<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 333-50681
AURORA FOODS INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-3303521
-------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1000 Union Station; Suite 300
St. Louis, MO 63103
(Address of Principal Executive Office, Including Zip Code)
(314) 241-0303
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Shares Outstanding
November 4, 1999
Common stock, $0.01 par value 67,030,440
================================================================================
<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 September 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...... 22
PART II
1. Legal Proceedings.......................................................................... 33
6. Exhibits and Reports on Form 8-K........................................................... 33
(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 21.
2
<PAGE>
AURORA FOODS INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
(as restated) (as restated)
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 446 $ 354
Accounts receivable (net of $603 and $670 allowance, respectively) 115,149 82,093
Inventories 95,465 77,331
Prepaid expenses and other assets 15,326 6,850
Current deferred tax assets 15,090 27,170
----------- -----------
Total current assets 241,476 193,798
Property, plant and equipment, net 161,343 152,085
Deferred tax asset 2,051 -
Goodwill and other intangible assets, net 1,117,902 1,072,759
Asset held for sale 800 3,000
Other assets 29,747 26,800
----------- -----------
Total assets $ 1,553,319 $ 1,448,442
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of senior secured term debt $ 22,756 $ 20,000
Senior secured revolving debt facility 132,350 85,850
Accounts payable 72,640 59,395
Accrued liabilities 62,768 83,433
----------- -----------
Total current liabilities 290,514 248,678
Non-current deferred tax liabilities - 5,047
Other liabilities - 12,372
Senior secured term debt 279,573 200,000
Senior subordinated notes 402,099 402,242
----------- -----------
Total liabilities 972,186 868,339
----------- -----------
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; respectively; 67,030,440 and 67,016,173,
respectively, shares issued and outstanding 670 670
Paid in capital 648,100 647,889
Promissory notes (322) (562)
Accumulated deficit (67,315) (67,894)
----------- -----------
Total stockholders' equity 581,133 580,103
----------- -----------
Total liabilities and stockholders' equity $ 1,553,319 $ 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 September 30,
-------------------------------
1999 1998
------------- -------------
(as restated) (as restated)
<S> <C> <C>
Net sales $ 231,896 $ 218,768
Cost of goods sold 101,536 89,794
--------- ---------
Gross profit 130,360 128,794
--------- ---------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 23,535 22,677
Trade promotions 47,816 61,638
Consumer marketing 16,369 15,928
--------- ---------
Total brokerage, distribution and marketing expenses 87,720 100,243
Amortization of goodwill and other intangibles 9,600 8,623
Selling, general and administrative expenses 8,377 7,510
Transition expenses (Note 4) 1,697 1,269
--------- ---------
Total operating expenses 107,394 117,645
--------- ---------
Operating income 22,966 11,149
Interest income (36) (123)
Interest expense 16,910 15,682
Amortization of deferred financing expense 498 372
Other bank and financing expenses 48 49
--------- ---------
Income (loss) before income taxes and extraordinary item 5,546 (4,831)
Income tax expense (benefit) 1,719 (163)
--------- ---------
Net income (loss) before extraordinary item 3,827 (4,668)
Extraordinary loss on early extinguishment of debt,
net of tax of $4,520 - 7,449
--------- ---------
Net income (loss) $ 3,827 $ (12,117)
========= =========
Basic and diluted earnings (loss) per share before
extraordinary item $ 0.06 $ (0.07)
Extraordinary loss per share - 0.11
--------- ---------
Basic and diluted earnings (loss) per share $ 0.06 $ (0.18)
========= =========
Weighted average number of shares outstanding 67,030 67,000
========= =========
</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>
Nine Months Ended September 30,
-------------------------------------------
1999 1998
------------------- -------------------
(as restated) (as restated)
<S> <C> <C>
Net sales $ 700,194 $ 507,966
Cost of goods sold 297,469 209,451
------------------- -------------------
Gross profit 402,725 298,515
------------------- -------------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 69,099 50,890
Trade promotions 167,930 122,508
Consumer marketing 55,094 37,423
------------------- -------------------
Total brokerage, distribution and marketing expenses 292,123 210,821
Amortization of goodwill and other intangibles 27,764 21,409
Selling, general and administrative expenses 24,171 17,414
Incentive plan expense (Note 3) - 56,583
Transition expenses (Note 4) 9,094 5,716
------------------- -------------------
Total operating expenses 353,152 311,943
------------------- -------------------
Operating income (loss) 49,573 (13,428)
Interest income (86) (544)
Interest expense 47,290 50,080
Amortization of deferred financing expense 1,379 1,472
Other bank and financing expenses 150 189
------------------- -------------------
Income (loss) before income taxes and extraordinary loss 840 (64,625)
Income tax expense (benefit) 261 (230)
------------------- -------------------
Net income (loss) before extraordinary loss 579 (64,395)
Extraordinary loss on early extinguishment of debt,
net of tax of $5,704 - 9,325
------------------- -------------------
Net income (loss) $ 579 $ (73,720)
=================== ===================
Basic and diluted earnings (loss) per share before
extraordinary loss $ 0.01 $ (1.31)
Extraordinary loss per share - 0.19
------------------- -------------------
Basic and diluted earnings (loss) per share $ 0.01 $ (1.50)
=================== ===================
Weighted average number of shares outstanding 67,021 49,159
=================== ===================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
AURORA FOODS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Promissory (Accumulated
-----------------------
Shares Amount Capital Notes Deficit) Total
--------- ---------- ------------ ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998 (as restated) 67,016 $ 670 $ 647,889 $ (562) $ (67,894) $ 580,103
Payments on officer
promissory notes - - - 240 - 240
Employee stock purchases 14 - 211 - - 211
Net income (as restated) - - - - 579 579
--------- ---------- ------------ ------------- --------------- -----------
Balance at September 30,
1999 (as restated) 67,030 $ 670 $ 648,100 $ (322) $ (67,315) $ 581,133
========= ========== ============ ============= =============== ===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
--------------------------------------
Nine Months Ended September 30,
----------------- -----------------
1999 1998
----------------- -----------------
(as restated) (as restated)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 579 $ (73,720)
Early extinguishment of debt, net of tax of $5,704 - 9,325
Adjustments to reconcile net (loss) income to cash provided by
operating activities:
Depreciation and amortization 39,448 29,587
Deferred income taxes 261 (229)
Loss on disposition of fixed asset 14 -
Incentive plan expense - 56,583
Change in assets and liabilities, net of effects of businesses
acquired:
Increase in accounts receivable (25,443) (39,883)
Increase in inventories (5,306) (43,291)
Increase in prepaid expenses and other assets (8,361) (4,321)
Increase in accounts payable 4,026 35,016
(Decrease) increase in accrued liabilities (22,501) 24,107
----------------- -----------------
Net cash used in operating activities (17,283) (6,826)
----------------- -----------------
Cash flows from investing activities:
Additions to property, plant and equipment (15,805) (21,652)
Changes to other non-current assets and liabilities (17,022) (2,653)
Proceeds from sale of assets - 28,035
Payment for acquisition of businesses (76,756) (458,748)
----------------- -----------------
Net cash used in investing activities (109,583) (455,018)
----------------- -----------------
Cash flows from financing activities:
Proceeds from senior secured revolving and term debt 308,150 844,750
Proceeds from senior subordinated notes - 200,000
Repayment of borrowings (179,321) (892,759)
Payment of redemption premium - (14,500)
Proceeds from initial public offering - 254,831
Capital contributions, net of officer promissory notes 452 93,848
Debt issuance and equity raising costs (2,323) (27,130)
----------------- -----------------
Net cash provided by financing activities 126,958 459,040
----------------- -----------------
Increase (decrease) in cash and cash equivalents 92 (2,804)
Cash and cash equivalents, beginning of period 354 4,717
----------------- -----------------
Cash and cash equivalents, end of period $ 446 $ 1,913
================= =================
</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 nine months ended September 30,
1998 and 1999, have been included in the condensed consolidated financial
statements included herein.
For the three and nine months ended September 30, 1998, these misstatements
primarily understated trade promotions expense by $12.5 million, overstated net
sales by $1.6 million, overstated brokerage and distribution expense by $1.9
million, understated cost of goods sold by $0.7 million and understated selling,
general and administrative expenses by $0.3 million. After adjusting for the
misstatements, the Company recalculated its income tax provision reducing income
tax expense by $4.3 million.
