-----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, RZ2ngyxLlAz69GFqXrZHQzcM8HvF/Nr5qpUiBvDDLFourLFRYubi0HSZn38tNfH9 Gy2XYmmQ3K3+TtK/9sR5TA== 0000929624-99-001933.txt : 19991115 0000929624-99-001933.hdr.sgml : 19991115 ACCESSION NUMBER: 0000929624-99-001933 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AURORA FOODS INC /DE/ CENTRAL INDEX KEY: 0001060024 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 943303521 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14255 FILM NUMBER: 99748583 BUSINESS ADDRESS: STREET 1: 456 MONTGOMERY ST STREET 2: STE 2200 CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4159823019 MAIL ADDRESS: STREET 1: 456 MONTGOMERY ST STREET 2: STE 2200 CITY: SAN FRANCISCO STATE: CA ZIP: 94104 FORMER COMPANY: FORMER CONFORMED NAME: A FOODS INC DATE OF NAME CHANGE: 19980623 FORMER COMPANY: FORMER CONFORMED NAME: AURORA FOODS INC /MD/ DATE OF NAME CHANGE: 19980417 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- ---------------- Commission file number 333-50681 AURORA FOODS INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 94-3303521 --------- ---------- (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 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) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Shares Outstanding November 4, 1999 Common stock, $0.01 par value 67,030,440 ================================================================================ PART I - ------ FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS - ----------------------------- See pages 2 through 13. 1 AURORA FOODS INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands except per share amounts)
September 30, December 31, 1999 1998 -------------------- -------------------- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 376 $ 354 Accounts receivable (net of $603 and $670 allowance, respectively) 154,978 86,539 Inventories (Note 2) 96,862 76,674 Prepaid expenses and other assets 16,746 6,517 Current deferred tax assets 25,755 8,251 -------------------- -------------------- Total current assets 294,717 178,335 Property, plant and equipment, net 166,183 153,167 Goodwill and other intangible assets, net 1,121,598 1,072,760 Other assets 31,299 29,620 -------------------- -------------------- Total assets $1,613,797 $1,433,882 ==================== ==================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of senior secured term debt $ 22,756 $ 20,000 Senior secured revolving debt facility 132,350 85,850 Accounts payable 72,051 59,078 Accrued liabilities 33,656 49,836 -------------------- -------------------- Total current liabilities 260,813 214,764 Non-current deferred tax liabilities 40,055 649 Other liabilities - 12,372 Senior secured term debt 279,573 200,000 Senior subordinated notes 402,099 402,242 -------------------- -------------------- Total liabilities 982,540 830,027 -------------------- -------------------- Stockholders' equity: Preferred stock, $0.01 par value; 25,000,000 shares authorized; no shares issued or outstanding - - Common stock, $0.01 par value; 250,000,000 shares authorized; 67,030,440 and 67,016,173, respectively, shares issued and outstanding 670 670 Paid-in capital 648,100 647,889 Promissory notes (322) (562) Accumulated deficit (17,191) (44,142) -------------------- -------------------- Total stockholders' equity 631,257 603,855 -------------------- -------------------- Total liabilities and stockholders' equity $1,613,797 $1,433,882 ==================== ====================
See accompanying notes to financial statements. 2 AURORA FOODS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (unaudited)
Three Months Ended September 30, -------------------------------------------- 1999 1998 ----------------- ----------------- Net sales $238,275 $220,368 Cost of goods sold 100,970 89,264 ----------------- ----------------- Gross profit 137,305 131,104 ----------------- ----------------- Brokerage, distribution and marketing expenses: Brokerage and distribution 22,625 20,767 Trade promotions 44,310 49,102 Consumer marketing 15,551 15,928 ----------------- ----------------- Total brokerage, distribution and marketing expenses 82,486 85,797 Amortization of goodwill and other intangibles 9,042 8,623 Selling, general and administrative expenses 8,176 7,200 Transition expenses (Note 4) 2,136 1,269 ----------------- ----------------- Total operating expenses 101,840 102,889 ----------------- ----------------- Operating income 35,465 28,215 Interest expense, net 16,802 15,554 Amortization of deferred financing expense 498 372 Other bank and financing expenses 120 54 ----------------- ----------------- Income before income taxes and extraordinary loss 18,045 12,235 Income tax expense 6,877 4,132 ----------------- ----------------- Net income before extraordinary loss 11,168 8,103 Extraordinary loss on early extinguishment of debt net of tax of $4,520 - (7,449) ----------------- ----------------- Net income $ 11,168 $ 654 ================= ================= Basic and diluted earnings per share before extraordinary loss $0.17 $0.12 Extraordinary loss per share 0.00 (0.11) ----------------- ----------------- Basic and diluted earnings per share $0.17 $0.01 ================= ================= Weighted average number of shares outstanding 67,030 67,000 ================= =================
See accompanying notes to financial statements. 3 AURORA FOODS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (unaudited)
Nine Months Ended September 30, -------------------------------------------- 1999 1998 ----------------- ----------------- Net sales $721,036 $509,566 Cost of goods sold 292,467 208,741 ----------------- ----------------- Gross profit 428,569 300,825 ----------------- ----------------- Brokerage, distribution and marketing expenses: Brokerage and distribution 69,289 48,980 Trade promotions 152,687 109,972 Consumer marketing 54,039 37,423 ----------------- ----------------- Total brokerage, distribution and marketing expenses 276,015 196,375 Amortization of goodwill and other intangibles 26,896 21,409 Selling, general and administrative expenses 23,315 17,104 Incentive plan expense (Note 3) - 56,583 Transition expenses (Note 4) 9,478 5,716 ----------------- ----------------- Total operating expenses 335,704 297,187 ----------------- ----------------- Operating income 92,865 3,638 Interest expense, net 47,130 49,531 Amortization of deferred financing expense 1,380 1,472 Other bank and financing expenses 222 194 ----------------- ----------------- Income (loss) before income taxes and extraordinary loss 44,133 (47,559) Income tax expense 17,182 4,065 ----------------- ----------------- Net income (loss) before extraordinary loss 26,951 (51,624) Extraordinary loss on early extinguishment of debt, net of tax of $5,704 - (9,325) ----------------- ----------------- Net income (loss) $ 26,951 $(60,949) ================= ================= Basic and diluted earnings (loss) per share before extraordinary loss $0.40 $(1.05) Extraordinary loss per share 0.00 (0.19) ----------------- ----------------- Basic and diluted earnings (loss) per share $0.40 $(1.24) ================= ================= Weighted average number of shares outstanding 67,021 49,159 ================= =================
See accompanying notes to financial statements. 4 AURORA FOODS INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands) (unaudited)
