-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CTMQ4qZa1wvUUDqyzbj4TDd1vVfE89Y581o7gG2lnzCTyfzEgLSxAQZcM1STD3T+ Ath1YnVviC15cugu7AtFgg== 0000929624-99-000423.txt : 19990514 0000929624-99-000423.hdr.sgml : 19990514 ACCESSION NUMBER: 0000929624-99-000423 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AURORA FOODS INC CENTRAL INDEX KEY: 0001033523 STANDARD INDUSTRIAL CLASSIFICATION: 2090 IRS NUMBER: 133921934 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14255 FILM NUMBER: 99564017 BUSINESS ADDRESS: STREET 1: 445 HUTCHINSON AVE CITY: COLUMBUS STATE: OH ZIP: 43215 BUSINESS PHONE: 6144368600 MAIL ADDRESS: STREET 1: 445 HUTCHINSON AVE CITY: COLUMBUS STATE: OH ZIP: 43215 FORMER COMPANY: FORMER CONFORMED NAME: MBW FOODS INC DATE OF NAME CHANGE: 19970213 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K 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 Incorporation or Organization) (IRS Employer Identification No.)
456 Montgomery Street, Suite 2200 San Francisco, CA 94104 (Address of Principal Executive Office, Including Zip Code) (415) 982-3019 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- Common Stock, par value New York Stock Exchange $0.01 per share Pacific Exchange ----------------------- ----------------------------------------- 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. Shares Outstanding February 17, 1999 Common Stock, $0.01 par value 67,016,173 PART I - - ------ ITEM 1: BUSINESS - - ---------------- Aurora Foods Inc. (the "Company") is a leading producer and marketer of premium branded food products including Duncan Hines(R) baking mix products, Mrs. Butterworth's(R) and Log Cabin(R) syrup products, Van de Kamp's(R) and Mrs. Paul's(R) frozen seafood products, Aunt Jemima(R) frozen breakfast products and Celeste(R) frozen pizza. The Company's brands are among the most widely recognized food brands in the United States and have leading market positions. The Company groups its brands into two general divisions: dry grocery division and frozen food division. Products and Markets - - -------------------- The Company seeks to acquire brands with strong brand equity which have been undermarketed and undermanaged in recent years and have become non-core businesses to their corporate parents. The Company's objective is to renew the growth of its brands by giving them the focus, strategic direction, marketing resources and dedicated sales and marketing organization they have lacked in recent years. The Company then sustains the growth of the brands with high levels of marketing support directed towards media, consumer promotions and new products. Each of the Company's brands is a leading national brand with significant market share and strong consumer awareness. The Company competes in two segments of the food industry: dry grocery and frozen food. [LOGO OF MRS. BUTTERWORTH'S(R) APPEARS HERE] [LOGO OF LOG CABIN(R) APPEARS HERE] [LOGO OF VAN DE KAMP'S(R) APPEARS HERE] [LOGO OF CELESTE(R) APPEARS HERE] [LOGO OF MRS. PAUL'S(R) HERE] [LOGO OF DUNCAN HINES(R) APPEARS HERE] [LOGO OF AUNT JEMIMA(R) APPEARS HERE] References to market, category and segment sales, market share percentages and market positions reflect U.S. retail supermarket sales dollars for the 52-week period ended December 27, 1998, as gathered by Information Resources Incorporated for the frozen food division and for the 52-week period ended December 26, 1998, as gathered by A.C. Nielsen Company for the dry grocery division. Dry Grocery - - ----------- The Company has three brands in the dry grocery segment: Mrs. Butterworth's(R), Log Cabin(R) and Duncan Hines(R). Mrs. Butterworth's(R) and Log Cabin(R) Together, the Mrs. Butterworth's(R) and Log Cabin(R) syrup products have a leading 33% share of the syrup category. Log Cabin(R) and Mrs. Butterworth's(R) Original 24-ounce bottles are the number one and number two selling stock keeping units, respectively, in the syrup category. Different consumer perceptions of these two brands offer unique opportunities for consumer targeting. Mrs. Butterworth's(R) distinctive, grandmother-shaped bottle represents a fun image to the family with children. The strong heritage of Log Cabin(R), which dates back to 1888, represents an authentic, rich maple brand targeted more to traditional, "warm, cozy" breakfast occasions. The Company also sells Country Kitchen(R), a value priced syrup, to target the economy segment. Introduced in 1954, Country Kitchen(R) has the highest share in the economy segment. The Company's products are sold to the retail, club store, restaurant and 1 institutional channels. Mrs. Butterworth's(R), Log Cabin(R), and Country Kitchen(R) are offered in regular and lite versions. The Company also sells pancake mixes under the Mrs. Butterworth's(R) brand. In 1998, a sugar-free syrup was introduced under the Log Cabin(R) label to target health-conscious and diabetic consumers. In 1999, the Company will introduce flavored syrups targeting children under the Mrs. Butterworth's(R) brand. Duncan Hines(R) For over 40 years, the Duncan Hines(R) brand has represented excellence in baking mixes. The Duncan Hines(R) product line consists of cake mix, ready-to- spread frosting, brownie mix, muffin mix, and cookie and other specialty mixes. The Duncan Hines(R) trademark is among the most widely recognized in the U.S. with 92% unaided brand awareness. Duncan Hines(R) cake mix products have a 100% all commodity volume distribution and a market share of 37%. Duncan Hines(R) baking mixes enjoy consumer satisfaction ratings that are superior to those of its principal competitors, Betty Crocker(R) and Pillsbury(R) brand baking mixes. Consumer test results show the Duncan Hines(R) brand appeals to the consumer who wants to bake a "quality, good as homemade" product. The brownie mix product was reformulated in 1998. In 1999, cookie and other specialty mixes will be reformulated and packaging for the entire Duncan Hines(R) product line will be restaged. Frozen Food - - ----------- The Company has four brands in the frozen food segment: Van de Kamp's(R), Mrs. Paul's(R), Aunt Jemima(R) and Celeste(R). Van de Kamp's(R) and Mrs. Paul's(R) The Company manufactures and markets frozen seafood products under the Van de Kamp's(R) and Mrs. Paul's(R) brands, which together command a leading market share position of 25%. The frozen seafood product line includes breaded and battered fish sticks and fish fillets, grilled and plain fish fillets, "healthy" breaded fish, and specialty seafood items. The Company's dual brand strategy emphasizes both the brands' respective regional strengths (Van de Kamp's(R) is stronger in the West and Central U.S., while Mrs. Paul's(R) is stronger in the Northeast and Southeast) and brand positioning (Van de Kamp's(R) targets families with children while Mrs. Paul's(R) targets adults). The Van de Kamp's(R) trademark dates back over 40 years and is recognized as a fun, "contemporary" image that appeals to families with children. The Mrs. Paul's(R) franchise began in the mid-1940's with the introduction of deviled crab cakes and has grown to include a wide range of specialty seafood items that target the adult consumer. The Company introduced premium grilled products in 1998 and will introduce new "Tenders" and "Selects" products under both brands in 1999. Aunt Jemima(R) Aunt Jemima(R) was established as a brand over 100 years ago. Aunt Jemima(R) frozen breakfast products are offered in three categories: french toast, pancakes and waffles. Aunt Jemima(R) has a number one market share position in french toast, a number two position in pancakes and is the number three brand in the frozen waffle category. Aunt Jemima(R) waffle and pancake products are offered in four varieties: original, blueberry, buttermilk and lowfat. The french toast product is offered in two flavors: regular and cinnamon. The Company will expand its offerings in frozen breakfast products with the launch of french toast sticks and mini pancakes in 1999. Celeste(R) For over 36 years, Celeste(R) frozen pizza has been a prominent regional brand in the Northeast. Celeste(R) frozen pizzas are offered in small and large sizes and a rising crust pizza is offered under the Mama Celeste(TM) label. Celeste(R) small pizzas (marketed as Celeste(R) Pizza for One) and large pizzas are economy priced, while the Mama Celeste(TM) Fresh-Baked Rising Crust pizza is premium priced. In the markets in which it competes, Celeste(R) Pizza for One is the leading brand of small pizzas. Celeste(R) products are primarily sold in the Northeast, Florida and California. The Company's products are sold nationwide to supermarkets and other retail channels. The Company sells its products through a network of food brokers to wholesale and retail grocery accounts. The products are distributed either directly to the customer or through independent wholesalers. 2 The Company also sells its syrup and frozen food products in the foodservice distribution channel through a foodservice distributor. Customers include military bases, restaurant chains and business/industry. Industry - - -------- The U.S. food industry is relatively stable with growth based on modest price and population increases. Over the last ten years, food companies have been divesting non-core business lines and making strategic acquisitions. The desire for nutrition and convenience strongly affects consumer demand for food products. Increasingly, consumers want nutritious food that is convenient to prepare and can be served as a meal occasion. The Company targets consumers between the ages of 18 and 48 and particularly households with children. There are approximately 39 million children between the ages of 5 and 14, which represent a growing target market for the Company. The Company competes in the dry grocery and frozen food categories of the retail food industry. The Company is expanding its presence in the foodservice markets, which offer further growth opportunities. Financial Information About Industry Segments - - --------------------------------------------- See "Item 14(a) 1.a. Financial Statements of the Company". Trademarks - - ---------- The Company's principal trademarks are Duncan Hines(R), Log Cabin(R), Mrs. Butterworth's(R), Van de Kamp's(R), Mrs. Paul's(R), Celeste(R) and Mama Celeste(TM). The Company licenses the Aunt Jemima(R) trademark pursuant to a perpetual, royalty-free, license agreement with The Quaker Oats Company ("Quaker Oats"). The license agreement requires the Company to obtain the approval of Quaker Oats for any material change to any labels, packaging, advertising, and promotional materials bearing the Aunt Jemima(R) trademark. Quaker Oats can only withhold approval if such proposed use violates the license agreement. The registrations for the Company's trademarks expire from time to time and the Company renews them in the ordinary course of business prior to the expiration dates. Competition - - ----------- The food industry is highly competitive. Numerous brands and products compete for shelf space and sales, with competition based primarily on brand recognition and loyalty, price, quality, and convenience. The Company competes with a significant number of companies of varying sizes, including divisions or subsidiaries of larger companies. A number of these competitors have broader product lines, substantially greater financial and other resources available to them, lower fixed costs and/or longer operating histories. Production - - ---------- The Company produces its Van de Kamp's(R) and Mrs. Paul's(R) frozen seafood products at its Erie, Pennsylvania, Jackson, Tennessee and Yuba City, California manufacturing facilities. Certain specialty seafood items such as shrimp and clams are contract manufactured by third parties. The Company produces its Aunt Jemima(R) frozen breakfast and Celeste(R) frozen pizza products at its Jackson, Tennessee facility. The Company's syrup products are produced by contract manufacturers at various manufacturing facilities pursuant to syrup co-pack agreements. These agreements have terms of five to seven years and automatic renewal provisions for one year unless cancelled by either party. All of the Company's syrup production equipment, including batching, filling and case- packing equipment, is located at the contract manufacturers' facilities. Duncan Hines(R) brownie mixes, specialty mixes and frosting products are also produced by contract manufacturers pursuant to co-pack agreements. These agreements have terms of five years and automatic renewal provisions for one year unless cancelled by either party. All of the Company's brownie mixes, specialty mixes and frosting production equipment including co-milling, blending and packaging equipment is located at the contract manufacturers' facilities. Duncan Hines(R) cake mix products are contract manufactured by The Procter & Gamble Company ("P&G") pursuant to a co-pack agreement. The Company entered into a long-term co-pack agreement for its Duncan Hines(R) cake mixes with a contract manufacturer and is in the process of relocating and installing the Duncan Hines(R) manufacturing assets from P&G's Jackson, Tennessee plant to production facilities owned or leased by such contract manufacturer. This agreement has a term of five years and automatic renewal provisions for one year unless cancelled by either party. 3 Quality Control - - --------------- Quality control processes at the Company's principal manufacturing facilities and at the production facilities where the Company's products are contract manufactured emphasize applied research and technical services directed at quality control and product improvement. The Company's products and the facilities where the products are manufactured are subject to various laws and regulations administered by the Federal Food and Drug Administration, the United States Department of Agriculture, and other federal, state, and local governmental agencies relating to the quality of products, safety and sanitation. The Company believes that it complies with such laws and regulations in all material respects. Customers - - --------- The Company's business is not dependent upon a single customer or a small number of customers, the loss of whom would have a material adverse effect on the Company's operations. Seasonality - - ----------- The Company does not experience any material effects of seasonality in its business. However, the first and fourth quarters generally experience higher levels of sales. There are no material backlogs. Raw Materials and Supplies - - -------------------------- The principal raw materials used by the Company are corn syrup, flour, sugar, fish, eggs, cheese, vegetable oils, shortening, other agricultural products and paper and plastic for packaging materials. All such materials and supplies are available from numerous independent suppliers. The Company procures ingredients through its contract manufacturer partners for most of the dry grocery division and manages the procurement process for its frozen food division and the production of brownie mixes. The Company's objective is to meet both the Company's production needs and its quality standards, while at the lowest aggregate cost to the Company. Research and Development - - ------------------------ The Company maintains its primary research and development departments for its dry grocery division in Columbus, Ohio and for its frozen food division in St. Louis, Missouri. The departments are responsible for nearly all of the food research and product development for the Company. The Company uses food technology consultants where appropriate. The Company's research and development resources are focused on new product development, product enhancement, process design and improvement, packaging, and exploratory research in new business areas. Employees - - --------- As of February 17, 1999, the Company had a total of approximately 1,311 employees, none of whom are represented by unions. Management of the Company believes it generally has good relations with its employees. Business History - - ---------------- 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" or the "Predecessor"). 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 P&G in January 1998. Van de Kamp's, Inc. ("VDK") was a wholly-owned subsidiary of VDK Holdings, Inc., a Delaware corporation ("VDK Holdings"), and was incorporated in Delaware in July 1995 for the purpose of acquiring the Van de Kamp's(R) frozen seafood and frozen dessert businesses from The Pillsbury Company in September 1995. VDK then acquired the Mrs. Paul's(R) frozen seafood business from the Campbell Soup Company in May 1996 and the Aunt Jemima(R) frozen breakfast and Celeste(R) frozen pizza businesses from Quaker Oats in July 1996. VDK Holdings was wholly- owned by VDK Foods LLC ("VDK LLC"). On April 8, 1998, MBW LLC and VDK LLC 4 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"). On July 1, 1998, Holdings, AurFoods, VDK Holdings and VDK merged with and into the Company and the initial public offering of 12,909,372 shares of Common Stock of the Company and 1,590,628 shares of the Company's Common Stock sold by New LLC was consummated at an initial public offering price of $21.00 per share (the "IPO" or "Equity Offerings"). Also, concurrently with the IPO, the Company issued $200.0 million aggregate principal amount of 8.75% senior subordinated notes due 2008 (the "Notes Offering" or "New Notes") and borrowed $225.0 million of senior secured term debt and $99.0 million out of the total available of $175.0 million of senior secured revolving debt under the Third Amended and Restated Credit Agreement, dated as of July 1, 1998, among the Company, as borrower, the lenders listed therein, The Chase Manhattan Bank, as Administrative Agent, The National Westminster Bank PLC, as Syndication Agent and Swiss Bank Corporation, as Documentation Agent (the "New Senior Bank Facilities"). ITEM 2: PROPERTIES - - ------------------ The Company owns and operates three manufacturing facilities for its frozen food products described in the following table. The Company also owns a 175,000 square foot manufacturing facility located in Chambersburg, Pennsylvania, which the Company has made available for sale. The Company manufactured its frozen desserts product line, which it sold on May 1, 1998, at this facility. The Company's headquarters are leased by Dartford Partnership L.L.C. ("Dartford") pursuant to a lease that expires February 2002. See "Certain Relationships and Related Transactions". The frozen food division's corporate office lease will expire in March 2001. The dry grocery division's corporate office lease will expire in March 2004. The Company's facilities, equipment and offices are subject to security interests granted to its lenders.
Approximate Location Principal Use Square Footage Owned/Leased - - --------------------------- --------------------------------------- ------------------ -------------------- Jackson, TN Frozen breakfast, frozen pizza and 302,000 Owned grilled fish production Erie, PA Frozen seafood production 116,000 Owned Yuba City, CA Frozen seafood production 56,000 Owned St. Louis, MO Frozen food division corporate office 36,000 Leased Columbus, OH Dry grocery division corporate office 10,500 Leased San Francisco, CA Company headquarters 7,000 Leased
All of the Company's equipment is generally in good physical condition, well maintained and suitable for the manufacture of the particular product line for which it is used. The Company's equipment generally operates with some available capacity. ITEM 3: LEGAL PROCEEDINGS - - ------------------------- The Company is subject to litigation in the ordinary course of business. In the opinion of management, the ultimate outcome of any existing litigation would not have a material adverse effect on the Company's financial condition or results of operations. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - - ----------------------------------------------------------- Not applicable. 5 PART II - - ------- ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - - ----------------------------------------------------------------------------- The Company's common stock is traded on the New York Stock Exchange and the Pacific Exchange under the symbol AOR. The table below states the high and low closing prices by quarter on the New York Stock Exchange from the date of the Company's IPO through December 31, 1998:
1998 High Low ------------------------ ------------- -------------- June 26- June 30 $21.1250 $21.0000 July 1- September 30 $22.3750 $12.6250 October 1- December 31 $19.8750 $ 9.9375
As of December 31, 1998, there were approximately 140 holders of record of the Company's common stock. The Company has not paid any cash dividends since its inception. Due to restrictions imposed by the New Senior Bank Facilities, the Company cannot declare dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". 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.
