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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
[_]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
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AURORA FOODS INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3303521
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
1000 Union Station, St. Louis, MO 63103
(Address of Principal Executive Office, Including Zip Code)
(314) 241-0303
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, par value $0.01 per
share New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 March 28, 2001, based upon the closing price of the
Common Stock as reported on the New York Stock Exchange on such date, was
approximately $208,642,039.
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock as of the latest practicable date.
Shares Outstanding
March 28, 2001
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Common Stock, $0.01 par value.......................... 73,239,410
Documents incorporated by reference:
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the 2001 Annual Meeting of Stockholders is incorporated herein
by reference in Part III
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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,
Lender's(R) bagel 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, Celeste(R) frozen pizza and Chef's
Choice(R) frozen skillet meals. 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: the dry grocery
division and the frozen foods division.
Current Year Developments
The Company was significantly affected by the following items in the past
year.
Special Committee Investigation; Restatement of Financial Results
As described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, on February 11, 2000, the Company's Board of Directors,
after discussions with the Company's auditors, PricewaterhouseCoopers LLP,
formed a special committee (the "Special Committee") to conduct an
investigation into the Company's application of its accounting policies. The
Special Committee retained legal counsel, which retained an independent
accounting firm to assist in the investigation.
Prior to the issuance of the Company's financial statements as of and for
the year ended December 31, 1999, it was determined that the results reported
in the Company's Form 10-K as of and for the year ended December 31, 1998 as
well as the unaudited interim results reported in the Company's Forms 10-Q as
of and for the periods ended September 30, 1998, March 31, 1999, June 30, 1999
and September 30, 1999 were misstated. Upon further investigation, it was
determined that liabilities that existed for certain trade promotion and
marketing activities and other expenses (primarily sales returns and
allowances, distribution and consumer marketing) were not properly recognized
as liabilities and that certain assets were overstated (primarily accounts
receivable, inventories and fixed assets). In addition, certain activities
were improperly recognized as sales. As a result, the financial statements as
of and for the year ended December 31, 1998 as well as the unaudited quarterly
financial data as of and for the interim periods ended September 30, 1998,
March 31, 1999, June 30, 1999 and September 30, 1999 have been restated. The
restated financial statements as of and for the year ended December 31, 1998
have been included in the consolidated financial statements included herein.
Unaudited restated condensed financial statement information for the quarters
ended March 31, 1999, June 30, 1999 and September 30, 1999 have been included
in the notes to the consolidated financial statements included herein. All
restated financial information included herein has been adjusted to properly
expense costs and recognize revenues in accordance with generally accepted
accounting principles and the Company's stated accounting policies included in
the notes to the consolidated financial statements.
For the year ended December 31, 1998, these misstatements primarily
understated trade promotions expense by $28.5 million, overstated net sales by
$4.6 million, understated brokerage and distribution expense by $2.8 million
and understated cost of goods sold by $1.4 million. After adjusting for the
misstatements, the Company recalculated its income tax provision reducing
income tax expense by $14.5 million. The impact of the misstatements on
reported operating results for the year ended December 31, 1998, was to
overstate gross profit by $6.0 million, operating income by $38.3 million, and
net income by $23.8 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Restatements" and Notes 1 and
24 to the consolidated financial statements.
The Company has filed amended Form 10-Qs for the quarters ended September
30, 1998, March 31, 1999, June 30, 1999 and September 30, 1999, and an amended
Form 10-K for the year ended December 31, 1998.
2
Management Changes
On February 17, 2000 the following members of senior management resigned:
Ian R. Wilson, Chairman and Chief Executive Officer, James B. Ardrey, Vice
Chairman, Ray Chung, Executive Vice President and M. Laurie Cummings, Chief
Financial Officer. Mr. Wilson and Mr. Ardrey also resigned from the Board of
Directors. The Board appointed Richard C. Dresdale, President of Fenway
Partners, Inc. as Chairman of the Board, David E. De Leeuw, Managing Director
of McCown De Leeuw & Co., Inc., as Vice Chairman, Peter Lamm, Chairman and
Chief Executive Officer of Fenway Partners, Inc. as acting President and Chief
Executive Officer and Andrea Geisser, Managing Director of Fenway Partners,
Inc. as acting Vice President-- Finance, acting Treasurer and acting
Secretary, effective February 18, 2000.
On April 3, 2000, the Company announced that it had hired James T. Smith as
President and Chief Executive Officer of the Company, and Christopher T.
Sortwell as Executive Vice President and Chief Financial Officer. Mr. Smith
and Mr. Sortwell were also elected to the Board of Directors of the Company.
See "Directors and Executive Officers of the Company" in the Aurora Foods Inc.
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the 2001 Annual Meeting of Stockholders.
Legal Proceedings
Following the announcement of the aforementioned investigation, several
purported class action lawsuits were filed against the Company in the United
States District Court for the Northern District of California alleging that
the Company and the directors and officers who resigned on February 17, 2000
violated federal securities laws. On April 14, 2000, certain of the Company's
current and former directors were named as defendants in a derivative lawsuit
filed in the Superior Court of the State of California, in the County of San
Francisco, alleging breach of fiduciary duty, mismanagement and related causes
of action based upon the Company's restatement of its financial statements.
The case was then removed to federal court in San Francisco.
On January 16, 2001, the Company announced that it reached a preliminary
agreement to settle the Securities class action and derivative lawsuits
pending against the Company and its former management team in the U.S.
District Court in the Northern District of California. On March 1, 2001,
Stipulations of Settlement for the Securities class action and derivative
lawsuits were entered into in the U.S. District Court in the Northern District
of California to fully resolve, discharge and settle the claims made in each
respective lawsuit but have not yet been approved by the court. The District
Court has scheduled a final hearing to approve the settlement on May 11, 2001.
Under the terms of the agreement, Aurora will pay the class members $26
million in cash and $10 million in common stock of the Company. On March 2,
2001 the Company entered into definitive agreements with certain members of
former management to transfer to the Company between approximately 3 million
and 3.6 million shares of common stock of the Company, in consideration for a
resolution of any civil claims that the Company may have, and partially
conditioned upon future events and circumstances. The cash component of the
settlement will be funded entirely by the Company's insurance. As of March 23,
2001, with respect to the common stock component of the settlement, the stock
received from former management would be sufficient to satisfy Aurora's
obligation without issuing additional shares. The actual number of shares of
common stock of the Company needed to fund this component will be based on
average share prices determined at later dates. However, members of the class
have the opportunity to opt out of the settlement agreement, and bring
separate claims against the Company.
In addition, the Company has agreed to continue to implement certain
remedial measures, including the adoption of an audit committee charter, the
reorganization of the Company's finance department, the establishment of an
internal audit function and the institution of a compliance program, as
consideration for resolution of the derivative litigation.
The staff of the Securities and Exchange Commission (the "SEC") and the
United States Attorney for the Southern District of New York (the "U.S.
Attorney") also initiated investigations relating to the events that resulted
in the restatement of the Company's financial statements for prior periods
("Prior Events").
3
On January 23, 2001, the U.S. Attorney announced indictments alleging
financial accounting fraud against members of former management and certain
former employees of the Company. The U.S. Attorney did not bring charges
against the Company.
In a cooperation agreement with the U.S. Attorney, the Company confirmed
that it would continue to implement an extensive compliance program, which
will include an internal audit function, a corporate code of conduct, a
comprehensive policies and procedures manual, employee training and education
on policies and procedures and adequate disciplinary mechanisms for violations
of policies and procedures.
In addition, the Company consented to the entry of an order by the SEC
requiring compliance with requirements for accurate and timely reporting of
quarterly and annual financial results, and the maintenance of internal
control procedures in connection with a civil action by the SEC concerning
accounting irregularities at the Company in 1998 and 1999. Aurora did not
either admit or deny any wrongdoing, and the SEC did not seek any monetary
penalty. The Company also committed to continue to cooperate with the SEC in
connection with its actions against certain former members of management and
former employees.
See "Item 3. Legal Proceedings."
Headquarters
In February 2000, the company relocated its corporate headquarters from San
Francisco, CA to the frozen food division corporate office in St. Louis, MO.
During the third quarter of 2000, the Company closed its office in Columbus,
Ohio and consolidated its administrative offices and functions in St. Louis,
Missouri.
Products and Markets
The Company has acquired premium, well recognized brands with strong brand
equity that have been under-marketed and under-managed 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, product development, and dedicated sales and marketing
resources they have lacked in recent years. The Company's goal is to then
sustain the growth of the brands with high levels of marketing support
directed towards increased advertising, consumer promotions, new products,
product improvements and new packaging. Each of the Company's brands is a
leading brand with significant market share and strong consumer awareness. The
Company primarily competes in the dry grocery and frozen food industry
segments, and sells its products nationwide to supermarkets and other retail
channels. The Company sells its products through food brokers to wholesale and
retail grocery accounts. The products are distributed either directly to the
customer or through independent wholesalers and distributors. The Company also
sells its products in the club store, private label, military, and foodservice
distribution channels. Foodservice customers include restaurant chains,
business/industry, and schools.
4
The Company's net sales are generated from the following product lines (in
thousands):
Actual Years Ended Year Ended
December 31, December 31,
---------------------------- 1999
2000 1999 1998 Pro forma (1)
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(Unaudited)
Frozen division:
Seafood...................... $ 200,469 $198,033 $ 99,560 $ 196,974
Bagels....................... 169,563 26,927 -- 177,577
Breakfast products........... 115,347 111,448 77,682 109,869
All other.................... 138,128 128,511 64,199 146,492
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623,507 464,919 241,441 630,912
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Dry grocery division:
Baking mixes and frostings... 241,152 245,035 268,451 245,222
Syrup and mixes.............. 135,472 166,252 179,747 158,146
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376,624 411,287 448,198 403,368
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$1,000,131 $876,206 $689,639 $1,034,280
========== ======== ======== ==========
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(1) Proforma amounts include adjustments to historical results to reflect the
acquisitions of Lender's and Chef's Choice and the adoption of EITF 00-14
(Accounting for Certain Sales Incentives) as if they had taken place at
the beginning of 1999.
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 24, 2000, as gathered by Information Resources
Incorporated for the frozen food and fresh Lender's brands; and for the 52-
week period ended December 23, 2000, as gathered by A.C. Nielsen Company for
the dry grocery brands.
Dry Grocery Division
The Company has three brands in the dry grocery segment: Duncan Hines(R),
Mrs. Butterworth's(R), and Log Cabin(R).
Duncan Hines(R)
For nearly 45 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 mix. Duncan Hines(R)
cake mix products are universally available throughout chain grocery stores in
the United States and have a market share of nearly 33%. Consumer research
indicates the Duncan Hines(R) brand appeals to the consumer who wants to bake
a "quality, good as homemade" product. In 2000, the Company expanded its
successful Red Velvet cake mix and Cream Cheese frosting items into national
distribution. The Company also introduced a Turtle Brownie mix.
The Duncan Hines(R) brand has been built on the strength of its cake mix.
Introduced in 1956, Duncan Hines(R) has the #1 and #2 selling stock keeping
units in the cake mix segment (yellow and butter golden cake mixes). Cake
mixes accounted for approximately 62% of Duncan Hines(R) total retail volume
for the year ended December 31, 2000. To complement its cake mixes, Duncan
Hines(R) offers Ready To Spread frostings. Popular Duncan Hines(R) frostings
include chocolate and vanilla flavors. Duncan Hines(R) also offers two tiers
of brownie mixes, family-style and chocolate lovers. Other Duncan Hines(R)
products include muffin and cookie mixes.
Mrs. Butterworth's(R) and Log Cabin(R)
Together, the Mrs. Butterworth's(R) and Log Cabin(R) syrup products have a
leading 32% share of the syrup category. Different consumer perceptions of
these two brands offer unique opportunities for consumer targeting.
5
Mrs. Butterworth's(R) distinctive, grandmother-shaped bottle and buttery
flavor represents a fun image to families with children. The strong heritage
of Log Cabin(R), which dates back to 1888, represents authentic, rich maple
brand equity targeted to a more traditional, "warm and cozy" breakfast
experience. The Company also sells Country Kitchen(R) value-priced syrup, to
target the economy segment. Introduced in 1954, Country Kitchen(R) has the
highest share in the economy segment. 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) and Log Cabin(R) brands.
In 1998, the Company introduced a sugar-free syrup under the Log Cabin(R)
label to target health-conscious and diabetic consumers, which has become the
leading brand in the sugar-free syrup segment.
Frozen Food Division
The Company has six brands in the frozen foods segment: Lender's(R), Van de
Kamp's(R), Mrs. Paul's(R), Aunt Jemima(R), Celeste(R), and Chef's Choice(R).
Lender's(R)
Founded in 1927, the Lender's(R) brand is synonymous with bagels.
Lender's(R) is the leading brand of scannable bagels (bagels sold through the
grocery store, excluding in-store bakery), with a 32% market share. The
Lender's(R) brand participates in all three scannable bagel categories:
frozen, refrigerated and fresh. In the frozen and refrigerated segments,
Lender's(R) enjoys leading market shares of 80% and 68%, respectively. In the
fresh segment, Lender's(R) is the number three brand. Lender's(R) bagels are
offered in a variety of flavors and styles: Lender's(R) Original, Lender's(R)
Big "n Crusty(R), Lender's(R) Refrigerated Bagel Shop(TM) and Lender's(R)
Fresh Bagel Shop(TM).
Beginning in the Fall of 2000, the Company introduced new packaging, new
products, and product improvements. New packaging graphics were introduced
across the entire line to improve shelf visibility, appetite appeal,
standardize the Lender's(R) logo, and more effectively communicate flavors.
Two new frozen Lender's(R) Original(R) bagel flavors (Chocolate Chip and
Strawberry Swirl) were introduced regionally, Lender's(R) Big "n Crusty(R)
frozen bagels were increased in size by 10%, and a new "bagel expert"
positioning and advertising campaign were developed to begin airing in early
2001.
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 hold a leading market
share position of nearly 43% of the frozen prepared seafood category. The
frozen seafood product line includes breaded and battered fish sticks and fish
fillets, "healthy" breaded fish, grilled fish fillets, breaded shrimp,
marinated shrimp, and specialty seafood items such as crab cakes and clam
strips. The Company's dual brand strategy emphasizes both brands' respective
regional strengths (Van de Kamp's(R) is the leading brand 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 younger children
while Mrs. Paul's(R) targets adults and families with older children). 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. Van de Kamp's(R) appeals to larger families with younger
children by offering larger package sizes and a newly developed advertising
campaign to communicate the great taste of Van de Kamp's(R)--"Van de
Kamp's(R)--the fish and shrimp you can't resist". Mrs. Paul's(R) targets
smaller families with older children with larger portion sizes and a quality
message focused on ingredients and preparation, "Only whole fillets, Never
minced pieces, Only Mrs. Paul's(R)".
In 2000, the Company introduced several new products into the large and
growing shrimp segment of the seafood market. Van de Kamp's(R) introduced
Buffalo shrimp and two marinated shrimp items; and Mrs. Paul's(R) entered the
shrimp segment with three breaded shrimp items and two marinated shrimp items.
The Company continues to build Van de Kamp's(R) and Mrs. Paul's(R) brand
equity through television and print advertising, product news, and consumer
promotions.
6
Aunt Jemima(R)
The Aunt Jemima(R) brand was established over 100 years ago. The Company
offers Aunt Jemima(R) frozen breakfast products in three categories: French
toast, pancakes and waffles. Aunt Jemima(R) is the French toast market leader
with a 52% share, is the number two pancake brand and the only major brand of
pancakes to increase market share in 2000 (3.8 points), 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. During 2000, Aunt Jemima(R) continued to benefit from the early 1999
shift to expand its offerings of child friendly products such as round
waffles, mini pancakes and French toast sticks. Aunt Jemima(R) mini pancakes
sales increased 42% in 2000 and sales of French toast sticks increased nearly
39% in 2000, and a three-item line of waffle sticks was introduced into test
markets late in the year.
Celeste(R)
For over 37 years, Celeste(R) frozen pizza has been a prominent regional
brand in the Northeast. The Company offers Celeste(R) frozen pizzas in small
and large sizes and a rising crust pizza under the Mama Celeste(TM) label.
Celeste(R) small pizzas are marketed as Celeste(R) Pizza for One(TM). The
large pizzas and the Mama Celeste(TM) Fresh-Baked Rising Crust pizza are
value-priced relative to other large and rising crust pizzas. In the aggregate
markets in which it competes, Celeste(R) Pizza for One(TM) is the leading
brand of small pizzas in terms of dollar sales. Celeste(R) products are
primarily sold in the Northeast, Florida and California. Late in 1999,
Celeste(R) introduced two new flavors of Pizza for One(TM), Zesty Chicken
Supreme and Sausage and Pepperoni, in aproximately 15% to 20% of the United
Sates.
Chef's Choice(R)
The Chef's Choice(R) line of frozen skillet meals is a leading premium
brand in the large and rapidly growing frozen prepared meal category, and is
positioned in the Home Meal Replacement segment. Skillet meals are an entire
meal in one package that can be cooked in a single skillet in less than
fifteen minutes. The Chef's Choice(R) brand was created to address consumer
demand for great tasting, restaurant quality meals that are easy to prepare.
Chef's Choice(R) is a premium product offering and includes more protein and
higher quality ingredients than other competitors in the category. During
2000, the Company introduced new, improved packaging graphics to provide
stronger shelf impact, a more stylized branded logo, and more appetizing food
photography to more effectively communicate the brand's premium positioning.
Four new products were introduced in late 2000 to address consumer desires for
additional variety. The Chef's Choice(R) product line consists of thirteen
items: Shrimp Stir Fry, Chicken Stir Fry, Beef Stir Fry, Shrimp Linguini,
Chicken Santa Fe, Chicken Marinara, Shrimp Fried Rice, Steak Ranchero, Ham
with Roasted Potatoes, and four new flavors introduced in late 2000: Shrimp
Alfredo, Chicken Alfredo, Garlic Chicken Primavera and Chicken Fried Rice.
Industry
The U.S. food industry is relatively stable with growth driven primarily by
modest population increases and new products. 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 25 and 54, and particularly households
with children. There are approximately 40 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 and in club, military and private label distribution
channels. The Company is expanding its presence in foodservice and club
channels, which the Company believes offer further growth opportunities.
7
Financial Information About Industry Segments
See "Item 14(a) 1. Consolidated Financial Statements of the Company"
incorporated herein by reference.
Trademarks
The Company's principal trademarks are Duncan Hines(R), Lender's(R), Log
Cabin(R), Mrs. Butterworth's(R), Van de Kamp's(R), Mrs. Paul's(R), Aunt
Jemima(R), Celeste(R), and Chef's Choice(R). The trademarks are important to
the maintenance of the Company's brands. The Company licenses, for use on
frozen breakfast products, 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 terms
of the license agreement. The Company also licenses the Chef's Choice(R)
trademark pursuant to a perpetual, royalty free 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
Frozen Food Division
The Company produces its Van de Kamp's(R) and Mrs. Paul's(R) frozen seafood
products primarily at its Erie, Pennsylvania, and Jackson, Tennessee
manufacturing facilities. The Company has also moved the manufacturing of some
of its specialty seafood products from co-packers to a seafood processing
facility in Yuba City, California that the Company acquired in February 1999.
The Company also uses this facility to produce some of its new seafood items.
The Company produces its Aunt Jemima(R) frozen breakfast products at its
Jackson, Tennessee and Erie, Pennsylvania facilities and its Celeste(R) frozen
pizza products at the Jackson, Tennessee facility. The Company produces its
Lender's(R) frozen, refrigerated and fresh bagel products at its Mattoon,
Illinois and West Seneca, New York facilities. The Company's Chef's Choice(R)
products are packaged by a contract manufacturer and, starting in 2001, the
Yuba City, California facility.
Dry Grocery Division
The Company's syrup products are produced by contract manufacturers at
various manufacturing facilities pursuant to syrup co-pack agreements. These
syrup 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) cake mixes, brownie mixes, specialty mixes and frosting products are
also produced by contract manufacturers pursuant to co-pack agreements. All of
the Company's cake mixes, brownie mixes, specialty mixes and frosting
production equipment including co-milling, blending and packaging equipment is
located at the contract manufacturers' facilities. These Duncan Hines(R)
agreements have terms of five years and automatic renewal provisions for one
year unless cancelled by either party. It is the Company's intention to
maintain long-term relationships with its contract manufacturer partners.
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.
8
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 product improvement.
The Company's products and the facilities where the products are
manufactured are also 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 experiences some seasonality in its businesses. In the Frozen
Foods Division, seasonality is primarily due to increased demand for its
seafood products during Lent. In the Dry Grocery Division, it is primarily due
to increased demand for its Duncan Hines(R) products during the Thanksgiving
and Christmas holiday baking seasons. As a result, 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, shrimp, 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. The procurement process for its frozen food
division and the production of brownie mixes is managed by purchasing the
necessary raw materials directly from various suppliers. The Company's
objective is to meet both the Company's production needs and its quality
standards, while achieving the lowest aggregate cost to the Company.
Research and Development
The Company maintains its research and development department in St. Louis,
Missouri. This department is responsible for 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, existing product
enhancement, and cost optimization. Exploratory research is conducted in new
business areas to assure a continuous pipeline of new and improved products.
Cost optimization is accomplished through improvements in formulation,
manufacturing process, and packaging.
Employees
As of March 15, 2001, the Company had approximately 2000 employees. Of
these, approximately 220 employees at the West Seneca, NY facility are covered
by a collective bargaining agreement expiring in 2006. Management of the
Company believes it generally has good relations with its employees and has
not experienced any work stoppages or strikes.
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
9
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 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 business and the frozen dessert business (subsequently sold) 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 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 Company consummated an initial public offering of
12,909,372 shares of its Common Stock (the "IPO"). Concurrently with the IPO,
New LLC also sold 1,590,628 shares of the Company's Common Stock to the public
at a price of $21.00 per share. The sale of stock by New LLC and the IPO are
together herein referred to as the "Equity Offerings." Also, concurrently with
the IPO, the Company issued $200.0 million aggregate principal amount of 8.75%
senior subordinated notes due 2008 (the "New Notes") and borrowed $225.0
million of senior secured term debt and $99.0 million out of a total of $175.0
million of available senior secured revolving debt.
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. Seacoast markets the line of Chef's Choice(R) frozen
skillet meals.
On November 1, 1999, the Company acquired all the assets and certain
liabilities of the Lender's Bagel business ("Lender's") from The Eggo Company,
a subsidiary of the Kellogg Company ("Kellogg's").
ITEM 2. PROPERTIES
The Company owns and operates five facilities, described in the following
table, to manufacture its frozen foods products. The Company's lease in St.
Louis, MO has been extended and will expire in September, 2001. The Company
leases office space in Columbus, Ohio, pursuant to a lease which expires in
2004. Subsequent to consolidating its administrative functions in 2000, the
Company has been actively seeking to sublease this space. The Company also
sold a 175,000 square foot manufacturing facility located in Chambersburg,
Pennsylvania, during 2000. The Company's facilities and equipment are subject
to security interests granted to its lenders.
Approximate
Square
Location Principal Use Footage Owned/Leased
- -------- ------------- ----------- ------------
Jackson, TN Frozen breakfast, frozen pizza and grilled fish production 302,000 Owned
Erie, PA Frozen seafood production 116,000 Owned
Yuba City, CA Frozen seafood production 56,000 Owned
Mattoon, IL Frozen and refrigerated bagel production 215,000 Owned
West Seneca, NY Frozen and fresh bagel production 92,000 Owned
St. Louis, MO Corporate office 50,000 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.
