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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
__________________________
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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
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
November 5, 2002
-----------------------
Common stock, $0.01 par value...................................................... 77,143,642
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1
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)
September 30, December 31,
2002 2001
------------------ -----------------
ASSETS (unaudited)
------
Current assets:
Cash and cash equivalents.................................................... $ 155 $ 184
Accounts receivable, net of $716 and $588 allowance, respectively............ 62,815 91,229
Accounts receivable sold..................................................... (19,139) (33,302)
Inventories.................................................................. 100,591 99,560
Prepaid expenses and other assets............................................ 15,087 5,524
Current deferred tax assets.................................................. 15,442 18,563
----------------- ----------------
Total current assets..................................................... 174,951 181,758
Property, plant and equipment, net........................................... 197,470 232,650
Deferred tax assets.......................................................... 171,936 47,799
Goodwill and other intangible assets, net.................................... 982,683 1,229,652
Other assets................................................................. 28,082 31,181
----------------- ----------------
Total assets............................................................. $ 1,555,122 $ 1,723,040
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of senior secured term debt.................................. $ 43,248 $ 37,970
Accounts payable............................................................. 52,304 73,001
Accumulated preferred dividends payable...................................... 2,593 1,586
Accrued liabilities.......................................................... 58,064 80,417
----------------- ----------------
Total current liabilities................................................ 156,209 192,974
Senior secured term debt..................................................... 475,403 472,793
Senior secured revolving debt facility....................................... 151,900 127,700
Senior unsecured debt........................................................ 21,806 -
Senior subordinated notes.................................................... 401,413 401,605
Capital lease obligation..................................................... 1,760 1,833
Other liabilities............................................................ 17,694 16,683
----------------- ----------------
Total liabilities........................................................ 1,226,185 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 $17,593 and $16,586, respectively........ 37 37
Common stock, $0.01 par value; 250,000,000 shares authorized; 77,143,642
and 74,254,467 shares issued, respectively............................... 772 743
Paid-in capital.............................................................. 684,797 685,582
Treasury stock............................................................... - (13,266)
Promissory notes............................................................. (40) (40)
Accumulated deficit.......................................................... (354,756) (159,760)
Accumulated other comprehensive loss......................................... (1,873) (3,844)
----------------- ----------------
Total stockholders' equity............................................... 328,937 509,452
----------------- ----------------
Total liabilities and stockholders' equity............................... $ 1,555,122 $ 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 September 30,
---------------------------------------
2002 2001
---------------------------------------
Net sales....................................................................... $ 184,893 $ 200,838
Cost of goods sold.............................................................. (113,222) (114,309)
-------------- ---------------
Gross profit.............................................................. 71,671 86,529
-------------- ---------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution................................................ (25,526) (26,587)
Consumer marketing........................................................ (4,508) (6,156)
-------------- ---------------
Total brokerage, distribution and marketing expenses................. (30,034) (32,743)
Amortization of goodwill and other intangibles.................................. (2,545) (10,896)
Selling, general and administrative expenses.................................... (11,732) (14,454)
-------------- ---------------
Total operating expenses............................................. (44,311) (58,093)
-------------- ---------------
Operating income.......................................................... 27,360 28,436
Interest and financing expenses:
Interest expense, net..................................................... (24,076) (25,934)
Adjustment to value of derivatives........................................ (5,674) (6,386)
Reduction in warrants previously issued................................... 2,480 -
Amortization of deferred financing expense................................ (935) (867)
-------------- ---------------
Total interest and financing expenses................................ (28,205) (33,187)
-------------- ---------------
Loss before income taxes.................................................. (845) (4,751)
Income tax benefit.............................................................. 289 1,545
-------------- ---------------
Net loss.................................................................. (556) (3,206)
Preferred dividends............................................................. (344) (318)
-------------- ---------------
Net loss available to common stockholders................................. $ (900) $ (3,524)
============== ===============
Basic and diluted loss per share available to common stockholders:
Net loss available to common stockholders................................. $ (0.01) $ (0.05)
============== ===============
Weighted average number of shares outstanding................................... 73,270 71,610
============== ===============
See accompanying notes to financial statements.
4
AURORA FOODS INC.
STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Nine Months Ended September 30,
------------------------------------
2002 2001
------------------------------------
Net sales....................................................................... $ 559,509 $ 612,513
Cost of goods sold.............................................................. (359,772) (357,147)
------------- -------------
Gross profit.............................................................. 199,737 255,366
------------- -------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution................................................ (83,989) (85,016)
Consumer marketing........................................................ (20,327) (30,037)
------------- -------------
Total brokerage, distribution and marketing expenses................. (104,316) (115,053)
Amortization of goodwill and other intangibles.................................. (7,572) (33,419)
Selling, general and administrative expenses.................................... (44,082) (45,838)
Plant closure charge............................................................ (29,900) -
Other financial, legal, accounting and consolidation items, net................. - 3,066
------------- -------------
Total operating expenses............................................. (185,870) (191,244)
------------- -------------
Operating income.......................................................... 13,867 64,122
Interest and financing expenses:
Interest expense, net..................................................... (69,111) (79,339)
Adjustment to value of derivatives........................................ (10,854) (11,287)
Issuance of warrants...................................................... (1,779) -
Amortization of deferred financing expense................................ (4,811) (2,601)
------------- -------------
Total interest and financing expenses................................ (86,555) (93,227)
------------- -------------
Loss before income taxes and cumulative effect of change in accounting.... (72,688) (29,105)
Income tax benefit.............................................................. 28,152 9,144
------------- -------------
Net loss before cumulative effect of change in accounting................. (44,536) (19,961)
Cumulative effect of change in accounting, net of tax of $94,110................ (149,453) -
------------- -------------
Net loss.................................................................. (193,989) (19,961)
Preferred dividends............................................................. (1,007) (933)
------------- -------------
Net loss available to common stockholders................................. $ (194,996) $ (20,894)
============= =============
Basic and diluted loss per share available to common stockholders:
Loss before cumulative effect of change in accounting..................... $ (0.63) $ (0.29)
Cumulative effect of change in accounting, net of tax..................... (2.07) -
------------- -------------
Net loss available to common stockholders................................. $ (2.70) $ (0.29)
============= =============
Weighted average number of shares outstanding................................... 72,287 72,794
============= =============
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 ...................... - 1 389 - - - - 390
Restricted stock awards ...................... - 1 252 - - - - 253
Employee stock purchases ..................... - - 5 - - - - 5
Issuance of warrants ......................... - - 4,362 - - - - 4,362
Distribution of shares to shareholder class... - 27 (5,793) - 13,266 - - 7,500
Net loss ..................................... - - - - - (193,989) - (193,989)
Cumulative preferred dividends ............... - - - - - (1,007) - (1,007)
Net deferred hedging adjustment .............. - - - - - - 1,971 1,971
-------- ------ --------- -------- -------- --------- --------- ---------
Balance at September 30, 2002 ................ $ 37 $ 772 $ 684,797 $ (40) $ - $(354,756) $ (1,873) $ 328,937
======== ====== ========= ======== ======== ========= ========= =========
See accompanying notes to financial statements.
6
AURORA FOODS INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
------------------------------------
2002 2001
----------------- -----------------
Cash flows from operations:
Net loss..................................................................... $(193,989) $ (19,961)
Adjustments to reconcile net loss to net cash from operations:
Depreciation and amortization............................................ 35,897 56,513
Deferred income taxes.................................................... (28,152) (9,144)
Recognition of loss on derivatives....................................... 10,854 10,265
Cumulative effect of change in accounting, net of tax.................... 149,453 -
Issuance of warrants..................................................... 1,779 -
Non-cash plant closure charge............................................ 26,000 -
Receipt of shares from former management................................. - (15,654)
Recognition of liability to shareholder class............................ - 10,000
Other, net............................................................... 23 261
Changes in operating assets and liabilities:
Accounts receivable.................................................. 29,464 35,552
Inventories.......................................................... (384) 6,996
Prepaid expenses and other current assets............................ (11,697) (4,196)
Accounts payable..................................................... (20,697) 27,786
Accrued expenses..................................................... (17,029) (28,820)
Other non-current liabilities........................................ (5,657) (4,615)
--------- ---------
Net cash (used for) provided by operations...................................... (24,135) 64,983
--------- ---------
Cash flows from investing activities:
Asset additions.............................................................. (18,700) (14,408)
Proceeds from asset sales.................................................... 404 66
--------- ---------
Net cash used for investment activities......................................... (18,296) (14,342)
--------- ---------
Cash flows from financing activities:
Senior secured revolving borrowings (repayments), net........................ 24,200 (20,000)
Repayment of borrowings...................................................... (27,251) (24,694)
Senior secured financing..................................................... 35,000 -
Senior unsecured financing................................................... 24,250 -
Decrease in accounts receivable sold......................................... (14,163) (3,535)
Capital contributions and other, net......................................... 366 323
--------- ---------
Net cash provided by (used for) financing activities............................ 42,402 (47,906)
--------- ---------
(Decrease) increase in cash and cash equivalents................................ (29) 2,735
Cash and cash equivalents, beginning of period.................................. 184 525
--------- ---------
Cash and cash equivalents, end of period........................................ $ 155 $ 3,260
========= =========
See accompanying notes to financial statements.
7
AURORA FOODS INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2002
(unaudited)
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 November 5, 2002, the
Company had outstanding, approximately $1.1 billion in aggregate principal
indebtedness for borrowed money, had approximately $30 million of cash and
available borrowing capacity under the revolving credit facility and the
accounts receivable sale facility.
As further described in Note 11, on June 27, 2002, the Company secured
commitments for $62.6 million of additional financing, which satisfied the
Company's liquidity needs during the third quarter. The Company's liquidity has
improved since the end of the third quarter, and is expected to improve further
over the remainder of the fiscal year. 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 & Co. and J.P. Morgan Securities
Inc. 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 liquidity has not led to any
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 September 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,
completed during the second quarter of 2002, 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 principally 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 will complete those tests during the fourth quarter of 2002. At
January 1, 2002, the book value of goodwill for these two reporting units was in
excess of their estimated fair value by $88.0 million, which 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.
