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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 001-14255
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AURORA FOODS INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-3303521
-------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
11432 Lackland Road, St. Louis, MO 63146
(Address of Principal Executive Office, Including Zip Code)
(314) 801-2300
(Registrant's Telephone Number, Including Area Code)
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No[ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date.
Shares outstanding as of
August 6, 2002
------------------------
Common stock, $0.01 par value................ 71,824,493
The number of shares outstanding as of August 6, 2002 reflects the initial
share transfers to and from the Company in connection with the settlement,
described in Note 20 to the financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
1
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
See pages 3 through 17.
2
AURORA FOODS INC.
BALANCE SHEETS
(dollars in thousands except per share amounts)
June 30, December 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents .................................................... $ 12,021 $ 184
Accounts receivable, net of $716 and $588 allowance, respectively ............ 65,792 91,229
Accounts receivable sold ..................................................... (31,248) (33,302)
Inventories .................................................................. 88,659 99,560
Prepaid expenses and other assets ............................................ 19,473 5,524
Current deferred tax assets .................................................. 20,184 18,563
------------ ------------
Total current assets .................................................... 174,881 181,758
Property, plant and equipment, net ........................................... 200,100 232,650
Deferred tax asset ........................................................... 167,439 47,799
Goodwill and other intangible assets, net .................................... 982,921 1,229,652
Other assets ................................................................. 28,956 31,181
------------ ------------
Total assets ............................................................ $1,554,297 $1,723,040
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of senior secured term debt .................................. $ 42,916 $ 37,970
Accounts payable ............................................................. 57,159 73,001
Accumulated preferred dividends payable ...................................... 2,249 1,586
Accrued liabilities .......................................................... 86,825 80,417
------------ ------------
Total current liabilities ............................................... 189,149 192,974
Senior secured term debt ..................................................... 451,384 472,793
Senior secured revolving debt facility ....................................... 158,000 127,700
Senior unsecured debt ........................................................ 14,551 -
Senior subordinated notes .................................................... 401,477 401,605
Capital lease obligation ..................................................... 1,784 1,833
Other liabilities ............................................................ 16,428 16,683
------------ ------------
Total liabilities ....................................................... 1,232,773 1,213,588
------------ ------------
Commitments and contingencies
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 $17,249 and $16,586, respectively ......... 37 37
Common stock, $0.01 par value; 250,000,000 shares authorized; 74,410,534
and 74,254,467 shares issued, respectively ................................ 744 743
Paid-in capital .............................................................. 690,549 685,582
Treasury stock ............................................................... (13,266) (13,266)
Promissory notes ............................................................. (40) (40)
Accumulated deficit .......................................................... (353,856) (159,760)
Accumulated other comprehensive loss ......................................... (2,644) (3,844)
------------ ------------
Total stockholders' equity .............................................. 321,524 509,452
------------ ------------
Total liabilities and stockholders' equity .............................. $1,554,297 $1,723,040
============ ============
See accompanying notes to financial statements.
3
AURORA FOODS INC.
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three Months Ended June 30,
----------------------------
2002 2001
----------------------------
Net sales ................................................................... $ 176,544 $ 181,607
Cost of goods sold .......................................................... (112,091) (108,904)
---------- ----------
Gross profit .............................................................. 64,453 72,703
---------- ----------
Brokerage, distribution and marketing expenses:
Brokerage and distribution ................................................ (27,393) (25,516)
Consumer marketing ........................................................ (6,080) (4,876)
---------- ----------
Total brokerage, distribution and marketing expenses ................... (33,473) (30,392)
Amortization of goodwill and other intangibles .............................. (2,579) (11,322)
Selling, general and administrative expenses ................................ (15,010) (15,651)
Plant closure charge ........................................................ (29,900) -
Other financial, legal, accounting and consolidation items, net ............. - 3,066
---------- ----------
Total operating expenses .............................................. (80,962) (54,299)
---------- ----------
Operating (loss) income ................................................... (16,509) 18,404
Interest and financing expenses:
Interest expense, net ..................................................... (22,793) (25,461)
Adjustment to value of derivatives ........................................ (4,063) (4,901)
Issuance of warrants ...................................................... (4,259) -
Amortization of deferred financing expense ................................ (3,009) (867)
Other bank and financing expenses ......................................... (37) (37)
---------- ----------
Total interest and financing expenses .................................. (34,161) (31,266)
---------- ----------
Loss before income taxes .................................................. (50,670) (12,862)
Income tax benefit .......................................................... 19,614 3,864
---------- ----------
Net loss .................................................................. (31,056) (8,998)
Preferred dividends ......................................................... (332) (308)
---------- ----------
Net loss available to common stockholders ................................. $ (31,388) $ (9,306)
========== ==========
Basic and diluted loss per share available to common stockholders:
Net loss available to common stockholders ................................. $ (0.44) $ (0.13)
========== ==========
Weighted average number of shares outstanding ............................... 71,823 72,675
========== ==========
See accompanying notes to financial statements.
4
AURORA FOODS INC.
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Six Months Ended June 30,
--------------------------------
2002 2001
--------------------------------
Net sales ......................................................................... $ 374,616 $ 411,675
Cost of goods sold ................................................................ (246,550) (242,838)
------------ -------------
Gross profit ................................................................. 128,066 168,837
------------ ------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution ................................................... (58,463) (58,429)
Consumer marketing ........................................................... (15,819) (23,881)
------------ ------------
Total brokerage, distribution and marketing expenses ................... (74,282) (82,310)
Amortization of goodwill and other intangibles .................................... (5,027) (22,523)
Selling, general and administrative expenses ...................................... (32,350) (31,384)
Plant closure charge .............................................................. (29,900) -
Other financial, legal, accounting and consolidation items, net ................... - 3,066
------------ ------------
Total operating expenses ............................................... (141,559) (133,151)
------------ ------------
Operating (loss) income ...................................................... (13,493) 35,686
Interest and financing expenses:
Interest expense, net ........................................................ (44,961) (53,331)
Adjustment to value of derivatives ........................................... (5,180) (4,901)
Issuance of warrants ......................................................... (4,259) -
Amortization of deferred financing expense ................................... (3,876) (1,734)
Other bank and financing expenses ............................................ (74) (74)
------------ ------------
Total interest and financing expenses .................................. (58,350) (60,040)
------------ ------------
Loss before income taxes and cumulative effect of change in accounting ....... (71,843) (24,354)
Income tax benefit ................................................................ 27,863 7,599
------------ ------------
Net loss before cumulative effect of change in accounting .................... (43,980) (16,755)
Cumulative effect of change in accounting, net of tax of $94,110 .................. (149,453) -
------------ ------------
Net loss ..................................................................... (193,433) (16,755)
Preferred dividends ............................................................... (663) (615)
------------ ------------
Net loss available to common stockholders .................................... $ (194,096) $ (17,370)
============ ============
Basic and diluted loss per share available to common stockholders:
Loss before cumulative effect of change in accounting ........................ $ (0.62) $ (0.24)
Cumulative effect of change in accounting, net of tax ........................ (2.08) -
------------ ------------
Net loss available to common stockholders .................................... $ (2.70) $ (0.24)
============ ============
Weighted average number of shares outstanding ..................................... 71,788 73,395
============ ============
See accompanying notes to financial statements.
5
AURORA FOODS INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
Accumulated
Additional Other
Preferred Common Paid-in Promissory Treasury Accumulated Comprehensive
Stock Stock Capital Notes Stock Deficit Loss Total
----------- ------------ ----------- ------------ ---------- ------------- ------------- -----------
Balance at December 31, 2001.... $ 37 $ 743 $ 685,582 $ (40) $(13,266) $ (159,760) $ (3,844) $ 509,452
Stock options exercised......... - 1 451 - - - - 452
Restricted stock awards......... - - 252 - - - - 252
Employee stock purchases........ - - 5 - - - - 5
Issuance of warrants............ - - 4,259 - - - - 4,259
Net loss........................ - - - - - (193,433) - (193,433)
Cumulative preferred dividends.. - - - - - (663) - (663)
Net deferred hedging adjustment. - - - - - - 1,200 1,200
----------- ------------ ----------- ------------ ---------- ------------- ------------- -----------
Balance at June 30, 2002........$ 37 $ 744 $ 690,549 $ (40) $(13,266) $ (353,856) $ (2,644) $ 321,524
=========== ============ =========== ============ ========== ============= ============= ===========
See accompanying notes to financial statements.
6
AURORA FOODS INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
--------------------------------
2002 2001
--------------------------------
Cash flows from operations:
Net loss .................................................................... $ (193,433) $ (16,755)
Adjustments to reconcile net loss to net cash from operations:
Depreciation and amortization .......................................... 24,934 37,552
Deferred income taxes .................................................. (27,863) (7,599)
Recognition of loss on derivatives ..................................... 5,180 4,901
Receipt of shares from former management ............................... - (15,654)
Recognition of liability to shareholder class .......................... - 10,000
Cumulative effect of change in accounting, net of tax .................. 149,453 -
Issuance of warrants ................................................... 4,259 -
Non-cash plant closure charge .......................................... 26,000 -
Other, net ............................................................. 2 189
Changes in operating assets and liabilities:
Accounts receivable .............................................. 25,437 47,803
Inventories ...................................................... 11,548 19,564
Prepaid expenses and other current assets ........................ (16,057) (5,330)
Accounts payable ................................................. (15,842) (3,857)
Accrued expenses ................................................. 6,138 (20,952)
Other non-current liabilities .................................... (3,500) (2,712)
------------ ------------
Net cash (used for) provided by operations ....................................... (3,744) 47,150
------------ ------------
Cash flows from investing activities:
Asset additions ............................................................. (11,548) (5,269)
Proceeds from asset sales ................................................... 404 66
------------ ------------
Net cash used for investment activities .......................................... (11,144) (5,203)
------------ ------------
Cash flows from financing activities:
Senior secured revolving borrowings (repayments), net ....................... 30,300 (13,600)
Repayment of borrowings ..................................................... (16,463) (16,462)
Senior unsecured financing .................................................. 14,550 -
Decrease in accounts receivable sold ........................................ (2,053) (9,959)
Capital contributions and other, net ........................................ 391 259
------------ ------------
Net cash provided by (used for) financing activities ............................. 26,725 (39,762)
------------ ------------
Increase in cash and cash equivalents ............................................ 11,837 2,185
Cash and cash equivalents, beginning of period ................................... 184 525
------------ ------------
Cash and cash equivalents, end of period ......................................... $ 12,021 $ 2,710
============ ============
See accompanying notes to financial statements.
