)
Incentive plan expense - 56,583
Change in assets and liabilities, net of effects of businesses
acquired:
(Decrease) increase in accounts receivable 8,675 (28,178)
Increase in inventories (842) (29,817)
Increase in prepaid expenses and other assets (4,803) (5,020)
(Decrease) increase in accounts payable (16,013) 29,464
(Decrease) increase in accrued liabilities (8,484) 21,723
------------- -------------
Net cash (used in) provided by operating activities (566) 2,704
------------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment (12,972) (7,391)
Changes to other non-current assets and liabilities (3,474) (1,467)
Proceeds from sale of assets 11 28,012
Payment for acquisition of businesses (75,128) (463,762)
------------- -------------
Net cash used in investing activities (91,563) (444,608)
------------- -------------
Cash flows from financing activities:
Proceeds from senior secured revolving and term debt 229,651 473,000
Repayment of borrowings (134,750) (114,000)
Capital contributions, net of officer promissory notes 438 93,806
Debt issuance and equity raising costs (2,323) (12,501)
------------- -------------
Net cash provided by financing activities 93,016 440,305
------------- -------------
(Increase) decrease in cash and cash equivalents 887 (1,599)
Cash and cash equivalents, beginning of period 354 4,717
------------- -------------
Cash and cash equivalents, end of period $ 1,241 $ 3,118
============= =============
</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 the issuance of the Aurora Foods Inc. (the "Company") financial
statements as of and for the year ended December 31, 1999, it was determined
that the results reported in the Company's Form 10-K as of and for the year
ended December 31, 1998 as well as the interim results reported in the Company's
Forms 10-Q as of and for the periods ended September 30, 1998, March 31, 1999,
June 30, 1999 and September 30, 1999 were misstated. Upon further investigation,
it was determined that liabilities that existed for certain trade promotion and
marketing activities and other expenses (primarily sales returns and allowances,
distribution and consumer marketing) were not properly recognized as liabilities
and that certain assets were overstated (primarily accounts receivable,
inventories and fixed assets). In addition, certain activities were improperly
recognized as sales. As a result, the financial statements as of and for the
year ended December 31, 1998 as well as the quarterly financial data as of and
for the interim periods ended September 30, 1998, March 31, 1999, June 30, 1999
and September 30, 1999 have been restated. The restated financial statements and
related footnotes as of and for the three and six months ended June 30, 1999,
have been included in the condensed consolidated financial statements included
herein.
For the three months ended June 30, 1999, these misstatements primarily
overstated net sales by $7.7 million, understated cost of goods sold by $3.9
million, understated trade promotions expense by $3.6 million, understated
brokerage and distribution expense by $1.6 million, understated consumer
marketing by $1.1 million and understated selling, general and administrative
expenses by $0.4 million. After adjusting for the misstatements, the Company
recalculated its income tax provision reducing income tax expense by $6.9
million.
For the six months ended June 30, 1999, these misstatements primarily overstated
net sales by $14.5 million, understated trade promotions expense by $11.7
million, understated cost of goods sold by $4.4 million, overstated brokerage
and distribution expense by $1.1 million, understated selling, general and
administrative expenses by $0.7 million and understated consumer marketing by
$0.2 million. After adjusting for the misstatements, the Company recalculated
its income tax provision reducing income tax expense by $11.8 million.
A summary of the effects of the restatement is set forth in Note 8.
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;
8
<PAGE>
. 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.
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.
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
9
<PAGE>
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 accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The operating results for interim periods are not necessarily
indicative of results to be expected for an entire year.
For further information, reference should be made to the financial statements of
the Company and notes thereto included in the amended annual report on Form
10-K/A of Aurora Foods Inc. for the year ended December 31, 1998.
10
<PAGE>
THE COMPANY, ITS BUSINESS AND OWNERSHIP
The Company was incorporated in Delaware on June 19, 1998, as the successor to
Aurora Foods Holdings Inc. ("Holdings") and its subsidiary, AurFoods Operating
Co., Inc. (formerly known as Aurora Foods Inc.) ("AurFoods"), both of which were
incorporated in Delaware in December 1996. AurFoods was wholly-owned by
Holdings, which in turn was wholly-owned by MBW Investors LLC ("MBW LLC").
AurFoods was formed for the purpose of acquiring the Mrs. Butterworth's(R) syrup
business from Conopco, Inc., a subsidiary of Unilever United States, Inc.
AurFoods subsequently acquired the Log Cabin(R) syrup business from Kraft Foods,
Inc. in July 1997 and the Duncan Hines(R) baking mix business ("DH") from The
Procter & Gamble Company ("P&G") in January 1998.
Van de Kamp's, Inc. ("VDK") was a wholly-owned subsidiary of VDK Holdings, Inc.,
a Delaware corporation ("VDK Holdings") and was incorporated in Delaware in July
1995 for the purpose of acquiring the Van de Kamp's(R) frozen seafood and frozen
dessert businesses from The Pillsbury Company in September 1995. VDK then
acquired the Mrs. Paul's(R) frozen seafood business from the Campbell Soup
Company in May 1996 and the Aunt Jemima(R) frozen breakfast and Celeste(R)
frozen pizza businesses from The Quaker Oats Company in July 1996. VDK Holdings
was wholly-owned by VDK Foods LLC ("VDK LLC").
On April 8, 1998, MBW LLC and VDK LLC formed Aurora/VDK LLC ("New LLC"). MBW LLC
contributed all of the capital stock of Holdings and VDK LLC contributed all of
the capital stock of VDK Holdings to New LLC (the "Contribution"). In return for
these contributions, MBW LLC was issued 55.5% of the interests in New LLC plus a
right to receive a special $8.5 million priority distribution from New LLC, and
VDK LLC was issued 44.5% of the interests in New LLC plus a right to receive a
special $42.4 million priority distribution from New LLC. The amount and source
of consideration used by MBW LLC and VDK LLC for their acquisition of interests
in New LLC was their equity in Holdings and VDK Holdings, respectively. New LLC
accounted for the contribution of the ownership of Holdings at MBW LLC's
historical cost and the contribution of the ownership of VDK Holdings was
accounted for as an acquisition using the purchase method of accounting at New
LLC's cost. After giving effect to the Contribution, New LLC directly held 100%
of Holdings' capital stock and Holdings continued to hold directly 100% of
AurFoods capital stock and New LLC directly held 100% of VDK Holdings' capital
stock and VDK Holdings continued to hold directly 100% of VDK's capital stock.
On June 25, 1998, New LLC contributed to the Company all the issued and
outstanding stock of Holdings and VDK Holdings. Therefore, the Company's
financial statements, as it is the successor to Holdings, includes the
historical financial information of Holdings from its inception. New LLC was
then dissolved in connection with the IPO (defined below).
On July 1, 1998, Holdings, AurFoods, VDK Holdings and VDK merged with and into
the Company and the initial public offering (the "IPO" or "Equity Offerings") of
12,909,372 shares of Common Stock of the Company and 1,590,628 shares of the
Company's Common Stock sold by New LLC was consummated at an initial public
offering price of $21.00 per share. Also, concurrently with the IPO, the Company
issued $200.0 million aggregate principal amount of 8.75% senior subordinated
notes due 2008 (the "Notes Offering" or "New Notes") and borrowed $225.0 million
of senior secured term debt and $99.0 million out of the total available of
$175.0 million of senior secured revolving debt under the Third Amended and
Restated Credit Agreement, dated as of July 1, 1998, among the Company, as
borrower, the lenders listed therein, The Chase Manhattan Bank, as
Administrative
11
<PAGE>
Agent, The National Westminster Bank PLC, as Syndication Agent and Swiss Bank
Corporation, as Documentation Agent (the "New Senior Bank Facilities").