9
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 tradenames. Amortization of the tradenames 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 tradenames based on valuations
performed by outside parties using the excess earnings approach. The fair value
of all tradenames exceeded their net carrying value except for the Lender's and
Celeste tradenames. The net carrying value for these two tradenames was in
excess of their fair value by $155.6 million, which 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 total impairment charges
of $243.6 million, which has been recorded, net of tax of $94.1 million, as a
cumulative effect of a change in accounting principle.
The following table summarizes the intangibles as of September 30, 2002
(in thousands):
Carrying Value
------------------------------------------
Accumulated
Gross Amortization Net
------------- ---------------- ---------
Intangible assets subject to amortization:
Recipes and formulations....................... $ 32,779 $ 18,857 $ 13,922
Other.......................................... 16,828 10,729 6,099
------------- ------------ ----------
Total $ 49,607 $ 29,586 20,021
============= ============
Intangible assets not subject to amortization............................................ 328,169
----------
Net carrying value of intangible assets.................................................. $ 348,190
==========
The following schedule shows net loss and net loss per share adjusted to
exclude the Company's amortization expense related to goodwill and indefinite
lived intangibles (net of tax effects) as if such amortization expense had been
discontinued in 2001 (in thousands):
Three months ended September 30, Nine months ended September 30,
----------------------------------- ---------------------------------
2002 2001 2002 2001
----------- -------------- ---------- ---------
Reported net loss available to common stockholders....... $ (900) $ (3,524) $ (194,996) $ (20,894)
Add back:
Cumulative effect of change in
accounting, net of tax......................... - - 149,453 -
Goodwill amortization.......................... - 3,387 - 10,161
Intangible amortization........................ - 2,297 - 6,891
---------- ------------- ---------- ----------
Adjusted net income (loss) available to
common stock stockholders .......................... $ (900) $ 2,160 $ (45,543) $ (3,842)
========== ============= ========== ==========
Basic and diluted income (loss) per share
available to common stockholders:
Reported net loss................................... $ (0.01) $ (0.05) $ (2.70) $ (0.29)
Add back:
Cumulative effect of change in
accounting, net of tax......................... - - 2.07 -
Goodwill amortization.......................... - 0.05 - 0.14
Intangible amortization........................ - 0.03 - 0.09
---------- ------------- ---------- ----------
Adjusted net income (loss).......................... $ (0.01) $ 0.03 $ (0.63) $ (0.06)
========== ============= ========== ==========
10
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 received 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 of
approximately $26.0 million is principally attributable to the write-down of
property, plant and equipment, with the remaining $4 million of cash costs
primarily related to severance and other employee related costs. As of September
30, 2002, the Company had paid approximately $2.2 million of severance and other
employee related costs, with a majority of the remaining costs expected to be
paid by the end of 2002, and the remainder in early fiscal 2003.
NOTE 2 - INVENTORIES
Inventories consist of the following (in thousands):
September 30, December 31,
2002 2001
---------------- --------------
(unaudited)
Raw materials............................................ $ 23,275 $ 17,507
Work in process.......................................... 750 98
Finished goods........................................... 67,090 74,686
Packaging and other supplies............................. 9,476 7,269
--------------- -------------
$100,591 $ 99,560
================ =============
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 further 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 extended 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.
11
During May 2001, the Company distributed 465,342 shares of its common
stock as settlement for the first $2.5 million of the common stock component of
the settlement. On September 6, 2002, the Company distributed 5,319,149 shares
of common stock to the settlement class as settlement for the remaining $7.5
million of the common stock portion of the settlement, following completion of
the claims processing by the third-party claims administrator appointed by the
court. This distribution was comprised of the remaining 2,586,041 shares held in
treasury that had been received from former management, and 2,733,108 additional
shares issued by the Company. This recent distribution, in conjunction with the
distribution of 465,342 shares in May 2001, finalizes the Company's obligations
under the shareholder settlement agreement.