7
AURORA FOODS INC.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2002
NOTE 1 - BASIS OF PRESENTATION
Interim Financial Statements
The interim financial statements of the Company included herein have not
been audited by independent accountants. The statements include all adjustments,
including normal recurring accruals, which management considers necessary for a
fair presentation of the financial position and operating results of the Company
for the periods presented. The statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The operating results for interim periods are not necessarily
indicative of results to be expected for an entire year. Certain prior period
amounts have been reclassified to conform to the current period's presentation.
For further information, reference should be made to the financial
statements of the Company and notes thereto included in the Annual Report on
Form 10-K of the Company for the year ended December 31, 2001.
The Company
The Company has acquired premium, well recognized brands with strong brand
equity that had been undermarketed, undermanaged, non-core businesses to their
former corporate parents. The Company's objective has been to renew the growth
of its brands by giving them the focus, strategic direction, product
development, and dedicated sales and marketing resources they need to thrive.
Each of the Company's brands is a leading brand with significant market share
and strong consumer awareness. The Company primarily competes in the following
three industry segments: retail, food service and other distribution channels.
The Company's products are sold nationwide, primarily through food brokers to
supermarkets, wholesale and retail grocery accounts and other retail channels,
as well as food service distribution channels (restaurant chains,
business/industry and schools) and club store, private label and military
customers. Distribution is either directly to the customer or through
independent wholesalers and distributors.
Liquidity
The Company continues to be highly leveraged. As of August 6, 2002, the
Company had outstanding, approximately $1.09 billion in aggregate principal
indebtedness for borrowed money, had approximately $31 million of cash and
available borrowing capacity under the revolving credit facility and had sold
substantially all eligible receivables pursuant to the receivables sale
facility.
As further described in Note 11, on June 27, 2002, the Company secured
commitments for $62.6 million of additional financing, $15.0 million of which,
net of applicable discount, was received prior to June 30, 2002, with the
remainder received on July 2, 2002. Liquidity is expected to remain tight during
the third quarter, due to seasonality. In addition, the Company is also actively
reviewing a number of possibilities to provide additional liquidity and reduce
the Company's leverage, both in the short-term and in the long-term. These
possibilities include but are not limited to the sale of certain assets or
businesses. The Company has hired Merrill Lynch and JPMorgan to assist it in
reviewing strategic alternatives. The Company is also attempting to actively
reduce controllable expenditures that are not expected to have major impacts on
the business. The Company's tight liquidity has not led to significant
disruptions in its ability to obtain necessary raw materials from its vendors.
8
Accounting Changes
Effective January 1, 2002, the Company adopted the consensus reached in
EITF 00-25 and 01-09, which required that certain items which had been
classified as trade promotions expense in prior years be reclassified as
reductions of net sales. Adoption of the consensus had no impact on cash flow or
the reported amounts of operating income for any period. Following this change,
all payments made by the Company to direct and indirect customers to promote and
facilitate the sale of the Company's products are reflected as reductions of net
sales. Prior year amounts in the accompanying statement of operations have been
reclassified to conform with this new presentation.
Net sales for each quarter and the full year for 2001 and 2000, after
reflecting this reclassification from trade promotion expense, are as follows
(in thousands):
Net Sales After
Reclassification
---------------------
Quarter ending: 2001 2000
-------- --------
March 31 $230,068 $227,607
June 30 181,607 172,915
September 30 200,838 197,541
December 31 229,628 222,951
-------- --------
Calendar Year $842,141 $821,014
======== ========
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 ("FAS 142"), Goodwill and Other Intangible Assets. FAS 142
generally requires that (1) recorded amounts of goodwill no longer be amortized,
on a prospective basis, (2) the amount of goodwill recorded on the balance sheet
of the Company be evaluated annually for impairment using a two-step method, (3)
other identifiable intangible assets be categorized as to whether they have
indefinite or finite lives, (4) intangibles having indefinite lives no longer be
amortized on a prospective basis, and (5) the amount of intangibles having
indefinite lives on the balance sheet of the Company be evaluated annually for
impairment using a one-step method.
As of June 30, 2002, the Company has implemented all aspects of FAS 142
except for the completion of the second step of its impairment test of goodwill.
The two-step method used to evaluate recorded amounts of goodwill for possible
impairment involves comparing the total fair value of each reporting unit, as
defined, less the book value of all recorded identifiable net assets of the
reporting unit (the "residual"), to the recorded book value of the reporting
unit's goodwill. If the book value of goodwill exceeds this residual, a second
step is required. The second step involves comparing the fair value of the
reporting unit less the fair value of all identifiable net assets that exist
(the "adjusted residual") to the book value of goodwill. Where the adjusted
residual is less than the book value of goodwill for the reporting unit, an
adjustment of the book value down to the adjusted residual is required.
Results of the first step of the Company's impairment test of goodwill
indicate goodwill impairment in two of the Company's reporting units.
Independent valuations using the excess earnings and market comparable
approaches indicate the fair value of each reporting unit exceeds the book value
for each reporting unit except for the Company's seafood and Chef's Choice
businesses, primarily in the retail segment, due primarily to changes in
business conditions and performance relative to original expectations. The
Company is in the process of completing the second step of its goodwill
impairment test for the seafood and Chef's Choice reporting units and expects
those tests to be completed during the third quarter of 2002. The book value of
goodwill for these two reporting units was in excess of their estimated fair
value by $88.0 million that has been recorded, net of tax of $33.4 million, in
the statement of operations as a cumulative effect of a change in accounting
principle. This impairment loss represents management's best estimate of the
goodwill impairment that will be recognized, and will be adjusted as necessary
once the Company completes the second step of its goodwill impairment test. FAS
142 requires impairment losses recognized as a result of a transitional goodwill
impairment test be recorded in the first interim reporting period after
adoption, even if measurement of the transitional impairment loss occurs in a
later period. Consequently, the Company has restated the first quarter of 2002
to recognize the goodwill impairment loss as an additional cumulative effect of
this change in accounting principle.
9
The following table summarizes the restated results for the quarter ended
March 31, 2002 (in thousands except per share amounts):
As Reported As Restated
----------- -----------
Net loss:
Net loss before cumulative effect of change in
accounting principle ............................ $ (12,924) $ (12,924)
Cumulative effect of change in accounting, net of
tax ............................................. (94,893) (149,453)
--------- ---------
Net loss ......................................... (107,817) (162,377)
Preferred dividends .............................. (331) (331)
--------- ---------
Net loss available to common stockholders ........ $(108,148) $(162,708)
========= =========
Basic and diluted loss per share available to common
stockholders:
Loss before cumulative effect of change in
accounting ...................................... $ (0.19) $ (0.19)
Cumulative effect of change in accounting, net of
tax ............................................. (1.32) (2.08)
--------- ---------
Net loss available to common stockholders ........ $ (1.51) $ (2.27)
========= =========
Effective January 1, 2002, with the adoption of FAS 142, the Company
reclassified $1.6 million of other intangibles to goodwill to comply with new
intangible asset classification guidelines in FAS 142.
During the first quarter of 2002, the Company determined that all
identifiable intangibles have definite lives with the exception of all of the
Company's trade names. Amortization of the trade names ceased January 1, 2002
and the carrying values were tested for impairment as of that date using a
one-step test comparing the fair value of the asset to its net carrying value.
The Company determined the fair value of the trade names based on valuations
performed by outside parties using the excess earnings approach. The fair value
of all trade names exceeded their net carrying value except for the Lender's and
Celeste trade names. The net carrying value for these two trade names was in
excess of their fair value by $155.6 million that has been recorded, net of tax
of $60.7 million, in the statement of operations for the first quarter, in
addition to the previously described goodwill adjustment, as a cumulative effect
of a change in accounting principle, which results in a total impairment charges
of $243.6 million, net of tax of $94.1 million, recorded as a cumulative effect
of a change in accounting principle.