Aurora Foods Inc. Predecessor ------------------------------------------- ----------------------------------------- Years Ended Years Ended ------------------------------------------- ----------------------------------------- December 31, December 27, (dollars in thousands) 1998 1997 1996 1995 1994 -------------------- --------------- -------------- ----------- ----------- Net sales $ 789,193 $143,020 $89,541 $91,302 $96,729 Gross profit 471,646 97,291 60,586 63,559 66,799 Operating income 44,762 23,398 17,186 17,185 14,100 Net (loss) income (45,377) 1,235 10,570 10,569 8,671 Total assets (1) 1,433,882 372,739 - - - Total debt (1) 708,092 279,919 - - -
(1) Total assets and total debt 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. 6 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. Certain statements contained in this report, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects," "estimates" and words of similar import, constitute "forward-looking statements" and involve known and unknown risk, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: the actions of the Company's competitors; general economic and business conditions; industry trends; demographics; raw material costs and availability; the continued success of management's strategy; integration of acquired businesses into the Company; terms and development of capital; and changes in, or the failure or inability to comply with, governmental rules and regulations, including, without limitation, FDA and environmental rules and regulations. Given these uncertainties, undue reliance should not be placed on such forward looking statements. The Company disclaims an obligation to update any such factors or to publicly announce the results of any revisions to any other forward-looking statements contained herein to reflect future events or developments. 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 Statements of Operations - - ------------------------ (in thousands except per share amounts)
Actual Pro Forma --------------------------------------------------------- --------------------------------- Aurora Foods Inc. Predecessor Aurora Foods Inc. -------------------------------------- ------------ --------------------------------- Years Ended Years Ended --------------------------------------------------------- --------------------------------- December 31, December 27, December 31, December 31, December 27, 1998 1997 1996 1998 1997 ------------------ ------------- -------------- --------------- -------------- Net sales $ 789,193 $ 143,020 $ 91,581 (1) $ 946,984 $ 874,230 Cost of goods sold 317,547 45,729 28,955 377,769 373,101 ------------- ------------- -------------- --------------- -------------- Gross profit 471,646 97,291 62,626 569,215 501,129 ------------- ------------- -------------- --------------- -------------- Brokerage, distribution and marketing expenses: Brokerage and distribution 74,703 17,096 10,180 (1) 89,616 88,187 Trade promotions 173,467 26,075 17,672 217,859 172,487 Consumer marketing 56,683 15,142 10,835 70,163 65,718 ------------- ------------- -------------- --------------- -------------- Total brokerage, distribution and marketing expenses 304,853 58,313 38,687 377,638 326,392 Amortization of goodwill and other intangibles 30,048 5,938 - 34,105 33,424 Selling, general and administrative expenses 25,043 5,229 6,753 30,325 34,426 Incentive plan expense 56,583 2,300 - 121,323 2,300 Transition expenses 10,357 2,113 - 10,357 3,405 ------------- ------------- -------------- --------------- -------------- Total operating expenses 426,884 73,893 45,440 573,748 399,947 ------------- ------------- -------------- --------------- -------------- Operating income (loss) 44,762 23,398 17,186 (4,533) 101,182 Interest expense, net 64,487 18,242 - 58,474 58,233 Amortization of deferred financing expense 1,872 3,059 - 1,491 1,491 Other bank and financing expenses 263 83 - 339 304 ------------- ------------- -------------- --------------- -------------- (Loss) income before income taxes and extraordinary item (21,860) 2,014 17,186 (64,837) 41,154 Income tax expense 14,306 779 6,616 22,312 16,256 ------------- ------------- -------------- --------------- -------------- Net (loss) income before extraordinary item (36,166) 1,235 10,570 (87,149) 24,898 Extraordinary loss on early extinguishment of debt, net of tax of $5,632 9,211 - - 9,211 - ------------- ------------- -------------- ---------------- -------------- Net (loss) income $ (45,377) $ 1,235 $ 10,570 $ (96,360) $ 24,898 ============= ============= ============== ================ ============== Earnings per share $ (0.85) $ 0.04 n/a $ (1.44) $ 0.37 ============= ============= ============== ================ ============== Adjusted EBITDA (2) $ 151,702 $ 34,809 $ 17,463 $ 173,473 $ 154,403 ============= ============= ============== ================ ============== Adjusted EPS (3) $ 0.51 $ 0.14 n/a $ 0.60 $ 0.42 ============= ============= ============== ================ ==============
(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. (2) Adjusted EBITDA is defined as operating income before incentive plan expense, transition expense, depreciation and amortization of goodwill and other intangibles. (3) Adjusted EPS is defined as EPS plus the per share after tax effect of incentive plan expense, transition expense and extraordinary item. 8 Statements of Operations - - ------------------------ (as a percentage of net sales)
Actual Pro Forma ------------------------------------------------- --------------------------------- Aurora Foods Inc. Predecessor Aurora Foods Inc. ---------------------------- ------------- --------------------------------- Years Ended Years Ended ------------------------------------------------- --------------------------------- December 31, December 27, December 31, December 31, December 27, 1998 1997 1996 1998 1997 ------------------------------------------------- --------------------------------- Net sales 100.0% 100.0% 100.0% (1) 100.0% 100.0% Cost of goods sold 40.2 32.0 31.6 39.9 42.7 ------------ ---------- ---------- ---------- ----------- Gross profit 59.8 68.0 68.4 60.1 57.3 ------------ ---------- ---------- ---------- ------------ Brokerage, distribution and marketing expenses: Brokerage and distribution 9.5 12.0 11.1 (1) 9.5 10.1 Trade promotions 22.0 18.2 19.3 23.0 19.7 Consumer marketing 7.2 10.6 11.8 7.4 7.5 ------------ ---------- ---------- ---------- ------------ Total brokerage, distribution and marketing expenses 38.7 40.8 42.2 39.9 37.3 Amortization of goodwill and other intangibles 3.8 4.1 0.0 3.6 3.8 Selling, general and administrative expenses 3.2 3.6 7.4 3.2 3.9 Incentive plan expense 7.2 1.6 0.0 12.8 0.3 Transition expenses 1.3 1.5 0.0 1.1 0.4 ------------ ---------- ---------- ---------- ------------ Total operating expenses 54.2 51.6 49.6 60.6 45.7 ------------ ---------- ---------- ---------- ------------ Operating income (loss) 5.6 16.4 18.8 (0.5) 11.6 Interest expense, net 8.1 12.8 0.0 6.2 6.7 Amortization of deferred financing expense 0.2 2.1 0.0 0.1 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 (2.7) 1.4 18.8 (6.8) 4.7 Income tax expense 1.8 0.5 7.2 2.4 1.9 ------------ ---------- ---------- ---------- ------------ Net (loss) income before extraordinary item (4.5) 0.9 11.6 (9.2) 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 (5.7%) 0.9% 11.6% (10.2%) 2.8% ============ ========== ========== ========== ============
(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. 9 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 27, 1997 Net Sales. Net sales for the year ended December 31, 1998 were $789.2 million, which was an increase of $646.2 million as compared to net sales in 1997 of $143.0 million. The 1997 year included results of the Mrs. Butterworth's(R) brand from January 1, 1997 and the Log Cabin(R) brand from July 1, 1997, which were the only businesses owned by the Company at the time. The year ended December 31, 1998 included the results of the Mrs. Butterworth's(R) brand, the Log Cabin(R) brand, the Duncan Hines(R) brand from January 16, 1998 and the VDK business from April 9, 1998. Pro Forma Net Sales. Pro forma net sales (which reflect all the acquisitions noted previously as if they had occurred on January 1 for both 1998 and 1997) for the year ended December 31, 1998 were $947.0 million, which represented an 8.3% 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 5.0% to 51.4 million cases from 49.0 million cases in the prior year. The frozen food division unit volumes increased 9.7% versus last year, driven by a 6.2% increase in frozen breakfast products, a 2.9% increase in Celeste(R) frozen pizza and a 63.5% increase in foodservice volumes compared to a relatively low sales base in 1997. Unit volumes for frozen seafood declined by 2.6% 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 1.6% versus the prior year. Unit volumes of the Company's syrup brands increased by 0.9% and volumes of Duncan Hines(R) baking mix products increased 1.9%. 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. 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 to 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 10.4% 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 was 59.8% of net sales, which was lower than the gross profit in 1997 of 68.0%. The decline was due to the inclusion of Duncan Hines(R) baking mix products and the VDK business, both of which have lower gross profit margins than syrup products. Also, the cost of corn syrup increased over the 1997 year, which the Company has offset with a price increase as previously described. Pro Forma Gross Profit. On a pro forma basis, gross profit was 60.1% 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 for the 1998 year increased $246.5 million as compared to the prior year due to the inclusion of the acquired businesses. As a percentage of net sales, brokerage, distribution and marketing expenses were 38.7%, which was 2.1 percentage points lower than the prior year of 40.8%. Pro Forma Brokerage, Distribution and Marketing Expenses. On a pro forma basis, brokerage, distribution and marketing expenses increased to $377.6 million, or 39.9% of net sales, which was above the prior year of 10 37.3%. Brokerage and distribution expenses increased $1.4 million over last year and decreased as a percentage of net sales to 9.5% from 10.1% in the prior year. The decrease as a percent of net sales was mainly the result of lower average brokerage commissions. Marketing expenses increased $49.8 million and were 30.4% of net sales, which was 3.2 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 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 to $30.0 million from $5.9 million in 1997. The increase of $24.1 million was due to the additional amortization expense generated by the goodwill recorded in connection with the brands acquired by the Company over the past year. Selling, General and Administrative Expenses. Selling, general and administrative expenses of $25.0 million were $19.8 million higher than the prior year expense of $5.2 million. The increase was due to the inclusion of VDK and the additional infrastructure and staffing required by the dry grocery division to operate the Log Cabin(R) and Duncan Hines(R) businesses, which were newly integrated in 1998. Selling, general and administrative expenses were 3.2% of net sales, which was 0.4 percentage points lower than the 3.6% experienced in the prior year. The decrease as a percentage of net sales reflects the efficiency gained as the size of the Company has grown dramatically over the prior year. Incentive Plan Expense. For the year ended December 31, 1998, the Company recorded non-cash incentive plan expense of $56.6 million in accordance with the Aurora Plan contained in the MBW LLC Agreement (See Financial Statement Note 14 - - - Incentive Plan Expense). Transition Expenses. Transition expenses were $10.3 million as compared to $2.1 million recorded in the prior year and represent one-time costs incurred to establish the Company's operations and integrate the acquired businesses. The increase was due to the acquisitions of the Log Cabin(R) and Duncan Hines(R) brands. Operating Income. Operating income was $44.8 million as compared to operating income in the prior year of $23.4 million. Excluding the effects of the incentive plan expense and transition expenses, the Company would have achieved operating income of $111.7 million in 1998 versus operating income of $27.8 million in the prior year. The significant increase versus the prior year was due to the inclusion of operating income generated by the acquired businesses. Pro Forma Operating (Loss) Income. On a pro forma basis, the Company incurred an operating loss of $4.5 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 $127.1 million in 1998 versus the prior year operating income of $106.9 million. The increase in operating income was due to the improvement in gross profit margins and a reduction in selling, general and administrative expenses as a percentage of net sales, which were partially offset by higher marketing 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 expense and amortization of deferred financing expense in 1998 of $66.4 million was higher than the prior year amount of $21.3 million. The increase was due to the additional debt associated with the acquisitions over the past year. Income Tax Expense. The income tax expense recorded for the 1998 year was $14.3 million and the prior year income tax expense was $0.8 million. The effective tax rate for the current year was different than the statutory rate primarily due to the effect of the non-deductible incentive plan expense. Net (Loss) Income. The Company incurred a net loss of $45.4 million as compared to net income recorded for the prior year of $1.2 million. In addition to the incentive plan expense recorded in the current year, the Company also 11 incurred an extraordinary charge in the net of tax amount of $9.2 million as a result of the write-off of deferred financing charges associated with the early extinguishment of debt facilities. Pro Forma Net (Loss) Income. On a pro forma basis, the Company incurred a pro forma loss of $96.4 million. Excluding the effects of the incentive plan expense and transition expenses, adjusted net income would have been $34.2 million and earnings per share would have been $0.60. 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. 12 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 $50.2 million. Net loss plus non-cash charges provided $76.1 million of operating cash flow and an increase in net working capital used $25.9 million of cash during the current year. As compared to December 27, 1997, current assets, excluding cash and current deferred tax assets, increased $150.0 million and current liabilities, excluding current maturities of senior secured debt, increased $85.1 million. The increase in both current assets and current liabilities was the result of three factors: (1) the inclusion of items of working capital related to the Log Cabin(R) and Duncan Hines(R) businesses, which had previously been recorded on the prior owners' books in accordance with the respective transition services agreements, (2) the inclusion of all items of working capital related to the VDK business acquired on April 8, 1998 and (3) increased inventory levels of certain Duncan Hines(R) products produced by P&G in advance of relocating certain production equipment to the Company's contract manufacturers' production facilities, which have been financed mainly from the Company's senior secured revolving debt facility. The increase in current assets, primarily additional receivable balances and higher inventory levels, was greater than the inclusion of current liability balances from the respective acquisitions, which caused the use of cash for working capital needs to be $25.9 million. Inventory balances are expected to remain near current levels as the Company continues to carry Duncan Hines(R) transitional inventories while production equipment is decommissioned and relocated to the Company's contract manufacturers' production facilities over the next six months. Net cash used in investing activities was $478.7 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 $39.8 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. The Company expects to spend approximately $17.0 million on capital projects in 1999. 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 the Aurora 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 New Senior Bank Facilities and New Notes in the amount of $324.0 million and $200.0 million, respectively, to repay $647.8 million of senior secured debt and $114.5 million of senior subordinated notes, including the associated redemption premium, and pay associated fees and expenses. As a result of the early extinguishment of senior secured debt, the Company recorded 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 13 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. Other Information - - ----------------- 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 within internal mission-critical systems and applications is nearly complete. Given the relatively recent incorporation of the Company, most systems and applications have been purchased within the last year or two. All purchases made were for systems that were Year 2000 compliant or for those that had documented plans and dates for future compliance. Currently, the Warehouse Management System in the frozen food division, which accesses a compliant information database, is the only remaining mission-critical application 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 June 1999. Internal non-mission-critical systems and applications are currently being analyzed and are presently expected to be compliant by the middle of 1999. In addition to reviewing its internal systems, the Company has polled or is in the process of polling its third-party vendors, customers and freight carriers to determine whether they are Year 2000 compliant and to attempt to identify any potential issues. If the Company's customers and vendors do not achieve Year 2000 compliance before the end of 1999, the Company may experience a variety of problems, which may have a material adverse effect on the Company. Among other things, to the extent the Company's customers are not Year 2000 compliant by the end of 1999, such customers may lose 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 co-packers are not Year 2000 compliant by the end of 1999, such vendors or co-packers may fail to deliver ordered materials and products to the Company and may fail to bill the Company properly and promptly. Consequently, the Company may not have the correct inventory to send to its customers and may experience a shortage or surplus of inventory which could materially adversely affect the Company's business and results of operations. The Company is in the process of developing a plan to address potential problems with respect to its vendors; however, the Company believes it has access to sufficient alternative sources of supply. 14 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 is in the process of developing 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 will be structured to address both remediation of systems and their components and overall business operating risk. These plans are intended to mitigate both internal risks as well as potential risks in the supply chain of the Company's suppliers and customers. Acquisitions. Growth of the Company through acquisitions may require the Company to incur additional indebtedness or issue equity securities. There can be no assurance that additional debt or equity will be available to the Company or, if available, on terms acceptable to the Company. 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%. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - - ------------------------------------------------------------------ The Company entered into interest rate swap and collar agreements for non- trading purposes. Risks associated with the interest rate swap and collar agreements include those associated with changes in the market value and interest 15 rates. Management considers the potential loss in future earnings and cash flows attributable to the interest rate swap and collar agreements not to be material. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - - --------------------------------------------------- Reference is made to Item 14. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE - - -------------------- Not applicable. 16 PART III - - -------- ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY - - --------------------------------------------------------- The names, ages and positions of all directors and executive officers of Aurora Foods Inc., as of February 17, 1999, are listed below, followed by a brief account of their business experience for at least the past five years. Directors and officers serve in their positions until their resignation or removal. Officers serve at the pleasure of the Board of Directors.