10
ITEM 3. LEGAL PROCEEDINGS
As of November 9, 2000, the Company had been served with eighteen
complaints in purported class action lawsuits filed in the U.S. District Court
for the Northern District of California. The complaints received by the
Company alleged that, among other things, as a result of accounting
irregularities, the Company's previously issued financial statements were
materially false and misleading and thus constituted violations of federal
securities laws by the Company and the directors and officers who resigned on
February 17, 2000 (Ian R. Wilson, James B. Ardrey, Ray Chung and M. Laurie
Cummings). The actions (the "Securities Actions") alleged that the defendants
violated Sections 10(b) and/or Section 20(a) of the Securities Exchange Act
and Rule 10b-5 promulgated thereunder. The Securities Actions complaints
sought damages in unspecified amounts. These Securities Actions purported to
be brought on behalf of purchasers of the Company's securities during various
periods, all of which fell between October 28, 1998 and April 2, 2000.
On April 14, 2000, certain of the Company's current and former directors
were named as defendants in a derivative lawsuit filed in the Superior Court
of the State of California, in the County of San Francisco, alleging breach of
fiduciary duty, mismanagement and related causes of action based upon the
Company's restatement of its financial statements. The case was then removed
to federal court in San Francisco.
On January 16, 2001 the Company announced that it reached a preliminary
agreement to settle the securities class action and derivative lawsuits
pending against the Company and its former management team in the U.S.
District Court in the Northern District of California. On March 1, 2001,
Stipulations of Settlement for the Securities class action and derivative
lawsuits were entered into in the U.S. District Court in the Northern District
of California to fully resolve, discharge and settle the claims made in each
respective lawsuit but have not yet been approved by the court. The District
Court has scheduled a final hearing to approve the settlement on May 11, 2001.
Under the terms of the agreement, Aurora will pay the class members $26
million in cash and $10 million in common stock of the Company. On March 2,
2001 the Company entered into definitive agreements with certain members of
former management to transfer to the Company between approximately 3 million
and 3.6 million shares of common stock of the Company, in consideration for a
resolution of any civil claims that the Company may have, and partially
conditioned upon future events and circumstances. The cash component of the
settlement will be funded entirely by the Company's insurance. As of March 23,
2001, with respect to the common stock component of the settlement, the stock
received from former management would be sufficient, at current share prices,
to satisfy Aurora's obligation without issuing additional shares. The actual
number of shares of common stock of the Company needed to fund this component
will be based on average share prices determined at later dates. However,
members of the class have the opportunity to opt out of the settlement
agreement, and bring separate claims against the Company.
In addition, the Company has agreed to continue to implement certain
remedial measures, including the adoption of an audit committee charter, the
reorganization of the Company's finance department, the establishment of an
internal audit function and the institution of a compliance program, as
consideration for resolution of the derivative litigation.
The staff of the Securities and Exchange Commission (the "SEC") and the
United States Attorney for the Southern District of New York (the "U.S.
Attorney") also initiated investigations relating to the events that resulted
in the restatement of the Company's financial statements for prior periods
("Prior Events"). The SEC and the U.S. Attorney requested that the Company
provide certain documents relating to the Company's historical financial
statements. On September 5, 2000, the Company received a subpoena from the SEC
to produce documents in connection with the Prior Events. The SEC also
requested certain information regarding some of the Company's former officers
and employees, correspondence with the Company's auditors and documents
related to financial statements, accounting policies and certain transactions
and business arrangements.
11
On January 23, 2001 the U.S. Attorney announced indictments alleging
financial accounting fraud against members of former management and certain
former employees of the Company. The U.S. Attorney did not bring charges
against the Company.
In a cooperation agreement with the U.S. Attorney, the Company confirmed
that it would continue to implement an extensive compliance program, which
will include an internal audit function, a corporate code of conduct, a
comprehensive policies and procedures manual, employee training and education
on policies and procedures and adequate disciplinary mechanisms for violations
of policies and procedures.
In addition, the Company consented to the entry of an order by the SEC
requiring compliance with requirements for accurate and timely reporting of
quarterly and annual financial results, and the maintenance of internal
control procedures in connection with a civil action by the SEC concerning
accounting irregularities at the Company in 1998 and 1999. Aurora did not
either admit or deny any wrongdoing, and the SEC did not seek any monetary
penalty. The Company also committed to continue to cooperate with the SEC in
connection with its actions against certain former members of management and
former employees.
The Company is also the defendant in an action filed by a former employee
in the U.S. District Court for the Eastern District of Missouri. The plaintiff
alleges breach of contract, fraud and negligent misrepresentation as well as
state law securities claims. The Company intends to defend these claims
vigorously.
The Company is also subject to litigation in the ordinary course of
business.
In the opinion of management, the ultimate outcome of any existing
litigation, other than the Securities Actions described above, would not have
a material adverse effect on the Company's financial condition, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
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 during the years
ended December 31, 1999 and 2000:
1999 High Low
---- -------- --------
January 1--March 31....................................... $20.0000 $12.7500
April 1--June 30.......................................... $19.5000 $14.1250
July 1--September 30...................................... $19.0000 $13.5000
October 1--December 31.................................... $15.9375 $ 7.5625
2000 High Low
---- -------- --------
January 1--March 31....................................... $10.2500 $ 2.8125
April 1--June 30.......................................... $ 4.9375 $ 3.0000
July 1--September 30...................................... $ 4.1250 $ 2.9375
October 1--December 31.................................... $ 3.5625 $ 2.1875
As of March 23, 2001, there were approximately 358 holders of record of the
Company's common stock. The Company has not paid any cash dividends since its
inception. The terms of the Senior Bank Facilities restrict the Company's
ability to declare dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and Note 10 to the Company's consolidated financial statements.
13
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below, as of and for the years ended
December 31, 2000, 1999, 1998, and December 27, 1997 is derived from the
Company's audited financial statements. The selected financial data of the
Predecessor for the year ended December 31, 1996 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
notes thereto included elsewhere in this Form 10-K. The comparability of the
selected financial data presented below is significantly affected by a change
of accounting method in 2000, the merger of VDK with the Company and by the
acquisitions and related financings completed by the Company during its
history. See "Business--Business History," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Aurora Foods Inc. Predecessor
---------------------------------------------- ------------
Years Ended (1)
-----------------------------------------------------------
(In thousands, except per December 31, December 27, December 31,
share data) -------------------------------- ------------ ------------
2000 1999 1998 1997 1996
---------- --------- --------- ------------ ------------
As Restated(2)
Net sales................ $1,000,131 $ 876,206 $ 689,639 $143,020 $89,541
Gross profit............. 511,546 451,270 370,704 97,291 60,586
Operating income......... 24,965 64,061 6,492 23,398 17,186
Net (loss) income before
cumulative effect of
change in accounting and
extrordinary loss....... (56,091) (4,449) (59,918) 1,235 10,570
Net (loss) income........ (68,252) (4,449) (69,129) 1,235 10,570
Total assets(3).......... 1,794,286 1,851,116 1,448,442 372,739 --
Total debt(3)............ 1,105,428 1,079,220 708,092 279,919 --
Basic and diluted
earnings (loss) per
share available to
common stockholders (3):
Before cumulative
effect of change in
accounting and
extraordinary loss.... (0.81) (0.07) (1.12) 0.04 --
Net earnings (loss) per
share available to
common stockholders... (0.99) (0.07) (1.29) 0.04 --
- --------
(1) Net sales and gross profit for 1997 and 1996 do not include
reclassifications associated with the change in accounting for certain
sales incentives in 2000, as the amounts are not available. These
reclassifications, if known, would have reduced net sales and gross
profit, but would not have had any impact on operating income or net
(loss) income.
(2) As restated. See "Item 7. Management's Discussion and Analysis of
Financial Conditions--Restatements" for a description of the adjustments.
(3) Total assets, total debt and earnings (loss) per share of the Predecessor
for the year ended December 31, 1996 is not available. The Predecessor did
not operate MBW as a separate division or business entity and, as a
result, such information is not available.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the historical
financial information included in the financial statements and notes thereto.
Unless otherwise noted, fiscal years in this discussion refer to the Company's
December-ending fiscal years.
Restatements
Prior to the issuance of the Company's financial statements as of and for
the year ended December 31, 1999, it was determined that the results reported
in the Company's Form 10-K as of and for the year ended December 31, 1998 as
well as the unaudited interim results reported in the Company's Forms 10-Q as
of and for the periods ended September 30, 1998, March 31, 1999, June 30, 1999
and September 30, 1999 were misstated. Upon further investigation, it was
determined that liabilities that existed for certain trade promotion and
marketing activities and other expenses (primarily sales returns and
allowances, distribution and consumer marketing) were not properly recognized
as liabilities and that certain assets were overstated (primarily accounts
receivable, inventories and fixed assets). In addition, certain activities
were improperly recognized as sales. As a result, the financial statements as
of and for the year ended December 31, 1998 as well as the quarterly financial
data as of and for the unaudited interim periods ended September 30, 1998,
March 31, 1999, June 30, 1999 and September 30, 1999 have been restated. The
restated financial statements as of and for the year ended December 31, 1998
have been included in the consolidated financial statements included herein.
Unaudited restated condensed financial statement information for the quarters
ended March 31, 1999, June 30, 1999 and September 30, 1999 have been included
in the notes to the consolidated financial statements included herein. All
restated financial information included herein has been adjusted to properly
expense costs and recognize revenues in accordance with generally accepted
accounting principles and the Company's stated accounting policies included in
the notes to the consolidated financial statements.
Results of Operations
The following tables set forth the historical and pro forma results of
operations for the periods indicated as well as the percentage which the
historical and pro forma items in the Statements of Operations bear to net
sales. The statements include a presentation of the pro forma results of
operations as if the Lender's and Seacoast acquisitions and related financings
and the change in accounting for certain sales incentives had taken place
January 1, 1999. Certain amounts from prior years have been reclassified to
conform to the Company's current year presentation, and financial information
for the year ended December 31, 1998 has been restated as discussed above.
15
Statements of Operations
(in thousands except per share amounts)
Actual Years Ended
----------------------------------
December 31, Year Ended
---------------------------------- December 31,
1998 (as 1999
2000 1999 restated)(1) Pro Forma
---------- -------- ------------ ------------
(unaudited)
Net sales...................... $1,000,131 $876,206 $689,639 $1,034,280
Cost of goods sold............. (488,585) (424,936) (318,935) (508,015)
---------- -------- -------- ----------
Gross profit............... 511,546 451,270 370,704 526,265
---------- -------- -------- ----------
Brokerage, distribution and
marketing expenses:
Brokerage and distribution... (117,830) (101,652) (77,553) (127,093)
Trade promotions............. (179,117) (150,114) (129,561) (174,575)
Consumer marketing........... (44,655) (50,913) (34,146) (59,829)
---------- -------- -------- ----------
Total brokerage, distribution
and marketing expenses ....... (341,602) (302,679) (241,260) (361,497)
Amortization of goodwill and
other intangibles............. (44,819) (38,305) (30,048) (42,456)
Selling, general and
administrative expenses....... (42,903) (35,596) (25,955) (45,899)
Other financial, legal and
accounting expense............ (47,352) -- -- --
Incentive plan (expense)
credit........................ -- 571 (56,583) 571
Columbus consolidation costs... (6,868) -- -- --
Transition expenses............ (3,037) (11,200) (10,366) (11,200)
---------- -------- -------- ----------
Total operating expenses... (486,581) (387,209) (364,212) (460,481)
---------- -------- -------- ----------
Operating income........... 24,965 64,061 6,492 65,784
Interest expense, net.......... (109,554) (68,403) (64,493) (90,006)
Amortization of deferred
financing expense............. (3,016) (2,060) (1,872) (2,060)
Other bank and financing
expenses...................... (336) (838) (259) (838)
---------- -------- -------- ----------
Loss before income taxes,
cumulative effect of
change in accounting and
extraordinary loss ....... (87,941) (7,240) (60,132) (27,120)
Income tax benefit............. 31,850 2,791 214 10,071
---------- -------- -------- ----------
Net loss before cumulative
effect of change in
accounting and
extraordinary loss........ (56,091) (4,449) (59,918) (17,049)
Cumulative effect of change in
accounting, net of tax of
$5,722........................ (12,161) -- -- --
Extraordinary loss on early
extinguishment of debt, net of
tax of $5,632................. -- -- (9,211) --
---------- -------- -------- ----------
Net loss................... (68,252) (4,449) (69,129) (17,049)
Preferred dividend............. (333) -- -- --
---------- -------- -------- ----------
Net loss available to
common stockholders....... $ (68,585) $ (4,449) $(69,129) $ (17,049)
========== ======== ======== ==========
Loss per share available to
common stockholders........... $ (0.99) $ (0.07) $ (1.29) $ (0.25)
========== ======== ======== ==========
EBITDA(2)...................... $ 95,411 $117,448 $ 46,486 $ 128,325
========== ======== ======== ==========
Adjusted EBITDA(3)............. $ 152,669 $128,077 $113,435 $ 151,579
========== ======== ======== ==========
- --------
(1) As restated. See "--Restatements" and Notes 1 and 24 to the consolidated
financial statements.
(2) EBITDA is defined as net income plus cumulative effect of change in
accounting, extraordinary loss, income tax (expense) benefit, interest
expense, amortization of deferred financing expense, other bank and
financing expenses, depreciation and amortization of goodwill and other
intangibles. The Company believes EBITDA provides additional information
for determining its ability to meet debt service requirements. EBITDA does
not represent and should not be considered an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles. EBITDA does not necessarily indicate whether cash flow will be
sufficient for cash requirements and should not be deemed to represent
16
funds available to the Company. The calculation of EBITDA does not include
the commitments of the Company for capital expenditures and payment of
debt. EBITDA, as presented, may not be comparable to similarly-titled
measures of other companies.
(3) Adjusted EBITDA is defined as EBITDA plus other financial, legal and
accounting expenses, incentive plan (expense) credit, transition expenses
and, for pro forma purposes only, Kellogg's allocations of $15,958 in
1999, less estimated pro forma costs to be incurred by the Company of
$3,333 in 1999, related to the estimated additional administrative costs
associated with operating the Lender's business.
Statements of Operations
(as a percentage of net sales)
Actual Years Ended
-----------------------------------------
December 31,
-----------------------------------------
1998 (as Pro-forma
2000 1999 restated) (1) 1999
----- ----- ------------- -----------
(unaudited)
Net sales............................ 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................... (48.9) (48.5) (46.2) (49.1)
----- ----- ----- -----
Gross profit..................... 51.1 51.5 53.8 50.9
----- ----- ----- -----
Brokerage distribution and marketing
expenses:
Brokerage and distribution....... (11.8) (11.6) (11.2) (12.3)
Trade promotions................. (17.9) (17.1) (18.8) (16.9)
Consumer marketing............... (4.5) (5.8) (5.0) (5.8)
----- ----- ----- -----
Total brokerage, distribution and
marketing expenses.................. (34.2) (34.5) (35.0) (35.0)
Amortization of goodwill and other
intangibles......................... (4.4) (4.4) (4.4) (4.1)
Selling, general and administrative
expenses............................ (4.3) (4.1) (3.8) (4.4)
Other financial, legal and accounting
expense............................. (4.7) -- -- --
Incentive plan (expense) credit...... -- 0.1 (8.2) 0.1
Columbus consolidation cost.......... (0.7) -- -- --
Transition expenses.................. (0.3) (1.3) (1.5) (1.1)
----- ----- ----- -----
Total operating expenses......... (48.6) (44.2) (52.9) (44.5)
----- ----- ----- -----
Operating income................. 2.5 7.3 0.9 6.4
Interest expense, net................ (11.0) (7.8) (9.3) (8.7)
Amortization of deferred financing
expense............................. (0.3) (0.2) (0.3) (0.2)
Other bank and financing expenses.... -- (0.1) -- (0.1)
----- ----- ----- -----
Loss before income taxes,
cumulative effect of change in
accounting and extraordinary
loss............................ (8.8) (0.8) (8.7) (2.6)
Income tax benefit................... 3.2 0.3 -- 1.0
----- ----- ----- -----
Net loss before cumulative effect
of change in accounting and
extraordinary loss.............. (5.6) (0.5) (8.7) (1.6)
Cumulative effect of change in
accounting, net of tax of $5,722.... (1.2) -- -- --
Extraordinary loss on early
extinguishment of debt, net of tax
of $5,632........................... -- -- (1.3)
----- ----- ----- -----
Net loss......................... (6.8)% (0.5)% (10.0)% (1.6)%
===== ===== ===== =====
The Company manages its business in two operating segments, the frozen food
division and the dry grocery division. The separate financial information of
each segment is presented consistently with the manner in which results for
2000 and prior years are evaluated by the chief operating decision-maker in
deciding how to allocate resources and in assessing performance.
17
In 1998, the Company acquired VDK Holdings, which had four brands, Van de
Kamp's(R) and Mrs. Paul's(R) seafood products, Aunt Jemima(R) frozen breakfast
products and Celeste(R) frozen pizza products and which now comprises the
frozen foods division. In 1999, the frozen foods division added two additional
brands, Chef's Choice(R) frozen skillet meal products and Lender's(R) bagel
products. The dry grocery division consists of three brands, Mrs.
Buttersworth(R) and Log Cabin(R) breakfast products and Duncan Hines(R) baking
mix products, which was acquired in 1998.
Accounting Change
Effective as of January 1, 2000, the Company adopted the consensus reached
in EITF 00-14, Accounting for Certain Sales Incentives. This change in
accounting principle, required to be adopted by most companies no later than
the first quarter of 2001, has the effect of accelerating the recognition of
certain marketing expenses as well as requiring that certain items previously
classified as distribution, promotion and marketing expenses now be classified
as reductions of revenue. After adopting EITF 00-14, the Company now expenses
all estimated costs associated with redemption of consumer coupons at the time
they are distributed, rather than reflecting them as expense over the expected
redemption period. In addition, the estimated coupon redemption costs along
with certain other allowances typically given to retailers and others to
facilitate certain promotions and distribution have been reclassified from
expense to Net Sales in the accompanying Statement of Operations. The similar
expense items in prior year comparable periods have been reclassified to
conform to the current period's presentation.
As a result of this change in accounting, the cumulative after tax effect
of the change on prior years (to December 31, 1999) of $12,161,000 has been
recognized as an expense in the Statement of Operations for the year ended
December 31, 2000.
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
The following table sets forth certain historical results of operations
data by division for the years ended December 31, 2000 and December 31, 1999
(in thousands):
Years Ended December 31,
--------------------------------------
2000 1999
------------------ ------------------
Frozen Dry Frozen Dry
-------- -------- -------- --------
Net sales.............................. $623,507 $376,624 $464,919 $411,287
Cost of goods sold..................... (319,439) (169,146) (238,491) (186,445)
-------- -------- -------- --------
Gross profit......................... 304,068 207,478 226,428 224,842
-------- -------- -------- --------
Brokerage, distribution and marketing
expenses:
Brokerage and distribution........... (69,668) (48,162) (56,032) (45,620)
Trade promotions..................... (115,264) (63,853) (78,111) (72,003)
Consumer marketing................... (27,196) (17,459) (27,618) (23,295)
-------- -------- -------- --------
Total brokerage, distribution and
marketing expenses................ (212,128) (129,474) (161,761) (140,918)
Amortization of goodwill and other
intangibles........................... (22,236) (22,583) (17,223) (21,082)
Selling, general and administrative
expenses (1).......................... (26,728) (16,175) (23,604) (11,992)
Other financial, legal and accounting
expenses (1).......................... (29,500) (17,852) -- --
Columbus consolidation costs........... -- (6,868) -- --
Incentive plan (expense) credit........ -- -- -- 571
Transition expenses.................... (1,424) (1,613) (3,179) (8,021)
-------- -------- -------- --------
Total operating expenses........... (292,016) (194,565) (205,767) (181,442)
-------- -------- -------- --------
Operating income..................... $ 12,052 $ 12,913 $ 20,661 $ 43,400
======== ======== ======== ========
- --------
(1) In 2000, amounts were allocated to each division based on the percentage
of each division's net sales to total net sales.
18
Net Sales. Net sales for the year ended December 31, 2000 were $1.0
billion, an increase of $123.9 million from 1999. The sales growth in 2000 was
due principally to acquisition activity in the Frozen Foods division as
described below.
Frozen Foods. Net sales in 2000 include a full year of both Chef's
Choice(R) and Lenders(R), as compared to only nine months of Chef's
Choice(R) and two months of Lenders(R) in 1999. Net sales of other frozen
divisions' products were up slightly, primarily due to seafood price
increase in the fourth quarter of 1999, offset in part by lower volumes.
The volume declines were principally a result of the Company's decision in
2000 to terminate the prior practice of heavy quarter-end trade loading and
to drive down the excessive trade inventories that had accumulated as a
result of these practices. Increased food service volume in part offset
these volume reductions.
Dry Grocery. Dry grocery division net sales decreased 8.4% to $376.6
million in 2000, principally because of the Company's decision in 2000 to
terminate the prior practice of heavy quarter-end trade loading and to
drive down the excessive trade inventories that had accumulated as a result
of these practices. This decrease was offset in part by reduced allowances
for baking products, which were used heavily in the prior year to increase
sales volumes and a price increase in baking products in June 2000.
Gross Profit. Gross profit increased from $451.3 million in 1999 to $511.5
million in 2000, an increase of 13.4%, due to increased gross profit in the
frozen foods division partially offset by decreases in the dry grocery
division.
Frozen Foods. Gross profit increased from $226.4 million in 1999 to
$304.1 million in 2000, an increase of 34.3% due primarily to the
acquisitions of Chef's Choice(R) in April 1999 and Lender's(R) in November
1999. The increased food service related volume and additional margin on
seafood products as a result of the price increase primarily accounted for
the balance of the increased gross profit. These were partially offset by
lower overall volume.
Dry Grocery. Gross profit decreased from $224.8 million in 1999 to
$207.5 million in 2000, or 7.7% due primarily to the decrease in net sales.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses increased from $302.7 million in 1999 to $341.6 million in
2000, an increase of 12.9%, as a result of increases in both divisions. As a
percentage of net sales, brokerage, distribution and marketing expenses
decreased from 34.5% of net sales in 1999 to 34.2% of net sales in 2000 due
primarily to decreases as a percentage of net sales in the frozen food
division. Brokerage and distribution costs, which include broker commissions,
freight, warehousing and term discounts, increased from 11.6% of net sales in
1999 to 11.8% of net sales in 2000 due primarily to higher freight and
warehousing expenditures as a percentage of net sales in the dry grocery
division. Trade promotions expense, which consists of incentives offered to
food retailers to carry and promote Aurora products, increased from 17.1% of
net sales in 1999 to 17.9% of net sales in 2000 due to increased trade
promotion spending in the frozen foods division. Consumer marketing expenses,
which include the costs of advertising, market research and in-store
promotions, decreased primarily due to reductions in the amount of support
required for baking, breakfast and pizza products.
Frozen Foods. Brokerage, distribution and marketing expenses increased
from $161.8 million in 1999 to $212.1 million in 2000, an increase of
31.1%, due primarily to the acquisitions of Chef's Choice(R) in April 1999
and Lender's(R) in November 1999. Brokerage and distribution expenses
decreased from 12.1% of net sales 1999 to 11.2% of net sales in 2000. This
decrease is due primarily to a reduction in term discounts offered to
customers and reduced brokerage costs as a result of consolidating
brokerage to one national brokerage during the second quarter of 2000.
Trade promotions expense increased from 16.8% of net sales in 1999 to 18.5%
of net sales in 2000. The increase in trade promotions as a percentage of
net sales is due primarily to an increase in performance-based promotions,
particularly in seafood. Consumer marketing expenses decreased from 5.9% of
net sales in 1999 to 4.4% of net sales in 2000. This decrease was due
primarily to the inclusion of the Lender's(R) and Chef's Choice(R)
businesses in 2000, which have
19
lower levels of consumer marketing as a percentage of net sales than other
products in the division. In addition, consumer expense in 1999 included
incremental support for new breakfast and pizza products and market
expansion.