Common Stock Additional ---------------------- Paid-in Promissory Accumulated Shares Amount Capital Notes Deficit Total ------------ ------ ---------- ---------- --------- --------- Balance at December 31, 1998 67,016 $670 $647,889 $(562) $(44,142) $603,855 Payments on officer promissory notes - - - 240 - 240 Employee stock purchases 14 - 211 - - 211 Net income - - - - 26,951 26,951 ------------ ------ ---------- ---------- --------- --------- Balance at September 30, 1999 67,030 $670 $648,100 $(322) $(17,191) $631,257 ============ ====== ========== ========== ========= =========
See accompanying notes to financial statements. 5 AURORA FOODS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended September 30, ---------------------------------- 1999 1998 -------------- ------------- Cash flows from operating activities: Net income (loss) $ 26,951 $ (60,949) Early extinguishment of debt, net of tax of $5,704 - 9,325 Adjustments to reconcile net income (loss) to cash used in operating activities: Depreciation and amortization 38,484 29,587 Deferred income taxes 17,182 4,065 Loss on disposition of fixed asset 13 - Incentive plan expense (Note 3) - 56,583 Change in assets and liabilities, net of effects of businesses acquired: Increase in accounts receivable (60,826) (40,611) Increase in inventories (9,010) (41,636) Increase in prepaid expenses and other assets (10,114) (6,755) Increase in accounts payable 3,754 35,016 (Decrease) increase in accrued liabilities (19,795) 8,549 -------------- ------------- Net cash used in operating activities (13,361) (6,826) -------------- ------------- Cash flows from investing activities: Additions to property, plant and equipment (19,655) (21,652) Changes to other non-current assets and liabilities (17,164) (2,653) Proceeds from sale of assets - 28,035 Payment for acquisition of businesses (76,756) (458,748) -------------- ------------- Net cash used in investing activities (113,575) (455,018) -------------- ------------- Cash flows from financing activities: Proceeds from senior secured revolving and term debt 308,150 844,750 Proceeds from senior subordinated notes - 200,000 Repayment of borrowings (179,321) (892,759) Payment of redemption premium (Note 1) - (14,500) Proceeds from initial public offering - 254,831 Capital contributions, net of officer promissory notes 452 93,848 Debt issuance and equity raising costs (2,323) (27,130) -------------- ------------- Net cash provided by financing activities 126,958 459,040 -------------- ------------- Increase (decrease) in cash and cash equivalents 22 (2,804) Cash and cash equivalents, beginning of period 354 4,717 -------------- ------------- Cash and cash equivalents, end of period $ 376 $ 1,913 ============== =============
See accompanying notes to financial statements. 6 AURORA FOODS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION - ------------------------------ INTERIM FINANCIAL STATEMENTS The interim financial statements of Aurora Foods Inc. (the "Company"), included herein, have not been audited by independent accountants. The statements include all adjustments, such as normal recurring accruals, which management considers necessary for a fair presentation of the financial position and operating results of the Company for the periods presented. The statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of results to be expected for an entire year. For further information, reference should be made to the financial statements of the Company and notes thereto included in the annual report on Form 10-K of Aurora Foods Inc. for the year ended December 31, 1998. THE COMPANY, ITS BUSINESS AND OWNERSHIP The Company was incorporated in Delaware on June 19, 1998, as the successor to Aurora Foods Holdings Inc. ("Holdings") and its subsidiary, AurFoods Operating Co., Inc. (formerly known as Aurora Foods Inc.) ("AurFoods"), both of which were incorporated in Delaware in December 1996. AurFoods was wholly-owned by Holdings, which in turn was wholly-owned by MBW Investors LLC ("MBW LLC"). AurFoods was formed for the purpose of acquiring the Mrs. Butterworth's(R) syrup business from Conopco, Inc., a subsidiary of Unilever United States, Inc. AurFoods subsequently acquired the Log Cabin(R) syrup business from Kraft Foods, Inc. in July 1997 and the Duncan Hines(R) baking mix business ("DH") from The Procter & Gamble Company ("P&G") in January 1998. Van de Kamp's, Inc. ("VDK") was a wholly-owned subsidiary of VDK Holdings, Inc., a Delaware corporation ("VDK Holdings") and was incorporated in Delaware in July 1995 for the purpose of acquiring the Van de Kamp's(R) frozen seafood and frozen dessert businesses from The Pillsbury Company in September 1995. VDK then acquired the Mrs. Paul's(R) frozen seafood business from the Campbell Soup Company in May 1996 and the Aunt Jemima(R) frozen breakfast and Celeste(R) frozen pizza businesses from The Quaker Oats Company in July 1996. VDK Holdings was wholly-owned by VDK Foods LLC ("VDK LLC"). On April 8, 1998, MBW LLC and VDK LLC formed Aurora/VDK LLC ("New LLC"). MBW LLC contributed all of the capital stock of Holdings and VDK LLC contributed all of the capital stock of VDK Holdings to New LLC (the "Contribution"). In return for these contributions, MBW LLC was issued 55.5% of the interests in New LLC plus a right to receive a special $8.5 million priority distribution from New LLC, and VDK LLC was issued 44.5% of the interests in New LLC plus a right to receive a special $42.4 million priority distribution from New LLC. 7 The amount and source of consideration used by MBW LLC and VDK LLC for their acquisition of interests in New LLC was their equity in Holdings and VDK Holdings, respectively. New LLC accounted for the contribution of the ownership of Holdings at MBW LLC's historical cost and the contribution of the ownership of VDK Holdings was accounted for as an acquisition using the purchase method of accounting at New LLC's cost. After giving effect to the Contribution, New LLC directly held 100% of Holdings' capital stock and Holdings continued to hold directly 100% of AurFoods capital stock and New LLC directly held 100% of VDK Holdings' capital stock and VDK Holdings continued to hold directly 100% of VDK's capital stock. On June 25, 1998, New LLC contributed to the Company all the issued and outstanding stock of Holdings and VDK Holdings. Therefore, the Company's financial statements, as it is the successor to Holdings, includes the historical financial information of Holdings from its inception. New LLC was then dissolved in connection with the IPO (defined below). On July 1, 1998, Holdings, AurFoods, VDK Holdings and VDK merged with and into the Company and the initial public offering (the "IPO" or "Equity Offerings") of 12,909,372 shares of Common Stock of the Company and 1,590,628 shares of the Company's Common Stock sold by New LLC was consummated at an initial public offering price of $21.00 per share. As a consequence of the IPO, no additional incentive plan expense will be recorded under the Aurora Plan (See Note 3 - Incentive Plan Expense). MBW LLC satisfied its liability under the Aurora Plan by distributing shares of the Company's common stock in connection with the liquidation of MBW LLC. On April 1, 1999, the Company acquired 100% of the stock in Sea Coast Foods, Inc. ("Seacoast") from Galando Investment Limited Partnership, Carey-On Limited Partnership, Joseph A. Galando, Barbara J. Galando, Stanley J. Carey and Mary K. Carey for a purchase price of $51.2 million. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Seacoast. NOTE 2 - INVENTORIES - -------------------- Inventories consist of the following (in thousands):