Name Age Position(s) ---- --- ----------- Ian R. Wilson 69 Chairman of the Board and Chief Executive Officer James B. Ardrey 40 Vice Chairman and Director Ray Chung 50 Executive Vice President M. Laurie Cummings 35 Chief Financial Officer and Secretary Thomas O. Ellinwood 44 President, Frozen Food Division Thomas J. Ferraro 50 President, Dry Grocery Division Anthony A. Bevilacqua 42 Executive Vice President, Sales and Marketing, Frozen Food Division C. Gary Willett 44 Executive Vice President, Dry Grocery Division Clive A. Apsey 49 Director Charles Ayres 38 Director David E. De Leeuw 53 Director Charles J. Delaney 37 Director Richard C. Dresdale 42 Director Andrea Geisser 55 Director Peter Lamm 46 Director Tyler T. Zachem 32 Director
IAN R. WILSON - CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Mr. Wilson has served as Chairman of the Board and Chief Executive Officer of the Company since June 1998. Prior to that time, Mr. Wilson was Chairman of both AurFoods from December 1996 to June 1998 and VDK from September 1995 to June 1998. Mr. Wilson is the Managing Partner of Dartford, a private partnership focused on the food and beverage industries. From 1995 to 1998, Mr. Wilson was the Chairman of Windy Hill Pet Food Company, Inc. ("Windy Hill"). From 1989 through 1995, Mr. Wilson was Chairman and Chief Executive Officer of Windmill Holdings Corporation ("Windmill"), a leading specialty miller and supplier of branded food products. From 1985 through 1989, Mr. Wilson was Chairman and Chief Executive Officer of Wyndham Foods, Inc. ("Wyndham"), a major cookie company he founded and positioned as a leading popular priced cookie company in the United States. From 1983 to 1984, Mr. Wilson was the Chairman and Chief Executive Officer of Castle & Cooke, Inc. (now known as Dole Food Company, Inc.), an international food and real estate concern. Prior to Castle & Cooke, Inc., Mr. Wilson spent 25 years with The Coca-Cola Company, serving in a series of international operating management positions. Ultimately, Mr. Wilson served as Vice Chairman of The Coca-Cola Company and President of the Pacific Group. Mr. Wilson's past service as a director includes Chairman of the Board of Wyndham, Windmill and Windy Hill and membership on the boards of Novell, Inc., Revlon, Inc., Crown Zellerbach Corporation and Castle & Cooke, Inc. JAMES B. ARDREY - VICE CHAIRMAN AND DIRECTOR Mr. Ardrey has served as Vice Chairman and Director of the Company since June 1998. Prior to that time, Mr. Ardrey was Executive Vice President and Director of VDK from September 1995 to June 1998 and Executive Vice President and Director of AurFoods from December 1996 to June 1998. Mr. Ardrey is a partner of Dartford. From 1996 to 1998, Mr. Ardrey was Executive Vice President of Windy Hill. From 1993 to 1995, Mr. Ardrey was a consultant to Windmill, conducting its divestiture program. From 1984 to 1992, Mr. Ardrey was an investment banker with PaineWebber Incorporated, serving as Managing Director from 1990 to 1992. Prior to joining PaineWebber, Mr. Ardrey was a consultant with Booz, Allen & Hamilton. 17 RAY CHUNG - EXECUTIVE VICE PRESIDENT Mr. Chung has served as Executive Vice President of the Company since June 1998. Prior to that time, Mr. Chung was Executive Vice President of VDK and Director of VDK Holdings, Inc. from September 1995 to June 1998 and Executive Vice President and Director of AurFoods from December 1996 to June 1998. Mr. Chung is a founding partner of Dartford. Mr. Chung has previously served as a Director and Executive Vice President of Windy Hill from 1995 to 1998, as a Director, Executive Vice President and Chief Financial Officer of Windmill from 1989 to 1995 and as a Director, Executive Vice President and Chief Financial Officer of Wyndham from 1985 to 1990. From May 1984 to September 1985, Mr. Chung served as Vice President-Finance for the Kendall Company (Colgate-Palmolive). Between 1981 and 1984, Mr. Chung served as Vice President-Finance for Riviana Foods, Inc. He currently serves as a director of Doane Pet Care Enterprises, Inc. M. LAURIE CUMMINGS - CHIEF FINANCIAL OFFICER AND SECRETARY Ms. Cummings has served as Chief Financial Officer and Secretary of the Company since June 1998. Prior to that time, Ms. Cummings was Vice President and Secretary of VDK from September 1995 to June 1998 and Vice President and Secretary of AurFoods from December 1996 to June 1998. Ms. Cummings is a partner of Dartford. Ms. Cummings served as Vice President and Secretary of Windy Hill from 1995 to 1998. Ms. Cummings was Vice President, Controller and Treasurer of Windmill from 1989 to 1995. Between 1987 and 1990, Ms. Cummings was the Controller and Assistant Treasurer of Wyndham. THOMAS O. ELLINWOOD - PRESIDENT, FROZEN FOOD DIVISION Mr. Ellinwood has been with VDK since 1995. Mr. Ellinwood has been responsible for the management of VDK since Pet Incorporated ("Pet") acquired Van de Kamp's, Inc. from Grand Metropolitan, PLC in October 1989, when he headed the acquisition and integration team as Director/Marketing Manager. Mr. Ellinwood was Vice President and General Manager of Pet from March 1992 until VDK bought the Van de Kamp's, Inc. business in 1995. Between 1990 and 1992, Mr. Ellinwood held the position of Vice President, Marketing at Pet. Prior to Pet's acquisition of Van de Kamp's, from 1986 to 1989, Mr. Ellinwood held various positions of increasing responsibility with Pet's sales and marketing departments. Mr. Ellinwood served as General Manager of Omar, Inc., a privately owned aerospace manufacturing company, from 1983 to 1986. THOMAS J. FERRARO - PRESIDENT, DRY GROCERY DIVISION Prior to joining AurFoods in December 1996, from September 1994 to June 1996, Mr. Ferraro served as President of Campfire, Inc., which merged into International Home Foods, Inc. Prior to joining Campfire, Inc. he was Vice President of Sales for the Niche Grocery division of Borden, Inc. from 1991 to 1994. Mr. Ferraro's experience with niche grocery products extends back to his early career with RJR Nabisco Inc. and Dracket products, a division of Bristol- Meyers Squibb Company, where he held a variety of marketing and sales positions. ANTHONY A. BEVILACQUA - EXECUTIVE VICE PRESIDENT, SALES AND MARKETING, FROZEN FOOD DIVISION Mr. Bevilacqua joined VDK in February 1998 and is responsible for the frozen food division's sales and marketing functions. Prior to joining VDK, Mr. Bevilacqua was Senior Vice President at Aramark's Spectrum Healthcare Services from September 1994 to December 1997. Between 1980 and 1994, Mr. Bevilacqua held various positions of increasing responsibility in sales and marketing with Ralston Purina Company ("Ralston"). In 1992, he was promoted to Vice President of Marketing at Ralston's Eveready Battery Canadian division. C. GARY WILLETT - EXECUTIVE VICE PRESIDENT, DRY GROCERY DIVISION Mr. Willett joined AurFoods in December 1996. From August 1995 to September 1996, he served as Executive Vice President/General Manager of Campfire, Inc., which merged into International Home Foods, Inc. Prior to joining Campfire, Inc., Mr. Willett spent 12 years with Borden, Inc., from June 1983 to August 1995, in a series of marketing and general management positions, most recently as Vice President/General Manager of Elmer's, a division of Borden, Inc. 18 CLIVE A. APSEY - DIRECTOR Mr. Apsey has served as a Director of the Company since June 1998. Prior to that time, Mr. Apsey was a Director of VDK from September 1995 to June 1998. Mr. Apsey was an Executive Director of Tiger Oats Ltd. ("Tiger Oats") from 1987 to 1998 and currently serves as a non-Executive Director and consultant to the group. CHARLES AYRES - DIRECTOR Mr. Ayres has served as a Director of the Company since June 1998. Prior to that time, Mr. Ayres was a Director of AurFoods from December 1996 to June 1998. Mr. Ayres is a managing director of McCown De Leeuw & Co., Inc. ("MDC"). Mr. Ayres has been associated with MDC since 1991. Prior to joining MDC, Mr. Ayres was a founding partner of HMA Investments, Inc., a private investment firm focused on middle market management buyouts. Mr. Ayres began his career as an investment banker with Lazard Freres & Co. He currently serves as a director of The Brown Schools, Inc. David E. De Leeuw - Director Mr. De Leeuw has served as a Director of the Company since June 1998. Prior to that time, Mr. De Leeuw was a Director of AurFoods from December 1996 to June 1998. Mr. De Leeuw is a managing director of MDC. Prior to founding MDC with George E. McCown in 1984, Mr. De Leeuw was Manager of the Leveraged Acquisition Unit and Vice President in the Capital Markets Group at Citibank, N.A. Mr. De Leeuw also worked with W.R. Grace & Co. where he was Assistant Treasurer and Manager of Corporate Finance. Mr. De Leeuw began his career as an investment banker with Paine Webber Incorporated. He currently serves as a director of Outsourcing Solutions Inc., American Residential Investment Trust and DIMAC Holdings, Inc. CHARLES J. DELANEY - DIRECTOR Mr. Delaney has served as a Director of the Company since June 1998. Prior to that time, Mr. Delaney was a Director of VDK from September 1995 to June 1998. Mr. Delaney has been the President of UBS Capital LLC ("UBS") since it was established in 1993 as a subsidiary of Union Bank of Switzerland (now UBS AG). From 1989 to 1993, Mr. Delaney headed the UBS Leverage Finance Group of the Corporate Banking Division. Mr. Delaney is also a director of ETM Entertainment Network, Inc. and Peoples Telephone Company, Inc. RICHARD C. DRESDALE - DIRECTOR Mr. Dresdale has served as a Director of the Company since June 1998. Prior to that time, Mr. Dresdale was a Director of AurFoods from December 1996 to June 1998. Mr. Dresdale is President of Fenway Partners, Inc. ("Fenway") and was a founding partner. Fenway is a New York-based private equity firm for institutional investors with the primary objective of acquiring leading middle- market companies. Prior to founding Fenway with Messrs. Lamm and Geisser, Mr. Dresdale was employed by Clayton, Dubilier and Rice, Inc. from June 1985 to March 1994, most recently as a Principal. Mr. Dresdale serves as a director of a number of Fenway's portfolio companies, including Blue Capital Management, LLC, Central Tractor Farm & Country, Inc., Delimex Holdings, Inc. and Simmons Company. ANDREA GEISSER - DIRECTOR Mr. Geisser has served as a Director of the Company since June 1998. Prior to that time, Mr. Geisser was a Director of VDK from September 1995 to June 1998 and a Director of AurFoods from December 1996 to June 1998. Mr. Geisser has been a Managing Director of Fenway since the firm's founding in 1994. Prior to founding Fenway with Messrs. Lamm and Dresdale, Mr. Geisser was employed by Butler Capital Corporation ("BCC") from February 1989 to June 1994, most recently as Managing Director and General Partner of each of the management partnerships of the investment partnerships sponsored by BCC. From 1986 to 1989, Mr. Geisser was a Managing Director of Onex Investment Corporation, the largest Canadian leveraged buyout company, and prior to that started the U.S. operations of EXOR, a European investment company, where he was a Senior Vice President and Director. Mr. Geisser serves as a director of a number of Fenway's portfolio companies, including Decorative Concepts, Inc., New Creative Enterprises, Inc., Iron Age Corporation, Simmons Company and Valley Recreation Products, Inc. 19 PETER LAMM - DIRECTOR Mr. Lamm has served as a Director of the Company since June 1998. Prior to that time, Mr. Lamm was a Director of VDK from September 1995 to June 1998 and a director of AurFoods from December 1996 to June 1998. Mr. Lamm is Chairman and Chief Executive Officer of Fenway and was a founding partner. Prior to founding Fenway with Messrs. Dresdale and Geisser, Mr. Lamm was employed by Butler Capital Corporation from February 1982 to April 1994, most recently as Managing Director and General Partner of each of the management partnerships of the investment partnerships sponsored by BCC. Mr. Lamm serves as a director of a number of Fenway's portfolio companies, including Blue Capital Management, LLC, Central Tractor Farm & Country, Inc., Delimex Holdings, Inc., Iron Age Corporation and Simmons Company. TYLER T. ZACHEM - DIRECTOR Mr. Zachem has served as a Director of the Company since June 1998. Prior to that time, Mr. Zachem was a Director of AurFoods from December 1996 to June 1998. Mr. Zachem is a managing director of MDC. Mr. Zachem has been associated with MDC since July 1993. Mr. Zachem previously worked as a consultant with McKinsey & Co. and as an investment banker with McDonald & Company. He currently serves as a director of Outsourcing Solutions Inc., RSP Manufacturing Corporation, The Brown Schools, Inc. and Papa Gino's, Inc. There are no family relationships between any directors or executive officers of the Company. Section 16(a) Beneficial Ownership Reporting Compliance Each of the entities and individuals who are signatories to the Securityholders Agreement (defined below) filed a Form 3 in either July or August 1998 instead of on the due date of June 25, 1998 and filed a Form 4 several days after the due date August 10, 1998. ITEM 11: EXECUTIVE COMPENSATION - - -------------------------------- The following Summary Compensation Table sets forth the compensation received by the officers of the Company (together, the "Named Executive Officers"), during the years ended December 31, 1998 and December 27, 1997. Summary Compensation Table - - --------------------------
Long-term Annual Compensation Compensation ------------------- ------------ Securities Name and Principal Position Underlying All Other as of December 31, 1998 Year Salary (1) Bonus (1) Options Compensation - - ---------------------------------- ------ ------------ ----------- ---------- -------------- Ian R. Wilson 1998 $ 1,000,000 $ 450,000 - $ - Chairman of the Board and Chief Executive Officer James B. Ardrey 1998 600,000 270,000 - - Vice Chairman Ray Chung 1998 350,000 157,500 - - Executive Vice President M. Laurie Cummings 1998 250,000 112,500 - - Chief Financial Officer and Secretary Thomas O. Ellinwood 1998 275,000 123,750 175,000 8,895 President, Frozen Food Division Thomas J. Ferraro 1998 275,000 165,000 175,000 9,000 President, Dry Grocery Division 1997 175,000 143,000 - 9,000
(1) Amounts have been annualized. 20 Other compensation includes Company contributions on behalf of the officers to profit sharing and savings plans and other related benefits. The following table sets forth information with respect to stock option grants to the Named Executive Officers during 1998. The options were granted at an exercise price equal to 100% of the fair market value of the common stock on the date of grant. The options vest ratably over three years beginning in the third year after the date of grant and expire ten years after the date of grant. Option Grants in the Last Fiscal Year - - -------------------------------------
Individual Grants ----------------------------------------------------------------- Number of Securities Percent of Total Underlying Options Granted to Options Employees in Exercise Expiration Grant Date Present Name Granted (1) Fiscal Year Price Date Value (2) - - ------------------------- ----------------- ------------------ ---------- ------------- ------------------ Ian R. Wilson - - $ - - $ - James B. Ardrey - - - - - Ray Chung - - - - - M. Laurie Cummings - - - - - Thomas O. Ellinwood 175,000 8.6% 21.00 7/1/08 5.96 Thomas J. Ferraro 175,000 8.6% 21.00 7/1/08 5.96
(1) Options were granted pursuant to the Company's 1998 Incentive Plan dated July 1, 1998 and vest ratably over three years beginning with the third year after the date of grant. (2) Present value was calculated 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 five years. The following table sets forth information with respect to each exercise of stock options during the 1998 fiscal year by a Named Executive Officer and the number and value of unexercised stock options held by the Named Executive Officers at December 31, 1998. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option - - -------------------------------------------------------------------------- Values - - ------
Number of Securities Value of Unexercised In-the- Underlying Unexercised Money Options at Fiscal Year Options at Fiscal Year End End (2) -------------------------------- -------------------------------- Shares Acquired on Value Name Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable - - ------------------------ ------------- --------------- -------------- ---------------- -------------- ---------------- Ian R. Wilson - $ - - - $ - $ - James B. Ardrey - - - - - - Ray Chung - - - - - - M. Laurie Cummings - - - - - - Thomas O. Ellinwood - - - 175,000 - - Thomas J. Ferraro - - - 175,000 - -
(1) The Value Realized is equal to the fair market value on the date of exercise, less the exercise price, times the number of shares acquired. No options were exercised during the last fiscal year. (2) The Value of Unexercised In-the-Money Options at Fiscal Year End is equal to $19.8125, the fair market value of each share underlying the options at December 31, 1998, less the exercise price, times the number of options. No options were in-the-money at December 31, 1998. 21 Compensation Committee Interlocks and Insider Participation - - ----------------------------------------------------------- The Board of Directors has appointed Messrs. Lamm, Ayres and Dresdale as members of its Compensation Committee. Mr. Wilson, the Chairman of the Board and Chief Executive Officer of the Company, is an ex officio member of the Compensation Committee. The Compensation Committee governs the compensation of the executive officers of the Company subject to ratification by the Board of Directors. Messrs. Apsey and Delaney are the members of the Compensation Subcommittee. The Compensation Subcommittee administers the Company's 1998 Incentive Plan and the 1998 Employee Stock Purchase Plan. Mr. Wilson is the managing partner of Dartford and, until August 1998, was the Chairman of the Board of Directors and Chief Executive Officer of Windy Hill. Mr. Ardrey, Vice Chairman of the Company, is also a partner of Dartford and, until August 1998, was an Executive Vice President of Windy Hill. Pursuant to an agreement, dated September 19, 1995 and terminated on June 26, 1998, Dartford provided management oversight on financial and operational matters to the Company with respect to VDK. Dartford received $900,000, $1,800,000 and $631,000 during 1998, 1997 and 1996, respectively, under such agreement. Further, pursuant to an agreement with the Company, dated December 31, 1996 and terminated on July 1, 1998, Dartford provided management oversight to the Company with respect to AurFoods. Dartford received $951,419 and $768,000 for 1998 and 1997, respectively, under such agreement. Also, Dartford earned $1,500,000 in fees in connection with the Contribution. From December 31, 1996 through January 16, 1998, the Company paid Dartford $1,250,000 in fees for services rendered in connection with the acquisitions of MBW, LC and DH. Also, from September 1995 through July 9, 1996, VDK paid Dartford $1,950,000 in fees for services rendered in connection with acquisitions and related financings by VDK. The Company has entered into agreements pursuant to which it agreed to pay transaction fees to each of Dartford, MDC, and Fenway of 0.333% of the acquisition price for future acquisitions by the Company. The Company has agreed to pay Dartford $800,000 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 ending the earlier of July 1, 2000 or the date that Mr. Wilson is no longer Chairman or Chief Executive Officer of the Company. Messrs. Ayres, De Leeuw and Zachem are general partners of MDC. Pursuant to an agreement, dated December 31, 1996 and terminated on July 1, 1998, MDC Management Company III, L.P. ("MDC III"), an affiliate of MDC, a beneficial owner of the Company, advised the Company as to the structuring of the Company's bank financing and the capital structure of the Company, identification and financing of future acquisitions, and general management advice relating to the overall strategy and positioning of the Company. MDC III received $318,000 and $293,000 during 1998 and 1997, respectively, under such agreement. From December 31, 1996 through January 16, 1998 the Company paid MDC III $5,700,000 in fees for services rendered in connection with the acquisitions of MBW, LC and DH. Also, MDC III earned $1,500,000 in fees in connection with the Contribution. Messrs. Dresdale, Geisser and Lamm are partners of Fenway. From December 31, 1996 through January 16, 1998, the Company paid Fenway $1,500,000 in fees for services rendered in connection with the acquisitions of the MBW, LC and DH. Also, from September 1995 through July 9, 1996, VDK paid Fenway $1,474,000 in fees for services rendered in connection with acquisitions and related financings by VDK. Fenway earned $1,500,000 in fees in connection with the Contribution. Employment Agreements - - --------------------- Mr. Ian R. Wilson serves as the Chairman of the Board and the Chief Executive Officer of the Company pursuant to an employment agreement dated July 1, 1998. Under the agreement, Mr. Wilson receives an annual base salary of $1.0 million during the term of the agreement and is eligible to receive a bonus of up to 80% of his base salary based on certain earnings criteria. The employment agreement provides for a term of two years and a non-compete covenant for the term of his employment and thereafter, if applicable, until the earlier of July 1, 2000 or the first anniversary of employing a Chief Executive Officer other than Mr. Wilson. Upon termination by the Company other than for cause (as defined in the employment agreement), Mr. Wilson shall receive his salary and shall be eligible to receive his bonus through the remaining term of the non-compete period. In addition, a termination of Mr. Wilson by the Company other than for cause shall also constitute a termination of Messrs. Ardrey and Chung and Ms. Cummings other than for cause under the employment agreements described below. 