Dry Grocery. Brokerage, distribution and marketing expenses decreased
8.1% from $140.9 million in 1999 to $129.5 million in 2000. As a percentage
of net sales, brokerage, distribution and marketing expenses increased from
34.3% in 1999 to 34.4% in 2000. Brokerage and distribution expenses
increased from 11.1% of net sales in 1999 to 12.8% of net sales in 2000.
This increase is primarily a result of freight fuel surcharges and higher
inventory storage costs in the first half of 2000. Trade promotions expense
decreased from 17.5% of net sales in 1999 to 17.0% of net sales in 2000.
This decrease is due to reduced spending, not required in 2000 to support
the prior practices of loading of trade inventories, offset in part by
carryover amortization in 2000 of slotting fees incurred in 1999. Consumer
marketing decreased from 5.7% of net sales in 1999 to 4.6% of net sales as
a result of reduced media spending.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles increased from $38.3 million in 1999 to $44.8 million in
2000 due to the impact of acquisitions of the Chef's Choice(R) and Lender's(R)
businesses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $35.6 million in 1999 to $42.9 million
in 2000, due primarily to the incremental costs necessary to manage the
acquired Chef's Choice(R) and Lender's(R) businesses, the costs related to the
employment of new management and other compensation related costs.
Other Financial, Legal and Accounting Expenses. As a result of the
investigation into the Company's accounting practices, the resulting
restatement of its financial statements, related litigation and governmental
proceedings, defaults under its loan agreements, indentures and related
matters (see--"Restatements"), the Company has incurred financial, legal and
accounting expenses, including charges to obtain waivers of its events of
default and charges related to amending its financing facilities. Such costs
totaled $47.4 million in 2000, including $5.9 million which has been accrued
for estimated remaining costs to be paid. Consequently, the Company does not
expect additional expense in future periods. These costs included a $17.7
million non-cash charge associated with the issuance of common stock to
certain holders of the Company's senior subordinated debt. Management believes
that cash expenditures for such financial, legal and accounting expenses will
be substantially completed in 2001.
Columbus Consolidation Costs. During the third quarter of 2000, the Company
consolidated its administrative office and functions in St. Louis, Missouri
and closed its office in Columbus, Ohio. The charge of $6.9 million primarily
represents amounts for the involuntary termination of approximately 50 sales,
marketing, finance, information systems, purchasing and customer service
employees of $2.7 million, a non-cash charge for abandoned leasehold
improvements and capitalized software that will no longer be used of $3.1
million, and estimated unrecovered office lease costs after consolidation and
other items of $1.1 million. All payments related to the consolidation have
been made with the exception of $0.9 million of remaining reserves included in
accrued expenses at December 31, 2000 for employee severance to be paid in the
first six months of 2001 and the estimated unrecovered office lease costs.
Absent other changes in the Company's operations, annual savings of
approximately $10 million, beginning in 2001, are expected.
Transition Expenses. During 2000, the Company incurred approximately $3.0
million primarily related to the integration of the Chef's Choice(R) and
Lender's(R) businesses and the dry grocery administrative consolidation. The
Company incurred $11.2 million in transition expenses in 1999 primarily due to
the integration of the Duncan Hines(R) business. These expenses represent one-
time costs incurred to integrate operations and acquired businesses.
Operating Income. Operating income decreased from $64.1 million in 1999 to
$25.0 million in 2000. Operating income in 2000 was affected by the $47.4
million of other financial, legal and accounting expenses, $6.9 million in
Columbus consolidation costs, and by transition expenses in both 1999 and
2000. Before giving
20
effect to other financial, legal and accounting expenses, Columbus
consolidation costs and transition expenses, operating income increased from
$75.3 million in 1999 to $82.2 million in 2000.
Interest and Other Financing Expenses. The aggregate of the net interest
income and expense, amortization of loan fees and other bank and financing
expenses increased from $71.3 million in 1999 to $112.9 million in 2000. The
increase was due primarily to the additional debt associated with the
acquisitions of Chef's Choice(R) in April 1999 and Lender's(R) in November
1999. In addition, higher interest rates, costs associated with the accounts
receivable sale facility and increased debt levels in 2000 contributed to
higher interest expense.
Year Ended December 31, 2000 Compared to the Pro Forma Year Ended December 31,
1999
The following table sets forth certain results of operations data by
division for the year ended December 31, 2000 compared to the pro forma
results for the year ended 1999. The pro forma amounts include adjustments to
historical results to reflect the acquisitions of Lender's and Chef's Choice
and the adoption of EITF 00-14 (Accounting for Certain Sales Incentives) as if
they had taken place at the beginning of 1999.
Years Ended December 31,
------------------------------------------
2000 1999 Pro Forma
-------------------- --------------------
Frozen Dry Frozen Dry
--------- --------- --------- ---------
(in thousands)
------------------------------------------
Net sales.......................... $ 623,507 $ 376,624 $ 630,912 $ 403,368
Cost of goods sold................. (319,439) (169,146) (321,570) (186,445)
--------- --------- --------- ---------
Gross profit................... 304,068 207,478 309,342 216,923
--------- --------- --------- ---------
Brokerage, distribution and
marketing expenses:
Brokerage and distribution..... (69,668) (48,162) (81,473) (45,620)
Trade promotions............... (115,264) (63,853) (102,572) (72,003)
Consumer marketing............. (27,196) (17,459) (34,091) (25,738)
--------- --------- --------- ---------
Total brokerage, distribution and
marketing expenses................ (212,128) (129,474) (218,136) (143,361)
Amortization of goodwill and other
intangibles....................... (22,236) (22,583) (21,374) (21,082)
Selling, general and administrative
expenses (1)...................... (26,728) (16,175) (33,907) (11,992)
Other financial, legal and
accounting expenses (1)........... (29,500) (17,852) -- --
Columbus consolidation costs....... -- (6,868) -- --
Incentive plan (expense) credit.... -- -- -- 571
Transition expenses................ (1,424) (1,613) (3,179) (8,021)
--------- --------- --------- ---------
Total operating expenses....... (292,016) (194,565) (276,596) (183,885)
--------- --------- --------- ---------
Operating income................... $ 12,052 $ 12,913 $ 32,746 $ 33,038
========= ========= ========= =========
- --------
(1) In 2000, amounts were allocated to each division based on the percentage
of each division's net sales to total net sales.
Net Sales. Net sales for the year ended December 31, 2000 were $1.0
billion, a decrease of $34.1 million from pro forma 1999. This decrease was
primarily in the dry division.
Frozen Foods. Net sales in 2000 were down $7.4 million or 1.2% from pro
forma 1999 levels, principally a result of the Company's decision in early
2000 to terminate the prior practice of heavy quarter-end trade loading and
to drive down the excessive trade inventories that had accumulated as a
result of these practices. Increased food service volume, reduced coupon
expense and seafood price increases in part offset these volume reductions.
Dry Grocery. Dry grocery division net sales decreased 6.6% to $376.6
million in 2000 from pro forma 1999 levels, principally because of the
Company's decision in early 2000 to terminate the prior practice of heavy
quarter-end trade loading and to drive down the excessive trade inventories
that had accumulated as a result of these practices. This was offset in
part by reduced coupons and allowances, which were used heavily in 1999 to
increase sales volumes, and a price increase in baking products in June,
2000.
21
Gross Profit. Gross profit decreased from $526.3 million in 1999 (pro
forma) to $511.5 million in 2000.
Frozen Foods. Gross profit decreased from $309.3 million in 1999 (pro
forma) to $304.1 in 2000, a decrease of 1.7%, principally the result of the
reduced volume, offset in part by increased food service related volume and
additional margin on seafood products as a result of the price increase.
Dry Grocery. Gross profit decreased 4.4% from $216.9 million in 1999
(pro forma) to $207.5 million in 2000, due primarily to the decrease in net
sales, offset in part by lower coupon redemption costs in 2000 from high
1999 (pro forma) levels.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses decreased from $361.5 million in 1999 (pro forma) to $341.6
million in 2000, a decrease of 5.5%, as a result of decreases in both
divisions. As a percentage of net sales, brokerage, distribution and marketing
expenses decreased from 34.9% of net sales in 1999 (pro forma) to 34.2% of net
sales in 2000. Brokerage and distribution costs, which include broker
commissions, freight, warehousing and term discounts, decreased from 12.3% of
net sales in 1999 (pro forma) to 11.8% of net sales in 2000 due primarily to
reduction in brokerage and term discounts, offset in part by higher freight
and warehousing expenditures as a percentage of net sales in the dry grocery
division. Trade promotions expense, which consists of incentives offered to
food retailers to carry and promote Aurora products, increased from 16.9% of
net sales in 1999 (pro forma) to 17.9% of net sales in 2000 due to increased
trade promotion spending in the frozen foods division. Consumer marketing
expenses, which include the costs of advertising, market research and in-store
promotions, decreased primarily due to reductions in baking, breakfast and
pizza support required in 1999.
Frozen Foods. Brokerage, distribution and marketing expenses decreased
from $218.1 million in 1999 (pro forma) to $212.1 million in 2000, a
decrease of 2.8%. Brokerage and distribution expenses decreased from 12.9%
of net sales 1999 (pro forma) to 11.2% of net sales in 2000. This decrease
is due primarily to a reduction in term discounts offered to customers and
reduced brokerage costs as a result of consolidating brokerage to one
national brokerage during the second quarter of 2000. Trade promotions
expense increased from 16.3% of net sales in 1999 (pro forma) to 18.5% of
net sales in 2000. The increase in trade promotions as a percentage of net
sales is due primarily to an increase in performance based promotions,
particularly in seafood. Consumer marketing expenses decreased from 5.4% of
net sales in 1999 (pro forma) to 4.4% of net sales in 2000. This decrease
was due primarily to incremental support in 1999 for new breakfast and
pizza products and market expansion.
Dry Grocery. Brokerage, distribution and marketing expenses decreased
from $143.4 million in 1999 (pro forma) to $129.5 million in 2000, or 9.7%.
As a percentage of net sales, brokerage, distribution and marketing
expenses decreased from 35.5% in 1999 (pro forma) to 34.4% in 2000. This
decrease as a percentage of net sales was driven primarily by decreases in
trade promotions and consumer marketing, offset in part by increases in
brokerage and distribution costs. Brokerage and distribution expenses
increased from 11.3% of net sales in 1999 (pro forma) to 12.8% of net sales
in 2000. This increase is primarily a result of freight fuel surcharges and
higher inventory storage costs. Trade promotions expense decreased from
17.9% of net sales in 1999 (pro forma) to 17.0% of net sales in 2000. This
decrease is due to reduced spending not required in 2000 to support the
prior practice of loading of trade inventories, offset in part by carryover
amortization in 2000 of slotting fees incurred in 1999. Consumer marketing
decreased from 6.4% of net sales in 1999 (pro forma) to 4.6% of net sales
as a result of reduced media spending.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased from $45.9 million in 1999 (pro forma) to
$42.9 million in 2000, primarily due to administrative office consolidation in
2000.
Other Financial, Legal and Accounting Expenses. As a result of the
investigation into the Company's accounting practices, the resulting
restatement of its financial statements, related litigation and governmental
proceedings, defaults under its loan agreements, indentures and related
matters (see--"Restatements"), the
22
Company has incurred financial, legal and accounting expenses, including
charges to obtain waivers of its events of default and charges related to
amending its financing facilities. Such costs totaled $47.4 million in 2000,
including $5.9 million which has been accrued for estimated remaining costs to
be paid. Consequently, the Company does not expect additional expense in
future periods. These costs included a $17.7 million non-cash charge
associated with the issuance of common stock to certain holders of the
Company's senior subordinated debt. Management believes that cash expenditures
for such financial, legal and accounting expenses will be substantially
completed in 2001.
Columbus Consolidation Costs. During the third quarter of 2000, the Company
consolidated its administrative office and functions in St. Louis, Missouri
and closed its office in Columbus, Ohio. The charge of $6.9 million primarily
represents amounts for the involuntary termination of approximately 50 sales,
marketing, finance, information systems, purchasing and customer service
employees of $2.7 million, a non-cash charge for abandoned leasehold
improvements and capitalized software that will no longer be used of $3.1
million, and estimated unrecovered office lease costs after consolidation and
other items of $1.1 million. All payments related to the consolidation have
been made with the exception of $0.9 million of remaining reserves included in
accrued expenses at December 31, 2000 for employee severance to be paid in the
first six months of 2001 and the estimated unrecovered office lease costs.
Absent other changes in the Company's operations, annual savings of
approximately $10 million, beginning in 2001, are expected.
Transition Expenses. The Company incurred $11.2 million in transition
expenses in 1999 primarily due to the integration of the Duncan Hines
business. During 2000, the Company incurred approximately $3.0 million
primarily related to the integration of the Chef's Choice and Lender's
businesses and the dry grocery administrative consolidation. These expenses
represent one-time costs incurred to integrate operations and acquired
businesses.
Operating Income. Operating income decreased from $65.8 million in 1999
(pro forma) to $25.0 million in 2000. Operating income in 2000 was affected by
the $47.4 million of other financial, legal and accounting expenses, $6.9
million in Columbus consolidation costs, and by transition expenses in both
1999 and 2000. Before giving effect to other financial, legal and accounting
expenses, Columbus consolidation costs and transition expenses, operating
income increased from $77.0 million in 1999 (pro forma) to $82.2 million in
2000.
Interest and Other Financing Expenses. The aggregate of the net interest
income and expense, amortization of loan fees and other bank and financing
expenses increased from $92.9 million in 1999 (pro forma) to $112.9 million in
2000. The increase was due primarily to higher interest rates, costs
associated with the accounts receivable sale facility and increased debt
levels in 2000.
23
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998 (as
restated)
The following table sets forth certain historical results of operations
data by division for the years ended December 31, 1999 and 1998 (in
thousands):
Years Ended December 31,
------------------------------------------
1999 1998 (as restated)
-------------------- --------------------
Frozen Dry Frozen Dry
--------- --------- --------- ---------
Net sales.......................... $ 464,919 $ 411,287 $ 241,441 $ 448,198
Cost of goods sold................. (238,491) (186,445) (121,371) (197,564)
--------- --------- --------- ---------
Gross profit..................... 226,428 224,842 120,070 250,634
--------- --------- --------- ---------
Brokerage, distribution and
marketing expenses:
Brokerage and distribution....... (56,032) (45,620) (26,872) (50,681)
Trade promotions................. (78,111) (72,003) (50,073) (79,488)
Consumer marketing............... (27,618) (23,295) (9,159) (24,987)
--------- --------- --------- ---------
Total brokerage, distribution
and marketing expenses........ (161,761) (140,918) (86,104) (155,156)
Amortization of goodwill and other
intangibles....................... (17,223) (21,082) (10,038) (20,010)
Selling, general and administrative
expenses.......................... (23,604) (11,992) (14,438) (11,517)
Incentive plan (expense) credit.... -- 571 -- (56,583)
Transition expenses................ (3,179) (8,021) -- (10,366)
--------- --------- --------- ---------
Total operating expenses....... (205,767) (181,442) (110,580) (253,632)
--------- --------- --------- ---------
Operating income (loss).......... $ 20,661 $ 43,400 $ 9,490 $ (2,998)
========= ========= ========= =========
Net Sales. Net sales increased from $689.6 million in 1998 to $876.2
million in 1999 due to increased sales in the frozen foods division, which was
partially offset by a decline in dry grocery division sales.
Frozen Foods. Frozen foods division net sales increased from $241.4
million in 1998 to $464.9 million in 1999. Net sales in 1998 included nine
months of frozen foods operations, following the acquisition of VDK
Holdings in April 1998. Sales in 1999 included a full year of frozen foods
operation and the subsequent acquisitions of Chef's Choice(R) in April 1999
and Lender's(R) in November 1999. Before giving effect to the Chef's
Choice(R) and Lender's(R) acquisitions, net sales in 1999 were $392.8
million.
Dry Grocery. Dry grocery division net sales decreased from $448.2
million in 1998 to $411.3 million in 1999 due primarily to unit volume
declines for both syrup and baking products. Breakfast products unit volume
declined 3%, and sales decreased 7.5% due to the volume decline and a shift
from retail to alternative channels sales. Baking products net sales
decreased 8.7% due to capacity constraints related to the transition from
production in the predecessor owner's facility to the new co-manufacturer.
Gross Profit. Gross profit increased from $370.7 million, or 53.8% of net
sales in 1998 to $451.3 million, or 51.5% of net sales in 1999. The decline in
gross profit as a percentage of net sales was attributable to both segments of
the business.
Frozen Foods. Frozen foods division gross profit as a percentage of net
sales declined from 49.7% in 1998 to 48.7% in 1999 due to higher seafood
material costs, a lower gross profit percentage on Aunt Jemima(R) waffles
due to an increase in the number of waffles per carton and increased sales
to private label and club customers, which typically have a lower gross
profit percentage and lower associated marketing expenses. In addition, the
Chef's Choice(R) acquisition affected the division's gross profit
percentage, as the Chef's Choice(R) business generates a lower gross profit
percentage than the other retail brands.
Dry Grocery. Dry Grocery Division gross profit as a percentage of net
sales declined from 55.9% in 1998 to 54.7% in 1999 due to increased sales
of lower gross margin products and higher raw material costs. Syrup sales
were lower in traditional retail channels and higher in club and
foodservice, which typically
24
have lower gross margins and lower marketing expenses than retail. Baking
mixes experienced lower gross margins due to lower sales of high-margin,
capacity-constrained products such as cake and frosting products, which
were partially offset by higher sales of lower margin muffin and specialty
product mixes. The division also experienced higher material costs,
particularly on corn syrup and packaging.
Brokerage, Distribution and Marketing Expenses. Brokerage, distribution and
marketing expenses increased from $241.3 million in 1998 to $302.7 million in
1999, and decreased from 35.0% of net sales in 1998 to 34.5% of net sales in
1999. Brokerage and distribution costs, which include broker commissions,
freight, warehousing and term discounts, increased to 11.6% of net sales due
to freight increases and acquired businesses. Trade promotions, which consist
of incentives offered to food retailers to carry and promote Aurora products,
declined to 17.1% of net sales due to trade promotion spending rate reductions
in both divisions. Consumer marketing expenses, which include the costs of
advertising, market research, and in store promotions increased slightly to
5.8% of net sales in 1999.
Frozen Foods. Brokerage and distribution expenses increased from 11.1%
of net sales in 1998 to 12.1% of net sales in 1999 due to distribution cost
increases and the inclusion of the Lender's(R) business for part of the
year, which has higher distribution costs due to the fresh bagel
distribution system. Trade promotion expenses decreased from 20.7% of net
sales in 1998 to 16.8% of net sales in 1999 due to reductions in trade
spending in each of the product groups to support a shift in focus toward
consumer spending. In addition, cost containment initiatives lowered the
overall trade spending rate. Consumer spending increased from 3.8% of net
sales in 1998 to 5.9% of net sales in 1999 due to increased advertising on
the seafood brands and introductory consumer support for new breakfast
products.
Dry Grocery. Brokerage and distribution expenses decreased from 11.3% of
net sales in 1998 to 11.1% of net sales in 1999 due to a slight decrease in
freight costs. Trade promotion expenses decreased from $79.5 million in
1998 to $72.0 million in 1999, primarily due to volume declines. Consumer
marketing expenses increased from 5.6% of net sales in 1998 to 5.7% of net
sales in 1999 due to increases in coupon activity on the breakfast brands
which were partially offset by advertising reductions.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles increased from $30.0 million in 1998 to $38.3 million in
1999 due to the impact of a full year of ownership of VDK. The 1998 results
include nine months of operating activity for the frozen foods division due to
the acquisition of VDK Holdings in April 1998. The acquisitions of Chef's
Choice(R) and Lender's(R) in 1999 also contributed to the increase in
amortization. Frozen foods amortization totaled $17.2 million and $10.0
million in 1999 and 1998, respectively. Dry grocery amortization was $21.1
million in 1999 and $20.0 million in 1998.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased from $26.0 million in 1998 to $35.6 million
in 1999 due primarily to the effect of including only nine months of operating
activity for the frozen foods division in 1998 compared to a full year for
1999. Selling, general and administrative expenses were 4.1% of net sales in
1999 compared to 3.8% of net sales in the prior year. Frozen foods selling,
general and administrative expenses increased from $14.4 million in 1998 to
$23.6 million in 1999 due to the growth in the business. Dry grocery selling,
general and administrative expenses were in $12.0 million in 1999 compared to
$11.5 million in 1998.
Incentive Plan Expense. Incentive plan expense of $56.6 million in 1998
represents a one-time, non-cash charge estimated and recorded by the Company
related to its equity incentive plan, whereby certain employees of the Company
were provided the opportunity to participate in the potential appreciation of
the value of the Company's common stock. The credit of $0.6 million in 1999
represents an adjustment to the Company's estimate.
Transition Expenses. Transition expenses were $11.2 million in 1999, an
increase of $0.8 million versus prior year. These expenses represent one-time
costs incurred to integrate acquired businesses. Transition expenses totaled
$3.2 million for the frozen foods division in 1999, which were related to the
acquisitions of Chef's
25
Choice(R) and Lender's(R). Dry grocery transition expenses were related to the
integration of Duncan Hines(R) and totaled $10.4 million and $8.0 million in
1998 and 1999, respectively.
Operating Income. Operating income increased from $6.5 million in 1998 to
$64.1 million in 1999. Operating income in 1998 was affected by the $56.6
million one-time expense for the Company's equity incentive plan. Before
giving effect to the equity incentive plan expense and transition expense,
operating income increased from $73.4 million in 1998 to $74.7 million in
1999. Operating income in 1998 reflected nine months of VDK Holdings operating
activity. Operating income in 1999 reflected twelve months of frozen foods
division activity, including nine months of Chef's Choice(R) and two months of
Lender's(R). Frozen foods operating income increased from $9.5 million in 1998
to $20.7 million in 1999 due primarily to the increase in the size of the
division. Dry grocery operating results improved from a loss of $3.0 million
in 1998 to operating income of $43.4 million in 1999 due primarily to the
impact of the equity incentive plan in 1998. Before giving effect to the
equity incentive plan and transition expenses in both years, dry division
operating income decreased from $64.0 million in 1998 to $50.9 million in 1999
due primarily to the decrease in sales.
Interest Expense and Amortization of Deferred Financing Expense. The
aggregate of net interest income and expense, amortization of loan fees and
other bank and financing expenses increased from $66.6 million in 1998 to
$71.3 million in 1999. The increase was due to the additional debt associated
with the acquisitions of Chef's Choice(R) in April 1999 and Lender's(R) in
November 1999.
Income Tax Benefit. The income tax benefit for 1999 was $2.8 million
compared to an income tax benefit in 1998 of $0.2 million. The effective tax
rate for 1999 was 38.5% compared to 0.4% in 1998. After giving effect to the
impact of the extraordinary loss, the effective tax rate in 1998 was 7.8%. The
low effective tax rate in 1998 was due to the non-deductibility of the
incentive compensation recorded by the Company.
Net (Loss) Income. The Company incurred a net loss of $4.4 million in 1999
compared to a net loss in 1998 of $69.1 million. The loss in 1998 included the
$56.6 equity incentive plan expense and 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.
Liquidity and Capital Resources
For the year ended December 31, 2000 the Company used $17.9 million to fund
operating activities compared to the year ended December 31, 1999, when $11.1
million of cash was provided by operations. The increase in cash used in 2000
was primarily a result of the net loss incurred during the period including an
increase in cash interest payments of $44.0 million and $29.6 million of
pretax cash expenses for other financial, legal and accounting expenses
relating to the restatements. In addition, working capital requirements
increased $23.8 million, due in part to historically high balances of accounts
payable and accrued expenses, which were reduced in 2000, requiring cash.