September 30, December 31, 1999 1998 -------------- ------------ Raw materials $29,530 $17,982 Work in process 843 271 Finished goods 60,383 54,640 Packaging and other supplies 6,106 3,781 -------------- ------------ $96,862 $76,674 ============== ============
NOTE 3 - INCENTIVE PLAN EXPENSE - ------------------------------- AURORA INCENTIVE PLAN The Amended and Restated Limited Liability Company Agreement of MBW LLC contained an incentive plan (the "Aurora Plan") as a means by which certain key employees and other 8 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 requirements based on terms of employment or other factors. Prior to the closing of the Equity Offerings, the final value of all classes of VDK Management Units were determined based on the valuation of the shares of the Company held indirectly by VDK LLC, and upon the closing of the Equity Offerings all unvested VDK Management Units became fully vested. The aggregate value of all VDK Management Units was $66.7 million. Through December 31, 1997, no incentive plan expense had been recorded by VDK based on the estimated valuation of VDK at that time. Incentive plan expense of $66.7 million was recorded in the first and second quarters of 1998. The incentive plan expense was recorded as a liability of VDK LLC as sponsor of the VDK Plan. However, because the VDK Plan was for the benefit of VDK Covered Employees, expense recognized under the VDK Plan was pushed down to VDK as incentive plan expense and as additional paid-in capital from its parent. No additional incentive plan expense will be recorded under the VDK Plan. 9 VDK LLC (or the Company as described below) distributed a fixed number of shares of Common Stock of the Company upon the dissolution of VDK LLC, based on the valuation of the VDK Management Units at the initial public offering price of the Company's Common Stock. The VDK Plan provided for tax gross-up payments on certain distributions. Because the Company will receive the tax benefit of such distributions and related tax gross-up payments, and because the tax benefit is expected to exceed the amount of the tax gross-up payments, the Company incurred an $11.8 million liability for the tax gross-up payments due. The tax benefit of the tax gross-up payment and related distributions of $17.3 million, which more than offsets the gross-up payments, has been recorded to income tax expense and as a deferred tax asset. To facilitate payment of the tax gross-up obligation and recognition of related tax benefits, VDK adopted a new incentive plan (the "New VDK Plan" and together with the VDK Plan, the "VDK Plans"), which was assumed by the Company in connection with the Contribution. Under the New VDK Plan, the Company distributed on July 1, 1999 1,801,769 shares of the Company's Common Stock to VDK Covered Employees who were granted certain types of VDK Management Units under the VDK Plan and satisfied the associated tax gross-up liability. The issuance of such shares (the "MC Shares") did not increase the number of outstanding shares of Common Stock because the Company's obligations to issue the MC Shares was contingent upon the Company's receiving from VDK LLC, as a contribution, a number of shares of the Company's Common Stock owned by VDK LLC equal to the number of MC Shares. The Company received a contribution of an equal number of shares from VDK LLC. VDK LLC was obligated to contribute such shares to the Company after the closing of the Equity Offerings. The Company's obligation to make the tax gross-up payments referred to above is subject to the Company being allowed a deduction for federal income tax purposes with respect to the payment of the MC Shares and tax gross-up payment. NOTE 4 - TRANSITION EXPENSES - ---------------------------- Transition expenses consist of one-time costs incurred to integrate the acquired businesses, including relocation expenses, recruiting fees, sales support, production transition and other unique transitional expenses. NOTE 5 - EARNINGS PER SHARE - --------------------------- Basic earnings per share represents the income available to common stockholders divided by the weighted average number of common shares outstanding during the measurement period. Diluted earnings per share represents the income available to common stockholders divided by the weighted average number of common shares outstanding during the measurement period while also giving effect to all potentially dilutive common shares that were outstanding during the period. Potentially dilutive common shares consist of stock options (the dilutive impact is calculated by applying the "treasury stock method"). 10 The table below summarizes the numerator and denominator for the basic and diluted earnings (loss) per share calculations (in thousands except per share amounts):
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------- ----------------------------------------- 1999 1998 1999 1998 ---------------- ---------------- ---------------- -------------------- Numerator: Income (loss) before extraordinary loss $11,168 $ 8,103 $26,951 $(51,624) Extraordinary loss, net of tax - (7,449) - (9,325) ---------------- ---------------- ---------------- -------------------- Net income (loss) $11,168 $ 654 $26,951 $(60,949) ================ ================ ================ ==================== Denominator: Weighted average number of basic shares 67,030 67,000 67,021 49,159 Effect of dilutive securities - - - - ---------------- ---------------- ---------------- -------------------- Weighted average number of diluted shares 67,030 67,000 67,021 49,159 ================ ================ ================ ==================== Basic and diluted earnings (loss) per share before extraordinary loss $ 0.17 $ 0.12 $ 0.40 $ (1.05) Extraordinary loss per share 0.00 (0.11) 0.00 (0.19) ---------------- ---------------- ---------------- -------------------- Basic and diluted earnings (loss) per share $ 0.17 $ 0.01 $ 0.40 $ (1.24) ================ ================ ================ ====================
11 NOTE 6 - SEGMENT INFORMATION - ---------------------------- The Company groups its businesses in two operating segments: dry grocery division and frozen food division. The operating segments are managed as strategic units due to their distinct manufacturing methodologies, distribution channels and dedicated segment management teams. The dry grocery division includes Duncan Hines(R) baking mix products, and Mrs. Butterworth's(R) and Log Cabin(R) syrup products. The frozen food division includes Van de Kamp's(R) and Mrs. Paul's(R) frozen seafood products, Aunt Jemima(R) frozen breakfast products, Celeste(R) frozen pizza products and Chef's Choice(R) skillet meal products. The following table presents a summary of operations by segment (in thousands):