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 and stock warrants. The
Company has had net losses available to common stockholders in each period,
therefore the impact of these potentially dilutive common shares has been
antidilutive and, therefore, excluded from the determination of diluted loss per
share. The loss amounts and 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 nine month period ended September 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
Issuance of stock settlement shares................ 2,733 2,586 5,319
----------- ---------- -------------
Shares at September 30, 2002....................... 77,143 - 77,143
=========== ========== =============
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
12
products to club stores, the military, mass merchandisers, convenience, drug,
discount 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 nine months ended September 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 principally 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 and
assumptions 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 and was compounded by
the absence of reliable historical data, and the loss of information during the
second and third quarters of 2001 following the bankruptcy of the Company's
national retail sales broker. The Company has taken several steps to improve
this information for current and future periods, including new systems and
processes implemented beginning in the fourth quarter of 2001. 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):
13
Three months ended September 30, Nine months ended September 30,
---------------------------------- ---------------------------------
2002 2001 2002 2001
-------------- ------------ --------------- --------------
Net sales: (unaudited) (unaudited)
Retail............................................... $ 142,722 $ 156,152 $ 438,339 $ 488,230
Foodservice.......................................... 15,532 17,058 45,502 45,618
Other................................................ 26,639 27,628 75,668 78,665
-------------- ------------ ------------- --------------
Total............................................ $ 184,893 $ 200,838 $ 559,509 $ 612,513
============== ============ ============= ==============
Segment contribution and operating income:
Retail................................ .............. $ 46,862 $ 53,864 $ 119,056 $ 153,714
Foodservice.......................................... 5,624 7,484 15,904 18,363
Other................................................ 6,992 8,372 19,115 23,219
-------------- ------------ ------------- --------------
Segment contribution............................. 59,478 69,720 154,075 195,296
Fixed manufacturing costs............................ (17,841) (15,934) (58,654) (54,983)
Amortization of goodwill and other intangibles....... (2,545) (10,896) (7,572) (33,419)
Selling, general and administrative expenses......... (11,732) (14,454) (44,082) (45,838)
Plant closure charge................................. - - (29,900) -
Other financial, legal, accounting and
consolidation items.................................. - - - 3,066
-------------- ------------ ------------- --------------
Operating income................................. $ 27,360 $ 28,436 $ 13,867 $ 64,122
============== ============ ============= ==============
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, and alleged damages in the amount of $3.7 million. 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 warrants on May 1, 2002 and July 8, 2002, described in Note
11, activated certain anti-dilution provisions of the Company's convertible
preferred stock. In August 2002, the Special Committee of the Board of Directors
reduced the number of May 1, 2002 warrants from 718,230 to 300,000. Due to the
issuance of warrants, 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 $3.24 per share.
Based
14
on the liquidation preference value at September 30, 2002, these changes would
result in the issuance of approximately 178,000 additional common shares, if
converted.
NOTE 9 - DERIVATIVE INSTRUMENTS
During the three and nine month periods ended September 30, 2002, the
Company recorded additional expense of approximately $5.7 million and $10.9
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 September 30, 2002, the Company's net liability reflected in the
accompanying balance sheet associated with its interest rate derivatives was
approximately $16.9 million, $3.0 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 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 INCOME (LOSS)
The components of total comprehensive income (loss) for the three- and
nine-month periods ended September 30, 2002 and 2001 were as follows (in
thousands):
Three months ended September 30, Nine months ended september 30,
---------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------- ----------- ------------
(unaudited) (unaudited)
Net loss ................................................ $ (556) $ (3,206) $ (193,989) $ (19,961)
------------ ------------- ----------- ------------
Other comprehensive income (loss), net of tax:
Adoption of FAS 133 for hedging activities .......... - - - (2,277)
Loss deferred on qualifying cash flow hedges ........ (210) (2,315) (917) (3,423)
Reclassification adjustment for cash flow
hedging losses realized in net loss ............ 982 532 2,889 1,676
------------ -------------- ----------- ------------
Total other comprehensive income (loss) ................. 772 (1,783) 1,972 (4,024)
------------ -------------- ----------- ------------
Total comprehensive income (loss) ................... $ 216 $ (4,989) $ (192,017) $ (23,985)
============ ============== =========== ============
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.
15
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 was subject to adjustment by the
Special Committee of the Board of Directors and was not to 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. In August 2002, the Special
Committee of the Board of Directors reduced the number of warrants from 718,230
to 300,000, and as a result, the Company recorded a reduction of expense in the
third quarter of approximately $2.5 million.
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 was recorded as additional debt discount in the
third quarter, and is being 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 this 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.
16
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 was subject to adjustment by the Special Committee
of the Board of Directors and was not to 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. In August 2002, the Special Committee of the Board of Directors
reduced the number of warrants from 718,230 to 300,000, and as a result, the
Company recorded a reduction of expense in the third quarter of approximately
$2.5 million. 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 was recorded as additional debt discount in the
third quarter, and is being 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 warrants on May 1, 2002 and July 8, 2002, described in Note
11, activated certain anti-dilution provisions of the Company's convertible
preferred stock. In August 2002, the Special Committee of the Board of Directors
reduced the number of May 1, 2002 warrants from 718,230 to 300,000. Due to the
issuance of warrants, 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 $3.24 per share.
Based on the liquidation preference value at September 30, 2002, these changes
would result in the issuance of approximately 178,000 additional common shares,
if converted.
On August 28, 2002, Dale F. Morrison became the interim Chairman of the
Board and Chief Executive Officer of the Company. Mr. Morrison is employed by
Fenway Partners Resources, Inc. Fenway Partners Resources, Inc. is owned by
Fenway Partners Capital Fund, L.P. and Fenway Partners Capital Fund II, L.P.,
which are shareholders of the Company.
NOTE 13 - SUBSEQUENT EVENTS
On October 30, 2002, the Company announced its intention to close the
Company's manufacturing facility located in Yuba City, California, by the end of
fiscal 2002. The Company expects to record a pre-tax charge during the fourth
quarter of 2002 of approximately $7.0 million, associated with the closing.
Included in the charge is an estimated $2.5 million of cash costs, consisting
primarily of severance and other employee related costs that will be paid
primarily in fiscal 2003, with the balance of the charge principally
attributable to the write-down of property, plant and equipment. The Company
will move the production of its Chef's Choice products from Yuba City to its
existing facility in Jackson, Tennessee, and will outsource the production of
certain frozen seafood products.