For the three months ended September 30, 1999, these misstatements primarily
overstated net sales by $6.4 million, understated trade promotions expense by
$3.5 million, understated brokerage and distribution expense by $0.9 million,
understated consumer marketing expense by $0.8 million and understated cost of
goods sold by $0.6 million. After adjusting for the misstatements, the Company
recalculated its income tax provision reducing income tax expense by $5.2
million.
For the nine months ended September 30, 1999, these misstatements primarily
overstated net sales by $20.8 million, understated trade promotions expense by
$15.2 million, understated cost of goods sold by $5.0 million, understated
consumer marketing expense by $1.1 million and understated other operating
expenses by $1.3 million. After adjusting for the misstatements, the Company
recalculated its income tax provision reducing income tax expense by $16.9
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.
8
<PAGE>
As a result of the restatements, the Company was in default of a number of
provisions of the agreements covering its senior secured debt and senior
subordinated debt. The Company and the lenders party to the senior secured debt
amended this agreement in 2000 to provide:
. for the sale by the Company of accounts receivable;
. amended financial covenants;
. waiver of certain existing defaults of covenants and breaches of
representations and warranties;
. until the defaults are cured or waived, a forbearance from exercising
remedies that are available as a result of the Company's defaults under the
Indentures governing the senior subordinated debt until September 30, 2000;
or, if earlier, in the event that the senior subordinated debt would be
accelerated; and
. the interest rate on borrowings made pursuant to the facility.
During the third quarter of 2000, the Company solicited and received sufficient
consents from holders of its senior subordinated notes to amend certain
provisions and waive certain events of default under the respective indentures.
Pursuant to the terms of the consent solicitation, the Company issued, effective
September 20, 2000, an aggregate of 6,778,577 shares of common stock to the
senior subordinated note holders who participated in the consent solicitation.
As a result of the amendments and waivers on the senior subordinated notes, the
remaining contingencies associated with the Company's senior secured debt were
resolved.
As of November 9, 2000, the Company has been served with eighteen complaints in
purported class action lawsuits filed in the United States District Court for
the Northern District of California. The complaints received by the Company
allege that, among other things, as a result of accounting irregularities, the
Company's previously issued financial statements were materially false and
misleading and thus constituted violations of federal securities laws by the
Company and the directors and officers who resigned on February 17, 2000 (Ian R.
Wilson, James B. Ardrey, Ray Chung and M. Laurie Cummings). The actions allege
that the defendants violated Section 10(b) and/or Section 20(a) of the
Securities Exchange Act and Rule 10b-5 promulgated thereunder (the "Securities
Actions"). The Securities Actions complaints seek damages in unspecified
amounts. These Securities Actions purport to be brought on behalf of purchasers
of the Company's securities during various periods, all of which fall between
October 28, 1998 and April 2, 2000.
On April 14, 2000, certain of the Company's current and former directors were
named as defendants in a derivative lawsuit filed in the Superior Court of the
State of California, in the County of San Francisco, alleging breach of
fiduciary duty, mismanagement and related causes of action based upon the
Company's restatement of its financial statements. The case has been removed to
federal court in San Francisco. The Company believes that the litigation is
procedurally defective, in light of the plaintiffs' failure to make prior demand
on the Board to investigate the claims in question.
The Company announced on January 16, 2001 that it reached a preliminary
agreement to settle the securities class action and derivative lawsuits pending
against the Company and its former management team in the US District Court in
the Northern District of California, pending court approval of a definitive
agreement and related matters.
Under terms of the agreement, Aurora will pay the class members $26 million in
cash and $10 million in common stock. Separately, the Company has entered into
a preliminary agreement with certain members of former management to transfer
between approximately 3 million and 3.6 million shares of Aurora common stock to
the Company, in consideration for a resolution of any civil claims that the
Company may have, and partially conditioned upon future events and
circumstances.
The Company expects that the cash component of the settlement with the Company's
shareholders will be funded entirely by the Company's insurance. With respect to
the stock component of the settlement, the stock received from former management
would be sufficient, at current share prices, to satisfy Aurora's obligation
without issuing additional shares. The actual number of shares needed to fund
the stock component of the settlement will be based on average share prices
determined at later dates.
The terms of the agreement call for the Company to continue to implement certain
remedial measures, including the adoption of an audit committee charter, the
reorganization of its finance department, the establishment of an internal audit
function and the institution of a compliance program, as consideration for
resolution of the derivative litigation.
9
<PAGE>
Pursuant to the Company's articles of incorporation, and certain of its
contractual obligations, the Company has agreed to indemnify its officers and
directors and certain other employees under certain circumstances against claims
and expenses arising from such proceedings. The Company may be obligated to
indemnify certain of its officers and directors for the costs they may incur as
a result of these proceedings.
The Company has been informed that the staff of the Securities and Exchange
Commission (the "SEC") and the Department of Justice (the "DOJ") are conducting
investigations relating to the events that resulted in the restatement of the
Company's financial statements for prior periods ("Prior Events"). The SEC and
DOJ have requested that the Company provide certain documents relating to the
Company's historical financial statements. On September 5, 2000, the Company
received a subpoena from the SEC to produce documents in connection with the
Prior Events. The SEC also requested certain information regarding some of the
Company's former officers and employees, correspondence with the Company's
auditors and documents related to financial statements, accounting policies and
certain transactions and business arrangements.
The Company is cooperating with the SEC and the DOJ in connection with both
investigations. The Company cannot predict the outcome of either governmental
investigation. An adverse outcome in either proceeding may have a material
adverse effect on the Company.
ACCOUNTING CHANGES
During the second quarter of 2000, effective January 1, 2000, the Company
adopted the consensus reached in EITF 00-14, Accounting for Certain Sales
Incentives. This change in accounting principle had the effect of accelerating
the recognition of certain expenses as well as requiring that certain items
previously classified as distribution, promotion and marketing expenses now be
classified as reductions of revenue.
The financial statements included in this amended Form 10-Q do not reflect the
adoption of EITF 00-14, in order to provide more consistent and comparable
information. The accompanying financial statements consistently present the
Company's accounting policies in 1999 and 1998 prior to the accounting change in
2000. The information necessary to reclassify the presentations of expense for
periods prior to 1999 is not available and the accompanying financial statements
do not include any periods subsequent to the change on January 1, 2000.
Reference is made to the financial statements included in the Company's Form
10-Q for the period ended June 30, 2000 for further information on this change
in accounting.
INTERIM FINANCIAL STATEMENTS
The interim financial statements of the Company included herein have not been
audited by independent accountants. The statements include all adjustments, such
as normal recurring accruals, which management considers necessary for a fair
presentation of the financial position and operating results of the Company for
the periods presented. The statements have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
financial statements
10
<PAGE>
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.
THE COMPANY, ITS BUSINESS AND OWNERSHIP
The Company was incorporated in Delaware on June 19, 1998, as the successor to
Aurora Foods Holdings Inc. ("Holdings") and its subsidiary, AurFoods Operating
Co., Inc. (formerly known as Aurora Foods Inc.) ("AurFoods"), both of which were
incorporated in Delaware in December 1996. AurFoods was wholly-owned by
Holdings, which in turn was wholly-owned by MBW Investors LLC ("MBW LLC").
AurFoods was formed for the purpose of acquiring the Mrs. Butterworth's(R) syrup
business from Conopco, Inc., a subsidiary of Unilever United States, Inc.
("Conopco"). AurFoods subsequently acquired the Log Cabin(R) syrup business
("LC") from Kraft Foods, Inc. ("Kraft") in July 1997 and the Duncan Hines(R)
baking mix business ("DH") from The Procter & Gamble Company ("P&G") in January
1998.
Van de Kamp's, Inc. ("VDK") was a wholly-owned subsidiary of VDK Holdings, Inc.,
a Delaware corporation ("VDK Holdings") and was incorporated in Delaware in July
1995 for the purpose of acquiring the Van de Kamp's(R) frozen seafood and frozen
dessert businesses from The Pillsbury Company in September 1995. VDK then
acquired the Mrs. Paul's(R) frozen seafood business from the Campbell Soup
Company in May 1996 and the Aunt Jemima(R) frozen breakfast and Celeste(R)
frozen pizza businesses from The Quaker Oats Company in July 1996. VDK Holdings
was wholly-owned by VDK Foods LLC ("VDK LLC").