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------ ----------------------------------------- 1999 1998 1999 1998 ------------------ ------------------ ----------------- ------------------ Net sales Dry grocery $ 131,525 $ 133,571 $ 341,547 $ 339,854 Frozen food 106,750 86,797 379,489 169,712 ------------------ ------------------ ----------------- ------------------ Total $ 238,275 $ 220,368 $ 721,036 $ 509,566 ================== ================== ================= ================== Operating income Dry grocery $ 27,424 $ 25,745 $ 70,023 $ 54,148 Frozen food 10,177 3,739 32,320 11,790 Other (2,136) (1,269) (9,478) (62,300) ------------------ ------------------ ----------------- ------------------ Total $ 35,465 $ 28,215 $ 92,865 $ 3,638 ================== ================== ================= ================== Total assets Dry grocery $1,020,362 $ 977,475 $1,020,362 $ 977,475 Frozen food 593,435 479,793 593,435 479,793 ------------------ ------------------ ----------------- ------------------ Total $1,613,797 $1,457,268 $1,613,797 $1,457,268 ================== ================== ================= ================== Depreciation and amortization Dry grocery $ 7,404 $ 6,982 $ 20,864 $ 19,929 Frozen food 5,814 4,863 17,620 9,658 ------------------ ------------------ ----------------- ------------------ Total $ 13,218 $ 11,845 $ 38,484 $ 29,587 ================== ================== ================= ================== Capital expenditures Dry grocery $ 1,520 $ 8,182 $ 11,592 $ 10,735 Frozen food 2,787 6,079 8,063 10,917 ------------------ ------------------ ----------------- ------------------ Total $ 4,307 $ 14,261 $ 19,655 $ 21,652 ================== ================== ================= ==================
The Other line item in operating income is comprised of one-time expenses related to incentive plan expense (See Note 3 - Incentive Plan Expense) and transition expenses (See Note 4 - Transition Expenses) that were incurred in the respective periods. NOTE 7 - SUBSEQUENT EVENT - ------------------------- On November 1, 1999, the Company acquired substantially all of the assets and liabilities of the Lender's Bagel ("Lender's") business from The Eggo Company, a subsidiary of the Kellogg Company ("Kellogg's"). The assets acquired by the Company include (i) Lender's(R) brand and associated trademarks, (ii) manufacturing facilities located in Mattoon, Illinois and West Seneca, New York, plus substantially all the equipment for the manufacture of Lender's(R) products currently located in Kellogg's West Haven, Connecticut facility, (iii) 12 proprietary formulations for Lender's(R) products, (iv) other product specification and customer lists, and (v) rights under certain contracts, licenses, purchase orders and other arrangements and permits. The purchase price of approximately $275.0 million was based on an arms' length negotiation between the Company and Kellogg's. The acquisition was accounted for by using the purchase method of accounting. The allocation of the purchase price has not been finalized; however, any changes are not expected to be material. To finance the acquisition of the Lender's business and related costs, the Company added $275.0 million of senior secured term debt to its existing senior bank facilities under the Fifth Amended and Restated Credit Agreement dated November 1, 1999, among the Company, as Borrower, the lenders listed therein, The Chase Manhattan Bank, as Administrative Agent, The National Westminster Bank PLC, as Syndication Agent and UBS AG, Stamford Branch, as Documentation Agent ("Fifth Senior Bank Facilities"). The cost to acquire the Lender's business has been allocated to tangible and intangible assets acquired as follows (in thousands): Cash paid to acquire assets $273,591 Other acquisition costs 5,000 -------------- 278,591 Costs assigned to tangible assets (92,817) -------------- Costs attributable to intangible assets $185,774 ==============
Had the Lender's acquisition taken place July 1, 1999 and 1998 and January 1, 1999 and 1998 and had the Duncan Hines(R) brand and Van de Kamp's, Inc. acquisitions taken place January 1, 1998 the unaudited pro forma results of operations for the three months and nine months ended September 30, 1999 and 1998, respectively, would have been as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ------------------------------- 1999 1998 1999 1998 ------------- -------------- ------------- -------------- Net sales $287,925 $271,443 $869,986 $820,582 ============= ============== ============= ============== Gross profit $161,680 $157,829 $501,703 $478,530 ============= ============== ============= ============== Operating income (loss) $ 37,534 $ 32,050 $ 99,082 $(34,192) ============= ============== ============= ==============
13 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS - ------------- Reference is made to Notes to Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations presented in the annual report on Form 10-K of Aurora Foods Inc. for the year ended December 31, 1998. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the historical financial information included in the Consolidated Financial Statements and notes to the consolidated financial statements. Unless otherwise noted, years (1999 and 1998) in this discussion refer to the Company's September-ending quarters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may from time to time make written or oral statements that are "forward-looking" including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to the Company's stockholders. Certain statements, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects," "estimates" and words of similar import, and relating to Year 2000 remediation efforts, constitute "forward-looking statements" and involve known and unknown risk, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: the actions of the Company's competitors; general economic and business conditions; industry trends; demographics; raw material costs; the continued success of management's strategy; integration of acquired businesses into the Company; terms and development of capital; and changes in, or the failure or inability to comply with, governmental rules and regulations, including, without limitation, FDA and environmental rules and regulations. See "- Liquidity and Capital Resources - Year 2000". Given these uncertainties, undue reliance should not be placed on such forward-looking statements. The Company disclaims an obligation to update any such factors or to publicly announce the results of any revisions to any forward-looking statements contained herein to reflect future events or developments. The following tables set forth, for the periods indicated, the percentage, which the items in the Statement of Operations bear to net sales. A summary of the components of the Statements of Operations is shown on the following pages. The statement for the nine month period includes a presentation of the pro forma results of the Company, which include the acquisitions of the Duncan Hines(R) brand and Van de Kamp's, Inc. business as if they had occurred on January 1, 1998. 14 COMPARATIVE RESULTS: THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 (unaudited)