The following table summarizes the intangibles as of June 30, 2002 (in
thousands):
Carrying Value
-------------------------------------
Accumulated
Gross Amortization Net
-------- ------------ ---------
Intangible assets subject to
amortization:
Recipes and formulations ............ $32,779 $17,828 $ 14,951
Other ............................... 15,493 10,073 5,420
------- ------- ---------
Total ............................. $48,272 $27,901 20,371
======= =======
Intangible assets not subject to
amortization ..................................................... 328,169
---------
Net carrying value of intangible assets ........................... $ 348,540
=========
10
The following schedule shows net losses and net loss per share adjusted to
exclude the Company's amortization expense related to goodwill and indefinite
lived intangibles (net of tax effects) (in thousands):
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
--------- -------- --------- ---------
Reported net loss available to common stockholders....... $ (31,388) $ (9,306) $(194,096) $ (17,370)
Add back:
Cumulative effect of change in accounting,
net of tax .................................... 149,453 -
Goodwill amortization .......................... - 3,387 - 6,774
Intangible amortization ........................ - 2,297 - 4,594
--------- -------- --------- ---------
Adjusted net loss available to common stockholders.. $ (31,388) $ (3,622) $ (44,643) $ (6,002)
========= ======== ========= =========
Basic and diluted loss per share available to
common stockholders:
Reported net loss .................................. $ (0.44) $ (0.13) $ (2.70) $ (0.24)
Add back
Cumulative effect of change in accounting,
net of tax .................................... 2.08 -
Goodwill amortization .......................... - 0.05 - 0.09
Intangible amortization ........................ - 0.03 - 0.06
--------- -------- --------- ---------
Adjusted net loss .................................. $ (0.44) $ (0.05) $ (0.62) $ (0.09)
========= ======== ========= =========
Plant Closure Charge
On May 2, 2002, the Company announced its intention to close its West
Seneca, New York, Lender's bagel manufacturing facility. As a result of this
decision, production at West Seneca ceased on May 31, 2002, with the formal
closing on July 2, 2002. The closing resulted in the elimination of 204 jobs.
Impacted employees will receive severance pay in accordance with the Company's
policies and union agreements. The Company recorded a pre-tax charge of
approximately $30 million during the second quarter of 2002 in connection with
the shutdown of the West Seneca facility. The non-cash portion of the charge is
approximately $26.0 million and is primarily attributable to the write-down of
property, plant and equipment, with the remaining $4 million primarily related
to severance and other employee related costs. As of June 30, 2002, the Company
had paid approximately $0.7 million of severance and other employee related
costs, with the remaining costs expected to be paid prior to the fiscal year
end.
NOTE 2 - INVENTORIES
Inventories consist of the following (in thousands):
June 30, December 31,
2002 2001
----------- ------------
(unaudited)
Raw materials .......................... $20,908 $17,507
Work in process ........................ 245 98
Finished goods ......................... 59,277 74,686
Packaging and other supplies ........... 8,229 7,269
------- -------
$88,659 $99,560
======= =======
11
NOTE 3 - ACCOUNTS RECEIVABLE SALES FACILITY
On March 28, 2002, the Company's receivables purchase agreement, which
provided for the sale of up to $42 million of specified accounts receivable on a
periodic basis, was amended for a fee of $150,000 to extend its term through
June 30, 2002.
On June 28, 2002, in connection with the amendment to the Company's secured
debt agreement and additional financing, further described in Note 11, the
Company's receivables purchase agreement was also amended for a fee of $550,000.
This amendment permanently reduced the level of receivables eligible for sale
from $42 million to $40 million for the period through July 31, 2002, and
further reduced the facility limit to $30 million after July 31, 2002. The
amendment also extends the term of the receivables purchase agreement through
September 30, 2003.
NOTE 4 - OTHER FINANCIAL, LEGAL, ACCOUNTING AND CONSOLIDATION ITEMS, NET
During the second quarter of 2001, in connection with the settlement of the
securities class action and derivative lawsuits, as more fully described in Note
20 to the financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001, the Company received 3,051,303
shares, valued at $15.7 million, of the Company's common stock from former
management. These shares served as a partial recovery of losses and were
recorded as treasury stock at an amount equal to the market value of the shares
of $5.13 per share at the date the settlement was confirmed by the court. In
addition, the Company recorded a liability for the value of the shares required
to be distributed to members of the shareholder class in the amount of $10.0
million and recorded accruals of $1.9 million for estimated remaining costs to
be incurred to complete all of the Company's obligations under terms of the
settlement agreements. As a result, a pretax net gain of approximately $3.8
million was recorded and is reflected as other financial, legal and accounting
income in the accompanying Statement of Operations. During May 2001, the Company
distributed to the claims administrator, who ultimately distributes to members
of the shareholder class, 465,342 shares of its common stock as settlement for
the first $2.5 million of the common stock component of the settlement. The
remaining $7.5 million liability will be distributed once the claims
administration process is completed by the plaintiff's settlement counsel. In
accordance with the settlement agreement, the Company has the option to satisfy
the remaining settlement liability in either common stock or cash. If that
payment is made in common stock, it will be based on the 30-day average trading
price ending five business days prior to the distribution date, which has yet to
be determined. Based on the current share price of $1.37 at August 6, 2002, the
remaining shares of common stock received from former management will not be
sufficient to completely satisfy the Company's remaining obligation without
issuing additional shares. If the average share price were to equal $1.37,
approximately 2.9 million shares, in addition to those held in treasury, would
have to be issued in order to fully satisfy the remaining liability using common
stock, or require the use of approximately $4.0 million in cash in substitution
for the 2.9 million shares.
Also during the second quarter of 2001, the Company recorded a charge of
$0.7 million to reflect the additional net cost expected to be incurred by the
Company for its unused office space in Columbus, Ohio, subsequent to the
administration consolidation in 2000.
NOTE 5 - EARNINGS PER SHARE AND NUMBER OF COMMON SHARES OUTSTANDING
Basic earnings per share represents the income available to common
stockholders divided by the weighted average number of common shares outstanding
during the measurement period. Diluted earnings per share represents the income
available to common stockholders divided by the weighted average number of
common shares outstanding during the measurement period while also giving effect
to all potentially dilutive common shares that were outstanding during the
period. Potentially dilutive common shares consist of stock options (the
dilutive impact is calculated by applying the "treasury stock method"), the
outstanding convertible cumulative preferred stock, stock warrants, and the
common shares expected to be issued from treasury stock pursuant to the
settlement of the class action and derivative lawsuits in 2001. The Company has
had net losses available to common stockholders in each year, therefore the
impact of these potentially dilutive common shares has been antidilutive. The
loss amounts and
12
the weighted average shares outstanding contained in the statements of
operations were used to compute both the basic and diluted loss per share.
Common shares outstanding
The number of shares of common stock outstanding and the transactions
during the six month period ended June 30, 2002 were as follows (in thousands):
Common
Stock Treasury Net
Issued Stock Outstanding
------ -------- -----------
Shares at December 31, 2001 .............. 74,254 (2,586) 71,668
Exercise of stock options ................ 105 - 105
Restricted stock awards to employees ..... 50 - 50
Employee stock purchases ................. 1 - 1
------ -------- -----------
Shares at June 30, 2002 .................. 74,410 (2,586) 71,824
====== ======== ===========
NOTE 6 - SEGMENT INFORMATION
The Company groups its business in three operating segments: retail, food
service and other distribution channels. In general, each of the Company's
brands is sold through two or more of the segments. The retail distribution
segment includes all of the Company's brands and products sold to customers who
sell or distribute these products to consumers through supermarkets, grocery
stores and normal grocery retail outlets. The food service segment includes both
branded and non-branded products sold to customers such as restaurants,
business/industry and schools. The other distribution channels segment includes
sales of branded and private label products to club stores, the military, mass
merchandisers, convenience, drug and chain stores, as well as exports from the
United States.
The Company's definition of segment contribution differs from operating
income as presented in its primary financial statements and a reconciliation of
the segmented and consolidated results is provided in the following table.
Interest expense, financing costs and income tax amounts are not allocated to
the operating segments.
The Company's assets are not managed or maintained on a segmented basis.
Property, plant and equipment is used in the production and packaging of
products for each of the segments. Cash, accounts receivable, prepaid expenses,
other assets and deferred tax assets are maintained and managed on a
consolidated basis and generally do not pertain to any particular segment.
Inventories include primarily raw materials and packaged finished goods, which
in most circumstances are sold through any or all of the segments. The Company's
goodwill and other intangible assets, which include its tradenames, are used by
and pertain to the activities and brands sold across all of its segments. As no
segmentation of the Company's assets, depreciation expense (included in fixed
manufacturing costs and general and administrative expenses) or capital
expenditures is maintained by the Company, no allocation of these amounts has
been made solely for purposes of segment disclosure requirements.
Results for the six months ended June 30, 2002 include pretax adjustments
of $20.1 million taken during the first quarter of 2002, primarily consisting of
net sales adjustments of $17.7 million primarily for trade promotion costs which
are now reflected in net sales, along with a charge to cost of sales of
approximately $1.0 million for unresolved inventory disputes and $1.1 million
charged to selling, general and administrative costs, principally associated
with a former executive's severance. The trade promotion adjustments were a
result of updated evaluations of the Company's reserves for such costs,
including the timing of the ultimate settlements with customers and the
Company's ability to obtain more reliable information concerning actual
historical spending, along with resolution of deductions taken by its customers.
Settlement of trade promotion costs has historically occurred primarily when a
customer deducts from amounts otherwise due to the Company amounts the customer
determines are due to it. Final resolution of the amounts appropriately deducted
has taken extended periods of time
13
and was compounded by the absence of reliable historical data, and the loss of
information following the bankruptcy of the Company's national retail sales
broker during the second and third quarters of 2001. The Company has taken
several steps to improve this information for current and future periods,
including new systems and processes implemented during the fourth quarter of
2001 and the first quarter of 2002. In addition, the Company is in the process
of changing its promotion payment strategies to reduce both the amounts that are
settled through subsequent deduction by its customers and the resulting
estimation required in establishing appropriate reserves for incurred costs.