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).
11
<PAGE>
On July 1, 1998, Holdings, AurFoods, VDK Holdings and VDK merged with and into
the Company and the initial public offering (the "IPO" or "Equity Offerings") of
12,909,372 shares of Common Stock of the Company and 1,590,628 shares of the
Company's Common Stock sold by New LLC was consummated at an initial public
offering price of $21.00 per share.
As a consequence of the IPO, no additional incentive plan expense will be
recorded under the Aurora Plan (See Note 3 - Incentive Plan Expense). MBW LLC
satisfied its liability under the Aurora Plan by distributing shares of the
Company's common stock in connection with the liquidation of MBW LLC.
On April 1, 1999, the Company acquired 100% of the stock in Sea Coast Foods,
Inc. ("Seacoast") from Galando Investment Limited Partnership, Carey-On Limited
Partnership, Joseph A. Galando, Barbara J. Galando, Stanley J. Carey and Mary K.
Carey for a purchase price of $51.2 million. The consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiary
Seacoast.
NOTE 2 - INVENTORIES
--------------------
Inventories consist of the following (in thousands):
September 30, December 31,
1999 1998
------------- ------------
Raw materials $ 29,107 $ 17,999
Work in process 843 271
Finished goods 59,409 55,280
Packaging and other supplies 6,106 3,781
------------- ------------
$ 95,465 $ 77,331
============= ============
NOTE 3 - INCENTIVE PLAN EXPENSE
-------------------------------
AURORA INCENTIVE PLAN
The Amended and Restated Limited Liability Company Agreement of MBW LLC
contained an incentive plan (the "Aurora Plan") as a means by which certain key
employees and other 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
12
<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) distributed a fixed number of shares
of Common Stock of the Company upon the dissolution of VDK LLC, based on the
valuation of the VDK Management Units at the initial public offering price of
the Company's Common Stock.
The VDK Plan provided for tax gross-up payments on certain distributions.
Because the Company will receive the tax benefit of such distributions and
related tax gross-up payments, and because the tax benefit is expected to exceed
the amount of the tax gross-up payments, the Company incurred an $11.8 million
liability for the tax gross-up payments due. The tax benefit of the tax gross-up
payment and related distributions of $17.3 million, which more than offsets the
gross-up payments, has been recorded to income tax expense and as a deferred tax
asset.
To facilitate payment of the tax gross-up obligation and recognition of related
tax benefits, VDK adopted a new incentive plan (the "New VDK Plan" and together
with the VDK Plan, the "VDK
13
<PAGE>
Plans"), which was assumed by the Company in connection with the Contribution.
Under the New VDK Plan, the Company distributed on July 1, 1999 1,801,769 shares
of the Company's Common Stock to VDK Covered Employees who were granted certain
types of VDK Management Units under the VDK Plan and satisfied the associated
tax gross-up liability. The issuance of such shares (the "MC Shares") did not
increase the number of outstanding shares of Common Stock because the Company's
obligations to issue the MC Shares was contingent upon the Company's receiving
from VDK LLC, as a contribution, a number of shares of the Company's Common
Stock owned by VDK LLC equal to the number of MC Shares. The Company received a
contribution of an equal number of shares from VDK LLC. VDK LLC was obligated to
contribute such shares to the Company after the closing of the Equity Offerings.
The Company's obligation to make the tax gross-up payments referred to above is
subject to the Company being allowed a deduction for federal income tax purposes
with respect to the payment of the MC Shares and tax gross-up payment.
NOTE 4 - TRANSITION EXPENSES
----------------------------
Transition expenses consist of one-time costs incurred to integrate the acquired
businesses, including relocation expenses, recruiting fees, sales support,
production transition and other unique transitional expenses.
NOTE 5 - EARNINGS PER SHARE
---------------------------
Basic earnings per share represents the income available to common stockholders
divided by the weighted average number of common shares outstanding during the
measurement period. Diluted earnings per share represents the income available
to common stockholders divided by the weighted average number of common shares
outstanding during the measurement period while also giving effect to all
potentially dilutive common shares that were outstanding during the period.
Potentially dilutive common shares consist of stock options (the dilutive impact
is calculated by applying the "treasury stock method").
The table below summarizes the numerator and denominator for the basic and
diluted earnings (loss) per share calculations (in thousands except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before extraordinary loss $ 3,827 $ (4,668) $ 579 $(64,395)
Extraordinary loss, net of tax -- (7,449) -- (9,325)
-------- -------- -------- --------
Net income (loss) $ 3,827 $(12,117) $ 579 $(73,720)
======== ======== ======== ========
Denominator:
Weighted average number of basic shares 67,030 67,000 67,021 49,159
Effect of dilutive securities -- -- -- --
-------- -------- -------- --------
Weighted average number of diluted shares 67,030 67,000 67,021 49,159
======== ======== ======== ========
Basic and diluted earnings (loss) per share
Before extraordinary loss $ 0.06 $ (0.07) $ 0.01 $ (1.31)
Extraordinary loss per share 0.00 (0.11) 0.00 (0.19)
-------- -------- -------- --------
Basic and diluted earnings (loss) per share $ 0.06 $ (0.18) $ 0.01 $ (1.50)
======== ======== ======== ========
</TABLE>
14
<PAGE>
NOTE 6 - SEGMENT INFORMATION
----------------------------
The Company groups its businesses in two operating segments: dry grocery
division and frozen food division. The operating segments are managed as
strategic units due to their distinct manufacturing methodologies, distribution
channels and dedicated segment management teams. The dry grocery division
includes Duncan Hines(R) baking mix products, and Mrs. Butterworth's(R) and Log
Cabin(R) syrup products. The frozen food division includes Van de Kamp's(R) and
Mrs. Paul's(R) frozen seafood products, Aunt Jemima(R) frozen breakfast
products, Celeste(R) frozen pizza products and Chef's Choice(R) skillet meal
products.
The following table presents a summary of operations by segment (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales
Dry grocery $ 131,937 $ 133,571 $ 332,943 $ 339,854
Frozen food 99,959 85,197 367,251 168,112
----------- ----------- ----------- -----------
Total $ 231,896 $ 218,768 $ 700,194 $ 507,966
=========== =========== =========== ===========
Operating income (loss)
Dry grocery $ 21,274 $ 14,651 $ 46,368 $ 48,858
Frozen food 3,389 (2,233) 12,299 13
Other (1,697) (1,269) (9,094) (62,299)
----------- ----------- ----------- -----------
Total $ 22,966 $ 11,149 $ 49,573 $ (13,428)
=========== =========== =========== ===========
Total assets
Dry grocery $ 886,017 $ 880,617 $ 886,017 $ 880,617
Frozen food 667,302 574,356 667,302 574,356
----------- ----------- ----------- -----------
Total $ 1,553,319 $ 1,454,973 $ 1,553,319 $ 1,454,973
=========== =========== =========== ===========
Depreciation and amortization
Dry grocery $ 6,908 $ 6,982 $ 19,688 $ 19,929
Frozen food 6,934 4,863 19,760 9,658
----------- ----------- ----------- -----------
Total $ 13,842 $ 11,845 $ 39,448 $ 29,587
=========== =========== =========== ===========
Capital expenditures
Dry grocery $ 46 $ 8,182 $ 7,742 $ 10,735
Frozen food 2,787 6,079 8,063 10,917
----------- ----------- ----------- -----------
Total $ 2,833 $ 14,261 $ 15,805 $ 21,652
=========== =========== =========== ===========
</TABLE>
The Other line item in operating income is comprised of one-time expenses
related to incentive plan expense (See Note 3 - Incentive Plan Expense) and
transition expenses (See Note 4 - Transition Expenses) that were incurred in the
respective periods.