These uses were offset in part by inventory reductions and funding from the
sale of accounts receivable (see Note 5 to the consolidated financial
statements). As of December 31, 2000, the Company had received a net $38.6
million from the sale of accounts receivable. The receivable sales facility,
which initially allowed for the sale of up to $60 million in outstanding
accounts receivable at any point in time, has been used to fund working
capital needs.
Net cash used in investing activities for the year ended December 31, 2000,
was approximately $23.6 million compared to $375.2 million during the year
ended December 31, 1999. Investing activities in 2000 consisted of additions
to fixed assets and other assets of $16.8 million, $8.0 million paid as
additional purchase price for the Seacoast acquisition (see Note 3 to the
consolidated financial statements) and the receipt of $1.2 million from the
sale of non-operating real estate. Investing activities in 1999 consisted
primarily of $343.9 million paid to acquire the Sea Coast and Lender's
businesses, along with $31.3 million in fixed asset and other asset additions.
26
During the year ended December 31, 2000, financing activities provided cash
of $41.8 million. The Company received $15 million from the issuance of Series
A Preferred Stock in connection with the Consent Solicitation (See Notes 10 &
11 to the consolidated financial statements.) The Company repaid $28.0 million
in principal on its senior secured term debt and borrowed a net $54.4 million
on the revolving facility to fund its operations and other cash requirements.
In 1999 net cash from financing activities of $364.0 million was used
primarily to fund the business acquisitions.
During part of 2000, as a result of the restatements of the Company's
financial statements, the Company was in default of a number of provisions of
the agreements covering its senior secured debt and senior subordinated debt.
During the third quarter of 2000, the Company solicited and received
sufficient consents from holders of the senior subordinated debentures to
amend certain provisions and waive certain events of default under its senior
subordinated indentures (the "Consent Solicitation"). As a result, the Company
issued 6,965,736 shares of common stock to the holders of senior subordinated
notes who participated in the consent solicitation.
In connection with the successful completion of the Consent Solicitation,
certain investors, including funds affiliated with certain existing
stockholders, purchased 3,750,000 shares of the Company's Series A Preferred
Stock for an aggregate purchase price of $15 million, enhancing the Company's
liquidity.
The Company and its lenders under the senior secured debt also amended
their agreement to provide for the sale by the Company of certain accounts
receivable, waiver of certain defaults, amendment of financial covenants and
increases in interest rates on borrowings made pursuant to the facility. In
February, 2001, the Company and lenders party to the senior secured debt
further amended this agreement to provide revised financial covenants for
2001, to affirm the ability of the Company to continue to sell up to $60
million of accounts receivable, to increase the interest rate spread on
borrowings by 0.25% and to provide for a further increase in the interest rate
spread of 0.25% if asset sale proceeds and related repayments of debt between
February 1, 2001 and June 30, 2001 are less than $90 million. In addition, the
accounts receivable sale facility was amended to extend the termination date
to March 31, 2002 and effectively reduce the available facility to $46 million
as of March 31, 2001 and $36 million as of December 31, 2001.
Based upon the amendments and waivers relating to the senior secured debt
and senior subordinated debt, the Company has classified its senior secured
and senior subordinated debt as long-term in the accompanying December 31,
2000 balance sheet.
As of March 19, 2001, the Company has $9.1 million available for borrowings
under its revolving credit facility and has sold a net $17.8 million of
accounts receivable.
The Company is highly leveraged. At March 19, 2001, the Company has
outstanding approximately $1.1 billion in aggregate principal amount of
indebtedness for borrowed money. The degree to which the Company is leveraged
results in significant cash interest expense and principal repayment
obligations and such interest expense may increase with respect to its
revolving credit facility based upon changes in prevailing interest rates.
This leverage may, among other things, affect the ability of the Company to
obtain additional financing, or adjust to changing market conditions. In
addition, the Company is currently limited in its ability to pursue additional
acquisitions.
Management of the Company believes that cash generated from operations and
cash available to the Company from sale of accounts receivable and borrowings
under the revolving credit agreement will be adequate in 2001 to fund its
operating and capital expenditure requirements and its debt repayment
obligations.
Contingencies
Following the announcement of the special investigation by the Company's
Board of Directors, several purported class action lawsuits were filed against
the Company in the United States District Court for the Northern District of
California alleging that the Company and the directors and officers that
resigned on
27
February 17, 2000 violated federal securities laws. In addition, the
Securities and Exchange Commission and the U.S. Attorney conducted
investigations relating to the events that resulted in restatement of the
Company's financial statements. While the Company announced substantial
resolution of these lawsuits and investigations in January, 2001,
implementation of certain remedial measures will continue in 2001. See "Item
3. Legal Proceedings," which is incorporated herein by reference.
Impact of New Accounting Pronouncements
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities (as amended). SFAS 133 is
effective for all fiscal years beginning after June 15, 2000. SFAS 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. Due to its limited use of derivative instruments, the adoption of
SFAS 133 on January 1, 2001 did not have a significant effect on the Company's
results of operations or its financial position.
Interest Rate Agreements
The Company does not use derivative financial instruments for trading or
speculative purposes. In accordance with the 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:
At December 31, 2000, the Company was party to three interest rate swap
agreements. On March 17, 1998, the Company entered into a three-year interest
rate swap agreement (the "Swap") with a notional principal amount of $150.0
million. The counterparty to the Swap is a major financial institution. The
applicable rate is set quarterly, and was reset on March 19, 2001, resulting
in a net liability to the Company of 1.07% for the following three months. On
November 30, 1998, the Company amended the Swap whereby the counterparty
received the option to extend the termination date to March 17, 2003 and the
applicable rate was decreased from 5.81% to 5.37%. On April 28, 2000, the
Company further amended the Swap whereby the applicable rate was increased
from 5.37% to 6.01%. Under the Swap, the Company would receive payments from
the counterparty if the three-month LIBOR rate exceeds 6.01% and make payments
to the counterparty if the three-month LIBOR rate is less than 6.01%.
Subsequent to December 31, 2000, the counterparty exercised its option to
extend the term of the Swap to March 17, 2003.
On April 13, 1999, the Company entered into a three-year bond swap to
floating interest rate collar agreement, which was amended on April 28, 2000
(the "Bond Swap") with a notional principal amount of $200.0 million. The
counterparty to the Bond Swap is a major financial institution. The applicable
rate is set quarterly, with the next reset date of April 2, 2001. Under the
Bond Swap, the Company receives an effective 8.63% fixed interest rate and
pays three-month LIBOR plus 3.25%, subject to certain caps and floors. Under
the Bond Swap, the Company would receive payments from the counterparty if the
three-month LIBOR rate plus 3.25% is between 7.80% and 8.63% and make payments
if the three-month LIBOR rate plus 3.25% exceeds 10.65%.
On November 15, 1999, the Company entered into a five-year interest rate
collar agreement, which was amended on April 28, 2000 (the "Collar") with a
notional principal amount of $150.0 million. The counterparty to the Collar is
a major financial institution. The applicable rate is set quarterly, with the
next reset date of May 17, 2001. Under the Collar, the Company would receive
payments from the counterparty if the three-month LIBOR rate is between 6.50%
and 7.50% or exceeds 8.25%. The Company would make payments if the three-month
LIBOR rate is less than 4.95%.
28
During fiscal 2000, the Company received payments of $0.9 million and in
fiscal years 1999 and 1998 made payments under interest rate agreements
aggregating $0.7 million and $0.2 million respectively.
Risks associated with the interest rate agreements include those associated
with changes in market value and interest rates. At December 31, 2000, the
fair value of the Company's interest rate agreements was a liability of $4.7
million.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or oral
statements that are "forward-looking" including statements contained in this
report and other filings with the Securities and Exchange Commission and in
reports to the Company's stockholders. Certain statements, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," "estimates" and words of similar import constitute
"forward-looking statements" and involve known and unknown risk, uncertainties
and other factors that may cause the actual results, performance or
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such factors could include, among others, the following:
the availability of funding for operations; the ability of the Company to
service its high level of indebtedness; the ability of new management to
implement a successful strategy; the ability of the Company to successfully
integrate the Company's brands; whether the Company can increase its
competitive position in the marketplace; the ability of the Company to reduce
expenses; the ability of the Company to successfully introduce new products;
the Company's success in increasing volume; the effectiveness of the Company's
advertising campaigns; the ability of the Company to successfully leverage its
brands; the ability of the Company to secure new, effective distribution
channels; the ability of the Company to grow and maintain its market share;
the actions of the Company's competitors; general economic and business
conditions; industry trends; demographics; raw material costs; integration of
acquired businesses into the Company; terms and development of capital; the
ability of the Company to realize the value of its deferred tax assets; the
outcome of the Securities Actions; and changes in, or the failure or inability
to comply with, governmental rules and regulations, including, without
limitation, FDA and environmental rules and regulations. See "--Liquidity and
Capital Resources." Given these uncertainties, undue reliance should not be
placed on such forward-looking statements. Unless otherwise required by law,
the Company disclaims an obligation to update any such factors or to publicly
announce the results of any revisions to any forward-looking statements
contained herein to reflect future events or developments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company entered into interest rate swap agreements for non-trading
purposes. Risks associated with the interest rate swap 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.
29
The table below provides information about the Company's financial
instruments and derivatives that are sensitive to changes in interest rates,
including interest rate swaps and debt obligations. For debt obligations, the
table presents principal cash flows and related weighted average interest
rates by maturity dates. For interest rate swaps, the table presents the
notional amounts and weighted average interest rates by expected (contractual)
maturity dates. Notional amounts are used to calculate the contractual
payments to be exchanged under the contract rates. Weighted average variable
rates are based on implied forward rates in the yield curve as of December 31,
2000.
Expected Maturity Date as of December 31,
2000 Value
----------------------------------------------- ------------
There-
2001 2002 2003 2004 2005 after Total 2000 1999
---- ----- ----- ----- ----- ------ ----- ----- -----
($ in millions)
Long-term debt:
Fixed rate debt....... -- -- -- -- -- 400.0 400.0 282.0 418.6
Average interest
rate............... 9.3% 9.3% 9.3% 9.3% 9.3% 9.3% 9.3%
Variable rate debt.... 32.9 37.9 42.8 47.8 188.0 354.2 703.6 703.6 677.2
Average interest
rate............... 9.6% 9.4% 9.6% 9.8% 10.0% 10.1% 10.0%
Interest rate
derivatives:
Variable to fixed..... -- -- 150.0 -- -- -- 150.0 (0.9) (1.8)
Average pay rate.... 6.0% 6.0% 6.0% 0.0% 0.0% 0.0% N/A
Average receive
rate............... 5.8% 5.6% 5.8% 0.0% 0.0% 0.0 N/A
Fixed to variable..... -- 200.0 -- 150.0 -- -- 350.0 (3.8) 4.2
Average pay rate.... 7.4% 6.8% 5.8% 6.0% 0.0% 0.0% N/A
Average receive
rate............... 7.4% 6.8% 5.8% 6.0% 0.0% 0.0% N/A
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Item 14, which is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item appears in the Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the 2001
Annual Meeting of Stockholders (the "2001 Proxy Statement") under the caption
"Directors and Executive Officers," the text of which is incorporated by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the 2001 Proxy Statement
under the captions "Compensation of Directors," "Executive Compensation,"
"Stock Option Grants," "Option Exercises and Year-End Value of Unexpired
Operations," the texts of which are incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears in the 2001 Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management," the text of which is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the 2001 Proxy Statement
under the captions "Certain Relationships and Related Transactions,"
"Employment Contracts," "Interest of Certain Persons in Matters to be Acted
upon" and "Compensation Committee Interlock and Insider Participation," the
texts of which are incorporated by reference.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements of the Company
Report of Independent Accountants................................. 39
Consolidated Balance Sheets as of December 31, 2000 and 1999...... 40
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.................................. 41
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2000 and 1999......................... 42
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.................................. 43
Notes to Consolidated Financial Statements........................ 44
2. Financial Statement Schedule
Schedule II--Valuation Reserves................................... 75
3. Exhibits
(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. (Incorpo-
rated 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 Compa-
ny. (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 Au-
rora 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 Hold-
ings, 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, Van de Kamp's, Inc. and Morningstar Foods, Inc. (In-
corporated 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, be-
tween Van de Kamp's, Inc. and Morningstar Foods, Inc. (Incor-
porated by reference to Exhibit 2.1 to Van de Kamp's, Inc.'s
Form 10-Q for the quarter ended March 31, 1997).
32
Exhibit
Number Exhibit
------- -------
2.9 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).
2.10 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).
2.11 Asset Purchase and Sale Agreement, dated as of January 17,
1996, between Shellfish Acquisition Company, LLC ("Shellfish")
and Campbell Soup Company ("Campbell"). (Incorporated by ref-
erence to the text of which and Exhibits to which are incorpo-
rated 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 ref-
erence to Exhibit 2.1 to Van de Kamp's, Inc.'s Form 8-K dated
May 6, 1996).
2.12 Asset Purchase Agreement, dated as of January 17, 1996, be-
tween Van de Kamp's, Inc. and Shellfish. (Incorporated by ref-
erence to Exhibit 2.2 to the Van de Kamp's, Inc.'s Form 10-Q
for the quarter ended March 20, 1996).
2.13 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 ref-
erence to Exhibit 2.2 to Van de Kamp's, Inc.'s Form S-4 filed
on October 4, 1995 (the "Van de Kamp's S-4")).
2.14 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).
2.15 Asset Purchase Agreement, dated as of March 10, 1999, by and
among the Company and Sea Coast Foods, Inc., Galando Invest-
ments Limited Partnership, Carry-on Limited Partnership, Jo-
seph Galando, Barbara J. Galando, Stanley J. Carey and Mary K.
Carey. (Incorporated by reference to Exhibit 2.1 to the Form
10-Q for the quarter ended March 31, 1999).
2.16 Asset Purchase Agreement Dated September 24, 1999 between Au-
rora Foods Inc. and The Eggo Company (Incorporated by refer-
ence to Exhibit 2.1 to the Aurora Foods Inc. 8-K dated Novem-
ber 1, 1999).
2.17 Securities Purchase Agreement for Series A Preferred Stock
dated as of September 20, 2000 between the Company and the
Purchasers listed on the signature page thereto. (Incorporated
by reference to Exhibit 2.1 to the Aurora Foods Inc. Form 8-K
filed on September 21, 2000).
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. (Incorpo-
rated by reference to exhibit 3.2 to the Aurora Foods Inc.
Form 10-Q for the quarter ended June 30, 2000.).
3.3 Certificate of Designation for the Company's Series A Pre-
ferred Stock filed with the Secretary of State of Delaware on
September 7, 2000. (Incorporated by reference to Exhibit 3.1
to the Aurora Foods Inc. Form 8-K filed on September 21,
2000).
4.1 Indenture dated as of February 10, 1997, governing the 9 7/8%
Series B Senior Subordinated Notes due 2007 by and between Au-
rora 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
Notes due 2007 (included in Exhibit 4.1 hereto). (Incorporated
by reference to Exhibit 4.2 to the Aurora S-4).
33
Exhibit
Number Exhibit
------- -------
4.3 Form of Note Guarantee to be issued by future subsidiaries of
Aurora Foods Inc. pursuant to the Indenture (included in Ex-
hibit 4.1 hereto). (Incorporated by reference to Exhibit 4.4
to the Aurora S-4).
4.4 Indenture dated as of July 1, 1997, governing the 9 7/8% Se-
ries D Senior Subordinated Notes due 2007 by and between Au-
rora 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
Notes 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, governing the 8 3/4% Se-
nior Subordinated Notes due 2008 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. (Incorporated by reference to Exhibit 4.9 to the Aurora
Foods Inc. Form 10-K for the year ended December 31, 1999.)
4.10 Specimen Certificate of the Common Stock. (Incorporated by
reference to Exhibit 4.1 to the S-1).
4.11 Supplemental Indenture, governing the 9 7/8% Series D Senior
Subordinated Notes due 2007, dated as of April 1, 1999, among
Sea Coast Foods, Inc., Aurora Foods Inc. and Wilmington Trust
Company, as Trustee. (Incorporated by reference to Exhibit
4.11 to the Aurora Foods Inc. Form 10-K for the year ended De-
cember 31, 1999.)
4.12 Supplemental Indenture, governing the 9 7/8% Series C Senior
Subordinated Notes due 2007, dated as of April 1, 1999, among
Sea Coast Foods, Inc., Aurora Foods Inc. and Wilmington Trust
Company, as Trustee. (Incorporated by reference to Exhibit
4.12 to the Aurora Foods Inc. Form 10-K for the year ended De-
cember 31, 1999.)
4.13 Supplemental Indenture, governing the 8 3/4% Senior Subordi-
nated Notes due 2008, dated as of April 1, 1999, among Sea
Coast Foods, Inc., Aurora Foods Inc. and Wilmington Trust Com-
pany, as Trustee. (Incorporated by reference to Exhibit 4.13
to the Aurora Foods Inc. Form 10-K for the year ended December
31, 1999.)
4.14 Amendment of Securityholders Agreement among Aurora Foods Inc.
and the parties listed on the signature page thereto. (Incor-
porated by reference to Exhibit 4.14 to the Aurora Foods Inc.
Form 10-Q for the quarter ended September 30, 2000).
4.15 Supplemental Indenture dated as of September 20, 2000 between
the Company, Sea Coast Foods, Inc. and Wilmington Trust Compa-
ny, as trustee, amending the Indenture dated as of July 1,
1998, as amended. (Incorporated by reference to Exhibit 4.1 to
Aurora Foods Inc.'s Form 8-K filed September 21, 2000).
4.16 Supplemental Indenture dated as of September 20, 2000 between
the Company, Sea Coast Foods, Inc. and Wilmington Trust Compa-
ny, as trustee, amending the Indenture dated as of February
10, 1997, as amended. (Incorporated by reference to Exhibit
4.2 to Aurora Foods Inc.'s Form 8-K filed September 21, 2000).
4.17 Supplemental Indenture dated as of September 20, 2000 between
the Company, Sea Coast Foods, Inc. and Wilmington Trust Compa-
ny, as trustee, amending the Indenture dated as of July 1,
1997, as amended. (Incorporated by reference to Exhibit 4.3 to
Aurora Foods Inc.'s Form 8-K filed September 21, 2000).
34
Exhibit
Number Exhibit
------- -------
10.1* VDK Holdings, Inc. Incentive Compensation Plan. (Incorporated
by reference to Exhibit 10.1 to the S-1).
10.2 Purchase Agreement, dated February 5, 1997, by and between Au-
rora Foods Inc. and Chase Securities, Inc. (Incorporated by
reference to Exhibit 1.1 to the Aurora S-4).
10.3* 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).
10.4* 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).
10.5 License Agreement, dated as of February 21, 1979, between Gen-
eral Host Corporation and VDK Acquisition Corporation. (Incor-
porated by reference to Exhibit 10.27 to the Van de Kamp's S-
4).
10.6 License Agreement, dated as of October 14, 1978, between Gen-
eral Host Corporation and Van de Kamp's Dutch Bakeries. (In-
corporated by reference to Exhibit 10.28 to the Van de Kamp's
S-4).
10.7 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 Ex-
hibit 2.1 to Van de Kamp's, Inc.'s Form 8-K dated July 9,
1996).
10.8 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 por-
tion of this document has been requested by the Company). (In-
corporated by reference to Exhibit 10.16 to Aurora Foods
Inc.'s Form 10-K, filed on March 27, 1998 (the "Aurora 10-
K")).
10.9 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).
10.10* 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).
10.11* 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).
10.12* Employment Agreement between Ian R. Wilson and Aurora Foods
Inc. (Incorporated by reference to Exhibit 10.7 to the S-1).
10.13* Employment Agreement between James B. Ardrey and Aurora Foods
Inc. (Incorporated by reference to Exhibit 10.8 to the S-1).
10.14* Employment Agreement between Ray Chung and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.9 to the S-1).
10.15* Employment Agreement between M. Laurie Cummings and Aurora
Foods Inc. (Incorporated by reference to Exhibit 10.10 to the
S-1).
10.16* Amendment No. 1 to Ellinwood Amended and Restated Employment
Agreement, dated as of January 1, 1998, between Thomas O. El-
linwood and Van de Kamp's, Inc. (Incorporated by reference to
Exhibit 10.15 to the S-1).
10.17* 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).
10.18* Employment Agreement, dated as of February 16, 1998, by and
between Van de Kamp's, Inc. and Anthony A. Bevilacqua. (Incor-
porated by reference to Exhibit 10.17 to the S-1).
10.19 Expense Agreement, made as of July 1, 1998, between Aurora
Foods Inc. and Dartford Partnership LLC (Incorporated by ref-
erence to Exhibit 10.32 to the S-1).
35
Exhibit
Number Exhibit
------- -------
10.20* 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
LLC (Incorporated by reference to Exhibit 10.33 to the S-1).
10.21* 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).
10.22* 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).
10.23 Indemnity Agreement, dated as of July 1, 1998, between Ian R.
Wilson and Aurora Foods Inc. (Incorporated by reference to Ex-
hibit 10.46 to the S-1).
10.24 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).
10.25 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).
10.26 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).
10.27 Indemnity Agreement, dated as of July 1, 1998, between Charles
J. Delaney and Aurora Foods Inc. (Incorporated by reference to
Exhibit 10.53 to the S-1).
10.28 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).
10.29 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).
10.30 Indemnity Agreement, dated as of July 1, 1998, between Peter
Lamm and Aurora Foods Inc. (Incorporated by reference to Ex-
hibit 10.56 to the S-1).
10.31* 1998 Employee Stock Purchase Plan (Incorporated by reference
to Exhibit 10.48 to the Aurora Foods Inc. Form 10-K for the
fiscal year ended December 31, 1998).
10.32 Production Agreement, dated as of June 4, 1998, by and between
Aurora Foods Inc. and Gilster-Mary Lee Corporation. (Incorpo-
rated by reference to Exhibit 10.48 to the S-1).
10.33* 1998 Long Term Incentive Plan (Incorporated by reference to
Exhibit 10.50 to the Aurora Foods Inc. Form 10-K for the fis-
cal year ended December 31, 1998).
10.34 Fifth Amended and Restated Credit Agreement dated November 1,
1999 and entered into by and among Aurora Foods Inc., as Bor-
rower, the Lenders listed therein, the Chase Manhattan Bank,
as Administrative Agent for the Lenders, National Westminster
Bank PLC, as Syndication Agent, and UBS AG, Stamford Branch,
as Documentation Agent (Incorporated by reference to Exhibit
10.1 to the Aurora Foods Inc. Form 8-K dated November 1,
1999).
10.35 Amendment, dated as of April 28, 2000, to the Fifth Amended
and Restated Credit Agreement dated November 1, 1999 and en-
tered into by and among Aurora Foods Inc., as Borrower, the
Lenders listed therein, the Chase Manhattan Bank, as Adminis-
trative Agent for the Lenders, National Westminster Bank PLC,
as Syndication Agent, and UBS AG, Stamford Branch, as Documen-
tation Agent. (Incorporated by reference to Exhibit 10.35 to
the Aurora Foods Inc. Form 10-Q for the quarter ended
March 31, 2000).
10.36 First Amendment, Forbearance and Waiver, dated as of March 29,
2000, to the Fifth Amended and Restated Credit Agreement dated
November 1, 1999 and entered into by and among Aurora Foods
Inc., as Borrower, the Lenders listed therein, the Chase Man-
hattan Bank, as Administrative Agent for the Lenders, National
Westminster Bank PLC, as Syndication Agent, and UBS AG, Stam-
ford Branch, as Documentation Agent. (Incorporated by refer-
ence to Exhibit 10.36 to the Aurora Foods Inc. Form 10-Q for
the quarter ended March 31, 2000).