The following table presents a summary of operations by segment (in
thousands):
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- ----------
(unaudited) (unaudited)
Net sales:
Retail .......................................... $137,770 $143,148 $295,617 $332,078
Foodservice ..................................... 15,422 14,625 29,970 28,560
Other ........................................... 23,352 23,834 49,029 51,037
-------- -------- -------- --------
Total ....................................... $176,544 $181,607 $374,616 $411,675
======== ======== ======== ========
Segment contribution and operating income:
Retail .......................................... $ 39,790 $ 49,794 $ 72,194 $ 99,850
Foodservice ..................................... 5,459 5,607 10,280 10,879
Other ........................................... 6,177 7,189 12,123 14,847
-------- -------- -------- --------
Segment contribution ....................... 51,426 62,590 94,597 125,576
Fixed manufacturing costs ....................... (20,446) (20,279) (40,813) (39,049)
Amortization of goodwill and other intangibles .. (2,579) (11,322) (5,027) (22,523)
Selling, general and administrative expenses .... (15,010) (15,651) (32,350) (31,384)
Plant closure charge ............................ (29,900) - (29,900) -
Other financial, legal, accounting and
consolidation income ............................ - 3,066 - 3,066
-------- -------- -------- --------
Operating income ............................ $(16,509) $ 18,404 $(13,493) $ 35,686
======== ======== ======== ========
NOTE 7 - LITIGATION AND CONTINGENCIES
During the first quarter of 2002, the Company lost a dispute in arbitration
associated with termination of a contract in 2000 and recorded additional
expense of approximately $730,000. The total award and related costs of
approximately $1.5 million were paid in April 2002.
The Company is a defendant in an action filed by a former employee in the
U.S. District Court in the Eastern District of Missouri. The plaintiff alleged
breach of contract, fraud and negligent misrepresentation as well as state law
securities claims. In the first quarter of 2002, the plaintiff's federal and
state securities law claims were dismissed and the remaining claims were
remanded to the Circuit Court for the City of St. Louis. Since the remand, the
plaintiff has sought to add a claim for breach of fiduciary duty. The case is
set for trial in February 2003. The Company intends to defend the 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 would not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
NOTE 8 - PREFERRED STOCK AND PREFERRED DIVIDENDS
Dividends on the outstanding Series A Convertible Cumulative Preferred
Stock are being accrued each period, but are not being paid in cash. Preferred
dividends may be paid in additional preferred stock until such time as the
restrictions on payment of dividends contained in the senior secured debt
agreements are no longer in effect, at which time the Company will determine
whether future dividends will be paid in cash or additional shares of preferred
stock.
The issuance of 718,230 warrants on May 1, 2002 and 2.1 million warrants on
July 8, 2002, described in Note 11, activated certain anti-dilution provisions
of the Company's convertible preferred stock. Consequently, the conversion price
used in the calculation to convert the preferred stock liquidation preference
value into shares of the Company's common stock, if converted, was reduced from
$3.35 per share to $3.22 per share, subject to adjustment by the Special
Committee of the Board of Directors of the number of May 1, 2002 warrants. Based
on the
14
liquidation preference value at June 30, 2002, this change, prior to adjustment,
would result in the issuance of approximately 208,000 additional common shares,
if converted.
NOTE 9 - DERIVATIVE INSTRUMENTS
During the three and six month periods ended June 30, 2002, the Company
recorded additional expense of approximately $4.1 million and $5.2 million,
respectively, associated with the change in value of its interest rate collar
agreement which is not an effective hedge. The change in value of this
instrument was primarily due to lower expected future LIBOR rates used to
compute the net liability to the Company. This agreement expires in November
2004.
At June 30, 2002, the Company's net liability reflected in the accompanying
balance sheet associated with its interest rate derivatives was approximately
$14.3 million, $4.3 million of which has been deferred through other
comprehensive income for amounts related to its interest rate swap agreement
which remains effective as a hedge. The Company's bond fixed to floating
interest rate collar agreement with a notional principal amount of $200.0
million expired on July 1, 2002.
NOTE 10 - OTHER COMPREHENSIVE LOSS
The components of total comprehensive income (loss) for the three and six
month periods ended June 30, 2002 and 2001 were as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------- ---------------------
2002 2001 2002 2001
-------- ------- --------- --------
(unaudited) (unaudited)
Net loss.......................................... $(31,056) $(8,998) $(193,433) $(16,755)
-------- ------- --------- --------
Other comprehensive income (loss), net of tax:
Adoption of FAS 133 for hedging activities...... - - - (2,277)
Loss deferred on qualifying cash flow hedges.... (858) (31) (707) (900)
Reclassification adjustment for cash flow
hedging losses realized in net loss........... 948 936 1,907 936
-------- ------- --------- --------
Total other comprehensive income (loss) 90 905 1,200 (2,241)
-------- ------- --------- --------
Total comprehensive loss $(30,966) $(8,093) $(192,233) $(18,996)
======== ======= ========= ========
NOTE 11 - DEBT
In February 2002, the Company's senior secured debt agreement was amended,
with provisions to allow for the potential issuance of additional senior
subordinated notes to replace the current receivables purchase facility and to
further amend the financial covenants for periods through March 31, 2003.
In March 2002, the Company received a waiver of a specific technical
provision of the senior secured debt agreement which would have otherwise
required the Company to prepay approximately $20 million of this facility.
On May 1, 2002, the senior secured debt agreement was further amended to
revise certain of the financial covenants for future interim periods in 2002 and
to provide for the exclusion of (1) approximately $20.1 million of
15
expenses recorded by the Company in the quarter ended March 31, 2002, and (2)
fees and expenses associated with the provisions of the amendment, for purposes
of the financial covenant calculations at March 31, 2002 and future periods. In
addition, the Company provided a revised 2002 business plan to the
Administrative Agent, met with the lenders to discuss the Company's business and
assisted a consultant, chosen by the Administrative Agent and at the Company's
expense, in reviewing the Company's business plan and trade promotion systems
along with cash flow projections and liquidity. As a condition to the amendment,
certain entities affiliated with Fenway Partners, Inc. and McCown De Leeuw &
Co., Inc. (the "Investors") entered into a Revolving Loan Subordinated
Participation Agreement, pursuant to which they agreed to purchase, on a
subordinated basis, a participation of $10 million of the Company's outstanding
revolving loans. The Company issued 718,230 warrants to purchase common stock of
the Company at $0.01 per share to these entities affiliated with the Investors
as consideration for their willingness to enter into this Participation
Agreement. The number of warrants issued is subject to adjustment by the Special
Committee of the Board of Directors and will not exceed 1% of the number of
shares of common stock outstanding on May 1, 2002. The warrants expire on April
30, 2012. The warrants were valued on May 1, 2002 at $4.3 million and were
expensed during the second quarter as the Revolving Loan Subordinated
Participation Agreement was cancelled by the June 27, 2002 credit agreement
amendment and additional financing described below.
On June 27, 2002, the Company secured commitments for $62.6 million of
additional financing and further amended the senior secured debt agreement. The
financing package included $25 million in the form of senior unsecured
promissory notes (the "Notes") from certain entities affiliated with the
Investors. The Notes mature October 1, 2006, and accrue interest at the rate of
12% per annum, payable semi-annually. Any unpaid interest will accrue at a
default rate of the applicable interest rate plus 2% per annum and will be
payable at maturity. The Notes were purchased at a discount of $750,000. In
addition to the discount, as part of the senior unsecured note agreement the
Investors received warrants from the Company to purchase 2.1 million shares of
common stock of the Company at $0.01 per share. The warrants were issued on July
8, 2002 and expire on July 7, 2012. A value of approximately $2.6 million was
assigned to the warrants which will be recorded as additional debt discount in
the third quarter, and be amortized as additional interest expense over the life
of the debt. The Company received $15 million, less applicable discount, from
the Investors on June 27, 2002, with the remaining $10 million, less applicable
discount, received on July 2, 2002. In consideration of the $25 million
financing provided by the Investors, the Revolving Loan Subordinated
Participation Agreement, entered into on May 1, 2002 was terminated.
The remaining $37.6 million of financing was obtained from new term loans
under an amendment to the Company's existing credit facility with various
lenders. The terms and conditions of this financing are identical to the Tranche
B Term Loans under the Company's existing senior credit facility. The
supplemental Tranche B loans were purchased at a discount of approximately $2.6
million. The Company received $35.0 million in proceeds from the additional
financing on July 2, 2002.
The Company used the new capital to reduce debt under the senior secured
revolving debt facility and for working capital purposes.
The June 27, 2002 amendment to the senior secured debt agreement revised
certain of the financial covenants for future periods through September 30, 2003
and provided for the exclusion of fees and expenses associated with the
amendment for purposes of the financial covenant calculations at June 30, 2002
and future periods.
The Company remains in compliance with the provisions of the senior secured
debt agreement, as amended, and its other debt agreements.
NOTE 12 - RELATED PARTIES
In connection with the May 1, 2002 amendment to the Company's senior secured
debt agreement, certain entities affiliated with Fenway Partners, Inc. and
McCown De Leeuw & Co. (the "Investors") agreed to purchase on a subordinated
basis, a participation of $10 million of the Company's outstanding revolving
loans. The Company issued 718,230 warrants to purchase common stock of the
Company at $0.01 per share to these entities affiliated with the Investors as
consideration for their willingness to enter into this Participation Agreement.
The number of warrants issued is subject to adjustment by the Special Committee
of the Board of Directors and will not exceed 1% of the number of shares of
common stock
16
outstanding on May 1, 2002. The warrants expire on April 30, 2012. The warrants
were valued on May 1, 2002 at $4.3 million and were expensed during the quarter
as the Revolving Loan Subordinated Participation Agreement was cancelled by the
June 27, 2002 credit agreement amendment and additional financing. See Note 11.