22 Mr. James B. Ardrey serves as the Vice Chairman of the Company pursuant to an employment agreement dated July 1, 1998. Under the agreement, Mr. Ardrey receives an annual base salary of $600,000 during the term of the agreement and is eligible to receive a bonus of up to 80% of his base salary based on certain earnings criteria. The employment agreement provides for a term of two years and a non-compete covenant for the term of his employment and thereafter, if applicable, until the earlier of July 1, 2000 or the first anniversary of employing a Chief Executive Officer other than Mr. Wilson. Upon termination by the Company of Mr. Ardrey or Mr. Wilson other than for cause, Mr. Ardrey shall receive his salary and shall be eligible to receive his bonus through the remaining term of the non-compete period. Mr. Ray Chung serves as the Executive Vice President of the Company pursuant to an employment agreement dated July 1, 1998. Under the agreement, Mr. Chung receives an annual base salary of $350,000 during the term of the agreement and is eligible to receive a bonus of up to 80% of his base salary based on certain earnings criteria. The employment agreement provides for a term of two years and a non-compete covenant for the term of his employment and thereafter, if applicable, until the earlier of July 1, 2000 or the first anniversary of employing a Chief Executive Officer other than Mr. Wilson. Upon termination by the Company of Mr. Chung or Mr. Wilson other than for cause, Mr. Chung shall receive his salary and shall be eligible to receive his bonus through the remaining term of the non-compete period. Ms. M. Laurie Cummings serves as the Chief Financial Officer and Secretary of the Company pursuant to an employment agreement dated July 1, 1998. Under the agreement, Ms. Cummings receives an annual base salary of $250,000 during the term of the agreement and is eligible to receive a bonus of up to 80% of her base salary based on certain earnings criteria. The employment agreement provides for a term of two years and a non-compete covenant for the term of her employment and thereafter, if applicable, until the earlier of July 1, 2000 or the first anniversary of employing a Chief Executive Officer other than Mr. Wilson. Upon termination by the Company of Ms. Cummings or Mr. Wilson other than for cause, Ms. Cummings shall receive her salary and shall be eligible to receive her bonus through the remaining term of the non-compete period. Mr. Thomas J. Ferraro serves as the President of the Dry Grocery Division pursuant to an employment agreement, dated as of December 31, 1996, as amended (the "Ferraro Employment Agreement"). He receives an annual base salary of $290,000 (subject to annual adjustment) during the term of the agreement and is eligible to receive a bonus of up to 80% of his base salary based upon certain earnings criteria. The Ferraro Employment Agreement provides for a two-year term ending December 31, 2000; however, on each December 31st, the term automatically extends for one additional year so that the term ends three years after such December 31st unless notice by either the Company or Mr. Ferraro to terminate is given 30 days prior to the automatic extension. If the Company terminates Mr. Ferraro's employment without cause, the Ferraro Employment Agreement requires the Company to pay him an amount equal to the base salary he would have been entitled to receive through the end of the current term of his employment agreement. Mr. Ferraro is also entitled to receive any bonus for the preceding fiscal year which has not been paid as of the date of his termination plus a pro rata portion of any base and supplemental bonus with respect to such fiscal year based upon the actual number of days the Company employed Mr. Ferraro during such fiscal year. Mr. Ferraro may not compete with or solicit employees from the Company until the later of the first anniversary of his termination and the end of the current term of his employment agreement. Mr. Thomas O. Ellinwood serves as the President of the Frozen Food Division pursuant to an employment agreement, dated as of March 1, 1997 as amended (the "Ellinwood Employment Agreement"). The Ellinwood Employment Agreement provides for a three-year term; however, on each September 30th, the term automatically extends for one additional year so that the term ends three years after such September 30th unless notice by either the Company or Mr. Ellinwood to terminate is given 30 days prior to the automatic extension. Mr. Ellinwood receives an annual base salary of $290,000 (subject to annual adjustment) during the term of the agreement and is eligible to receive a bonus of up to 80% of his base salary based upon certain earnings criteria. If the Company terminates Mr. Ellinwood's employment without cause before a change of control (as defined in the agreement), the Company is required to pay him the greater of (i) 200% of his base salary then in effect or (ii) the base salary he would have been entitled to receive through the end of the current term of the employment agreement plus his base bonus pro rated according to the actual number of days the Company employed him for such fiscal year. If the Company terminates Mr. Ellinwood's employment without cause after a change of control (as defined in the agreement) or Mr. Ellinwood terminates his employment with the Company for "Good Reason" (as defined in the agreement) after a change of control, the Company must pay him the sum of 200% of his base salary then in effect plus his bonus pro rated according to the actual number of days the Company employed him for such fiscal year. The pro rated portion of his bonus is payable as if the Company's financial results equal exactly 100% of the EBITDA target for that year. Mr. Ellinwood's employment agreement also provides that for one year following his 23 termination of employment with the Company (other than a termination by the Company without cause), Mr. Ellinwood may not compete with or solicit employees from the Company. Directors' Compensation - - ----------------------- Directors who are officers, employees, or otherwise affiliates of the Company do not receive compensation for their services as directors. Non-employee directors receive an annual retainer of $20,000, plus $2,000 for attending each committee meeting of the Board of Directors and $5,000 per annum for serving as a Chairman of any committee of the Board of Directors. Directors of the Company are entitled to reimbursement of their reasonable out-of-pocket expenses in connection with their travel to and attendance at meetings of the Board of Directors or committees thereof. Aurora Incentive Plan - - --------------------- The Amended and Restated Limited Liability Company Agreement of MBW LLC contains 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 Aurora, were given an opportunity to benefit from appreciation in the value of AurFoods. Under the Aurora Plan, Aurora Covered Employees were issued a specific class of limited liability company member units ("Management Units"), at a nominal value, as a means to participate in the appreciation of the equity value of AurFoods. The Management Units were subject to vesting requirements based on terms of employment or other factors. Prior to the closing of the Equity Offerings, the final value of all classes of Management Units were determined based on the valuation of the Common Stock held indirectly by MBW LLC, and upon the closing of the Equity Offerings all unvested Management Units became fully vested. The aggregate value of all Management Units was $58.9 million. Through December 27, 1997, the Company had recorded estimated incentive plan expense of $2.3 million based on the estimated valuation of the 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 has been 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 LLC. Pursuant to the Aurora Plan, Dartford, Thomas J. Ferraro and C. Gary Willett received 2,699,071, 427,454, and 267,158 shares of Common Stock, respectively, on the closing of the Equity Offerings in respect of the Aurora Plan. In addition, 56 other employees received an aggregate of 758,734 shares pursuant to the Aurora Plan. 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 24 additional paid-in capital from its parent. All expense recognized was recorded on VDK's books prior to its acquisition by the Company; no expense has been recorded on the Company's books. No additional incentive plan expense will be recorded under the VDK Plan. VDK LLC (or the Company as described below) will distribute a fixed number of shares of Common Stock of the Company upon the dissolution of VDK LLC, based on the valuation of the VDK Management Units at the initial public offering price of the Company's Common Stock. The VDK Plan provides for tax gross-up payments on certain distributions. Because the Company will receive the tax benefit of such distributions and related tax gross-up payments, and because the tax benefit is expected to exceed the amount of the tax gross-up payments, the Company will bear the liability for any such tax gross-up payments due. The estimated tax gross-up payment is $12.4 million and has been recorded as additional incentive plan expense and other liabilities. The tax benefit of the tax gross-up payment and related distributions of $19.6 million, which more than offsets the gross-up payments, has been recorded to income tax expense and as a deferred tax asset. To facilitate payment of the tax gross-up obligation and recognition of related tax benefits, VDK adopted a new incentive plan (the "New VDK Plan" and together with the VDK Plan, the "VDK Plans"), which was assumed by the Company in connection with the Contribution. Under the New VDK Plan, the Company is obligated to distribute no later than July 1, 1999 1,801,769 shares of the Company's Common Stock to VDK Covered Employees who were granted certain types of VDK Management Units under the VDK Plan. The issuance of such shares (the "MC Shares") will not increase the number of outstanding shares of Common Stock because the Company's obligations to issue the MC Shares is contingent upon the Company's receiving from VDK LLC, as a contribution, a number of shares of the Company's Common Stock owned by VDK LLC equal to the number of MC Shares. The Company will have no obligation to issue MC Shares unless it receives a contribution of an equal number of shares from VDK LLC. VDK LLC is obligated to contribute such shares to the Company after the closing of the Equity Offerings. The Company's obligation to make the tax gross up payments referred to above is subject to the Company being allowed a deduction for federal income tax purposes with respect to the payment of the MC Shares and tax gross up payment. Pursuant to the VDK Plan, Dartford, Thomas O. Ellinwood, and Anthony A. Bevilacqua are entitled to receive 2,255,334, 244,072, and 91,756 shares of Common Stock, respectively, under the VDK Plans no later than July 1, 1999. In addition, 27 employees and other persons are entitled to receive an aggregate of 979,067 shares pursuant to the VDK Plans no later than July 1, 1999. Compensation Committee Report on Executive Compensation - - ------------------------------------------------------- The Compensation Committee of the Board of Directors consists exclusively of non-employee directors and is responsible for setting and administering the policies that govern the compensation of executive officers of the Company. The Compensation Committee also administers the Company's 1998 Incentive Plan and the 1998 Employee Stock Purchase Plan. Compensation Philosophy The Company's compensation program for its executive officers is based on the following objectives: . Total compensation of the executive officers should be linked to the financial performance of the Company. . The compensation paid to the executive officers of the Company should compare favorably with executive compensation levels of other similarly- sized companies so that the Company can continue to attract and retain outstanding executives. . The compensation program should reward outstanding individual performance and contributions as well as experience. 25 Compensation Methodology The Company's executive compensation program has three components: base salary, annual bonus and stock options. The Compensation Committee reviews executive compensation in light of the Company's performance during the fiscal year and compensation data at companies that are considered comparable. In reviewing the Company's performance during 1998, the Compensation Committee considered a variety of factors: Pro forma net sales increased 8.3% to $947.0 million in 1998 from $874.2 million in 1997; pro forma operating income increased 12.7% to $116.8 million in 1998 from $103.5 million in 1997 excluding non-cash incentive plan expense; and adjusted pro forma EBITDA increased 12.4% to $173.5 million in 1998 from $154.4 million in 1997. During 1998, the Company also consummated the purchase of the Duncan Hines(R) brand in January, the merger with VDK in April and the initial public offering of its common stock in July. The Compensation Committee considered these strong operating results as a whole without assigning specific weights to particular factors. The Company, however, sets aggressive standards in determining executive compensation and, as such, annual bonuses earned were generally not the maximum allowable under the respective employment agreements. Base Salary The annual base salary is designed to compensate executives for their sustained performance and level of responsibility. The Compensation Committee approves all salary increases for executive officers, which is then subject to ratification by the Board of Directors. The salaries of all executive officers are established by employment agreements as previously discussed. Annual Bonus The annual bonus is given to promote the achievement of the Company's performance objectives. The specific performance objectives for each executive officer and the payments made relative thereto are governed by earnings criteria as established in the employment agreements. Such criteria are primarily measured by Company and/or divisional operating earnings and working capital targets established in the annual operating budget process. The annual bonus also takes into consideration any major acquisitions and the executive's performance in integrating such acquisition into the Company's operations. Stock Options Stock options are designed to provide long-term incentives and rewards tied to the price of the Company's Common Stock. The Compensation Committee believes that stock options, which provide value to participants only when the Company's shareholders benefit from stock price appreciation, are an important component of the Company's executive compensation program. The Compensation Committee has not established any target level of ownership of the Company's Common Stock by the Company's executives. Retention of shares of the Company's Common Stock, however, is encouraged. Stock options are awarded under the Company's 1998 Incentive Plan. Stock options granted to executive officers have exercise prices equal to the market price of the Company's Common Stock on the date of grant, vest over five years and have terms of ten years. The Compensation Subcommittee approves all stock option grants, which is then subject to ratification by the Board of Directors. Concurrent with the Company's initial public offering, Messrs. Ellinwood and Ferraro were each granted options to purchase 175,000 shares of the Company's Common Stock. The grants were made to give Messrs. Ellinwood and Ferraro incentives tied to the long-term price of the Company's Common Stock. Messrs. Wilson, Ardrey and Chung and Ms. Cummings were not granted any stock options under the 1998 Incentive Plan due to their pre-existing ownership of the Company's Common Stock through Dartford (See "Security Ownership of Certain Beneficial Owners and Management"). Compensation of the Chief Executive Officer Mr. Wilson became Chairman of the Board and Chief Executive Officer of the Company in June 1998. Mr. Wilson and the Company entered into an employment agreement dated July 1, 1998 as described in "Executive Compensation - Employment Agreements". 26 The Compensation Committee and the Board of Directors approved a total compensation package that was designed to be competitive with compensation provided to chief executive officers at companies of comparable size to the Company as well as provide a compensation level and structure necessary to obtain an executive with Mr. Wilson's experience and credentials. Tax Deductibility of Executive Compensation Section 162(m) of the Internal Revenue Code of 1986 ("Section 162(m)"), as amended, limits the federal income tax deductibility of compensation paid to the executive officers named in the Summary Compensation Table on page 20. The Company generally may deduct compensation to such an officer only if the compensation does not exceed $1,000,000 during any fiscal year or is "performance-based" as defined in Section 162(m). The Compensation Committee intends to design the Company's compensation programs so that total compensation paid to any employee will not exceed $1,000,000 in any one year, except for compensation payments in excess of $1,000,000 which qualify as "performance- based." However, the Company may pay compensation that is not deductible in limited circumstances when prudent management of the Company so requires. The Compensation Committee believes these executive compensation policies and programs effectively serve the interests of shareholders and the Company and are appropriately balanced to provide increased motivation for executives to contribute to the Company's future success. THE COMPENSATION COMMITTEE Charles Ayres Richard C. Dresdale Peter Lamm Performance Graph - - ----------------- The following graph compares the cumulative total return to stockholders of the Company's Common Stock from July 1, 1998 through December 31, 1998 to the cumulative total return of (1) the Russell 2000 Index and (2) the S&P Mid Cap Food Index over the same period (assuming the investment of $100 in the Company's Common Stock and in each of the other indexes and reinvestment of all dividends). COMPARISON OF CUMULATIVE TOTAL RETURN AMONG AURORA FOODS INC., THE RUSSEL 2000 INDEX AND THE S&P MID CAP FOOD INDEX [GRAPH APPEARS HERE]
7/1/98 7/31/98 8/31/98 9/30/98 10/30/98 11/30/98 12/31/98 AOR 100.0 83.3 69.6 65.5 83.3 93.2 94.3 Russell 2000 100.0 91.3 73.5 79.1 82.2 86.4 91.8 S&P Mid Cap Food 100.0 89.9 72.6 77.1 85.8 87.0 91.2
27 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - - ------------------------------------------------------------------------ The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock, as of February 17, 1999 by (a) each person who is known to the Company to be the beneficial owner of more than five percent of the Company's Common Stock, (b) each director and executive officer of the Company, and (c) all directors and executive officers of the Company as a group. Except as otherwise indicated, the Company believes that the persons or entities listed below have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them, except to the extent such power may be shared with a spouse.
SHARE BENEFICIALLY OWNED (1) -------------------------------------- NAME AND ADDRESS OF OWNER NUMBER PERCENT ----------------- -------------- VDK Foods LLC (2) 22,949,265 34.2% Fenway Partners Capital Fund, L.P. (3) 16,626,412 24.8% McCown De Leeuw & Co. entities (4) (5) 16,384,371 24.4% California Public Employees Retirement System (5) 3,737,581 5.6% Dartford Partnership L.L.C. (6) 7,275,685 10.9% Tiger Oats Limited (7) 4,237,394 6.3% UBS Capital LLC (8) 4,237,394 6.3% OFFICERS AND DIRECTORS: Ian R. Wilson (6) 7,275,685 10.9% James B. Ardrey (6) 7,275,685 10.9% Ray Chung (6) 7,275,685 10.9% M. Laurie Cummings (6) 7,275,685 10.9% Thomas O. Ellinwood (9) 280,514 * Thomas J. Ferraro (10) 486,444 * Clive A. Apsey (7) 4,237,394 6.3% Charles Ayres (4) 16,384,371 24.4% David E. De Leeuw (4) 16,384,371 24.4% Charles J. Delaney (8) 4,237,394 6.3% Richard C. Dresdale (3) 16,626,412 24.8% Andrea Geisser (3) 16,626,412 24.8% Peter Lamm (3) 16,626,412 24.8% Tyler T. Zachem (4) 16,384,371 24.4% All directors and executive officers of the Company as a group (14 persons) 49,528,214 73.9%
* Less than 1%. (1) As used in this table, beneficial ownership means the sole or shared power to vote, or to direct the voting of a security, or the sole or shared power to dispose, or direct the disposition of, a security. The table above assumes that VDK LLC was dissolved on July 1, 1998 and 22,949,265 shares of Common Stock were distributed to the members of VDK LLC based on the $21.00 per share initial public offering price of the Common Stock. Of the 22,949,265 shares directly held by VDK LLC, 2,470,132 shares are distributable under the VDK Plans and the remaining shares are distributable by VDK LLC to its members upon its dissolution, which will occur no later than July 1, 1999. The number of shares of Common Stock distributable to the members of VDK LLC upon its dissolution will be based on the average closing sales price of the Common Stock for the actual number of trading days during the 60-day period immediately preceding the actual date of dissolution. (2) Immediately prior to the closing of the Equity Offerings, New LLC was the sole stockholder of the Company. New LLC has been dissolved and its shares of Common Stock were distributed to MBW LLC and VDK LLC, its sole members. MBW LLC was dissolved after the dissolution of New LLC and its shares of Common Stock were distributed to its members including MDC, Fenway Partners Capital Fund, L.P., Dartford, California Public Employees Retirement System ("CALPERS"), Sunapee Securities Inc. and Squam Lake Investors II, L.P., and certain divisional management. Each of these beneficial owners is party to the Securityholders Agreement dated April 8, 1998 (the "Securityholders Agreement"). The address of VDK LLC is 456 Montgomery Street, Suite 2200, San Francisco, CA 94104. (3) Includes 16,301,510, 194,619 and 130,283 shares of Common Stock owned directly or indirectly by the Fenway Partners Capital Fund, L.P. (the "Fenway Fund"), FPIP, LLC and FPIP Trust, LLC, respectively (assuming the dissolution VDK LLC). Does not include shares of Common Stock directly owned by VDK LLC resulting from the dissolution of New LLC in respect of which Fenway does not have an economic interest and as to which Fenway disclaims beneficial ownership. The Fenway Fund holds a majority of the voting interests of VDK LLC, and as such may be deemed to have the power to 28 vote or dispose of the shares of Common Stock held directly by VDK LLC. FPIP, LLC and FPIP Trust, LLC are entities formed by the investment professionals of Fenway to make co-investments alongside the Fenway Fund. The managing member of each of FPIP, LLC, and FPIP Trust, LLC is Fenway. The general partner of the Fenway Fund is Fenway Partners, L.P., a Delaware limited partnership, whose general partner is Fenway Partners Management, Inc., a Delaware corporation. Peter Lamm, Richard Dresdale, and Andrea Geisser are directors and officers of each of Fenway Partners Management, Inc. and Fenway, and as such may be deemed to have or share the power to vote or dispose of the shares of Common Stock held by the Fenway Fund, FPIP, LLC and FPIP Trust, LLC. Each of Messrs. Lamm, Dresdale, and Geisser has no direct ownership of any shares of the Common Stock and disclaims beneficial ownership of any of such shares except to the extent of their direct or indirect partnership or membership interests in the Fenway Fund, FPIP, LLC and FPIP Trust, LLC. The address of Fenway is 152 West 57th Street, New York, New York 10019. (4) Includes 5,897,598 shares of Common Stock owned by McCown De Leeuw & Co. III, L.P., an investment partnership whose general partner is MDC III, 418,687 shares of Common Stock owned by McCown De Leeuw & Co. III (Europe), L.P., an investment partnership whose general partner is MDC III, 98,124 shares of Common Stock owned by McCown De Leeuw & Co. III (Asia), L.P., an investment partnership whose general partner is MDC Management Company IIIA, L.P. ("MDC IIIA"), 127,571 shares of Common Stock owned by Gamma Fund LLC, a California limited liability company, 5,885,400 shares of Common Stock owned by McCown De Leeuw & Co. IV, L.P., an investment partnership whose general partner is MDC Management Company IV, LLC ("MDC IV"), 95,308 shares of Common Stock owned by Delta Fund LLC, a California limited liability company and 124,102 shares of Common Stock owned by McCown De Leeuw & Co. IV Associates, L.P. In addition, includes 3,737,581 shares of Common Stock held by CALPERS for which McCown De Leeuw & Co. III, L.P. has an irrevocable proxy which provides the power to vote all of the securities held by CALPERS. The voting members of Gamma Fund LLC and Delta Fund LLC are George E. McCown, David E. De Leeuw, David E. King, Robert B. Hellman, Jr., Charles Ayres, and Steven A. Zuckerman, who are also the only general partners of MDC III and MDC IIIA and the only managing members of MDC IV. Voting and dispositive decisions regarding the securities are made by Mr. McCown and Mr. De Leeuw, as Managing General Partners of each of MDC III and MDC IIIA who together have more than the required two-thirds-in-interest vote of the Managing General Partners necessary to effect such decision on behalf of such entity and by a vote or consent of all of the managing members of MDC IV. Voting and dispositive decisions regarding securities owned by Delta Fund LLC and Gamma Fund LLC are made by a vote or consent of a majority in number of the voting members of Gamma Fund LLC and Delta Fund LLC. Messrs. McCown, De Leeuw, King, Hellman, Ayres and Zuckerman have no direct ownership of any securities and disclaim beneficial ownership of such shares except, in the case of Gamma Fund LLC and Delta Fund LLC, to the extent of their proportionate membership interests. The address of each of the above referenced entities is c/o McCown De Leeuw & Co., 3000 Sand Hill Road, Building 