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 September 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,
completed during the second quarter of 2002, 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 principally 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 will complete those tests during the fourth quarter of 2002. At
January 1, 2002, the book value of goodwill for these two reporting units was in
excess of their estimated fair value by $88.0 million, which 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 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 tradenames. Amortization of the tradenames 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 tradenames based on valuations
performed by outside parties using the excess earnings approach. The fair value
of all tradenames exceeded their net carrying value except for the Lender's and
Celeste tradenames. The net carrying value for these two tradenames was in
excess of their fair value by $155.6 million, which has been recorded, net of
tax of $60.7 million, in the
18
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, which
was recorded, net of tax of $94.1 million, 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 nine month
periods ended on September 30, respectively.
19
Results of Operations for the Three Months Ended September 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 September 30,
-----------------------------------------------
2002 2001
----------------------- ----------------------
Net sales............................................................... $ 184,893 100.0 % $ 200,838 100.0 %
Cost of goods sold...................................................... (113,222) (61.2) (114,309) (56.9)
----------- ------ ----------- ------
Gross profit....................................................... 71,671 38.8 86,529 43.1
----------- ------ ----------- ------
Brokerage, distribution and marketing expenses:
Brokerage and distribution......................................... (25,526) (13.8) (26,587) (13.2)
Consumer marketing................................................. (4,508) (2.4) (6,156) (3.1)
----------- ------ ----------- ------
Total brokerage, distribution and marketing expenses........... (30,034) (16.2) (32,743) (16.3)
Amortization of goodwill and other intangibles.......................... (2,545) (1.4) (10,896) (5.4)
Selling, general and administrative expenses............................ (11,732) (6.4) (14,454) (7.2)
----------- ------ ----------- ------
Total operating expenses....................................... (44,311) (24.0) (58,093) (28.9)
----------- ------ ----------- ------
Operating income................................................... 27,360 14.8 28,436 14.2
Interest and financing expenses:
Interest expense, net.............................................. (24,076) (13.0) (25,934) (12.9)
Adjustment of value of derivatives................................. (5,674) (3.1) (6,386) (3.2)
Reduction in warrants previously issued............................ 2,480 1.3 - -
Amortization of deferred financing expense......................... (935) (0.5) (867) (0.5)
----------- ------ ----------- ------
Total interest and financing expenses........................... (28,205) (15.3) (33,187) (16.6)
----------- ------ ----------- ------
Loss before income taxes........................................... (845) (0.5) (4,751) (2.4)
Income tax benefit...................................................... 289 0.2 1,545 0.8
----------- ------ ----------- ------
Net loss........................................................... (556) (0.3) (3,206) (1.6)
Preferred dividends..................................................... (344) (0.2) (318) (0.2)
----------- ------ ----------- ------
Net loss available to common stockholders.......................... $ (900) (0.5)% $ (3,524) (1.8)%
=========== ====== =========== ======
Basic and diluted loss per share available to common stockholders:
Net loss available to common stockholders.......................... $ (0.01) $ (0.05)
=========== ===========
EBITDA (1).............................................................. $ 37,174 20.1 % $ 46,588 23.2 %
=========== ====== =========== ======
Adjusted EBITDA (2)..................................................... $ 37,257 20.2 % $ 46,588 23.2
=========== ====== =========== ======
(1) EBITDA represents earnings before interest and financing expenses, taxes,
depreciation and amortization. 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 senior debt amendment expenses.
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 September
30, 2002 and 2001 were as follows (in thousands):
2002 2001
------------- ---------
Net sales: (unaudited)
Retail................................... $ 142,722 $ 156,152
Foodservice.............................. 15,532 17,058
Other.................................... 26,639 27,628
--------- ---------
Total............................... $ 184,893 $ 200,838
========= =========
Net sales decreased $15.9 million or 7.9% to $184.9 million in 2002 from
$200.8 million in 2001. Total unit volume was flat during the quarter versus the
prior year. Net sales in the 2002 quarter as compared to 2001 were impacted by
retail volume decreases of approximately 2.0%, primarily in bagels, skillet
meals and frozen pizza, offset in part by increased volume of frozen breakfast
and baking products. Lender's bagel volume was down 20.6% as increased sales of
refrigerated bagels and new cream cheese products were more than offset by lower
frozen and fresh sales. The frozen bagel category continues to contract, and the
fresh bagel business suffers from less than optimal distribution, driving the
overall decline in the bagel business. Skillet meals net sales continued to
decline due to significant market segment contraction as a result of increased
competition and promotion in other meal segments. Frozen pizza net sales were
down due to the Company not offering the magnitude of certain promotional events
in the current period, as compared to the comparable prior period. Retail frozen
breakfast products volume increased 4.5% primarily due to increased pancake and
waffle sales, offset in part by declines in french toast sales. Waffle sales
have benefited from favorable pricing as compared to other major competitors.