NOTE 7 - SUBSEQUENT EVENT
-------------------------
On November 1, 1999, the Company acquired substantially all of the assets and
liabilities of the Lender's Bagel ("Lender's") business from The Eggo Company, a
subsidiary of the Kellogg
15
<PAGE>
Company ("Kellogg's"). The assets acquired by the Company include (i)
Lender's(R) brand and associated trademarks, (ii) manufacturing facilities
located in Mattoon, Illinois and West Seneca, New York, plus substantially all
the equipment for the manufacture of Lender's(R) products currently located in
Kellogg's West Haven, Connecticut facility, (iii) proprietary formulations for
Lender's(R) products, (iv) other product specification and customer lists, and
(v) rights under certain contracts, licenses, purchase orders and other
arrangements and permits. The purchase price of approximately $275.0 million was
based on an arms' length negotiation between the Company and Kellogg's. The
acquisition was accounted for by using the purchase method of accounting. The
allocation of the purchase price has not been finalized; however, any changes
are not expected to be material.
To finance the acquisition of the Lender's business and related costs, the
Company added $275.0 million of senior secured term debt to its existing senior
bank facilities under the Fifth Amended and Restated Credit Agreement dated
November 1, 1999, among the Company, as Borrower, the lenders listed therein,
The Chase Manhattan Bank, as Administrative Agent, The National Westminster Bank
PLC, as Syndication Agent and UBS AG, Stamford Branch, as Documentation Agent
("Fifth Senior Bank Facilities").
The cost to acquire the Lender's business has been preliminarily allocated to
tangible and intangible assets acquired as follows (in thousands):
Cash paid to acquire assets $ 273,591
Other acquisition costs 5,000
-----------
278,591
Costs assigned to tangible assets (92,817)
-----------
Costs attributable to intangible assets $ 185,774
===========
Had the Lender's acquisition taken place January 1, 1998 and had the Duncan
Hines(R) brand and Van de Kamp's, Inc. acquisitions taken place January 1, 1998
the unaudited pro forma results of operations for the three months and nine
months ended September 30, 1999 and 1998, respectively, would have been as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 283,668 $ 273,008 $ 857,390 $ 823,536
========= ========= ========= =========
Gross profit $ 161,389 $ 157,776 $ 494,884 $ 485,147
========= ========= ========= =========
Operating income (loss) $ 29,340 $ 15,956 $ 62,586 $ (62,240)
========= ========= ========= =========
Net income (loss) before extraordinary item $ 3,446 $ (8,317) $ (2,807) $ (93,616)
========= ========= ========= =========
Net income (loss) $ 3,446 $ (15,766) $ (2,807) $(102,942)
========= ========= ========= =========
Net income (loss) per share:
Net income (loss) before extraordinary item $ 0.05 $ (0.12) $ (0.04) $ (1.40)
========= ========= ========= =========
Net income (loss) $ 0.05 $ (0.24) $ (0.04) $ (1.54)
========= ========= ========= =========
</TABLE>
16
<PAGE>
NOTE 8 RESTATEMENT
------------------
As described in Note 1, the September 30, 1999 and 1998 financial statements
have been restated. A summary of the effects of the restatement follows (in
thousands, except share and per share data):
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, 1999
----------------------------
(As previously
ASSETS reported) (As restated)
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 376 $ 446
Accounts receivable 154,978 115,149
Inventories 96,862 95,465
Prepaid expenses and other assets 16,746 15,326
Current deferred tax assets 25,755 15,090
----------- -----------
Total current assets 294,717 241,476
Property, plant and equipment, net 166,183 161,343
Deferred tax asset -- 2,051
Goodwill and other intangible assets, net 1,121,598 1,117,902
Asset held for sale -- 800
Other assets 31,299 29,747
----------- -----------
Total assets $ 1,613,797 $ 1,553,319
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of senior secured term debt $ 22,756 $ 22,756
Senior secured revolving debt facility 132,350 132,350
Accounts payable 72,051 72,640
Accrued liabilities 33,656 62,768
----------- -----------
Total current liabilities 260,813 290,514
Non-current deferred tax liabilities 40,055 --
Senior secured term debt 279,573 279,573
Senior subordinated notes 402,099 402,099
----------- -----------
Total liabilities 982,540 972,186
----------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value; 25,000,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $0.01 par value; 250,000,000 shares
authorized; 67,030,440 shares issued and outstanding 670 670
Paid in capital 648,100 648,100
Promissory notes (322) (322)
Accumulated deficit (17,191) (67,315)
----------- -----------
Total stockholders' equity 631,257 581,133
----------- -----------
Total liabilities and stockholders' equity $ 1,613,797 $ 1,553,319
=========== ===========
</TABLE>
17
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
-------------------------------------
(As previously
reported) (As restated)
----------------- ------------------
<S> <C> <C>
Net sales $ 238,275 $ 231,896
Cost of goods sold 100,970 101,536
--------- ---------
Gross profit 137,305 130,360
--------- ---------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 22,625 23,535
Trade promotions 44,310 47,816
Consumer marketing 15,551 16,369
--------- ---------
Total brokerage, distribution and marketing expenses 82,486 87,720
Amortization of goodwill and other intangibles 9,042 9,600
Selling, general and administrative expenses 8,176 8,377
Transition expenses 2,136 1,697
--------- ---------
Total operating expenses 101,840 107,394
--------- ---------
Operating income 35,465 22,966
Interest income -- (36)
Interest expense 16,802 16,910
Amortization of deferred financing expense 498 498
Other bank and financing expenses 120 48
--------- ---------
Income before income taxes 18,045 5,546
Income tax expense 6,877 1,719
--------- ---------
Net income $ 11,168 $ 3,827
========= =========
Basic and diluted earnings per share $ 0.17 $ 0.06
========= =========
Weighted average number of shares outstanding 67,030 67,030
========= =========
</TABLE>
18
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
-------------------------------------------
(As previously
reported) (As restated)
------------------ -------------------
<S> <C> <C>
Net sales $ 721,036 $ 700,194
Cost of goods sold 292,467 297,469
--------- ---------
Gross profit 428,569 402,725
--------- ---------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 69,289 69,099
Trade promotions 152,687 167,930
Consumer marketing 54,039 55,094
--------- ---------
Total brokerage, distribution and marketing expenses 276,015 292,123
Amortization of goodwill and other intangibles 26,896 27,764
Selling, general and administrative expenses 23,315 24,171
Transition expenses 9,478 9,094
--------- ---------
Total operating expenses 335,704 353,152
--------- ---------
Operating income 92,865 49,573
Interest income -- (86)
Interest expense 47,130 47,290
Amortization of deferred financing expense 1,380 1,379
Other bank and financing expenses 222 150
--------- ---------
Income before income taxes 44,133 840
Income tax expense 17,182 261
--------- ---------
Net income $ 26,951 $ 579
========= =========
Basic and diluted earnings per share $ 0.40 $ 0.01
========= =========
Weighted average number of shares outstanding 67,021 67,021
========= =========
</TABLE>
19
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1998
----------------------------------------
(As Previously
Reported) (As Restated)
----------------- ------------------
<S> <C> <C>
Net sales $ 220,368 $ 218,768
Cost of goods sold 89,264 89,974
--------- ---------
Gross profit 131,104 128,794
--------- ---------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 20,767 22,677
Trade promotions 49,102 61,638
Consumer marketing 15,928 15,928
--------- ---------
Total brokerage, distribution and marketing expenses 85,797 100,243
Amortization of goodwill and other intangibles 8,623 8,623
Selling, general and administrative expenses 7,200 7,510
Transition expenses 1,269 1,269
--------- ---------
Total operating expenses 102,889 117,645
--------- ---------
Operating income 28,215 11,149
Interest income (123) (123)
Interest expense 15,677 15,682
Amortization of deferred financing expense 372 372
Other bank and financing expenses 54 49
--------- ---------
Income (loss) before income taxes and extraordinary item 12,235 (4,831)
Income tax expense (benefit) 4,132 (163)
--------- ---------
Net income (loss) before extraordinary item 8,103 (4,668)
Extraordinary loss on early extinguishment of debt,
net of tax of $4,520 7,449 7,449
--------- ---------
Net income (loss) $ 654 $ (12,117)
========= =========
Basic and diluted earnings (loss) per share before
extraordinary item $ 0.12 $ (0.07)
Extraordinary item per share 0.11 0.11
--------- ---------
Basic and diluted earnings (loss) per share $ 0.01 $ (0.18)
========= =========
Weighted average number of shares outstanding 67,000 67,000
========= =========
</TABLE>
20
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Nine months Ended
September 30, 1998
----------------------------------------
(As Previously
Reported) (As Restated)
----------------- ----------------
<S> <C> <C>
Net sales $ 509,566 $ 507,966
Cost of goods sold 208,741 209,451
--------- ---------
Gross profit 300,825 298,515
--------- ---------
Brokerage, distribution and marketing expenses:
Brokerage and distribution 48,980 50,890
Trade promotions 109,972 122,508
Consumer marketing 37,423 37,423
--------- ---------
Total brokerage, distribution and marketing expenses 196,375 210,821
Amortization of goodwill and other intangibles 21,409 21,409
Selling, general and administrative expenses 17,104 17,414
Incentive plan expense 56,583 56,583
Transition expenses 5,716 5,716
--------- ---------
Total operating expenses 297,187 311,943
--------- ---------
Operating income (loss) 3,638 (13,428)
Interest income (544) (544)
Interest expense 50,075 50,080
Amortization of deferred financing expense 1,472 1,472
Other bank and financing expenses 194 189
--------- ---------
Loss before income taxes and extraordinary item (47,559) (64,625)
Income tax expense (benefit) 4,065 (230)
--------- ---------
Net loss before extraordinary item (51,624) (64,395)
Extraordinary loss on early extinguishment of debt,
net of tax of $5,704 9,325 9,325
--------- ---------
Net loss $ (60,949) $ (73,720)
========= =========
Basic and diluted loss per share before
extraordinary item $ (1.05) $ (1.31)
Extraordinary item per share 0.19 0.19
--------- ---------
Basic and diluted loss per share $ (1.24) $ (1.50)
========= =========
Weighted average number of shares outstanding 49,159 49,159
========= =========
</TABLE>
21
<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 Consolidated Financial Statements and
notes to the consolidated financial statements. Unless otherwise noted, years
(1999 and 1998) in this discussion refer to the Company's September-ending
quarters.