3, Suite 290, Menlo Park, CA 94025. (5) Under an irrevocable proxy, CALPERS has granted McCown De Leeuw & Co. III, L.P. the right to vote all of the shares of Common Stock it holds. The address of California Public Employees Retirement System is Lincoln Plaza, 400 P Street, Sacramento, CA 95814. (6) Includes 1,249,031 shares, 796,268 shares, 776,942 shares, 510,800 shares and 519,292 shares held directly by Ian R. Wilson, James B. Ardrey, Ray Chung, M. Laurie Cummings and Cary S. Fitchey, respectively. Also includes 903,595 shares of Common Stock held directly by VDK LLC and indirectly by Dartford, and 2,255,334 shares of Common Stock to be distributed to Dartford under the VDK Plan no later than July 1, 1999. Assuming the dissolution of VDK LLC, also includes 130,017 shares of Common Stock held directly or indirectly by a trust for the benefit of certain family members of Ian R. Wilson, an aggregate of 101,526 shares of Common Stock held directly or indirectly by trusts for the benefit of certain family members of Ray Chung, and 32,880 shares of Common Stock held directly or indirectly by certain family members and trusts for the benefit of certain family members of James B. Ardrey. Pursuant to the Securityholders Agreement, such permitted transferees of Dartford are included for the purpose of determining the number of persons Dartford may designate to the Board of Directors of the Company. Mr. Ian R. Wilson is the managing partner, and Messrs. James B. Ardrey and Ray Chung and Ms. M. Laurie Cummings are partners, of Dartford and, as such, they may be deemed to have or share the power to vote or dispose of the Company's Common Stock beneficially owned by Dartford. Each of Messrs. Wilson, Ardrey, and Chung and Ms. Cummings disclaim beneficial ownership of any such shares of the Company's Common Stock except for those shares held directly by him or her, respectively, or otherwise in which they have a pecuniary interest. Does not include shares of Common Stock directly owned by VDK LLC resulting from the dissolution of New LLC in respect of which Dartford does not have an economic interest. Dartford is a member manager of VDK LLC, together with UBS, Gloriande (Luxembourg) SarL ("Gloriande"), and Fenway and as such, may be deemed to have the shared power to vote or dispose of such shares. Dartford disclaims beneficial ownership of any such shares. The address of Dartford is 456 Montgomery Street, Suite 2200, San Francisco, CA 94104. (7) Includes 3,773,085 shares held directly by VDK LLC. Tiger Oats' shares are held by Gloriande, a corporation organized under the laws of Luxembourg, which is the record owner of the Company's Common Stock. Gloriande is an indirect wholly-owned subsidiary of Tiger Oats. The shares of capital stock of Tiger Oats are traded publicly on the Johannesburg Stock Exchange. Mr. Clive A. Apsey is a director of Tiger Oats and as such may be deemed to have the power to vote or dispose of the Company's Common Stock held by Tiger Oats. Mr. Apsey disclaims beneficial ownership of any such shares. Does not include shares directly owned by VDK LLC resulting from the dissolution of New LLC in respect of which Tiger Oats does not have an economic interest. Gloriande is a member manager of VDK LLC, together with Dartford, UBS and Fenway and as such may be deemed to have or share the power to vote or dispose of the Company's 29 Common Stock distributed to VDK LLC. Gloriande disclaims beneficial ownership of any such shares. The address of Tiger Oats Limited is 85 Bute Lane, Sandown, Sandton 2196, Republic of South Africa. (8) Includes 3,773,085 shares held directly by VDK LLC. UBS is a member manager of VDK LLC, together with Dartford, Gloriande, and Fenway and as such may be deemed to have or share the power to vote or dispose of the Company's Common Stock distributed to VDK LLC. UBS disclaims beneficial ownership of any such shares. UBS is a wholly-owned indirect subsidiary of Union Bank of Switzerland. Does not include shares directly owned by VDK LLC resulting from the dissolution of New LLC in respect of which UBS does not have an economic interest and UBS disclaims any beneficial ownership as to such shares. The shares of capital stock of Union Bank of Switzerland (now UBS AG) are publicly held. Mr. Charles J. Delaney, a director of the Company, is the president of UBS and disclaims beneficial ownership of the Company's Common Stock held by UBS. The address of UBS is 299 Park Avenue, 34th Floor, New York, NY 10171. (9) Includes 244,072 shares of Common Stock to be distributed to Mr. Ellinwood under the VDK Plan no later than July 1, 1999. (10) Includes 427,454 shares of Common Stock distributed to Mr. Ferraro under the Aurora Plan and trusts for the benefit of certain of his family members. Mr. Ferraro disclaims beneficial ownership as to the 128,236 of such shares which were transferred to trusts for the benefit of certain of his family members. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - - -------------------------------------------------------- As of February 17, 1999, Aurora Foods Inc. has maintained business relationships and engaged in certain transactions described below. Pursuant to an agreement, dated September 19, 1995 and terminated on the closing of the Equity Offerings, Dartford, a beneficial owner of the Company, provided management oversight on financial and operational matters to the Company with respect to VDK. Dartford received $900,000, $1,800,000 and $631,000 for 1998, 1997 and 1996, respectively, under such agreement. Pursuant to an agreement with the Company, dated December 31, 1996 and terminated on the closing of the Equity Offerings, Dartford, a beneficial owner of the Company, provided management oversight to the Company with respect to AurFoods. Dartford received $951,419 and $768,000 for 1998 and 1997, respectively, under such agreement. Pursuant to an agreement, dated December 31, 1996 and terminated on the closing of the Equity Offerings, MDC III, an affiliate of MDC, a beneficial owner of the Company, advised the Company as to the structuring of the Company's bank financing and the capital structure of the Company, identification and financing of future acquisitions, and general management advice relating to the overall strategy and positioning of the Company. MDC III received $318,000 and $293,000 for 1998 and 1997, respectively, under such agreement. From December 31, 1996 through January 16, 1998, the Company paid the following fees for services rendered in connection with the acquisitions of MBW, LC and DH: $1,250,000 to Dartford, whose partners, Messrs. Wilson, Ardrey and Chung, and Ms. Cummings are executive officers and directors of the Company; $184,000 to Mr. Ferraro (President, Dry Grocery Division) and $75,000 to Mr. Willett (Executive Vice President, Dry Grocery Division); $5,700,000 to MDC III, whose general partners and principal include Messrs. Ayres, De Leeuw and Zachem (all directors of the Company); and $1,500,000 was paid to Fenway, whose partners include Messrs. Dresdale, Geisser and Lamm (all directors of the Company). Services provided in connection with such fees included the identification and analysis of the acquisition opportunity, the negotiation of the acquisition and the raising of financing for such acquisition. Fees of $1,500,000, $2,925,000, and $4,025,000, in the aggregate, were paid in connection with the acquisitions of MBW, LC and DH, respectively. Also, from September 1995 through July 9, 1996, the Company paid the following fees for services rendered in connection with acquisitions and related financings of VDK's acquisitions: $1,950,000 to Dartford; $1,474,000 to Fenway; $294,000 to National Sun Industries Inc., an indirect wholly-owned subsidiary of Tiger Oats, whose director is Mr. Apsey (a director of the Company); and $294,000 to UBS, whose president is Mr. Delaney (a director of the Company). Services provided in connection with such fees included the identification and analysis of the acquisition opportunity, the negotiation of the acquisition and the raising of financing for such acquisition. Fees of $1,012,500, $950,000, and $2,050,000 in the aggregate were paid in connection with the acquisitions of Van de Kamp's(R) and Mrs. Paul's(R) frozen food business and the Quaker Oats frozen breakfast and pizza business, respectively. 30 Pursuant to an agreement with Windy Hill, dated as of September 5, 1995, the Company paid $198,000 in both 1996 and 1997 for computer support services. Prior to its merger with Doane Products Company in August 1998, Dartford (of which Mr. Wilson is the managing partner) and its partners owned 14.2% of Windy Hill and Mr. Wilson was the Chairman of the Board and Chief Executive Officer of Windy Hill. Each of Fenway, MDC III, and Dartford earned $1,500,000, UBS earned $150,000, and each of Tiger Oats and CALPERS earned $75,000 in fees in connection with the Contribution. The Company has 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. Acquisition price is 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 has agreed to pay Dartford $800,000 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 ending the earlier of July 1, 2000 and the date that Mr. Wilson is no longer Chief Executive Officer of the Company. The Company and the Stockholders have entered into the Securityholders Agreement which provides for certain rights, including registration rights of the Stockholders. On December 31, 1996 and January 16, 1998, Mr. Thomas J. Ferraro, President, Dry Grocery Division, 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. Thomas O. Ellinwood, President, Frozen Food Division, executed a promissory note in the amount of $125,000 in favor of the Company 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 with required annual payments. 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. Pursuant to the VDK Plans, Dartford, Thomas O. Ellinwood, and Anthony A. Bevilacqua are entitled to receive 2,255,334, 244,072, and 91,756 shares of Common Stock, respectively, no later than July 1, 1999. See "Executive Compensation - VDK Incentive Plan". 31 PART IV - - ------- ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - - ------------------------------------------------------------------------
(a) 1.a. Financial Statements of the Company Report of Independent Accountants 39 Balance Sheets as of December 31, 1998 and December 27, 1997 40 Statements of Operations for the years ended December 31, 1998 and December 27, 1997 41 Statements of Changes in Stockholders' Equity as of December 31, 1998 and December 27, 1997 42 Statements of Cash Flows for the years ended December 31, 1998 and December 27, 1997 43 Notes to Financial Statements 44 through 61 b. Financial Statements of the Predecessor Mrs. Butterworth's Business (A Component of CONOPCO, Inc.): Report of Independent Accountants 62 Statement of Operations for the year ended December 31, 1996 63 Notes to Financial Statements 64 through 66 2. Financial Statement Schedule Schedule IX - Valuation Reserves 67 3. Exhibits 68
32 (a) Exhibits Exhibit Number Exhibit - - ------ ------- 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). 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")). 33 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). 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). 34 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). 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 35 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). 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). 36 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. (b) Reports on Form 8-K None. 37 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. By: /s/ Ian R. Wilson ----------------- Ian R. Wilson Chief Executive Officer Date: March 12, 1999 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 March 12, 1999. /s/ Ian R. Wilson ------------- Ian R. Wilson Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) /s/ James B. Ardrey --------------- James B. Ardrey Vice Chairman and Director /s/ Ray Chung --------- Ray Chung Executive Vice President /s/ M. Laurie Cummings ------------------ M. Laurie Cummings Chief Financial Officer and Secretary (Principal Finance and Accounting Officer) /s/ Clive A. Apsey -------------- Clive A. Apsey Director /s/ Charles Ayres ------------- Charles Ayres Director /s/ Charles J. Delaney ------------------ Charles J. Delaney Director /s/ David E. De Leeuw ----------------- David E. De Leeuw Director /s/ Richard C. Dresdale ------------------- Richard C. Dresdale Director /s/ Andrea Geisser -------------- Andrea Geisser Director /s/ Peter Lamm ---------- Peter Lamm Director /s/ Tyler T. Zachem --------------- Tyler T. Zachem Director 38 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Stockholders of Aurora Foods Inc. In our opinion, the financial statements listed in the index appearing under Item 14 (a) 1.a. and Item 14 (a) 2. on page 32 present fairly, in all material respects, 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 generally accepted accounting principles. 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 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. PricewaterhouseCoopers LLP San Francisco, California February 5, 1999 39 AURORA FOODS INC. BALANCE SHEETS (dollars in thousands except per share amounts)
December 31, December 27, 1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 354 $ 4,717 Accounts receivable, net of $670 and $140 allowance, respectively 86,539 13,836 Inventories (Note 4) 76,674 6,902 Prepaid expenses and other assets 6,517 1,955 Asset held for sale 3,000 - Current deferred tax assets (Note 10) 8,251 2,966 ---------- -------- Total current assets 181,335 30,376 Property, plant and equipment, net (Note 5) 153,167 14,075 Goodwill and other intangible assets, net (Note 6) 1,072,760 315,241 Other assets 26,620 13,047 ---------- -------- Total assets $1,433,882 $372,739 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY 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 59,078 6,443 Accrued liabilities (Note 7) 49,836 17,409 ---------- -------- Total current liabilities 214,764 28,227 Non-current deferred tax liabilities (Note 10) 649 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 830,027 307,516 ---------- -------- Stockholders' equity: Preferred stock, $0.01 par value; 25,000,000 shares authorized; no shares issued or outstanding - - Common stock, $0.01 par value; 250,000,000 and 87,159,000 shares authorized, respectively; 67,016,173 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 (44,142) 1,235 ---------- -------- Total stockholders' equity 603,855 65,223 ---------- -------- Commitments and contingent liabilities (Note 15) Total liabilities and stockholders' equity $1,433,882 $372,739 ========== ========
See accompanying notes to financial statements. 40 AURORA FOODS INC. STATEMENTS OF OPERATIONS (in thousands except per share amounts)
Years Ended ------------------------------------ December 31, December 27, 1998 1997 ------------ ------------ Net sales $ 789,193 $ 143,020 Cost of goods sold 317,547 45,729 ------------ ------------ Gross profit 471,646 97,291 ------------ ------------ Brokerage, distribution and marketing expenses: Brokerage and distribution 74,703 17,096 Trade promotions 173,467 26,075 Consumer marketing 56,683 15,142 ------------ ------------ Total brokerage, distribution and marketing expenses 304,853 58,313 Amortization of goodwill and other intangibles 30,048 5,938 Selling, general and administrative expenses 25,043 5,229 Incentive plan expense (Note 14) 56,583 2,300 Transition expenses (Note 9) 10,357 2,113 ------------ ------------ Total operating expenses 426,884 73,893 ------------ ------------ Operating income 44,762 23,398 Interest expense, net 64,487 18,242 Amortization of deferred financing expense 1,872 3,059 Other bank and financing expenses 263 83 ------------ ------------ (Loss) income before income taxes and extraordinary item (21,860) 2,014 Income tax expense (Note 10) 14,306 779 ------------ ------------ Net (loss) income before extraordinary item (36,166) 1,235 Extraordinary loss on early extinguishment of debt, net of tax of $5,632 9,211 - ------------ ------------ Net (loss) income $ (45,377) $ 1,235 ============ ============ Basic and diluted (loss) earnings per share before extraordinary item $ (0.68) $ 0.04 Extraordinary item per share 0.17 - ------------ ------------ Basic and diluted (loss) earnings per share $ (0.85) $ 0.04 ============ ============ Weighted average number of shares outstanding 53,541 29,053 ============ ============
See accompanying notes to financial statements. 41 AURORA FOODS INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands)
Retained Common Additional Earnings Stock Paid-in Promissory (Accumulated ------------------------------ Shares Amount Capital Notes Deficit) Total ------------- ------------- -------------- ------------- ------------- ----------- 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 2) 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 - - - - (45,377) (45,377) ------------- ------------- -------------- ------------- ------------- ----------- Balance at December 31, 1998 67,016 $ 670 $ 647,889 $ (562) $ (44,142) $ 603,855 ============= ============= ============== ============= ============= ===========
See accompanying notes to financial statements. 42 AURORA FOODS INC. STATEMENTS OF CASH FLOWS (in thousands)
Years Ended ---------------------------------------- December 31, December 27, 1998 1997 --------------- -------------- Cash flows from operating activities: Net (loss) income $ (45,377) $ 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 41,343 10,057 Deferred income taxes 14,306 779 Incentive plan expense (Note 14) 56,583 2,300 Change in assets and liabilities, net of effects of businesses acquired: Increase in accounts receivable (34,318) (13,356) (Increase) decrease in inventories (36,575) 2,975 Increase in prepaid expenses and other current assets (3,400) (1,946) Increase in accounts payable 43,284 6,443 Increase in accrued liabilities 5,132 14,624 --------------- ------------- Net cash provided by operating activities 50,189 23,111 --------------- ------------- Cash flows from investing activities: Additions to property, plant and equipment (39,799) (2,411) Changes to other non-current assets and liabilities (4,164) (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 (478,735) (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
y See accompanying notes to financial statements. 43 NOTES TO FINANCIAL STATEMENTS NOTE 1 - THE COMPANY - - -------------------- OPERATIONS Aurora Foods Inc. (the "Company") produces and markets branded food products that are sold across the United States. The Company groups its brands into two general divisions: dry grocery division and frozen food division. The dry grocery division includes Duncan Hines(R) baking mix products and Mrs. Butterworth's(R) and Log Cabin(R) syrup products. The frozen food division includes Van de Kamp's(R) and Mrs. Paul's(R) frozen seafood, Aunt Jemima(R) frozen breakfast and Celeste(R) frozen pizza products. The dry grocery division's products are manufactured under long-term co-packing agreements with third parties and under a temporary co-packing agreement with The Procter & Gamble Company ("P&G"). The Company's manufacturing equipment has been or will be 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 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"). On April 8, 1998, MBW LLC and VDK LLC formed Aurora/VDK LLC ("New LLC"). MBW LLC contributed all of the capital stock of Holdings and VDK LLC contributed all of the capital stock of VDK Holdings to New LLC (the "Contribution"). In return for these contributions, MBW LLC was issued 55.5% of the interests in New LLC plus a right to receive a special $8.5 million priority distribution from New LLC, and VDK LLC was issued 44.5% of the interests in New LLC plus a right to receive a special $42.4 million priority distribution from New LLC. The amount and source of consideration used by MBW LLC and VDK LLC for their acquisition of interests in New LLC was their equity in Holdings and VDK Holdings, respectively. New LLC accounted for the contribution of the ownership of Holdings at MBW LLC's historical cost and the contribution of the ownership of VDK Holdings was accounted for as an acquisition using the purchase method of accounting at New LLC's cost. After giving effect to the Contribution, New LLC directly held 100% of Holdings' capital stock and Holdings continued to hold directly 100% of AurFoods capital stock and New LLC directly held 100% of VDK Holdings' capital stock and VDK Holdings continued to hold directly 100% of VDK's capital stock. On June 25, 1998, New LLC contributed to the Company all the issued and outstanding stock of Holdings and VDK Holdings. Therefore, the Company's financial statements, as it is the successor to Holdings, includes the historical financial information of Holdings from its inception. New LLC was then dissolved in connection with the IPO (defined below). On July 1, 1998, Holdings, AurFoods, VDK Holdings and VDK merged with and into the Company and the initial public offering of 12,909,372 shares of Common Stock of the Company and 1,590,628 shares of the Company's common stock sold by New LLC was consummated at an initial public offering price of $21.00 per share (the "IPO" or "Equity Offering"). 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 the total available of $175.0 million of senior secured revolving debt under the Third Amended and Restated Credit Agreement, dated as of July 1, 1998, among the 44 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. 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. 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. 45 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. 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. 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. 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. 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. 46 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): 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 ==========
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. The cost to acquire LC has been allocated to tangible and intangible assets acquired, as follows (in thousands): 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 ==========
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 47 Agreement, dated as of January 16, 1998 by and among Holdings, the Company, the lenders listed therein, The Chase Manhattan Bank, The National Westminster Bank PLC, and Swiss Bank Corporation (the "Aurora Senior Bank Facilities"), and received a capital contribution from Holdings of $93.8 million. As a result of the new bank borrowings under the Aurora Senior Bank Facilities, the Company incurred an early extinguishment of its pre-DH senior secured bank debt and the write-off of the associated deferred financing charges was recorded in the quarter ended March 28, 1998 as an extraordinary charge of $1.9 million, net of income taxes of $1.2 million. The cost to acquire DH has been allocated to tangible and intangible assets acquired as follows (in thousands): Cash paid to acquire assets $ 445,000 Other acquisition costs 9,343 ---------- 454,343 Cost assigned to tangible assets (40,672) ---------- Cost attributable to intangible assets $ 413,671 ==========
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 allocation of purchase price has not been finalized; however, any changes are not expected to be material. The cost to acquire VDK Holdings has been allocated to tangible and intangible assets acquired as follows (in thousands): Value of stock used to acquire VDK Holdings $ 183,469 Liabilities assumed 381,212 Other acquisition costs 8,431 ---------- 573,112 Cost assigned to tangible assets (201,545) ---------- Cost attributable to intangible assets $ 371,567 ==========
Had the VDK Holdings and DH acquisitions taken place January 1, 1998 and 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):