Actual ---------------------------------------------------- (in thousands except September 30, 1999 September 30, 1998 per share amounts) ------------------------ --------------------- Net sales $238,275 100.0% $220,368 100.0% Cost of goods sold 100,970 42.4 89,264 40.5 ----------- ------ ---------- ------ Gross profit 137,305 57.6 131,104 59.5 ----------- ------ ---------- ------ Brokerage, distribution and marketing expenses: Brokerage and distribution 22,625 9.5 20,767 9.4 Trade promotions 44,310 18.6 49,102 22.3 Consumer marketing 15,551 6.5 15,928 7.2 ----------- ------ ---------- ------ Total brokerage, distribution and marketing expenses 82,486 34.6 85,797 38.9 Amortization of goodwill and other intangibles 9,042 3.8 8,623 3.9 Selling, general and administrative expenses 8,176 3.4 7,200 3.3 Transition expenses 2,136 0.9 1,269 0.6 ----------- ------ ---------- ------ Total operating expenses 101,840 42.7 102,889 46.7 ----------- ------ ---------- ------ Operating income 35,465 14.9 28,215 12.8 Interest expense, net 16,802 7.1 15,554 7.0 Amortization of deferred financing expense 498 0.2 372 0.2 Other bank and financing expenses 120 0.0 54 0.0 ----------- ------ ---------- ------ Net income before taxes and extraordinary loss 18,045 7.6 12,235 5.6 Income tax expense 6,877 2.9 4,132 1.9 ----------- ------ ---------- ------ Net income before extraordinary loss 11,168 4.7 8,103 3.7 Extraordinary loss on early extinguishment of debt net of tax $4,520 - 0.0 (7,449) (3.4) ----------- ------ ---------- ------ Net income $ 11,168 4.7% $ 654 0.3% =========== ====== ========== ====== Earnings per share $0.17 $0.01 =========== ========== Adjusted EBITDA (1) $ 50,371 $ 41,354 =========== ========== Adjusted EPS (2) $0.19 $0.12 =========== ========== Cash EPS (3) $0.26 $0.20 =========== ==========
(1) Adjusted EBITDA is defined as operating income before transition expenses, depreciation and amortization of goodwill and other intangibles. (2) Adjusted EPS is defined as earnings per share plus the per share after tax effect of transition expenses and extraordinary loss. (3) Cash EPS is defined as Adjusted EPS plus the per share after tax effect of deductible goodwill and other intangibles amortization expense. 15 RESULTS OF OPERATIONS Three Months Ended September 30, 1999 Compared to Three Months Ended September 30, 1998 Net Sales. Net sales for the quarter ended September 30, 1999 were $238.3 million, which was an 8.1% increase as compared to net sales in the prior year quarter of $220.4 million. Sales growth was driven by Chef's Choice(R) skillet meals, which contributed $17.0 million in sales, and sales growth of frozen seafood, pizza and syrup products. Frozen food sales, excluding Chef's Choice(R), increased 3.4% to $89.7 million versus $86.8 million in the prior year period due to sales growth of 5.9% in frozen seafood and 5.0% in Celeste(R) frozen pizza. The growth in frozen seafood was due to increased sales with Wal-Mart and other mass merchandisers. Sales of Aunt Jemima(R) frozen breakfast products declined 1.9%, as expected, because of the conversion of the frozen waffle package size from 8 waffles per package to 10. The package size was changed in response to a similar increase by Eggo. Sales of $131.5 million for the dry grocery division were off 1.5% from the prior year period. Syrup sales increased 5.9% over the prior year period as a result of the introduction of Mrs. Butterworth's(R) flavored syrup for children, the switch to plastic from glass bottles on Mrs. Butterworth's syrup and the launch of new premium Log Cabin syrups in the Northeast markets. Baking mix sales decreased 6.2% compared to the prior year due to lower trade promotional spending. Trade promotions were higher last year in order to support the launch of the reformulated brownie product and to mitigate the price increase taken in the June quarter of 1998 on cake and frosting products. Gross Profit. Gross profit was 57.6% of net sales, which was 1.9 percentage points lower than the gross profit in the 1998 quarter of 59.5%. The decrease was primarily due to the inclusion of Chef's Choice(R) brand products and increased frozen food sales to the mass merchandiser and food service channels. Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and marketing expenses for the quarter decreased $3.3 million as compared to the prior year. As a percentage of net sales, brokerage, distribution and marketing expenses were 34.6%, which was 4.3 percentage points lower than the prior year of 38.9%. Marketing expenses were 25.1% of net sales, which was 4.4 percentage points lower than the prior year of 29.5%. The decrease in marketing expenses was due to the prior year's higher trade support on Duncan Hines(R) products and reduced trade promotions in the seasonally slow third quarter. Amortization of Goodwill and Other Intangibles. Amortization of goodwill and other intangibles increased to $9.0 million from $8.6 million in the 1998 quarter. The increase of $0.4 million was due to the additional amortization expense generated by the goodwill recorded in connection with the acquisition of the Chef's Choice(R) brand in 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses of $8.2 million were $1.0 million higher than the prior year expense of $7.2 million. The increase 16 was due primarily to the inclusion of the Chef's Choice(R) business. Selling, general and administrative expenses were 3.4% of net sales, which was flat compared to the prior quarter. Transition Expenses. Transition expenses were $2.1 million as compared to $1.3 million recorded in the prior year and represent one-time costs incurred to integrate the acquired businesses. The expenses were due to the acquisitions of the Duncan Hines(R) and Chef's Choice(R) brands. Operating Income. Operating income was $35.5 million as compared to an operating income in the prior year of $28.2 million. Excluding the effect of transition expenses, operating income increased 27.5% to $37.6 million in the quarter versus $29.5 million in the prior year. The increase was due to higher sales and lower operating expenses. Interest Expense and Amortization of Deferred Financing Expense. The aggregate of net interest expense and amortization of deferred financing expense of $17.3 million was $1.4 million greater than the prior year amount of $15.9 million. The increase in interest expense was due primarily to increased debt in 1999 due to the acquisition of Chef's Choice(R). Income Tax Expense. The income tax expense recorded for the quarter was $6.9 million, which represents an effective tax rate of 38.1%. The effective tax rate was less than the anticipated rate of 39.5% due to state tax credits taken in the current quarter. Income tax expense of $4.1 million was recorded in the prior year quarter. The prior year effective tax rate of 33.8% was less than the current quarter due to adjustments to reflect an increase in state tax rates. Net Income. The Company recorded net income of $11.2 million as compared to $0.7 million in the prior year. Excluding the effect of transition expenses in 1999 and 1998, and excluding the extraordinary loss from the early extinguishment of debt in 1998, net income would have been $13.3 million in the current quarter versus $9.4 million in the prior year quarter. 17 COMPARATIVE RESULTS: NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 (unaudited)
