<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
----------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission file number 333-50681
----------------
AURORA FOODS INC.
(Exact Name of Registrant as Specified in Its Charter)
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)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
<S> <C>
Common Stock, par value $0.01 per share New York Stock Exchange
Pacific Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None (Title of
Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 17, 1999, based upon the closing price of the
Common Stock as reported on the New York Stock Exchange on such date, was
approximately $235,625,000.
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock as of the latest practicable date.
<TABLE>
<CAPTION>
Shares Outstanding
February 17, 1999
------------------
<S> <C>
Common Stock, $0.01 par value.......................... 67,016,173
</TABLE>
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<PAGE>
This amendment on Form 10-K/A amends Items 3, 6, 7, 8, and 14 of the Annual
Report of Aurora Foods Inc. (the "Company") on Form 10-K previously filed for
the year ended December 31, 1998. This Annual Report on Form 10-K/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 for the quarterly and annual periods noted above 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 Annual Report on Form 10-K/A is as of the date
of the original filing.
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Item Page
---- ----
<C> <S> <C>
3. Legal Proceedings.................................................. 2
PART II
6. Selected Financial Data............................................ 3
7. Management's Discussion and Analysis of Financial Condition........ 3
8. Financial Statements and Supplementary Data........................ 19
PART IV
14. Exhibits, Financial Statement Schedules and Reports of Form 8-K.... 20
(Only those exhibits which have been revised have been included
herein.)
</TABLE>
<PAGE>
PART I
ITEM 3: 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
2
<PAGE>
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.
PART II
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data presented below, as of December 31, 1998 and
December 27, 1997 and for the years ended December 31, 1998 and December 27,
1997, is derived from the Company's audited financial statements. The selected
financial data of the Predecessor for the years ended December 31, 1996, 1995,
and 1994 is derived from the audited Statements of Operations of the
Predecessor. The selected financial data should be read in conjunction with
the Company's financial statements and the Predecessor's Statement of
Operations and notes thereto, included in Item 14.
<TABLE>
<CAPTION>
Aurora Foods Inc. Predecessor
--------------------------------- ---------------
Years Ended Years Ended
--------------------------------- ---------------
December 31, December 27,
1998 1997 1996 1995 1994
------------ ------------ ------- ------- -------
As
Restated(1)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales................... $ 784,557 $143,020 $89,541 $91,302 $96,729
Gross profit................ 465,622 97,291 60,586 63,559 66,799
Operating income............ 6,492 23,398 17,186 17,185 14,100
Net (loss) income........... (69,129) 1,235 10,570 10,569 8,671
Total assets(2)............. 1,448,442 372,739 N/A N/A N/A
Total debt(2)............... 708,092 279,919 N/A N/A N/A
Earnings (loss) Per
Share(2)................... (1.29) 0.04 N/A N/A N/A
</TABLE>
--------
(1) As restated. See "Item 7. Management's Discussion and Analysis of
Financial Conditions--Restatements" for a description of the adjustments..
(2) Total assets, total debt and earnings (loss) per share of the Predecessor
for the years ended December 31, 1996, 1995, and 1994 are not available.
The Predecessor did not operate MBW as a separate division or business
entity and therefore maintained debt and certain other components of
assets and liabilities on a consolidated basis. See Note 1 to the Notes to
Statement of Operations of Mrs. Butterworth's Business contained in Item
14.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the historical
financial information included in the financial statements and notes to the
financial statements. Unless otherwise noted, fiscal years in this discussion
refer to the Company's December-ending fiscal years.
Restatements
Prior to the issuance of the Company's financial statements as of and for
the year ended December 31, 1999, it was determined that the results reported
in the Company's Form 10-K as of and for the year ended
3
<PAGE>
December 31, 1998 as well as the unaudited 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
unaudited quarterly financial data as of and for the interim periods ended
September 30, 1998, March 31, 1999, June 30, 1999 and September 30, 1999 have
been restated. The restated financial statements as of and for the year ended
December 31, 1998 have been included in the consolidated financial statements
included herein. All restated financial information included herein has been
adjusted to properly expense costs and recognize revenues in accordance with
generally accepted accounting principles and the Company's stated accounting
policies included in the notes to the consolidated financial statements.
For the year ended December 31, 1998, these misstatements primarily
understated trade promotions expense by $28.5 million, overstated net sales by
$4.6 million, understated brokerage and distribution expense by $2.8 million,
understated cost of goods sold by $1.4 million and understated selling,
general and administrative expenses by $0.9 million. After adjusting for the
misstatements, the Company recalculated its income tax provision, reducing
income tax expense by $14.5 million. The impact of the misstatements on
reported operating results for the year ended December 31, 1998, was to
overstate gross profit by $6.0 million, operating income by $38.3 million, and
net income by $23.8 million.
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 an "off-invoice" amount. The Company records the sale to the
customer at the list price of its product when the product is shipped and
records the cost of the off-invoice amount as an expense in the appropriate
period in accordance with the Company's policy. In order to collect money from
the Company for trade promotion deals that are not provided in an "off-
invoice" form, customers deduct specified deal costs from their payments on
other invoices. The Company records the sale to the customer at the list price
of its product when the product is shipped. In this case, however, the Company
estimates the amount of trade promotion expense and accrues it at the time of
shipment. As customers take deductions from their invoices upon payment, the
Company charges these deductions against the accrual. See Notes 1, 19 and 20
to the consolidated financial statements.
4
<PAGE>
A summary of the effects of the restatement follows (in thousands, except
per share data):
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 31, 1998
-------------------
As
Previously As
Reported Restated
---------- --------
<S> <C> <C>
Net sales................................................ $789,193 $784,557
Cost of goods sold....................................... 317,547 318,935
-------- --------
Gross profit........................................... 471,646 465,622
-------- --------
Brokerage, distribution and marketing expenses:
Brokerage and distribution............................. 74,703 77,553
Trade promotions....................................... 173,467 201,926
Consumer marketing..................................... 56,683 56,699
-------- --------
Total brokerage, distribution and marketing
expenses............................................ 304,853 336,178
Amortization of goodwill and other intangibles........... 30,048 30,048
Selling, general and administrative expenses............. 25,043 25,955
Incentive plan expense................................... 56,583 56,583
Transition expenses...................................... 10,357 10,366
-------- --------
Total operating expenses............................. 426,884 459,130
-------- --------
Operating income....................................... 44,762 6,492
Interest expense, net.................................... 64,487 64,493
Amortization of deferred financing expense............... 1,872 1,872
Other bank and financing expenses........................ 263 259
-------- --------
Loss before income taxes and extraordinary loss........ (21,860) (60,132)
Income tax expense (benefit)............................. 14,306 (214)
-------- --------
Loss before extraordinary loss......................... (36,166) (59,918)
Extraordinary loss on early extinguishment of debt, net
of tax.................................................. 9,211 9,211
-------- --------
Net loss............................................... $(45,377) $(69,129)
======== ========
Basic and diluted loss per share before extraordinary
loss.................................................... $ (0.68) $ (1.12)
Extraordinary loss per share............................. 0.17 0.17
-------- --------
Basic and diluted loss per share......................... $ (0.85) $ (1.29)
======== ========
EBITDA (1)............................................... $ 84,763 $ 46,486
======== ========
Adjusted EBITDA (2)...................................... $151,702 $113,435
======== ========
</TABLE>
--------
(1) EBITDA is defined as net loss plus extraordinary item, income tax expense,
interest expense, amortization of deferred financing expense, other bank
and financing expenses, depreciation and amortization of goodwill and
other intangibles. The Company believes that EBITDA provides additional
information for determining its ability to meet debt service requirements.
EBITDA does not represent and should not be considered as an alternative
to net income or cash flow from operations as determined by generally
accepted accounting principles, and EBITDA does not necessarily indicate
whether cash flow will be sufficient for cash requirements. The
calculation of EBITDA does not include the commitments of the Company for
capital expenditures and payment of debt and should not be deemed to
represent funds available to the Company. EBITDA, as presented, may not be
comparable to similarly-titled measures of other companies.
(2) Adjusted EBITDA is defined as EBITDA plus incentive plan expense and
transition expenses.
5
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998
------------------------
As previously As
reported restated
------------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 354 $ 354
Accounts receivable, net............................ 86,539 82,093
Inventories......................................... 76,674 77,331
Prepaid expenses and other assets................... 6,517 6,850
Asset held for sale................................. 3,000 --
Current deferred tax assets......................... 8,251 27,170
---------- ----------
Total current assets.............................. 181,335 193,798
Property, plant and equipment, net.................... 153,167 152,085
Goodwill and other intangible assets, net............. 1,072,760 1,072,759
Asset held for sale................................... -- 3,000
Other assets.......................................... 26,620 26,800
---------- ----------
Total assets...................................... $1,433,882 $1,448,442
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of senior secured term debt......... $ 20,000 $ 20,000
Senior secured revolving debt facility.............. 85,850 85,850
Accounts payable.................................... 59,078 59,395
Accrued liabilities................................. 49,836 83,433
---------- ----------
Total current liabilities......................... 214,764 248,678
Non-current deferred tax liabilities.................. 649 5,047
Other liabilities..................................... 12,372 12,372
Long-term debt........................................ 602,242 602,242
---------- ----------
Total liabilities................................. 830,027 868,339
---------- ----------
Stockholders' equity:
Preferred stock..................................... -- --
Common stock........................................ 670 670
Paid-in capital..................................... 647,889 647,889
Promissory notes.................................... (562) (562)
Accumulated deficit................................. (44,142) (67,894)
---------- ----------
Total stockholders' equity........................ 603,855 580,103
---------- ----------
Total liabilities and stockholders' equity........ $1,433,882 $1,448,442
========== ==========
</TABLE>
6
<PAGE>
A summary of the 1998 quarterly effects of the restatement follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended
----------------------------------------
September 30, 1998 December 31, 1998
------------------- -------------------
As As
previously As previously As
reported restated reported restated
---------- -------- ---------- --------
(unaudited)
<S> <C> <C> <C> <C>
Net sales........................... $220,368 $218,768 $279,627 $276,591
Cost of goods sold.................. 89,264 89,974 108,806 109,484
-------- -------- -------- --------
Gross profit........................ 131,104 128,794 170,821 167,107
Brokerage, distribution and
marketing expenses................. 85,797 100,243 108,480 125,358
Other operating expenses............ 17,092 17,402 21,218 21,830
-------- -------- -------- --------
Operating income.................... 28,215 11,149 41,123 19,919
Interest and financing expenses..... 15,980 15,980 15,425 15,426
-------- -------- -------- --------
Income (loss) before taxes and
extraordinary item................. 12,235 (4,831) 25,698 4,493
Income taxes........................ 4,132 (163) 10,241 16
-------- -------- -------- --------
Income (loss) before extraordinary
item............................... 8,103 (4,668) 15,457 4,477
Extraordinary item, net of tax...... 7,449 7,449 (114) (115)
-------- -------- -------- --------
Net income (loss)................... $ 654 $(12,117) $ 15,571 $ 4,592
======== ======== ======== ========
Basic and diluted earnings (loss)
per share.......................... $ 0.01 $ (0.18) $ 0.28 $ 0.07
======== ======== ======== ========
EBITDA (1).......................... $ 40,085 $ 23,019 $ 52,178 $ 31,314
======== ======== ======== ========
Adjusted EBITDA (2)................. $ 41,354 $ 24,286 $ 56,818 $ 35,965
======== ======== ======== ========
</TABLE>
--------
(1) EBITDA is defined as net income (loss) plus extraordinary item, income tax
expense, interest expense, amortization of deferred financing expense,
other bank and financing expenses, depreciation and amortization of
goodwill and other intangibles. The Company believes that EBITDA provides
additional information for determining its ability to meet debt service
requirements. EBITDA does not represent and should not be considered as an
alternative to net income or cash flow from operations as determined by
generally accepted accounting principles, and EBITDA does not necessarily
indicate whether cash flow will be sufficient for cash requirements. The
calculation of EBITDA does not include the commitments of the Company for
capital expenditures and payment of debt and should not be deemed to
represent funds available to the Company. EBITDA, as presented, may not be
comparable to similarly-titled measures of other companies.
(2) Adjusted EBITDA is defined as EBITDA plus incentive plan expense (credit)
and transition expenses.
Results of Operations
The following tables set forth for the periods indicated the historical and
pro forma results of operations as well as the percentage, which the
historical and pro forma items in the Statements of Operations bear to net
sales. The pro forma results of operations are presented as if the VDK
Holdings and DH acquisitions had taken place January 1, 1998 and the VDK
Holdings, DH and LC acquisitions had taken place January 1, 1997 for the years
ended December 31, 1998 and December 27, 1997, respectively. Certain amounts
from prior years have been reclassified to conform to the Company's current
year presentation. The Statement of Operations column for the year ended
December 31, 1996 is that of the Predecessor.
7
<PAGE>
Statement of Operations
(amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Actual Pro Forma
------------------------------------------- ------------------------------
Aurora Foods Inc. Predecessor Aurora Foods Inc.
------------------------------ ------------ ------------------------------
Years Ended Years Ended
------------------------------------------- ------------------------------
December 31, 1998 December 27, December 31, December 31, 1998 December 27,
(as restated) (1) 1997 1996 (as restated) (1) 1997
----------------- ------------ ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales............... $784,557 $143,020 $91,581(2) $942,348 $874,230
Cost of goods sold...... 318,935 45,729 28,955 379,157 373,101
-------- -------- ------- -------- --------
Gross profit........ 465,622 97,291 62,626 563,191 501,129
-------- -------- ------- -------- --------
Brokerage, distribution
and marketing expenses:
Brokerage and
distribution....... 77,553 17,096 10,180(2) 92,466 88,187
Trade promotions.... 201,926 26,075 17,672 246,318 172,487
Consumer marketing.. 56,699 15,142 10,835 70,179 65,718
-------- -------- ------- -------- --------
Total brokerage,
distribution and
marketing expenses..... 336,178 58,313 38,687 408,963 326,392
Amortization of goodwill
and other intangibles.. 30,048 5,938 -- 34,105 33,424
Selling, general and
administrative
expenses............... 25,955 5,229 6,753 31,237 34,426
Incentive plan expense.. 56,583 2,300 -- 121,323 2,300
Transition expenses..... 10,366 2,113 -- 10,366 3,405
-------- -------- ------- -------- --------
Total operating
expenses........... 459,130 73,893 45,440 605,994 399,947
-------- -------- ------- -------- --------
Operating income
(loss)............. 6,492 23,398 17,186 (42,803) 101,182
Interest expense, net... 64,493 18,242 -- 58,480 58,233
Amortization of deferred
financing expense...... 1,872 3,059 -- 1,491 1,491
Other bank and financing
expenses............... 259 83 -- 335 304
-------- -------- ------- -------- --------
(Loss) income before
income taxes and
extraordinary
item............... (60,132) 2,014 17,186 (103,109) 41,154
Income tax expense
(benefit).............. (214) 779 6,616 (19,678) 16,256
-------- -------- ------- -------- --------
Net (loss) income
before
extraordinary
item............... (59,918) 1,235 10,570 (83,431) 24,898
Extraordinary loss on
early extinguishment of
debt, net of tax of
$5,632................. 9,211 -- -- 9,211 --
-------- -------- ------- -------- --------
Net (loss) income... $(69,129) $ 1,235 $10,570 $(92,642) $ 24,898
======== ======== ======= ======== ========
Basic and diluted
earnings (loss) per
share before
extraordinary loss..... $ (1.12) $ 0.04 n/a $ (1.56) $ 0.37
Extraordinary loss per
share.................. $ (0.17) -- -- $ (0.17) --
Earnings (loss) per
share.................. $ (1.29) $ 0.04 n/a $ (1.73) $ 0.37
======== ======== ======= ======== ========
EBITDA (3).............. $ 46,486 $ 30,396 $17,463 $ 3,517 $148,698
======== ======== ======= ======== ========
Adjusted EBITDA (4)..... $113,435 $ 34,809 $17,463 $135,206 $154,403
======== ======== ======= ======== ========
Adjusted EPS (5)........ $ 0.05 $ 0.14 n/a $ 0.84 $ 0.49
======== ======== ======= ======== ========
</TABLE>
8
<PAGE>
--------
(1) As restated. See "--Restatements" and Notes 1, 19 and 20 to the
consolidated financial statements.
(2) Cash discounts of the Predecessor for the year ended December 31, 1996
have been reclassified from net sales to brokerage and distribution
expenses to provide consistency with the Company's presentation and
accounting policy and to facilitate comparison between periods.
(3) EBITDA is defined as net income plus extraordinary item, interest expense,
amortization of deferred financing expense, other bank and financing
expenses, depreciation and amortization of goodwill and other intangibles.