On June 27, 2002, the Company secured commitments for $62.6 million of
additional financing and further amended the senior secured debt agreement. The
financing package included $25 million in the form of senior unsecured
promissory notes (the "Notes") from certain entities affiliated with the
Investors. The Notes mature October 1, 2006, and accrue interest at the rate of
12% per annum, payable semi-annually. Any unpaid interest will accrue at a
default rate of the applicable interest rate plus 2% per annum and will be
payable at maturity. The Notes were purchased at a discount of $750,000. In
addition to the discount, as part of the senior unsecured note agreement the
Investors received warrants from the Company to purchase 2.1 million shares of
common stock of the Company at $0.01 per share. The warrants were issued on July
8, 2002 and expire on July 7, 2012. A value of approximately $2.6 million was
assigned to the warrants which will be recorded as additional debt discount in
the third quarter, and be amortized as additional interest expense over the life
of the debt. The Company received $15 million, less applicable discount, from
the Investors on June 27, 2002, with the remaining $10 million, less applicable
discount, received on July 2, 2002. In consideration of the $25 million
financing provided by the Investors, the Revolving Loan Subordinated
Participation Agreement, entered into on May 1, 2002 was terminated. See Note
11.
The issuance of 718,230 warrants on May 1, 2002 and 2.1 million warrants on
July 8, 2002, activated certain anti-dilution provisions of the Company's
convertible preferred stock. Consequently, the conversion price used in the
calculation to convert the preferred stock liquidation preference value into
shares of the Company's common stock, if converted, was reduced from $3.35 per
share to $3.22 per share, subject to adjustment by the Special Committee of the
Board of Directors of the number of May 1, 2002 warrants. Based on the
liquidation preference value at June 30, 2002, this change, prior to adjustment,
would result in the issuance of approximately 208,000 additional common shares,
if converted.
NOTE 13 - SUBSEQUENT EVENTS
On July 2, 2002, the Company received $10 million, less applicable
discount, representing the second portion of the senior unsecured promissory
notes, and $37.6 million of additional financing, less discount of approximately
$2.6 million, from the new term loans under the Company's existing credit
facility with various lenders. See Note 11.
On July 8, 2002, the Company issued 2.1 million warrants to purchase shares
of common stock of the Company at $0.01 per share to certain related parties who
provided senior unsecured financing. See Note 11. The issuance of the warrants,
together with the 718,230 warrants issued on May 1, 2002, activated certain
anti-dilution provisions of the Company's convertible preferred stock causing
the conversion price used in the calculation to convert the preferred stock
liquidation preference value into shares of the Company's common stock to be
reduced from $3.35 per share to $3.22 per share, subject to adjustment by the
Special Committee of the Board of Directors of the number of May 1, 2002
warrants. See Note 8.
17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to the Notes to Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
presented in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
Accounting Changes
Effective January 1, 2002, the Company adopted the consensus reached in
EITF 00-25 and 01-09, which required that certain items which had been
classified as trade promotions expense in prior years be reclassified as
reductions of net sales. Adoption of the consensus had no impact on cash flow or
the reported amounts of operating income for any period. Following this change,
all payments made by the Company to direct and indirect customers to promote and
facilitate the sale of the Company's products are reflected as reductions of net
sales. Prior year amounts in the accompanying statement of operations have been
reclassified to conform with this new presentation.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 ("FAS 142"), Goodwill and Other Intangible Assets. FAS 142
generally requires that (1) recorded amounts of goodwill no longer be amortized,
on a prospective basis, (2) the amount of goodwill recorded on the balance sheet
of the Company be evaluated annually for impairment using a two-step method, (3)
other identifiable intangible assets be categorized as to whether they have
indefinite or finite lives, (4) intangibles having indefinite lives no longer be
amortized on a prospective basis, and (5) the amount of intangibles having
indefinite lives on the balance sheet of the Company be evaluated annually for
impairment using a one-step method.
As of June 30, 2002, the Company has implemented all aspects of FAS 142
except for the completion of the second step of its impairment test of goodwill.
The two-step method used to evaluate recorded amounts of goodwill for possible
impairment involves comparing the total fair value of each reporting unit, as
defined, less the book value of all recorded identifiable net assets of the
reporting unit (the "residual"), to the recorded book value of the reporting
unit's goodwill. If the book value of goodwill exceeds this residual, a second
step is required. The second step involves comparing the fair value of the
reporting unit less the fair value of all identifiable net assets that exist
(the "adjusted residual") to the book value of goodwill. Where the adjusted
residual is less than the book value of goodwill for the reporting unit, an
adjustment of the book value down to the adjusted residual is required.
Results of the first step of the Company's impairment test of goodwill
indicate goodwill impairment in two of the Company's reporting units.
Independent valuations using the excess earnings and market comparable
approaches indicate the fair value of each reporting unit exceeds the book value
for each reporting unit except for the Company's seafood and Chef's Choice
businesses, primarily in the retail segment. The Company is in the process of
completing the second step of its goodwill impairment test for the seafood and
Chef's Choice reporting units and expects those tests to be completed during the
third quarter of 2002. The book value of goodwill for these two reporting units
was in excess of their estimated fair value by $88.0 million that has been
recorded, net of tax of $33.4 million, in the statement of operations as a
cumulative effect of a change in accounting principle. This impairment loss
represents management's best estimate of the goodwill impairment that will be
recognized, and will be adjusted as necessary once the Company completes the
second step of its goodwill impairment test. FAS 142 requires impairment losses
recognized as a result of a transitional goodwill impairment test be recorded in
the first interim reporting period after adoption, even if measurement of the
transitional impairment loss occurs in a later period. Consequently, the Company
has restated the first quarter of 2002 to recognize the goodwill impairment loss
as an additional cumulative effect of this change in accounting principle.
During the first quarter of 2002 the Company determined that all
identifiable intangibles have definite lives with the exception of all of the
Company's trade names. Amortization of the trade names ceased January 1, 2002
and the carrying values were tested for impairment as of that date using a
one-step test comparing the fair value of the asset to its net carrying value.
The Company determined the fair value of the trade names based on valuations
performed by outside parties using the excess earnings approach. The fair value
of all trade names exceeded their net carrying value except for the Lender's and
Celeste trade names. The net carrying value for these two trade names was in
excess of their fair value by $155.6 million that has been recorded, net of tax
of $60.7 million, in the statement of operations for the first quarter, in
addition to the previously described goodwill adjustment, as a
18
cumulative effect of a change in accounting principle, which results in a total
impairment charges of $243.6 million, net of tax of $94.1 million, recorded as a
cumulative effect of a change in accounting principle.
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the historical
financial information included in the Financial Statements and Notes to the
Financial Statements in Item 1 included herein. Unless otherwise noted, periods
(2002 and 2001) in this discussion refer to the Company's three and six month
periods ended on June 30, respectively.
19
Results of Operations for the Three Months Ended June 30
+The following table sets forth the results of operations for the periods
indicated as well as the percentage which the items in the statements of
operations bear to net sales.
AURORA FOODS INC.
STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(unaudited)
Three Months Ended June 30,
--------------------------------------------------
2002 2001
----------------------- ------------------------
Net sales ......................................................... $176,544 100.0% $181,607 100.0%
Cost of goods sold ................................................ (112,091) (63.5) (108,904) (60.0)
-------- ----- -------- -----
Gross profit ................................................. 64,453 36.5 72,703 40.0
-------- ----- -------- -----
Brokerage, distribution and marketing expenses:
Brokerage and distribution ................................... (27,393) (15.5) (25,516) (14.0)
Consumer marketing ........................................... (6,080) (3.5) (4,876) (2.7)
-------- ----- -------- -----
Total brokerage, distribution and marketing expenses .... (33,473) (19.0) (30,392) (16.7)
Amortization of goodwill and other intangibles .................... (2,579) (1.5) (11,322) (6.3)
Selling, general and administrative expenses ...................... (15,010) (8.5) (15,651) (8.6)
Plant closure charge .............................................. (29,900) (16.9) - -
Other financial, legal, accounting and consolidation items, net ... - - 3,066 1.7
-------- ----- -------- -----
Total operating expenses ................................ (80,962) (45.9) (54,299) (29.9)
-------- ----- -------- -----
Operating (loss) income ...................................... (16,509) (9.4) 18,404 10.1
Interest and financing expenses:
Interest expense, net ........................................ (22,793) (12.9) (25,461) (14.0)
Adjustment of value of derivatives ........................... (4,063) (2.3) (4,901) (2.7)
Issuance of warrants ......................................... (4,259) (2.4) - -
Amortization of deferred financing expense ................... (3,009) (1.7) (867) (0.5)
Other bank and financing expenses ............................ (37) (0.0) (37) (0.0)
-------- ----- -------- -----
Total interest and financing expenses ................... (34,161) (19.3) (31,266) (17.2)
-------- ----- -------- -----
Loss before income taxes ..................................... (50,670) (28.7) (12,862) (7.1)
Income tax benefit ................................................ 19,614 11.1 3,864 2.1
-------- ----- -------- -----
Net loss ..................................................... (31,056) (17.6) (8,998) (5.0)
Preferred dividends ............................................... (332) (0.2) (308) (0.1)
-------- ----- -------- -----
Net loss available to common stockholders .................... ($ 31,388) (17.8)% $ (9,306) (5.1)%
======== ===== ======== =====
Basic and diluted loss per share available to common stockholders:
Net loss available to common stockholders .................... $ (0.44) $ (0.13)
======== ========
EBITDA (1) ........................................................ $ (5,476) (3.1)% $ 36,583 20.1%
======== ===== ======== =====
Adjusted EBITDA (2) ............................................... $ 24,824 14.1% $ 33,517 18.5%
======== ===== ======== =====
(1) EBITDA represents earnings before interest and financing expenses, taxes,
depreciation and amortization and before the accounting change. The Company
believes EBITDA provides additional information for determining its ability
to meet debt service requirements. EBITDA does not represent and should not
be considered an alternative to net income or cash flow from operations as
determined by generally accepted accounting principles. EBITDA does not
necessarily indicate whether cash flow will be sufficient for cash
requirements and should not be deemed to represent funds available to the
Company. The calculation of EBITDA does not include the commitments of the
Company for capital expenditures and payment of debt. EBITDA, as presented,
may not be comparable to similarly-titled measures of other companies.