Duncan Hines volume increased 14.9%, however net sales dollars increased only
slightly due to product mix and increased promotional costs. Volume sales for
seafood products remained relatively flat as compared to the prior year, however
increased trade spending, primarily related to slotting costs for new shrimp
bowl products led to a decline in net sales. Syrup net sales were also lower
than in the comparable period in the prior year, although volume sales were
flat. This decline in net sales was primarily due to product mix and increase
coupon redemption costs and other trade expenses during the quarter.
Food service net sales decreased $1.5 million from prior year levels
primarily due to decreased sales of bagel and syrup products, slightly offset by
increased sales of frozen breakfast products. Net sales in other distribution
channels decreased $1.0 million, primarily due to lower volume sales of higher
than average per unit seafood products in club stores, principally due to
distribution losses, and lower sales of frozen pizza in limited assortment
outlets. This was offset in part by increased sales of baking and syrup products
in drug, discount, convenience stores and increased sales of private label
bagels and seafood.
Gross profit decreased $14.8 million to $71.7 million in 2002 from $86.5
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 in the other channels segments, and increased reserves for
potential excess inventory, offset in part by reduced costs in syrup production
as production was moved from contract manufacturers to a Company owned facility,
reduced raw materials prices for seafood and shrimp, and reduced costs as a
result of closing the West Seneca facility. In addition, the 2001 period
included a one-time gain associated with the termination of an unprofitable
contract production agreement. Gross profit as a percentage of net sales
declined from 43.1% in 2001 to 38.8% in 2002, as volume and cost of goods sold
remained relatively flat and net sales declined as described above.
Brokerage and distribution expenses decreased $1.1 million to $25.5 million
in 2002 from $26.6 million in 2001. This decrease was primarily due to the
decrease in incentive compensation for the Company's brokers, as compared to
amounts recorded in the prior period.
21
Consumer marketing expenses were $4.5 million in 2002 as compared to $6.2
million in 2001. This decrease was due to the lower levels of spending in 2002
on bagel and syrup products which was redeployed in part to trade spending
reflected in net sales.
Amortization expense decreased $8.4 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 decreased to $11.7 million in
2002 from $14.5 million in 2001 primarily due to lower expenses for incentive
compensation, market research and consulting services as the Company reduced
expenditures for these items and negotiated lower rates, partially offset by
increased compensation related expenses due to increased headcount from the
prior year.
Interest and financing expenses. Net interest expense, decreased to $24.1
million in 2002 from $25.9 million in 2001 primarily due to lower interest rates
on variable rate debt as compared to the prior year. Net market adjustments
associated with the Company's derivative instrument, which was not effective as
a hedge as determined by FAS 133, resulted in $5.7 million of expense in 2002,
compared to $6.4 million in 2001. See Note 9 to the Financial Statements
included in this Form 10-Q. As discussed in Note 11 to the Financial Statements
included in this Form 10-Q, the Company reduced its financing expense by $2.5
million related to the reduction in the number of warrants originally issued on
May 1, 2002.
Income tax benefit. The income tax benefit recorded in 2002 and 2001 was
34.2% and 32.5%, respectively, of the pre-tax loss. The increase in the
effective tax rate was due to expected results for the entire year and the
elimination of non-deductible amortization for goodwill and certain other
intangibles.
22
Results of Operations for the Nine Months Ended September 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)
Nine Months Ended September 30,
-----------------------------------------------------
2002 2001
------------------------- -------------------------
Net sales........................................................... $ 559,509 100.0 % $ 612,513 100.0 %
Cost of goods sold.................................................. (359,772) (64.3) (357,147) (58.3)
------------ -------- ----------- --------
Gross profit................................................... 199,737 35.7 255,366 41.7
------------ -------- ----------- --------
Brokerage, distribution and marketing expenses:
Brokerage and distribution..................................... (83,989) (15.0) (85,016) (13.9)
Consumer marketing............................................. (20,327) (3.6) (30,037) (4.9)
------------ -------- ----------- --------
Total brokerage, distribution and marketing expenses....... (104,316) (18.6) (115,053) (18.8)
Amortization of goodwill and other intangibles...................... (7,572) (1.4) (33,419) (5.5)
Selling, general and administrative expenses........................ (44,082) (7.9) (45,838) (7.5)
Plant closure charge................................................ (29,900) (5.3) - -
Other financial, legal, accounting and consolidation items, net..... - - 3,066 0.6
------------ -------- ----------- --------
Total operating expenses................................... (185,870) (33.2) (191,244) (31.2)
------------ -------- ----------- --------
Operating income............................................... 13,867 2.5 64,122 10.5
Interest and financing expenses:
Interest expense, net.......................................... (69,111) (12.4) (79,339) (13.0)
Adjustment of value of derivatives............................. (10,854) (1.9) (11,287) (1.9)
Issuance of warrants........................................... (1,779) (0.3) - -
Amortization of deferred financing expense..................... (4,811) (0.9) (2,601) (0.4)
------------ -------- ----------- --------
Total interest and financing expenses...................... (86,555) (15.5) (93,227) (15.3)
------------ -------- ----------- --------
Loss before income taxes and cumulative effect of
change in accounting....................................... (72,688) (13.0) (29,105) (4.8)
Income tax benefit.................................................. 28,152 5.0 9,144 1.5
------------ -------- ----------- --------
Net loss before cumulative effect of change in accounting...... (44,536) (8.0) (19,961) (3.3)