The Company believes EBITDA provides additional information for
determining its ability to meet debt service requirements. EBITDA does not
represent and should not be considered an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles. EBITDA does not necessarily indicate whether cash flow will be
sufficient for cash requirements and should not be deemed to represent
funds available to the Company. The calculation of EBITDA does not include
the commitments of the Company for capital expenditures and payment of
debt. EBITDA, as presented, may not be comparable to similarly-titled
measures of other companies.
(4) Adjusted EBITDA is defined as EBITDA before incentive plan expense and
transition expense.
(5) Adjusted EPS is defined as EPS plus the per share after tax effect of
incentive plan expense, transition expense and extraordinary item.
9
<PAGE>
Statement of Operations
(as a percentage of net sales)
<TABLE>
<CAPTION>
Actual Pro Forma
-------------------------------------- --------------------------
Aurora Foods Inc. Predecessor Aurora Foods Inc.
------------------------- ------------ --------------------------
Years Ended Years Ended
-------------------------------------- --------------------------
December 31,
1998 December 31,
(as December 27, December 31, 1998 December 27,
restated) 1997 1996 (as restated) 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0%(1) 100.0% 100.0%
Cost of goods sold...... 40.7 32.0 31.6 40.2 42.7
----- ----- ----- ----- -----
Gross profit........ 59.3 68.0 68.4 59.8 57.3
----- ----- ----- ----- -----
Brokerage, distribution
and marketing expenses:
Brokerage and
distribution....... 9.9 12.0 11.1 (1) 9.8 10.1
Trade promotions.... 25.7 18.2 19.3 26.2 19.7
Consumer marketing.. 7.2 10.6 11.8 7.4 7.5
----- ----- ----- ----- -----
Total brokerage,
distribution and
marketing expenses..... 42.8 40.8 42.2 43.4 37.3
Amortization of goodwill
and other intangibles.. 3.8 4.1 0.0 3.6 3.8
Selling, general and
administrative
expenses............... 3.3 3.6 7.4 3.3 3.9
Incentive plan expense.. 7.2 1.6 0.0 12.9 0.3
Transition expenses..... 1.3 1.5 0.0 1.1 0.4
----- ----- ----- ----- -----
Total operating
expenses........... 58.4 51.6 49.6 64.3 45.7
----- ----- ----- ----- -----
Operating income
(loss)............. 0.9 16.4 18.8 (4.5) 11.6
Interest expense, net... 8.2 12.8 0.0 6.2 6.7
Amortization of deferred
financing expense...... 0.2 2.1 0.0 0.2 0.2
Other bank and financing
expenses............... 0.0 0.1 0.0 0.0 0.0
----- ----- ----- ----- -----
(Loss) income before
income taxes and
extraordinary
item............... (7.5) 1.4 18.8 (10.9) 4.7
Income tax expense...... 0.0 0.5 7.2 (2.1) 1.9
----- ----- ----- ----- -----
Net (loss) income
before
extraordinary
item............... (7.5) 0.9 11.6 (8.8) 2.8
Extraordinary loss on
early extinguishment of
debt, net of tax of
$5,632................. 1.2 0.0 0.0 1.0 0.0
----- ----- ----- ----- -----
Net (loss) income... (8.7)% 0.9% 11.6% (9.8)% 2.8%
===== ===== ===== ===== =====
</TABLE>
--------
(1) Cash discounts of the Predecessor for the year ended December 31, 1996
have been reclassified from net sales to brokerage and distribution
expenses to provide consistency with the Company's presentation and
accounting policy and to facilitate comparison between periods.
10
<PAGE>
RESULTS OF OPERATIONS
Year Ended December 31, 1998 (as restated) Compared to the Year Ended December
27, 1997
The following table sets forth certain historical results of operations
data by division for the years ended December 31, 1998 (as restated) and
December 27, 1997 (in thousands):
<TABLE>
<CAPTION>
Years Ended
---------------------------------------
December 31, 1998 December 27, 1997
----------------- --------------------
Frozen Dry Frozen Dry
-------- -------- --------------------
<S> <C> <C> <C> <C>
Net sales............................. $279,229 $505,328 N/A $ 143,020
Cost of goods sold.................... 121,371 197,564 N/A 45,729
-------- -------- -----------
Gross profit...................... 157,858 307,764 N/A 97,291
-------- -------- -----------
Brokerage, distribution and marketing
expenses:
Brokerage and distribution........ 26,872 50,681 N/A 17,096
Trade promotions.................. 76,799 125,127 N/A 26,075
Consumer marketing................ 20,221 36,478 N/A 15,142
-------- -------- -----------
Total brokerage, distribution and
marketing expenses................... 123,892 212,286 N/A 58,313
Amortization of goodwill and other
Intangibles.......................... 10,038 20,010 N/A 5,938
Selling, general and administrative
expenses............................. 14,438 11,517 N/A 5,229
Incentive plan expense (credit)....... -- 56,583 N/A 2,300
Transition expenses................... -- 10,366 N/A 2,113
-------- -------- -----------
Total operating expenses.......... 148,368 310,762 N/A 73,893
-------- -------- -----------
Operating income (loss)............... $ 9,490 $ (2,998) N/A $ 23,398
======== ======== ===========
</TABLE>
Net Sales. Net sales for the year ended December 31, 1998 were $784.6
million, an increase of $641.5 million versus 1997. The sales growth in 1998
was due to acquisition activity as described below.
Dry Grocery. Dry grocery division net sales increased $362.3 million from
1997 to 1998, and totaled $505.3 million in 1998. Dry division breakfast net
sales in 1997 consisted of a full year of Mrs. Butterworth's(R) products and
sales of the Log Cabin(R) brand from acquisition at July 1, 1997 to December
31, 1997. Dry division net sales growth during 1998 was due to the full year
impact of owning the Log Cabin(R) brand and the acquisition of the Duncan
Hines(R) brand in January 1998.
Frozen Foods. VDK Holdings was acquired on April 8, 1998. Post acquisition
sales in 1998 totaled $279.2 million.
Pro Forma Net Sales. Pro forma net sales (which reflect all the
acquisitions noted previously as if they had occurred on January 1, 1997) for
the year ended December 31, 1998 were $942.3 million, which represented a 7.8%
increase over net sales in the comparable 1997 year of $874.2 million. Sales
growth in the year ended December 31, 1998 was due to unit volume growth in
both the frozen food and dry grocery divisions and higher prices for the
Company's Duncan Hines(R) baking mix products.
Unit volumes increased 5% to 51.4 million cases from 49.0 million cases in
the prior year. The frozen food division unit volumes increased 10% versus
1997, driven by a 6% increase in frozen breakfast products, a 3% increase in
Celeste(R) frozen pizza and a 64% increase in foodservice volumes compared to
a relatively low sales base in 1997. Unit volumes for frozen seafood declined
by 3% due to difficult comparisons with the prior year, which featured a
number of new product introductions, as well as slower category growth
relative to 1997. Unit volumes for the dry grocery division increased by 2%
versus the prior year. Unit volumes of the Company's syrup brands increased by
1% and volumes of Duncan Hines(R) baking mix products increased 2%. Unit
volumes for Duncan Hines(R) were negatively impacted in the first half of 1998
by a case load into retail channels initiated by P&G in the latter part of
1997 prior to P&G's divestiture of the business.
11
<PAGE>
The Company's net sales growth included a 3.3% increase related to pricing,
which was primarily attributable to the competitive price equalization program
initiated on the Duncan Hines(R) brand in March 1998 whereby the Company
increased the list price on cake and frosting products in parity with the
competition. The price equalization program generated approximately $40.5
million in net sales for the year ended December 31, 1998. A price increase
was also taken on syrup products in July 1998 in order to offset a cost
increase in corn syrup. In addition, product mix shifts in both the frozen
pizza and frozen seafood product lines have caused dollar sales for those
segments to increase at a higher rate than unit sales. The dollar sales
increase for the Celeste(R) business was 10% due to increased sales of premium
Mama Celeste(TM) Fresh-Baked Rising Crust frozen pizza products, which sell at
a higher list price per case than other Celeste(R) frozen pizza products.
Sales of premium frozen fish fillets for the Company's frozen seafood brands
(Van de Kamp's(R) and Mrs. Paul's(R)) resulted in greater dollar sales, which
mitigated the volume shortfall for the frozen seafood business. Product mix
shifts to higher priced items and higher prices on baking mix and syrup
products were partially offset by lower average prices on the Company's
foodservice volumes.
Gross Profit. Gross profit declined from 68.0% of sales in 1997 to 59.3% of
net sales in 1998. The decline is due to the mix of business, as the brands
acquired during 1998 generate lower gross margins than the breakfast brands
that comprised the 1997 sales.
Dry Grocery. Dry grocery margins declined to 60.9% of sales in 1998 due to
the acquisition of the Duncan Hines(R) brand, which generates lower gross
margins than the breakfast business, which comprised all of the 1997 sales.
Frozen Foods. Frozen foods gross margin on 1998 sales was 56.5%.
Pro Forma Gross Profit. On a pro forma basis, gross profit was 59.8% of net
sales as compared to the prior year gross profit margin of 57.3%. The increase
was due to the pricing action initiated on the Duncan Hines(R) business, which
elevated the gross margin on baking mix products, and cost savings achieved
from outsourcing the production of syrup and baking mix products.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses increased from $58.3 million in 1997 to $336.2 million in
1998. The increase was due to the acquisition of the Log Cabin(R), Duncan
Hines(R) and VDK Holdings businesses. Brokerage, distribution and marketing
expenses increased from 40.8% of sales in 1997 to 42.9% of sales in 1998, with
an increase in trade promotion offsetting declines in distribution and
consumer marketing costs. Brokerage and distribution costs decreased from
12.0% of sales in 1997 to 9.9% of sales in 1998 due to the lower cost
structure in the acquired businesses. Trade promotion expenses increased from
18.2% of sales in 1997 to 25.7% of sales in 1998 due to the higher trade
promotion spending rate on the Duncan Hines(R) brand and the Frozen division,
both of which were acquired in 1998. Consumer marketing expenses declined from
10.6% of sales in 1997 to 7.2% of sales in 1998 due to lower consumer spending
rates in both divisions.
Dry grocery. Dry grocery brokerage, distribution and marketing expenses
increased from 40.8% in 1997 to 42.0% in 1998. Trade promotion expenses
increased from 18.2% of sales in 1997 to 24.8% of sales in 1998 due to the
acquisition of Duncan Hines(R) in January 1998 and the shift in promotional
strategy adopted on the brand after it was acquired.
Pro Forma Brokerage, Distribution and Marketing Expenses. On a pro forma
basis, brokerage, distribution and marketing expenses increased to $409.0
million, or 43.4% of net sales, which was above the prior year of 37.3%.
Brokerage and distribution expenses increased $4.3 million over 1997 and
decreased as a percentage of net sales to 9.8% from 10.1% in the prior year.
The decrease as a percent of net sales was mainly the result of lower average
brokerage commissions. Trade promotion and consumer marketing expenses
increased $78.3 million and were 33.6% of net sales, which was 6.4 percentage
points higher than the prior year of 27.2%. The increase was primarily
attributable to trade and consumer marketing programs implemented on the
Duncan Hines(R) business to compensate for the higher list pricing strategy
initiated on cake and frosting products. The prior owners, P&G, followed an
every-day-low-price ("EDLP") strategy and, consequently, the prior year
included comparatively little marketing support. The balance of the increase
was due to consumer promotions
12
<PAGE>
and media support for the Log Cabin(R) brand where none existed in the prior
year and consumer promotions and slotting expenses related to the Company's
new pizza product, Mama Celeste(TM) Fresh-Baked Rising Crust, and new premium
grilled frozen seafood products.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles increased from $5.9 million in 1997 to $30.0 million in
1998. The increase of $24.1 million was due to the additional amortization
expense generated by the goodwill recorded in connection with the Log
Cabin(R), Duncan Hines(R) and VDK Holdings acquisitions.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased from $5.2 million in 1997 to $26.0 million
in 1998 due to the additional infrastructure and staffing required by the
acquisitions of the Log Cabin(R), Duncan Hines(R) and VDK Holdings businesses
in 1997 and 1998. Selling, general and administrative expenses declined to
3.3% of net sales due to the increased scale of the business.
Incentive Plan Expense. Incentive plan expense increased from $2.3 million
to $56.6 million. The expense in both years represents the recording of
incentive plan expense in accordance with the equity incentive awards granted
to Company employees under the Aurora Incentive Plan.
Pro Forma Incentive Plan Expenses. Pro Forma Incentive Plan Expense
increased from $2.3 million to $121.3 million. The 1997 expense related to
awards under the Aurora Incentive Plan. The expense in 1998 related to awards
under the Aurora and VDK Incentive Plans.
Transition Expense. Transition expenses were $10.4 million in 1998, an
increase of $8.3 million compared to the prior year. These expenses represent
one-time costs incurred to establish the Company's operations and integrate
the acquired Log Cabin(R) and Duncan Hines(R) businesses.
Operating Income. Operating income was $6.5 million in 1998 compared to
operating income of $23.4 million in 1997. Excluding the effects of equity
incentive plan and transition expenses, the Company would have achieved
operating income of $73.4 million in 1998 compared to operating income of
$27.8 million in the prior year. The increase is due to the acquisitions of
Log Cabin(R), Duncan Hines(R) and VDK Holdings.
Pro Forma Operating (Loss) Income. On a pro forma basis, the Company
incurred an operating loss of $42.8 million as compared to operating income in
the prior year of $101.2 million. Excluding the effects of the incentive plan
expense and transition expenses, the Company would have achieved operating
income of $88.9 million in 1998 versus the prior year operating income of
$106.9 million. The decrease in operating income was due to the increase in
trade promotion spending, which was partially offset by gross margin
improvement and a reduction in selling, general and administrative expenses.
Marketing expenses were increased to establish media programs where none
existed in the past, support the change to a high-low pricing strategy for
Duncan Hines(R) and support the introduction of new products in the frozen
food division.
Interest Expense and Amortization of Deferred Financing Expense. The
aggregate of net interest income and expense, amortization of loan fees and
other bank and financing expenses totaled $66.6 million in 1998 compared to
$21.4 million in 1997. The increase was due to the additional debt associated
with the acquisitions of Log Cabin(R), Duncan Hines(R) and VDK Holdings.
Income Tax Expense. The income tax benefit reported for 1998 was $0.2
million compared to 1997 income tax expense of $0.8 million. The effective tax
rate for 1998 was 0.4% compared to 38.7% for 1997. The effective tax rate in
1998 was 7.2% after giving effect to the impact of the extraordinary loss. The
low effective tax rate in 1998 was due to the non-deductibility of the
incentive compensation recorded by the Company.
Net (Loss) Income. The Company incurred a net loss of $69.1 million in
1998, compared to net income of $1.2 million in 1997. The 1998 loss included
the incentive plan expense and an extraordinary charge of $9.2 million net of
tax as a result of the write-off of deferred financing charges associated with
the early extinguishment of debt facilities.
13
<PAGE>
Year Ended December 27, 1997 Compared to the Year Ended December 31, 1996
Net Sales. Net sales for the period increased $51.4 million versus the
prior year to $143.0 million. The increase was due primarily to the
acquisition of Log Cabin(R), which added $50.4 million in net sales. Net
dollar sales for Mrs. Butterworth's(R) increased 1.0% to $92.6 million for the
year ended December 27, 1997 from $91.6 million for the 1996 period, while
case volume increased 5.4% to 4.14 million standard cases.
Syrup sales increased $52.1 million to $133.2 million in 1997 from $81.1
million in 1996. The increase was due primarily to the Log Cabin(R)
acquisition, which added $50.4 million in sales during 1997.
Mrs. Butterworth's(R) syrup dollar sales increased $1.7 million, or 2.1%, to
$82.8 million in 1997. Mrs. Butterworth's(R) syrup case volume increased 7.6%
to 3.52 million standard cases in 1997 from 3.27 million standard cases in
1996. The percentage increase in Mrs. Butterworth's(R) syrup case volume
exceeded the percentage increase in dollar sales because the Predecessor
adopted a value pricing strategy in mid-1996, which lowered the list cost on
90% of its retail syrup volume by 10%. The increase in syrup volume was
attributable to increases in the Company's Mrs. Butterworth's(R) Original
brand and foodservice and club products. The volume increase was partially
offset by a decrease in sales of Mrs. Butterworth's(R) Country Best Recipe and
Mrs. Butterworth's(R) Lite brands.
Pancake mix sales of $9.8 million in 1997 were down by $0.7 million as
compared to the 1996 period and pancake mix volume decreased 7.0% to 611,000
standard cases. The overall pancake mix category was down approximately 4.0%
in 1997 from the prior year.
Gross Profit. Gross profit as a percentage of net sales was 68.0% for the
1997 period as compared to 68.4% for the 1996 period. The gross margin
percentage in the 1996 period was impacted by the value pricing strategy
implemented in mid-year 1996. The change to value pricing caused net revenues
and gross profits to be reduced in 1997 relative to the prior year, which only
included a partial year impact of value pricing.