(2) Adjusted EBITDA is defined as EBITDA before the plant closure charge,
senior debt amendment expenses and other financial, legal, accounting and
consolidation items, net.
20
The Company manages its business in three operating segments: retail,
foodservice and other channels. The separate financial information of each
segment is presented consistently with the manner in which results are evaluated
by the chief operating decision-maker in deciding how to allocate resources and
in assessing performance.
Net sales by operating segment for the three month periods ended June 30,
2002 and 2001 were as follows (in thousands):
2002 2001
----------- -----------
Net sales: (unaudited)
Retail ........... $ 137,770 $ 143,148
Foodservice ...... 15,422 14,625
Other ............ 23,352 23,834
----------- -----------
Total ....... $ 176,544 $ 181,607
=========== ===========
Net sales decreased $5.1 million or 2.8% to $176.5 million in 2002 from
$181.6 million in 2001. Net sales in the 2002 quarter as compared to 2001 were
impacted by retail volume increases of approximately 7.5%, primarily in frozen
breakfast and baking products offset in part by decreased volume of seafood
products along with bagels, skillet meals and frozen pizza. Retail frozen
breakfast products volume increased 20.6% primarily due to increased pancake and
waffle sales and favorable product pricing in comparison to major competitors.
Duncan Hines volume increased 28.9%, however net sales dollars increased at a
lower rate due to product mix and increased promotional costs. The seafood sales
decline resulted from stronger than expected industry sales of private label
shrimp, which reduced sales and consumption of traditional fish products. Shrimp
prices were significantly below historical levels. In addition, the quarter's
seafood sales were adversely affected by an earlier Lent period in 2002, as
compared to 2001. These seafood related declines in the Mrs. Paul's brand were
offset by sales of its new shrimp bowls meals, resulting in a volume increase
for the brand. In addition, the Company increased its overall trade spending on
seafood, primarily to place and promote the new shrimp bowls, which lowered net
sales. Lender's bagel volume was down 6.3%, an improvement from the prior
trends. Increased sales of refrigerated bagels were more than offset by lower
frozen and fresh sales. Overall, Lender's increased trade spending, reflected in
net sales, to drive volume and reduced its consumer marketing and advertising
from prior year levels. Skillet meals net sales were lower due to significant
market segment contraction as a result of increased promotion in other meal
segments.
Food service net sales increased $0.8 million from prior year levels
primarily behind increased sales of frozen breakfast products. Net sales in
other distribution channels decreased $0.5 million, primarily due to lower sales
of higher per unit seafood in club stores, principally due to distribution
losses. This was offset in part by increased sales of baking and syrup products
in drug, discount, convenience stores and limited assortment outlets.
Gross profit decreased $8.3 million to $64.4 million in 2002 from $72.7
million in the prior year. Gross profit in 2002 as compared to 2001 was impacted
by the decline in net sales described above, a shift in the mix of sales to
lower margin products and additional depreciation expenses associated with
capital expenditures, offset in part by reduced costs in syrup production as the
production is being moved from contract manufacturers to a Company owned
facility and reduced raw materials prices for seafood and shrimp.
Brokerage and distribution expenses increased $1.8 million to $27.4 million
in 2002 from $25.5 million in 2001. This increase was primarily due to increased
sales volumes.
Consumer marketing expenses were $6.1 million in 2002 as compared to $4.9
million in 2001. This increase was due to increased advertising and promotional
spending on Duncan Hines, partially offset by decreased levels of spending on
seafood and bagels.
Amortization expense decreased $8.7 million as a result of adoption of FAS
142. See Note 1 to the Financial Statements included in this Form 10-Q.
21
Selling, general and administrative expenses decreased to $15.1 million in
2002 from $15.7 million in 2001 primarily due to lower expenses for market
research, relocation and consulting services, partially offset by increased
compensation related expenses as compared to amounts recorded in 2001.
Plant closure charge. During the second quarter of 2002, the Company
announced its intention to close its West Seneca, New York, Lender's bagel
manufacturing facility. As a result of this decision, production at West Seneca
ceased on May 31, 2002, with the formal closing on July 2, 2002. The closing
resulted in the elimination of 204 jobs. Impacted employees will receive
severance pay in accordance with the Company's policies and union agreements.
The Company recorded a pre-tax charge of approximately $30 million in connection
with the shutdown of the West Seneca facility. The non-cash portion of the
charge is approximately $26 million and is primarily attributable to write-down
of property, plant and equipment, with the remaining $4 million primarily
related to severance and other employee related costs. The Company estimates
that the 2002 cash impact of the shutdown will be offset through cost savings of
the closure.
Other financial, legal, accounting, and consolidation items, net. During
the second quarter of 2001, the Company recorded a pretax gain of approximately
$3.8 million related to the settlement with former management in excess of
amounts required to be distributed to the shareholder class. In addition, the
Company recorded additional reserves of approximately $0.7 million related to
unused office space in Columbus, Ohio subsequent to the administrative
consolidation in 2000. See Note 4 to the Financial Statements included in this
Form 10-Q.
Interest and other financing expenses. Net interest income and expense,
decreased to $22.8 million in 2002 from $25.5 million in 2001 primarily due to
lower interest costs resulting from lower levels of outstanding debt and lower
interest rates on variable rate debt as compared to the prior year. Net market
adjustments associated with the Company's two derivative instruments, which were
not effective as hedges as required by FAS 133, resulted in $4.1 million of
expense in 2002, compared to $4.9 million in 2001. See Note 9 to the Financial
Statements included in this Form 10-Q. The Company expensed $4.3 million related
to the value of warrants issued on May 1, 2002. See Note 11 to the Financial
Statements included in this Form 10-Q. Amortization of loan fees and other bank
and financing expenses increased $2.1 million to $3.0 million in 2002, compared
to $0.9 million in 2001. During the second quarter of 2002, the Company expensed
approximately $1.9 million of previously deferred financing costs that related
to credit agreement amendments that were replaced by the June 27, 2002
amendment.
Income tax benefit. The income tax benefit recorded in 2002 and 2001 was
38.7% and 30.0%, respectively, of the pretax loss. The increase in the effective
tax rate was due to expected results for the entire year and the elimination of
non-deductible book amortization for goodwill and certain other intangibles.
22
Results of Operations for the Six Months Ended June 30
The following table sets forth the reults of operations for the periods
indicated as well as the percentage which the items in the statements of
operations bear to net sales.
AURORA FOODS INC.
STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(unaudited)
Six Months Ended June 30,
-------------------------------------------
2002 2001
-------------------- -----------------
Net sales ......................................................... $374,616 100.0 % $411,675 100.0 %
Cost of goods sold ................................................ (246,550) (65.8) (242,838) (59.0)
-------- ----- -------- -----
Gross profit .................................................. 128,066 34.2 168,837 41.0
-------- ----- -------- -----
Brokerage, distribution and marketing expenses:
Brokerage and distribution .................................... (58,463) (15.6) (58,429) (14.2)
Consumer marketing ............................................ (15,819) (4.2) (23,881) (5.8)
-------- ----- -------- -----
Total brokerage, distribution and marketing expenses ...... (74,282) (19.8) (82,310) (20.0)
Amortization of goodwill and other intangibles .................... (5,027) (1.4) (22,523) (5.5)
Selling, general and administrative expenses ...................... (32,350) (8.6) (31,384) (7.6)
Plant closure charge .............................................. (29,900) (8.0) - -
Other financial, legal, accounting and consolidation items, net ... - - 3,066 0.8
-------- ----- -------- -----
Total operating expenses .................................. (141,559) (37.8) (133,151) (32.3)
-------- ----- -------- -----
Operating (loss) income ....................................... (13,493) (3.6) 35,686 8.7
Interest and financing expenses:
Interest expense, net ......................................... (44,961) (12.0) (53,331) (13.0)
Adjustment of value of derivatives ............................ (5,180) (1.4) (4,901) (1.2)
Issuance of warrants .......................................... (4,259) (1.2) -
Amortization of deferred financing expense .................... (3,876) (1.0) (1,734) (0.4)
Other bank and financing expenses ............................. (74) (0.0) (74) (0.0)
-------- ----- -------- -----
Total interest and financing expenses ..................... (58,350) (15.6) (60,040) (14.6)
-------- ----- -------- -----
Loss before income taxes and cumulative effect of
change in accounting ....... .............................. (71,843) (19.2) (24,354) (5.9)
Income tax benefit ................................................ 27,863 7.5 7,599 1.8
-------- ----- -------- -----
Net loss before cumulative effect of change in accounting ..... (43,980) (11.7) (16,755) (4.1)
Cumulative effect of change in accounting, net of tax of $94,110 .. (149,453) (39.9) - -
-------- ----- -------- -----
Net loss ...................................................... (193,433) (51.6) (16,755) (4.1)
Preferred dividends ............................................... (663) (0.2) (615) (0.1)
-------- ----- -------- -----
Net loss available to common stockholders ..................... (194,096) (51.8)% $(17,370) (4.2)
======== ===== ======== =====
Basic and diluted loss per share available to common stockholders:
Loss before cumulative effect of change in accounting ......... $ (0.62) $ (0.24)
Cumulative effect of change in accounting, net of tax ......... (2.08) -
-------- --------
Net loss available to common stockholders ..................... $ (2.70) $ (0.24)
======== ========
EBITDA (1) ........................................................ $ 7,692 2.1 % $ 71,620 17.4 %
======== ===== ======== =====
Adjusted EBITDA (2) ............................................... $ 37,992 10.1 % $ 68,554 16.7 %
======== ===== ======== =====
(1) EBITDA represents earnings before interest and financing expenses, taxes,
depreciation and amortization and before the accounting change. The Company
believes EBITDA provides additional information for determining its ability
to meet debt service requirements. EBITDA does not represent and should not
be considered an alternative to net income or cash flow from operations as
determined by generally accepted accounting principles. EBITDA does not
necessarily indicate whether cash flow will be sufficient for cash
requirements and should not be deemed to represent funds available to the
Company. The calculation of EBITDA does not include the commitments of the
Company for capital expenditures and payment of debt. EBITDA, as presented,
may not be comparable to similarly-titled measures of other companies.