The Company used the net proceeds from the IPO, the Notes Offering and the New
Senior Bank Facilities to (i) repay $180.8 million of senior secured bank debt
under the Second Amended and Restated Credit and Guarantee Agreement, dated as
of July 9, 1996, among VDK Holdings, VDK, the banks and other financial
institutions parties thereto and the Chase Manhattan Bank, as agent, as amended
(the "VDK Senior Bank Facilities"), (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 year ended December 31, 1998 an
extraordinary charge of $7.3 million, net of income tax of $4.4 million, for the
write off of deferred financing charges.
As a consequence of the IPO, no additional incentive plan expense will be
recorded under the Aurora Plan (See Note 4 - Incentive Plan Expense). MBW LLC
satisfied its liability under the Aurora Plan by distributing shares of the
Company's common stock in connection with the liquidation of MBW LLC.
On April 1, 1999, the Company acquired 100% of the stock in Sea Cost Foods, Inc.
("Seacoast") from Galando Investment Limited Partnership, Carey-On Limited
Partnership, Joseph A. Galando, Barbara J. Galando, Stanley J. Carey and Mary K.
Carey for a purchase price of $51.2 million. The consolidated financial
statements include the accounts of the Company and its 100% owned subsidiary
Seacoast.
NOTE 2 - VDK HOLDINGS, INC. ACQUISITION
----------------------------------------
On April 8, 1998, New LLC completed a stock purchase of VDK Holdings (See Note 1
- Basis of Presentation). The Company acquired all the capital stock of VDK
Holdings in exchange for $183.5 million of the Company's equity. The acquisition
was accounted for using the purchase method of accounting.
The cost to acquire VDK Holdings has been allocated to tangible and intangible
assets acquired as follows (in thousands):
Value of stock used to acquire VDK Holdings $ 183,469
Liabilities assumed 383,063
Other acquisition costs 9,700
-----------
576,232
Cost assigned to tangible assets (200,214)
-----------
Cost attributable to intangible assets $ 376,018
===========
12
<PAGE>
Had the VDK Holdings and DH acquisitions taken place January 1, 1998, the
unaudited pro forma results of operations for the three and six months periods
ended June 30, 1998 would have been as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- ------------- -------------
(actual) (pro forma) (actual) (pro forma)
<S> <C> <C> <C> <C>
Net sales $ 214,034 $ 206,652 $ 468,298 $ 446,989
============== ============== ============= =============
Gross profit $ 122,804 $ 122,064 $ 272,365 $ 267,290
============== ============== ============= =============
Operating income (loss) $ 10,878 $ 25,346 $ 26,607 $ (73,873)
============== ============== ============= =============
Net income (loss) before extraordinary item $ (3,730) $ 6,319 $ (3,248) $ (92,959)
============== ============== ============= =============
Net income (loss) $ (3,730) $ 6,319 $ (3,248) $ (94,835)
============== ============== ============= =============
Net income (loss) per share:
Net income (loss) before extraordinary item $ (0.06) $ 0.09 $ (0.05) $ (1.39)
============== ============== ============= =============
Net income (loss) $ (0.06) $ 0.09 $ (0.05) $ (1.42)
============== ============== ============= =============
</TABLE>
NOTE 3 - INVENTORIES
--------------------
Inventories consist of the following (in thousands):
June 30, December 31,
1999 1998
------------- ---------------
Raw materials $ 26,444 $ 17,999
Work in process 670 271
Finished goods 59,062 55,280
Packaging and other supplies 4,826 3,781
------------- ---------------
$ 91,002 $ 77,331
============= ===============
NOTE 4 - INCENTIVE PLAN EXPENSE
-------------------------------
AURORA INCENTIVE PLAN
The Amended and Restated Limited Liability Company Agreement of MBW LLC
contained an incentive plan (the "Aurora Plan") as a means by which certain key
employees and other specifically designated persons ("Aurora Covered Employees")
of AurFoods and/or affiliated with AurFoods, were given an opportunity to
benefit from appreciation in the value of AurFoods. Under the Aurora Plan,
Aurora Covered Employees were issued a specific class of limited liability
company member units ("Management Units"), at a nominal value, as a means to
participate in the appreciation of the equity value of AurFoods. The Management
Units were subject to vesting requirements based on terms of employment or other
factors.
Prior to the closing of the Equity Offerings, the final value of all classes of
Management Units were determined based on the valuation of the Common Stock held
indirectly by MBW LLC, and upon the closing of the Equity Offerings all unvested
Management Units became fully vested. The aggregate value of all Management
Units was $58.9 million. Through December 27, 1997, the Company had recorded
estimated incentive plan expense of $2.3 million based on the estimated
valuation of the
13
<PAGE>
Company at that time. Additional incentive plan expense of $56.6 million was
recorded in the first and second quarters of 1998.
The incentive plan expense was recorded as a liability of MBW LLC as sponsor of
the Aurora Plan. However, because the Aurora Plan was for the benefit of Aurora
Covered Employees, expense recognized under the Aurora Plan was pushed down to
the Company as incentive plan expense and as additional paid-in capital from its
parent. No additional incentive plan expense will be recorded under the Aurora
Plan.
MBW LLC satisfied its liability under the Aurora Plan by distributing 4,152,417
shares of Common Stock of the Company based on the valuation of the Management
Units at the initial public offering price of the Company's Common Stock on the
dissolution of MBW Investors LLC.
VDK INCENTIVE PLAN
VDK LLC provided a compensation arrangement (the "VDK Plan") as a means by which
certain key employees, and other specifically designated persons ("VDK Covered
Employees") of VDK and/or affiliated with VDK, were given an opportunity to
benefit from appreciation in the equity value of VDK. Under the VDK Plan, VDK
Covered Employees were issued a specific class of limited liability company
member units and/or performance-based units (collectively, "VDK Management
Units"), at a nominal value, as a means to participate in the appreciation of
the equity value of VDK. The VDK Management Units were subject to vesting
requirements based on terms of employment or other factors.
Prior to the closing of the Equity Offerings, the final value of all classes of
VDK Management Units were determined based on the valuation of the shares of the
Company held indirectly by VDK LLC, and upon the closing of the Equity Offerings
all unvested VDK Management Units became fully vested. The aggregate value of
all VDK Management Units was $66.7 million. Through December 31, 1997, no
incentive plan expense had been recorded by VDK based on the estimated valuation
of VDK at that time. Incentive plan expense of $66.7 million was recorded in the
first and second quarters of 1998. The incentive plan expense was recorded as a
liability of VDK LLC as sponsor of the VDK Plan. However, because the VDK Plan
was for the benefit of VDK Covered Employees, expense recognized under the VDK
Plan was pushed down to VDK as incentive plan expense and as additional paid-in
capital from its parent. No additional incentive plan expense will be recorded
under the VDK Plan.
VDK LLC (or the Company as described below) will distribute a fixed number of
shares of Common Stock of the Company upon the dissolution of VDK LLC, based on
the valuation of the VDK Management Units at the initial public offering price
of the Company's Common Stock.