Brokerage, Distribution, and Marketing Expenses. Brokerage, distribution,
and marketing expenses for 1997 were 40.8% of net sales as compared to 42.2%
for 1996. The improvement was due to lower trade promotions in 1997 as a
result of the value pricing strategy as well as a reduction in high value in-
ad coupons compared to 1996.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles of $5.9 million was attributable to amortization of
goodwill associated with the acquisitions of Mrs. Butterworth's(R) on December
31, 1996 and Log Cabin(R) on July 1, 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $5.2 million for 1997 were $1.6 million less than
the $6.8 million of expense incurred for 1996. The favorable variance was due
to lower overhead spending associated with the Company's stand-alone structure
as compared to amounts allocated to Mrs. Butterworth's(R) during the
Predecessor's ownership period.
Transition Expenses. Transition related costs consist of one-time costs
incurred to establish the Company's operations and integrate the acquired
businesses, including relocation expenses, recruiting fees, sales support and
other unique transitional expenses.
Operating Income. Operating income as a percentage of net sales was 16.4%
for 1997 as compared to 18.8% for 1996. The decrease in the Company's
operating profit margin was primarily due to amortization of goodwill and
other intangibles (4.1%), incentive plan expense (1.6%) and transition
expenses (1.5%), which were not incurred under the Predecessor's ownership.
Excluding the impact of these expenses, the operating margin increased to
23.6% of net sales because trade promotions, consumer marketing and selling,
general and administrative expenses were lower than the prior year as a
percentage of net sales. Overall, operating income increased $6.2 million, or
36.1%, to $23.4 million as compared to $17.2 million in 1996.
14
<PAGE>
Interest Expense and Amortization of Deferred Financing Expense. Net
interest expense and amortization of deferred financing expense was $21.3
million in 1997. These expenses were related to the financing of the acquired
businesses. The Predecessor did not separately allocate these respective costs
to Mrs. Butterworth's(R).
Income Tax Expense. The Company has a combined federal and state tax rate
of approximately 38.7% in 1997 as compared to the Predecessor's effective rate
in 1996 of 38.5%.
Net Income. Net income was $1.2 million in 1997, which was $9.3 million
lower than the prior year. The decline in net income was attributable to the
interest expense, financing and goodwill expenses incurred during 1997.
Liquidity and Capital Resources
For the year ended December 31, 1998, cash provided by operations was $49.3
million. Net loss plus non-cash charges provided $37.8 million of operating
cash flow and a decrease in net working capital generated $11.5 million of
cash during 1998.
Net cash used in investing activities was $477.8 million for the year ended
December 31, 1998. The acquisitions of Duncan Hines(R) and VDK Holdings used
cash of $454.3 million and $8.4 million, respectively. On May 1, 1998, VDK
completed the sale of its frozen desserts product line (the "Desserts Sale"),
which generated net proceeds of $28.0 million. During the year, the Company
spent $38.7 million on capital expenditures and received $10.0 million from
P&G as a contractual reimbursement, which offset capital costs incurred in
connection with the relocation of manufacturing equipment to the Company's
contract manufacturers' production facilities. Capital expenditures were
incurred to expand capacity for its frozen breakfast products, establish
internal production of its new rising crust frozen pizza product and relocate
and install acquired manufacturing equipment.
During the year ended December 31, 1998, financing activities provided cash
of $424.2 million. To finance the acquisition on January 16, 1998 of the
Duncan Hines(R) business and related expenses, the Company borrowed $450.0
million of senior secured term debt under its Senior Bank Facilities and
received a $93.8 million capital contribution from Holdings (See Financial
Statement Note 3--Business Acquisitions). The Company repaid the senior
secured term debt and senior secured revolving debt facility that existed
prior to the Aurora Senior Bank Facilities in the amount of $77.5 million and
incurred an extraordinary charge for the write-off of deferred financing
charges in connection with the early extinguishment of debt in the net of tax
amount of $1.9 million. The Company used the net proceeds from the Desserts
Sale to repay $25.0 million on the VDK Senior Bank Facilities.
In conjunction with the consummation of the IPO on July 1, 1998 (See
Financial Statement Note 1--The Company), the Company used net proceeds from
the sale of 12,909,372 of common equity securities in the amount of $254.8
million and proceeds from the Company's Senior Bank Facilities and New Notes
in the amount of $324.0 million and $200.0 million, respectively, to repay
$647.8 million of senior secured debt and $114.5 million of senior
subordinated notes, including the associated redemption premium, and pay
associated fees and expenses. As a result of the early extinguishment of
senior secured debt, the Company recorded an extraordinary charge of $7.3
million, net of income tax of $4.4 million, for the write-off of deferred
financing charges. The remaining proceeds and repayments during the year ended
December 31, 1998 were periodic draws and repayments under the Company's
senior secured revolving debt facilities.
At December 31, 1998, the Company had $0.4 million of cash and cash
equivalents and an unused commitment of $89.2 million on its senior secured
revolving debt facility under the Company's New Senior Bank Facilities. The
Company's primary sources of liquidity are cash flows from operations and
available borrowings under the $175.0 million revolving debt facility.
Management believes the available borrowing capacity under the revolving debt
facility combined with cash provided by operations will provide the Company
with sufficient cash to fund operations as well as to meet existing
obligations.
15
<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.
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.
16
<PAGE>
Year 2000
The dates on which the Company believes Year 2000 compliance will be
completed are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved, or that there will not be a delay in, or increased costs associated
with, the implementation of Year 2000 compliance. Specific factors that might
cause differences between the estimates and actual results include, but are
not limited to, the availability and cost of personnel trained in these areas,
the ability to locate and correct all relevant computer code, timely responses
to and corrections by third-parties and suppliers, the ability to implement
interfaces between the new systems and the systems not being replaced, and
similar uncertainties. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third-parties, the Company cannot ensure its ability to resolve
problems associated with the Year 2000 issue that may affect its operations
and business, or expose it to third-party liability in a timely and cost-
effective manner.
The Year 2000 issue, which is common to most corporations, concerns the
inability of information systems, including computer software programs as well
as non-information technology systems, to properly recognize and process date-
sensitive information related to the Year 2000 and beyond. The Company
believes that it will be able to achieve Year 2000 compliance by the end of
1999 and does not currently anticipate any material disruption of its
operations as a result of any failure by the Company to be Year 2000
compliant. However, to the extent the Company is unable to achieve Year 2000
compliance, the Company's business and results of operations could be
materially affected. This could be caused by computer-related failures in a
number of areas including, but not limited to, the failure of the Company's
financial systems or manufacturing and inventory management systems.
Efforts to identify the risks associated with Year 2000 compliance began in
1997 by identifying the potential areas of exposure. The Company's information
technology was split into three areas of concern: internal mission-critical
systems and applications, internal non-mission-critical systems and
applications and external data sources and trading partners.
Compliance with internal mission-critical systems and applications is
nearly complete. Given the relatively recent incorporation of the Company,
most systems and applications have been purchased within the last year or two.
All purchases made were for systems that were Year 2000 compliant or for those
that had documented plans and dates for future compliance. Currently, the
Warehouse Management System in the frozen food division, which accesses a
compliant information database, is the only remaining mission-critical
application not compliant. The Company has elected to upgrade the
functionality of its current Warehouse Management System and, therefore, will
be replacing the entire system. The new system has been selected and is
scheduled to have installation and testing completed by September 1999.
Internal non-mission-critical systems and applications are currently being
analyzed and are presently expected to be compliant by September of 1999.
In addition to reviewing its internal systems, the Company has polled its
third-party vendors, customers, contract manufacturers and freight carriers to
determine whether they are Year 2000 compliant. If the Company's customers and
vendors do not achieve Year 2000 compliance before the end of 1999, the
Company may experience a variety of problems, which may have a material
adverse effect on the Company. Among other things, to the extent the Company's
customers are not Year 2000 compliant by the end of 1999, such customers may
lose electronic data interchange ("EDI") capabilities at the beginning of the
Year 2000. Where EDI communication would no longer be available, the Company
expects to utilize voice, facsimile and/or mail communications in order to
receive customer orders and process customer billings. To the extent the
Company's vendors or contract manufacturers are not Year 2000 compliant by the
end of 1999, such vendors or contract manufacturers may fail to deliver
ordered materials and products to the Company and may fail to bill the Company
properly and promptly. Consequently, the Company may not have the correct
inventory to send to its customers and may experience a shortage or surplus of
inventory which could materially adversely affect the Company's business and
results of operations. Through its polling efforts, the Company has not
identified any
17
<PAGE>
potential Year 2000 issues with any of its major third-party vendors, contract
manufacturers, customers or freight carriers which could have a materially
adverse affect on the Company's business or results of operations or which
could not be investigated through alternate sources of supply.
To date, the Company has incurred and expensed approximately $0.1 million
related to the assessment and development of the remediation plan and the
purchase of new compliant hardware and software. Management anticipates
spending and expensing an additional $0.5 million through the end of 1999 to
implement its entire Year 2000 plan. The costs of the project and the date on
which the Company plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived using numerous assumptions of
future events including the continued availability of certain resources,
third-parties' Year 2000 readiness and other factors.
The Company has developed contingency plans so that the Company's critical
business processes can be expected to continue to function on January 1, 2000
and beyond. The Company's contingency plans are structured to address both
remediation of systems and their components and overall business operating
risk. These plans were created to mitigate both internal risks as well as
potential risks in the supply chain of the Company's suppliers and customers.
Impact of New Accounting Pronouncements
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Company). FAS 133 requires that all derivatives be recorded on
the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Management of the Company
anticipates that, due to its limited use of derivative instruments, the
adoption of FAS 133 will not have a significant effect on the Company's
results of operations or its financial position.
The Company currently does not use derivative financial instruments for
trading or speculative purposes. In accordance with the New Senior Bank
Facilities, the Company is required to enter into interest rate protection
agreements to the extent necessary to provide that, when combined with the
Company's senior subordinated notes, at least 50% of the Company's aggregate
indebtedness is subject to either a fixed interest rate or interest rate
protection agreements. Accordingly, the Company's interest rate agreements are
as follows:
Interest Rate Collar Agreements
At December 31, 1998, the Company was party to two interest rate collar
agreements. On August 22, 1996, the Company entered into a three year interest
rate collar agreement with a notional principal amount of $70.0 million, a cap
rate of 6.5% (plus the applicable margin) and a floor rate of 5.75% (plus the
applicable margin). On November 26, 1996, the Company entered into a three
year interest rate collar agreement with a notional principal amount of $50.0
million, a cap rate of 7.5% (plus the applicable margin) and a floor rate of
5.5% (plus the applicable margin).
Interest Rate Swap Agreement
The Company entered into an interest rate swap agreement on March 17, 1998.
The notional principal amount covered under the interest rate swap agreement
is $150.0 million and the term is three years. The effective swap rate was
5.81%.
On November 30, 1998, the Company amended the existing interest agreement
whereby the counterparty received the option to extend the termination date to
March 17, 2003. The new effective swap rate through the termination date of
the interest rate swap agreement is 5.37%.
18
<PAGE>
Recent Developments
In February 2000, the Company relocated its corporate headquarters from San
Francisco, CA to the frozen food division corporate office in St. Louis, MO.
In April 2000, the Company announced that it intended to streamline its
operations and management structure and, as a result, took a one-time charge
of $6.6 million in the second quarter of 2000 to close its Columbus, OH
facility and consolidate these operations in St. Louis.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or oral
statements that are "forward-looking" including statements contained in this
report and other filings with the Securities and Exchange Commission and in
reports to the Company's stockholders. Certain statements, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," "estimates" and words of similar import constitute
"forward-looking statements" and involve known and unknown risk, uncertainties
and other factors that may cause the actual results, performance or
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such factors include, among others, the following: the
availability of funding for operations; the outcome of the Securities Actions
and other current litigation; the ability of the Company to service its high
level of indebtedness; the ability of new management to implement a successful
strategy; whether the Company's lenders continue to forbear from accelerating
the Company's senior debt obligations; the Company's success in obtaining from
its bondholders waivers of defaults under its senior subordinated notes; the
actions of the Company's competitors; general economic and business
conditions; industry trends; demographics; raw material costs; integration of
acquired businesses into the Company; terms and development of capital; and
changes in, or the failure or inability to comply with, governmental rules and
regulations, including, without limitation, FDA and environmental rules and
regulations. See "--Liquidity and Capital Resources." Given these
uncertainties, undue reliance should not be placed on such forward-looking
statements. Unless otherwise required by law, the Company disclaims an
obligation to update any such factors or to publicly announce the results of
any revisions to any forward-looking statements contained herein to reflect
future events or developments.
Item 8: Financial Statements and Supplementary Data
Reference is made to Item 14, which is incorporated herein by reference.
19
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
<C> <C> <S> <C>
(a) 1.a. Financial Statements of the Company
Report of Independent Accountants.................... 26
Balance Sheets as of December 31, 1998 and December
27, 1997............................................ 27
Statements of Operations for the years ended December
31, 1998 and December 27, 1997...................... 28
Statements of Changes in Stockholders' Equity as of
December 31, 1998 and December 27, 1997............. 29
Statements of Cash Flows for the years ended December
31, 1998 and December 27, 1997...................... 30
Notes to Financial Statements........................ 31 through 53
b. Financial Statements of the Predecessor
Mrs. Butterworth's Business (A Component of CONOPCO,
Inc.):
Report of Independent Accountants.................... 54
Statement of Operations for the year ended December
31, 1996............................................ 55
Notes to Financial Statements........................ 56 through 59
2. Financial Statement Schedule
Schedule IX--Valuation Reserves...................... 60
3. Exhibits............................................. 61 through 64
</TABLE>
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
2.1 Asset Purchase Agreement, dated as of December 18, 1996, by and
between MBW Foods Inc. (as successor-in-interest to MBW Acquisition
Corp.) and Conopco, Inc., as amended. (Incorporated by reference to
Exhibit 2.1 to Aurora Foods Inc.'s Form S-4 filed on August 21, 1997,
File No. 333-24715 ("Aurora S-4")).
2.2 Asset Purchase Agreement, dated as of March 7, 1997, by and between
Aurora Foods Inc. and Kraft Foods, Inc. (Incorporated by reference to
Exhibit 2.2 to the Aurora S-4).
2.3 Asset Purchase Agreement, dated as of November 26, 1997, by and
between Aurora Foods Inc. and The Procter & Gamble Company.
(Incorporated by reference to Exhibit 2.1 to the Aurora Foods Inc.'s
Form 8-K filed on January 30, 1998 (the "Form 8-K")).
2.4 Merger Agreement, dated as of June 22, 1998, between the Aurora Foods
Inc. and A Foods Inc. (Incorporated by reference to Exhibit 2.1 to the
Aurora Foods Inc.'s Form S-1 filed on April 22, 1998, as amended, File
No. 338-50681 (the "S-1")).
2.5 Merger Agreement, dated as of June 25, 1998, among Aurora Foods
Holdings Inc., AurFoods Operating Co. Inc., VDK Holdings, Inc., Van de
Kamp's, Inc. and A Foods Inc. (Incorporated by reference to Exhibit
2.2 to the S-1).
2.6 Certificate of Merger, dated June 23, 1998, of Aurora Foods Inc. with
and into A Foods Inc. (Incorporated by reference to Exhibit 2.14 to
the S-1).
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
2.7 Amendment to Asset Purchase Agreement, dated as of February 13, 1997,
between Van de Kamp's, Inc. and Morningstar Foods, Inc. (Incorporated
by reference to Exhibit 2.2 to Van de Kamp's, Inc.'s Form 10-Q for the
quarter ended March 31, 1997).
2.8 Asset Purchase Agreement, dated as of February 3, 1997, between Van de
Kamp's, Inc. and Morningstar Foods, Inc. (Incorporated by reference to
Exhibit 2.1 to Van de Kamp's, Inc.'s Form 10-Q for the quarter ended
March 31, 1997).
2.10 Supplement No. 1 to Asset Purchase and Sales Agreement, dated as of
July 9, 1996, between Van de Kamp's, Inc. and the Quaker Oats Company
("Quaker Oats"). (Incorporated by reference to Exhibit 2.2 to Van de
Kamp's, Inc.'s Form 8-K dated July 9, 1996).
2.11 Asset Purchase and Sales Agreement, dated as of May 15, 1996 between
Van de Kamp's, Inc. and Quaker Oats. (Incorporated by reference to
Exhibit 2.1 to Van de Kamp's, Inc.'s Form 8-K dated July 9, 1996).