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 nine months ended September 30,
1998 and 1999, have been included in the condensed consolidated financial
statements included herein.
For the three and nine months ended September 30, 1998, these misstatements
primarily understated trade promotions expense by $12.5 million, overstated net
sales by $1.6 million, overstated brokerage and distribution expense by $1.9
million, understated cost of goods sold by $0.7 million and understated selling,
general and administrative expenses by $0.3 million. After adjusting for the
misstatements, the Company recalculated its income tax provision reducing income
tax expense by $4.3 million.
For the three months ended September 30, 1999, these misstatements primarily
overstated net sales by $6.4 million, understated trade promotions expense by
$3.5 million, understated brokerage and distribution expense by $0.9 million,
understated consumer marketing expense by $0.8 million and understated cost of
goods sold by $0.6 million. After adjusting for the misstatements, the Company
recalculated its income tax provision reducing income tax expense by $5.2
million.
For the nine months ended September 30, 1999, these misstatements primarily
overstated net sales by $20.8 million, understated trade promotions expense by
$15.2 million, understated cost of goods sold by $5.0 million, understated
consumer marketing expense by $1.1 million and understated other operating
expenses by $1.3 million. After adjusting for the misstatements, the Company
recalculated its income tax provision reducing income tax expense by $16.9
million.
A summary of the effects of the restatement is set forth in Note 8 to the
Condensed Consolidated Financial Statements.
22
<PAGE>
Trade promotions expense includes the costs paid to retailers to promote the
Company's products. Such costs include amounts paid to customers for space in
the retailers' stores ("slotting fees"), amounts paid to provide samples of the
Company's products to consumers, and amounts paid to obtain favorable display
positions in the retailers' stores. These promotions are offered to customers in
lump sum payments and as rate per unit allowances as dictated by industry norms.
The Company expenses slotting fees when incurred or, when under a 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 on "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 for the nine-month periods include
a presentation of the pro forma results of the Company for the nine months ended
September 30, 1998, which include the acquisitions of the Duncan Hines(R) brand
and Van de Kamp's, Inc. business as if they had occurred on January 1, 1998.
23
<PAGE>
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Actual Three Months Ended
--------------------------------------------------------
September 30, 1999 September 30, 1998
------------------------- --------------------------
<S> <C> <C> <C> <C>
Net sales $ 231,896 100.0% $ 218,768 100.0%
Cost of goods sold 101,536 43.8 89,974 41.1
------------ ------- ----------- ---------
Gross profit 130,360 56.2 128,794 58.9
------------ ------- ----------- ---------
Brokerage, distribution and
marketing expenses:
Brokerage and distribution 23,535 10.1 22,677 10.4
Trade promotions 47,816 20.6 61,638 28.2
Consumer marketing 16,369 7.1 15,928 7.3
------------ ------- ----------- ---------
Total brokerage, distribution
and marketing expenses 87,720 37.8 100,243 45.8
Amortization of goodwill
and other intangibles 9,600 4.1 8,623 3.9
Selling, general and
administrative expenses 8,377 3.6 7,510 3.4
Transition expenses 1,697 0.7 1,269 0.6
------------ ------- ----------- ---------
Total operating expenses 107,394 46.3 117,645 53.8
------------ ------- ----------- ---------
Operating income 22,966 9.9 11,149 5.1
Interest income (36) (0.0) (123) (0.1)
Interest expense 16,910 7.3 15,682 7.2
Amortization of deferred
financing expense 498 0.2 372 0.2
Other bank and financing
expenses 48 0.0 49 0.0
------------ ------- ----------- ---------
Net income (loss) before taxes and
and extraordinary loss 5,546 2.4 (4,831) (2.2)
Income tax expense (benefit) 1,719 0.7 (163) (0.1)
------------ ------- ----------- ---------
Net income (loss) before
extraordinary loss 3,827 1.7 (4,668) (2.1)
Extraordinary loss on early
extinguishment of debt
net of tax $4,520 $ - 0.0 7,449 3.4
------------ ------- -----------
Net income (loss) $ 3,827 1.7% $ (12,117) (5.5)%
============ ======= =========== =========
Earnings (loss) per share $ 0.06 $ (0.18)
============ ===========
Adjusted EBITDA/(1)/ $ 37,868 $ 24,286
============ ===========
Adjusted EPS/(2)/ $ 0.07 $ (0.06)
============ ===========
</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
loss.
24
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1998
Net Sales. Net sales for the quarter ended September 30, 1999 were $231.9
million, which was a 6.0% increase compared to net sales in the prior year
quarter of $218.8 million. Sales growth was driven by Chef's Choice(R) skillet
meals, which contributed $18.1 million in sales, partially offset by other sales
declines in both the frozen foods division and the dry grocery division.
Frozen food sales, excluding Chef's Choice(R), decreased 3.9% to $81.9 million
versus $85.2 million in the prior year period due to sales declines of 12.2% in
frozen seafood and 6.8% in breakfast, partially offset by sales growth of 7.1%
in Celeste(R) frozen pizza. Sales declines in frozen seafood occurred in both
the Van de Kamp's(R) and Mrs. Paul's(R) brands. Sales of Aunt Jemima(R) frozen
breakfast products declined as expected because of the conversion of the frozen
waffle package count from 8 waffles per package to 10. The package size was
changed in response to a similar increase by Eggo.
Sales of $131.9 million for the dry grocery division were off 1.2% from the
prior year period. Syrup sales increased 5.8% over the prior year period as a
result of the introduction of Mrs. Butterworth's(R) flavored syrup for children,
the switch to plastic from glass bottles on Mrs. Butterworth's syrup and the
launch of new premium Log Cabin(R) syrups in the Northeast markets. Baking mix
sales decreased 5.7% compared to the prior year due to lower trade promotional
spending. Trade promotions were higher last year in order to support the launch
of the reformulated brownie product and to mitigate the price increase taken in
the June quarter of 1998 on cake and frosting products.
Gross Profit. Gross profit was 56.2% of net sales, which was 2.7 percentage
points lower than the gross profit in the 1998 quarter of 58.9%. The decrease
was primarily due to the inclusion of Chef's Choice(R) brand products and
increased frozen food sales to the club and food service channels.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses for the quarter decreased $12.5 million compared to the prior
year. As a percentage of net sales, brokerage, distribution and marketing
expenses were 37.8%, which was 8.0 percentage points lower than the prior year
of 45.8%. Marketing expenses were 27.7% of net sales, which was 7.8 percentage
points lower than the prior year of 35.5%. The decrease in marketing expenses
was due to the prior year's higher trade support on Duncan Hines(R) products and
reduced trade promotions in the seasonally slow third quarter.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles increased to $9.6 million from $8.6 million in the 1998
quarter. The increase of $1.0 million was due to the additional amortization
expense generated by the goodwill recorded in connection with the acquisition of
the Chef's Choice(R) brand in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $8.4 million were $0.9 million higher than the prior
year expense of $7.5 million. The increase was due primarily to the inclusion of
the Chef's Choice(R) business. Selling, general and administrative expenses were
3.6% of net sales compared to 3.4% for the prior quarter.