The VDK Plan provides for tax gross-up payments on certain distributions.
Because the Company will receive the tax benefit of such distributions and
related tax gross-up payments, and because the tax benefit is expected to exceed
the amount of the tax gross-up payments, the Company will bear the $12.4 million
liability for any such tax gross-up payments due. The tax benefit of the tax
gross-up payment and related distributions of $19.6 million, which more than
offsets the gross-up payments, has been recorded to income tax expense and as a
deferred tax asset.
To facilitate payment of the tax gross-up obligation and recognition of related
tax benefits, VDK adopted a new incentive plan (the "New VDK Plan" and together
with the VDK Plan, the "VDK Plans"), which was assumed by the Company in
connection with the Contribution. Under the New
14
<PAGE>
VDK Plan, the Company is obligated to distribute no later than July 1, 1999
1,801,769 shares of the Company's Common Stock to VDK Covered Employees who were
granted certain types of VDK Management Units under the VDK Plan. The issuance
of such shares (the "MC Shares") will not increase the number of outstanding
shares of Common Stock because the Company's obligations to issue the MC Shares
is contingent upon the Company's receiving from VDK LLC, as a contribution, a
number of shares of the Company's Common Stock owned by VDK LLC equal to the
number of MC Shares. The Company will have no obligation to issue MC Shares
unless it receives a contribution of an equal number of shares from VDK LLC. VDK
LLC is obligated to contribute such shares to the Company after the closing of
the Equity Offerings. The Company's obligation to make the tax gross-up payments
referred to above is subject to the Company being allowed a deduction for
federal income tax purposes with respect to the payment of the MC Shares and tax
gross-up payment.
On July 1, 1999, the Company satisfied its liability under the VDK Plans by
distributing shares of the Company's Common Stock and paying the associated tax
gross-up liability.
NOTE 5 - TRANSITION EXPENSES
----------------------------
Transition expenses consist of one-time costs incurred to integrate the acquired
businesses, including relocation expenses, recruiting fees, sales support,
production transition and other unique transitional expenses.
NOTE 6 - EARNINGS PER SHARE
---------------------------
Basic earnings per share represents the income available to common stockholders
divided by the weighted average number of common shares outstanding during the
measurement period. Diluted earnings per share represents the income available
to common stockholders divided by the weighted average number of common shares
outstanding during the measurement period while also giving effect to all
potentially dilutive common shares that were outstanding during the period.
Potentially dilutive common shares consist of stock options (the dilutive impact
is calculated by applying the "treasury stock method").
The table below summarizes the numerator and denominator for the basic and
diluted loss per share calculations (in thousands except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
1999 1998 1999 1998
---------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item $ (3,730) $ 3,230 $ (3,248) $(59,726)
Extraordinary loss item, net of tax - - - 1,876
---------- ----------- ----------- ----------
Net income (loss) $ (3,730) $ 3,230 $ (3,248) $(61,602)
========== =========== =========== ==========
Denominator:
Weighted average number of basic shares 67,016 51,981 67,061 40,580
Effect of dilutive securities - - - -
---------- ----------- ----------- ----------
Weighted average number of diluted shares 67,016 51,981 67,061 40,580
========== =========== =========== ==========
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Basic and diluted earnings (loss) per share
before extraordinary item $ (0.06) $ 0.06 $ (0.05) $ (1.47)
Extraordinary item per share - - - 0.05
----------- ----------- ----------- ----------
Basic and diluted earnings (loss) per share $ (0.06) $ 0.06 $ (0.05) $ (1.52)
=========== =========== =========== ==========
</TABLE>
NOTE 7 - SEGMENT INFORMATION
----------------------------
The Company groups its businesses in two operating segments: dry grocery
division and frozen food division. The operating segments are managed as
strategic units due to their distinct manufacturing methodologies, distribution
channels and dedicated segment management teams. The dry grocery division
includes Duncan Hines(R) baking mix products, and Mrs. Butterworth's(R) and Log
Cabin(R) syrup products. The frozen food division includes Van de Kamp's(R) and
Mrs. Paul's(R) frozen seafood products, Aunt Jemima(R) frozen breakfast
products, Celeste(R) frozen pizza products and Chef's Choice(R) skillet meal
products.
The following table presents a summary of operations by segment (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
---------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Net sales
Dry grocery $ 103,781 $ 116,898 $ 201,005 $ 206,283
Frozen food 110,253 82,915 267,293 82,915
----------------- -------------- -------------- ---------------
Total $ 214,034 $ 199,813 $ 468,298 $ 289,198
================= ============== ============== ===============
Operating income (loss)
Dry grocery $ 12,098 $ 16,616 $ 25,096 $ 28,403
Frozen food 1,900 8,051 8,908 8,051
Other (3,120) 895 (7,397) (61,031)
----------------- -------------- -------------- ---------------
Total $ 10,878 $ 25,562 $ 26,607 $ (24,577)
================= ============== ============== ===============
Total assets
Dry grocery $ 863,137 $ 956,661 $ 863,137 $ 956,661
Frozen food 658,705 468,772 658,705 468,772
----------------- -------------- -------------- ---------------
Total $ 1,521,842 $ 1,425,433 $ 1,521,842 $ 1,425,433
================= ============== ============== ===============
Depreciation and amortization
Dry grocery $ 6,629 $ 6,849 $ 12,780 $ 12,947
Frozen food 7,179 4,795 12,826 4,795
----------------- -------------- -------------- ---------------
Total $ 13,808 $ 11,644 $ 25,606 $ 17,742
================= ============== ============== ===============
Capital expenditures
Dry grocery $ 4,295 $ 1,041 $ 7,696 $ 2,553
Frozen food 2,273 4,838 5,276 4,838
----------------- -------------- -------------- ---------------
Total $ 6,568 $ 5,879 $ 12,972 $ 7,391
================= ============== ============== ===============
</TABLE>
The Other line item in operating income (loss) is comprised of one-time expenses
related to incentive plan expense (See Note 4 - Incentive Plan Expense) and
transition expenses (See Note 5 - Transition Expenses) that were incurred in the
respective periods.