2.12 Asset Purchase and Sale Agreement, dated as of January 17, 1996,
between Shellfish Acquisition Company, LLC ("Shellfish") and Campbell
Soup Company ("Campbell"). (Incorporated by reference to the text of
which and Exhibits to which are incorporated by reference to Exhibit
2.1 to Van de Kamp's, Inc.'s Form 10-Q for the quarter ended March 30,
1996 and a list of the contents of the schedule of which is
incorporated by reference to Exhibit 2.1 to Van de Kamp's, Inc.'s Form
8-K dated May 6, 1996 ).
2.13 Asset Purchase Agreement, dated as of January 17, 1996, between Van de
Kamp's, Inc. and Shellfish. (Incorporated by reference to Exhibit 2.2
to the Van de Kamp's, Inc.'s Form 10-Q for the quarter ended March 20,
1996).
2.14 Agreement and Amendment No. 1, dated September 19, 1995, to the Asset
Purchase Agreement among Van de Kamp's, Inc., the Pillsbury Company
and PET Incorporated. (Incorporated by reference to Exhibit 2.2 to Van
de Kamp's, Inc.'s Form S-4 filed on October 4, 1995 (the "Van de
Kamp's S-4")).
2.15 Asset Purchase Agreement, dated as of July 7, 1995 among Van de
Kamp's, Inc., the Pillsbury Company and PET Incorporated.
(Incorporated by reference to Exhibit 2.1 to the Van de Kamp's S-4).
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 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 February 10, 1997, by and between Aurora Foods
Inc. and Wilmington Trust Company. (Incorporated by reference to
Exhibit 4.1 to the Aurora S-4).
4.2 Specimen Certificate of 9 7/8% Series B Senior Subordinated Note due
2007 (included in Exhibit 4.1 hereto). (Incorporated by reference to
Exhibit 4.2 to the Aurora S-4).
4.3 Form of Note Guarantee to be issued by future subsidiaries of Aurora
Foods Inc. pursuant to the Indenture (included in Exhibit 4.1 hereto).
(Incorporated by reference to Exhibit 4.4 to the Aurora S-4).
4.4 Indenture dated as of July 1, 1997 by and between Aurora Foods Inc.
and Wilmington Trust Company (the "Series D Indenture"). (Incorporated
by reference to Exhibit 4.6 to the Aurora S-4).
4.5 Specimen Certificate of 9 7/8% Series D Senior Subordinated Note due
2007 (included in Exhibit 4.4 hereto). (Incorporated by reference to
Exhibit 4.3 to the Aurora S-4).
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
4.6 Form of Note Guarantee to be issued by future subsidiaries of Aurora
Foods Inc. pursuant to the Series D Indenture (included in Exhibit 4.4
hereto). (Incorporated by reference to Exhibit 4.8 to the Aurora S-4).
4.7 Securityholders Agreement, dated as of April 8, 1998, by and among
Aurora/VDK LLC, MBW Investors LLC, VDK Foods LLC and the other parties
signatory thereto. (Incorporated by reference to Exhibit 4.2 to the S-
1).
4.8 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).
4.9 Specimen Certificate of 8 3/4% Senior Subordinated Notes due 2008.
(Included in Exhibit 4.8 hereto).
4.10 Specimen Certificate of the Common Stock. (Incorporated by reference
to Exhibit 4.1 to the S-1).
4.11 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).
4.12 Indenture, dated as of September 15, 1995, between Van de Kamp's, Inc.
and Harris Trust and Savings Bank. (Incorporated by reference to
Exhibit 4.1 to the Van de Kamp's S-4).
4.13 Global Note, dated September 19, 1995, issued by Van de Kamp's, Inc.
to the Depository Trust Company and registered in the name of Cede &
Co. in the principal amount of $100,000,000. (Incorporated by
reference to Exhibit 4.2 to the Van de Kamp's S-4).
10.1 VDK Holdings, Inc. Incentive Compensation Plan. (Incorporated by
reference to Exhibit 10.1 to S-1).
10.2 Purchase Agreement, dated June 25, 1998, between Aurora Foods Inc. and
Chase Securities Inc., Goldman, Sachs & Co. and NatWest Capital
Markets Limited. (Incorporated by reference to Exhibit 10.3 to S-1).
10.3 Purchase Agreement, dated June 18, 1997, by and among Aurora Foods
Inc., Chase Securities, Inc. and Credit Suisse First Boston
Corporation. (Incorporated by reference to Exhibit 1.2 to the Aurora
S-4).
10.4 Purchase Agreement, dated February 5, 1997, by and between Aurora
Foods Inc. and Chase Securities, Inc. (Incorporated by reference to
Exhibit 1.1 to the Aurora S-4).
10.5 Employment Agreement, dated as of December 31, 1996, by and between
Aurora Foods Inc. and Thomas J. Ferraro (Incorporated by reference to
Exhibit 10.5 to the Aurora S-4).
10.6 Employment Agreement, dated as of December 31, 1996, by and between
Aurora Foods Inc. and C. Gary Willett. (Incorporated by reference to
Exhibit 10.6 to the Aurora S-4).
10.7 Purchase Agreement, dated September 14, 1995, between Van de Kamp's,
Inc. and Chemical Securities, Inc. (Incorporated by reference to
Exhibit 10.6 to S-1).
10.8 Flavor Supply Agreement, dated as of December 31, 1996, by and between
Aurora Foods Inc. and Quest International Flavors & Food Ingredients
Company. (Incorporated by reference to Exhibit 10.8 to the Aurora S-
4).
10.9 License Agreement, dated as of February 21, 1979, between General Host
Corporation and VDK Acquisition Corporation. (Incorporated by
reference to Exhibit 10.27 to the Van de Kamp's S-4).
10.10 License Agreement, dated as of October 14, 1978, between General Host
Corporation and Van de Kamp's Dutch Bakeries. (Incorporated by
reference to Exhibit 10.28 to the Van de Kamp's S-4).
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
10.11 Trademark License Agreement, dated July 9, 1996 among Quaker Oats, The
Quaker Oats Company of Canada Limited and Van de Kamp's, Inc.
(Incorporated by reference to Exhibit H to Exhibit 2.1 to Van
de Kamp's, Inc.'s Form 8-K dated July 9, 1996).
10.13 Amended Transitional Co-Pack Agreement, dated as of July 1, 1997, by
and between Aurora Foods Inc. and Kraft Foods, Inc. (Incorporated by
reference to Exhibit 10.13 to the Aurora S-4).
10.16 First Amended and Restated Red Wing Co-Pack Agreement, dated as of
November 19, 1997, by and between Aurora Foods Inc. and The Red Wing
Company, Inc. (Confidential treatment for a portion of this document
has been requested by the Company). (Incorporated by reference to
Exhibit 10.16 to Aurora Foods Inc.'s Form 10-K, filed on March 27,
1998 (the "Aurora 10-K")).
10.18 Production Agreement, dated November 19, 1997, by and between Aurora
Foods Inc. and The Red Wing Company, Inc. (Confidential treatment for
a portion of this document has been requested by the Company).
(Incorporated by reference to Exhibit 10.18 to the Aurora 10-K).
10.19 Transitional Supply Agreement, dated January 16, 1998, by and between
Aurora Foods Inc. and The Procter & Gamble Manufacturing Company.
(Confidential treatment for a portion of this document has been
requested by the Company). (Incorporated by reference to Exhibit 10.20
to the Aurora 10-K).
10.20 Amendment No. 1 to Ferraro Employment Agreement, dated as of January
1, 1998, between Aurora Foods Inc. and Thomas J. Ferraro.
(Incorporated by reference to Exhibit 10.10 to the S-1).
10.21 Amendment No. 1 to Willett Employment Agreement, dated as of January
1, 1998, between C. Gary Willett and Aurora Foods Inc. (Incorporated
by reference to Exhibit 10.13 to the S-1).
10.22 Third Amended and Restated Credit Agreement, dated as of July 1, 1998,
among Aurora Foods Inc., as borrower, the Lenders listed therein, The
Chase Manhattan Bank, as Administrative Agent, National Westminster
Bank PLC, as Syndication Agent and Swiss Bank Corporation, as
Documentation Agent. (Incorporated by reference to Exhibit 10.20 to
the S-1).
10.26 Employment Agreement between Ian R. Wilson and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.7 to the S-1).
10.27 Employment Agreement between James B. Ardrey and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.8 to the S-1).
10.28 Employment Agreement between Ray Chung and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.9 to the S-1).
10.29 Employment Agreement between M. Laurie Cummings and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.10 to the S-1).
10.30 Amendment No. 1 to Ellinwood Amended and Restated Employment
Agreement, dated as of January 1, 1998, between Thomas O. Ellinwood
and Van de Kamp's, Inc. (Incorporated by reference to Exhibit 10.15 to
the S-1).
10.31 Amended and Restated Employment Agreement, dated as of March 11, 1997,
by and between Thomas O. Ellinwood and Van de Kamp's, Inc.
(Incorporated by reference to Exhibit 10.16 to the S-1).
10.32 Employment Agreement, dated as of February 16, 1998, by and between
Van de Kamp's, Inc. and Anthony A. Bevilacqua. (Incorporated by
reference to Exhibit 10.17 to the S-1).
10.33 Expense Agreement, made as of July 1, 1998, between Aurora Foods Inc.
and Dartford Partnership L.L.C. (Incorporated by reference to Exhibit
10.32 to the S-1).
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
10.34 Advisory Agreement, made as of April 8, 1998, among Aurora/VDK LLC,
Van de Kamp's, Inc., VDK Holdings, Inc., Aurora Foods Inc. and Aurora
Foods Holdings Inc. and Dartford Partnership L.L.C. (Incorporated by
reference to Exhibit 10.33 to the S-1).
10.35 Advisory Agreement, made as of April 8, 1998, among Aurora/VDK LLC,
Van de Kamp's, Inc., VDK Holdings, Inc., Aurora Foods Inc. and Aurora
Foods Holdings Inc. and MDC Management Company III, L.P. (Incorporated
by reference to Exhibit 10.34 to the S-1).
10.36 Advisory Agreement, made as of April 8, 1998, between Fenway Partners,
Inc. and Aurora/VDK LLC, Van de Kamp's, Inc., VDK Holdings, Inc.,
Aurora Foods Inc. and Aurora Foods Holdings Inc. (Incorporated by
reference to Exhibit 10.35 to the S-1).
10.37 Indemnity Agreement, dated as of July 1, 1998, between Ian R. Wilson
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.46 to
the S-1).
10.38 Indemnity Agreement, dated as of July 1, 1998, between James B. Ardrey
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.49 to
the S-1).
10.39 Indemnity Agreement, dated as of July 1, 1998, between Clive A. Apsey
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.50 to
the S-1).
10.40 Indemnity Agreement, dated as of July 1, 1998, between Charles Ayres
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.51 to
the S-1).
10.41 Indemnity Agreement, dated as of July 1, 1998, between David E. De
Leeuw and Aurora Foods Inc. (Incorporated by reference to Exhibit
10.52 to the S-1).
10.42 Indemnity Agreement, dated as of July 1, 1998, between Charles J.
Delaney and Aurora Foods Inc. (Incorporated by reference to Exhibit
10.53 to the S-1).
10.43 Indemnity Agreement, dated as of July 1, 1998, between Richard C.
Dresdale and Aurora Foods Inc. (Incorporated by reference to Exhibit
10.54 to the S-1).
10.44 Indemnity Agreement, dated as of July 1, 1998, between Andrea Geisser
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.55 to
the S-1).
10.45 Indemnity Agreement, dated as of July 1, 1998, between Peter Lamm and
Aurora Foods Inc. (Incorporated by reference to Exhibit 10.56 to the
S-1).
10.46 Indemnity Agreement, dated as of July 1, 1998, between Tyler T. Zachem
and Aurora Foods Inc. (Incorporated by reference to Exhibit 10.57 to
the S-1).
10.48 1998 Employee Stock Purchase Plan.
10.49 Production Agreement, dated as of June 4, 1998, by and between Aurora
Foods Inc. and Gilster-Mary Lee Corporation. (Incorporated by
reference to Exhibit 10.48 to the S-1).
10.50 1998 Incentive Plan.
12.1 Ratio of Earnings to Fixed Charges
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule for the period ended December 31, 1998
submitted to the Securities and Exchange Commission in electronic
format.
</TABLE>
(b) Reports on Form 8-K
None.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Aurora Foods Inc.
/s/ James T. Smith
Date: January 17, 2001 By: _________________________________
James T. Smith
Director, President and Chief
Executive Officer (Principal
Executive Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on
January 17, 2001.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S> <C>
/s/ Clive A. Apsey Director
______________________________________
Clive A. Apsey
/s/ George E. McCown Director
______________________________________
George E. McCown
/s/ Charles J. Delaney Director
______________________________________
Charles J. Delaney
/s/ David E. De Leeuw Director and Vice Chairman
______________________________________
David E. De Leeuw
/s/ Richard C. Dresdale Director and Chairman of the
______________________________________ Board
Richard C. Dresdale
/s/ Andrea Geisser Director
______________________________________
Andrea Geisser
/s/ Peter Lamm Director
______________________________________
Peter Lamm
/s/ Ronald S. Orr Director
______________________________________
Ronald S. Orr
/s/ Christopher T. Sortwell Director, Executive Vice
______________________________________ President, and Chief Financial
Christopher T. Sortwell Officer (Principal Accounting
and Finance Officer)
/s/ James T. Smith Director, President and Chief
______________________________________ Executive Officer (Principal
James T. Smith Executive Officer)
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Aurora Foods Inc.
In our opinion, the accompanying consolidated financial statements listed
in the index appearing under Item 14(a)(1)(a) on page 19 presents fairly, in
all material respects, after the restatements described in Note 1, the
financial position of Aurora Foods Inc. (the "Company") at December 31, 1998
and December 27, 1997 and the results of its operations and its cash flows for
the years ended December 31, 1998 and December 27, 1997 in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2) on page 19 presents fairly, in all material respects,
after the restatements described in Note 1, the information set forth therein
when read in conjunction with the related financial statements. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the
Company restated its December 31, 1998 financial statements for trade
promotion liabilities and certain other matters.
PricewaterhouseCoopers LLP
San Francisco, California
March 30, 2000, except for Notes 1 and 15,
which are as of January 17, 2001
26
<PAGE>
AURORA FOODS INC.
BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1998 December 27,
(as restated) 1997
----------------- ------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 354 $ 4,717
Accounts receivable, net of $670 and $140
allowance, respectively...................... 82,093 13,836
Inventories (Note 4).......................... 77,331 6,902
Prepaid expenses and other assets............. 6,850 1,955
Current deferred tax assets (Note 10)......... 27,170 2,966
---------- --------
Total current assets........................ 193,798 30,376
Property, plant and equipment, net (Note 5)..... 152,085 14,075
Goodwill and other intangible assets, net (Note
6)............................................. 1,072,759 315,241
Asset held for sale............................. 3,000 --
Other assets.................................... 26,800 13,047
---------- --------
Total assets................................ $1,448,442 $372,739
========== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of senior secured term debt
(Note 8)..................................... $ 20,000 $ 4,375
Senior secured revolving debt facility (Note
8)........................................... 85,850 --
Accounts payable.............................. 59,395 6,443
Accrued liabilities (Note 7).................. 83,433 17,409
---------- --------
Total current liabilities................... 248,678 28,227
Non-current deferred tax liabilities (Note 10).. 5,047 3,745
Other liabilities............................... 12,372 --
Senior secured revolving debt facility (Note
8)............................................. -- 37,500
Senior secured term debt (Note 8)............... 200,000 35,625
Senior subordinated notes (Note 8).............. 402,242 202,419
---------- --------
Total liabilities........................... 868,339 307,516
---------- --------
Commitments and contingent liabilities (Note 15)
Stockholders' equity:
Preferred stock, $0.01 par value; 25,000,000
shares authorized; no shares issued or
outstanding.................................. -- --
Common stock, $0.01 par value; 250,000,000 and
87,159,000 shares authorized, respectively;
67,016,173 and 29,053,000 shares issued and
outstanding, respectively.................... 670 291
Paid-in capital............................... 647,889 63,912
Promissory notes (Note 13).................... (562) (215)
(Accumulated deficit) retained earnings....... (67,894) 1,235
---------- --------
Total stockholders' equity.................. 580,103 65,223
---------- --------
Total liabilities and stockholders' equity.. $1,448,442 $372,739
========== ========
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
AURORA FOODS INC.