36
Exhibit
Number Exhibit
------- -------
10.37 Collective Bargaining Agreement between Lender's Bagel Bakery
and Bakery, Confectionery and Tobacco Workers of America Local
# 429 September 1, 1998 to August 31, 2001. (Incorporated by
reference to Exhibit 10.35 to the Aurora Foods Inc. Form 10-K
for the year ended December 31, 1999).
10.38 Receivables Purchase Agreement, dated as of April 19, 2000,
and entered into by and between Aurora Foods Inc., as Seller,
and the Chase Manhattan Bank, as borrower. (Incorporated by
reference to Exhibit 10.38 to the Aurora Foods Inc. Form 10-Q
for the quarter ended March 31, 2000.)
10.39* Employment Agreement dated as of March 21, 2000, between Au-
rora Foods Inc. and Christopher T. Sortwell. (Incorporated by
reference to Exhibit 10.39 to the Aurora Foods Inc. Form 10-Q
for the quarter ended March 31, 2000).
10.40* Employment Agreement dated as of March 27, 2000, between Au-
rora Foods Inc. and James T. Smith. (Incorporated by reference
to Exhibit 10.40 to the Aurora Foods Inc. Form 10-Q for the
quarter ended September 30, 2000).
10.41* Employment Agreement dated as of March 27, 2000, between Au-
rora Foods Inc. and Paul Graven.
10.42 Registration Rights Agreement dated as of January 31, 2001 by
and among Aurora Foods Inc., and the Holders listed on Sched-
ule A thereto.
10.43* Aurora Foods Inc. 2000 Equity Incentive Plan.
- --------
21.1 Subsidiary of Aurora Foods Inc. (Incorporated by reference to
Exhibit 21.1 to the Aurora Foods Inc. Form 10-K for the year
ended December 31, 1999.)
*Represents management contracts or compensatory plans or arrangements
(b)Reports on Form 8-K
None.
23.1 Consent of PricewaterhouseCoopers LLP
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.
/s/ James T. Smith
Date: April 2, 2001 By___________________________________
James T. Smith
Director, President and Chief
Executive Officer
(Principal Executive
Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on April 2, 2001.
Signature Title
--------- -----
/s/ Richard C. Dresdale Director and Chairman of the Board
___________________________________________
Richard C. Dresdale
/s/ David E. De Leeuw Director and Vice Chairman
___________________________________________
David E. De Leeuw
/s/ James T. Smith Director, President and Chief Executive
___________________________________________ Officer (Principal Executive Officer)
James T. Smith
/s/ Christopher T. Sortwell Director, Executive Vice President, and
___________________________________________ Chief Financial Officer (Principal
Christopher T. Sortwell Accounting and Finance Officer)
/s/ Clive A. Apsey Director
___________________________________________
Clive A. Apsey
/s/ Charles J. Delaney Director
___________________________________________
Charles J. Delaney
/s/ Andrea Geisser Director
___________________________________________
Andrea Geisser
/s/ Peter Lamm Director
___________________________________________
Peter Lamm
/s/ George E. McCown Director
___________________________________________
George E. McCown
/s/ Ronald S. Orr Director
___________________________________________
Ronald S. Orr
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Aurora Foods Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Aurora Foods Inc. and its subsidiary at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, which require that we plan
and perform audits 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 our
opinion.
As discussed in Note 1 to the consolidated financial statements, in April
2000, the Company, in conjunction with the issuance of its December 31, 1999
audited financial statements, restated its December 31, 1998 financial
statements for trade promotion liabilities and certain other matters.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2000, the Company adopted Emerging Issues Task Force Issue No. 00-
14, "Accounting for Certain Sales Incentives".
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 22, 2001, except for Notes 12 and 20,
which are as of March 2, 2001
39
AURORA FOODS INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share amounts)
December 31,
----------------------
2000 1999
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 525 $ 315
Accounts receivable, net of $725 and $1,311
allowance, respectively............................. 82,628 92,576
Inventories (Note 6)................................. 104,319 123,967
Prepaid expenses and other assets.................... 6,496 21,876
Current deferred tax assets (Note 15)................ 17,133 17,338
---------- ----------
Total current assets............................... 211,101 256,072
Property, plant and equipment, net (Note 7)............ 239,107 257,443
Deferred tax asset (Note 15)........................... 40,045 2,357
Goodwill and other intangible assets, net (Note 8)..... 1,268,942 1,294,995
Asset held for sale.................................... -- 800
Other assets........................................... 35,091 37,671
---------- ----------
Total assets....................................... $1,794,286 $1,849,338
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Senior secured term debt (Note 10)................... $ -- $ 543,591
Senior secured revolving debt facility (Note 10)..... -- 105,600
Senior subordinated notes (Note 10).................. -- 402,049
Current portion of senior securred term debt (Note
10)................................................. 32,926 27,980
Accounts payable..................................... 50,456 87,942
Accrued liabilities (Note 9)......................... 87,840 100,533
---------- ----------
Total current liabilities.......................... 171,222 1,267,695
Other liabilities...................................... 5,848 5,385
Senior secured term debt (Note 10)..................... 510,665 --
Senior secured revolving debt facility (Note 10)....... 160,000 --
Senior subordinated notes (Note 10).................... 401,837 --
---------- ----------
Total liabilities.................................. 1,249,572 1,273,080
---------- ----------
Commitments and contingent liabilities (Notes 4, 5, 12
and 20)
Stockholders' equity:
Preferred stock, $0.01 par value; 25,000,000 shares
authorized; 3,750,000 shares, Series A Convertible
Cumulative, issued and outstanding, with a
liquidation preference value of $15,033............. 37 --
Common stock, $0.01 par value; 250,000,000 shares
authorized; 74,123,709 and 67,049,811 shares issued
and outstanding, respectively....................... 741 670
Paid-in capital...................................... 685,091 648,254
Promissory notes (Note 18)........................... (227) (323)
Accumulated deficit.................................. (140,928) (72,343)
---------- ----------
Total stockholders' equity......................... 544,714 576,258
---------- ----------
Total liabilities and stockholders' equity......... $1,794,286 $1,849,338
========== ==========
See accompanying notes to consolidated financial statements.
40
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
Years Ended December 31,
------------------------------
2000 1999 1998
---------- -------- --------
Net sales...................................... $1,000,131 $876,206 $689,639
Cost of goods sold............................. (488,585) (424,936) (318,935)
---------- -------- --------
Gross profit................................. 511,546 451,270 370,704
---------- -------- --------
Brokerage, distribution and marketing expenses:
Brokerage and distribution................... (117,830) (101,652) (77,553)
Trade promotions............................. (179,117) (150,114) (129,561)
Consumer marketing........................... (44,655) (50,913) (34,146)
---------- -------- --------
Total brokerage, distribution and marketing
expenses.................................. (341,602) (302,679) (241,260)
Amortization of goodwill and other intangibles. (44,819) (38,305) (30,048)
Selling, general and administrative expenses... (42,903) (35,596) (25,955)
Other financial, legal and accounting expenses. (47,352) -- --
Incentive plan (expense) credit (Note 19)...... -- 571 (56,583)
Columbus consolidation costs................... (6,868) -- --
Transition expenses (Note 13).................. (3,037) (11,200) (10,366)
---------- -------- --------
Total operating expenses................... (486,581) (387,209) (364,212)
---------- -------- --------
Operating income............................. 24,965 64,061 6,492
Interest expense, net.......................... (109,554) (68,403) (64,493)
Amortization of deferred financing expense..... (3,016) (2,060) (1,872)
Other bank and financing expenses.............. (336) (838) (259)
---------- -------- --------
Loss before income taxes, cumulative effect
of change in accounting and extraordinary
loss...................................... (87,941) (7,240) (60,132)
Income tax benefit (Note 15)................... 31,850 2,791 214
---------- -------- --------
Net loss before cumulative effect of change
in accounting and extraordinary loss...... (56,091) (4,449) (59,918)
Cumulative effect of change in accounting, net
of tax of $5,722.............................. (12,161) -- --
Extraordinary loss on early extinguishment of
debt, net of tax of $5,632.................... -- -- (9,211)
---------- -------- --------
Net loss................................... (68,252) (4,449) (69,129)
Preferred dividends............................ (333) -- --
---------- -------- --------
Net loss available to common stockholders.... $ (68,585) $ (4,449) $(69,129)
========== ======== ========
Basic and diluted loss per share available to
common stockholders before cumulative effect
of change in accounting and extraordinary
loss.......................................... $ (0.81) $ (0.07) $ (1.12)
Cumulative effect of change in accounting.... (0.18) -- --
Extraordinary loss per share................. -- -- (0.17)
---------- -------- --------
Basic and diluted loss per share available to
common stockholders......................... $ (0.99) $ (0.07) $ (1.29)
========== ======== ========
Pro forma amounts assuming the change in
accounting was applied retroactively:
Net loss available to common stockholders.... $ (56,424) $(14,085) N/A (1)
========== ======== ========
Basic and diluted loss per share available to
common stockholders......................... $ (0.81) $ (0.21) N/A (1)
========== ======== ========
Weighted average number of shares outstanding.. 69,041 67,023 53,541
========== ======== ========
- --------
(1) Historical information necessary to compute proforma amounts is not
available.
See accompanying notes to consolidated financial statements.
41
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Retained
Common Stock Additional Earnings
Preferred -------------- Paid-in Promissory (Accumulated
Stock Shares Amount Capital Notes Deficit) Total
--------- ------ ------ ---------- ---------- ------------ --------
Balance at December 27,
1997................... $-- 29,053 $291 $ 63,912 $(215) $ 1,235 $ 65,223
Capital contribution
(Notes 1 & 18)......... -- -- -- 94,263 (473) -- 93,790
Shares issued for
acquisition of business
(Note 3)............... -- 25,038 250 183,219 -- -- 183,469
Shares issued (Note 1).. -- 12,909 129 254,702 -- -- 254,831
Equity offering costs... -- -- -- (5,062) -- -- (5,062)
Employee stock purchases
(Note 21).............. -- 16 -- 272 -- -- 272
Payments on officer
promissory notes (Note
18).................... -- -- -- -- 126 -- 126
Incentive plan expense
(Note 19) -- -- -- 56,583 -- -- 56,583
Net loss................ -- -- -- -- -- (69,129) (69,129)
---- ------ ---- -------- ----- --------- --------
Balance at December 31,
1998................... -- 67,016 670 647,889 (562) (67,894) 580,103
Employee stock purchases
(Note 21).............. -- 34 -- 365 -- -- 365
Payments on officer
promissory notes (Note
18).................... -- -- -- -- 239 -- 239
Net loss................ -- -- -- -- -- (4,449) (4,449)
---- ------ ---- -------- ----- --------- --------
Balance at December 31,
1999................... -- 67,050 670 648,254 (323) (72,343) 576,258
Issuance of preferred
stock (Note 11)........ 37 -- -- 14,963 -- -- 15,000
Cumulative preferred
dividends (Note 11).... -- -- -- -- -- (333) (333)
Common stock issued to
senior subordinated
noteholders (Note 10).. -- 6,966 70 21,644 -- -- 21,714
Employee stock purchases
(Note 21).............. -- 150 1 394 -- -- 395
Retirements of stock.... -- (42) -- (164) -- -- (164)
Payment on officer
promissory notes (Note
18).................... -- -- -- -- 96 -- 96
Net loss................ -- -- -- -- -- (68,252) (68,252)
---- ------ ---- -------- ----- --------- --------
Balance at December 31,
2000................... $ 37 74,124 $741 $685,091 $(227) $(140,928) $544,714
==== ====== ==== ======== ===== ========= ========
See accompanying notes to consolidated financial statements.
42
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
----------------------------
December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net loss....................................... $(68,252) $ (4,449) $(69,129)
Early extinguishment of debt, net of tax of
$5,632........................................ -- -- 9,211
Cumulative effect of change in accounting...... 12,161 -- --
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization................ 73,335 55,256 41,336
Deferred income taxes........................ (31,850) (2,244) (184)
Incentive plan expense....................... -- (571) 56,583
Non-cash restructuring cost.................. 3,094 -- --
Non-cash other financial, legal and
accounting expense.......................... 17,714 -- --
(Gain) loss on disposal of fixed assets...... (303) 1,780 --
Change in assets and liabilities, net of
effects of businesses acquired:
Increase in accounts receivable............ (26,768) (6,625) (29,872)
Accounts receivable sold................... 38,565 -- --
(Increase) decrease in inventories......... 18,352 (22,664) (37,233)
(Increase) decrease in prepaid expenses and
other current assets...................... 15,211 (14,728) (3,733)
Increase (decrease) in accounts payable.... (37,707) 19,528 43,573
Increase (decrease) in accrued liabilities. (30,924) (1,281) 38,727
Decrease in other non-current liabilities.. (576) (12,853) --
-------- -------- --------
Net cash provided by (used by) operating
activities...................................... (17,948) 11,149 49,279
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment..... (12,780) (25,281) (38,710)
Changes to other non-current assets and
liabilities................................... (4,034) (6,002) (4,343)
Proceeds from sale of assets................... 1,176 -- 28,012
Payment for acquisition of businesses.......... (7,984) (343,885) (462,784)
-------- -------- --------
Net cash used in investing activities............ (23,622) (375,168) (477,825)
-------- -------- --------
Cash flows from financing activities:
Proceeds from senior secured revolving and term
debt.......................................... 54,400 633,400 864,350
Proceeds from senior subordinated notes........ -- -- 200,000
Repayment of borrowings........................ (27,980) (262,080) (947,259)
Issuance of preferred stock.................... 15,000 -- --
Payment of redemption premium.................. -- -- (14,500)
Proceeds from initial public offering.......... -- -- 254,831
Capital contributions, net of officer
promissory notes.............................. 492 605 94,188
Debt issuance and equity offering costs........ (132) (7,945) (27,427)
-------- -------- --------
Net cash provided by financing activities........ 41,780 363,980 424,183
-------- -------- --------
Increase (decrease) in cash and cash equivalents. 210 (39) (4,363)
Cash and cash equivalents, beginning of period... 315 354 4,717
-------- -------- --------
Cash and cash equivalents, end of period......... $ 525 $ 315 $ 354
======== ======== ========
See accompanying notes to consolidated financial statements.
43
AURORA FOODS INC.
NOTES TO CONSOLIDATED 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 segments: the dry grocery division and the frozen food division. The
dry grocery division includes Duncan Hines(R) baking mix products and Mrs.
Butterworth's(R) and Log Cabin(R) breakfast products. The frozen food division
includes Van de Kamp's(R) and Mrs. Paul's(R) frozen seafood, Aunt Jemima(R)
frozen breakfast products, Celeste(R) frozen pizza products, Chef's Choice(R)
frozen skillet meals and Lender's(R) bagel products. The dry grocery
division's products are manufactured under long-term co-packing agreements
with third parties. The Company's manufacturing equipment has been installed
at certain production facilities of contract manufacturer partners. The frozen
food division's Chef's Choice(R) products are packaged by a contract
manufacturer and the meal components are sourced from several suppliers. The
remaining frozen food division's products are manufactured out of production
facilities that are owned and operated by the Company in Erie, Pennsylvania;
Jackson, Tennessee; Yuba City, California; Mattoon, Illinois and West Seneca,
New York.
The Company is highly leveraged. At December 31, 2000, the Company has
outstanding approximately $1.1 billion in aggregate principal amount of
indebtedness for borrowed money. The degree to which the Company is leveraged
results in significant cash interest expense and principal repayment
obligations and such interest expense may increase with respect to its
revolving credit facility based upon changes in prevailing interest rates.
This leverage may, among other things, affect the ability of the Company to
obtain additional financing, or adjust to changing market conditions. In
addition, the Company is limited in its ability to pursue additional
acquisitions.
Management of the Company believes that cash generated from operations and
cash available to the Company from sale of accounts receivable and borrowings
under the revolving credit agreement will be adequate in 2001 to fund its
operating and capital expenditure requirements and its debt repayment
obligations.
Organization
The Company was incorporated in Delaware on June 19, 1998, as the successor
to Aurora Foods Holdings Inc. ("Holdings") and its subsidiary, AurFoods
Operating Co., Inc. (formerly known as Aurora Foods Inc.) ("AurFoods"), both
of which were incorporated in Delaware in December 1996. AurFoods was wholly-
owned by Holdings, which in turn was wholly-owned by MBW Investors LLC ("MBW
LLC"). AurFoods was formed for the purpose of acquiring the Mrs.
Butterworth's(R) syrup business ("MBW") from Conopco, Inc., a subsidiary of
Unilever United States, Inc. ("Conopco"). AurFoods subsequently acquired the
Log Cabin(R) syrup business ("LC") from Kraft Foods, Inc. ("Kraft") in July
1997 and the Duncan Hines(R) baking mix business ("DH") from The Procter &
Gamble Company ("P&G") in January 1998.
Van de Kamp's, Inc. ("VDK") was a wholly-owned subsidiary of VDK Holdings,
Inc., a Delaware corporation ("VDK Holdings") which was incorporated in
Delaware in July 1995 for the purpose of acquiring the Van de Kamp's(R) frozen
seafood business and the frozen dessert business (subsequently sold) 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
44
the interests in New LLC plus a right to receive a special $8.5 million
priority distribution from New LLC, and VDK LLC was issued 44.5% of the
interests in New LLC plus a right to receive a special $42.4 million priority
distribution from New LLC. The amount and source of consideration used by MBW
LLC and VDK LLC for their acquisition of interests in New LLC was their equity
in Holdings and VDK Holdings, respectively. New LLC accounted for the
contribution of the ownership of Holdings at MBW LLC's historical cost and the
contribution of the ownership of VDK Holdings was accounted for as an
acquisition using the purchase method of accounting at New LLC's cost. After
giving effect to the Contribution, New LLC directly held 100% of Holdings'
capital stock and Holdings continued to directly hold 100% of AurFoods capital
stock. New LLC also directly held 100% of VDK Holdings' capital stock and VDK
Holdings continued to directly hold 100% of VDK's capital stock. On June 25,
1998, New LLC contributed to the Company all the issued and outstanding stock
of Holdings and VDK Holdings. Therefore, the Company's financial statements,
as it is the successor to Holdings, include the historical financial
information of Holdings from its inception. New LLC was then dissolved in
connection with the IPO (defined below).
On July 1, 1998, Holdings, AurFoods, VDK Holdings and VDK merged with and
into the Company, and the Company consummated an initial public offering of
12,909,372 shares of its Common Stock (the "IPO"). Concurrently with the IPO,
New LLC also sold 1,590,628 shares of the Company's common stock to the public
at a price of $21.00 per share. The sale of stock by New LLC and the IPO are
together herein referred to as the "Equity Offerings." The proceeds received
by New LLC were used to satisfy the $8.5 million priority distribution to MBW
LLC and, in combination with common stock, also satisfied the $42.4 million
priority distribution to VDK LLC. Also, concurrently with the IPO, the Company
issued $200.0 million aggregate principal amount of 8.75% senior subordinated
notes due 2008 (the "Notes Offering" or "New Notes") and borrowed $225.0
million of senior secured term debt and $99.0 million out of a total of $175.0
million of available senior secured revolving debt under the Third Amended and
Restated Credit Agreement, dated as of July 1, 1998, among the Company, as
borrower, the lenders listed therein, The Chase Manhattan Bank, as
Administrative Agent, The National Westminster Bank PLC, as Syndication Agent
and Swiss Bank Corporation, as Documentation Agent (the "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 19. 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, subject to an "earn-
out" clause under which the sellers were entitled to further consideration
based on the performance of Seacoast over a specified period. In 2000, an
additional payment of $8.0 million was made pursuant to the earnout clause,
which was recorded as additional purchase price and goodwill. The consolidated
financial statements include the accounts of the Company and Seacoast, its
wholly-owned subsidiary since the acquisition.
45
On November 1, 1999, the Company acquired all the assets of the Lender's
Bagel business ("Lender's") from The Eggo Company, a subsidiary of Kellogg
Company ("Kellogg's") for $275.5 million, subject to adjustment based on the
level of working capital acquired as of the date of closing. During 2000,
additional payments of $1.6 million were made by the Company for additional
working capital. The consolidated financial statements include the operations
of Lender's since its acquisition.
Restatements in 1999
Prior to the issuance of the Company's financial statements as of and for
the year ended December 31, 1999, it was determined that the results reported
in the Company's Form 10-K as of and for the year ended December 31, 1998 as
well as the interim results reported in the Company's Forms 10-Q as of and for
the periods ended September 30, 1998, March 31, 1999, June 30, 1999 and
September 30, 1999 were misstated. Upon further investigation, it was
determined that liabilities that existed for certain trade promotion and
marketing activities and other expenses (primarily sales returns and
allowances, distribution and consumer marketing) were improperly deferred into
future periods and that certain assets were overstated (primarily accounts
receivable, inventories and fixed assets). In addition, certain activities
were improperly recognized as sales. As a result, the financial statements as
of and for the year ended December 31, 1998 as well as the unaudited quarterly
financial data as of and for the interim periods ended September 30, 1998,
March 31, 1999, June 30, 1999 and September 30, 1999 have been restated. The
restated financial statements as of and for the year ended December 31, 1998
have been included in the consolidated financial statements included herein.
Unaudited restated condensed financial statement information for the quarters
ended March 31, 1999, June 30, 1999 and September 30, 1999 have been included
in the notes to the consolidated financial statements included herein.
For the year ended December 31, 1998, these misstatements primarily
understated trade promotions expense by $28.5 million, overstated net sales by
$4.6 million, understated brokerage and distribution expense by $2.8 million
and understated cost of goods sold by $1.4 million. After adjusting for the
misstatements, the Company recalculated its income tax provision reducing
income tax expense by $14.5 million. The impact of the misstatements on
reported operating results for the year ended December 31, 1998, was to
overstate gross profit by $6.0 million, operating income by $38.3 million, and
net income by $23.8 million.
Note 2. Significant Accounting Policies and Change in Accounting Method
The policies utilized by the Company in the preparation of the consolidated
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. Certain prior year amounts have
been reclassified to conform with the current year's presentation.
Fiscal Year
The Company's fiscal year ends on December 31. The Company's 1998 fiscal
year started on the last Saturday of December, 1997. Accordingly for fiscal
year 1998, the results of operations and cash flows reflect activity for the
period from December 28, 1997 through December 31, 1998.
Principles of Consolidation
The Consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany transactions are
eliminated.
Accounting Change
Effective as of January 1, 2000, the Company adopted the consensus reached
in EITF 00-14, Accounting for Certain Sales Incentives. This change in
accounting principle, required to be adopted by most companies no
46
later than the first quarter of 2001, has the effect of accelerating the
recognition of certain marketing expenses as well as requiring that certain
items previously classified as distribution, promotion and marketing expenses
now be classified as reductions of revenue. After adopting EITF 00-14, the
Company now expenses all estimated costs associated with redemption of
consumer coupons at the time they are distributed, rather than reflecting them
as expense over the expected redemption period. In addition, the estimated
coupon redemption costs along with certain other allowances typically given to
retailers and others to facilitate certain promotions and distribution have
been reclassified from expense to Net Sales in the accompanying Statement of
Operations. The similar expense items in prior year comparable periods have
been reclassified to conform to the current period's presentation.
As a result of this change in accounting, the cumulative after tax effect
of the change on prior years (to December 31, 1999) of $12,161,000 has been
recognized as an expense in the Statement of Operations for the year ended
December 31, 2000.
If this change had been applied retroactively in 1999, the pro forma impact
on the results of operations would have been a decrease in net sales and gross
profit of $10,582,000 and a decrease in operating income of $14,766,000. The
above pro forma effects are reflected in the pro forma information contained
in Note 3.
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 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 that improve an asset or extend its useful life are capitalized,
while repairs and maintenance costs are expensed as incurred. Depreciation
expense for the years ended December 31, 2000, 1999, and 1998 was $25.6
million, $15.1 million, and $9.9 million, respectively.