Cumulative effect of change in accounting, net of tax of $94,110.... (149,453) (26.7) - -
------------ -------- ----------- --------
Net loss....................................................... (193,989) (34.7) (19,961) (3.3)
Preferred dividends................................................. (1,007) (0.2) (933) (0.1)
------------ -------- ----------- --------
Net loss available to common stockholders...................... $ (194,996) (34.9)% $ (20,894) (3.4)%
============ ======== =========== ========
Basic and diluted loss per share available to common stockholders:
Loss before cumulative effect of change in accounting.......... $ (0.63) $ (0.29)
Cumulative effect of change in accounting, net of tax.......... (2.07) -
------------ -----------
Net loss available to common stockholders...................... $ (2.70) $ (0.29)
============ ===========
EBITDA (1).......................................................... $ 44,866 8.0 % $ 118,208 19.3 %
============ ======== =========== ========
Adjusted EBITDA (2)................................................. $ 75,249 13.4 % $ 115,142 18.8 %
============ ======== =========== ========
(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 nine months ended September 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 principally 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 and assumptions 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 during the second and third
quarters of 2001 following the bankruptcy of the Company's national retail sales
broker. The Company has taken several steps to improve this information for
current and future periods, including new systems and processes implemented
beginning in the fourth quarter of 2001. 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 nine-month periods ended
September 30, 2002 and 2001 were as follows (in thousands):
2002 2001
------------- -------------
Net sales: (unaudited)
Retail.................................... $ 438,339 $ 488,230
Foodservice............................... 45,502 45,618
Other..................................... 75,668 78,665
------------- -------------
Total................................ $ 559,509 $ 612,513
============= =============
Net sales decreased $53.0 million or 8.7% to $559.5 million in 2002
from $612.5 million in 2001. In addition to the first quarter adjustments, net
sales in the 2002 nine-month period as compared to 2001 were impacted by retail
volume increases of approximately 0.9%, primarily in frozen breakfast and baking
products, offset in part by decreased volume sales of seafood products, bagels,
frozen pizza and skillet meals. Retail frozen breakfast products volume
increased 12.7% primarily due to increased pancake and waffle sales and
favorable product pricing in comparison to major competitors. Duncan Hines
volumes increased 14.5%, 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 during the Lent
season. 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 net volume increase for the brand. However, 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 10.3% as increased sales
of refrigerated bagels were more than offset by lower frozen and fresh sales.
The decline in frozen pizza sales is due to the Company not offering the
magnitude of certain promotional events in the current period, as compared to
the comparable prior period. Skillet meals net sales were lower due to
significant market segment contraction as a result of increased promotion in
other meal segments. Volume sales for syrup products increased slightly over the
prior year, but net sales declined due to product mix and increased trade
expenses, reflected in net sales.
Food service net sales decreased $0.1 million from prior year levels
primarily behind increased sales of frozen breakfast products offset by a
decline in sale of bagel products. Net sales in other distribution channels
decreased $3.0 million, primarily due to lower volume sales of higher than
average per unit seafood products in club stores, principally due to
distribution losses. This was offset in part by increased sales of baking and
syrup products in drug, discount, and convenience stores and increased private
label seafood and bagel sales.
Gross profit decreased $55.7 million to $199.7 million in 2002 from
$255.4 million in the prior year. In addition to the first quarter adjustments,
gross profit in 2002 nine-month period as compared to 2001 was impacted
24
by the decline in net sales described above, a shift in the mix of sales to
lower margin products, increased reserves for potential excess inventory, and
additional depreciation expenses associated with capital expenditures, offset in
part by reduced costs in syrup production as production was moved from contract
manufacturers to a Company owned facility, reduced raw materials prices for
seafood and shrimp, and reduced costs as a result of closing the West Seneca
facility. In addition, the 2001 period included a one-time gain associated with
the renegotiation of employee benefits at the West Seneca, New York facility,
and a one-time gain associated with the termination of an unprofitable contract
production agreement. Gross profit as a percentage of net sales declined from
41.7% in 2001 to 35.7% in 2002, as volume and cost of goods sold remained
relatively flat and net sales declined as described above.
Brokerage and distribution expenses decreased $1.0 million to $84.0
million in 2002 as compared to $85.0 million in 2001. This decrease was
primarily due to the decrease in incentive compensation for the Company's
brokers, as compared to amounts in the prior year.
Consumer marketing expenses were $20.3 million in 2002 as compared to
$30.0 million in 2001. This decrease was due to the lower levels of spending in
2002 on seafood, bagel and syrup products which was redeployed to trade spending
reflected in net sales.
Amortization expense decreased $25.8 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 decreased to $44.1 million
in 2002 from $45.8 million in 2001 primarily due to decreases in expenses for
incentive compensation, market research and share data as the Company reduced
expenditures for these items and negotiated lower rates, and decreases in
expenses for relocation and consulting services, offset by severance costs
associated with a former executive officer, additional expense associated with
an arbitration settlement and increased compensation related expenses due to
increased headcount 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. The closing resulted in the elimination of 204 jobs.