Years Ended --------------------------- December 31, December 27, 1998 1997 ------------ ------------ Net sales $ 946,984 $ 874,230 ============ ============ Gross profit $ 569,215 $ 501,129 ============ ============ Operating (loss) income $ (4,533) $ 101,182 ============ ============
48 NOTE 4 - INVENTORIES - - -------------------- Inventories consist of the following (in thousands):
December 31, December 27, 1998 1997 ------------ ------------ Raw materials $ 17,982 $ 270 Work in process 271 - Finished goods 54,640 6,632 Packaging and other supplies 3,781 - ----------- ------------ $ 76,674 $ 6,902 =========== ============
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):
December 31, December 27, 1998 1997 ------------ ------------ Land $ 2,300 $ - Machinery and equipment 106,577 14,357 Buildings and improvements 14,339 - Furniture and fixtures 2,163 416 Computer equipment 2,065 313 Construction in progress 36,421 - ------------ ------------ 163,865 15,086 Less accumulated depreciation (10,698) (1,011) ------------ ------------ $ 153,167 $ 14,075 ============ ============
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. NOTE 6 GOODWILL AND OTHER INTANGIBLE ASSETS - - -------------------------------------------- Goodwill and other intangible assets consist of the following (in thousands):
December 31, December 27, 1998 1997 ------------ ------------ Goodwill $ 639,741 $ 216,485 Trademarks 342,162 99,600 Other intangibles 125,823 5,040 ------------ ------------ 1,107,726 321,125 Less accumulated amortization (34,966) (5,884) ------------ ------------ $ 1,072,760 $ 315,241 ============ ============
49 NOTE 7- ACCRUED LIABILITIES - - --------------------------- Accrued liabilities consist of the following (in thousands):
December 31, December 27, 1998 1997 ------------ ------------ Accrued interest $ 16,332 $ 8,383 Accrued marketing expenses 8,869 5,092 Accrued brokerage and distribution expenses 7,986 1,529 Accrued acquisition costs 6,059 895 Other 10,590 1,510 ------------ ------------ $ 49,836 $ 17,409 ============ ============
50 NOTE 8 -- LONG TERM DEBT Long term debt consists of the following (dollars in thousands):
December 31, December 27, 1998 1997 ------------ ------------ 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 - 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 =========== ==========
51 Annual principal payments for the next five years and thereafter consist of the following (in thousands):
1999 $ 20,000 2000 25,000 2001 30,000 2002 35,000 2003 40,000 Thereafter 555,850 -------- Total $705,850 ========
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. 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. 52 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). 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 $10.3 million and $2.1 million, respectively. 53 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):
Years Ended --------------------------------------------- December 31, December 27, 1998 1997 ------------- -------------- Current tax expense: Federal $ - $ - State - - ------------- -------------- Total current provision - - ------------- -------------- Deferred tax expense: Federal 12,348 656 State 1,958 123 ------------- -------------- Total deferred provision 14,306 779 ------------- -------------- Total provision for income taxes $ 14,306 $ 779 ============= ============== Deferred tax assets (liabilities) consist of the following: Deferred tax assets - current: Loss carryforwards $ - $ 1,230 Accounts receivable 1,350 - Asset held for sale 1,814 - Coupon reserves 1,321 844 Inventory 3,207 325 Accrued expenses 340 320 Other 219 247 ------------- -------------- Total deferred tax assets - current 8,251 2,966 ------------- -------------- Deferred tax assets - non-current: Loss carryforwards 29,349 - Incentive plan expense 19,773 873 ------------- -------------- Total deferred tax assets - non-current 49,122 873 ------------- -------------- Deferred tax liabilities - non-current: Goodwill (40,421) (4,237) Depreciation (9,350) (381) ------------- -------------- Total deferred tax liabilities - non-current (49,771) (4,618) ------------- -------------- Net deferred tax assets (liabilities) $ 7,602 $ (779) ============= ==============
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. 54 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):
Years Ended --------------------------------------------- December 31, December 27, 1998 1997 -------------- ------------- (Benefit from) provision for income taxes at U.S. statutory rate $ (7,432) $ 685 Increase (decrease) in tax resulting from: Non-deductible incentive plan expense 19,238 - Non-deductible goodwill 393 - Other non-deductible expenses 136 13 State taxes, net of federal benefit 1,293 81 Provision to return differences 775 - Change in net state tax rate (97) - -------------- ------------- $ 14,306 $ 779 ============== =============
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):
Minimum Lease Years ending December 31, Payments ------------------------- ---------------- 1999 $ 1,290 2000 1,273 2001 788 2002 618 2003 590 Thereafter 139 --------------- $ 4,698 ===============
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 $0.7 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 are directors and/or executive officers of the Company) pursuant to which Dartford provided management oversight on financial and operational matters. The Company 55 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 include 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. 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 has 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 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 has 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 ending the earlier of July 1, 2000 and the date that Mr. Wilson is no longer Chief Executive Officer of the Company. 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. 56 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 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) will distribute a fixed number of shares of Common Stock of the Company upon the dissolution of VDK LLC, based on the valuation of the VDK Management Units at the initial public offering price of the Company's Common Stock. The VDK Plan provides for tax gross-up payments on certain distributions. Because the Company will receive the tax benefit of such distributions and related tax gross-up payments, and because the tax benefit is expected to exceed the amount of the tax gross-up payments, the Company will bear the $12.4 million liability for any such tax gross-up payments due. The tax benefit of the tax gross-up payment and related distributions of $19.6 million, which more than offsets the gross-up payments, has been recorded to income tax expense and as a deferred tax asset. 57 To facilitate payment of the tax gross-up obligation and recognition of related tax benefits, VDK adopted a new incentive plan (the "New VDK Plan" and together with the VDK Plan, the "VDK Plans"), which was assumed by the Company in connection with the Contribution. Under the New VDK Plan, the Company is obligated to distribute no later than July 1, 1999 1,801,769 shares of the Company's Common Stock to VDK Covered Employees who were granted certain types of VDK Management Units under the VDK Plan. The issuance of such shares (the "MC Shares") will not increase the number of outstanding shares of Common Stock because the Company's obligations to issue the MC Shares is contingent upon the Company's receiving from VDK LLC, as a contribution, a number of shares of the Company's Common Stock owned by VDK LLC equal to the number of MC Shares. The Company will have no obligation to issue MC Shares unless it receives a contribution of an equal number of shares from VDK LLC. VDK LLC is obligated to contribute such shares to the Company after the closing of the Equity Offerings. The Company's obligation to make the tax gross-up payments referred to above is subject to the Company being allowed a deduction for federal income tax purposes with respect to the payment of the MC Shares and tax gross-up payment. NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES - - ------------------------------------------------ The Company is subject to litigation in the ordinary course of business. In the opinion of management, the ultimate outcome of any existing litigation would not have a material adverse effect on the Company's financial condition or results of operations. 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. As of December 31, 1998, the Company has granted 2,031,900 options under the 1998 Option Plan. Exercise prices ranged from $15 to $21 per share. The weighted average option price for 1998 was $20.91. 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 $46.2 million and loss per diluted share would have been $0.86. 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. 58 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):
Years Ended ------------------------------------- December 31, December 27, 1998 1997 -------------- -------------- Numerator: Net (loss) income before extraordinary item $ (36,166) $ 1,235 Extraordinary item, net of tax 9,211 - -------------- -------------- Net (loss) income $ (45,377) $ 1,235 ============== ============== Denominator - Basic shares: Average common shares outstanding 53,541 29,053 Basic earnings per share $ (0.85) $ 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 $ (0.85) $ 0.04 ============== ==============
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. 59 The following table presents a summary of operations by segment (in thousands):
Years Ended ------------------------------------- December 31, December 27, 1998 1997 -------------- --------------- Net sales Dry grocery $ 508,364 $ 143,020 Frozen food 280,829 - -------------- --------------- Total $ 789,193 $ 143,020 ============== =============== Operating income Dry grocery $ 88,646 $ 27,811 Frozen food 22,783 - Other (66,667) (4,413) -------------- --------------- Total $ 44,762 $ 23,398 ============== =============== Total assets Dry grocery $ 958,129 $ 372,739 Frozen food 475,753 - -------------- --------------- Total $ 1,433,882 $ 372,739 ============== =============== Depreciation and amortization Dry grocery $ 26,754 $ 10,057 Frozen food 14,589 - -------------- --------------- Total $ 41,343 $ 10,057 ============== =============== Capital expenditures Dry grocery $ 25,895 $ 2,411 Frozen food 13,904 - -------------- --------------- Total $ 39,799 $ 2,411 ============== ===============
The Other line item in operating income is comprised of one-time expenses related to incentive plan expense (See Note 14-Incentive Plan Expense) and transition expenses (See Note 9-Transition Expenses) that were incurred in the respective periods. 60 NOTE 19- QUARTERLY FINANCIAL DATA - - --------------------------------- Unaudited quarterly financial data for the years ended December 31, 1998 and December 27, 1997 are as follows (in thousands except per share data):
Quarter 1 Quarter 2 Quarter 3 Quarter 4 ---------------- ---------------- ---------------- ---------------- Year ended December 31, 1998: Net sales $ 89,385 $ 199,813 $ 220,368 $ 279,627 Gross profit 51,651 118,070 131,104 170,821 Operating income (loss) (50,138) 25,562 28,215 41,123 Adjusted operating income 11,788 24,667 29,484 45,763 Net income (loss) (64,832) 3,230 654 15,571 Basic earnings (loss) per share (1.20) 0.06 0.01 0.28 Diluted earnings (loss) per share (1.20) 0.06 0.01 0.28 Adjusted basic earnings per share 0.08 0.03 0.12 0.28 Year ended December 27, 1997: Net sales $ 21,253 $ 21,639 $ 49,125 $ 51,003 Gross profit 14,086 14,535 33,896 34,774 Operating income 4,826 3,346 10,146 5,080 Adjusted operating income 4,952 3,528 11,135 8,196 Net income (loss) (71) 415 1,923 (1,032) Basic earnings (loss) per share 0.00 0.01 0.07 (0.04) Diluted earnings (loss) per share 0.00 0.01 0.07 (0.04) Adjusted basic earnings per share 0.00 0.02 0.09 0.03
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. 61 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 62 MRS. BUTTERWORTH'S BUSINESS (A COMPONENT OF CONOPCO, INC.) STATEMENT OF OPERATIONS (IN THOUSANDS)
Year Ended December 31, 1996 --------------------- 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 =========
The accompanying notes are an integral part of the statement of operations. 63 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. 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. 64 MRS. BUTTERWORTH'S BUSINESS (A COMPONENT OF CONOPCO, INC.) NOTES TO STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS) 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 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. 65 MRS. BUTTERWORTH'S BUSINESS (A COMPONENT OF CONOPCO, INC.) NOTES TO STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS) 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:
1996 ------------------------- Amount % ----------- --------- Federal $ 5,843 34.0 State (net of federal tax benefit) 773 4.5 ----- ---- Provision for income taxes $ 6,616 38.5 ===== ====
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. 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. 66 Schedule IX - Valuation Reserves - - ---------------------------------
Column A Column B Column C Column D Column E Additions ----------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End Description of Period Expenses Accounts Deductions of Year - - ------------------------------------ ------------ ----------- ----------- ------------- ------------- 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 ========== ========== ========= ========== ============
67 EX-10.48 2 1998 EMPLOYEE STOCK PURCHASE PLAN Exhibit 10.48 AURORA FOODS INC. 1998 EMPLOYEE STOCK PURCHASE PLAN 1. Purpose. The purpose of the 1998 Employee Stock Purchase Plan is to ------- provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. ----------- (a) "Board" shall mean the Board of Directors of the Company. ----- (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (c) "Common Stock" shall mean the Common Stock of the Company. ------------ (d) "Company" shall mean Aurora Foods Inc., a Delaware corporation, ------- and any Designated Subsidiary of the Company. (e) "Compensation" shall mean all base straight time gross earnings ------------ and commissions, exclusive of payments for overtime, shift premium, incentive compensation, bonuses and other compensation. (f) "Designated Subsidiary" shall mean any Subsidiary which has been --------------------- designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the -------- Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. -1- (h) "Enrollment Date" shall mean the first Trading Day of each --------------- Offering Period. (i) "Exercise Date" shall mean the last Trading Day of each Offering ------------- Period. (j) "Fair Market Value" shall mean, as of any date, the value of ----------------- Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the NASDAQ National Market or The NASDAQ Small Cap Market of The NASDAQ Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (k) "Offering Period" shall mean a period of approximately six (6) --------------- months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after January 1 and terminating on the last Trading Day in the period ending the following June 30, or commencing on the first Trading Day on or after July 1 (beginning in 1998) and terminating on the last Trading Day in the period ending the following December 31. The duration of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this 1998 Employee Stock Purchase Plan. ---- (m) "Purchase Price" shall mean an amount equal to 85% of the Fair -------------- Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (n) "Reserves" shall mean the number of shares of Common Stock covered -------- by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. -2- (o) "Subsidiary" shall mean a corporation, domestic or foreign, of ---------- which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (p) "Trading Day" shall mean a day on which national stock exchanges ----------- and the NASDAQ System are open for trading. 3. Eligibility. ----------- (a) Any Employee who shall be employed by the Company for the three (3) months immediately preceding a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its Subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive ---------------- Offering Periods with a new Offering Period commencing on the first Trading Day on or after January 1 and July 1 of each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. Participation. ------------- (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which -3- such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. 6. Payroll Deductions. ------------------ (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may decrease the rate of his or her payroll deductions during the Offering Period to 0% by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during an Offering Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each --------------- eligible Employee participating in such Offering Period shall be granted an option to purchase on the -4- Exercise Date of such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Offering Period more than 5,000 shares (subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The Option shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as ------------------ provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Exercise Date on -------- which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. 10. Withdrawal. ---------- (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. -5- 11. Termination of Employment. Upon a participant's ceasing to be an ------------------------- Employee for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a -------- participant in the Plan. 13. Stock. ----- (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof, the maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 200,000 shares. Shares issued under the Plan may be authorized but unissued shares or reacquired shares; provided, however, that a maximum of 100,000 (as adjusted according to Section 19, hereof) of the shares may be authorized but unissued shares. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Administration. The Plan shall be administered by the Board or a -------------- committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. -------------------------- (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event -6- of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither payroll deductions credited to a --------------- participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 17. Use of Funds. All payroll deductions received or held by the Company ------------ under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 18. Reports. Individual accounts shall be maintained for each participant ------- in the Plan. Statements of account shall be given to participating employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, --------------------------------------------------------------------- Merger or Asset Sale. -------------------- (a) Changes in Capitalization. Subject to any required action by the ------------------------- stockholders of the Company, the Reserves, the maximum number of shares each participant may purchase per Offering Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or -7- decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or -------------------- substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"). The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. -8- 20. Amendment or Termination. ------------------------ (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offing Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the best interests of the Company and its stockholders. Except as provided in section 19 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any other applicable law, regulation or stock exchange rule), the Company shall obtain stockholder approval in such a manner and to such a degree as required. (b) Without stockholder consent and without regard to whether any participant's rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 21. Notices. All notices or other communications by a participant to the ------- Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Condition Upon Issuance of Shares. Shares shall not be issued with --------------------------------- respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in, the opinion of counsel for the Company, such a representation is required by -9- any of the aforementioned applicable provisions of law. 23. Term of Plan. Subject to Section 19, the Plan shall become effective ------------ upon the date of the Company's initial public offering of its equity securities registered on Form S-1 with the Securities and Exchange Commission. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. -10- EXHIBIT A --------- AURORA FOODS INC. 1998 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date:________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. ______________________________________ hereby elects to participate in the Aurora Foods Inc. 1998 Employee Stock Purchase Plan (the "Purchase Plan") and subscribes to purchase shares of the Company's Stock in accordance with this Subscription Agreement and the Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of _____% of my Compensation on each payday (not to exceed 15%) during the Offering Period in accordance with the Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Purchase Plan. I understand that my participation in the Purchase Plan is in all respects subject to the terms of the Plan. 5. Shares purchased for me under the Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only):________________________. 6. I understand that if I dispose of any shares received by me pursuant to the Purchase Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares), I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I hereby agree to notify ------------------------ the Company in writing within 30 days after the date of any disposition of -------------------------------------------------------------------------- shares and I will make adequate provision for Federal, state or other tax ------------------------------------------------------------------------- withholding obligations, if any, ------------------------------- Ex. A-1 which arise upon the disposition of the Common Stock. The Company may, but ---------------------------------------------------- will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2- year holding period, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Purchase Plan: NAME: (Please print) __________________________________________________ (First) (Middle) (Last) ___________________ __________________________________________________ Relationship __________________________________________________ (Address) Employee's Social Security Number: __________________________________________________ Employee's Address: __________________________________________________ __________________________________________________ __________________________________________________ I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Ex. A-2 Date:________________ __________________________________________________ Signature of Employee _____________________________________________________ Spouse's Signature (If beneficiary other than spouse) Ex. A-3 EXHIBIT B --------- AURORA FOODS INC. 1998 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the Aurora Foods Inc. 1998 Employee Stock Purchase Plan which began on ______, 19___ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undesigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: _______________________________________ _______________________________________ _______________________________________ Signature: _______________________________________ Date:__________________________________ Ex. B-1 EX-10.50 3 1998 INCENTIVE PLAN Exhibit 10.50 AURORA FOODS INC. 1998 LONG TERM INCENTIVE PLAN TABLE OF CONTENTS ----------------- SECTION 1. GENERAL PROVISIONS RELATING TO PLAN GOVERNANCE, COVERAGE AND BENEFITS.............................. 1 1.1. PURPOSE........................................................... 1 1.2. DEFINITIONS....................................................... 1 1.3. ADMINISTRATION.................................................... 4 1.4. SHARES OF COMMON STOCK SUBJECT TO THE PLAN........................ 5 1.5. PARTICIPATION..................................................... 6 1.6. INCENTIVE AWARDS.................................................. 6 1.7. MAXIMUM INDIVIDUAL RIGHTS......................................... 6 SECTION 2. STOCK OPTIONS........................................................... 6 2.1. GRANT OF OPTIONS.................................................. 6 2.2. OPTION TERMS...................................................... 7 2.3. OPTION EXERCISES.................................................. 7 SECTION 3. PROVISIONS RELATING TO PLAN PARTICIPATION............................... 8 3.1. PLAN CONDITIONS................................................... 8 3.2. TRANSFERABILITY................................................... 9 3.3. RIGHTS AS A STOCKHOLDER........................................... 9 3.4. LISTING AND REGISTRATION OF SHARES OF COMMON STOCK................ 10 3.5. CHANGE IN STOCK AND ADJUSTMENTS................................... 10 3.6. TERMINATION OF EMPLOYMENT, DEATH, DISABILITY AND RETIREMENT....... 11 3.7. CHANGES OF CONTROL................................................ 12 3.8. AMENDMENTS TO INCENTIVE AWARDS.................................... 14 3.9. EXCHANGE OF INCENTIVE AWARDS...................................... 14 3.10. FINANCING......................................................... 14 SECTION 4. MISCELLANEOUS........................................................... 14 4.1. EFFECTIVE DATE AND GRANT PERIOD................................... 14 4.2. FUNDING........................................................... 15 4.3. WITHHOLDING TAXES................................................. 15 4.4. CONFLICTS WITH PLAN............................................... 15 4.5. NO GUARANTEE OF TAX CONSEQUENCES.................................. 15