(in thousands except Actual Pro Forma per share amounts) ----------------------------------------- ------------------ September 30, 1999 September 30, 1998 September 30, 1998 ------------------ ------------------ ------------------ Net sales $721,036 100.0% $509,566 100.0% $ 667,357 100.0% Cost of goods sold 292,467 40.6 208,741 41.0 268,963 40.3 -------- ------ -------- ----- ---------- ----- Gross profit 428,569 59.4 300,825 59.0 398,394 59.7 -------- ------ -------- ----- ---------- ----- Brokerage, distribution and marketing expenses: Brokerage and distribution 69,289 9.6 48,980 9.6 63,894 9.6 Trade promotions 152,687 21.2 109,972 21.6 154,365 23.1 Consumer marketing 54,039 7.5 37,423 7.3 50,902 7.6 -------- ------ -------- ----- ---------- ----- Total brokerage, distribution and marketing expenses 276,015 38.3 196,375 38.5 269,161 40.3 Amortization of goodwill and other intangibles 26,896 3.7 21,409 4.2 25,466 3.8 Selling, general and administrative expenses 23,315 3.2 17,104 3.4 22,386 3.4 Incentive plan expense - 0.0 56,583 11.1 121,323 18.2 Transition expenses 9,478 1.3 5,716 1.1 5,716 0.9 -------- ------ -------- ----- ---------- ----- Total operating expenses 335,704 46.5 297,187 58.3 444,052 66.6 -------- ------ -------- ----- ---------- ----- Operating income (loss) 92,865 12.9 3,638 0.7 (45,658) (6.9) Interest expense, net 47,130 6.5 49,531 9.7 43,779 6.5 Amortization of deferred financing expense 1,380 0.2 1,472 0.3 1,117 0.2 Other bank and financing expenses 222 0.1 194 0.0 244 0.0 -------- ------ -------- ----- ---------- ----- Income (loss) before income taxes and extraordinary loss 44,133 6.1 (47,559) (9.3) (90,798) (13.6) Income tax expense (benefit) 17,182 2.4 4,065 0.8 (5,631) (0.8) -------- ------ -------- ----- ---------- ----- Net income (loss) before extraordinary loss 26,951 3.7 (51,624) (10.1) (85,167) (12.8) Extraordinary loss on early extinguishment of debt, net of tax of $5,704 - 0.0 (9,325) (1.8) (9,325) (1.4) -------- ------ -------- ----- ---------- ----- Net income (loss) $ 26,951 3.7% $(60,949) (11.9)% $(94,492) (14.2)% ======== ====== ======== ===== ========== ===== Earnings (loss) per share $0.40 $(1.24) $(1.41) ======== ======== ========== Adjusted EBITDA (1) $139,590 $ 94,184 $116,306 ======== ======== ========== Adjusted EPS (2) $0.50 $0.18 $0.33 ======== ======== ========== Cash EPS (3) $0.73 $0.43 $0.55 ======== ======== ==========
(1) Adjusted EBITDA is defined as operating income before incentive plan expense, transition expenses, depreciation and amortization of goodwill and other intangibles. (2) Adjusted EPS is defined as earnings per share plus the per share after tax effect of incentive plan expense, transition expenses and extraordinary loss. (3) Cash EPS is defined as Adjusted EPS plus the per share after tax effect of deductible goodwill and other intangibles amortization expense. 18 RESULTS OF OPERATIONS Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 Net Sales. Net sales for the nine months ended September 30, 1999 of $721.0 million were $211.4 million greater than the prior year period of $509.6 million. The prior year period included the results of the Mrs. Butterworth's(R) and Log Cabin(R) brands, the Duncan Hines(R) brand from January 16, 1998, and the Van de Kamp's, Inc. business from April 9, 1998. The Van de Kamp's, Inc. business was purchased on April 8, 1998 and is included in the pro forma results. Pro Forma Net Sales. Net sales for the nine month period increased 8.0% as compared to pro forma net sales of $667.4 million for the prior year period (which reflect the acquisitions of the Duncan Hines(R) brand and Van de Kamp's, Inc. as if they had occurred on January 1, 1998). Sales growth in the nine month period was led by sales growth of frozen food products and the addition of $37.1 million of sales from Chef's Choice(R), which was acquired in April 1999. Frozen food sales, excluding Chef's Choice(R), increased 6.4% to $342.4 million versus $321.8 million in the prior year period due to sales growth of 9.0% in frozen seafood, 6.2% in Celeste(R) frozen pizza, and 1.0% in frozen breakfast products. Sales for the dry grocery division were $341.5 million as compared to $345.5 million in the prior pro forma year period. Syrup sales were up 1.1% and sales of Duncan Hines(R) products were down 2.9%. Gross Profit. Gross profit was 59.4% of net sales, which was 0.4 percentage points greater than the gross profit in the 1998 period of 59.0%. The increase was primarily due to the cost savings from outsourcing the production of dry grocery products. Pro Forma Gross Profit. Gross profit of 59.4% for the nine month period was 0.3 percentage points lower than the pro forma gross profit of 59.7% for the prior year period due to the inclusion of Chef's Choice(R) sales, which have lower gross margins. Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and marketing expenses for the nine month period increased $79.6 million as compared to the prior year period due to the inclusion of the acquired businesses. As a percentage of net sales, brokerage, distribution and marketing expenses were 38.3% as compared to the prior year of 38.5%. Pro Forma Brokerage, Distribution and Marketing Expenses. On a pro forma basis, brokerage, distribution and marketing expenses for the period were $6.9 million higher than the pro forma prior year period, but declined as a percentage of net sales to 38.3% versus 40.3% in the prior year. Brokerage and distribution expenses increased $5.4 million over last year and were flat as a percentage of net sales to the prior year. Marketing expenses were 28.7% of net sales, which was 2.0 percentage points lower than the prior year of 30.7%. Trade promotions were higher last year in order to support the launch of the reformulated brownie product and the price increase on cake and frosting products. Amortization of Goodwill and Other Intangibles. Amortization of goodwill and other intangibles increased to $26.9 million from $21.4 million in the 1998 period. The increase of $5.5 million 19 was due to the additional amortization expense generated by the goodwill recorded in connection with the acquisitions of Van de Kamp's, Inc. in 1998 and Chef's Choice(R) in 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses of $23.3 million were $6.2 million higher than the prior year period of $17.1 million. The increase was due to the inclusion of Van de Kamp's, Inc. Selling, general and administrative expenses were 3.2% of net sales, which was 0.2 percentage points lower than 3.4% experienced in the prior year. Incentive Plan Expense. In the prior year period, the Company recorded a non- cash incentive plan expense of $56.6 million in accordance with the Aurora Plan contained in the MBW LLC Agreement (See Notes to the Financial Statements Note 3 - - Incentive Plan Expense). Transition Expenses. Transition expenses were $9.5 million as compared to $5.7 million recorded in the prior year and represent one-time costs incurred to integrate the acquired businesses. The expenses were due to the acquisitions of the Duncan Hines(R) and Chef's Choice(R) brands. Operating Income. Operating income was $92.9 million as compared to $3.6 million in the prior year period. Excluding the effects of the incentive plan expense and transition expenses, operating income increased 55.2% to $102.3 million for the nine month period as compared to $65.9 million in the prior year period. The increase was due to the inclusion of operating income generated by the acquired businesses, higher sales and gross margins, and