Depreciable lives for major classes of assets are as follows:
Computers........................................................ 3-5 years
Furniture and fixtures........................................... 2-8 years
Machinery and equipment.......................................... 10-15 years
Buildings and improvements....................................... 20-30 years
Goodwill and Other Intangible Assets
Goodwill and other intangible assets include goodwill, trademarks and
various identifiable intangible assets purchased by the Company. Goodwill,
which represents the excess of cost over the net identifiable assets of
acquired businesses, is being amortized over forty years using the straight-
line method. Other intangible assets, which include the costs of trademarks
and other identifiable intangibles, are being amortized using the straight-
line method over periods ranging from five to forty years. Amortization of
goodwill and other intangible assets charged against income for the years
ended December 31, 2000, 1999 and 1998 was $39.9 million, $34.8 million and
$30.0 million, respectively.
47
Long-Lived Assets
The Company periodically assesses the net realizable value of its
noncurrent assets and would recognize an impairment if the recorded value of
these assets exceeded the undiscounted cash flows expected in future periods.
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 effective 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, 2000, 1999 and 1998 was $7.9 million, $5.6 million, and $1.9
million, respectively.
Revenue Recognition
Revenue is recognized upon shipment of product and transfer of title to
customers. Sales and returns and allowances are included in net sales. Amounts
billed to customers for freight and handling are included in net sales. The
associated costs are included in brokerage and distribution expense. Such
amounts were $80.9 million, $58.5 million and $45.9 million in 2000, 1999 and
1998, 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, 2000. The fair market value of the New
Notes and the Notes (as defined in Note 10--Long Term Debt) at December 31,
2000, based on market prices, was $140.0 million and $142.0 million,
respectively. The fair value of the Company's interest rate agreements was a
liability of $4.7 million.
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, 2000.
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 Expenses
Advertising expenses are included in consumer marketing and include the
costs to produce, distribute and air print media, television and radio
advertising for the Company's products. Such costs are expensed ratably over
the year in relation to sales volume.
Trade Promotions Expense
Trade promotions expense includes the costs paid to retailers to promote
the Company's products. Such costs include amounts paid to customers for space
in the retailers' stores ("slotting fees"), amounts paid to provide samples of
the Company's products to consumers, and amounts paid to obtain favorable
display positions in the retailers' stores. These deals are offered to
customers in lump sum payments and as rate per unit
48
allowances as dictated by industry norms. The Company expenses slotting fees
when incurred or, when under a contract, over a period not to exceed 12 months
and expenses other trade promotions in the period during which the deals
occur.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
Accounting for Stock Based Compensation, allows companies to measure
compensation cost in connection with employee stock compensation plans either
using a fair value-based method or to continue to use the intrinsic value-
based method prescribed by Accounting Principles Board Opinion No. 25 ("APB
25"), Accounting for Stock Issued to Employees, and its related
interpretations, which generally does not result in compensation cost. The
Company measures compensation cost in accordance with APB 25. The Company's
stock-based compensation plans are discussed in Note 21.
Impact of New Accounting Pronouncements
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 is effective for all
fiscal years beginning after June 15, 2000. SFAS 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. Due
to its limited use of derivative instruments, the adoption of SFAS 133 on
January 1, 2001 did not have a significant effect on the Company's results of
operations or its financial position.
Note 3. Business Acquisitions
Duncan Hines
On January 16, 1998, the Company acquired all the assets of Duncan Hines(R)
from Procter & Gamble 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, (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 Duncan Hines(R). The acquisition was accounted for by using the
purchase method of accounting.
To finance the acquisition of Duncan Hines(R) and related costs, the
Company refinanced its previously existing senior bank facilities with $450.0
million of senior secured term debt under the Second Amended and Restated
Credit Agreement, dated as of January 16, 1998 by and among Holdings, the
Company, the lenders listed therein, The Chase Manhattan Bank, The National
Westminster Bank PLC, and Swiss Bank Corporation (the "Aurora Senior Bank
Facilities"), and received a capital contribution from Holdings of $93.8
million. As a result of the new bank borrowings under the Aurora Senior Bank
Facilities, the Company incurred an early extinguishment of its pre-Duncan
Hines(R) 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............................................ 11,544
--------
456,544
Cost assigned to tangible assets................................... (38,922)
--------
Cost attributable to intangible assets............................. $417,622
========
49
VDK Holdings, Inc.
On April 8, 1998, the Company completed a stock purchase of VDK Holdings
(See Note 1). The Company acquired all the capital stock of VDK Holdings in
exchange for $183.5 million of the Company's equity. The acquisition was
accounted for using the purchase method of accounting.
The cost to acquire VDK Holdings has been allocated to tangible and
intangible assets acquired as follows (in thousands):
Value of stock used to acquire VDK Holdings........................ $183,469
Liabilities assumed................................................ 386,362
Other acquisition costs............................................ 10,688
--------
580,519
Cost assigned to tangible assets................................... (199,757)
--------
Cost attributable to intangible assets............................. $380,762
========
Seacoast
On April 1, 1999, the Company acquired 100% of the stock in 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, subject to an "earn-out" clause under which
the sellers were entitled to further consideration based on the performance of
Seacoast over a specified period. In 2000, an additional payment of $8.0
million was made pursuant to the earnout clause, which was recorded as
additional purchase price and goodwill.
The cost to acquire Seacoast has been allocated to tangible and intangible
assets acquired as follows (in thousands):
Cash paid to acquire Seacoast....................................... $59,233
Other acquisition costs............................................. 1,873
-------
61,106
Cost assigned to tangible assets.................................... (2,867)
-------
Cost attributable to intangible assets.............................. $58,239
-------
Lender's Bagels
On November 1, 1999, the Company acquired all the assets of Lender's from
the Eggo Company, a subsidiary of Kellogg's. The assets acquired by the
Company include (i) Lender's(R) and all associated trademarks, (ii) the plants
and the accompanying assets in Mattoon, Illinois and West Seneca, New York,
(iii) proprietary formulations for Lender's 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 $275.5 million was based on an arms length negotiation
between the Company and the Eggo Company. The purchase price was subject to
adjustment based on the level of working capital acquired as of the date of
closing. In 2000, additional payments of $1.6 million were made by the Company
for additional working capital. The acquisition was accounted for by using the
purchase method of accounting.
To finance the acquisition of Lender's 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 October
31, 1999, among the Company, as borrower, the lenders listed therein, The
Chase Manhattan Bank, as Administrative Agent, The National Westminster Bank
PLC, as Syndication Agent and UBS AF, Stamford Branch, as Documentation Agent.
50
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........................................ $277,068
Other acquisition costs............................................ 3,321
--------
280,389
Costs assigned to tangible assets.................................. (89,925)
--------
Costs attributable to intangible assets............................ $190,464
========
Had the Lender's, and Seacoast acquisitions and related financings and the
change in accounting (See Note 2) taken place January 1, 1999, the unaudited
pro forma results of operations for the year ended December 31, 1999, would
have been as follows (in thousands except per share amount):
Net sales........................................................ $1,034,280
==========
Gross profit..................................................... $ 526,265
==========
Operating income................................................. $ 65,784
==========
Net loss......................................................... $ (17,049)
==========
Net loss per share............................................... $ (0.25)
==========
Note 4. Supplemental Cash Flow Disclosure
Cash interest payments, net of amounts capitalized, in the years ended
December 31, 2000, 1999 and 1998, were $111.7 million, $67.7 million, and
$60.2 million, respectively. Cash income taxes paid in the years ended
December 31, 2000, 1999 and 1998, was $0.2 million, $0.1 million, and $0.3
million, respectively. Cumulative preferred stock dividends unpaid at December
31, 2000 were $333,000. Additions to deferred financing costs in 2000, in the
amount of $4.0 million, were paid in common stock. See Note 10.
Barter Transaction
On September 30, 1999, the Company entered into a barter transaction
agreement with Active Media Services, Inc. ("Active") in which it agreed to
exchange inventory with a carrying value of $786,000 for credits to be
redeemed for broadcast media, electronic media, print media, and outdoor
media. The credits provide a $0.25 reduction for every dollar spent on such
media up to a maximum of $3.6 million in credits. The media related to such
credits needs to be purchased by February 28, 2003. The media credits were
valued at the carrying value of the exchanged inventory and classified as
prepaid advertising. At December 31, 2000 and 1999, the amount of prepaid
advertising relating to these credits was $644,000 and $786,000, respectively.
For cash flow statement purposes, this is a non-cash transaction.
Note 5. Sale of Accounts Receivable
In April 2000, the Company entered into an agreement to sell on a periodic
basis, specified accounts receivable in amounts up to $60 million. As of
December 31, 2000, the Company had received a net $38.6 million from the sale
of accounts receivable. In February, 2001 the Company entered into an
amendment to this agreement, which extended the termination date to March 31,
2002 and has effectively reduced the available facility to $46 million as of
March 31, 2001 and $36 million as of December 31, 2001. Under terms of the
agreement, accounts receivable are sold at a discount rate of prime plus 2.5%
to 3.0%. The total discount on amounts sold in 2000 was approximately $3.0
million and is included in interest expense.
51
Note 6. Inventories
Inventories consist of the following (in thousands):
December 31,
------------------
2000 1999
--------- --------
Raw materials............................................ $ 28,764 $ 29,187
Work in process.......................................... 299 1,262
Finished goods........................................... 66,787 83,900
Packaging and other supplies............................. 8,469 9,618
--------- --------
$ 104,319 $123,967
========= ========
At December 31, 2000, the Company had commitments to buy raw materials of
$66.2 million.
Note 7. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
December 31,
-------------------
2000 1999
--------- --------
Land.................................................... $ 3,436 $ 3,436
Machinery and equipment................................. 242,092 226,806
Buildings and improvements.............................. 28,023 27,342
Furniture and fixtures.................................. 3,238 3,853
Computer equipment...................................... 3,499 3,052
Construction in progress................................ 9,005 18,952
--------- --------
289,293 283,441
Less accumulated depreciation........................... (50,186) (25,998)
--------- --------
$ 239,107 $257,443
========= ========
At December 31, 2000, the Company had commitments for facility construction
and related machinery and equipment purchases aggregating approximately $0.7
million. During 2000 and 1999, the Company capitalized interest costs of $0.2
million and $1.2 million, respectively.
Note 8. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following (in
thousands):
December 31,
-----------------------
2000 1999
----------- ----------
Goodwill............................................ $ 798,263 $ 784,425
Trademarks.......................................... 493,187 493,187
Other intangibles................................... 87,131 87,131
----------- ----------
1,378,581 1,364,743
Less accumulated amortization....................... (109,639) (69,748)
----------- ----------
$ 1,268,942 $1,294,995
=========== ==========
52
Note 9. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31,
-----------------
2000 1999
-------- --------
Accrued marketing expenses................................ $ 31,364 $ 47,246
Accrued interest.......................................... 16,992 18,567
Accrued brokerage and distribution expenses............... 18,121 21,013
Employee related expenses................................. 11,236 6,287
Accrued legal and professional............................ 5,160 297
Other..................................................... 4,967 7,123
-------- --------
$ 87,840 $100,533
======== ========
Barter Transaction
On November 16, 1999, the Company entered into a Sale and Repurchase
Agreement with Active and First International Bank ("FIB"), whereby FIB agreed
to provide cash in the amount of $3.3 million to the Company in exchange for
the sale and assignment of media credits (See Note 4) and the obligation of
the Company to repurchase the media credits by November 16, 2000. In November,
2000, the Company repurchased the unused media credits by repaying the loan
and accrued interest totaling $2.9 million. The Company paid FIB a loan
structuring fee of $132,000 related to the arrangement. The note payable
carried an implied interest rate of 9.08%. As of December 31, 1999, $3.2
million remained on the note and was classified in other accrued liabilities.
53
Note 10. Long Term Debt
Long term debt consists of the following (dollars in thousands):
December 31,
-----------------------
2000 1999
---------- -----------
SENIOR SECURED DEBT
Senior secured tranche A debt--interest rate of 9.89%
at December 31, 2000; principal due in quarterly
installments through June 30, 2005; floating
interest rate at the prime rate plus 2.25%, or
alternatively, the one, three or six month
Eurodollar rate plus 3.25% payable monthly or at the
termination of the Eurodollar contract interest
period.............................................. $ 173,114 $ 197,845
Senior secured tranche B debt--interest rate of
10.39% at December 31, 2000; principal due in
quarterly installments through September 30, 2006;
floating interest rate at the prime rate plus 2.75%,
or alternatively, the one, three or six month
Eurodollar rate plus 3.75% payable monthly or at the
termination of the Eurodollar contract interest
period.............................................. 370,477 373,726
Senior secured revolving debt; weighted average
interest rate of 9.96% at December 31, 2000;
principal due June 30, 2005; floating interest rate
at the prime rate plus 2.25%, or alternatively, the
one, three or six month Eurodollar rate 3.25%
payable monthly or at the termination of the
Eurodollar contract interest period................. 160,000 105,600
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................................ 200,000 200,000
---------- -----------
1,103,591 1,077,171
Senior subordinated notes issued July 1, 1997 at par
value of $100,000 plus premium of $2,500; net of
unamortized premium of $1,837 and $2,049 at December
31, 2000 and December 31, 1999, 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
Add: Unamortized premium on senior subordinated
notes............................................... 1,837 2,049
---------- -----------
1,105,428 1,079,220
Less: Current portion of long term debt.............. (32,926) (1,079,220)
---------- -----------
Long term debt....................................... $1,072,502 $ --
========== ===========
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
54
Annual principal payments for the next five years and thereafter consist of
the following (dollars in thousands):
2001.............................................................. $ 32,926
2002.............................................................. 37,872
2003.............................................................. 42,818
2004.............................................................. 47,764
2005.............................................................. 187,979
Thereafter........................................................ 754,232
----------
Total............................................................. $1,103,591
==========
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 a $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 Company amended the Agreement, dated as of March 31, 1999, to provide
for additional borrowings of $100.0 million of senior secured term debt. The
proceeds were used to finance the acquisition of Seacoast and related costs
and reduce the outstanding revolving credit facility balance.
The Company amended the Agreement, dated November 1, 1999, to provide for
additional borrowings of $275.0 million of senior secured term debt to finance
the acquisition of the Lender's bagel business and related costs.
The $175.0 million senior secured revolving debt facility is subject to
limitations based on letters of credit. At December 31, 2000, the Company had
unused borrowing availability of $10.7 million. The Agreement requires a
commitment fee of 0.50% per annum payable monthly 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.
As a result of the adjustments to the Company's unaudited interim financial
results for the first, second and third quarters of 1999 and the third quarter
of 1998, and adjustments to its audited financial results for the year ended
December 31, 1998, the Company was in default of a number of provisions of the
Agreement. The
55
Company and the lenders amended the Agreement effective March 29, 2000. The
amendment to the Agreement included provisions that:
. amended the financial covenants;
. waived certain existing defaults of covenants and breaches of
representations and warranties;
. established the interest rate on borrowings made pursuant to the
facility; and
. contemplated the sale by the Company of accounts receivable subject to
approval by the Agent and majority lenders of the terms of such
arrangement.
In addition to the above amendments, the senior debt holders agreed to
forebear, through June 30, against their cross-defaults with the senior
subordinated note indentures which also suffered events of default due to the
restatements. During the remainder of 2000, the Company and its Lenders
entered into a number of additional amendments to extend the period of
forbearance. Upon the resolution of the events of default under the Senior
Subordinated Notes, the forbearance was terminated and all events of default
arising from the restatement under the Senior Secured Facility were deemed to
have been waived or cured.
The Senior Secured Debt facility was further amended on February 7, 2001.
The amendment includes provisions that:
. further amend the financial covenants for 2001;
. increase the interest rate spread on borrowings made pursuant to the
facility by 0.25%;
. affirm the ability of the Company to continue to sell accounts
receivable up to a maximum of $60 million; and
. provide for a further increase in the interest rate spread of 0.25% in
the event that the Company does not realize net cash proceeds of
$90 million from the sale of assets prior to June 30, 2001.
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, 2000 and 1999 was $1.8 million and $2.0 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. 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 has not redeemed the Notes and if a Change of Control occurs after
February 15, 2002, the Company is required to offer to repurchase the Notes at
a price equal to 101% together with accrued and unpaid interest.
On July 1, 1998, the Company issued the New Notes. The proceeds from the
New Notes were used to repay senior secured debt and senior subordinated debt
and related fees and expenses.
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
56
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 has
not redeemed the New Notes and if a 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. As
a result of the adjustments to the Company's unaudited interim financial
results for the first, second and third quarters of 1999 and the third quarter
of 1998, and adjustments to its audited financial results for the year ended
December 1998, the Company was in default under its indentures.
During the third quarter of 2000, the Company solicited and received
sufficient consents from holders of its senior subordinated notes to amend
certain provisions and waive certain events of default under its indentures.
As a result of the Consent Solicitation, the senior subordinated indentures
were amended to, among other things, increase the redemption price payable
upon optional redemption of the notes by the Company, allow the Company to
refinance its outstanding debt, and permit the Company to incur additional
indebtedness. Pursuant to the terms of the Consent Solicitation, the Company
issued, effective September 20, 2000, an aggregate of 6,965,736 shares of
common stock to the senior subordinated note holders who participated in the
consent solicitation.
The common stock issued in connection with the Consent Solicitation noted
above has been valued by the Company at the closing market price on September
20, 2000, less a 12.5% discount to reflect that the shares are subject to
transfer restrictions under the securities laws. The total increase to common
stock and paid-in-capital of $21,714,000 was allocated to other assets as
deferred financing costs ($4 million), with the balance ($17,714,000) recorded
as other financial, legal and accounting expense in the accompanying Statement
of Operations.
As a result of the amendments of provisions of, and waivers of certain
events of default under, the indentures governing the senior subordinated
notes, the remaining contingencies associated with the Company's senior
secured debt were resolved. Therefore, the Company has classified its senior
secured and senior subordinated debt as long-term in the accompanying balance
sheet as of December 31, 2000.
Interest Rate Agreements
The Company does not use derivative financial instruments for trading or
speculative purposes. In accordance with the 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:
At December 31, 2000, the Company was party to three interest rate swap
agreements. On March 17, 1998, the Company entered into a three-year interest
rate swap agreement (the "Swap") with a notional principal amount of $150.0
million. The counterparty to the Swap is a major financial institution. The
applicable rate is set quarterly, with the next reset on March 19, 2001. On
November 30, 1998, the Company amended the Swap whereby the counterparty
received the option to extend the termination date to March 17, 2003 and the
applicable rate was decreased from 5.81% to 5.37%. On April 28, 2000, the
Company further amended the Swap whereby the applicable rate was increased
from 5.37% to 6.01%. Under the Swap, the Company would receive payments from
the counterparty if the three-month LIBOR rate exceeds 6.01% and make payments
to the counterparty if the three-month LIBOR rate is less than 6.01%.
Subsequent to December 31, 2000, the counterparty exercised its option to
extend the term of the Swap to March 17, 2003.
On April 13, 1999, the Company entered into a three-year bond swap to
floating interest rate collar agreement, which was amended on April 28, 2000
(the "Bond Swap") with a notional principal amount of $200.0 million. The
counterparty to the Bond Swap is a major financial institution. The applicable
rate is set quarterly, with the next reset date of April 2, 2001. Under the
Bond Swap, the Company receives an effective
57
8.63% fixed interest rate and pays three-month LIBOR plus 3.25%, subject to
certain caps and floors. Under the Bond Swap, the Company would receive
payments from the counterparty if the three-month LIBOR rate plus 3.25% is
between 7.80% and 8.63% and make payments if the three-month LIBOR rate plus
3.25% exceeds 10.65%.
On November 15, 1999, the Company entered into a five-year interest rate
collar agreement, which was amended on April 28, 2000 (the "Collar") with a
notional principal amount of $150.0 million. The counterparty to the Collar is
a major financial institution. The applicable rate is set quarterly, with the
next reset date of May 17, 2001. Under the Collar, the Company would receive
payments from the counterparty if the three-month LIBOR rate is between 6.50%
and 7.50% or exceeds 8.25%. The Company would make payments if the three-month
LIBOR rate is less than 4.95%.
During fiscal 2000, the Company received $0.9 million under interest rate
agreements. During fiscal 1999 and 1998 the Company made payments under
interest rate agreements aggregating $0.7 million and $0.2 million
respectively.
Risks associated with the interest rate agreements include those associated
with changes in market value and interest rates. At December 31, 2000, the
fair value of the Company's interest rate agreements was a negative $4.7
million.
Note 11. Preferred Stock
In September, 2000, the Company issued to certain investors affiliated with
current shareholders, in exchange for $15 million, 3,750,000 shares of Series
A Convertible Cumulative Preferred Stock ("Series A Preferred Stock"), in
connection with the senior subordinated noteholders consent solicitation (see
Note 10). The shares have a par value of $0.01 per share, pay a cumulative
dividend in arrears of 8% and have a liquidation preference value of the
greater of (i) $4.00 per share, plus accumulated dividends, if any, plus any
unpaid dividends since the last dividend payment date or (ii) the amount
payable with respect to the number of shares of Common Stock into which the
shares of Preferred Stock plus accumulated dividends, if any, plus any unpaid
dividends since the last dividend payment date could be converted (assuming
the conversion of all outstanding shares of Preferred Stock immediately prior
to the liquidation). The Series A Preferred Stock is convertible into the
number of shares of Common Stock equal to $4.00 plus accumulated dividends, if
any and unpaid dividends since the last payment date, divided by the initial
conversion price of $3.35 (the "Conversion Price"). The Conversion Price is
currently $3.35 and is subject to adjustment for equity issuances by the
Company at a price per share less than the Conversion Price. The Series A
Preferred Stock converts at the Company's option into shares of Common Stock
in the event the Common Stock trades for 10 consecutive days at a price that
is in excess of 200% of the Conversion Price. Preferred dividends, to the
extent they are paid, will be paid in the form of additional Preferred Stock
until such time as the restrictions on payments of dividends contained in the
senior secured debt agreements are no longer in effect, at which time the
Company will consider how future dividends will be paid.
Note 12. Other Financial, Legal and Accounting Expenses
As a result of the investigation into the Company's accounting practices,
the resulting restatement of its financial statements, litigation,
governmental proceedings, defaults under its loan agreements and related
matters (see Note 1--Restatements, Note 10--Long term debt and Note 20--
Litigation), the Company has incurred legal and accounting expenses, charges
to obtain waivers on its events of default and charges related to amending its
financing facilities. Such costs, totaled $47.4 million in 2000, including
$5.9 million which has been accrued for estimated remaining costs, primarily
legal, accounting and financing related fees, to be paid in the future.
Consequently, the Company does not expect additional expense in future
periods. The costs during the period included a non-cash $17.7 million charge
associated with the issuance of common stock to certain holders of the
Company's senior subordinated debt as discussed in Note 10. On January 16,
2001, the Company announced that it reached a preliminary agreement to settle
the securities class action and derivative lawsuits pending against the
Company and its former management team in the U.S. District Court in the
Northern District of California. On March 1, 2001, Stipulations of Settlement
for the Securities class action and derivative lawsuits were entered into in
the U.S. District Court in the Northern District of California to fully
resolve, discharge and settle the
58
claims made in each respective lawsuit but have not yet been approved by the
court. The District Court has scheduled a final hearing to approve the
settlement on May 11, 2001.