4.6. SEVERABILITY...................................................... 16 4.7. GENDER, TENSE AND HEADINGS........................................ 16 4.8. AMENDMENT AND TERMINATION......................................... 16 4.9. SECTION 280G PAYMENTS............................................. 16 4.10. GOVERNING LAW..................................................... 17 4.11. LIMITATIONS APPLICABLE TO SECTION 16 PERSONS AND PERFORMANCE-BASED COMPENSATION.................................... 17
(ii) AURORA FOODS INC. 1998 LONG TERM INCENTIVE PLAN SECTION 1. GENERAL PROVISIONS RELATING TO PLAN GOVERNANCE, COVERAGE AND BENEFITS 1.1. PURPOSE ------- The purpose of the Aurora Foods Inc. 1998 Long Term Incentive Plan (the "Plan") is to foster and promote the long-term financial success of Aurora Foods Inc. (the "Company") and materially increase the value of the equity interests in the Company by: (a) encouraging the long-term commitment of selected key employees (defined in Section 1.2(h) below), (b) motivating superior performance of key employees by means of long-term performance related incentives, (c) encouraging and providing key employees with a formal program for obtaining an ownership interest in the Company, (d) attracting and retaining outstanding key employees by providing incentive compensation opportunities competitive with other major companies and (e) enabling participation by key employees in the long-term growth and financial success of the Company. The Plan provides for payment of various forms of incentive compensation and, accordingly, is not intended to be a plan that is subject to the Employee Retirement Income Security Act of 1974, as amended, and shall be administered accordingly. 1.2. DEFINITIONS ----------- The following terms shall have the meanings set forth below: (a) BOARD. The Board of Directors (or equivalent governing authority) of the Company. (b) CHANGE OF CONTROL. Any of the events described in and subject to SECTION 3.7. (c) CODE. The Internal Revenue Code of 1986, as amended. (d) COMMITTEE. The Committee, which shall be comprised of two or more members of the Board, each of whom is both a "non-employee director" as defined by Rule 16b-3 of the Exchange Act and an "outside director" for purposes of Section 162(m) of the Code, who shall be appointed by the Board to administer the Plan, which Board shall have the power to fill vacancies on the Committee arising by resignation, death, removal or otherwise. In the absence of a Committee, reference thereto shall be to the Board. (e) COMMON STOCK. Company Common Stock, par value $.01 per share, which the Company is authorized to issue or may in the future be authorized to issue. -1- (f) COMPANY. Aurora Foods Inc. and any successor corporation. (g) DISABILITY. Any complete and permanent disability as defined in Section 22(e)(3) of the Code and determined in accordance with the procedures set forth in the regulations, thereunder. (h) EMPLOYEE. Any common-law employee of the Company, Parent or Subsidiary, who, in the opinion of the Committee, is one of a select group of executive officers, other officers or other key management personnel of the Company, Parent or Subsidiary who is in a position to contribute materially to the continued growth and development and to the continued financial success of the Company, Parent or Subsidiary, including executive officers and officers who are members of the Board and including consultants and advisors. (i) EXCHANGE ACT. The Securities and Exchange Act of 1934, as amended. (j) FAIR MARKET VALUE. The closing sales price of Common Stock as reported or listed on a national securities exchange on any relevant date for valuation, or, if there is no such sale on such date, the applicable prices as so reported on the nearest preceding date upon which such sale took place. In the event the shares of Common Stock are not listed on a national securities exchange, the Fair Market Value of such shares shall be determined by the Committee in its sole discretion. (k) GRANTEE. Any Employee who in the opinion of the Committee performs significant services for the benefit of the Company and who is granted an Incentive Award under the Plan. (l) INCENTIVE AWARD. Any incentive award, individually or collectively, as the case may be, including any Non-Qualified Stock Option or Incentive Stock Option granted under the Plan. (m) INCENTIVE AWARD AGREEMENT. The written agreement entered into between the Company and the Grantee pursuant to which an Incentive Award shall be made under the Plan. (n) INCENTIVE STOCK OPTION. A stock option which is intended to qualify as an Incentive Stock Option under Section 422 of the Code and which shall be granted by the Committee to a Grantee under the Plan. (o) INVOLUNTARY TERMINATION. The termination of a Grantee's employment by the Company other than for death, Disability, Retirement, Terminated for Cause, Termination for Good Reason, or in the event of a Change of Control (as defined in SECTION 3.7(a) below). -2- (p) NON-QUALIFIED STOCK OPTION. A stock option granted by the Committee to a Grantee under the Plan, which shall not qualify as an Incentive Stock Option. (q) OPTION. A Non-Qualified Stock Option or Incentive Stock Option granted by the Committee to a Grantee under the Plan. (r) PARENT. Any corporation (whether now or hereafter existing) which constitutes a "parent" of the Company, as defined in Section 424(e) of the Code. (s) PLAN. The Aurora Foods Inc. 1998 Long Term Incentive Plan, as hereinafter amended from time to time. (t) RETIREMENT. The termination of employment by the Company, Parent or Subsidiary constituting retirement as determined by the Committee. (u) SECTION 162(m) PARTICIPANT. Any Employee designated by the Committee as an Employee whose compensation for the fiscal year in which the Employee is so designated or a future fiscal year may be subject to the limit on deductible compensation imposed by Section 162(m) of the Code. (v) SUBSIDIARY. Any corporation (whether now or hereafter existing) which constitutes a "subsidiary" of the Company, as defined in Section 424(f) of the Code. (w) TERMINATED FOR CAUSE. An Employee may be terminated for cause. For purposes of this Plan, "Cause" shall mean (A) proven dishonesty of the Employee detrimental to the best interests of the Company or any of its subsidiaries or conviction of the Employee of a crime which constitutes a felony, (B) any material act or omission by the Employee during the term of his or her employment involving willful malfeasance or gross negligence in the performance of his or her duties under the terms of his or her employment, (C) repeated failure of the Employee to follow the reasonable instructions of the Board of Directors of the Company (the "Board") (other than inattention or neglect resulting from illness or disability of the Employee) which inattention and neglect does not cease within 15 days after written notice thereof specifying the details of such conduct is given by the Board to the Employee or (D) material breach by the Employee of any material provision of his or her employment agreement (or consulting or advisory contract), in the event one exists (provided, however, that if such breach is curable and is remedied to the reasonable satisfaction of the Board within 15 days after written notice thereof specifying the details of such breach is given by the Board to the Executive, such breach shall not fall within the definition of "Cause" for purposes of this Subsection (D)). During the term of his or her employment, the Employee shall be entitled to only one such notice and right to cure for any single act or event. (x) TERMINATION FOR GOOD REASON. The resignation of an Employee shall be deemed to be a Termination for Good Reason if Employee's resignation is -3- within two years of a Change of Control as defined in SECTION 3.7, caused by and within 90 days of the following: (i) the Employee is moved to a new work location that is more than 50 miles from the Employee's principal work location prior to such Change of Control; (ii) the amount of the base annual salary of the Employee and the bonus opportunities of the Employee is reduced; (iii) the Employee's, title, duties and responsibilities are materially diminished; (iv) the Employee's reasonable, documented business expenses are not reimbursed in a manner consistent with the Company's reimbursement practice prior to a Change of Control; or (v) without limiting the generality or effect of the foregoing, the Company fails to comply with any of its material obligations hereunder. 1.3. ADMINISTRATION -------------- (a) COMMITTEE POWERS. The Plan shall be administered by the Committee, which shall have full power and authority to: (i) designate Grantees; (ii) determine the Incentive Awards to be granted to a Grantee and whether such Incentive Awards are to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code; (iii) subject to SECTION 1.4 of the Plan, determine the Common Stock (or securities convertible into Common Stock) to be covered by Incentive Awards and in connection therewith, to reserve shares of Common Stock as needed in order to cover grants of Incentive Awards; (iv) determine the terms and conditions of any Incentive Award; provided -------- however, that the terms and conditions of Incentive Awards intended to qualify - - ------- as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall include, but not limited to, such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m)(4)(C) of the Code; (v) determine whether, to what extent, and under what circumstances Incentive Awards may be settled or exercised in cash, Common Stock, other securities, or other property, or cancelled, substituted, forfeited or suspended, and the method or methods by which Incentive Awards may be settled, exercised, cancelled, substituted, forfeited or suspended; (vi) interpret and administer the Plan and any instrument or agreement relating to, or Incentive Award made under, the Plan; (vii) establish, amend, suspend or waive such rules and guidelines as the Committee shall deem necessary or appropriate for administration of the Plan; (viii) appoint such agents as it shall deem appropriate for the administration of the Plan; provided however, that the -------- ------- Committee shall not delegate any of the power or authority set forth in (i) through (vii) above; and (ix) make any other determination and take any other action that it deems necessary or desirable for such administration. No member of the Committee shall vote or act upon any matter relating solely to himself. All designations, determinations, interpretations and other decisions with respect to the Plan or any Incentive Award shall be within the sole discretion of the Committee and shall be final, conclusive and binding upon all persons, including the Company, Parent or Subsidiary, any Grantee, any holder or beneficiary of any Incentive Award, any owner of an equity interest in the Company and any Employee. (b) NO LIABILITY. No member of the Committee shall be liable for any action or determination made in good faith by the Committee with respect to this Plan or any Incentive Award under this Plan, and, to the fullest extent permitted by the Company's Articles -4- of Incorporation and Bylaws, the Company shall indemnify each member of the Committee. (c) MEETINGS. The Committee shall designate a chairman from among its members, who shall preside at all of its meetings, and shall designate a secretary, without regard to whether that person is a member of the Committee, who shall keep the minutes of the proceedings and all records, documents, and data pertaining to its administration of the Plan. Meetings shall be held at such times and places as shall be determined by the Committee. The Committee may take any action otherwise proper under the Plan by the affirmative vote, taken with or without a meeting, of a majority of its members. 1.4. SHARES OF COMMON STOCK SUBJECT TO THE PLAN. ------------------------------------------ (a) COMMON STOCK AUTHORIZED. Subject to adjustment under SECTION 3.5, the aggregate number of shares of Common Stock available for granting Incentive Awards under the Plan shall be equal to 3,500,000 shares of Common Stock. If any Incentive Award shall expire or terminate for any reason, without being exercised or paid, shares of Common Stock subject to such Incentive Award shall again be available for grant in connection with grants of subsequent Incentive Awards, subject to the limitations of SECTION 1.7. (b) COMMON STOCK AVAILABLE. The Common Stock available for issuance or transfer under the Plan shall be made available from such shares reserved under the Plan, from such shares now or hereafter held by the Company or from such shares to be purchased or acquired by the Company. The Common Stock available for issuance or transfer under the Plan, if applicable, shall be made available from shares now or hereafter held by the Company or from such shares to be purchased or acquired by the Company. No fractional shares shall be issued under the Plan; payment for fractional shares shall be made in cash. (c) INCENTIVE AWARD ADJUSTMENTS. Subject to the limitations set forth in SECTIONS 1.7, 3.6 and 4.8, the Committee may make any adjustment in the exercise price or the number of shares subject to any Incentive Award, or any other terms of any Incentive Award. Such adjustment shall be made by amending, substituting or canceling and re-granting such Incentive Award with the inclusion of terms and conditions that may differ from the terms and conditions of the original Incentive Award. If such action is effected by amendment, the effective date of such amendment shall be the date of the original grant. -5- 1.5. PARTICIPATION ------------- (a) ELIGIBILITY. The Committee shall from time to time designate those Employees, if any, to be granted Incentive Awards under the Plan, the type of awards granted, the number of shares, options, rights or units, as the case may be, which shall be granted to each such Employee and any other terms or conditions relating to the awards as it may deem appropriate, consistent with the provisions of the Plan. An Employee who has been granted an Incentive Award may, if otherwise eligible, be granted additional Incentive Awards at any time. (b) NO NON-EMPLOYEE BOARD PARTICIPATION. In no event may any member of the Board who is not an Employee be granted an Incentive Award under the Plan. 1.6. INCENTIVE AWARDS ---------------- The forms of Incentive Awards under this Plan are Non-Qualified Stock Options and Incentive Stock Options as described in SECTION 2. 1.7. MAXIMUM INDIVIDUAL RIGHTS ------------------------- No grantee may receive during any fiscal year of the Company Incentive Awards covering an aggregate of more than two hundred thousand (200,000) shares of Common Stock. To the extent required by Section 162(m) of the Code, shares subject to Options which are canceled continue to be counted against the maximum number of shares an individual may receive and if, after grant of an Option, the price of shares subject to such Option is reduced, the transaction will be treated as a cancellation of the Option and a grant of a new Option and both the Option deemed to be canceled and the Option deemed to be granted will be counted against the maximum number of shares an individual may receive. SECTION 2. STOCK OPTIONS 2.1. GRANT OF OPTIONS ---------------- The Committee is authorized to grant Options to Grantees in accordance with the terms and conditions required pursuant to this Plan and with such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine. -6- 2.2. OPTION TERMS ------------ (a) EXERCISE PRICE. The exercise price per share of Common Stock under each Option shall be determined by the Committee; provided however, that, -------- ------- in the case of an Option intended to qualify as an Incentive Stock Option or as performance-based compensation as described in Section 162(m)(4)(C) of the Code, such exercise price shall not be less than 100% of the Fair Market Value per share of such stock on the date the Option is granted, as determined by the Committee (110% in the case of an Incentive Stock Option granted to a Ten- Percent Stockholder). For purposes of this SECTION 2.2, Ten-Percent Stockholder shall mean an individual owning more than 10% of the total combined voting power of all classes of stock of the Company, Parent or Subsidiary. (b) TERM. The Committee shall fix the term of each Option which, in the case of an Incentive Stock Option, shall be not more than ten years from the date of grant. In the event no term is fixed, such term shall be ten years from the date of grant. The term shall be five years in the case of an Incentive Stock Option granted to a Ten-Percent Stockholder. (c) EXERCISE. The Committee shall determine the time or times at which an Option may be exercised in whole or in part. The Committee may accelerate the exercisability of any Option or a portion thereof at any time. 2.3. OPTION EXERCISES ---------------- (a) METHOD OF EXERCISE. To purchase shares under any Option granted under the Plan, Grantees must give notice in writing to the Company of their intention to purchase and specify the number of shares of Common Stock as to which they intend to exercise their Option. Upon the date or dates specified for the completion of the purchase of the shares, the purchase price will be payable in full. The purchase price may be paid in cash or an equivalent acceptable to the Committee. At the discretion of the Committee, the exercise price per share of Common Stock may be paid by the assignment and delivery to the Company of shares of Common Stock owned by the Grantee or a combination of cash and such shares equal in value to the exercise price. However, if the Grantee acquired the stock to be surrendered directly or indirectly from the Company, he must have owned the stock to be surrendered for at least six months prior to tendering such stock for the exercise of an Option. Any shares so assigned and delivered to the Company in payment or partial payment of the purchase price shall be valued at the Fair Market Value on the exercise date. In addition, at the request of the Grantee and to the extent permitted by applicable law, the Company in its discretion may selectively approve a "cashless exercise" arrangement with a brokerage firm under which such brokerage firm, on behalf of the Grantee, shall pay to the Company the exercise price of the Options being exercised, and the Company, pursuant to an irrevocable notice from the Grantee, shall promptly deliver the shares being purchased to such firm. (b) In the case of Incentive Stock Options, the terms and conditions of such -7- grants shall be subject to and comply with Section 422 of the Code and any rules or regulations promulgated thereunder, including the requirement that the aggregate Fair Market Value (determined as of date the date of grant) of the Common Stock with respect to which Incentive Stock Options granted under this Plan and all other option plans of the Company, the Parent and Subsidiary become exercisable by a Grantee during any calendar year shall not exceed $100,000. To the extent that the limitation set forth in the preceding sentence is exceeded for any reason (including the acceleration of the time for exercise of an Option), the Options with respect to such excess amount shall be treated as Non- Qualified Stock Options. (c) PROCEEDS. The proceeds received by the Company from the sale of shares of Common Stock pursuant to Options exercised under the Plan will be used for general purposes of the Company. SECTION 3. PROVISIONS RELATING TO PLAN PARTICIPATION 3.1. PLAN CONDITIONS --------------- (a) INCENTIVE AWARD AGREEMENT. Each Grantee to whom an Incentive Award is granted under the Plan shall be required to enter into an Incentive Award Agreement with the Company in a form provided by the Committee, which shall contain certain specific terms, as determined by the Committee, with respect to the Incentive Award and shall include provisions that the Grantee (i) shall not disclose any trade or secret data or any other confidential information of the Company acquired during employment by the Company or a Subsidiary, or after the termination of employment or Retirement, (ii) shall abide by all the terms and conditions of the Plan and such other terms and conditions as may be imposed by the Committee, and (iii) shall not interfere with the employment of any other Company employee. An Incentive Award may include a noncompetition agreement with respect to the Grantee and/or such other terms and conditions, including, without limitation, rights of repurchase or first refusal, not inconsistent with the Plan, as shall be determined from time to time by the Committee. Incentive Award Agreements evidencing Incentive Awards intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. (b) NO RIGHT TO EMPLOYMENT. Nothing in the Plan, Incentive Award Agreement or any instrument executed pursuant to the Plan shall create any employment rights (including without limitation, rights to continued employment) in any Grantee or affect the right of the Company to terminate the employment of any Grantee at any time for any reason. (c) SECURITIES REQUIREMENTS. No shares of Common Stock will be issued or transferred pursuant to an Incentive Award unless and until all then- applicable requirements imposed by federal and state securities and other laws, rules and regulations and -8- by any regulatory agencies having jurisdiction and by any stock market or exchange upon which the Common Stock may be listed, have been fully met. As a condition precedent to the issuance of shares pursuant to the grant or exercise of an Incentive Award, the Company may require the Grantee to take any reasonable action to meet such requirements. The Company shall not be obligated to take any affirmative action in order to cause the issuance or transfer of shares pursuant to an Incentive Award to comply with any law or regulation described in the second preceding sentence. 