lower operating expenses. Pro Forma Operating Income (Loss). On a pro forma basis, operating loss for the prior year period was $45.7 million. Excluding the effects of the incentive plan expense and transition expenses, the Company's operating income in the 1998 period would have been $81.4 million as compared to $102.3 million for the current period, which represented an increase of 25.8% over the prior year period and was the result of higher sales and lower operating expenses. Interest Expense and Amortization of Deferred Financing Expense. The aggregate of net interest expense and amortization of deferred financing expense of $48.5 million in the nine month period was lower than the prior year amount of $51.0 million. The decrease in interest expense was due to a lower debt balance following the reduction in debt from the net proceeds of the initial public offering in July 1998. Income Tax Expense (Benefit). The income tax expense recorded for the period was $17.2 million, which represents an effective tax rate of 38.9%, while income tax of $4.1 million was recorded in the prior year period, which represents an effective tax rate of 38.0%. The effective tax rate was less than the anticipated 39.5% in the current and prior year period due primarily to state tax credits taken in the current period and the effect of the non-deductible incentive plan expense in the prior year. Net Income (Loss). The Company recorded net income of $27.0 million as compared to a net loss for the prior year of $60.9 million. Excluding the effect of transition expenses in 1999 and 1998, and excluding the extraordinary loss from early extinguishment of debt and incentive plan 20 expense in 1998, net income would have been $36.4 million in the current period versus $10.7 million in the prior period. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended September 30, 1999, net income plus non-cash charges provided $82.6 million of operating cash flow. From December 31, 1998, net working capital, excluding cash, current deferred tax assets, and current maturities of senior secured debt, increased $96.0 million. The increase in net working capital was the result of the following factors: (1) the acquisition of the Chef's Choice(R) brand and the associated working capital, (2) the increase in inventories of new products to support introduction activities, and (3) an increase in inventories of seafood and baking mix products in advance of the seasonally heavy December quarter. Net cash used in investing activities was $113.6 million for the nine month period. Cash used during the period included $51.2 million for the acquisition of Chef's Choice(R) and $19.7 million on capital expenditures. In addition, the Company invested in additional manufacturing capacity of frozen seafood products with the purchase of a production facility and the associated working capital. The Company expects to spend approximately $26.0 million on capital expenditures for the year ended December 31, 1999. Capital expenditures were funded from operating cash flow. During the period, financing activities provided cash of $127.0 million. To finance the acquisition of the Chef's Choice(R) brand and related expenses, the Company increased its existing senior bank facilities with $100.0 million of senior secured term debt under the Company's Fourth Amended and Restated Credit Agreement, dated as of March 31, 1999, among the Company, as Borrower, the lenders listed therein, The Chase Manhattan Bank, as Administrative Agent, The National Westminster Bank PLC, as Syndication Agent and UBS AG, Stamford Branch, as Documentation Agent ("Amended New Senior Bank Facilities"). The proceeds were used to fund the acquisition of Chef's Choice(R) in April 1999 and reduce the senior secured revolving debt facility under the Amended New Senior Bank Facilities. The Company repaid $17.7 million in principal on its Amended New Senior Bank Facilities and borrowed on the revolving facility to fund working capital requirements. At September 30, 1999, the Company had $0.4 million of cash and cash equivalents and an unused commitment of $42.7 million on senior secured revolving debt facility under the Amended New Senior Bank Facilities. The Company's primary sources of liquidity are cash flows from operations and available borrowings under the $175.0 million revolving debt facility. Management believes the available borrowing capacity under the revolving debt facility combined with cash provided by operations will provide the Company with sufficient cash to fund operations as well as to meet existing obligations. 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 21 2000 compliance. Specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of personnel trained in these areas, the ability to locate and correct all relevant computer code, timely responses to and corrections by third-parties and suppliers, the ability to implement interfaces between the new systems and the systems not being replaced, and similar uncertainties. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-parties, the Company cannot ensure its ability to resolve problems associated with the Year 2000 issue that may affect its operations and business, or expose it to third-party liability in a timely and cost-effective manner. The Year 2000 issue, which is common to most corporations, concerns the inability of information systems, including computer software programs as well as non-information technology systems, to properly recognize and process date- sensitive information related to the Year 2000 and beyond. The Company believes that it is currently Year 2000 compliant and does not anticipate any material disruption of its operations as a result of any failure by the Company to be Year 2000 compliant. Given the uncertainty of the Year 2000 issue, however, to the extent the Company experiences any Year 2000 non-compliance problems, the Company's business and results of operations could be materially affected. This could be caused by computer-related failures in a number of areas including, but not limited to, the failure of the Company's financial systems or manufacturing and inventory management systems. Efforts to identify the risks associated with Year 2000 compliance began in 1997 by identifying the potential areas of exposure. The Company's information technology was split into three areas of concern: internal mission-critical systems and applications, internal non-mission-critical systems and applications and external data sources and trading partners. Compliance with internal mission-critical systems and applications is complete. Given the relatively recent incorporation of the Company, most systems and applications have been purchased within the last year or two. All purchases made were for systems that were Year 2000 compliant or for those that had documented plans and dates for future compliance. Internal non-mission-critical systems and applications have also been analyzed and have been deemed to be compliant. In addition to reviewing its internal systems, the Company has polled its third- party vendors, customers, contract manufacturers and freight carriers to determine whether they are Year 2000 compliant. If the Company's customers and vendors do not achieve Year 2000 compliance before the end of 1999, the Company may