STATEMENTS OF OPERATIONS
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Years Ended
-----------------------------------
December 31, 1998
(as restated) December 27, 1997
----------------- -----------------
<S> <C> <C>
Net sales................................. $784,557 $143,020
Cost of goods sold........................ 318,935 45,729
-------- --------
Gross profit............................ 465,622 97,291
-------- --------
Brokerage, distribution and marketing
expenses:
Brokerage and distribution.............. 77,553 17,096
Trade promotions........................ 201,926 26,075
Consumer marketing...................... 56,699 15,142
-------- --------
Total brokerage, distribution and
marketing expenses................... 336,178 58,313
Amortization of goodwill and other
intangibles.............................. 30,048 5,938
Selling, general and administrative
expenses................................. 25,955 5,229
Incentive plan expense (Note 14).......... 56,583 2,300
Transition expenses (Note 9).............. 10,366 2,113
-------- --------
Total operating expenses.............. 459,130 73,893
-------- --------
Operating income........................ 6,492 23,398
Interest expense, net..................... 64,493 18,242
Amortization of deferred financing
expense.................................. 1,872 3,059
Other bank and financing expenses......... 259 83
-------- --------
(Loss) income before income taxes and
extraordinary item..................... (60,132) 2,014
Income tax expense (benefit) (Note 10).... (214) 779
-------- --------
Net (loss) income before extraordinary
item................................... (59,918) 1,235
Extraordinary loss on early extinguishment
of debt, net of tax of $5,632............ 9,211 --
-------- --------
Net (loss) income....................... $(69,129) $ 1,235
======== ========
Basic and diluted (loss) earnings per
share before extraordinary item.......... $ (1.12) $ 0.04
Extraordinary loss per share.............. 0.17 --
-------- --------
Basic and diluted (loss) earnings per
share.................................... $ (1.29) $ 0.04
======== ========
Weighted average number of shares
outstanding.............................. 53,541 29,053
======== ========
</TABLE>
See accompanying notes to financial statements.
28
<PAGE>
AURORA FOODS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Retained
Common Stock Earnings
------------- Additional Promissory (Accumulated
Shares Amount Paid-in Capital Notes Deficit) Total
------ ------ --------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 29,053 $291 $ 32,979 $(110) $ -- $ 33,160
Capital contribution.... -- -- 28,633 (125) -- 28,508
Payments on officer
promissory notes
(Note 13).............. -- -- -- 20 -- 20
Incentive plan expense
(Note 14).............. -- -- 2,300 -- -- 2,300
Net income.............. -- -- -- -- 1,235 1,235
------ ---- -------- ----- -------- --------
Balance at December 27,
1997................... 29,053 291 63,912 (215) 1,235 65,223
Capital contribution
(Note 1)............... -- -- 94,263 (473) -- 93,790
Shares issued for
acquisition of business
(Note 3)............... 25,038 250 183,219 -- -- 183,469
Shares issued (Note 1).. 12,909 129 254,702 -- -- 254,831
Equity offering costs... -- -- (5,062) -- -- (5,062)
Employee stock purchases
(Note 16).............. 16 -- 272 -- -- 272
Payments on officer
promissory notes
(Note 13).............. -- -- -- 126 -- 126
Incentive plan expense
(Note 14).............. -- -- 56,583 -- -- 56,583
Net loss (as restated).. -- -- -- -- (69,129) (69,129)
------ ---- -------- ----- -------- --------
Balance at December 31,
1998 (as restated)..... 67,016 $670 $647,889 $(562) $(67,894) $580,103
====== ==== ======== ===== ======== ========
</TABLE>
See accompanying notes to financial statements.
29
<PAGE>
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended
--------------------------
December 31,
1998 December 27,
(as restated) 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income................................. $ (69,129) $ 1,235
Early extinguishment of debt, net of tax of
$5,632........................................... 9,211 --
Adjustments to reconcile net (loss) income to cash
provided by operating activities:
Depreciation and amortization................... 41,336 10,057
Deferred income taxes........................... (184) 779
Incentive plan expense (Note 14)................ 56,583 2,300
Change in assets and liabilities, net of effects
of businesses acquired:
Increase in accounts receivable............... (29,872) (13,356)
(Increase) decrease in inventories............ (37,233) 2,975
Increase in prepaid expenses and other current
assets....................................... (3,733) (1,946)
Increase in accounts payable.................. 43,573 6,443
Increase in accrued liabilities............... 38,727 14,624
--------- ---------
Net cash provided by operating activities........... 49,279 23,111
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment........ (38,710) (2,411)
Changes to other non-current assets and
liabilities...................................... (4,343) (925)
Proceeds from sale of assets...................... 28,012 --
Payment for acquisition of businesses (Note 3).... (462,784) (225,930)
--------- ---------
Net cash used in investing activities............... (477,825) (229,266)
--------- ---------
Cash flows from financing activities:
Proceeds from senior secured revolving and term
debt (Note 8).................................... 864,350 90,000
Proceeds from senior subordinated notes (Note 8).. 200,000 202,500
Repayment of borrowings........................... (947,259) (107,500)
Payment of redemption premium (Note 1)............ (14,500) --
Proceeds from initial public offering............. 254,831 --
Capital contributions, net of officer promissory
notes............................................ 94,188 28,500
Debt issuance and equity offering costs........... (27,427) (11,294)
--------- ---------
Net cash provided by financing activities........... 424,183 202,206
--------- ---------
Decrease in cash and cash equivalents............... (4,363) (3,949)
Cash and cash equivalents, beginning of period...... 4,717 8,666
--------- ---------
Cash and cash equivalents, end of period............ $ 354 $ 4,717
========= =========
Supplemental Cash Flow Disclosure:
Cash paid for interest............................ $ 60,195 $ 10,091
Cash paid for income taxes........................ $ 337 $ 195
</TABLE>
See accompanying notes to financial statements.
30
<PAGE>
AURORA FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
Restatements
Prior to the issuance of the Company's financial statements as of and for
the year ended December 31, 1999, it was determined that the results reported
in the Company's Form 10-K as of and for the year ended December 31, 1998 as
well as the interim results reported in the Company's Forms 10-Q as of and for
the periods ended September 30, 1998, March 31, 1999, June 30, 1999 and
September 30, 1999 were misstated. Upon examination, it was determined that
liabilities that existed for certain trade promotion and marketing activities
and other expenses (primarily sales returns and allowances, distribution and
consumer marketing) were improperly deferred into future periods and that
certain assets were overstated (primarily accounts receivable, inventories and
fixed assets). In addition, certain activities were improperly recognized as
sales. As a result, the financial statements as of and for the year ended
December 31, 1998 as well as the unaudited quarterly financial data as of and
for the interim periods ended September 30, 1998, March 31, 1999, June 30,
1999 and September 30, 1999 have been restated. The restated financial
statements as of and for the year ended December 31, 1998 have been included
in the consolidated financial statements included herein. Restated condensed
financial statement information for the quarters ended September 30, 1998 and
December 31, 1998 have been included in the notes to the consolidated
financial statements included herein. All restated financial information
included herein has been adjusted to properly expense costs and recognize
revenues in accordance with generally accepted accounting principles and the
Company's stated accounting policies included in the notes to consolidated
financial statements.
For the year ended December 31, 1998, these misstatements primarily
understated trade promotions expense by $28.5 million, overstated net sales by
$4.6 million, understated brokerage and distribution expense by $2.8 million,
understated cost of goods sold by $1.4 million and understated selling,
general and administrative expenses by $0.9 million. After adjusting for the
misstatements, the Company recalculated its income tax provision reducing
income tax expense by $14.5 million. The impact of the misstatements on
reported operating results for the year ended December 31, 1998, was to
overstate gross profit by $6.0 million, operating income by $38.3 million, and
net income by $23.8 million.
A summary of the effects of the restatement are set forth in Notes 19 and
20.
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.
31
<PAGE>
As a result of the amendments and waivers on the senior subordinated notes,
the remaining contingencies associated with the Company's senior secured debt
were resolved.
As of November 9, 2000, the Company has been served with eighteen
complaints in purported class action lawsuits filed in the United States
District Court for the Northern District of California. The complaints
received by the Company allege that, among other things, as a result of
accounting irregularities, the Company's previously issued financial
statements were materially false and misleading and thus constituted
violations of federal securities laws by the Company and the directors and
officers who resigned on February 17, 2000 (Ian R. Wilson, James B. Ardrey,
Ray Chung and M. Laurie Cummings). The actions allege that the defendants
violated Section 10(b) and/or Section 20(a) of the Securities Exchange Act and
Rule 10b-5 promulgated thereunder (the "Securities Actions"). The Securities
Actions complaints seek damages in unspecified amounts. These Securities
Actions purport to be brought on behalf of purchasers of the Company's
securities during various periods, all of which fall between October 28, 1998
and April 2, 2000.
On April 14, 2000, certain of the Company's current and former directors
were named as defendants in a derivative lawsuit filed in the Superior Court
of the State of California, in the County of San Francisco, alleging breach of
fiduciary duty, mismanagement and related causes of action based upon the
Company's restatement of its financial statements. The case has been removed
to federal court in San Francisco. The Company believes that the litigation is
procedurally defective, in light of the plaintiffs' failure to make prior
demand on the Board to investigate the claims in question.
The Company announced on January 16, 2001 that it reached a preliminary
agreement to settle the securities class action and derivative lawsuits
pending against the Company and its former management team in the US District
Court in the Northern District of California, pending court approval of a
definitive agreement and related matters.
Under terms of the agreement, Aurora will pay the class members $26 million
in cash and $10 million in common stock. Separately, the Company has entered
into a preliminary agreement with certain members of former management to
transfer between approximately 3 million and 3.6 million shares of Aurora
common stock to the Company, in consideration for a resolution of any civil
claims that the Company may have, and partially conditioned upon future events
and circumstances.
The Company expects that the cash component of the settlement with the
Company's shareholders will be funded entirely by the Company's insurance.
With respect to the stock component of the settlement, the stock received from
former management would be sufficient, at current share prices, to satisfy
Aurora's obligation without issuing additional shares. The actual number of
shares needed to fund the stock component of the settlement will be based on
average share prices determined at later dates.
The terms of the agreement call for the Company to continue to implement
certain remedial measures, including the adoption of an audit committee
charter, the reorganization of its finance department, the establishment of an
internal audit function and the institution of a compliance program, as
consideration for resolution of the derivative litigation.
Pursuant to the Company's articles of incorporation, and certain of its
contractual obligations, the Company has agreed to indemnify its officers and
directors and certain other employees under certain circumstances against
claims and expenses arising from such proceedings. The Company may 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
32
<PAGE>
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.
Operations
The Company produces and markets branded food products that are sold across
the United States. The Company groups its brands into two segments: the dry
grocery division and the frozen food division. The dry grocery division
includes Duncan Hines(R) baking mix products and Mrs. Butterworth's(R) and Log
Cabin(R) syrup products. The frozen food division includes Van de Kamp's(R)
and Mrs. Paul's(R) frozen seafood, Aunt Jemima(R) frozen breakfast products
and Celeste(R) frozen pizza products. The dry grocery division's products are
manufactured under long-term co-packing agreements with third parties. The
Company's manufacturing equipment has been installed at certain production
facilities of contract manufacturer partners. The frozen food division's
products are manufactured out of production facilities that are owned and
operated by the Company in Erie, Pennsylvania; Jackson, Tennessee and Yuba
City, California.
Organization
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 ("MBW") 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") which 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").
33
<PAGE>
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 directly hold 100% of AurFoods capital
stock. New LLC also directly held 100% of VDK Holdings' capital stock and VDK
Holdings continued to directly hold 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, include the historical financial
information of Holdings from its inception. New LLC was then dissolved in
connection with the IPO (defined below).
On July 1, 1998, Holdings, AurFoods, VDK Holdings and VDK merged with and
into the Company, and the Company consummated an initial public offering of
12,909,372 shares of its Common Stock (the "IPO"). Concurrently with the IPO,
New LLC also sold 1,590,628 shares of the Company's common stock to the public
at a price of $21.00 per share. The sale of stock by New LLC and the IPO are
together herein referred to as the "Equity Offerings." The proceeds received
by New LLC were used to satisfy the $8.5 million priority distribution to MBW
LLC and, in combination with common stock, also satisfied the $42.4 million
priority distribution to VDK LLC. Also, concurrently with the IPO, the Company
issued $200.0 million aggregate principal amount of 8.75% senior subordinated
notes due 2008 (the "Notes Offering" or "New Notes") and borrowed $225.0
million of senior secured term debt and $99.0 million out of a total of $175.0
million of available senior secured revolving debt under the Third Amended and
Restated Credit Agreement, dated as of July 1, 1998, among the Company, as
borrower, the lenders listed therein, The Chase Manhattan Bank, as
Administrative Agent, The National Westminster Bank PLC, as Syndication Agent
and Swiss Bank Corporation, as Documentation Agent (the "New Senior Bank
Facilities").
The Company used the net proceeds from the IPO, the Notes Offering and the
New Senior Bank Facilities to (i) repay $180.8 million of senior secured bank
debt under the Second Amended and Restated Credit and Guarantee Agreement,
dated as of July 9, 1996, among VDK Holdings, VDK, the banks and other
financial institutions parties thereto and The Chase Manhattan Bank, as agent,
as amended (the "VDK Senior Bank Facilities"), (ii) repay $467.0 million under
the Aurora Senior Bank Facilities (as defined in Note 3), (iii) redeem the 12%
Senior Subordinated Notes due 2005 issued under an Indenture dated as of
September 15, 1995, between VDK and Harris Trust and Savings Bank, as Trustee
(the "VDK Notes") (redemption completed on July 31, 1998) in the principal
amount of $100.0 million and (iv) pay the $14.5 million redemption premium
associated with the VDK Notes (in whole or in part, the "Refinancings"). As a
result of the early extinguishment of the Aurora Senior Bank Facilities, the
Company recorded in the year ended December 31, 1998 an extraordinary charge
of $7.3 million, net of income tax of $4.4 million, for the write off-of
deferred financing charges.
As a consequence of the IPO, no additional incentive plan expense will be
recorded under the Aurora Plan (See Note 14--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.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by the Company in the preparation of the financial
statements conform to generally accepted accounting principles and require
management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. Actual amounts could differ from these estimates and
assumptions. The Company uses the accrual basis of accounting in the
preparation of its financial statements.
34
<PAGE>
Fiscal Year
The Company's fiscal year ends on December 31. The Company's prior fiscal
year ended on the last Saturday of December. Accordingly, the results of
operations and cash flows reflect activity for the period from December 28,
1997 through December 31, 1998 and from December 31, 1996 (commencement of
operations) through December 27, 1997. The Company has presented balance
sheets as of December 31, 1998 and December 27, 1997. Certain prior year
amounts have been reclassified to conform with the current year's
presentation.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with original
maturities of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in first-out (FIFO) method. Inventories include the
cost of the Company's or the contract manufacturers' raw materials, packaging,
labor and manufacturing overhead.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the individual assets ranging from three to thirty
years. Costs which improve an asset or extend its useful life are capitalized,
while repairs and maintenance costs are expensed as incurred. Depreciation
expense for the years ended December 31, 1998 and December 27, 1997 was $9.9
million and $1.1 million, respectively.
Depreciable lives for major classes of assets are as follows:
<TABLE>
<S> <C>
Computers........................................................ 3-5 years
Furniture and fixtures........................................... 2-8 years
Machinery and equipment.......................................... 10-15 years
Buildings and improvements....................................... 20-30 years
</TABLE>
Goodwill and Other Intangible Assets
Goodwill and other intangible assets include goodwill, trademarks and
various identifiable intangible assets purchased by the Company. Goodwill is
being amortized over forty years using the straight-line method. Other
intangible assets are being amortized using the straight-line method over
periods ranging from five to forty years. Amortization of goodwill and other
intangible assets charged against income for the years ended December 31, 1998
and December 27, 1997 was $30.0 million and $5.9 million, respectively.
Impairment of Long-Lived Assets
Upon commencement of operations, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". SFAS 121 requires the Company to review long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The assessment of impairment is based on the estimated
undiscounted future cash flows from operating activities compared with the
carrying value of the assets. If the undiscounted future cash flows of an
asset are less than the carrying value, a write-down would be recorded,
measured by the amount of the difference between the carrying value of the
asset and the fair value of the asset. Management believes that there has been
no impairment at December 31, 1998.
35
<PAGE>
Other Assets
Other assets consist of deferred loan acquisition costs, systems software,
packaging design and plates, and other miscellaneous assets. Deferred loan
acquisition costs are being amortized using the interest method over the terms
of the respective debt. Aggregate amortization of deferred loan acquisition
costs and other assets charged against income for the years ended December 31,
1998 and December 27, 1997 was $1.9 million and $3.1 million, respectively.
Revenue Recognition
Revenue is recognized upon shipment of product and transfer of title to
customers. Gross sales and an allowance for returns are included in net sales.
Disclosure About Fair Value of Financial Instruments
For purposes of financial reporting, the Company has determined that the
fair value of financial instruments, other than the senior subordinated notes,
approximates book value at December 31, 1998. The fair market value of the New
Notes and the Notes (as defined in Note 8--Long Term Debt) at December 31,
1998, based on market prices, was $186.4 million and $200.0 million,
respectively.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
Concentration of Credit Risk
The Company sells its products to supermarkets, foodservice operators and
other retail channels. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and had no significant concentration of
credit risk at December 31, 1998.