16
<PAGE>
NOTE 8 - RESTATEMENT
--------------------
As described in Note 1, the June 30, 1999 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>
June 30, 1999
-----------------------------------------
(As Previously
ASSETS Reported) (As Restated)
------------------ -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,422 $ 1,241
Accounts receivable 113,288 81,032
Inventories 89,858 91,002
Prepaid expenses and other assets 11,411 11,767
Current deferred tax assets 22,149 21,815
----------------- ------------------
Total current assets 238,128 206,857
Property, plant and equipment, net 165,624 162,135
Deferred tax asset - 2,696
Goodwill and other intangible assets, net 1,122,681 1,119,303
Asset held for sale - 800
Other assets 31,113 30,051
----------------- ------------------
Total assets $ 1,557,546 $ 1,521,842
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of senior secured term debt $ 20,283 $ 20,283
Senior secured revolving debt facility 93,350 93,350
Accounts payable 52,258 52,597
Accrued liabilities 46,592 77,253
----------------- ------------------
Total current liabilities 212,483 243,483
Non-current deferred tax liabilities 23,921 -
Other liabilities 11,801 11,801
Senior secured term debt 287,116 287,116
Senior subordinated notes 402,149 402,149
----------------- ------------------
Total liabilities 937,470 944,549
----------------- ------------------
Stockholders' equity:
Preferred stock, $0.01 par value; 25,000,000 shares
authorized; no shares issued or outstanding - -
Common stock, $0.01 par value; 250,000,000
shares authorized; 67,016,173 shares
issued and outstanding 670 670
Paid in capital 648,104 648,104
Promissory notes (339) (339)
Accumulated deficit (28,359) (71,142)
----------------- ------------------
Total stockholders' equity 620,076 577,293
----------------- ------------------
Total liabilities and stockholders' equity $ 1,557,546 $ 1,521,842
================= ==================
</TABLE>
17
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
----------------------------------------
(As Previously
Reported) (As Restated)
----------------- ------------------
<S> <C> <C>
Net sales $ 221,711 $ 214,034
Cost of goods sold 87,369 91,230
----------------- ------------------
Gross profit 134,342 122,804
----------------- ------------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 22,031 23,634
Trade promotions 47,004 50,606
Consumer marketing 15,930 17,048
----------------- ------------------
Total brokerage, distribution and marketing expenses 84,965 91,288
Amortization of goodwill and other intangibles 9,082 9,292
Selling, general and administrative expenses 7,795 8,226
Transition expenses 3,071 3,120
----------------- ------------------
Total operating expenses 104,913 111,926
----------------- ------------------
Operating income 29,429 10,878
Interest expense, net 15,748 15,748
Amortization of deferred financing expense 485 485
Other bank and financing expenses 50 50
----------------- ------------------
Income (loss) before income taxes 13,146 (5,405)
Income tax expense (benefit) 5,193 (1,675)
----------------- ------------------
Net income (loss) $ 7,953 $ (3,730)
================= ==================
Basic and diluted earnings (loss) per share $ 0.12 $ (0.06)
================= ==================
Weighted average number of shares outstanding 67,016 67,016
================= ==================
</TABLE>
18
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
---------------------------------------
(As Previously
Reported) (As Restated)
---------------- -----------------
<S> <C> <C>
Net sales $ 482,761 $ 468,298
Cost of goods sold 191,497 195,933
---------------- -----------------
Gross profit 291,264 272,365
---------------- -----------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 46,665 45,564
Trade promotions 108,377 120,114
Consumer marketing 38,488 38,725
---------------- -----------------
Total brokerage, distribution and marketing expenses 193,530 204,403
Amortization of goodwill and other intangibles 17,854 18,164
Selling, general and administrative expenses 15,138 15,794
Transition expenses 7,342 7,397
---------------- -----------------
Total operating expenses 233,864 245,758
---------------- -----------------
Operating income 57,400 26,607
Interest expense, net 30,328 30,330
Amortization of deferred financing expense 882 881
Other bank and financing expenses 102 102
---------------- -----------------
Income (loss) before income taxes 26,088 (4,706)
Income tax expense (benefit) 10,305 (1,458)
---------------- -----------------
Net income (loss) $ 15,783 $ (3,248)
================ =================
Basic and diluted earnings (loss) per share $ 0.24 $ (0.05)
================ =================
Weighted average number of shares outstanding 67,016 67,016
================ =================
</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
annual report on Form 10-K/A of Aurora Foods Inc. for the year ended December
31, 1998.
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the historical
financial information included in the Financial Statements and notes to the
financial statements. Unless otherwise noted, years (1999 and 1998) in this
discussion refer to the Company's June-ending periods.
Restatements
Prior to the issuance of the Company's financial statements as of and for the
year ended December 31, 1999, it was determined that the results reported in the
Company's Form 10-K as of and for the year ended December 31, 1998 as well as
the interim results reported in the Company's Forms 10-Q as of and for the
periods ended September 30, 1998, March 31, 1999, June 30, 1999 and September
30, 1999 were misstated. Upon 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 six months ended June 30, 1999 have been included in
the condensed consolidated financial statements included herein.
For the three months ended June 30, 1999, these misstatements primarily
overstated net sales by $7.7 million, understated cost of goods sold by $3.9
million, understated trade promotions expense by $3.6 million, understated
brokerage and distribution expense by $1.6 million, understated consumer
marketing by $1.1 million and understated selling, general and administrative
expenses by $0.4 million. After adjusting for the misstatements, the Company
recalculated its income tax provision reducing income tax expense by $6.9
million.
For the six months ended June 30, 1999, these misstatements primarily overstated
net sales by $14.5 million, understated trade promotions expense by $11.7
million, understated cost of goods sold by $4.4 million, overstated brokerage
and distribution expense by $1.1 million, understated selling, general and
administrative expenses by $0.7 million and understated consumer marketing by
$0.2 million. After adjusting for the misstatements, the Company recalculated
its income tax provision reducing income tax expense by $11.8 million.
A summary of the effects of the restatement is set forth in Note 8 to the
Condensed Consolidated 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
20
<PAGE>
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
contract, 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 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 the 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 of its 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
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on behalf of the Company. The Company and
its representatives may from time to time make written or oral statements that
are "forward-looking" including statements contained in this report and other
filings with the Securities and Exchange Commission and in reports to the
Company's stockholders. Certain statements, including, without limitation,
statements containing the words "believes," "anticipates," "intends," "expects,"
"estimates" and words of similar import, and relating to Year 2000 remediation
efforts, constitute "forward-looking statements" and involve known and unknown
risk, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the actions of the Company's competitors; general economic and business
conditions; industry trends; demographics; raw material costs; the continued
success of management's strategy; integration of acquired businesses into the
Company; terms and development of capital; and changes in, or the failure or
inability to comply with, governmental rules and regulations, including, without
limitation, FDA and environmental rules and regulations. See "-- Liquidity and
Capital Resources -- Year 2000". Given these uncertainties, undue reliance
should not be placed on such forward looking statements. The Company disclaims
an obligation to update any such factors or to publicly announce the results of
any revisions to any forward-looking statements contained herein to reflect
future events or developments.
Results of Operations
The following tables have been restated as discussed above and set forth, for
the periods indicated, the percentage, which the items in the Statement of
Operations bear to net sales. The statements include a presentation of the pro
forma results of the Company for the respective periods, which includes the
acquisitions of the Duncan Hines(R) brand and Van de Kamp's, Inc. business as if
they had occurred on January 1, 1998.