experience a variety of problems, which may have a material adverse effect on the Company. Among other things, to the extent the Company's customers are not Year 2000 compliant by the end of 1999, such customers may lose electronic data interchange ("EDI") capabilities at the beginning of the Year 2000. Where EDI communication would no longer be available, the Company expects to utilize voice, facsimile and/or mail communications in order to receive customer orders and process customer billings. To the extent the Company's vendors or contract manufacturers are not Year 2000 compliant by the end of 1999, such vendors or contract manufacturers may fail to deliver ordered materials and products to the Company and may fail to bill the Company properly and promptly. Consequently, the Company may not have the correct inventory to send to its customers and may experience a shortage or surplus of inventory which could materially adversely affect the Company's business and results of operations. Through its polling efforts, the Company has not identified any potential Year 2000 issues with any of its major third-party vendors, contract 22 manufacturers, customers or freight carriers which could have a materially adverse effect on the Company's business or results of operations or which could not be investigated through alternate sources of supply. To date, the Company has incurred and expensed approximately $0.5 million related to the assessment and development of the remediation plan and the purchase of new compliant hardware and software. Management anticipates spending and expensing an additional $0.1 million through the end of 1999 to implement its entire Year 2000 plan. The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived using numerous assumptions of future events including the continued availability of certain resources, third- parties' Year 2000 readiness and other factors. The Company has developed contingency plans so that the Company's critical business processes can be expected to continue to function on January 1, 2000 and beyond. The Company's contingency plans are structured to address both remediation of systems and their components and overall business operating risk. These plans were created to mitigate both internal risks as well as potential risks in the supply chain of the Company's suppliers and customers. Interest Rate Collar Agreements. At September 30, 1999, the Company was party to an interest rate collar agreement. On November 26, 1997, the Company entered into a three year interest rate collar agreement with a notional principal amount of $50.0 million, a cap rate of 7.5% and a floor rate of 5.50%. Interest Rate Swap Agreements. The Company is party to two interest rate swap agreements. On March 17, 1998, the Company entered into an interest rate swap agreement with a notional principal amount of $150.0 million and a term of three years. The effective swap rate on March 17, 1998 was 5.81%. On November 30, 1998, the Company amended the existing interest agreement whereby the counterparty received the option to extend the termination date to March 17, 2003. The new effective swap rate through the termination date of the interest rate swap agreement is 5.37%. The applicable rate is set quarterly with the next reset date on December 17, 1999. On April 13, 1999, the Company entered into a three-year interest rate swap agreement (the "Swap") with a notional principal amount of $200.0 million. The Company entered into the Swap to achieve its objective of hedging approximately 60% of its debt against movements in interest rates. The applicable rate is set quarterly with the next reset date on January 1, 2000. The counterparty to the Company's Swap is a major financial institution. Under the Swap, the Company would receive payments from the counterparty if the three-month LIBOR plus a spread of 3.25% falls below a cap rate of 8.63%, but not below 7.8%. There would be no payments made to either counterparty if the three-month LIBOR plus a spread of 3.25% exceeds 8.63% and is less than 10.25%. The Company would make payments to the counterparty if the three-month LIBOR plus a spread of 3.25% exceeds 10.25%. Risks associated with the interest rate swap and collar agreements include those associated with changes in the market value and interest rates. Management considers the potential loss in future 23 earnings and cash flows attributable to the interest rate swap and collar agreements to not be material. ITEM 3: 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 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. 24 PART II ------- OTHER INFORMATION ----------------- ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits Exhibit Number Exhibit - ------- ------- 2.1 Asset Purchase Agreement, dated as of September 24, 1999, by and among the Company and The Eggo Company. (Incorporated by reference to Exhibit 2.1 to Aurora Foods Inc.'s Form 8-K filed November 10, 1999 ("8-K")). 3.1 Certificate of Incorporation of A Foods Inc., filed with the Secretary of State of the State of Delaware on June 19, 1998. (Incorporated by reference to Exhibit 3.1 to Aurora Foods Inc.'s Form S-1 filed on April 22, 1998, as amended (the "S-1")). 3.2 Amended and Restated By-laws of Aurora Foods Inc. (Incorporated by reference to Exhibit 3.2 to the S-1). 4.1 Indenture dated as of July 1, 1998 by and between Aurora Foods Inc. and Wilmington Trust Company (Incorporated by reference to Exhibit 4.13 to the S-1). 4.2 Specimen Certificate of 8 3/4% Senior Subordinated Notes due 2008. (Included in Exhibit 4.1 hereto). 4.3 Specimen Certificate of the Common Stock (Incorporated by reference to Exhibit 4.1 to the S-1.) 4.4 Registration Rights Agreement, dated July 1, 1998, between Aurora Foods Inc. and Chase Securities Inc., Goldman, Sachs & Co. and Natwest Capital Markets Limited (Incorporated by reference to Exhibit 4.15 to the S-1). 10.1 Fifth Amended and Restated Credit Agreement, dated as of November 1, 1999, among Aurora Foods Inc., as Borrower, the Lender listed therein, the Chase Manhattan Bank, as Administrative Agent, National Westminster Bank PLC, as Syndication Agent and UBS AG, Stamford Branch, as Documentation Agent. (Incorporated by reference to Exhibit 10.1 to the 8-K). 27.1 Financial Data Schedule for the period ended September 30, 1999 submitted to the Securities and Exchange Commission in electronic format. (b) Report on Form 8-K None. 25 SIGNATURE - --------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AURORA FOODS INC. Dated: November 12, 1999 By: /s/ M. Laurie Cummings ---------------------------- M. Laurie Cummings Chief Financial Officer (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer) 26 EX-27.1 2 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 9-MOS 9-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 DEC-28-1997 SEP-30-1999 SEP-30-1998 376 1,913 0 0 155,581 93,772 603 940 96,862 81,734 294,717 221,873 187,513 145,539 21,330 8,086 1,613,797 1,457,268 260,813 173,654 402,099 402,287 647,778 647,371 0 0 670 670 (17,191) (59,714) 1,613,797 1,457,268 721,036 509,566 721,036 509,566 292,467 208,741 568,482 405,116 60,602 100,994 603 940 47,216 50,075 44,133 (47,559) 17,182 4,065 26,951 (51,624) 0 0 0 (9,325) 0 0 26,951 (60,949) 0.40 (1.24) 0.40 (1.24)
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