(2) Adjusted EBITDA is defined as EBITDA before the plant closure charge,
senior debt amendment expenses and other financial, legal, accounting and
consolidation items, net.
23
Results for the six months ended June 30, 2002 include pretax adjustments
of $20.1 million taken during the first quarter of 2002, primarily consisting of
net sales adjustments of $17.7 million primarily for trade promotion costs which
are now reflected in net sales, along with a charge to cost of sales of
approximately $1 million for unresolved inventory disputes and $1.1 million
charged to selling, general and administrative costs, principally associated
with an executive's severance. The trade promotion adjustments were a result of
updated evaluations of the Company's reserves for such costs, including the
timing of the ultimate settlements with customers and the Company's ability to
obtain more reliable information concerning actual historical spending, along
with resolution of deductions taken by its customers. Settlement of trade
promotion costs has historically occurred when a customer deducts from amounts
otherwise due to the Company amounts the customer determines are due to it.
Final resolution of the amounts appropriately deducted has taken extended
periods of time and was compounded by the absence of reliable historical data,
and the loss of information following the bankruptcy of the Company's national
retail sales broker during the second and third quarters of 2001. The Company
has taken several steps to improve this information for current and future
periods, including new systems and processes implemented during the fourth
quarter of 2001 and the first quarter of 2002. In addition, the Company is in
the process of changing its promotion payment strategies to reduce both the
amounts that are settled through subsequent deduction by its customers and the
resulting estimation required in establishing appropriate reserves for incurred
costs.
Net sales by operating segment for the six month periods ended June 30,
2002 and 2001 were as follows (in thousands):
2002 2001
-------- --------
(unaudited)
Net sales:
Retail ................. $295,617 $332,078
Foodservice ............ 29,970 28,560
Other .................. 49,029 51,037
-------- --------
Total ................ $374,616 $411,675
======== ========
Net sales decreased $37.1 million or 9.0% to $374.6 million in 2002 from
$411.7 million in 2001. In addition to the first quarter adjustments, net sales
in the 2002 period as compared to 2001 were impacted by retail volume increases
of approximately 2.4%, primarily in frozen breakfast and baking products, offset
in part by decreased volume sales of seafood products, bagels and skillet meals.
Retail frozen breakfast products volume increased 16.8% primarily due to
increased pancake and waffle sales and favorable product pricing in comparison
to major competitors. Duncan Hines volumes increased 14.3%, however net sales
dollars increased at a lower rate due to product mix and increased promotional
costs. The seafood sales decline resulted from stronger than expected industry
sales of private label shrimp, which reduced sales and consumption of
traditional fish products. Shrimp prices were significantly below historical
levels. These seafood related declines in the Mrs. Paul's brand were offset by
sales of its new shrimp bowls meals, resulting in a small volume increase for
the brand. In addition, the Company reduced its seafood consumer marketing and
advertising in 2002 and increased trade spending, primarily to place and promote
the new shrimp bowls, which lowered net sales. Lender's bagel volume was down
5.2%, an improvement from the prior trends. Increased sales of refrigerated
bagels were more than offset by lower frozen and fresh sales. Overall, Lender's
increased trade spending, reflected in net sales, to drive volume and reduced
its consumer marketing and advertising from prior year levels. Skillet meals net
sales were lower due to significant market segment contraction as a result of
increased promotion in other meal segments.
Food service net sales increased $1.4 million from prior year levels
primarily behind increased sales of frozen breakfast products. Net sales in
other distribution channels decreased $2.0 million, primarily due to lower sales
of higher per unit seafood in club stores, principally due to distribution
losses. This was offset in part by increased sales of baking, syrup and seafood
products in club stores, drug, discount, and convenience stores and limited
assortment outlets.
Gross profit decreased $40.8 million to $128.0 million in 2002 from $168.8
million in the prior year. In addition to the first quarter adjustments, gross
profit in 2002 as compared to 2001 was impacted by decline in net sales
described above, a shift in the mix of sales to lower margin products and
additional depreciation expenses associated with capital expenditures, offset in
part by reduced costs in syrup production as the production is being
24
moved from contract manufacturers to a Company owned facility and reduced raw
materials prices for seafood and shrimp. In addition, the 2001 period included a
one-time gain associated with the renegotiation of employee benefits at the West
Seneca, New York facility.
Brokerage and distribution expenses remained flat at $58.4 million in 2002
and 2001. This was primarily due to increased sales volumes, offset by improved
efficiencies, lower rates and the benefit of moving some distribution to the St.
Elmo, Illinois facility.
Consumer marketing expenses were $15.8 million in 2002 as compared to $23.9
million in 2001. This decrease was due to the lower levels of spending in 2002
on seafood, bagel and syrup products which was redeployed in part to trade
spending reflected in net sales, partially offset by increased advertising and
consumer promotion on Duncan Hines.
Amortization expense decreased $17.5 million as a result of adoption of
FAS 142. See Note 1 to the Financial Statements included in this Form 10-Q.
Selling, general and administrative expenses increased to $32.4 million in
2002 from $31.4 million in 2001 primarily due to severance costs associated with
a former executive officer, additional expense associated with an arbitration
settlement and increased incentive compensation expense, offset by decreases in
expenses for market research, relocation and consulting services.
Plant closure charge. During the second quarter of 2002, the Company
announced its intention to close its West Seneca, New York, Lender's bagel
manufacturing facility. As a result of this decision, production at West Seneca
ceased on May 31, 2002, with the formal closing on July 2, 2002. The closing
resulted in the elimination of 204 jobs. Impacted employees will receive
severance pay in accordance with the Company's policies and union agreements.
The Company recorded a pre-tax charge of approximately $30 million in connection
with the shutdown of the West Seneca facility. The non-cash portion of the
charge is approximately $26 million and is primarily attributable to write-down
of property, plant and equipment, with the remaining $4 million related to
severance and other employee related costs. The Company estimates that the 2002
cash impact of the shutdown will be offset through cost savings of the closure.
Other financial, legal, accounting, and consolidation items, net. During
the second quarter of 2001, the Company recorded a pretax gain of approximately
$3.8 million related to the settlement with former management in excess of
amounts required to be distributed to the shareholder class. In addition, the
Company recorded additional reserves of approximately $0.7 million related to
unused office space in Columbus, Ohio subsequent to the administrative
consolidation in 2000. See Note 4 to the Financial Statements included in this
Form 10-Q.
Interest and other financing expenses. Net interest income and expense,
decreased to $45.0 million in 2002 from $53.3 million in 2001 primarily due to
lower interest costs resulting from lower levels of outstanding debt and lower
interest rates on variable rate debt as compared to the prior year. Net market
adjustments associated with the Company's two derivative instruments, which were
not effective as hedges as required by FAS 133, resulted in $5.2 million of
expense in 2002, compared to $4.9 million in 2001. See Note 9 to the Financial
Statements included in this Form 10-Q. The Company expensed $4.3 million related
to the value of warrants issued on May 1, 2002. See Note 11 to the Financial
Statements included in this Form 10-Q. Amortization of loan fees and other bank
and financing expenses increased $2.2 million to $3.9 million in 2002, compared
to $1.7 million in 2001. During the second quarter of 2002, the Company expensed
approximately $1.9 million of previously deferred financing costs that related
to credit agreement amendments that were replaced by the June 27, 2002
amendment.
Income tax benefit. The income tax benefit recorded in 2002 and 2001 was
38.8% and 31.2%, respectively, of the pretax loss. The increase in the effective
tax rate was due to expected results for the entire year and the elimination of
non-deductible book amortization for goodwill and certain other intangibles.
Cumulative effect of change in accounting. Effective January 1, 2002, the
Company adopted FAS 142, Goodwill and Other Intangible Assets. As a result, the
Company recorded a cumulative effect of a change in accounting principle of
$149.5 million, net of tax in the accompanying statement of operations. See Note
1 to the Financial Statements included in this Form 10-Q.
25
Liquidity and Capital Resources
For the six months ended June 30, 2002 the Company used $3.7 million for
operating activities compared to the six months ended June 30, 2001, when $47.2
million of cash was generated from operations. The primary reasons were the
decline in sales and operating income, increased expenditures in 2002 for
advertising, promotion and new product placement costs, and lower amounts of
cash generated in 2002 from reductions in accounts receivable and inventory,
which had been at unusually high levels at the beginning of 2001.
Cash used for investment activities in 2002 was $11.1 million, an increase
of $5.9 million from the same period of 2001. The increase was primarily
attributable to asset additions related to the start up of syrup production in
the Company's St. Elmo, Illinois facility along with expenditures at the
Company's product development center.
During the six months ended June 30, 2002, the Company borrowed an
additional $30.3 million under its revolving credit facility. Funding required
from reduced borrowings under the receivables sale facility and for scheduled
senior secured debt repayments totaled approximately $18.5 million. Financing
from senior unsecured promissory notes provided $14.6 million in cash during the
six months ended June 30, 2002.
In March 2002, the Company received a waiver of a specific technical
provision of the senior secured debt agreement which would have otherwise
required the Company to prepay approximately $20 million of this facility.