Income Taxes
The Company records income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". This method of accounting for income taxes uses an asset and liability
approach which requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
Advertising
Costs related to advertising the Company's products are expensed in the
period incurred or expensed ratably over the year in relation to revenues.
Advertising expense for the years ended December 31, 1998 and December 27,
1997 was $15.6 million and $4.1 million, respectively.
Trade Promotions Expense
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
36
<PAGE>
in the retailers' stores. These deals 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.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock Based Compensation", allows companies to measure
compensation cost in connection with employee stock compensation plans either
using a fair value-based method or to continue to use the intrinsic value-
based method prescribed by Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees", and its related
interpretations, which generally does not result in compensation cost. The
Company measures compensation cost in accordance with APB 25. The Company's
stock-based compensation plans are discussed in Note 16.
NOTE 3--BUSINESS ACQUISITIONS
Mrs. Butterworth's
At the close of business on December 31, 1996, the Company acquired
substantially all the assets of MBW from Conopco. The Company manufactures the
products under co-packing agreements with third parties.
The Company acquired the inventories, manufacturing equipment and
intangible assets of MBW for a purchase price of $114.1 million. The
acquisition was accounted for by using the purchase method of accounting. The
acquisition was financed by (i) a net capital contribution from Holdings of
approximately $33.2 million, (ii) term loans of $15.0 million and revolving
loans of $30.0 million borrowed under a $60.0 million senior secured debt
facility and (iii) loans of $50.0 million borrowed under a senior subordinated
debt facility. On February 10, 1997, the senior subordinated debt facility of
$50.0 million and the senior secured facilities of $15.0 million of term debt
and $30.0 million of revolving debt were repaid with proceeds from a $100.0
million senior subordinated note offering.
The cost to acquire MBW has been allocated to tangible and intangible
assets acquired as follows (in thousands):
<TABLE>
<S> <C>
Cash paid to acquire assets........................................ $114,132
Other acquisition costs............................................ 3,663
--------
117,795
Costs assigned to tangible assets.................................. (6,138)
--------
Cost attributable to intangible assets............................. $111,657
========
</TABLE>
Log Cabin
On July 1, 1997, the Company acquired substantially all the assets of LC
from Kraft. The Company manufactures the products under co-packing agreements
with third parties.
The Company acquired the inventories, certain manufacturing equipment and
intangible assets of LC for a purchase price of $222.0 million. The
acquisition was accounted for by using the purchase method of accounting. The
acquisition was financed by (i) a capital contribution from Holdings of
approximately $28.6 million, (ii) term loans of $40.0 million and revolving
loans of $47.0 million borrowed under a senior secured debt facility, and
(iii) proceeds of $102.5 million received in a senior subordinated note
offering.
37
<PAGE>
The cost to acquire LC has been allocated to tangible and intangible assets
acquired, as follows (in thousands):
<TABLE>
<S> <C>
Cash paid to acquire assets........................................ $221,995
Other acquisition costs............................................ 4,169
--------
226,164
Costs assigned to tangible assets.................................. (15,266)
--------
Cost attributable to intangible assets............................. $210,898
========
</TABLE>
Duncan Hines
On January 16, 1998, the Company acquired all the assets of DH from P&G for
a purchase price of $445.0 million. The assets acquired by the Company include
(i) the Duncan Hines(R) brand and associated trademarks, (ii) substantially
all of the equipment used for the manufacture of Duncan Hines(R) products
currently located in P&G's Jackson, Tennessee facility, (iii) proprietary
formulations for Duncan Hines(R) products, (iv) other product specifications
and customer lists and (v) rights under certain contracts, licenses, purchase
orders and other arrangements and permits. The Company uses the acquired
assets in its operations of DH. The acquisition was accounted for by using the
purchase method of accounting. The allocation of purchase price has not been
finalized; however, any changes are not expected to be material.
To finance the acquisition of DH and related costs, the Company refinanced
its previously existing senior bank facilities with $450.0 million of senior
secured term debt under the Second Amended and Restated Credit Agreement,
dated as of January 16, 1998 by and among Holdings, the Company, the lenders
listed therein, The Chase Manhattan Bank, The National Westminster Bank PLC,
and Swiss Bank Corporation (the "Aurora Senior Bank Facilities"), and received
a capital contribution from Holdings of $93.8 million. As a result of the new
bank borrowings under the Aurora Senior Bank Facilities, the Company incurred
an early extinguishment of its pre-DH senior secured bank debt and the write-
off of the associated deferred financing charges was recorded in the quarter
ended March 28, 1998 as an extraordinary charge of $1.9 million, net of income
taxes of $1.2 million.
The cost to acquire DH has been allocated to tangible and intangible assets
acquired as follows (in thousands):
<TABLE>
<S> <C>
Cash paid to acquire assets........................................ $445,000
Other acquisition costs............................................ 9,343
--------
454,343
Cost assigned to tangible assets................................... (40,672)
--------
Cost attributable to intangible assets............................. $413,671
========
</TABLE>
VDK Holdings, Inc.
On April 8, 1998, the Company completed a stock purchase of VDK Holdings
(See Note 1--The Company). The Company acquired all the capital stock of VDK
Holdings in exchange for $183.5 million of the Company's equity. The
acquisition was accounted for using the purchase method of accounting.
The cost to acquire VDK Holdings has been allocated to tangible and
intangible assets acquired as follows (in thousands):
<TABLE>
<S> <C>
Value of stock used to acquire VDK Holdings....................... $ 183,469
Liabilities assumed............................................... 386,362
Other acquisition costs........................................... 10,688
---------
580,519
Cost assigned to tangible assets.................................. (199,757)
---------
Cost attributable to intangible assets............................ $ 380,762
=========
</TABLE>
38
<PAGE>
Had the VDK Holdings, DH and LC acquisitions taken place January 1, 1997,
the unaudited pro forma results of operations for the years ended December 31,
1998 and December 27, 1997, respectively, would have been as follows (in
thousands except per share data:
<TABLE>
<CAPTION>
Years Ended
-------------------------
December 31, December 27,
1998 1997
------------ ------------
<S> <C> <C>
Net sales......................................... $942,348 $874,230
======== ========
Gross profit...................................... $563,191 $501,129
======== ========
Operating (loss) income........................... $(42,803) $101,182
======== ========
Net income (loss) before extraordinary item....... $(83,431) $ 24,898
======== ========
Net income (loss)................................. $(92,642) $ 24,898
======== ========
Net income (loss) per share:
Net income (loss) before extraordinary item... $ (1.56) $ 0.37
======== ========
Net income (loss)............................. $ (1.73) $ 0.37
======== ========
</TABLE>
NOTE 4--INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 December 27,
(as restated) 1997
------------- ------------
<S> <C> <C>
Raw materials..................................... $17,999 $ 270
Work in process................................... 271 --
Finished goods.................................... 55,280 6,632
Packaging and other supplies...................... 3,781 --
------- ------
$77,331 $6,902
======= ======
</TABLE>
At December 31, 1998, the Company had commitments to buy raw materials of
$23.8 million. No commitments existed at December 27, 1997.
NOTE 5--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 December 27,
(as restated) 1997
------------- ------------
<S> <C> <C>
Land.............................................. $ 2,300 $ --
Machinery and equipment........................... 106,227 14,357
Buildings and improvements........................ 14,339 --
Furniture and fixtures............................ 2,163 416
Computer equipment................................ 2,065 313
Construction in progress.......................... 35,682 --
-------- -------
162,776 15,086
Less accumulated depreciation..................... (10,691) (1,011)
-------- -------
$152,085 $14,075
======== =======
</TABLE>
At December 31, 1998, the Company had commitments for facility construction
and related machinery and equipment purchases aggregating approximately $4.9
million. No commitments existed at December 27, 1997.
39
<PAGE>
NOTE 6--GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
1998 December 27,
(as restated) 1997
------------- ------------
<S> <C> <C>
Goodwill.......................................... $ 684,680 $216,485
Trademarks........................................ 332,780 99,600
Other intangibles................................. 90,265 5,040
---------- --------
1,107,725 321,125
Less accumulated amortization..................... (34,966) (5,884)
---------- --------
$1,072,759 $315,241
========== ========
</TABLE>
NOTE 7--ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 December 27,
(as restated) 1997
----------------- ------------
<S> <C> <C>
Accrued interest........ $16,332 $ 8,383
Accrued marketing
expenses............... 38,104 5,092
Accrued brokerage and
disrtibution expenses.. 10,411 1,529
Accrued acquisition
costs.................. 6,059 895
Other................... 12,527 1,510
------- -------
$83,433 $17,409
======= =======
</TABLE>
NOTE 8--LONG TERM DEBT
Long term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31, December 27,
1998 1997
------------ ------------
<S> <C> <C>
SENIOR SECURED DEBT
Senior secured term debt; interest rate of 6.8% at
December 31, 1998; principal due in quarterly
installments through June 30, 2005; floating
interest rate at the prime rate plus 0.50% or,
alternatively, the one, two, three or six month
Eurodollar rate plus 1.50% payable quarterly or at
the termination of the Eurodollar contract interest
period.............................................. $ 220,000 $ --
Senior secured revolving debt; weighted average
interest rate of 7.0% at December 31, 1998;
principal due June 30, 2005; floating interest rate
at the prime rate plus 0.50% or, alternatively, the
one, two, three, or six month Eurodollar rate plus
1.50% payable quarterly or at the termination of the
Eurodollar contract interest period................. 85,850 --
Senior secured term debt; weighted average interest
rate of 8.0% at December 27, 1997; principal due in
quarterly installments through December 31, 2003;
floating interest rate at the prime rate plus 1.25%
or, alternatively, the one, two, three or six month
Eurodollar rate plus 2.25% payable quarterly or at
the termination of the Eurodollar contract interest
period.............................................. -- 40,000
Senior secured revolving debt facility; interest
rate of 8.0% at December 27, 1997; principal due
December 31, 2003; floating interest rate at prime
plus 1.25% or, alternatively, the one, two, three,
or six month Eurodollar rate plus 2.25% payable
quarterly or at the termination of the Eurodollar
contract period..................................... -- 37,500
SENIOR SUBORDINATED NOTES
Senior subordinated notes issued July 1, 1998 at par
value of $200,000; coupon interest rate of 8.75%
with interest payable each January 1 and July 1;
matures July 1, 2008................................ 200,000 --
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Senior subordinated notes issued July 1, 1997 at par value of
$100,000 plus premium of $2,500; net of unamortized premium of
$2,242 and $2,419 at December 31, 1998 and December 27, 1997,
respectively; coupon interest rate of 9.875% with interest payable
each August 15 and February 15; matures on February 15, 2007........ 100,000 100,000
Senior subordinated notes issued February 10, 1997 at par value of
$100,000; coupon interest rate of 9.875% with interest payable each
August 15 and February 15; matures on February 15, 2007............. 100,000 100,000
--------- --------
705,850 277,500
Add: unamortized premium on senior subordinated notes............... 2,242 2,419
Less: current portion of senior secured term debt and senior secured
revolving debt facility............................................ (105,850) (4,375)
--------- --------
Long term debt...................................................... $ 602,242 $275,544
========= ========
</TABLE>
Annual principal payments for the next five years and thereafter consist of
the following (in thousands):
<TABLE>
<S> <C>
1999................................................................ $ 20,000
2000................................................................ 25,000
2001................................................................ 30,000
2002................................................................ 35,000
2003................................................................ 40,000
Thereafter.......................................................... 555,850
--------
Total........................................................... $705,850
========
</TABLE>
Senior Secured Debt
On December 31, 1996, the Company entered into a Credit Agreement (the
"Agreement") with several banks for $15.0 million of senior secured term debt
and a $45.0 million senior secured revolving debt facility.
The Company amended the Agreement, dated as of July 1, 1997, to provide for
borrowings of $40.0 million of senior secured term debt and a $60.0 million
senior secured revolving debt facility. Together with a $100.0 million senior
subordinated note offering and capital contributed from Holdings, the Company
consummated the LC acquisition, paid fees and expenses and provided for the
working capital requirements related to the acquisition.
The Company amended the Agreement, dated as of January 16, 1998, to provide
for borrowings of $450.0 million of senior secured term debt and $75.0 million
senior secured revolving debt facility. Together with capital contributed from
Holdings, the Company consummated the DH acquisition, paid fees and expenses
and provided for the working capital requirements related to the acquisition.
The Company amended the Agreement, dated as of July 1, 1998, to provide for
borrowings of $225.0 million of senior secured term debt and a $175.0 million
senior secured revolving debt facility. Together with a $200.0 million senior
subordinated note offering, the Company completed the repayment of debt in
connection with the Refinancings.
The $175.0 million senior secured revolving debt facility is subject to
limitations based on letters of credit. At December 31, 1998, the Company had
unused borrowing availability of $89.2 million. The Agreement requires a
commitment fee of 0.375% per annum payable quarterly on the unused portions of
the revolving debt facility.
The Agreement includes restrictive covenants, which limit additional
borrowing, cash dividends, and capital expenditures while also requiring the
Company to maintain certain financial ratios. The Company was in compliance
with these covenants at December 31, 1998.
41
<PAGE>
Senior Subordinated Notes
On February 10, 1997, the Company issued $100.0 million of senior
subordinated notes (the "MBW Notes"). The proceeds from the MBW Notes were
primarily used to retire debt incurred to finance the MBW acquisition. On July
1, 1997, the Company issued $100.0 million of senior subordinated notes (the
"LC Notes"). The LC Notes were issued at a premium in the amount of $2.5
million. The unamortized balance of the premium on the LC Notes at December
31, 1998 and December 27, 1997 was $2.2 million and $2.4 million,
respectively. The proceeds from the LC Notes were primarily used to fund the
acquisition of LC (together, the MBW Notes and the LC Notes are the "Notes").
The Company may redeem the Notes at any time after February 15, 2002, at
the redemption price together with accrued and unpaid interest. In addition,
the Company may redeem $35.0 million of the Notes at any time prior to
February 15, 2000 subject to certain requirements, with the cash proceeds
received from one or more Equity Offerings (as defined), at a redemption price
of 109.875% together with accrued and unpaid interest. Upon a Change in
Control (as defined), the Company has the option at any time prior to February
15, 2002 to redeem the Notes at a redemption price of 100% plus the Applicable
Premium (as defined), together with accrued and unpaid interest. If the
Company does not redeem the Notes or if the Change of Control occurs after
February 15, 2002, the Company is required to offer to repurchase the Notes at
a price equal to 101% together with accrued and unpaid interest.
On July 1, 1998, the Company issued the New Notes. The proceeds from the
New Notes were used to repay senior secured debt and senior subordinated debt
and pay fees and expenses related to the repayment of the debt in connection
with the Refinancings.
The Company may redeem the New Notes at any time after July 1, 2003, at the
redemption price together with accrued and unpaid interest. In addition, the
Company may redeem $70.0 million of the New Notes at any time prior to July 1,
2003 subject to certain requirements, with the cash proceeds received from one
or more Subsequent Equity Offerings (as defined), at a redemption price of
108.75% together with accrued and unpaid interest. Upon a Change in Control
(as defined), the Company has the option at any time prior to July 1, 2003, to
redeem the New Notes at a redemption price of 100% plus the Applicable Premium
(as defined), together with accrued and unpaid interest. If the Company does
not redeem the New Notes or if the Change of Control occurs after July 1,
2003, the Company is required to offer to repurchase the New Notes at a price
equal to 101% together with accrued and unpaid interest.
The indentures include restrictive covenants, which limit additional
borrowings, cash dividends, sale of assets, mergers and the sale of stock. The
Company was in compliance with these covenants at December 31, 1998.
Interest Rate Agreements
The Company does not use derivative financial instruments for trading or
speculative purposes. In accordance with the New Senior Bank Facilities, the
Company is required to enter into interest rate protection agreements to the
extent necessary to provide that, when combined with the Company's senior
subordinated notes, at least 50% of the Company's aggregate indebtedness is
subject to either a fixed interest rate or interest rate protection
agreements. Accordingly, the Company's interest rate agreements are as
follows:
Interest Rate Collar Agreement--At December 31, 1998, the Company was party
to two interest rate collar agreements. On August 22, 1996, the Company
entered into a three-year interest rate collar agreement with a notional
principal amount of $70.0 million, a cap rate of 6.5% (plus the applicable
margin) and a floor rate of 5.75% (plus the applicable margin). On November
26, 1996, the Company entered into a three-year interest rate collar agreement
with a notional principal amount of $50.0 million, a cap rate of 7.5% (plus
the applicable margin) and a floor rate of 5.5% (plus the applicable margin).
42
<PAGE>
Under the interest rate collar agreements, the Company would receive
payments from the counterparty if the three-month LIBOR rate exceeds the cap
rates and make payments to the counterparty if the three-month LIBOR rate
falls below the floor rates. The payments would be calculated based upon the
respective notional principal amount. During fiscal 1998, the Company made
payments aggregating $0.1 million under the interest rate collar agreements.