Impacted employees received 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 of approximately $26 million is
principally attributable to write-down of property, plant and equipment, with
the remaining $4 million of cash costs related to severance and other employee
related costs. The Company estimates that the 2002 cash impact of the shutdown
will be offset through elimination of fixed costs.
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 financing expenses. Net interest expense, decreased to
$69.1 million in 2002 from $79.3 million in 2001 primarily due to lower interest
rates on variable rate debt and lower levels of indebtedness as compared to the
prior year. Net market adjustments associated with the Company's two derivative
instruments, which were not effective as hedges as determined by FAS 133,
resulted in $10.9 million of expense in 2002, compared to $11.3 million in 2001.
See Note 9 to the Financial Statements included in this Form 10-Q. Net of the
third quarter reduction in the number of warrants, the Company expensed $1.8
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 $4.8 million in
2002, compared to $2.6 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 31.4%, respectively, of the pre-tax loss. The increase in the
effective tax rate was due to expected results for the entire year and the
elimination of non-deductible amortization for goodwill and certain other
intangibles.
25
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.
Liquidity and Capital Resources
For the nine months ended September 30, 2002 the Company used $24.1
million for operating activities compared to the nine months ended September 30,
2001, when $65.0 million of cash was generated from operations. The primary
reasons were the decline in sales and operating income, increased expenditures
in 2002 for new product placement costs, and changes in working capital. The net
change in cash used to pay vendors of $48.5 million drove a $58.7 million total
change in cash from working capital.
Cash used for investment activities in 2002 was $18.3 million, an
increase of $4.0 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.
During the nine months ended September 30, 2002, the Company's net
borrowings under its revolving credit facility increased $24.2 million and
financing from senior secured and unsecured promissory notes provided $59.3
million. Funding required due to reduced borrowings under the receivables sale
facility and for scheduled senior secured debt repayments totaled approximately
$41.4 million.
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 was 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. In August 2002, the Special
Committee of the Board of Directors reduced the number of warrants from 718,230
to 300,000, and as a result, the Company recorded a reduction of expense in the
third quarter of approximately $2.5 million.
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 was recorded as additional debt discount in the
third
26
quarter, and is being 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 this 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.
On June 28, 2002, in connection with the amendment to the Company's
secured debt agreement and additional financing, the Company's receivables
purchase agreement was further amended. 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 extended the term of the
receivables purchase agreement through September 30, 2003.
The Company continues to be highly leveraged. As of November 5, 2002,
the Company had outstanding, approximately $1.1 billion in aggregate principal
indebtedness for borrowed money, had approximately $30 million of cash and
available borrowing capacity under the revolving credit facility and the
accounts receivable sale facility.
The additional financing obtained by the Company on June 27, 2002 has
helped liquidity, which has continued to improve since the end of the third
quarter. Management expects the Company's liquidity position to improve by
approximately $10 million over current levels by December 31, 2002. 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 & Co.
and J.P. Morgan Securities Inc. 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 liquidity has not led to significant disruptions in its ability to
obtain necessary raw materials from its vendors.
Interest Rate Agreements
At September 30, 2002, the Company was party to two interest rate swap
and collar agreements. On July 1, 2002, the Company's 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.
27
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 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.
ITEM 4: CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's chief executive officer and chief
financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act 13a-14(c)
and 15d-14(c). Based upon that evaluation, the chief executive officer and chief
financial officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic SEC
filings.
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, and alleged damages in the amount of $3.7 million. 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 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K during the quarter ended September 30, 2002:
August 13, 2002 Certification required pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, which accompanied the
Quarterly Report on Form 10-Q filed by the Company on
August 13, 2002.
August 29, 2002 Press release dated August 28, 2002 announcing that
Dale F. Morrison would become the Company's Chairman
and Chief Executive Officer, effective immediately, and
that James T. Smith, the Company's former Chairman and
Chief Executive Officer had resigned.
September 9, 2002 Press release dated September 6, 2002 announcing that
the Company has made the final distribution of common
stock to members of the shareholder class under terms
of the March 2001 shareholder-settlement agreement.
30
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/ Dale F. Morrison
--------------------
Dale F. Morrison
Chairman of the Board,
President and
Chief Executive Officer
By: /s/ William R. McManaman
------------------------
William R. McManaman
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date: November 13, 2002
31
CERTIFICATION
I, Dale F. Morrison, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aurora Foods Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 By: /s/ Dale F. Morrison
--------------------
Dale F. Morrison
Chairman of the Board,
President and
Chief Executive Officer
32
CERTIFICATION
I, William R. McManaman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aurora Foods Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 By: /s/ William R. McManaman
------------------------
William R. McManaman
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
33
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, with
amended Exhibit A, effective as of October 7, 2002.
10.1 Consent and Waiver, dated as of July 26, 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 Executive Long Term Incentive Plan, dated as of January 1, 2002.
10.3 Amendment dated August 14, 2002 to Production Agreement, dated as of
June 4, 1998, by and between Aurora Foods Inc. and Gilster-Mary Lee
Corporation (Confidential treatment for a portion of this document
has been requested by Aurora Foods Inc. The location of the omissions
is denoted as follows: "...".).