On May 1, 2002, the senior secured debt agreement was further amended to
revise certain of the financial covenants for future interim periods in 2002 and
to provide for the exclusion of (1) approximately $20.1 million of expenses
recorded by the Company in the quarter ended March 31, 2002, and (2) fees and
expenses associated with the provisions of the amendment, for purposes of the
financial covenant calculations at March 31, 2002 and future periods. In
addition, the Company provided a revised 2002 business plan to the
Administrative Agent, met with the lenders to discuss the Company's business and
assisted a consultant, chosen by the Administrative Agent and at the Company's
expense, in reviewing the Company's business plan and trade promotion systems
along with cash flow projections and liquidity. As a condition to the amendment,
certain entities affiliated with Fenway Partners, Inc. and McCown De Leeuw &
Co., Inc. (the "Investors") entered into a Revolving Loan Subordinated
Participation Agreement, pursuant to which they agreed to purchase, on a
subordinated basis, a participation of $10 million of the Company's outstanding
revolving loans. The Company issued 718,230 warrants to purchase common stock of
the Company at $0.01 per share to these entities affiliated with the Investors
as consideration for their willingness to enter into this Participation
Agreement. The number of warrants issued is subject to adjustment by the Special
Committee of the Board of Directors and will not exceed 1% of the number of
shares of common stock outstanding on May 1, 2002. The warrants expire on April
30, 2012. The warrants were valued on May 1, 2002 at $4.3 million and were
expensed during the second quarter as the Revolving Loan Subordinated
Participation Agreement was cancelled by the June 27, 2002 credit agreement
amendment and additional financing described below.
On June 27, 2002, the Company secured commitments for $62.6 million of
additional financing and further amended the senior secured debt agreement. The
financing package included $25 million in the form of senior unsecured
promissory notes (the "Notes") from certain entities affiliated with the
Investors. The Notes mature October 1, 2006, and accrue interest at the rate of
12% per annum, payable semi-annually. Any unpaid interest will accrue at a
default rate of the applicable interest rate plus 2% per annum and will be
payable at maturity. The Notes were purchased at a discount of $750,000. In
addition to the discount, as part of the senior unsecured note agreement the
Investors received warrants from the Company to purchase 2.1 million shares of
common stock of the Company at $0.01 per share. The warrants were issued on July
8, 2002 and expire on July 7, 2012. A value of approximately $2.6 million was
assigned to the warrants which will be recorded as additional debt discount in
the third quarter, and be amortized as additional interest expense over the life
of the debt. The Company received $15 million, less applicable discount, from
the Investors on June 27, 2002, with the remaining $10 million, less applicable
discount, received on July 2, 2002. In consideration of the $25 million
financing provided by the Investors, the Revolving Loan Subordinated
Participation Agreement, entered into on May 1, 2002 was terminated.
The remaining $37.6 million of financing was obtained from new term loans
under an amendment to the Company's existing credit facility with various
lenders. The terms and conditions of this financing are identical to
26
the Tranche B Term Loans under the Company's existing senior credit facility.
The supplemental Tranche B loans were purchased at a discount of approximately
$2.6 million. The Company received $35.0 million in proceeds from the additional
financing on July 2, 2002.
The Company used the new capital to reduce debt under the senior secured
revolving debt facility and for working capital purposes.
The June 27, 2002 amendment to the senior secured debt agreement revised
certain of the financial covenants for future periods through September 30, 2003
and provided for the exclusion of fees and expenses associated with the
amendment for purposes of the financial covenant calculations at June 30, 2002
and future periods.
The Company remains in compliance with the provisions of the senior secured
debt agreement, as amended, and its other debt agreements.
The Company continues to be highly leveraged. As of August 6, 2002, the
Company had outstanding, approximately $1.09 billion in aggregate principal
indebtedness for borrowed money, had approximately $31 million of cash and
available borrowing capacity under the revolving credit facility and had sold
substantially all eligible receivables pursuant to the receivables sale
facility.
The additional financing obtained by the Company on June 27, 2002 has
improved liquidity; however liquidity is expected to remain tight during the
third quarter, due to seasonality. In addition, the Company is also actively
reviewing a number of possibilities to provide additional liquidity and reduce
the Company's leverage. These possibilities include but are not limited to the
sale of certain assets or businesses. The Company has hired Merrill Lynch and
JPMorgan to assist it in reviewing strategic alternatives. The Company is also
attempting to actively reduce controllable expenditures that are not expected to
have major impacts on the business. The Company's tight liquidity has not led to
significant disruptions in its ability to obtain necessary raw materials from
its vendors.
Interest Rate Agreements
At June 30, 2002, the Company was party to three interest rate swap and
collar agreements. On July 1, 2002, the Company's bond fixed to floating
interest rate collar agreement with a notional principal amount of $200.0
million expired. Risks associated with the interest rate swap and collar
agreements include those associated with changes in the market value and
interest rates. The Company is generally a beneficiary of lower interest rates.
To reduce the risk associated with rising interest rates, the Company entered
into swap and collar agreements, which have the effect of fixing the interest
rates or limiting this risk on a portion of its variable rate debt. Conversely,
when interest rates decline, the Company benefits, but on a reduced basis on the
amounts subject to these interest rate agreements. As the Company's debt
financing portfolio has not changed significantly since December 31, 2001, the
risks associated with fluctuations in market interest rates have not changed
significantly in 2002.
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 risks, 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 risks,
uncertainties and other factors could include, among others: changes in interest
rates; the availability of funding for operations; the ability of the Company to
service its high level of indebtedness; the
27
ability of management to implement a successful strategy; the ability of the
Company to develop and maintain effective internal controls, systems and
processes; the ability of the Company to successfully integrate the Company's
brands; the ability of the Company to reduce expenses; the ability of the
Company to retain key personnel; the ability of the Company to retain key
customers; the ability of the Company to successfully introduce new products;
the Company's success in increasing sales 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 develop and maintain
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; terms
and development of capital; the ability of the Company to realize the value of
its deferred tax assets; the ultimate outcome of asserted and unasserted claims
against the Company; and changes in, or the failure or inability to comply with,
governmental rules and regulations, including, without limitation, FDA and
environmental rules and regulations. Given these uncertainties, undue reliance
should not be placed on such forward-looking statements. 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 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has entered into interest rate swap and collar agreements for
non-trading purposes. Risks associated with the interest rate swap and collar
agreements include those associated with changes in the market value and
interest rates. The Company is generally a beneficiary of lower interest rates.
To reduce the risk associated with rising interest rates, the Company entered
into swap and collar agreements, which have the effect of fixing the interest
rates or limiting this risk on a portion of its variable rate debt. Conversely,
when interest rates decline, the Company benefits, but on a reduced basis on the
amounts subject to these interest rate agreements. As the Company's debt
financing portfolio has not changed significantly since December 31, 2001, the
risks associated with fluctuations in market interest rates have not changed
significantly in 2002.
28
PART II--OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is a defendant in an action filed by a former employee in the
U.S. District Court in the Eastern District of Missouri. The plaintiff alleged
breach of contract, fraud and negligent misrepresentation as well as state law
securities claims. In the first quarter of 2002, the plaintiff's federal and
state securities law claims were dismissed and the remaining claims were
remanded to the Circuit Court for the City of St. Louis. Since the remand, the
plaintiff has sought to add a claim for breach of fiduciary duty. The case is
set for trial in February 2003. The Company intends to defend the 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 would not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
29
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting on May 2, 2002, shareholders voted for the
election of all nominees for the Board of Directors, as described in the
Company's Proxy Statement for such meeting.
Vote tabulations were as follows:
Board of Directors:
Name For Against Withheld
----------------------- ---------------- ----------------- --------------
William B. Connell 54,116,270 - 63,983
David E. De Leeuw 54,122,585 - 57,668
Charles J. Delaney 54,125,760 - 54,493
Richard C. Dresdale 54,124,190 - 56,063
Andrea Geisser 54,124,160 - 56,093
Stephen L. Key 54,123,823 - 56,430
Peter Lamm 54,121,520 - 58,733
George E. McCown 54,112,575 - 67,678
Jack Murphy 54,125,535 - 54,718
James T. Smith 53,853,335 - 326,918
30
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
None.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AURORA FOODS INC.
By: /s/ James T. Smith
------------------
James T. Smith
Chairman of the Board,
President and
Chief Executive Officer
By: /s/ William R. McManaman
------------------------
William R. McManaman
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date: August 13, 2002
32
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -------
4.1 Warrant Issuance Agreement dated as of May 1, 2002, among Aurora
Foods Inc. and the parties listed therein, as Warrantholders.
4.2 Amendment, dated as of May 1, 2002, to the Securityholders Agreement
dated April 8, 1998 as amended, between the Company and the parties
named therein.
4.3 Note Purchase Agreement between Aurora Foods Inc. and the Purchasers
listed therein, dated as of June 27, 2002.
4.4 Amendment, dated as of June 27, 2002, to the Securityholders
Agreement dated April 8, 1998 as amended, between the Company and the
parties named therein.
10.1 Amendment, dated as of June 27, 2002, 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 Manhattan Bank, as Administrative Agent for the Lenders,
National Westminster Bank PLC, as Syndication Agent, and UBS AG,
Stamford Branch, as Documentation Agent.
10.2 Amendment, dated June 28, 2002, to the Receivables Purchase
Agreement, dated as of April 19, 2000, and entered into by and
between Aurora Foods Inc., as Seller, and JP Morgan Chase Bank, as
Borrower.
10.3 Supplemental Tranche B Joinder Agreement, dated July 2, 2002, by and
among Aurora Foods Inc., as Borrower, 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.