Under the terms of the agreement, Aurora will pay the class members $26
million in cash and $10 million in common stock of the Company. On March 2,
2000, the Company entered into definitive settlement agreements with certain
members of former management to transfer to the Company between approximately
3 million and 3.6 million shares of common stock of the Company, in
consideration for a resolution of any civil claims that the Company may have,
and partially conditioned upon future events and circumstances. The cash
component of the settlement will be funded entirely by the Company's
insurance. With respect to the common stock component of the settlement, the
stock received from former management would be sufficient, at share prices
above $3.33 per share, to satisfy Aurora's obligation without issuing
additional shares. The actual number of shares of common stock of the Company
needed to fund this component will be based on average share prices determined
at later dates. However, members of the class have the opportunity to opt out
of the settlement agreement, and bring separate claims against the Company.
Management has accrued all of the expected costs and believes that cash
expenditures for such financial, legal and accounting expenses will be
substantially completed in 2001.
Note 13. Transition Expenses
Transition expenses consist of one-time costs incurred to establish the
Company's operations and integrate acquired businesses and operations,
including relocation expenses, recruiting fees, sales support and other unique
transitional expenses. Transition expenses for the years ended December 31,
2000, 1999 and 1998 were approximately $3.0 million, $11.2 million and $10.4
million.
Note 14. Columbus Office Consolidation
During the third quarter of 2000, the Company consolidated its
administrative offices and functions in St. Louis, Missouri and closed its
office in Columbus, Ohio. The Columbus office had been responsible for
administration of the Company's Dry Grocery Segment. A reserve and charge to
expense of $6.9 million has been recorded for costs associated with this
closing and has been presented separately as Columbus consolidation costs in
the accompanying Statements of Operations. The primary components of the
charge were amounts for the involuntary termination of approximately 50 sales,
marketing, finance, information systems, purchasing and customer service
employees of $2.7 million, a non-cash charge for abandoned leasehold
improvements and capitalized software that will no longer be used of $3.1
million, and estimated unrecovered office lease costs after consolidation and
other items of $1.1 million. All payments related to the consolidation have
been made with the exception of $0.9 million of remaining reserves included in
accrued expenses at December 31, 2000 for employee severance to be paid in the
first six months of 2001 and the estimated unrecovered office lease costs.
59
Note 15. Income Taxes
The Company was included in the consolidated federal income tax return of
Holdings for the six months ended June 25, 1998. State income tax returns were
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 six months ended
June 25, 1998. The Company filed short period federal and state returns for
the six months ended December 31, 1998 and files federal and state returns
annually, thereafter.
The provision for income taxes is summarized as follows (in thousands):
Years Ended December 31,
------------------------------
1998
2000 1999 As Restated
-------- ------- -----------
Current tax expense (benefit):
Federal $ -- $ -- $ --
State.......................................... (177) (547) (30)
-------- ------- -----
Total current benefit........................ (177) (547) (30)
Deferred tax expense (benefit):
Federal........................................ (28,675) (795) (144)
State.......................................... (2,998) (1,449) (40)
-------- ------- -----
Total deferred benefit....................... (31,673) (2,244) (184)
-------- ------- -----
Total income tax benefit..................... $(31,850) $(2,791) $(214)
======== ======= =====
Deferred tax assets (liabilities) consist of the following:
December 31,
-----------------
2000 1999
-------- -------
Deferred tax assets--current:
Accounts receivable........................................ $ 958 $ 1,293
Coupon reserves............................................ 1,133 1,051
Inventory.................................................. 4,432 6,498
Accrued expenses........................................... 10,610 8,496
-------- -------
Total deferred tax assets--current....................... $ 17,133 $17,338
======== =======
Deferred tax assets (liabilities)--non-current:
Loss carryforwards......................................... $151,411 $73,771
Assets held for sale....................................... -- 2,768
State tax credit........................................... 2,228 2,102
Other...................................................... 742 211
Goodwill................................................... (87,000) (61,277)
Depreciation............................................... (27,336) (15,218)
-------- -------
Net deferred tax assets--non-current..................... $ 40,045 $ 2,357
======== =======
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. Based on management's review of its forecasted performance in
future periods and management's estimates of the value of its brands, in the
event of sale of such brands, sufficient taxable income would be generated
prior to the expiration of the Company's net operating loss carryforwards to
realize the recorded amounts of deferred tax assets.
At December 31, 2000, the Company had a federal net operating loss carry
forward of approximately $376.0 million. The net operating loss can be used to
offset future taxable income and expires in 2011 through 2020. The Company is
a loss corporation as defined in section 382 of the Internal Revenue Code.
Therefore, if
60
certain substantial changes of the Company's ownership should occur, there
could be significant annual limitations of the amount of net operating loss
carryforwards which can be utilized.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
to pretax income as a result of the following differences (in thousands):
Years Ended December 31,
-------------------------------
1998
2000 1999 As Restated
--------- ------- -----------
Income tax benefit at U.S. statutory rate....... $ (30,779) $(2,462) $(20,445)
Increase (decrease) in tax resulting from:
Non-deductible incentive plan expense.......... -- -- 19,238
Non-deductible goodwill........................ 950 851 393
State taxes, net of federal taxes.............. (2,064) (1,317) (153)
Other, net..................................... 43 137 753
--------- ------- --------
$(31,850) $(2,791) $ (214)
========= ======= ========
Note 16. 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 2005.
Future annual minimum lease payments under these leases are summarized as
follows (in thousands):
Minimum
Lease
Years ending December 31, Payments
------------------------- --------
2001............................................................. $1,047
2002............................................................. 659
2003............................................................. 607
2004............................................................. 170
2005............................................................. 16
Thereafter....................................................... --
------
$2,499
======
Rent expense for the years ended December 31, 2000, 1999 and 1998 was $1.9
million, $1.8 million and $1.0 million, respectively.
Note 17. 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) plans, employee
contributions of up to 6% of total compensation, subject to certain tax law
limitations, are matched by Company contributions, varying by plan of 3% to 5%
of total compensation, with vesting ratably over various periods up to five
years. Additional discretionary contributions of up to 4% of compensation are
made on behalf of all employees on an annual basis. These contributions also
vest ratably over a five-year period. The Company recorded expenses for the
401(k) and the discretionary contributions for the years ended December 31,
2000, 1999 and 1998, of $4.0 million, $1.1 million and $0.8 million,
respectively.
61
Note 18. Related Party Transactions
On April 19, 2000, Aurora Foods Inc. (the "Company") entered into an
agreement pursuant to which The Chase Manhattan Bank ("Chase") agreed to
purchase from time to time certain of the Company's accounts receivable. The
agreement was amended as of February 7, 2001. The agreement provides that the
amount of purchased and uncollected accounts receivable outstanding at any
given time is not to exceed $60 million, which is effectively reduced to $46
million on March 31, 2001 and to $36 million on December 31, 2001. Funds
affiliated with Fenway Partners, Inc. ("Fenway"), whose partners include
Messrs. Dresdale, Geisser and Lamm (all directors of the Company), McCown De
Leeuw & Co., Inc. ("MDC"), whose managing directors include Messrs. McCown and
De Leeuw (both directors of the Company), and whose operating affiliates
include Mr. Orr (a director of the Company), and UBS Capital LLC ("UBS
Capital") (Charles J. Delaney, a director of the Company is president of UBS
Capital Americas) have agreed to participate, on a subordinated basis, in not
less than 15% of this accounts receivable transaction. The purchase price will
be calculated to include a customary discount to the amount of the receivables
purchased. The Company has agreed to pay customary fees in connection with
this accounts receivable transaction. The agreement also contains customary
representations, warranties and covenants by the Company. The agreement
terminates on March 31, 2002.
On September 20, 2000, the Company issued 3,750,000 shares of its Series A
Convertible Cumulative Preferred Stock ("Series A Preferred Stock") to certain
existing stockholders including funds affiliated with Fenway, MDC and UBS
Capital at a price of $4.00 per share for an aggregate offering price of
$15,000,000. The number of shares of Common Stock into which the Series A
Preferred Stock is convertible into the number of shares of Common Stock equal
to $4.00 plus accumulated dividends, if any, and unpaid dividends since the
last dividend payment date divided by the initial conversion price of $3.35
(the "Conversion Price"). The Conversion Price is currently $3.35 and is
subject to adjustment for equity issuances by the Company at a price per share
less than the Conversion Price. The Series A Preferred Stock converts at the
Company's option into shares of Common Stock in the event the Common Stock
trades for 10 consecutive days at a price that is in excess of 200% of the
Conversion Price.
During 1999, the Company paid the following fees for services rendered in
connection with the acquisitions of Seacoast and Lender's: $1,083,000 to
Dartford Partnership L.L.C., whose partners, Messrs. Wilson, Ardrey and Chung,
and Ms. Cummings are former executive officers and/or directors of the
Company; $1,083,000 to MDC Management Company III, L.P. ("MDC III"), whose
general partners and operating affiliates include Messrs. McCown, De Leeuw and
Orr (all directors of the Company); and $1,083,000 was paid to Fenway.
Services provided in connection with such fees included identification and
analysis of the acquisition opportunity, the negotiation of the acquisition
and the raising of financing for such acquisition. Fees of $500,000 and
$2,750,000, in the aggregate, were paid in connection with the acquisitions of
Seacoast and Lender's, respectively.
The Company has entered into agreements pursuant to which it agreed to pay
transaction fees to each of Fenway, MDC III and Dartford of 0.333% of the
acquisition price for future acquisitions by the Company. The Dartford
agreement terminated upon the resignation of Ian Wilson on February 17, 2000.
The 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.
Pursuant to an agreement dated July 1, 1998 and terminated on February 17,
2000, the Company paid Dartford $200,000 for 2000, $800,000 for 1999 and
$400,000 for 1998 as reimbursement for corporate headquarters expenses. Such
expenses included staff salaries, miscellaneous office expenses related to the
administration of the Company's former headquarters, and rent for the space
leased by Dartford and formerly used by the Company as its corporate
headquarters.
The Company and certain stockholders of the Company 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, former
President, Dry Grocery Division, executed promissory notes in the amount of
$60,000 and $131,000, respectively, in favor of the
62
Company to evidence monies borrowed to assist in the capitalization of his
limited liability company interests held in MBW LLC. The promissory notes
matured 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 as of
December 31, 2000 and December 31, 1999 was $53,667 and $107,334,
respectively. In accordance with the terms of Mr. Ferraro's resignation
agreement, the outstanding principal amount of $107,334 on June 8, 2000 is
being repaid in four equal installments ending June 30, 2001.
On July 7, 1999, Mr. Thomas O. Ellinwood, Executive Vice President, Brands,
and Mr. Anthony A. Bevilacqua, Executive Vice President, Marketing, in
connection with certain equity issuances to them, executed secured promissory
notes payable on demand by the Company in the amount of $501,571 and $188,561,
respectively, in favor of the Company. If Mr. Ellinwood or Bevilacqua sells
his shares of the Company's Common Stock, he must repay his note. The interest
payable on the notes is reset annually on July 1st. The interest rate for the
year ending June 30, 2001 is 6.5%. The entire amount of both notes remains
outstanding as of December 31, 2000.
The Company entered into a Management Services Agreement, dated December
31, 1996 and terminated on July 1, 1998, with Dartford pursuant to which
Dartford provided management oversight on financial and operational matters.
The Company paid fees to Dartford in connection with this agreement totaling
$1.0 million and $0.8 million for the years ended December 31, 1998 and
December 27, 1997, respectively. The annual management fee was $0.6 million
prior to the acquisition of Log Cabin, $0.9 million after the acquisition of
Log Cabin but before the acquisition of Duncan Hines and $2.0 million after
the acquisition of Duncan Hines.
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 & Co. III") whose general partner is MDC III pursuant to which MDC & Co.
III provided certain advisory functions. The Company paid fees to MDC & Co.
III 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 Log Cabin, $0.3 million after the
acquisition of Log Cabin but before the acquisition of Duncan Hines and $0.7
million after the acquisition of Duncan Hines.
In connection with the acquisitions of MBW, Log Cabin and Duncan Hines the
Company paid to certain members of MBW LLC, who were 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, $0.0 and $1.2 million was paid to Dartford; $0.0 and $0.3 million in
total was paid to Mr. Thomas J. Ferraro (former President, Dry Grocery
Division) and Mr. C. Gary Willett (former Executive Vice President, Dry
Grocery Division); $3.0 million and $2.7 million was paid to MDC & Co. III;
and $1.0 million and $0.5 million was paid to Fenway Partners Capital Fund,
L.P. (whose general partner is Fenway Partners, L.P., whose general partner is
Fenway Partners Management, Inc., the directors and officers of which include
Messrs. Lamm, Geisser and Dresdale, all directors of the Company) in 1998 and
1997, respectively. The fee amounts were negotiated among the equity
investors.
Each of Fenway, MDC & Co. III and Dartford earned $1.5 million; UBS Capital
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 & Co. III under an
irrevocable proxy, earned $0.1 million in fees in connection with the
Contribution transaction.
Note 19. 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
63
issued a specific class of limited liability company member units ("Management
Units"), at a nominal value, as a means to participate in the appreciation of
the equity value of AurFoods. The Management Units were subject to vesting
requirements based on terms of employment or other factors.
Prior to the closing of the Equity Offerings, the final value of all
classes of Management Units were determined based on the valuation of the
Common Stock held indirectly by MBW LLC, and upon the closing of the Equity
Offerings all unvested Management Units became fully vested. The aggregate
value of all Management Units was $58.9 million. Through December 27, 1997,
the Company had recorded estimated incentive plan expense of $2.3 million
based on the estimated valuation of the Company at that time. Additional
incentive plan expense of $56.6 million was recorded in the first and second
quarters of 1998.
The incentive plan expense was recorded as a liability of MBW LLC as
sponsor of the Aurora Plan. However, because the Aurora Plan was for the
benefit of Aurora Covered Employees, expense recognized under the Aurora Plan
was pushed down to the Company as incentive plan expense and as additional
paid-in capital from its parent. No additional incentive plan expense will be
recorded under the Aurora Plan.
MBW LLC satisfied its liability under the Aurora Plan by distributing
4,152,417 shares of Common Stock of the Company based on the valuation of the
Management Units at the initial public offering price of the Company's Common
Stock on the dissolution of MBW Investors LLC.
VDK Incentive Plan
VDK LLC provided a compensation arrangement (the "VDK Plan") as a means by
which certain key employees and other specifically designated persons ("VDK
Covered Employees") of VDK and/or affiliated with VDK, were given an
opportunity to benefit from appreciation in the equity value of VDK. Under the
VDK Plan, VDK Covered Employees were issued a specific class of limited
liability company member units and/or performance-based units (collectively,
"VDK Management Units"), at a nominal value, as a means to participate in the
appreciation of the equity value of VDK. The VDK Management Units were subject
to vesting requirement based on terms of employment or other factors.
Prior to the closing of the Equity Offerings, the final value of all
classes of VDK Management Units were determined based on the valuation of the
shares of the Company held indirectly by VDK LLC, and upon the closing of the
Equity Offerings all unvested VDK Management Units became fully vested. The
aggregate value of all VDK Management Units was $66.7 million. Through
December 31, 1997, no incentive plan expense had been recorded by VDK based on
the estimated valuation of VDK at that time. Incentive plan expense of
$66.7 million was recorded in the first and second quarters of 1998. The
incentive plan expense was recorded as a liability of VDK LLC as sponsor of
the VDK Plan. However, because the VDK Plan was for the benefit of VDK Covered
Employees, expense recognized under the VDK Plan was pushed down to VDK as
incentive plan expense and as additional paid-in capital from its parent. No
additional incentive plan expense will be recorded under the VDK Plan.
VDK LLC (or the Company as described below) satisfied its liability by
distributing a fixed number of shares of Common Stock of the Company upon the
dissolution of VDK LLC, based on the valuation of the VDK Management Units at
the initial public offering price of the Company's Common Stock.
The VDK Plan provides for tax gross-up payments on certain distributions.
Because the Company received the tax benefit of such distributions and related
tax gross-up payments, and because the tax benefit exceeded the amount of the
tax gross-up payments, the Company recorded the $11.8 million liability for
the tax gross-up payments due. The tax benefit of the tax gross-up payment and
related distributions of $17.1 million, which more than offset the gross-up
payments, was 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 was
64
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") did not increase the number of outstanding shares of Common Stock
because the Company's obligations to issue the MC Shares was contingent upon
the Company's receiving from VDK LLC, as a contribution, a number of shares of
the Company's Common Stock owned by VDK LLC equal to the number of MC Shares.
The Company had no obligation to issue MC Shares unless it 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 was subject to the Company being allowed a deduction for federal
income tax purposes with respect to the payment of the MC Shares and tax
gross-up payment. On July 1, 1999, the Company satisfied its liability under
the VDK Plans by distributing shares of the Company's Common Stock and paying
the associated tax gross-up liability.
Note 20. Commitments and Contingent Liabilities
Litigation
As of November 9, 2000, the Company had been served with eighteen
complaints in purported class action lawsuits filed in the U.S. District Court
for the Northern District of California. The complaints received by the
Company alleged that, among other things, as a result of accounting
irregularities, the Company's previously issued financial statements were
materially false and misleading and thus constituted violations of federal
securities laws by the Company and the directors and officers who resigned on
February 17, 2000 (Ian R. Wilson, James B. Ardrey, Ray Chung and M. Laurie
Cummings). The actions (the "Securities Actions") alleged that the defendants
violated Sections 10(b) and/or Section 20(a) of the Securities Exchange Act
and Rule 10b-5 promulgated thereunder. The Securities Actions complaints
sought damages in unspecified amounts. These Securities Actions purported to
be brought on behalf of purchasers of the Company's securities during various
periods, all of which fell between October 28, 1998 and April 2, 2000.
On April 14, 2000, certain of the Company's current and former directors
were named as defendants in a derivative lawsuit filed in the Superior Court
of the State of California, in the County of San Francisco, alleging breach of
fiduciary duty, mismanagement and related causes of action based upon the
Company's restatement of its financial statements. The case was then removed
to federal court in San Francisco.
On January 16, 2001 the Company announced that it reached a preliminary
agreement to settle the securities class action and derivative lawsuits
pending against the Company and its former management team in the U.S.
District Court in the Northern District of California. On March 1, 2001,
Stipulations of Settlement for the Securities class action and derivative
lawsuits were entered into in the U.S. District Court in the Northern District
of California to fully resolve, discharge and settle the claims made in each
respective lawsuit but have not yet been approved by the court. The District
Court has scheduled a final hearing to approve the settlement on May 11, 2001.
Under the terms of the agreement, Aurora will pay the class members $26
million in cash and $10 million in common stock of the Company. On March 2,
2001 the Company entered into definitive agreements with certain members of
former management to transfer between approximately 3 million and 3.6 million
shares of common stock of the Company to the Company, in consideration for a
resolution of any civil claims that the Company may have, and partially
conditioned upon future events and circumstances. The cash component of the
settlement will be funded entirely by the Company's insurance. With respect to
the common stock component of the settlement, the stock received from former
management would be sufficient, at share prices above $3.33 per share, to
satisfy Aurora's obligation without issuing additional shares. The actual
number of shares of common stock of the Company needed to fund this component
will be based on average share prices determined at later dates. However,
members of the class have the opportunity to opt out of the settlement
agreement, and bring separate claims against the Company.
65
In addition, the Company has agreed to continue to implement certain
remedial measures, including the adoption of an audit committee charter, the
reorganization of the Company's finance department, the establishment of an
internal audit function and the institution of a compliance program, as
consideration for resolution of the derivative litigation.
The staff of the Securities and Exchange Commission (the "SEC") and the
United States Attorney for the Southern District of New York (the "U.S.
Attorney") also initiated investigations relating to the events that resulted
in the restatement of the Company's financial statements for prior periods
("Prior Events"). The SEC and the U.S. Attorney requested that the Company
provide certain documents relating to the Company's historical financial
statements. On September 5, 2000, the Company received a subpoena from the SEC
to produce documents in connection with the Prior Events. The SEC also
requested certain information regarding some of the Company's former officers
and employees, correspondence with the Company's auditors and documents
related to financial statements, accounting policies and certain transactions
and business arrangements.
On January 23, 2001 the U.S. Attorney announced indictments alleging
financial accounting fraud against members of former management and certain
former employees of the Company. The U.S. Attorney did not bring charges
against the Company.
In a cooperation agreement with the U.S. Attorney, the Company confirmed
that it would continue to implement an extensive compliance program, which
will include an internal audit function, a corporate code of conduct, a
comprehensive policies and procedures manual, employee training and education
on policies and procedures and adequate disciplinary mechanisms for violations
of policies and procedures.
In addition, the Company consented to the entry of an order by the SEC
requiring compliance with requirements for accurate and timely reporting of
quarterly and annual financial results, and the maintenance of internal
control procedures in connection with a civil action by the SEC concerning
accounting irregularities at the Company in 1998 and 1999. Aurora did not
either admit or deny any wrongdoing, and the SEC did not seek any monetary
penalty. The Company also committed to continue to cooperate with the SEC in
connection with its actions against certain former members of management and
former employees.
The Company is also the defendant in an action filed by a former employee
in the U.S. District Court for the Eastern District of Missouri. The plaintiff
alleges breach of contract, fraud and negligent misrepresentation as well as
state law securities claims. The Company intends to defend these claims
vigorously.
The Company is also subject to litigation in the ordinary course of
business.
In the opinion of management, the ultimate outcome of any existing
litigation, other than the Securities Actions described above, would not have
a material adverse effect on the Company's financial condition, results of
operations or cash flows.
Purchase Commitments
The Company has entered into manufacturing contracts, which require minimum
annual production orders. The minimum annual production orders for all
contracts through the year 2002 are 5.8 million cases of product. This volume
represents substantially less than the Company's current production
requirements.
Note 21. Stock Option and Employee Stock Purchase Plans
The Company has stock option plans 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.
66
The Company has two stock option plans, the 1998 Long Term Incentive Plan
(the "1998 Option Plan") and the 2000 Equity Incentive Plan (the "2000
Incentive 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, of which 2,322,050 shares
remained available as of December 31, 2000. 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.
The terms of the 2000 Incentive Plan provide for the grant of up to 7
million options, stock appreciation rights, restricted stock, unrestricted
stock, deferred stock or performance awards or a combination thereof. During
2000, 5,077,125 options were granted, net of forfeitures, pursuant to the plan
at option prices equal to fair market value at the dates of grant, which vest
ratably over a three or four year period. A total of 1,922,875 shares remained
available for grant at December 31, 2000.
Presented below is a summary of stock option plans activity for the years
shown:
Options Wtd. Avg. Options Wtd. Avg.
Outstanding Exercise Price Exercisable Exercise Price
----------- -------------- ----------- --------------
December 31, 1997......... -- $ -- -- $ --
Granted................. 2,031,900 20.91
Forfeited............... (30,250) 20.91
---------- ------ --------- ------
December 31, 1998......... 2,001,650 $20.91 -- $ --
Granted................. 340,750 15.70
Forfeited............... (58,379) 20.16
---------- ------ --------- ------
December 31, 1999......... 2,284,021 $20.15 650,552 $20.91
Granted................. 5,181,375 3.86
Forfeited............... (1,210,321) 18.76
---------- ------ --------- ------
December 31, 2000......... 6,255,075 $ 6.93 1,166,300 $14.29
========== ====== ========= ======
The following table provides additional information for options outstanding
at December 31, 2000:
Range of Wtd. Avg. Wtd. Avg.
Prices Number Remaining Life Exercise Price
-------- --------- -------------- --------------
$20.91 - 20.91 1,008,450 7 yrs $20.91
13.63 - 17.00 169,500 8 yrs 15.70
2.81 - 4.00 5,077,125 9 yrs 3.86
- -------------- --------- ------- ------
$ 2.81 - 20.91 6,255,075 8.7 yrs $ 6.93
The following table provides additional information for options exercisable
at December 31, 2000:
Range of Wtd. Avg.