25
<PAGE>
Transition Expenses. Transition expenses were $1.7 million compared to $1.3
million recorded in the prior year and represent one-time costs incurred to
integrate the acquired businesses. The expenses were due to the acquisitions of
the Duncan Hines(R) and Chef's Choice(R) brands.
Operating Income. Operating income was $23.0 million compared to operating
income in the prior year of $11.1 million. Excluding the effect of transition
expenses, operating income increased 99.2% to $24.7 million in the quarter
versus $12.4 million in the prior year. The increase was primarily due to lower
brokerage, distribution and marketing expenses.
Interest Income, Interest Expense and Amortization of Deferred Financing
Expense. The aggregate of net interest expense and amortization of deferred
financing expense of $17.4 million was $1.4 million greater than the prior year
amount of $15.9 million. The increase in interest expense was due primarily to
increased debt in 1999 due to the acquisition of Chef's Choice(R).
Income Tax Expense. The income tax expense recorded for the quarter was $1.7
million, which represents an effective tax rate of 31.0%. The effective tax rate
was less than the anticipated rate due to state tax credits taken in the current
quarter. An income tax benefit of $0.2 million was recorded in the prior year
quarter. The prior year effective tax rate of 3.4% was low due to the
nondeductibility of the incentive plan expense incurred during 1998.
Net Income. The Company recorded net income of $3.8 million compared to a loss
of $12.1 million in the prior year. Excluding the effect of transition expenses
in 1999 and 1998, and excluding the extraordinary loss from the early
extinguishment of debt in 1998, net income would have been $5.0 million in the
current quarter versus a loss of $3.9 million in the prior year quarter.
26
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Actual Nine Months Ended Pro Forma Nine Months
-------------------------------------------------------
September 30, 1999 September 30, 1998 Ended September 30, 1998
------------------------- ------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 700,194 100.0% $ 507,966 100.0% $ 665,757 100.0%
Cost of goods sold 297,469 42.5 209,451 41.2 269,673 40.5
------------- ------- ----------- ------ ---------- -------
Gross profit 402,725 57.5 298,515 58.8 396,084 59.5
------------- ------- ----------- ------ ---------- -------
Brokerage, distribution and
marketing expenses:
Brokerage and distribution 69,099 9.9 50,890 10.0 65,804 9.9
Trade promotions 167,930 24.0 122,508 24.1 166,901 25.1
Consumer marketing 55,094 7.9 37,423 7.4 50,902 7.6
------------- ------- ----------- ------ ---------- -------
Total brokerage, distribution
and marketing expenses 292,123 41.7 210,821 41.5 283,607 42.6
Amortization of goodwill and other
intangibles 27,764 4.0 21,409 4.2 25,466 3.8
Selling, general and
administrative expenses 24,171 3.5 17,414 3.4 22,696 3.4
Incentive plan expense - 0.0 56,583 11.1 121,323 18.2
Transition expenses 9,094 1.3 5,716 1.1 5,716 0.9
------------- -------- ----------- ------ ---------- -------
Total operating expenses 353,152 50.4 311,943 61.4 458,808 68.9
------------- ------- ----------- ------ ---------- --------
Operating income (loss) 49,573 7.1 (13,428) (2.6) (62,724) (9.4)
Interest income (86) (0.0) (544) (0.1) (544) (0.1)
Interest expense 47,290 6.8 50,080 9.9 44,328 6.7
Amortization of deferred
financing expense 1,379 0.2 1,472 0.3 1,117 0.2
Other bank and financing expenses 150 0.0 189 0.0 239 0.0
------------- ------- ----------- ------ ---------- -------
Income (loss) before income
taxes and extraordinary
loss 840 0.1 (64,625) (12.7) (107,864) (16.2)
Income tax expense (benefit) 261 0.0 (230) (0.0) (9,926) (1.5)
------------- ------- ----------- ------ ---------- -------
Net income (loss) before
extraordinary loss 579 0.1 (64,395) (12.7) (97,938) (14.7)
Extraordinary loss on early
extinguishment of debt,
net of tax of $5,704 - 0.0 9,325 1.8 9,325 1.4
------------- ------- ----------- ------ ---------- -------
Net income (loss) $ 579 0.1% (73,720) (14.5)% $(107,263) (16.1)%
============= ======= =========== ====== ========== =======
Earnings (loss) per share $ 0.01 $ (1.50) $ (1.60)
============= =========== ==========
Adjusted EBITDA/(1)/ $ 96,135 $ 77,470 $ 99,592
============= =========== ==========
Adjusted EPS/(2)/ $ 0.10 $ (0.09) $ 0.06
============= =========== ==========
</TABLE>
(1) Adjusted EBITDA is defined as operating income before incentive plan
expense, transition expenses, depreciation and amortization of goodwill
and other intangibles.
(2) Adjusted EPS is defined as earnings per share plus the per share after tax
effect of incentive plan expense, transition expenses and extraordinary
loss.
27
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1998
Net Sales. Net sales for the nine months ended September 30, 1999 of $700.2
million were $192.2 million greater than the prior year period of $508.0
million. The prior year period included the results of the Mrs. Butterworth's(R)
and Log Cabin(R) brands, the Duncan Hines(R) brand from January 16, 1998, and
the Van de Kamp's, Inc. business from April 9, 1998. The Van de Kamp's, Inc.
business was purchased on April 8, 1998 and is included in the pro forma
results.
Pro Forma Net Sales. Net sales for the nine month period increased 5.2%
as compared to pro forma net sales of $665.8 million for the prior year
period (which reflect the acquisitions of the Duncan Hines(R) brand and
Van de Kamp's, Inc. as if they had occurred on January 1, 1998). Sales
growth in the nine-month period was led by sales growth of frozen food
products and the addition of $37.1 million of sales from Chef's
Choice(R), which was acquired in April 1999.
Frozen food sales, excluding Chef's Choice(R), increased 3.1% to $330.2
million versus $320.2 million in the prior year period due to sales
growth of 2.7% in frozen seafood, 6.8% in Celeste(R) frozen pizza,
partially offset by a sales decline of 0.5% in frozen breakfast
products. Sales for the dry grocery division were $332.9 million
compared to $345.5 million in the prior pro forma year period. Syrup
sales were down 2.2% and sales of Duncan Hines(R) products were down
4.7%.
Gross Profit. Gross profit was 57.5% of net sales, which was 1.3 percentage
points lower than gross profit in the 1998 period of 58.8%. The decrease was
primarily due to the inclusion of the lower margin Chef's Choice(R) brand
products in 1999.
Pro Forma Gross Profit. Gross profit of 57.5% for the nine-month period
was 2.0 percentage points lower than the pro forma gross profit of
59.5% for the prior year period primarily due to the inclusion of
Chef's Choice(R) brand products in 1999.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses for the nine-month period increased $81.3 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
41.7% as compared to the prior year of 41.5%.
Pro Forma Brokerage, Distribution and Marketing Expenses. On a pro
forma basis, brokerage, distribution and marketing expenses for the
period were $8.5 million higher than the prior year period, but
declined as a percentage of net sales to 41.7% versus 42.6% in the
prior year. Brokerage and distribution expenses increased $3.3 million
over last year and were flat as a percentage of net sales to the prior
year. Marketing expenses were 31.9% of net sales, which was 0.8
percentage points lower than the prior year of 32.7%. Trade promotions
were higher last year in order to support the launch of the
reformulated brownie product and the price increase on cake and
frosting products.
28
<PAGE>
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles increased to $27.8 million from $21.4 million in the 1998
period. The increase of $6.4 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 Chef's Choice(R) in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $24.2 million were $6.8 million higher than the prior
year period of $17.4 million. The increase was due to the inclusion of Van de
Kamp's, Inc. Selling, general and administrative expenses were 3.5% of net
sales, which was 0.1 percentage points higher than the 3.4% experienced in the
prior year.