At December 31, 1998, the three-month LIBOR rate was 5.28%.
Interest Rate Swap Agreement--The Company entered into an interest rate
swap agreement on March 17, 1998. The notional principal amount covered under
the interest rate swap agreement is $150.0 million and the term is three
years. The effective swap rate was 5.81%. On November 30, 1998, the Company
amended the existing interest rate agreement whereby the counterparty received
the option to extend the termination date to March 17, 2003. The new effective
swap rate through the termination date of the interest rate swap agreement
is 5.37%.
Under the interest rate swap agreement, the Company would receive payments
from the counterparty if the three-month LIBOR rate exceeds 5.37% and make
payments to the counterparty if the three-month LIBOR rate is less than 5.37%.
The payments would be calculated based upon the respective notional principal
amount. During fiscal 1998 the Company made payments aggregating $0.2 million
under the interest rate swap agreement.
Risks associated with the interest rate agreements include those associated
with changes in market value and interest rates. At December 31, 1998, the
fair value of the Company's interest rate agreements was immaterial and
management considers the potential loss in future earnings and cash flows
attributable to such agreements to be immaterial.
NOTE 9--TRANSITION EXPENSES
Transition expenses consist of one-time costs incurred to establish the
Company's operations and integrate the acquired businesses, including
relocation expenses, recruiting fees, sales support and other unique
transitional expenses. Transition expenses for the years ended December 31,
1998 and December 27, 1997 were approximately $10.4 million and $2.1 million,
respectively.
NOTE 10--INCOME TAXES
The Company is included in the consolidated federal income tax return of
Holdings for the year ended December 27, 1997 and the six months ended June
25, 1998. State income tax returns are filed by Holdings and the Company on a
separate company basis or on a combined basis depending on the particular
rules in each state for the year ended December 27, 1997 and the six months
ended June 25, 1998. The Company will file short period federal and state
returns for the six months ended December 31, 1998.
The provision for income taxes is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended
--------------------------
December 31,
1998 December 27,
(as restated) 1997
------------- ------------
<S> <C> <C>
Current tax expense:
Federal......................................... $ -- $--
State........................................... (30) --
----- ----
Total current provision....................... (30) --
----- ----
Deferred tax expense:
Federal......................................... (144) 656
State........................................... (40) 123
----- ----
Total deferred provision...................... (184) 779
----- ----
Total provision for income taxes.............. $(214) $779
===== ====
</TABLE>
43
<PAGE>
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
Years Ended
--------------------------
December 31,
1998 December 27,
(as restated) 1997
------------- ------------
<S> <C> <C>
Deferred tax assets--
current:
Loss carryforwards........ $ -- $ 1,230
Accounts receivable....... 1,860 --
Incentive plan expense.... 20,098 873
Coupon reserves........... 1,265 844
Inventory................. 3,072 325
Accrued expenses.......... 875 320
-------- -------
Total deferred tax
assets--current........ 27,170 3,592
-------- -------
Deferred tax assets--non-
current:
Loss carryforwards........ 42,917 --
Asset held for sale....... 2,384 --
Other..................... 210 247
-------- -------
Total deferred tax
assets--non-current.... 45,511 247
-------- -------
Deferred tax liabilities--
non-current:
Goodwill.................. (41,054) (4,237)
Depreciation.............. (9,504) (381)
-------- -------
Total deferred tax
liabilities--non-
current................ (50,558) (4,618)
-------- -------
Net deferred tax assets
(liabilities).............. $ 22,123 $ (779)
======== =======
</TABLE>
The Company has not recorded a valuation allowance for its deferred tax
assets. Management believes the deferred tax assets are more likely than not
to be realized.
At December 31, 1998, the Company generated a federal net operating loss of
approximately $78.3 million. These losses can be used to offset future taxable
income through the year 2018. The Company is a loss corporation as defined in
section 382 of the Internal Revenue Code. Therefore, if certain substantial
changes of the Company's ownership should occur, there could be significant
annual limitations of the amount of net operating loss carryforwards which can
be utilized.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
to pretax income as a result of the following differences (in thousands):
<TABLE>
<CAPTION>
Years Ended
------------------------------
December 31, 1998 December 27,
(as restated) 1997
----------------- ------------
<S> <C> <C>
(Benefit from) provision for income taxes
at U.S. statutory rate.................... $(20,445) $685
Increase (decrease) in tax resulting from:
Non-deductible incentive plan expense.... 19,238 --
Non-deductible goodwill.................. 393 --
Other non-deductible expenses............ 104 13
State taxes, net of federal benefit...... (153) 81
Provision to return differences.......... 746 --
Change in net state tax rate............. (97) --
-------- ----
$ (214) $779
======== ====
</TABLE>
44
<PAGE>
NOTE 11--LEASES
The Company leases certain facilities, machinery and equipment under
operating lease agreements with varying terms and conditions. The leases are
noncancellable and expire on various dates through 2004.
Future annual minimum lease payments under these leases are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Minimum
Years ending December 31, Lease Payments
------------------------- --------------
<S> <C>
1999.......................................................... $1,290
2000.......................................................... 1,273
2001.......................................................... 788
2002.......................................................... 618
2003.......................................................... 590
Thereafter.................................................... 139
------
$4,698
======
</TABLE>
Rent expense for the years ended December 31, 1998 and December 27, 1997
was $1.0 million and $0.1 million, respectively.
NOTE 12--SAVINGS AND BENEFIT PLANS
The Company offers a retirement savings plan to employees in the form of
401(k) and profit sharing plans. Under the 401(k) plan, dry grocery division
employee contributions up to 6% of total compensation are matched 50% by the
Company and frozen food division employee contributions up to 3% of total
compensation are matched 100% by the Company, with vesting occurring ratably
over a five year period. Profit sharing contributions of 2% of compensation
are made on behalf of all employees on an annual basis. Profit sharing
contributions also vest ratably over a five year period. The Company's
contributions to the 401(k) and profit sharing plans for the years ended
December 31, 1998 and December 27, 1997 were $0.8 million and $0.1 million,
respectively.
NOTE 13--RELATED PARTY TRANSACTIONS
The Company maintains business relationships and engages in certain
transactions as described below.
The Company entered into a Management Services Agreement, dated December
31, 1996 and terminated on July 1, 1998, with Dartford Partnership L.L.C.
("Dartford"), whose partners include Messrs. Ian R. Wilson, Ray Chung and
James B. Ardrey and Ms. M. Laurie Cummings (all were directors and/or
executive officers of the Company) pursuant to which Dartford provided
management oversight on financial and operational matters. The Company paid
fees to Dartford in connection with this agreement totaling $1.0 million and
$0.8 million for the years ended December 31, 1998 and December 27, 1997,
respectively. The annual management fee was $0.6 million prior to the
acquisition of LC, $0.9 million after the acquisition of LC but before the
acquisition of DH and $2.0 million after the acquisition of DH.
The Company entered into an Advisory Services Agreement, dated December 31,
1996 which terminated on July 1, 1998, with McCown De Leeuw & Co. III, L.P.
("MDC") whose general partners and principal included Mr. David E. De Leeuw,
Mr. Charles Ayres and Mr. Tyler T. Zachem (all directors of the Company)
pursuant to which MDC provided certain advisory functions. The Company paid
fees to MDC in connection with this agreement totaling $0.3 million for each
of the years ended December 31, 1998 and December 27, 1997. The annual
advisory fee was $0.2 million prior to the acquisition of LC, $0.3 million
after the acquisition of LC but before the acquisition of DH and $0.7 million
after the acquisition of DH.
45
<PAGE>
In connection with the acquisitions of MBW, LC and DH the Company paid to
certain members of MBW LLC, who are also represented on the Board of Directors
or officers of the Company and beneficial owners, fees for services rendered
in connection with the acquisitions and related financings. The aggregate
amount paid to certain members of MBW LLC for the years ended December 31,
1998 and December 27, 1997 was $4.0 million and $4.7 million, respectively,
and was funded by the proceeds of the financings. Of this amount, $0 and $1.2
million was paid to Dartford; $0 and $0.3 million in total was paid to Mr.
Thomas J. Ferraro (President, Dry Grocery Division) and Mr. C. Gary Willett
(Executive Vice President, Dry Grocery Division); $3.0 million and $2.7
million was paid to MDC; and $1.0 million and $0.5 million was paid to Fenway
Partners Capital Fund, L.P. ("Fenway"), whose partners include Mr. Peter Lamm,
Mr. Andrea Geisser and Mr. Richard C. Dresdale (all directors of the Company)
in 1998 and 1997, respectively. The fee amounts were negotiated among the
equity investors.
Each of Fenway, MDC, and Dartford earned $1.5 million; UBS Capital LLC,
whose president is Mr. Charles J. Delaney (a director of the Company), earned
$0.2 million; and each of Tiger Oats Limited, whose directors include Mr.
Clive A. Apsey (a director of the Company), and the California Public
Employees Retirement System, who granted the right to vote all of the public
shares of common stock of the Company it holds to MDC under an irrevocable
proxy, earned $0.1 million in fees in connection with the Contribution
transaction.
The Company entered into agreements pursuant to which it agreed to pay
transaction fees to each of Fenway, MDC, and Dartford of 0.333% of the
acquisition price for future acquisitions by the Company. The agreements
terminated upon the resignation of Ian Wilson on February 17, 2000. The
acquisition price is defined as the sum of (i) the cash purchase price
actually received by the seller, (ii) the fair market value of any equity
securities issued by the seller, (iii) the face value of any debt securities
issued to the seller less any discounts, (iv) the amount of liabilities
assumed by the Company plus (v) the fair market value of any other property or
consideration paid in connection with the acquisition, with installment or
deferred payments to be calculated using the present value thereof.
The Company agreed to pay Dartford $0.8 million per year as reimbursement
of corporate headquarters expenses which include staff salaries, miscellaneous
office expenses related to the administration of the Company's corporate
headquarters, and rent for the space leased by Dartford and used by the
Company as its corporate headquarters for a term ended July 1, 2000.
On December 31, 1996 and January 16, 1998, Mr. Ferraro, executed promissory
notes in the amount of $60,000 and $131,000, respectively, in favor of the
Company to evidence monies borrowed to assist in the capitalization of his
limited liability company interests held in MBW LLC. The promissory notes
mature December 31, 1999 and January 16, 2001. Interest is due and payable
quarterly at the rate of 8% per annum and there are required annual principal
payments. The aggregate balance outstanding on his promissory notes was
$151,000 as of December 31, 1998 and was $40,000 as of December 27, 1997.
On September 19, 1995, Mr. Ellinwood, executed a promissory note in the
amount of $125,000 in favor of VDK to evidence monies borrowed to assist in
the capitalization of his limited liability company interests held in VDK LLC.
The promissory note matures March 31, 1999. Interest is due and payable
quarterly at the rate of 8.5% per annum. The balance outstanding on his
promissory note as of December 31, 1998 and December 27, 1997 was $41,666.
NOTE 14--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
46
<PAGE>
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 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 requirement 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) satisfied its liability by
distributing 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 received the tax benefit of such distributions and related
tax gross-up payments, and because the tax benefit was expected to exceed the
amount of the tax gross-up payments, the Company recorded the $11.8 million
liability for any of the tax gross-up payments due. The tax benefit of the tax
gross-up payment and related distributions of $17.1 million, which more than
offsets the gross-up payments, has been recorded to income tax expense and as
a deferred tax asset.
To facilitate payment of the tax gross-up obligation and recognition of
related tax benefits, VDK adopted a new incentive plan (the "New VDK Plan" and
together with the VDK Plan, the "VDK Plans"), which was
47
<PAGE>
assumed by the Company in connection with the Contribution. Under the New VDK
Plan, the Company distributed 1,801,769 shares of the Company's Common Stock
to VDK Covered Employees who were granted certain types of VDK Management
Units under the VDK Plan. The issuance of such shares (the "MC Shares") 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
had no obligation to issue MC Shares unless it receives 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 was subject to
the Company being allowed a deduction for federal income tax purposes with
respect to the payment of the MC Shares and tax gross-up payment. On July 1,
1999, the company satisfied its liability under the VDK Plans by distributing
shares of the Company's common stock and paying the associated tax gross-up
liability.
NOTE 15--COMMITMENTS AND CONTINGENT LIABILITIES
Litigation
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.
48
<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.
The Company is subject to other litigation in the ordinary course of
business. In the opinion of management, the ultimate outcome of any existing
other litigation would not have a material adverse effect on the Company's
financial condition or results of operations.
Purchase Commitments
The Company has entered into manufacturing contracts, which require minimum
annual production orders. The minimum annual production orders for all
contracts through the year 2002 are 5.8 million cases of product. This volume
represents substantially less than the Company's current production
requirements.
NOTE 16--STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company has a stock option plan and an employee stock purchase plan as
described below. The Company applies APB 25 and its related interpretations in
accounting for its plans. No compensation cost has been recognized for its
stock option plans because grants have been made at exercise prices at or
above fair market value of the common stock on the date of grant.
Prior to the Equity Offerings, the Board of Directors adopted the 1998 Long
Term Incentive Plan (the "1998 Option Plan") and the sole stockholder approved
such plan. Under the 1998 Option Plan, the Company is authorized to grant both
incentive and non-qualified stock options to purchase common stock up to an
aggregate amount of 3,500,000 shares. No incentive stock options may be
granted with an exercise price less than fair market value of the stock on the
date of grant; non-qualified stock options may be granted at any price but, in
general, are not granted with an exercise price less than the fair market
value of the stock on the date of grant. Options are generally granted with a
term of ten years and vest ratably over three years beginning on either the
first or third anniversary of the date of grant.
A summary of the activity under the 1998 Option Plan is as follows:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price Options
Outstanding per Share Vested
----------- ---------------- -------
<S> <C> <C> <C>
December 31, 1997........................ -- $ -- --
Granted................................ 2,031,900 20.91 --
Vested................................. -- -- --
Forfeited.............................. (30,250) 20.91 --
--------- ------ ----
December 31, 1998........................ 2,001,650 20.91 --
</TABLE>
49
<PAGE>
For the purposes of calculating compensation cost under SFAS 123, the
minimum fair value of each option grant is estimated on the date of grant
using the Black-Scholes single option pricing model with the following
weighted-average assumptions: dividend yield of 0%, expected volatility of
0.20, a risk-free interest rate of 4.8% and expected option lives of three to
five years. Had the minimum value of the options been calculated in accordance
with SFAS 123, net loss available to common stockholders would have been $70.0
million and loss per diluted share would have been $1.31.
Prior to the Equity Offerings, the Board of Directors adopted the 1998
Employee Stock Purchase Plan (the "1998 Purchase Plan") and the sole
stockholder approved such plan covering an aggregate of 200,000 shares of
common stock. Under the 1998 Purchase Plan, eligible employees have the right
to purchase common stock at 85% of the lower of the fair market value of the
common stock on the commencement date of each offering period or the date of
purchase. Purchases are made from accumulated payroll deductions of up to 15%
of such employee's earnings. During the year ended December 31, 1998, 16,193
shares were purchased under the 1998 Purchase Plan at $16.84 per share.
NOTE 17--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 per share calculations (in thousands except per share
amounts):
<TABLE>
<CAPTION>
Years Ended
------------------------------
December 31, 1998 December 27,
(as restated) 1997
----------------- ------------
<S> <C> <C>
Numerator:
Net (loss) income before
extraordinary item..... $(59,918) $ 1,235
Extraordinary item, net
of tax................. 9,211 --
-------- -------
Net (loss) income....... $(69,129) $ 1,235
======== =======
Denominator--Basic
shares:
Average common shares
outstanding............ 53,541 29,053
-------- -------
Basic earnings per
share.................. $ (1.29) $ 0.04
======== =======
Denominator--Diluted
shares:
Average common shares
outstanding............ 53,541 29,053
Dilutive effect of
common stock
equivalents............ -- --
-------- -------
Total diluted shares.... 53,541 29,053
-------- -------
Diluted earnings per
share.................. $ (1.29) $ 0.04
======== =======
</TABLE>
NOTE 18--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, 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, Aunt Jemima(R) frozen breakfast
and Celeste(R) brand frozen pizza products.