3.2. TRANSFERABILITY --------------- (a) NON-TRANSFERABLE AWARD. Unless otherwise provided in an Incentive Award Agreement, no Incentive Award and no right under the Plan, contingent or otherwise, shall be (i) assignable, saleable, or otherwise transferable by a Grantee except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order, or (ii) subject to any encumbrance, pledge or charge of any nature. No transfer by will or by the laws of descent and distribution shall be effective to bind the Company unless the Committee shall have been furnished with a copy of the deceased Grantee's will or such other evidence as the Committee may deem necessary to establish the validity of the transfer. Any attempted transfer in violation of this SECTION 3.2 shall be void and ineffective for all purposes. (b) ABILITY TO EXERCISE RIGHTS. Only the Grantee or his guardian (if the Grantee becomes Disabled), or in the event of his death, his legal representative or beneficiary, may exercise Options, receive cash payments and deliveries of shares, or otherwise exercise rights under the Plan. The executor or administrator of the Grantee's estate, or the person or persons to whom the Grantee's rights under any Incentive Award will pass by will or the laws of descent and distribution, shall be deemed to be the Grantee's beneficiary or beneficiaries of the rights of the Grantee hereunder and shall be entitled to exercise such rights as are provided hereunder. 3.3. RIGHTS AS A STOCKHOLDER ----------------------- Except as otherwise provided in any Incentive Award Agreement, a Grantee of an Incentive Award or a transferee of such Grantee shall have no rights as a stockholder with respect to any shares of Common Stock until such person becomes a holder of record of such Common Stock. Except as otherwise provided in SECTION 3.5, no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities, or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued. -9- 3.4. LISTING AND REGISTRATION OF SHARES OF COMMON STOCK -------------------------------------------------- Prior to issuance and/or delivery of shares of Common Stock, the Company shall consult with representatives of the Company, as appropriate, regarding compliance with laws, rules and regulations that apply to such shares. If necessary, the Company shall postpone the issuance and/or delivery of the affected shares of Common Stock upon any exercise of an Incentive Award until completion of such stock exchange listing, registration, or other qualification of such shares under any state and/or federal law, rule or regulation as the Company may consider appropriate, and may require any Grantee to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of the shares in compliance with applicable laws, rules and regulations. The Company shall not be obligated to take any affirmative action in order to cause the issuance or transfer of shares pursuant to an Incentive Award to comply with any law, rule or regulation described in the immediately preceding sentence. 3.5. CHANGE IN STOCK AND ADJUSTMENTS ------------------------------- (a) CHANGES IN CAPITALIZATION. In the event the outstanding shares of the Common Stock, as constituted from time to time, shall be changed as a result of a change in capitalization of the Company or a combination, merger, or reorganization of the Company into or with any other corporation or any other transaction with similar effects, then, for all purposes, references herein to Common Stock shall mean and include all securities or other property (other than cash) that holders of Common Stock are entitled to receive in respect of Common Stock by reason of each successive aforementioned event, which securities or other property (other than cash) shall be treated in the same manner and shall be subject to the same restrictions as the underlying Common Stock. (b) CHANGES IN LAW OR CIRCUMSTANCE. In the event of any change in applicable laws or any change in circumstances which results in or would result in any dilution of the rights granted under the Plan, or which otherwise warrants equitable adjustment because it interferes with the intended operation of the Plan, then if the Committee shall, in its sole discretion, determine that such change equitably requires an adjustment in the number or kind of shares of stock or other securities or property theretofore subject, or which may become subject, to issuance or transfer under the Plan or in the terms and conditions of outstanding Incentive Awards, such adjustment shall be made in accordance with such determination. Such adjustments may include without limitation changes with respect to (i) the aggregate number of shares that may be issued under the Plan, (ii) the number of shares subject to Incentive Awards and (iii) the price per share for outstanding Incentive Awards. The Committee shall give notice to each Grantee, and upon notice such adjustment shall be effective and binding for all purposes of the Plan. (c) PROVISIONS APPLICABLE TO SECTION 162(m) PARTICIPANTS. With respect to any Incentive Award granted to any Section 162(m) Participant that is intended -10- to qualify as performance-based compensation under Section 162(m)(4)(C), no adjustment or action described in this SECTION 3.5 or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause such Incentive Award to fail to so qualify under Section 162(m)(4)(C) or any successor provision thereto. Furthermore, no such adjustment or action shall be authorized to the extent such adjustment or action would result in short- swing profits liability under Section 16 of the Exchange Act or violate the exemptive conditions of Rule 16b-3 of the Exchange Act unless the Committee determines that the Option or other award is not to comply with such exemptive conditions. 3.6. TERMINATION OF EMPLOYMENT, DEATH, DISABILITY AND RETIREMENT ----------------------------------------------------------- (a) TERMINATION OF EMPLOYMENT. If an Employee's employment with the Company, Parent or Subsidiary is terminated for any reason whatsoever other than death, Disability, Retirement, Involuntary Termination or Termination for Good Reason, any Incentive Award granted pursuant to the Plan outstanding at the time and all rights thereunder shall wholly and completely terminate, and unless otherwise established by the Committee, no further vesting shall occur and the Employee shall be entitled to exercise his or her rights with respect to the portion of the Incentive Award vested as of the date of termination for a period of 30 calendar days after such termination date; provided however, that if an -------- ------- Employee is Terminated for Cause, such Employee's right to exercise the vested portion of his or her Incentive Award shall terminate as of the date of termination of employment. In the event of termination for death, Disability, Retirement, or Change of Control, an Incentive Award may only be exercised as determined by the Committee and provided in the Incentive Award Agreement. However, the following shall be used as a general guideline. (b) RETIREMENT. Unless otherwise approved by the Committee, upon Retirement of an Employee: (i) any nonvested portion of any outstanding Incentive Award shall continue to vest after Retirement; and (ii) any vested Incentive Award shall expire on the earlier of (A) the expiration date set forth in the Incentive Award Agreement with respect to such Incentive Awards; or (B) the expiration of 6 months after the date of Retirement. (c) DISABILITY OR DEATH. Unless otherwise approved by the Committee, upon termination of employment from the Company, Parent or Subsidiary as a result of Disability or death: (i) any nonvested portion of any outstanding Incentive Award shall continue to vest after Disability or death; and (ii) any vested Incentive Award shall expire upon the earlier of -11- (A) the expiration date set forth in the Incentive Award Agreement with respect to such Incentive Awards; or (B) the first anniversary of such termination of such employment as a result of Disability or death. (d) INVOLUNTARY TERMINATION. Unless otherwise approved by the Committee, upon termination of employment from the Company, Parent or Subsidiary as a result of Involuntary Termination (not Change of Control): (i) any nonvested portion or any outstanding Incentive Award shall vest on a pro-rated basis based upon the number of months the terminated Employee has been employed within the applicable term; and (ii) any vested Incentive Award shall expire upon the earlier of (A) the expiration date set forth in the Incentive Award Agreement with respect to such Incentive Awards or (B) the expiration of 30 days after the date of Termination. (e) CONTINUATION. Subject to the express provisions of the Plan and the terms of any applicable Incentive Award Agreement, the Committee, in its discretion, may provide for the continuation of any Incentive Award for such period and upon such terms and conditions as are determined by the Committee in the event that a Grantee ceases to be an employee. 3.7. CHANGES OF CONTROL ------------------ (a) CHANGES OF CONTROL. In the event of Involuntary Termination or Termination for Good Reason within two years after a Change of Control, all Options then outstanding shall become vested and immediately exercisable, notwithstanding any provision therein for the exercise in installments. For the purposes of this SECTION 3.7, a "Change of Control" shall mean a change of control of a nature that would be required to be reported in response to item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act as such Schedule, Regulation and Act were in effect on the date of adoption of this Plan by the Board, assuming that such Schedule, Regulation and Act applied to the Company, provided that such change of control shall be deemed to have occurred at such time as: (i) any "person" (as that term is used in SECTION 13(d) and 14(d)(2) of the Exchange Act) (other than the Company or an affiliate of the Company) becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities representing 30% or more of the combined voting power for election of members of the Board of the then outstanding voting securities of the Company or any successor of the Company; (ii) during any period of 2 consecutive years or less, -12- individuals who at the beginning of such period constituted the Board of the Company cease, for any reason, to constitute at least a majority of the Board, unless the election or nomination for election of each new member of the Board was approved by a vote of at least two-thirds of the members of the Board then still in office who were members of the Board at the beginning of the period; (iii) the equity holders of the Company approve any merger or consolidation to which the Company is a party as a result of which the persons who were equity holders of the Company immediately prior to the effective date of the merger or consolidation (and excluding, however, any shares held by any party to such merger or consolidation and their affiliates) shall have beneficial ownership of less than 50% of the combined voting power for election of members of the Board (or equivalent) of the surviving entity following the effective date of such merger or consolidation; or (iv) the equity holders of the Company approve any merger or consolidation as a result of which the equity interests in the Company shall be changed, converted or exchanged (other than a merger with a wholly owned subsidiary of the Company) or any liquidation of the Company or any sale or other disposition of 50% or more of the assets or earnings power of the Company; provided however, that no Change of Control shall be deemed to have occurred if, - - -------- ------- prior to such time as a Change of Control would otherwise be deemed to have occurred, the Board determines otherwise. Notwithstanding the foregoing (A) the merger or consolidation of Aurora Foods Holdings, Inc., Aurora Foods, Inc., a wholly owned subsidiary of Aurora Foods Holdings, Inc., VDK Holdings, Inc., and Van de Kamp's, Inc., a wholly owned subsidiary of VDK Holdings, Inc., with and into the Company, (B) the Public Offering of the Common Stock of the Company, and (C) the liquidation or dissolution of Aurora/VDK LLC, MBW Investors LLC or VDK LLC shall not constitute a Change of Control for purposes of this Plan. (b) RIGHT OF CASH-OUT. If approved by the Board prior to or within 30 days after such time as a Change of Control shall be deemed to have occurred, the Board shall have the right for a 45 day period immediately following the date that the Change of Control is deemed to have occurred to require all, but not less than all, Grantees to transfer and deliver to the Company all Incentive Awards previously granted to Grantees in exchange for an amount equal to the "cash value" (defined below) of the Incentive Awards. Such right shall be exercised by written notice to all Grantees. For purposes of this SECTION 3.7(b), the cash value of an Incentive Award shall equal the sum of (i) all cash to which the Grantee would be entitled upon settlement or exercise of such Incentive Award and (ii) the excess of the "market value" (defined below) per share over the option price, if any, multiplied by the number of shares subject to such Incentive Award. For purposes of the preceding sentence, "market value" per share shall mean the higher of (i) the average of the Fair Market Value per share on each of the five trading days immediately following the date a Change of Control is deemed to have occurred or (ii) the highest price, if any, offered in connection with a Change of Control. The amount payable to each Grantee by the Company pursuant to this SECTION 3.7(b) shall -13- be in cash or by certified check and shall be reduced by any taxes required to be withheld. 3.8. AMENDMENTS TO INCENTIVE AWARDS ------------------------------ The Committee may waive any conditions or rights with respect to, or amend, alter, suspend, discontinue, or terminate, any unexercised Incentive Award theretofore granted, prospectively or retroactively, with the consent of any relevant Grantee, subject to the limitations of SECTION 1.7. 3.9. EXCHANGE OF INCENTIVE AWARDS ---------------------------- The Committee may, in its discretion, permit Grantees under the Plan to surrender outstanding Incentive Awards in order to exercise or realize the rights under other Incentive Awards, or in exchange for the grant of new Incentive Awards or require holders of Incentive Awards to surrender outstanding Incentive Awards as a condition precedent to the grant of new Incentive Awards. 3.10. FINANCING --------- The Company may extend and maintain, or arrange for the extension and maintenance of, financing to any Grantee (including a Grantee who is a Director of the Company) to purchase shares pursuant to exercise of an Incentive Award on such terms as may be approved by the Committee in its sole discretion. In considering the terms for extension or maintenance of credit by the Company, the Committee shall, among other factors, consider the cost to the Company of any financing extended by the Company. SECTION 4. MISCELLANEOUS 4.1. EFFECTIVE DATE AND GRANT PERIOD ------------------------------- This Plan shall become effective as of the date of Board approval (the "Effective Date"). Unless sooner terminated by the Board, the Plan shall terminate on June 24, 2008, unless extended. After the termination of the Plan, no Incentive Awards may be granted under the Plan, but previously granted awards shall remain outstanding in accordance with their applicable terms and conditions. -14- 4.2. FUNDING ------- No provision of the Plan shall require the Company, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets in a manner that would provide any Grantee any rights that are greater than those of a general creditor of the Company, nor shall the Company maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund if such action would provide any Grantee with any rights that are greater than those of a general creditor of the Company. Grantees shall have no rights under the Plan other than as unsecured general creditors of the Company except that insofar as they may have become entitled to payment of additional compensation by performance of services, they shall have the same rights as other employees under applicable law. However, the Company may establish a "Rabbi Trust" for purposes of securing the payment pursuant to a Change of Control. 4.3. WITHHOLDING TAXES ----------------- The Company shall have the right to (i) make deductions from any settlement of an Incentive Award made under the Plan, including the delivery of shares, or require shares or cash or both be withheld from any Incentive Award, in each case in an amount sufficient to satisfy withholding of any federal, state or local taxes required by law, or (ii) take such other action as may be necessary or appropriate to satisfy any such withholding obligations. The Committee may determine the manner in which such tax withholding may be satisfied, and may permit shares of Common Stock (rounded up to the next whole number) to be used to satisfy required tax withholding based on the Fair Market Value of any such shares of Common Stock, as of the delivery of shares or payment of cash in satisfaction of the applicable Incentive Award. 4.4. CONFLICTS WITH PLAN ------------------- In the event of any inconsistency or conflict between the terms of the Plan and an Incentive Award Agreement, the terms of the Plan shall govern. 4.5. NO GUARANTEE OF TAX CONSEQUENCES -------------------------------- Neither the Company nor the Committee makes any commitment or guarantee that any federal, state or local tax treatment will apply or be available to any person participating or eligible to participate hereunder. -15- 4.6. SEVERABILITY ------------ In the event that any provision of this Plan shall be held illegal, invalid or unenforceable for any reason, such provision shall be fully severable, but shall not affect the remaining provision of the Plan, and the Plan shall be construed and enforced as if the illegal, invalid, or unenforceable provision had never been included herein. 4.7. GENDER, TENSE AND HEADINGS -------------------------- Whenever the context requires such, words of the masculine gender used herein shall include the feminine and neuter, and words used in the singular shall include the plural. Section headings as used herein are inserted solely for convenience and reference and constitute no part of the Plan. 4.8. AMENDMENT AND TERMINATION ------------------------- The Plan may be amended or terminated at any time by the Board by the affirmative vote of a majority of the members in office. The Plan, however, shall not be amended, without prior written consent of each affected Grantee if such amendment or termination of the Plan would adversely affect any material vested benefits or rights of such person. -16- 4.9. SECTION 280G PAYMENTS --------------------- In the event that the aggregate present value of the payments to a Grantee under the Plan, and any other plan, program, or arrangement maintained by the Company constitutes an "excess parachute payment" (within the meaning of Code Section 280G(b)(1)) and the excise tax on such payment would cause the net parachute payments (after taking into account federal, state and local income and excise taxes) to which the Grantee otherwise would be entitled to be less than what the Grantee would have netted (after taking into account federal, state and local income taxes) had the present value of his total parachute payments equaled $1.00 less than three times his "base amount" (within the meaning of Code Section 280G(b)(3)(A)), the Grantee's total "parachute payments" (within the meaning of Code Section 280G(b)(2)(A) shall be reduced (by the minimum possible amount) so that their aggregate present value equals $1.00 less than three times such base amount. For purposes of this calculation, it shall be assumed that the Grantee's tax rate will be the maximum marginal federal, state and local income tax rate on earned income, with such maximum federal rate to be computed with regard to Code Section 1(g), if applicable. In the event that the Grantee and the Company are unable to agree as to the amount of the reduction described above, if any, the Grantee shall select a law firm or accounting firm from among those regularly consulted (during the twelve-month period immediately prior to the change of control that resulted in the characterization of the payments as parachute payments) by the Company regarding federal income tax or employee benefit matters and such law firm or accounting firm shall determine the amount of such reduction and such determination shall be final and binding upon the Grantee and the Company. -17- 4.10. GOVERNING LAW ------------- The Plan shall be construed in accordance with the laws of the State of New York, except as superseded by federal law, and in accordance with applicable provisions of the Code and regulations or other authority issued thereunder by the appropriate governmental authority. 4.11. LIMITATIONS APPLICABLE TO SECTION 16 PERSONS AND PERFORMANCE- ------------------------------------------------------------ BASED COMPENSATION - - ------------------ Notwithstanding any other provision of this Plan, this Plan, and any Incentive Award granted to any individual who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan, and Incentive Awards granted hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule. Furthermore, notwithstanding any other provision of this Plan, any Option, which is granted to a Section 162(m) Participant and is intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the extent necessary to conform to such requirements. IN WITNESS WHEREOF, this Plan has been executed this 9th day of October, 1998, to be effective as of July 1, 1998. AURORA FOODS INC. By:______________________________ -18- EX-12.1 4 RATION OF EARNINGS TO FIXED CHARGES Exhibit 12.1 Aurora Foods Inc. Ratio of Earnings to Fixed Charges (dollars in thousands)
Years Ended --------------------------- December 31, December 27, 1998 1997 ------------ ------------ (Loss) income before income taxes $ (21,860) $ 2,014 Fixed charges: Interest expense 65,081 18,393 Amortization of deferred financing expense 1,872 3,059 Interest portion of rentals 347 33 ------------ ------------ Earnings available for fixed charges $ 45,440 $ 23,499 ============ ============ Fixed charges: Interest expense 65,081 18,393 Amortization of deferred financing expense 1,872 3,059 Interest portion of rentals 347 33 ------------ ------------ Fixed charges $ 67,300 $ 21,485 ============ ============ Ratio of earnings to fixed charges 0.68 1.09 ============ ============
(1) For the purpose of determining the ratio of earnings to fixed charges, earnings consist of income before income taxes and fixed charges. Fixed charges consist of interest expense, whether expensed or capitalized, including amortization of deferred financing expense and the portion (one- third) of rental expense that management believes is representative of the interest component of rent expense. EX-23.1 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-58215) of Aurora Foods Inc. of our report dated February 5, 1999 appearing on page 39 of this Form 10-K. PricewaterhouseCoopers LLP San Francisco, California March 12, 1999 EX-23.2 6 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-58215) of Aurora Foods Inc. of our report dated March 14, 1997 appearing on page 62 of this Form 10-K. PricewaterhouseCoopers LLP San Francisco, California March 12, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from balance sheets and statements of operations and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS 12-MOS DEC-31-1998 DEC-27-1997 DEC-28-1997 JAN-01-1997 DEC-31-1998 DEC-27-1997 354 4,717 0 0 87,209 13,976 670 140 76,674 6,902 181,335 30,376 163,865 15,086 10,698 1,011 1,433,882 372,739 214,764 28,227 402,242 202,419 647,327 63,697 0 0 670 291 (44,142) 1,235 1,433,882 372,739 789,193 143,020 789,193 143,020 317,547 45,729 622,400 104,042 122,902 18,431 670 140 65,081 18,393 (21,860) 2,014 14,306 779 (36,166) 1,235 0 0 9,211 0 0 0 (45,377) 1,235 (0.85) 0.04 (0.85) 0.04
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