21
<PAGE>
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Actual Three Months Ended Pro Forma Three Months
-------------------------------------------------------
June 30, 1999 June 30, 1998 Ended June 30, 1998
-------------------------- ------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 214,034 100.0 % $199,813 100.0 % $ 206,652 100.0 %
Cost of goods sold 91,230 42.6 81,743 40.9 84,588 40.9
-------------- -------- ------------ -------- ------------- --------
Gross profit 122,804 57.4 118,070 59.1 122,064 59.1
-------------- -------- ------------ -------- ------------- --------
Brokerage, distribution and
marketing expenses:
Brokerage and distribution 23,634 11.0 18,857 9.4 19,582 9.5
Trade promotions 50,606 23.6 45,302 22.7 47,526 23.0
Consumer marketing 17,048 8.0 13,497 6.8 13,916 6.7
-------------- -------- ------------ -------- ------------- --------
Total brokerage, distribution
and marketing expenses 91,288 42.6 77,656 38.9 81,024 39.2
Amortization of goodwill
and other intangibles 9,292 4.3 8,189 4.1 8,487 4.1
Selling, general and
administrative expenses 8,226 3.8 7,558 3.8 8,102 3.9
Incentive plan expense - 0.0 (3,417) (1.7) (3,417) (1.7)
Transition expenses 3,120 1.5 2,522 1.3 2,522 1.2
-------------- -------- ------------ -------- ------------- --------
Total operating expenses 111,926 52.3 92,508 46.4 96,718 46.7
-------------- -------- ------------ -------- ------------- --------
Operating income 10,878 5.1 25,562 12.7 25,346 12.4
Interest expense, net 15,748 7.4 21,363 10.7 14,434 7.0
Amortization of deferred
financing expense 485 0.2 587 0.3 373 0.2
Other bank and financing
expenses 50 0.0 89 0.0 95 0.0
-------------- -------- ------------ -------- ------------- --------
(Loss) income before taxes (5,405) (2.5) 3,523 1.7 10,444 5.2
Income tax (benefit) expense (1,675) (0.8) 293 0.1 4,125 2.0
-------------- -------- ------------ -------- ------------- --------
Net (loss) income $ (3,730) (1.7) % $ 3,230 1.6 % $ 6,319 3.2 %
============== ======== ============ ======== ============= ========
(Loss) earnings per share $ (0.06) $ 0.06 $ 0.09
============== ============ =============
Adjusted EBITDA/(1)/ $ 26,464 $ 35,770 $ 36,031
============== ============ =============
Adjusted EPS/(2)/ $ (0.02) $ 0.03 $ 0.09
============== ============ =============
</TABLE>
(1) Adjusted EBITDA is defined as operating income before incentive plan
expense, transition expense, depreciation and amortization of goodwill and
other intangibles.
(2) Adjusted EPS is defined as earnings per share plus the per share after tax
effect of incentive plan expense, transition expense and extraordinary
item.
22
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 (AS RESTATED) COMPARED TO
THREE MONTHS ENDED JUNE 30, 1998
Net Sales. Net sales for the quarter ended June 30, 1999 were $214.0 million,
which was an increase of $14.2 million compared to net sales in the prior year
quarter of $199.8 million. The prior year quarter included the results of the
Mrs. Butterworth's(R), Log Cabin(R), and Duncan Hines(R)brands, and the Van de
Kamp's, Inc. business from April 9, 1998. The Van de Kamp's, Inc. business was
purchased on April 8, 1998 and is included in the pro forma results.
Pro Forma Net Sales. Net sales for the quarter increased 3.6% compared to
pro forma net sales of $206.7 million for the prior year quarter (which
reflects the Van de Kamp's, Inc. acquisition as if it had occurred on
January 1, 1998). Sales growth in the quarter was led by the addition of
$19.0 million of sales from Chef's Choice(R), which was acquired in April
1999. Net sales of frozen food products excluding Chef's Choice(R)
increased 1.7% and net sales of dry grocery products declined 11.2%.
Frozen food division sales, excluding Chef's Choice(R), increased to $91.2
million versus $89.7 million in the prior year quarter. Sales of frozen
seafood products increased 7.9% to $36.8 million, driven by increased sales
to club stores, while sales of Aunt Jemima(R) frozen breakfast products and
Celeste(R) frozen pizza were flat relative to the prior year at
approximately $22.0 million each. Sales for the dry grocery division
decreased 11.2% to $103.8 million versus $116.9 million in the prior year
quarter, primarily due to the decrease in Duncan Hines(R) baking mix sales.
The decrease in sales of Duncan Hines(R) baking mix products was due to the
timing of trade promotions. Such promotions were heavier in the prior year
quarter as a result of the launch of a reformulated brownie mix and
additional spending to support the list price increase in cake and frosting
products.
Gross Profit. Gross profit was 57.4% of net sales, which was 1.7 percentage
points lower than the gross profit in the 1998 quarter of 59.1%. The decrease
was primarily attributable to the inclusion of the Chef's Choice(R) business in
1999, as the Chef's Choice(R) business generates a lower gross profit percentage
than the other retail brands.
Pro Forma Gross Profit. Gross profit of 57.4% for the quarter was 1.7
percentage points lower than the pro forma gross profit of 59.1% for the
prior year quarter. The decrease was primarily attributable to the
inclusion of the Chef's Choice(R) business in 1999, as the Chef's Choice(R)
business generates a lower gross profit percentage than the other retail
brands.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses for the quarter increased $13.6 million compared to the prior
year due to the inclusion of the Van de Kamp's, Inc. and Chef's Choice(R)
businesses. As a percentage of net sales, brokerage, distribution and marketing
expenses were 42.6%, which was 3.7 percentage points higher than the prior year
of 38.9%.
23
<PAGE>
Pro Forma Brokerage, Distribution and Marketing Expenses. Brokerage,
distribution and marketing expenses for the quarter were $10.3 million
higher than the pro forma prior year quarter, and increased as a percentage
of net sales to 42.6% versus 39.2% in the prior year. Brokerage and
distribution expenses increased $4.1 million over last year and increased
as a percentage of net sales to 11.0% from 9.5% in the prior year. The
increase as a percentage of net sales was primarily the result of lower
average brokerage commissions in the prior year. Marketing expenses were
31.6% of net sales, which was 1.9 percentage points higher than the prior
year primarily due to increased consumer promotion activity by the frozen
foods division.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles increased to $9.3 million from $8.2 million in the 1998
quarter. The increase of $1.1 million was due to the additional amortization
expense generated by the goodwill recorded in connection with the acquisitions
of Van de Kamp's, Inc. in 1998 and the Chef's Choice(R) brand in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $8.2 million were $0.6 million higher than the prior
year expense of $7.6 million. The increase was due to the inclusion of the Van
de Kamp's, Inc. and Chef's Choice(R) businesses. Selling, general and
administrative expenses were 3.8% of net sales, consistent with the prior year.
Incentive Plan Credit. In the prior year quarter, the Company recorded a
non-cash incentive plan credit of $3.4 million in accordance with the Aurora
Plan contained in the MBW LLC Agreement (See Notes to the Financial Statements
Note 4 -- Incentive Plan Expense).
Transition Expenses. Transition expenses were $3.1 million compared to $2.5
million recorded in the prior year and represent one-time costs incurred to
integrate the acquired businesses. The increase was due to the acquisitions of
the Duncan Hines(R) and Chef's Choice(R) brands.
Operating Income. Operating income was $10.9 million compared to operating
income in the prior year of $25.6 million. Excluding the effects of the
incentive plan credit and transition expenses, operating income decreased 43.3%
to $14.0 million in the quarter versus $24.7 million in the prior year. The
decrease was primarily due to higher brokerage, distribution and marketing
expenses.
Pro Forma Operating Income. On a pro forma basis, operating income for the
prior year quarter was $25.3 million. Excluding the effects of the
incentive plan credit and transition expenses, the Company's operating
income in the 1998 quarter would have been $24.5 million. Excluding the
incentive plan credit and transition expenses, operating income of $14.0
million for the current quarter represented a decrease of 42.9% from the
prior year and was primarily the result of higher brokerage, distribution
and marketing expenses.