50
<PAGE>
The following table presents a summary of operations by segment (in
thousands):
<TABLE>
<CAPTION>
Years Ended
------------------------------
December 31, 1998 December 27,
(as restated) 1997
----------------- ------------
<S> <C> <C>
Net sales
Dry grocery................................. $ 505,328 $143,020
Frozen food................................. 279,229 --
---------- --------
Total..................................... $ 784,557 $143,020
========== ========
Operating income
Dry grocery................................. $ (2,998) $ 23,398
Frozen food................................. 9,490 --
---------- --------
Total..................................... $ 6,492 $ 23,398
========== ========
Total assets
Dry grocery................................. $ 889,538 $372,739
Frozen food................................. 558,904 --
---------- --------
Total..................................... $1,448,442 $372,739
========== ========
Depreciation and amortization
Dry grocery................................. $ 25,258 $ 10,057
Frozen food................................. 16,609 --
---------- --------
Total..................................... $ 41,867 $ 10,057
========== ========
Capital expenditures
Dry grocery................................. $ 24,649 $ 2,411
Frozen food................................. 14,061 --
---------- --------
Total..................................... $ 38,710 $ 2,411
========== ========
</TABLE>
NOTE 19--QUARTERLY FINANCIAL DATA
As described in Note 1, the unaudited quarterly information for the three
months ended September 30, 1998 and December 31, 1998 have been restated.
Unaudited quarterly financial data for the years ended December 31, 1998
and December 27, 1997 are as follows (in thousands except per share data):
<TABLE>
<CAPTION>
Quarter 1 Quarter 2 Quarter 3 Quarter 4
--------- --------- ---------------------- ----------------------
As previously As As previously As
Actual Actual reported Restated reported Restated
--------- --------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1998:
Net sales............... $ 89,385 $199,813 $220,368 $218,768 $279,627 $276,591
Gross profit............ 51,651 118,070 131,104 128,794 170,821 167,107
Operating income
(loss)................. (50,138) 25,562 28,215 11,149 41,123 19,919
Adjusted operating
income................. 11,788 24,667 29,484 12,416 45,763 24,570
Net income (loss)....... (64,832) 3,230 654 (12,117) 15,571 4,592
Basic earnings (loss)
per share.............. (1.20) 0.06 0.01 (0.18) 0.28 0.07
Diluted earnings (loss)
per share.............. (1.20) 0.06 0.01 (0.18) 0.28 0.07
Adjusted basic earnings
per share.............. 0.08 0.03 0.12 (0.06) 0.28 0.11
Year ended December 27,
1997:
Net sales............... $ 21,253 $ 21,639 N/A $ 49,125 N/A $ 51,003
Gross profit............ 14,086 14,535 N/A 33,896 N/A 34,774
Operating income........ 4,826 3,346 N/A 10,146 N/A 5,080
Adjusted operating
income................. 4,952 3,528 N/A 11,135 N/A 8,196
Net income (loss)....... (71) 415 N/A 1,923 N/A (1,032)
Basic earnings (loss)
per share.............. 0.00 0.01 N/A 0.07 N/A (0.04)
Diluted earnings (loss)
per share.............. 0.00 0.01 N/A 0.07 N/A (0.04)
Adjusted basic earnings
per share.............. 0.00 0.02 N/A 0.09 N/A 0.03
</TABLE>
Adjusted operating income excludes incentive plan expense and transition
expenses for the respective quarters. Adjusted basic earnings per share
exclude the after-tax effect of incentive plan expense, transition expenses
and extraordinary items for the respective quarters.
51
<PAGE>
NOTE 20--RESTATEMENT
As described in Note 1, the December 31, 1998 Financial Statements have
been restated. A summary of the effects of the restatement follows (in
thousands, except per share data):
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 31, 1998
-------------------------
As Previously
Reported As Restated
------------- -----------
<S> <C> <C>
Net sales........................................... $789,193 $784,557
Cost of goods sold.................................. 317,547 318,935
-------- --------
Gross profit...................................... 471,646 465,622
-------- --------
Brokerage, distribution and marketing expenses:
Brokerage and distribution........................ 74,703 77,553
Trade promotions.................................. 173,467 201,926
Consumer marketing................................ 56,683 56,699
-------- --------
Total brokerage, distribution and marketing
expenses....................................... 304,853 336,178
Amortization of goodwill and other intangibles...... 30,048 30,048
Selling, general and administrative expenses...... 25,043 25,955
Incentive plan expense............................ 56,583 56,583
Transition expenses............................... 10,357 10,366
-------- --------
Total operating expenses........................ 426,884 459,130
-------- --------
Operating income.................................... 44,762 6,492
Interest expense, net............................. 64,487 64,493
Amortization of deferred financing expense........ 1,872 1,872
Other bank and financing expenses................. 263 259
-------- --------
Loss before income taxes and extraordinary
loss........................................... (21,860) (60,132)
Income tax expense (benefit)........................ 14,306 (214)
-------- --------
Net loss before extraordinary loss.............. (36,166) (59,918)
Extraordinary loss on early extinguishment of debt,
net of tax......................................... 9,211 9,211
-------- --------
Net loss........................................ $(45,377) $(69,129)
======== ========
Basic and diluted loss per share before
extraordinary loss................................. $ (0.68) $ (1.12)
Extraordinary loss per share........................ 0.17 0.17
-------- --------
Basic and diluted loss per share.................... $ (0.85) $ (1.29)
======== ========
</TABLE>
52
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998
------------------------
As previously As
reported restated
------------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 354 $ 354
Accounts receivable, net............................ 86,539 82,093
Inventories......................................... 76,674 77,331
Prepaid expenses and other assets................... 6,517 6,850
Asset held for sale................................. 3,000 --
Current deferred tax assets......................... 8,251 27,170
---------- ----------
Total current assets.............................. 181,335 193,798
Property, plant and equipment, net.................... 153,167 152,085
Goodwill and other intangible assets, net............. 1,072,760 1,072,759
Asset held for sale................................... -- 3,000
Other assets.......................................... 26,620 26,800
---------- ----------
Total assets...................................... $1,433,882 $1,448,442
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of senior secured term debt......... $ 20,000 $ 20,000
Senior secured revolving debt facility.............. 85,850 85,850
Accounts payable.................................... 59,078 59,395
Accrued liabilities................................. 49,836 83,433
---------- ----------
Total current liabilities......................... 214,764 248,678
Non-current deferred tax liabilities.................. 649 5,047
Other liabilities..................................... 12,372 12,372
Long-term debt........................................ 602,242 602,242
---------- ----------
Total liabilities................................. 830,027 868,339
---------- ----------
Stockholders' equity:
Preferred stock..................................... -- --
Common stock........................................ 670 670
Paid-in capital..................................... 647,889 647,889
Promissory notes.................................... (562) (562)
Accumulated deficit................................. (44,142) (67,894)
---------- ----------
Total stockholders' equity........................ 603,855 580,103
---------- ----------
Total liabilities and stockholders' equity........ $1,433,882 $1,448,442
========== ==========
</TABLE>
53
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of CONOPCO, Inc.
We have audited the accompanying statement of operations for the year ended
December 31, 1996 of Mrs. Butterworth's Business, a component of CONOPCO, Inc.
(the "Business"). This financial statement is the responsibility of CONOPCO,
Inc.'s management. Our responsibility is to express an opinion on this
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying financial statement was prepared to present the results of
operations of the Business pursuant to the purchase agreement between CONOPCO,
Inc. and MBW Acquisition Corp. (the "Buyer") as described in Note 1.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the results of its operations for the Business for
the year ended December 31, 1996, pursuant to the purchase agreement referred
to in Note 1, in conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
San Francisco, California
March 14, 1997
54
<PAGE>
Mrs. Butterworth's Business
(A Component of CONOPCO, Inc.)
Statement of Operations
(in thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
1996
------------
<S> <C>
Net sales.......................................................... $89,541
Costs and expenses:
Cost of products sold............................................ 28,955
Brokerage and distribution....................................... 8,140
Trade promotions................................................. 17,672
Consumer marketing............................................... 10,835
Selling, general and administrative.............................. 6,753
-------
Total costs and expenses....................................... 72,355
-------
Income before taxes................................................ 17,186
Provision for income taxes....................................... 6,616
-------
Net income......................................................... $10,570
=======
</TABLE>
The accompanying notes are an integral part of the statement of operations.
55
<PAGE>
Mrs. Butterworth's Business
(A Component of CONOPCO, Inc.)
Notes to Statement of Operations
Year Ended December 31, 1996
(in thousands)
1. Description of Business
In December 1996, CONOPCO, Inc. ("CONOPCO" or the "Company"), a subsidiary
of Unilever United States, Inc., entered into an Asset Purchase Agreement (the
"Agreement") with MBW Acquisition Corp., the predecessor of MBW Foods Inc.
(the "Buyer"). The Agreement provides for the sale of certain assets of
CONOPCO pertaining to its Mrs. Butterworth's Business (the "Business") and the
assumption of certain liabilities relating to future commitments as defined
(see Note 7). The Business was operated as part of Van den Bergh Foods Company
("Van den Bergh"), a division of the Company. The Business' products, which
are distributed on a national basis, consist of syrup and pancake mix. A
significant portion of the Business' net sales are with major retailers.
The sale was consummated on December 31, 1996, after the close of business
but before the end of the business day. Under the terms of the Agreement,
CONOPCO, Inc. sold to the Buyer certain assets exclusively used in the
Business, as defined in the Agreement, and retains the manufacturing plants,
employees and the retained liabilities of the Business, as defined in the
Agreement.
Throughout the period covered by the financial statements, the Business
operations were conducted and accounted for as a part of the Company. The
Statement of Operations has been carved out from the Company's historical
accounting records.
Under the Company's centralized cash management system, cash requirements
of the Business were generally provided directly by the Company and cash
generated by the Business was generally remitted directly to the Company.
Transaction systems (e.g., payroll, employee benefits, accounts payable) used
to record and account for cash disbursements were provided by centralized
company organizations outside the defined scope of the Business. Most of these
corporate systems are not designed to track assets/liabilities and
receipts/payments on a business specific basis. Given these constraints and
the fact that only certain assets of the Business were sold, statements of
financial position and cash flows could not be prepared.
The manufacturing and distribution operations of the Business are conducted
at sites where other Company manufacturing and distribution not included in
the Business are present. In addition, certain non-manufacturing operations of
the Business share facilities and space with other Company operations. At
these shared sites, only the assets of the Business (inventories and machinery
and equipment) were sold in accordance with the Agreement.
Net sales in the accompanying Statement of Operations represent net sales
directly attributable to the Business. Costs and expenses in the accompanying
statement of operations represent direct and allocated costs and expenses
related to the Business. Costs for certain functions and services performed by
centralized Company organizations outside the defined scope of the Business
have been allocated to the Business based on usage or sales of the Business,
as appropriate, compared to total Van Den Bergh usage or sales. The results of
operations include expense allocations for (1) costs for administrative
functions and services performed on behalf of the Business by centralized
staff groups within the Company, (2) research and development expense and (3)
CONOPCO's general corporate expenses including pension and certain other
postretirement benefits costs (see Note 2, 3 and 5 for a description of the
allocation methodologies employed). CONOPCO maintains all debt and notes
payable on a consolidated basis to fund and manage all of its operations. Debt
and related interest expense were not allocated to the Business.
56
<PAGE>
Mrs. Butterworth's Business
(A Component of CONOPCO, Inc.)
Notes to Statement of Operations--(Continued)
Year Ended December 31, 1996
(in thousands)
All of the allocations and estimates in the Statement of Operations are
based on assumptions that Company management believes are reasonable under the
circumstances. However, these allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted if the Business
had been operated as a separate entity or future results of the Business.
2. Summary of Significant Accounting Policies
Income recognition. Sales and related cost of products sold are included in
income and expense, respectively, when products are shipped to the customer.
Inventories. Inventories are priced at the lower of cost or market with
cost determined by the last-in, first-out (LIFO) method.
Machinery and equipment ("M&E"). M&E is stated at historical cost.
Alterations and major overhauls which extend the lives of its property or
increase the capacity of M&E are capitalized. The amounts for property
disposals are removed from M&E and accumulated depreciation accounts and any
resultant gain or loss is included in earnings. Ordinary repairs and
maintenance are charged to operating costs.
Depreciation. Van Den Bergh calculates depreciation using the straight-line
method over the useful lives of its property and M&E. Depreciation provided in
costs and expenses is allocated to the Business based on sales of the Business
compared to total Van Den Bergh sales.
Cost of Products Sold. Cost of products sold includes direct costs of
materials, labor, and overhead and allocated costs for facilities, functions
and services used by the Business at shared sites. Overhead allocations are
based on estimated time spent by employees, relative use of facilities,
estimated consumption of supplies, and sales of the Business compared to total
Van Den Bergh sales.
Brokerage and distribution. Brokerage and distribution includes costs of
the outside brokerage network and outbound freight.
Trade promotions. Trade promotions represents promotional incentives
offered to retailers.
Consumer marketing. Consumer marketing is comprised of all costs associated
with advertising coupons. Advertising expense is accrued as incurred.
Production costs are expensed on the initial use of the advertisement.
Selling, general and administrative. Selling, general and administrative
consists solely of allocated selling, administration and research and
development expenses. The Business is allocated these expenses based on sales
of the Business compared to total Van den Bergh sales.
Income taxes. The taxable income of the Business was included in the tax
returns of CONOPCO. As such, separate income tax returns were not prepared or
filed for the Business. The provision for income taxes included in the
accompanying Statement of Operations has been determined based upon statutory
rates applied to pre-tax income.
Pensions. The Company has noncontributory defined benefit plans covering
substantially all U.S. employees, including the employees of the Business. The
benefits for these plans are based primarily on employees' years of service
and employees' compensation during the last years of employment. It is the
57
<PAGE>
Mrs. Butterworth's Business
(A Component of CONOPCO, Inc.)
Notes to Statement of Operations--(Continued)
Year Ended December 31, 1996
(in thousands)
Company's policy to fund at least the minimum amounts required by the Employee
Retirement Income Security Act of 1974. The Company maintains profit-sharing
and savings plans for full-time employees who meet certain eligibility
requirements. The costs allocated to the Business relative to the
aforementioned plans are based on sales of the Business.
Other post retirement benefits. The Company provides certain health care
and life insurance benefits (post retirement benefits) to substantially all
eligible retired U.S. employees and their dependents. These benefits are
accounted for as they are earned by active employees. The post retirement
costs allocated to the Business are based on sales of the Business.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Also, as discussed in Note 1, the Statement of Operations includes allocations
and estimates that are not necessarily indicative of the costs and expenses
that would have resulted if the Business had been operated as a separate
entity or future results of the Business.
3. Related Party Transactions
The Statement of Operations includes significant allocations from other
Company organizations involving functions and services (such as finance and
accounting, management information systems, research and development, legal,
human resources and purchasing) that were provided to the Business by
centralized CONOPCO organizations outside the defined scope of the Business.
The costs of these functions and services have been allocated to the Business
using methods that CONOPCO's management believes are reasonable. Such
allocations are not necessarily indicative of the costs that would have been
incurred if the Business had been a separate entity. Total cost of products
sold includes $2,656 in allocated costs for the year ended December 31, 1996.
Selling, general and administrative expenses include $6,753 of allocated costs
for the year ended December 31, 1996.
4. Provision for Income Taxes
Taxes computed at the U.S. statutory rates are summarized below:
<TABLE>
<CAPTION>
1996
-----------
Amount %
------ ----
<S> <C> <C>
Federal....................................................... $5,843 34.0
State (net of federal tax benefit)............................ 773 4.5
------ ----
Provision for income taxes.................................... $6,616 38.5
====== ====
</TABLE>
5. Inventories
The Company's application of LIFO is not attributable to individual
business units. Accordingly, the results of applying LIFO have been allocated
to the Business based on relative inventory values. Management believes such
allocations are reasonable, but may not necessarily reflect the cost that
would have been incurred if LIFO had been applied on a business specific
basis.
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58
<PAGE>
Mrs. Butterworth's Business
(A Component of CONOPCO, Inc.)
Notes to Statement of Operations--(Continued)
Year Ended December 31, 1996
(in thousands)
6. Depreciation Expense
Depreciation provided in costs and expenses was $277 in 1996.
7. Commitments and Contingencies
The Business is currently subject to certain lawsuits and claims with
respect to matters such as product liability and other actions arising in the
normal course of business. Such lawsuits and claims, as defined in the
Agreement, are the responsibility of CONOPCO.
In the normal course of its operations, the Business has informal
agreements with two suppliers to provide the Business with its glass bottle
requirements. These informal agreements contain no specified duration and are
subject to price adjustments. If these agreements were to terminate, the
Company expects that the Business would acquire any on-hand inventory of the
suppliers.
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<PAGE>
Schedule IX--Valuation Reserves
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
------------------------ ---------- ------------------------------- ---------- ----------
Additions
Balance at ------------------------------- Balance at
Beginning Charged to Costs Charged to End
Description of Period and Expenses Other Accounts Deductions of Year
------------------------ ---------- ---------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
December 27, 1997
Allowance for doubtful
accounts............... $ -- $140,000 $ -- $ -- $140,000
======== ======== ======== ======== ========
December 31, 1998
Allowance for doubtful
accounts............... $140,000 $202,000 $419,000 $(91,000) $670,000
======== ======== ======== ======== ========
</TABLE>
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