Prices Number Exercise Price
-------- --------- --------------
$20.91 - 20.91 672,300 $20.91
13.63 - 17.00 56,500 15.70
3.63 - 4.00 437,500 3.94
-------------- --------- ------
$ 3.63 - 20.91 1,166,300 $14.29
67
Had compensation expense for the Company's stock options been recognized
based on the fair value on the grant date under the methodology prescribed by
FAS 123, the Company's loss from continuing operations and loss per share for
the three years ended December 31, would have been impacted as shown in the
following table (in thousands, except per share).
2000 1999 1998
-------- ------- --------
Reported net loss available to common
stockholders..................................... $(68,585) $(4,449) $(69,129)
Pro forma net loss available to common
stockholders..................................... (70,319) (6,674) (70,328)
Reported diluted loss per share available to
common stockholders.............................. (0.99) (0.07) (1.29)
Pro forma diluted loss per share available to
common stockholders ............................. (1.02) (0.10) (1.31)
The fair value of options granted, which is hypothetically amortized to
expense over the option vesting period in determining the pro forma impact,
has been estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
2000 1999 1998
------- ------ ------
Expected life of option................................... 5 yrs. 5 yrs. 5 yrs.
Risk-free interest rate................................... 5.1% 6.5% 4.8%
to 6.7%
Expected volatility of Aurora Foods stock................. 88% 30% 20%
Expected dividend yield on Aurora Foods stock............. 0.0% 0.0% 0.0%
The weighted average fair value of options granted during 2000, 1999, and
1998 determined using the Black-Scholes model is as follows:
2000 1999 1998
------ ----- ------
Fair value of each option granted........................... $ 2.80 $6.12 $ 5.99
Total number of options granted (in millions)............... 5.18 0.34 2.03
------ ----- ------
Total fair value of all options granted (in millions)....... $14.50 $2.08 $12.16
====== ===== ======
The Company has adopted a stock purchase plan, the 1998 Employee Stock
Purchase Plan (the "1998 Purchase 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 years ended December 31,
2000 and 1999, 149,963 and 33,638 shares were purchased at weighted average
prices of $2.65 and $10.87 per share, respectively.
Note 22. 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 and the outstanding Convertible Cumulative Preferred Stock (the
dilutive impact is calculated by applying the "treasury stock method").
68
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,
--------------------------------
1998
2000 1999 (As Restated)
-------- ------- -------------
Numerator:
Net loss available to common stockholders
before cumulative effect of accounting change
and extraordinary loss....................... $(56,424) $(4,449) $(59,918)
Cumulative effect of accounting change, net of
tax.......................................... (12,161) -- --
Extraordinary loss, net of tax................ -- -- 9,211
-------- ------- --------
Net loss available to common stockholders..... $(68,585) $(4,449) $(69,129)
======== ======= ========
Denominator--Basic shares:
Average common shares outstanding............. 69,041 67,023 53,541
-------- ------- --------
Basic loss per share.......................... $ (0.99) $ (0.07) $ (1.29)
======== ======= ========
Denominator--Diluted shares:
Average common shares outstanding............. 69,041 67,023 53,541
Dilutive effect of common stock equivalents... -- -- --
-------- ------- --------
Total diluted shares.......................... 69,041 67,023 53,541
-------- ------- --------
Diluted loss per share........................ $ (0.99) $ (0.07) $ (1.29)
======== ======= ========
69
Note 23. Segment Information
The Company manages its businesses in two operating segments: dry grocery
division and frozen food division. Historically, the operating segments have
been managed as strategic units due to their distinct manufacturing
methodologies and distribution channels. 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, Celeste(R) brand
frozen pizza products, Chef's Choice(R) frozen skillet meal products and
Lender's(R) bagel products.
The following table presents a summary of operations by segment (in
thousands):
Years Ended December 31,
-----------------------------------
1998
2000 1999 (As Restated)
---------- ---------- -------------
Net sales
Dry grocery................................ $ 376,624 $ 411,287 $ 448,198
Frozen food................................ 623,507 464,919 241,441
---------- ---------- ----------
Total..................................... $1,000,131 $ 876,206 $ 689,639
========== ========== ==========
Operating income
Dry grocery................................ $ 12,913 $ 43,400 $ (2,998)
Frozen food................................ 12,052 20,661 9,490
---------- ---------- ----------
Total..................................... $ 24,965 $ 64,061 $ 6,492
========== ========== ==========
Total assets
Dry grocery................................ $ 838,291 $ 890,927 $ 899,538
Frozen food................................ 955,995 960,189 558,904
---------- ---------- ----------
Total..................................... $1,794,286 $1,851,116 $1,448,442
========== ========== ==========
Depreciation and amortization
Dry grocery................................ $ 29,998 $ 27,458 $ 25,258
Frozen food................................ 43,337 27,990 16,609
---------- ---------- ----------
Total..................................... $ 73,335 $ 55,448 $ 41,867
========== ========== ==========
Capital expenditures
Dry grocery................................ $ 3,541 $ 14,477 $ 24,649
Frozen food................................ 12,517 10,804 14,061
---------- ---------- ----------
Total..................................... $ 16,058 $ 25,281 $ 38,710
========== ========== ==========
70
Note 24. Quarterly Financial Data (Unaudited)
As described in Note 1, the unaudited quarterly information for the three
months ended March 31, 1999, June 30, 1999 and September 30, 1999 were
restated prior to the filing of the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 and the Company has filed amended Form 10-Q's
for each of those periods.
Unaudited quarterly financial data for the years ended December 31, 2000
and 1999 are as follows (in thousands, except per share data):
Three months ended
----------------------------------------------
March
31, June 30, September 30, December 31,
-------- -------- ------------- ------------
Year ended December 31, 2000:
Net sales...................... $282,008 $214,721 $227,722 $275,680
Gross profit................... 143,606 113,263 110,396 144,281
Operating income............... 977 170 3,263 20,555
Net loss before cumulative
effect of change in
accounting.................... (16,449) (18,933) (15,294) (5,415)
Net loss....................... (28,610) (18,933) (15,294) (5,415)
Basic and diluted loss per
share available to common
stockholders:
Before comulative effect of
change in accounting ........ (0.25) -- -- --
Net earnings available to
common stockholders ......... (0.43) (0.28) (0.22) (0.08)
Year ended December 31, 1999:
Net sales...................... $254,264 $214,034 $231,896 $295,224
Gross profit................... 149,561 122,804 130,360 167,757
Operating income............... 15,729 10,878 22,966 14,487
Net income (loss).............. 482 (3,730) 3,827 (5,030)
Basic and diluted earnings
(loss) per share ............. 0.01 (0.06) 0.06 (0.08)
71
Note 25. Condensed Financial Statements of Subsidiary
Seacoast is a guarantor under the debt agreements. As a result, the
condensed financial statements as of December 31, 2000 and 1999, and for the
year ended December 31, 2000 and the period from acquisition (April 1, 1999) to
December 31, 1999, are included below:
SEA COAST FOODS, INC.
BALANCE SHEET
(dollars in thousands)
December 31,
---------------
2000 1999
------- -------
Assets
Current assets:
Accounts receivable (net of allowance of $100 and $299,
respectively)................................................ $ 3,919 $ 4,889
Inventories................................................... 10,415 12,445
Current deferred tax asset.................................... 166 62
Prepaid expenses.............................................. 16 116
------- -------
Total current assets......................................... 14,516 17,512
Property, plant and equipment, net............................ -- 107
Goodwill and intangible assets, net........................... 55,690 49,887
Other assets.................................................. 2,059 1,901
------- -------
Total assets................................................. $72,265 $69,407
======= =======
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable.............................................. $ 2,117 $ 2,742
Accrued expenses.............................................. 1,283 1,410
------- -------
Total current liabilities.................................... 3,400 4,152
Due to parent.................................................. 64,814 59,034
------- -------
Total liabilities............................................ 68,214 63,186
------- -------
Stockholder's equity:
Common stock.................................................. 1 1
Paid-in capital............................................... 200 200
Retained earnings............................................. 3,850 6,020
------- -------
Total stockholder's equity................................... 4,051 6,221
------- -------
Total liabilities and stockholder's equity................... $72,265 $69,407
======= =======
72
SEA COAST FOODS, INC.
STATEMENT OF OPERATIONS
(dollars in thousands)
Year Nine months
ended ended
December 31, December 31,
2000 1999
------------ ------------
Net sales................... $ 59,463 $ 47,754
Cost of goods sold.......... (40,617) (28,918)
-------- --------
Gross profit.............. 18,846 18,836
-------- --------
Brokerage, distribution and
marketing expenses:
Brokerage and
distribution............. (6,142) (5,665)
Trade promotions.......... (3,523) (3,094)
Consumer marketing........ (1,153) (573)
-------- --------
Total brokerage,
distribution and marketing
expenses................... (10,818) (9,332)
Amortization of goodwill and
other intangibles.......... (1,604) (985)
Selling, general and
administrative expenses.... (2,554) (1,937)
-------- --------
Total operating expenses.... (14,976) (12,254)
-------- --------
Operating income.......... 3,870 6,582
Interest expense, net....... (6,417) (3,755)
-------- --------
Income (loss) before
income taxes............. (2,547) 2,827
Income tax (expense)
benefit.................... 377 (1,525)
-------- --------
Net income (loss)....... $ (2,170) $ 1,302
======== ========
73
SEA COAST FOODS, INC.
STATEMENT OF CASH FLOWS
(dollars in thousands)
Year Nine months
ended ended
December 31, December 31,
2000 1999
------------ ------------
Cash flows from operating activities:
Net income (loss)................................... $(2,170) $1,302
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Depreciation and amortization...................... 1,901 1,243
Deferred taxes..................................... (104) 1,525
Change in assets and liabilities:
Decrease in receivables........................... 970 2,725
Decrease (increase) in inventories................ 2,030 (5,568)
Decrease (increase) in prepaid expenses and other
assets........................................... 85 (1)
Decrease in accounts payable...................... (625) (5,475)
Decrease in accrued expenses...................... (97) (254)
------- ------
Net cash provided by (used in) operating activities.. 1,990 (4,503)
------- ------
Cash flow used in investing activities:
Additions to other assets........................... (364) --
Payment for acquisition of business................. (7,954) --
------- ------
Net cash used for investing activities............... (8,318) --
------- ------
Cash flows from financing activities:
Debt issuance costs................................. (132) --
Intercompany borrowings............................. 6,460 4,503
------- ------
Net cash provided from financing activities.......... 6,328 4,503
------- ------
Net change in cash................................... -- --
Beginning cash and cash equivalents.................. -- --
------- ------
Ending cash and cash equivalents..................... $ -- $ --
======= ======
74
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. (Incorpo-
rated 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 Compa-
ny. (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 Au-
rora 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 Hold-
ings, 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, Van de Kamp's, Inc. and Morningstar Foods, Inc. (In-
corporated 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, be-
tween Van de Kamp's, Inc. and Morningstar Foods, Inc. (Incor-
porated by reference to Exhibit 2.1 to Van de Kamp's, Inc.'s
Form 10-Q for the quarter ended March 31, 1997).
2.9 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).
2.10 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).
2.11 Asset Purchase and Sale Agreement, dated as of January 17,
1996, between Shellfish Acquisition Company, LLC ("Shellfish")
and Campbell Soup Company ("Campbell"). (Incorporated by ref-
erence to the text of which and Exhibits to which are incorpo-
rated 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 ref-
erence to Exhibit 2.1 to Van de Kamp's, Inc.'s Form 8-K dated
May 6, 1996).
2.12 Asset Purchase Agreement, dated as of January 17, 1996, be-
tween Van de Kamp's, Inc. and Shellfish. (Incorporated by ref-
erence to Exhibit 2.2 to the Van de Kamp's, Inc.'s Form 10-Q
for the quarter ended March 20, 1996).
2.13 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 ref-
erence to Exhibit 2.2 to Van de Kamp's, Inc.'s Form S-4 filed
on October 4, 1995 (the "Van de Kamp's S-4")).
2.14 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).
Exhibit
Number Exhibit
------- -------
2.15 Asset Purchase Agreement, dated as of March 10, 1999, by and
among the Company and Sea Coast Foods, Inc., Galando Invest-
ments Limited Partnership, Carry-on Limited Partnership, Jo-
seph Galando, Barbara J. Galando, Stanley J. Carey and Mary K.
Carey. (Incorporated by reference to Exhibit 2.1 to the Form
10-Q for the quarter ended March 31, 1999).
2.16 Asset Purchase Agreement Dated September 24, 1999 between Au-
rora Foods Inc. and The Eggo Company (Incorporated by refer-
ence to Exhibit 2.1 to the Aurora Foods Inc. 8-K dated Novem-
ber 1, 1999).
2.17 Securities Purchase Agreement for Series A Preferred Stock
dated as of September 20, 2000 between the Company and the
Purchasers listed on the signature page thereto. (Incorporated
by reference to Exhibit 2.1 to the Aurora Foods Inc. Form 8-K
filed on September 21, 2000).
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. (Incorpo-
rated by reference to exhibit 3.2 to the Aurora Foods Inc.
Form 10-Q for the quarter ended June 30, 2000).
3.3 Certificate of Designation for the Company's Series A Pre-
ferred Stock filed with the Secretary of State of Delaware on
September 7, 2000. (Incorporated by reference to Exhibit 3.1
to the Aurora Foods Inc. Form 8-K filed on September 21,
2000).
4.1 Indenture dated as of February 10, 1997, governing the 9 7/8%
Series B Senior Subordinated Notes due 2007 by and between Au-
rora 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
Notes 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 Ex-
hibit 4.1 hereto). (Incorporated by reference to Exhibit 4.4
to the Aurora S-4).
4.4 Indenture dated as of July 1, 1997, governing the 9 7/8% Se-
ries D Senior Subordinated Notes due 2007 by and between Au-
rora 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
Notes 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, governing the 8 3/4% Se-
nior Subordinated Notes due 2008 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. (Incorporated by reference to Exhibit 4.9 to the Aurora
Foods Inc. Form 10-K for the year ended December 31, 1999.)
4.10 Specimen Certificate of the Common Stock. (Incorporated by
reference to Exhibit 4.1 to the S-1).
4.11 Supplemental Indenture, governing the 9 7/8% Series D Senior
Subordinated Notes due 2007, dated as of April 1, 1999, among
Sea Coast Foods, Inc., Aurora Foods Inc. and Wilmington Trust
Company, as Trustee. (Incorporated by reference to Exhibit
4.11 to the Aurora Foods Inc. Form 10-K for the year ended De-
cember 31, 1999.)
Exhibit
Number Exhibit
------- -------
4.12 Supplemental Indenture, governing the 9 7/8% Series C Senior
Subordinated Notes due 2007, dated as of April 1, 1999, among
Sea Coast Foods, Inc., Aurora Foods Inc. and Wilmington Trust
Company, as Trustee. (Incorporated by reference to Exhibit
4.12 to the Aurora Foods Inc. Form 10-K for the year ended De-
cember 31, 1999.)
4.13 Supplemental Indenture, governing the 8 3/4% Senior Subordi-
nated Notes due 2008, dated as of April 1, 1999, among Sea
Coast Foods, Inc., Aurora Foods Inc. and Wilmington Trust Com-
pany, as Trustee. (Incorporated by reference to Exhibit 4.13
to the Aurora Foods Inc. Form 10-K for the year ended December
31, 1999.)
4.14 Amendment of Securityholders Agreement among Aurora Foods Inc.
and the parties listed on the signature page thereto. (Incor-
porated by reference to Exhibit 4.14 to the Aurora Foods Inc.
Form 10-Q for the quarter ended September 30, 2000).
4.15 Supplemental Indenture dated as of September 20, 2000 between
the Company, Sea Coast Foods, Inc. and Wilmington Trust Compa-
ny, as trustee, amending the Indenture dated as of July 1,
1998, as amended. (Incorporated by reference to Exhibit 4.1 to
Aurora Foods Inc.'s Form 8-K filed September 21, 2000).
4.16 Supplemental Indenture dated as of September 20, 2000 between
the Company, Sea Coast Foods, Inc. and Wilmington Trust Compa-
ny, as trustee, amending the Indenture dated as of February
10, 1997, as amended. (Incorporated by reference to Exhibit
4.2 to Aurora Foods Inc.'s Form 8-K filed September 21, 2000).
4.17 Supplemental Indenture dated as of September 20, 2000 between
the Company, Sea Coast Foods, Inc. and Wilmington Trust Compa-
ny, as trustee, amending the Indenture dated as of July 1,
1997, as amended. (Incorporated by reference to Exhibit 4.3 to
Aurora Foods Inc.'s Form 8-K filed September 21, 2000).
10.1* VDK Holdings, Inc. Incentive Compensation Plan. (Incorporated
by reference to Exhibit 10.1 to the S-1).
10.2 Purchase Agreement, dated February 5, 1997, by and between Au-
rora Foods Inc. and Chase Securities, Inc. (Incorporated by
reference to Exhibit 1.1 to the Aurora S-4).
10.3* 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).
10.4* 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).
10.5 License Agreement, dated as of February 21, 1979, between Gen-
eral Host Corporation and VDK Acquisition Corporation. (Incor-
porated by reference to Exhibit 10.27 to the Van de Kamp's S-
4).
10.6 License Agreement, dated as of October 14, 1978, between Gen-
eral Host Corporation and Van de Kamp's Dutch Bakeries. (In-
corporated by reference to Exhibit 10.28 to the Van de Kamp's
S-4).
10.7 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 Ex-
hibit 2.1 to Van de Kamp's, Inc.'s Form 8-K dated July 9,
1996).
10.8 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 por-
tion of this document has been requested by the Company). (In-
corporated by reference to Exhibit 10.16 to Aurora Foods
Inc.'s Form 10-K, filed on March 27, 1998 (the "Aurora 10-
K")).
10.9 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).
10.10* 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).
Exhibit
Number Exhibit
------- -------
10.11* 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).
10.12* Employment Agreement between Ian R. Wilson and Aurora Foods
Inc. (Incorporated by reference to Exhibit 10.7 to the S-1).
10.13* Employment Agreement between James B. Ardrey and Aurora Foods
Inc. (Incorporated by reference to Exhibit 10.8 to the S-1).
10.14* Employment Agreement between Ray Chung and Aurora Foods Inc.
(Incorporated by reference to Exhibit 10.9 to the S-1).
10.15* Employment Agreement between M. Laurie Cummings and Aurora
Foods Inc. (Incorporated by reference to Exhibit 10.10 to the
S-1).
10.16* Amendment No. 1 to Ellinwood Amended and Restated Employment
Agreement, dated as of January 1, 1998, between Thomas O. El-
linwood and Van de Kamp's, Inc. (Incorporated by reference to
Exhibit 10.15 to the S-1).
10.17* 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).
10.18* Employment Agreement, dated as of February 16, 1998, by and
between Van de Kamp's, Inc. and Anthony A. Bevilacqua. (Incor-
porated by reference to Exhibit 10.17 to the S-1).
10.19 Expense Agreement, made as of July 1, 1998, between Aurora
Foods Inc. and Dartford Partnership LLC (Incorporated by ref-
erence to Exhibit 10.32 to the S-1).
10.20* 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
LLC (Incorporated by reference to Exhibit 10.33 to the S-1).
10.21* 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).
10.22* 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).
10.23 Indemnity Agreement, dated as of July 1, 1998, between Ian R.
Wilson and Aurora Foods Inc. (Incorporated by reference to Ex-
hibit 10.46 to the S-1).
10.24 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).
10.25 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).
10.26 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).
10.27 Indemnity Agreement, dated as of July 1, 1998, between Charles
J. Delaney and Aurora Foods Inc. (Incorporated by reference to
Exhibit 10.53 to the S-1).
10.28 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).
10.29 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).
10.30 Indemnity Agreement, dated as of July 1, 1998, between Peter
Lamm and Aurora Foods Inc. (Incorporated by reference to Ex-
hibit 10.56 to the S-1).
Exhibit
Number Exhibit
------- -------
10.31* 1998 Employee Stock Purchase Plan (Incorporated by reference
to Exhibit 10.48 to the Aurora Foods Inc. Form 10-K for the
fiscal year ended December 31, 1998).
10.32 Production Agreement, dated as of June 4, 1998, by and between
Aurora Foods Inc. and Gilster-Mary Lee Corporation. (Incorpo-
rated by reference to Exhibit 10.48 to the S-1).
10.33* 1998 Long Term Incentive Plan (Incorporated by reference to
Exhibit 10.50 to the Aurora Foods Inc. Form 10-K for the fis-
cal year ended December 31, 1998).
10.34 Fifth Amended and Restated Credit Agreement dated November 1,
1999 and entered into by and among Aurora Foods Inc., as Bor-
rower, the Lenders listed therein, the Chase Manhattan Bank,
as Administrative Agent for the Lenders, National Westminster
Bank PLC, as Syndication Agent, and UBS AG, Stamford Branch,
as Documentation Agent (Incorporated by reference to Exhibit
10.1 to the Aurora Foods Inc. Form 8-K dated November 1,
1999).
10.35 Amendment, dated as of April 28, 2000, to the Fifth Amended
and Restated Credit Agreement dated November 1, 1999 and en-
tered into by and among Aurora Foods Inc., as Borrower, the
Lenders listed therein, the Chase Manhattan Bank, as Adminis-
trative Agent for the Lenders, National Westminster Bank PLC,
as Syndication Agent, and UBS AG, Stamford Branch, as Documen-
tation Agent. (Incorporated by reference to Exhibit 10.35 to
the Aurora Foods Inc. Form 10-Q for the quarter ended March
31, 2000).
10.36 First Amendment, Forbearance and Waiver, dated as of March 29,
2000, to the Fifth Amended and Restated Credit Agreement dated
November 1, 1999 and entered into by and among Aurora Foods
Inc., as Borrower, the Lenders listed therein, the Chase Man-
hattan Bank, as Administrative Agent for the Lenders, National
Westminster Bank PLC, as Syndication Agent, and UBS AG, Stam-
ford Branch, as Documentation Agent. (Incorporated by refer-
ence to Exhibit 10.36 to the Aurora Foods Inc. Form 10-Q for
the quarter ended March 31, 2000).
10.37 Collective Bargaining Agreement between Lender's Bagel Bakery
and Bakery, Confectionery and Tobacco Workers of America Local
# 429 September 1, 1998 to August 31, 2001. (Incorporated by
reference to Exhibit 10.35 to the Aurora Foods Inc. Form 10-K
for the year ended December 31, 1999).
10.38 Receivables Purchase Agreement, dated as of April 19, 2000,
and entered into by and between Aurora Foods Inc., as Seller,
and the Chase Manhattan Bank, as borrower. (Incorporated by
reference to Exhibit 10.38 to the Aurora Foods Inc. Form 10-Q
for the quarter ended March 31, 2000).
10.39* Employment Agreement dated as of March 21, 2000, between Au-
rora Foods Inc. and Christopher T. Sortwell. (Incorporated by
reference to Exhibit 10.39 to the Aurora Foods Inc. Form 10-Q
for the quarter ended March 31, 2000).
10.40* Employment Agreement dated as of March 27, 2000, between Au-
rora Foods Inc. and James T. Smith. (Incorporated by reference
to Exhibit 10.40 to the Aurora Foods Inc.'s Form 10-Q for the
quarter ended September 30, 2000).
10.41* Employment Agreement dated as of March 27, 2000, between Au-
rora Foods Inc. and Paul Graven.
10.42 Registration Rights Agreement dated as of January 31, 2001 by
and among Aurora Foods Inc., and the Holders listed on Sched-
ule A thereto.
- --------
*Represents management contracts or compensatory plans or arrangements
10.43* Aurora Foods Inc. 2000 Equity Incentive Plan.
(b)Reports on Form 8-K
None.
21.1 Subsidiary of Aurora Foods Inc. (Incorporated by reference to
Exhibit 21.1 to the Aurora Foods Inc. Form 10-K for the year
ended December 31, 1999.)
23.1 Consent of PricewaterhouseCoopers LLP