Interest Expense and Amortization of Deferred Financing Expense. The aggregate
of net interest expense and amortization of deferred financing expense of $16.2
million was lower than the prior year amount of $22.0 million. The decrease in
interest expense was due to a lower debt balance following the reduction in debt
from the net proceeds of the initial public offering in July 1998.
Income Tax (Benefit) Expense. The income tax benefit recorded for the quarter
was $1.7 million, which represents an effective tax rate of 31.0%. Income tax
expense of $0.3 million was recorded in the prior year quarter. The effective
tax rate for the prior year was less than the anticipated rate due primarily to
the effect of the non-deductible incentive plan expense.
24
<PAGE>
Net (Loss) Income. The Company recorded a net loss of $3.7 million compared to
net income for the prior year of $3.2 million. Excluding the effects of
transition expenses in 1999 and 1998, and excluding the extraordinary loss from
early extinguishment of debt and incentive plan credit in 1998, the net loss
would have been $1.6 million in the current quarter versus $2.7 million of net
income in the prior year quarter.
25
<PAGE>
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Actual Six Months Ended Pro Forma Six Months
-------------------------------------------------------
June 30, 1999 June 30, 1998 Ended June 30, 1998
-------------------------- ------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 468,298 100.0 % $ 289,198 100.0 % $ 446,989 100.0 %
Cost of goods sold 195,933 41.8 119,477 41.3 179,699 40.2
-------------- -------- ------------- -------- ------------- -------
Gross profit 272,365 58.2 169,721 58.7 267,290 59.8
-------------- -------- ------------- -------- ------------- -------
Brokerage, distribution and
marketing expenses:
Brokerage and distribution 45,564 9.7 28,213 9.8 43,127 9.6
Trade promotions 120,114 25.6 60,870 21.0 105,262 23.5
Consumer marketing 38,725 8.3 21,495 7.4 34,975 7.8
-------------- -------- ------------- -------- ------------- -------
Total brokerage, distribution
and marketing expenses 204,403 43.6 110,578 38.2 183,364 40.9
Amortization of goodwill
and other intangibles 18,164 3.9 12,786 4.4 16,843 3.8
Selling, general and
administrative expenses 15,794 3.4 9,904 3.4 15,186 3.4
Incentive plan expense - 0.0 56,583 19.6 121,323 27.1
Transition expenses 7,397 1.6 4,447 1.5 4,447 1.0
-------------- -------- ------------- -------- ------------- -------
Total operating expenses 245,758 52.5 194,298 67.1 341,163 76.2
-------------- -------- ------------- -------- ------------- -------
Operating income (loss) 26,607 5.7 (24,577) (8.4) (73,873) (16.4)
Interest expense, net 30,330 6.5 33,977 11.8 28,868 6.5
Amortization of deferred
financing expense 881 0.2 1,099 0.4 746 0.2
Other bank and financing
expenses 102 0.0 140 0.1 190 0.0
-------------- -------- ------------- -------- ------------- -------
Income (loss) before income
taxes and extraordinary item (4,706) (1.0) (59,793) (20.7) (103,677) (23.1)
Income tax expense (benefit) (1,458) (0.3) (67) 0.0 (10,718) (2.4)
-------------- -------- ------------- -------- ------------- -------
Net income (loss) before
extraordinary item (3,248) (0.7) (59,726) (20.7) (92,959) (20.7)
Extraordinary loss on early
extinguishment of debt,
net of tax of $1,184 - 0.0 1,876 0.6 1,876 0.4
-------------- -------- ------------- -------- ------------- -------
Net income (loss) $ (3,248) (0.7)% $ (61,602) (21.3)% $ (94,835) (21.1) %
============== ======== ============= ======== ============= =======
Earnings per share $ (0.05) $ (1.52) $ (1.42)
============== ============= =============
Adjusted EBITDA/(1)/ $ 58,267 $ 53,182 $ 74,952
============== ============= =============
Adjusted EPS/(2)/ $ 0.03 $ 0.02 $ 0.20
============== ============= =============
</TABLE>
(1) Adjusted EBITDA is defined as operating income before incentive plan
expense, transition expense, depreciation and amortization of goodwill and
other intangibles.
(2) Adjusted EPS is defined as earnings per share plus the per share after tax
effect of incentive plan expense, transition expense and extraordinary
item.
26
<PAGE>
RESULTS OF OPERATIONS
Six Months Ended June 30, 1999 (As Restated) Compared to
Six Months Ended June 30, 1998
Net Sales. Net sales for the six months ended June 30, 1999 of $468.3 million
were $179.1 million greater than the prior year period of $289.2 million. The
prior year period included the results of the Mrs. Butterworth's(R) and Log
Cabin(R) brands, the Duncan Hines(R) brand from January 16, 1998, and the Van de
Kamp's, Inc. business from April 9, 1998. The Van de Kamp's, Inc. business was
purchased on April 8, 1998 and is included in the pro forma results.
Pro Forma Net Sales. Net sales for the six-month period increased 4.8%
compared to pro forma net sales of $447.0 million for the prior year
period (which reflect the acquisitions of the Duncan Hines(R) brand and
Van de Kamp's, Inc. business as if they had occurred on January 1,
1998). Sales growth in the six month period was led by the addition of
$19.0 million of sales from Chef's Choice(R), which was acquired in
April 1999, and the sales growth of frozen food products.
Frozen food sales, excluding Chef's Choice(R), increased 5.7% to $248.3
million versus $235.0 million in the prior year period due to increased
sales of 6.7% in frozen seafood, 6.8% in Celeste(R) frozen pizza, and
2.1% in frozen breakfast products. Sales for the dry grocery division
declined 5.2% to $201.0 million in the current year period compared to
$212.0 million in the prior year period. The new product introductions
of Van de Kamp's(R) and Mrs. Paul's(R) Crisp & Healthy and Tenders
frozen seafood products, and Aunt Jemima(R) french toast sticks and
mini-pancakes contributed to the increases in the frozen seafood and
breakfast sales. Frozen pizza sales rose due to an increase of
approximately 10% in consumption of the Celeste(R) brand pizza from the
prior year period.
Gross Profit. Gross profit was 58.2% of net sales in 1999, or 0.5 percentage
points less than in the 1998 period. The decrease was primarily attributable to
the inclusion of the Chef's Choice(R) business in 1999, as the Chef's Choice(R)
business generates a lower gross profit percentage than the other retail brands.
Pro Forma Gross Profit. Gross profit of 58.2% for the six month period
was 1.6 percentage points lower than the pro forma gross profit of
59.8% for the prior year period. The decrease was primarily
attributable to the inclusion of the Chef's Choice(R) business in 1999,
as the Chef's Choice(R) business generates a lower gross profit
percentage than the other retail brands.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses for the six-month period increased $93.8 million 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
43.6%, which was 5.4 percentage points higher than the prior year of 38.2%.
Pro Forma Brokerage, Distribution and Marketing Expenses. Brokerage,
distribution and marketing expenses for the period were $21.0 million
higher than the pro forma prior year period, and increased as a
percentage of net sales to 43.6% versus 40.9% in the prior year.