Incentive Plan Expense. In the prior year period, the Company recorded a
non-cash incentive plan expense of $56.6 million in accordance with the Aurora
Plan contained in the MBW LLC Agreement (See Notes to the Financial Statements
Note 3 - Incentive Plan Expense).
Transition Expenses. Transition expenses were $9.1 million compared to $5.7
million recorded in the prior year and represent one-time costs incurred to
integrate the acquired businesses. The expenses were due to the acquisitions of
the Duncan Hines(R) and Chef's Choice(R) brands.
Operating Income. Operating income was $49.6 million compared to a loss of $13.4
million in the prior year period. Excluding the effects of the incentive plan
expense and transition expenses, operating income increased 20.0% to $58.7
million for the nine month period compared to $48.9 million in the prior year
period. The increase was due to the inclusion of operating income generated by
the acquired businesses.
Pro Forma Operating Income (Loss). On a pro forma basis, operating loss
for the prior year period was $62.7 million. Excluding the effects of
the incentive plan expense and transition expenses, the Company's
operating income in the 1998 period would have been $64.3 million
compared to $58.7 million for the current period, an 8.7% decrease from
the prior year period primarily due to an increase in brokerage,
distribution and marketing expenses, partially offset by an increase in
gross profit.
Interest Income, Interest Expense and Amortization of Deferred Financing
Expense. The aggregate of net interest expense and amortization of deferred
financing expense of $48.6 million in the nine month period was lower than the
prior year amount of $51.0 million. The decrease in interest expense was due to
a lower debt balance following the reduction in debt from the net proceeds of
the initial public offering in July 1998.
Income Tax Expense (Benefit). The income tax expense recorded for the period was
$0.3 million, which represents an effective tax rate of 31.1%, while an income
tax benefit of $0.2 million was recorded in the prior year period an effective
tax rate of 0.4%. The effective tax rate was less than anticipated in the
current year period primarily due to state tax credits taken in the current
period. The effective tax rate in the prior year was lower than expected due to
the effect of the non-deductible incentive plan expense in the prior year.
Net Income (Loss). The Company recorded net income of $0.6 million compared to a
net loss for the prior year of $73.7 million. Excluding the effect of transition
expenses in 1999 and 1998, and excluding the extraordinary loss from early
extinguishment of debt and incentive plan expense in
29
<PAGE>
1998, net income would have been $6.9 million in the current period versus a
$4.2 million loss in the prior period.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, net income plus non-cash charges
provided $40.3 million of operating cash flow. From December 31, 1998, net
working capital, excluding cash, current deferred tax assets, and current
maturities of senior secured debt, increased $57.6 million. The increase in net
working capital was the result of the following factors: (1) an increase in dry
division receivables due to higher sales in September of 1999 in anticipation of
the holiday season, (2) a decrease in accrued liabilities related to the timing
of interest payments on the Company's debt, and (3) the acquisition of the
Chef's Choice(R) brand and the associated working capital.
Net cash used in investing activities was $109.6 million for the nine month
period. Cash used during the period included $51.2 million for the acquisition
of Chef's Choice(R) and $15.8 million on capital expenditures. In addition, the
Company invested in additional manufacturing capacity of frozen seafood products
with the purchase of a production facility and the associated working capital.
The Company expects to spend approximately $26.0 million on capital expenditures
for the year ended December 31, 1999. Capital expenditures were funded from
operating financing activities.
During the period, financing activities provided cash of $127.0 million. To
finance the acquisition of the Chef's Choice(R) brand and related expenses, the
Company increased its existing senior bank facilities with $100.0 million of
senior secured term debt under the Company's Fourth Amended and Restated Credit
Agreement, dated as of March 31, 1999, among the Company, as Borrower, the
lenders listed therein, The Chase Manhattan Bank, as Administrative Agent, The
National Westminster Bank PLC, as Syndication Agent and UBS AG, Stamford Branch,
as Documentation Agent ("Amended New Senior Bank Facilities"). The proceeds were
used to fund the acquisition of Chef's Choice(R) in April 1999 and reduce the
senior secured revolving debt facility under the Amended New Senior Bank
Facilities. The Company repaid $17.7 million in principal on its Amended New
Senior Bank Facilities and borrowed on the revolving facility to fund working
capital requirements.
At September 30, 1999, the Company had $0.4 million of cash and cash equivalents
and an unused commitment of $42.7 million on senior secured revolving debt
facility under the Amended New Senior Bank Facilities. The Company's primary
sources of liquidity are cash flows from operations and available borrowings
under the $175.0 million revolving debt facility. Management believes the
available borrowing capacity under the revolving debt facility combined with
cash provided by operations will provide the Company with sufficient cash to
fund operations as well as to meet existing obligations.
Interest Rate Collar Agreements. At September 30, 1999, the Company was party to
an interest rate collar agreement. On November 26, 1997, the Company entered
into a three year interest rate collar agreement with a notional principal
amount of $50.0 million, a cap rate of 7.5% and a floor rate of 5.50%.
Interest Rate Swap Agreements. The Company is party to two interest rate swap
agreements. On March 17, 1998, the Company entered into an interest rate swap
agreement with a notional principal amount of $150.0 million and a term of three
years. The effective swap rate on March 17, 1998 was 5.81%. On November 30,
1998, the Company amended the existing interest agreement whereby the
30
<PAGE>
counterparty received the option to extend the termination date to March 17,
2003. The new effective swap rate through the termination date of the interest
rate swap agreement is 5.37%. The applicable rate is set quarterly with the next
reset date on December 17, 1999.
On April 13, 1999, the Company entered into a three-year interest rate swap
agreement (the "Swap") with a notional principal amount of $200.0 million. The
Company entered into the Swap to achieve its objective of hedging approximately
60% of its debt against movements in interest rates. The applicable rate is set
quarterly with the next reset date on January 1, 2000. The counterparty to the
Company's Swap is a major financial institution.
Under the Swap, the Company would receive payments from the counterparty if the
three-month LIBOR plus a spread of 3.25% falls below a cap rate of 8.63%, but
not below 7.8%. There would be no payments made to either counterparty if the
three-month LIBOR plus a spread of 3.25% exceeds 8.63% and is less than 10.25%.
The Company would make payments to the counterparty if the three-month LIBOR
plus a spread of 3.25% exceeds 10.25%.
Risks associated with the interest rate swap and collar agreements include those
associated with changes in the market value and interest rates. Management
considers the potential loss in future 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;
. waiver of certain existing defaults of covenants and breaches of
representations and warranties;
. until the defaults are cured or waived, a forbearance from exercising
remedies that are available as a result of the Company's defaults under
the Indentures governing the senior subordinated debt until September 30,
2000; or, if earlier, in the event that the senior subordinated debt
would be accelerated; and
. the interest rate on borrowings made pursuant to the facility.
During the third quarter of 2000, the Company solicited and received sufficient
consents from holders of its senior subordinated notes to amend certain
provisions and waive certain events of default under the respective indentures.
Pursuant to the terms of the consent solicitation, the Company issued, effective
September 20, 2000, an aggregate of 6,778,577 shares of common stock to the
senior subordinated note holders who participated in the consent solicitation.
The Company solicited the consent (the "Consent Solicitation") of the holders of
the Company's 8 3/4% Senior Subordinated Notes due 2008 and February and July
issues of the Company's 9 7/8% Senior Subordinated Notes due 2007 (the "Notes").
The purpose of the Consent Solicitation was to amend certain provisions of each
Indenture (the "Indentures") governing the Notes, to waive certain events of
default under each Indenture and to receive a release of certain claims.
The Consent Solicitation expired on September 20, 2000. Upon receiving the
required consents pursuant to the Company's Confidential Consent Solicitation
Statement dated as of August 31, 2000, as supplemented (the "Consent
Solicitation Statement"), the Company and the trustee under the Indentures
executed a Supplemental Indenture with respect to each Indenture to make the
amendments operative and binding on all holders of Notes.
The amendments allow the Company to incur up to $90 million of additional senior
indebtedness to replace an existing $60 million receivables sale arrangement and
increase the call premium on the outstanding Notes by 2% starting in 2002 for
the 9 7/8% Notes and 2003 for the 8 3/4% Notes.