Brokerage and distribution expenses increased $2.4 million over last
year and increased as a
27
<PAGE>
percentage of net sales to 9.7% from 9.6% in the prior year. Marketing
expenses were 33.9% of net sales, which was 2.6 percentage points
higher than the prior year of 31.3%. The level of promotional activity
in the current period was higher than the prior year primarily due to
increased trade promotion activity by the dry grocery division.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles increased to $18.2 million from $12.8 million in the 1998
period. The increase of $5.4 million was due to the additional amortization
expense generated by the goodwill recorded in connection with the acquisitions
of Van de Kamp's, Inc. in 1998 and the Chef's Choice(R) brand in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $15.8 million were $5.9 million higher than the prior
year period expense of $9.9 million. The increase was due to the inclusion of
Van de Kamp's, Inc. and the additional infrastructure and staffing required by
the dry grocery division to operate the Duncan Hines(R) business, which was
being integrated during 1998. Selling, general and administrative expenses were
3.4% of net sales, consistent with the prior year.
Incentive Plan Expense. In the prior year period, the Company recorded a
non-cash incentive plan expense of $56.6 million in accordance with the Aurora
Plan contained in the MBW LLC Agreement (See Notes to the Financial Statements
Note 4 -- Incentive Plan Expense).
Transition Expenses. Transition expenses were $7.4 million compared to $4.4
million recorded in the prior year and represent one-time costs incurred to
integrate the acquired businesses. The increase was due to the acquisitions of
the Duncan Hines(R) and Chef's Choice(R) brands.
Operating Income (Loss). Operating income was $26.6 million compared to an
operating loss in the prior year period of $24.6 million. Excluding the effects
of the incentive plan expense and transition expenses, operating income
decreased to $34.0 million for the six-month period compared to $36.5 million in
the prior year period.
Pro Forma Operating Income (Loss). On a pro forma basis, operating loss
for the prior year period was $73.9 million. Excluding the effects of
the incentive plan expense and transition expenses, the Company's
operating income in the 1998 period would have been $51.9 million.
Excluding the incentive plan expense and transition expenses, operating
income of $34.0 million for the current period represented a decrease
of 34.5% over the prior year period and was primarily the result of
higher brokerage, distribution and marketing expenses.
Interest Expense and Amortization of Deferred Financing Expense. The aggregate
of net interest expense and amortization of deferred financing expense of $31.2
million in the six month period was lower than the prior year amount of $35.1
million. The decrease in interest expense was due to a lower debt balance
following the reduction in debt from the net proceeds of the initial public
offering in July 1998.
Income Tax Expense (Benefit). The income tax benefit recorded for the period was
$1.5 million, which represents an effective tax rate of 31.0%. An income tax
benefit of $0.1 million was recorded in the prior year period. The effective tax
rate for the prior year was less than the anticipated rate due primarily to the
effect of the non-deductible incentive plan expense.
Net Income (Loss). The Company recorded a net loss of $3.2 million compared to a
net loss for the prior year of $61.6 million. Excluding the effects of
transition expenses in 1999 and 1998, and
28
<PAGE>
excluding the extraordinary loss from early extinguishment of debt and incentive
plan expense in 1998, net income would have been $1.8 million in the current
period versus the prior year period net loss of $22.3 million.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999, net income plus non-cash charges
provided $20.9 million of operating cash flow. Net working capital items,
excluding cash, current deferred tax assets, and current maturities of senior
secured debt, used $21.5 million of cash. The increase in net working capital
was primarily due to reductions in the accounts payable and accrued liabilities
balance from December 31, 1998, caused by the seasonality of both divisions'
businesses.
Net cash used in investing activities was $91.6 million for the six month
period. Cash used during the period included $51.2 million for the acquisition
of the Chef's Choice(R) and $13.0 million on capital expenditures. In addition,
the Company invested in additional manufacturing capacity of frozen seafood
products with the purchase of a production facility and the associated working
capital. The Company expects to spend approximately $26.0 million on capital
expenditures for the year ended December 31, 1999. Capital expenditures were
funded from internal cash flow and borrowings on the senior secured revolving
debt facility under the Amended New Senior Bank Facilities (defined below).
During the period, financing activities provided cash of $93.0 million. To
finance the acquisition of the Chef's Choice(R) brand and related expenses, the
Company increased its existing senior bank facilities with $100.0 million of
senior secured term debt under the Company's Fourth Amended and Restated Credit
Agreement, dated as of March 31, 1999, among the Company, as borrower, the
lenders listed therein, The Chase Manhattan Bank, as Administrative Agent, The
National Westminster Bank PLC, as Syndication Agent and UBS AF, Stamford Branch,
as Documentation Agent ("Amended New Senior Bank Facilities"). The proceeds were
used to fund the acquisition of Chef's Choice(R) in April 1999 and reduce the
senior secured revolving debt facility under the Amended New Senior Bank
Facilities. The Company repaid $12.6 million in principal on its Amended New
Senior Bank Facilities and borrowed on the revolving facility to fund capital
expenditures and working capital requirements.
At June 30, 1999, the Company had $1.2 million of cash and cash equivalents and
an unused commitment of $79.5 million on senior secured revolving debt facility
under the Amended New Senior Bank Facilities. The Company's primary sources of
liquidity are cash flows from operations and available borrowings under the
$175.0 million revolving debt facility. Management believes the available
borrowing capacity under the revolving debt facility combined with cash provided
by operations will provide the Company with sufficient cash to fund operations
as well as to meet existing obligations.
Interest Rate Collar Agreements. At June 30, 1999, the Company was party to two
interest rate collar agreements. On August 22, 1996 the Company entered into a
three year interest rate collar agreement with a notional principal amount of
$70.0 million, a cap rate of 6.5% and a floor rate of 5.75%. On November 26,
1997, the Company entered into a three year interest rate collar agreement with
a notional principal amount of $50.0 million, a cap rate of 7.5% and a floor
rate of 5.50%.
Interest Rate Swap Agreements. The Company is party to two interest rate swap
agreements. On March 17, 1998, the Company entered into an interest rate swap
agreement with a notional principal amount of $150.0 million and a term of three
years. The effective swap rate on March 17, 1998 was
29
<PAGE>
5.81%. On November 30, 1998, the Company amended the existing interest agreement
whereby the counterparty received the option to extend the termination date to
March 17, 2003. The new effective swap rate through the termination date of the
interest rate swap agreement is 5.37%.
On April 13, 1999, the Company entered into a three-year interest rate swap
agreement (the "Swap") with a notional principal amount of $200.0 million. The
Company entered into the Swap to achieve its objective of hedging approximately
60% of its debt against movements in interest rates. The applicable rate is set
quarterly with the first reset date on July 1, 1999. The counterparty to the
Company's Swap is a major financial institution.
Under the Swap, the Company would receive payments from the counterparty if the
three-month LIBOR plus a spread of 3.25% falls below a cap rate of 8.63%, but
not below 7.8%. There would be no payments made to either counterparty if the
three-month LIBOR plus a spread of 3.25% exceeds 8.63% and is less than 10.25%.
The Company would make payments to the counterparty if the three-month LIBOR
plus a spread of 3.25% exceeds 10.25%.
Risks associated with the interest rate swap and collar agreements include those
associated with changes in the market value and interest rates. Management
considers the potential loss in future earnings and cash flows attributable to
the interest rate swap and collar agreements to not be material.
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;
. wavier 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 Supplement 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 stockholder,
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 dates on which the Company believes Year 2000 compliance will be completed
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, or that there will not be
a delay in, or increased costs associated with, the implementation of Year 2000
compliance. Specific factors that might cause differences between the estimates
and actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer code, timely responses to and corrections by third-parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-parties, the Company cannot
ensure its ability to resolve problems associated with the Year 2000 issue that
may affect its operations and business, or expose it to third-party liability in
a timely and cost-effective manner.
The Year 2000 issue, which is common to most corporations, concerns the
inability of information systems, including computer software programs as well
as non-information technology systems, to properly recognize and process
date-sensitive information related to the Year 2000 and beyond. The Company
believes that it will be able to achieve Year 2000 compliance by the end of 1999
and does not currently anticipate any material disruption of its operations as a
result of any failure by the Company to be Year 2000 compliant. However, to the
extent the Company is unable to achieve Year 2000 compliance, the Company's
business and results of operations could be materially affected. This could be
caused by computer-related failures in a number of areas including, but not
limited to, the failure of the Company's financial systems or manufacturing and
inventory management systems.
Efforts to identify the risks associated with Year 2000 compliance began in 1997
by identifying the potential areas of exposure. The Company's information
technology was split into three areas of concern: internal mission-critical
systems and applications, internal non-mission-critical systems and applications
and external data sources and trading partners.
30
<PAGE>
Compliance with internal mission-critical systems and applications is nearly
complete. Given the relatively recent incorporation of the Company, most systems
and applications have been purchased within the last year or two. All purchases
made were for systems that were Year 2000 compliant or for those that had
documented plans and dates for future compliance. Currently, the Warehouse
Management System in the frozen food division, which accesses a compliant
information database, is the only remaining mission-critical application not
compliant. The Company has elected to upgrade the functionality of its current
Warehouse Management System and, therefore, will be replacing the entire system.
The new system has been selected and is scheduled to have installation and
testing completed by September 1999. Internal non-mission-critical systems and
applications are currently being analyzed and are presently expected to be
compliant by September of 1999.
In addition to reviewing its internal systems, the Company has polled its
third-party vendors, customers, contract manufacturers and freight carriers to
determine whether they are Year 2000 compliant. If the Company's customers and
vendors do not achieve Year 2000 compliance before the end of 1999, the Company
may experience a variety of problems, which may have a material adverse effect
on the Company. Among other things, to the extent the Company's customers are
not Year 2000 compliant by the end of 1999, such customers may lose electronic
data interchange ("EDI") capabilities at the beginning of the Year 2000. Where
EDI communication would no longer be available, the Company expects to utilize
voice, facsimile and/or mail communications in order to receive customer orders
and process customer billings. To the extent the Company's vendors or contract
manufacturers are not Year 2000 compliant by the end of 1999, such vendors or
contract manufacturers may fail to deliver ordered materials and products to the
Company and may fail to bill the Company properly and promptly. Consequently,
the Company may not have the correct inventory to send to its customers and may
experience a shortage or surplus of inventory which could materially adversely
affect the Company's business and results of operations. Through its polling
efforts, the Company has not identified any potential Year 2000 issues with any
of its major third-party vendors, contract manufacturers, customers or freight
carriers which could have a materially adverse affect on the Company's business
or results of operations or which could not be investigated through alternate
sources of supply.
To date, the Company has incurred and expensed approximately $0.1 million
related to the assessment and development of the remediation plan and the
purchase of new compliant hardware and software. Management anticipates spending
and expensing an additional $0.5 million through the end of 1999 to implement
its entire Year 2000 plan. The costs of the project and the date on which the
Company plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived using numerous assumptions of future events
including the continued availability of certain resources, third-parties' Year
2000 readiness and other factors.
The Company has developed contingency plans so that the Company's critical
business processes can be expected to continue to function on January 1, 2000
and beyond. The Company's contingency plans are structured to address both
remediation of systems and their components and overall business operating risk.
These plans were created to mitigate both internal risks as well as potential
risks in the supply chain of the Company's suppliers and customers.
31
<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
------- -------
2.1 Amendment No. 1 to Stock Purchase Agreement, dated as of April 1, 1999,
to Stock Purchase Agreement dated March 10, 1999, by and among Aurora
Foods Inc., Sea Coast Foods, Inc., Galando Investments Limited
Partnership, Carry-on Limited Partnership, Joseph A. Galando, Barbara
J. Galando, Stanley J. Carey and Mary K. Carey.
3.1 Certificate of Incorporation of A Foods Inc., filed with the Secretary
of State of the State of Delaware on June 19, 1998. (Incorporated by
reference to Exhibit 3.1 to Aurora Foods Inc.'s Form S-1 filed on April
22, 1998, as amended (the "S-1")).
3.2 Amended and Restated By-laws of Aurora Foods Inc. (Incorporated by
reference to Exhibit 3.2 to the S-1).
4.1 Indenture dated as of July 1, 1998 by and between Aurora Foods Inc. and
Wilmington Trust Company (Incorporated by reference to Exhibit 4.13 to
the S-1).
4.2 Specimen Certificate of 8 3/4% Senior Subordinated Notes due 2008.
(Included in Exhibit 4.1 hereto).
4.3 Specimen Certificate of the Common Stock. (Incorporated by reference to
Exhibit 4.1 to the S-1).
4.4 Registration Rights Agreement, dated July 1, 1998, between Aurora Foods
Inc. and Chase Securities Inc., Goldman, Sachs & Co. and Natwest
Capital Markets Limited (Incorporated by reference to Exhibit 4.15 to
the S-1).
27.1 Financial Data Schedule for the period ended March 31, 1999 submitted
to the Securities and Exchange Commission in electronic format.
(b) Reports on Form 8-K.
A report on Form 8-K, dated April 1, 1998, was filed on April 8, 1999 on which
Items 5 and 7 were reported. No financial statements were filed with this
filing.
32
<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)
33
<PAGE>
Exhibit
Number Exhibit
------- -------
2.1 Amendment No. 1 to Stock Purchase Agreement, dated as of April 1, 1999,
to Stock Purchase Agreement dated March 10, 1999, by and among Aurora
Foods Inc., Sea Coast Foods, Inc., Galando Investments Limited
Partnership, Carry-on Limited Partnership, Joseph A. Galando, Barbara
J. Galando, Stanley J. Carey and Mary K. Carey.
3.1 Certificate of Incorporation of A Foods Inc., filed with the Secretary
of State of the State of Delaware on June 19, 1998. (Incorporated by
reference to Exhibit 3.1 to Aurora Foods Inc.'s Form S-1 filed on April
22, 1998, as amended (the "S-1")).
3.2 Amended and Restated By-laws of Aurora Foods Inc. (Incorporated by
reference to Exhibit 3.2 to the S-1).
4.1 Indenture dated as of July 1, 1998 by and between Aurora Foods Inc. and
Wilmington Trust Company (Incorporated by reference to Exhibit 4.13 to
the S-1).
4.2 Specimen Certificate of 8 3/4% Senior Subordinated Notes due 2008.
(Included in Exhibit 4.1 hereto).
4.3 Specimen Certificate of the Common Stock. (Incorporated by reference to
Exhibit 4.1 to the S-1).
4.4 Registration Rights Agreement, dated July 1, 1998, between Aurora Foods
Inc. and Chase Securities Inc., Goldman, Sachs & Co. and Natwest
Capital Markets Limited (Incorporated by reference to Exhibit 4.15 to
the S-1).
27.2 Financial Data Schedule for the period ended March 31, 1999 submitted
to the Securities and Exchange Commission in electronic format.
34