In connection with the successful completion of the Consent Solicitation,
certain investors, including funds affiliated with existing stockholders,
purchased 3,750,000 shares of the Company's Series A Preferred Stock for an
aggregate purchase price of $15 million, that further enhances the Company's
liquidity.
As a result of the amendments and waivers on the senior subordinated notes, the
remaining contingencies associated with the Company's senior secured debt were
resolved.
The Company is highly leveraged. At November 10, 2000, the Company has
outstanding approximately $1.1 billion in aggregate principal amount of
indebtedness for borrowed money. The degree to which the Company is leveraged
results in significant cash interest expense and principal repayment obligations
and such interest expense may increase with respect to its revolving credit
facility based upon changes in prevailing interest rates. This leverage may,
among other things, affect the ability of the Company to obtain additional
financing, or adjust to changing market conditions. In addition, the Company is
limited in its ability to pursue additional acquisitions.
The Company believes that its cash flow from operations and, if necessary, the
proceeds from asset sales will be sufficient to meet its payment obligations
under its debt obligations and other operational requirements.
Year 2000
The 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 is currently Year 2000 compliant and does not anticipate any
material disruption of its operations as a result of any failure by the Company
to be Year 2000 compliant. Given the uncertainty of the Year 2000 issue,
however, to the extent the Company experiences any Year 2000 non-compliance
problems, the Company's business and results of operations could be materially
affected. This could be caused by computer-related failures in a number of areas
including, but not limited to, the failure of the Company's financial systems or
manufacturing and inventory management systems.
Efforts to identify the risks associated with Year 2000 compliance began in 1997
by identifying the potential areas of exposure. The Company's information
technology was split into three areas of
31
<PAGE>
concern: internal mission-critical systems and applications, internal non-
mission-critical systems and applications and external data sources and trading
partners.
Compliance with internal mission-critical systems and applications is complete.
Given the relatively recent incorporation of the Company, most systems and
applications have been purchased within the last year or two. All purchases made
were for systems that were Year 2000 compliant or for those that had documented
plans and dates for future compliance. Internal non-mission-critical systems and
applications have also been analyzed and have been deemed to be compliant.
In addition to reviewing its internal systems, the Company has polled its
third-party vendors, customers, contract manufacturers and freight carriers to
determine whether they are Year 2000 compliant. If the Company's customers and
vendors do not achieve Year 2000 compliance before the end of 1999, the Company
may experience a variety of problems, which may have a material adverse effect
on the Company. Among other things, to the extent the Company's customers are
not Year 2000 compliant by the end of 1999, such customers may lose electronic
data interchange ("EDI") capabilities at the beginning of the Year 2000. Where
EDI communication would no longer be available, the Company expects to utilize
voice, facsimile and/or mail communications in order to receive customer orders
and process customer billings. To the extent the Company's vendors or contract
manufacturers are not Year 2000 compliant by the end of 1999, such vendors or
contract manufacturers may fail to deliver ordered materials and products to the
Company and may fail to bill the Company properly and promptly. Consequently,
the Company may not have the correct inventory to send to its customers and may
experience a shortage or surplus of inventory which could materially adversely
affect the Company's business and results of operations. Through its polling
efforts, the Company has not identified any potential Year 2000 issues with any
of its major third-party vendors, contract manufacturers, customers or freight
carriers which could have a materially adverse effect on the Company's business
or results of operations or which could not be investigated through alternate
sources of supply.
To date, the Company has incurred and expensed approximately $0.5 million
related to the assessment and development of the remediation plan and the
purchase of new compliant hardware and software. Management anticipates spending
and expensing an additional $0.1 million through the end of 1999 to implement
its entire Year 2000 plan. The costs of the project and the date on which the
Company plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived using numerous assumptions of future events
including the continued availability of certain resources, third-parties' Year
2000 readiness and other factors.
The Company has developed contingency plans so that the Company's critical
business processes can be expected to continue to function on January 1, 2000
and beyond. The Company's contingency plans are structured to address both
remediation of systems and their components and overall business operating risk.
These plans were created to mitigate both internal risks as well as potential
risks in the supply chain of the Company's suppliers and customers.
32
<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 Asset Purchase Agreement, dated as of September 24, 1999, by and among
the Company and The Eggo Company. (Incorporated by reference to
Exhibit 2.1 to Aurora Foods Inc.'s Form 8-K filed November 10, 1999
("8-K")).
3.1 Certificate of Incorporation of A Foods Inc., filed with the Secretary
of State of the State of Delaware on June 19, 1998. (Incorporated by
reference to Exhibit 3.1 to Aurora Foods Inc.'s Form S-1 filed on
April 22, 1998, as amended (the "S-1")).
3.2 Amended and Restated By-laws of Aurora Foods Inc. (Incorporated by
reference to Exhibit 3.2 to the S-1).
4.1 Indenture dated as of July 1, 1998 by and between Aurora Foods Inc.
and Wilmington Trust Company (Incorporated by reference to Exhibit
4.13 to the S-1).
4.2 Specimen Certificate of 8 3/4% Senior Subordinated Notes due 2008.
(Included in Exhibit 4.1 hereto).
4.3 Specimen Certificate of the Common Stock (Incorporated by reference to
Exhibit 4.1 to the S-1.)
4.4 Registration Rights Agreement, dated July 1, 1998, between Aurora
Foods Inc. and Chase Securities Inc., Goldman, Sachs & Co. and Natwest
Capital Markets Limited (Incorporated by reference to Exhibit 4.15 to
the S-1).
10.1 Fifth Amended and Restated Credit Agreement, dated as of November 1,
1999, among Aurora Foods Inc., as Borrower, the Lender listed therein,
the Chase Manhattan Bank, as Administrative Agent, National
Westminster Bank PLC, as Syndication Agent and UBS AG, Stamford
Branch, as Documentation Agent. (Incorporated by reference to Exhibit
10.1 to the 8-K).
27.1 Financial Data Schedule for the period ended September 30, 1999
submitted to the Securities and Exchange Commission in electronic
format.
(b) Report on Form 8-K
None.
33
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AURORA FOODS INC.
Dated: January 17, 2001 By: /s/ Christopher T. Sortwell
---------------------------
Christopher T. Sortwell
Chief Financial Officer
(Duly Authorized Officer,
Principal Financial Officer and
Principal Accounting Officer)
34
<PAGE>
Exhibit
Number Exhibit
------ -------
2.1 Asset Purchase Agreement, dated as of September 24, 1999, by and among
the Company and The Eggo Company. (Incorporated by reference to
Exhibit 2.1 to Aurora Foods Inc.'s Form 8-K filed November 10, 1999
("8-K")).
3.1 Certificate of Incorporation of A Foods Inc., filed with the Secretary
of State of the State of Delaware on June 19, 1998. (Incorporated by
reference to Exhibit 3.1 to Aurora Foods Inc.'s Form S-1 filed on
April 22, 1998, as amended (the "S-1")).
3.2 Amended and Restated By-laws of Aurora Foods Inc. (Incorporated by
reference to Exhibit 3.2 to the S-1).
4.1 Indenture dated as of July 1, 1998 by and between Aurora Foods Inc.
and Wilmington Trust Company (Incorporated by reference to Exhibit
4.13 to the S-1).
4.2 Specimen Certificate of 8 3/4% Senior Subordinated Notes due 2008.
(Included in Exhibit 4.1 hereto).
4.3 Specimen Certificate of the Common Stock (Incorporated by reference to
Exhibit 4.1 to the S-1.)
4.4 Registration Rights Agreement, dated July 1, 1998, between Aurora
Foods Inc. and Chase Securities Inc., Goldman, Sachs & Co. and Natwest
Capital Markets Limited (Incorporated by reference to Exhibit 4.15 to
the S-1).
10.1 Fifth Amended and Restated Credit Agreement, dated as of November 1,
1999, among Aurora Foods Inc., as Borrower, the Lender listed therein,
the Chase Manhattan Bank, as Administrative Agent, National
Westminster Bank PLC, as Syndication Agent and UBS AG, Stamford
Branch, as Documentation Agent. (Incorporated by reference to Exhibit
10.1 to the 8-K).
27.1 Financial Data Schedule for the period ended September 30, 1999
submitted to the Securities and Exchange Commission in electronic
format.
35
