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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 June 30, 2003
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
August 6, 2003
-----------------------
Common stock, $0.01 par value..................... 77,155,022
==============================================================================
Explanatory Note
On August 14, 2003, the Company announced that its financial results
for the years ended December 31, 2002 and 2001, and interim quarters, would be
restated to reflect additional deferred tax liabilities. The Company
reevaluated its deferred tax accounting and determined that its valuation
allowance for net deferred tax assets, which had been recorded by the Company
at December 31, 2002, should have been recorded at December 31, 2001, and that
the Company should have provided for ongoing deferred tax liabilities
subsequent to January 1, 2002 (the effective date of the adoption of Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (FAS 142)) for certain of the differences between the book and tax
amortization of the Company's goodwill and indefinite lived intangibles as
defined by FAS 142. The impact of the adjustments is as follows:
o For the year ended December 31, 2001, income tax expense and the net
loss increases by $65.4 million.
o For the year ended December 31, 2002, tax expense decreases by $30.9
million; the expense recorded for the cumulative effect of the change in
accounting principle increases by $60.8 million; and net loss increases
by $29.9 million.
o For the three months ended March 31, 2003, income tax expense and net
loss increases by $3.6 million.
The foregoing adjustments do not affect previously recorded net
sales, operating income (loss) or past or expected future cash tax
obligations. While provision for this deferred liability is required by
existing accounting literature, due to the existence of net operating tax loss
carry forwards, which expire at various times through the year 2022, the
Company does not expect that these potential taxes will be payable in the
foreseeable future, if ever.
As a result of the restatements, the Company intends to file amended
Form 10-K and Form 10-Q for the periods affected by the restatement.
PART I - FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
See pages 2 through 23.
1
AURORA FOODS INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share amounts)
(unaudited)
June 30, December 31,
2003 2002
------------- -------------
ASSETS (restated -
------ See Note 2)
Current assets:
Cash and cash equivalents ...................................... $ 21,566 $ 12,904
Accounts receivable, net of $1,452 and $412 allowance,
respectively ................................................ 33,104 34,944
Inventories .................................................... 63,795 94,680
Prepaid expenses and other assets .............................. 5,289 2,984
------------- -------------
Total current assets ........................................ 123,754 145,512
Property, plant and equipment, net .................................. 164,667 171,570
Goodwill and other intangible assets, net ........................... 899,236 903,870
Other assets ........................................................ 29,001 30,470
------------- -------------
Total assets ................................................ $ 1,216,658 $ 1,251,422
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Senior secured term debt ....................................... $ 486,569 $ 43,150
Senior secured revolving debt facility ......................... 167,000 -
Senior unsecured debt from related parties ..................... 22,258 -
Senior subordinated notes ...................................... 401,209 -
Current maturities of capital lease obligation ................. 119 109
Accounts payable ............................................... 23,585 45,596
Accumulated preferred dividends payable ........................ 3,656 2,939
Accrued liabilities ............................................ 70,299 60,408
------------- -------------
Total current liabilities .................................. 1,174,695 152,202
Senior secured term debt ............................................ - 464,756
Senior secured revolving debt facility .............................. - 153,600
Senior unsecured debt to related parties ............................ - 21,951
Senior subordinated notes ........................................... - 401,349
Deferred tax liability .............................................. 105,561 94,491
Capital lease obligations ........................................... 1,707 1,724
Other liabilities ................................................... 12,324 15,421
------------- -------------
Total liabilities ........................................... 1,294,287 1,305,494
------------- -------------
Commitments and contingent liabilities:
Stockholders' deficit:
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 $18,656 and $17,939, respectively........ 37 37
Common stock, $0.01 par value; 250,000,000 shares
authorized; 77,155,022 and 77,155,622 shares issued,
respectively ................................................ 772 772
Paid-in capital ............................................... 684,773 684,773
Accumulated deficit ........................................... (763,211) (739,598)
Accumulated other comprehensive loss .......................... - (56)
------------- -------------
Total stockholders' deficit ................................ (77,629) (54,072)
------------- -------------
Total liabilities and stockholders' deficit ................ $ 1,216,658 $ 1,251,422
============= =============
See accompanying notes to consolidated financial statements.
2
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three Months Ended June 30,
------------------------------
2003 2002
-------------- -------------
(restated -
See Note 2)
Net sales ....................................................... $ 161,092 $ 172,894
Cost of goods sold .............................................. (97,847) (112,091)
------------ -------------
Gross profit .............................................. 63,245 60,803
------------ -------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution ................................ (21,191) (23,743)
Consumer marketing ........................................ (1,971) (6,080)
------------ -------------
Total brokerage, distribution and marketing expenses .. (23,162) (29,823)
Amortization of intangibles ..................................... (3,146) (2,579)
Selling, general and administrative expenses .................... (13,191) (15,010)
Administrative restructuring and retention costs ................ (4,440) -
Financial restructuring and divestiture costs ................... (4,174) -
Plant closures .................................................. 2,674 (29,900)
------------ -------------
Total operating expenses .............................. (45,439) (77,312)
------------ -------------
Operating income (loss) ................................... 17,806 (16,509)
Interest and financing expenses:
Interest expense, net ..................................... (21,564) (22,893)
Excess leverage fee ....................................... (3,218) -
Adjustment to value of derivatives ........................ (729) (4,063)
Issuance of warrants ...................................... - (4,259)
Amortization of discount, premium and financing costs ..... (1,209) (2,946)
------------ -------------
Total interest and financing expenses ................. (26,720) (34,161)
------------ -------------
Loss before income taxes .................................. (8,914) (50,670)
Income tax expense .............................................. (6,032) (5,060)
------------ -------------
Net loss .............................................. (14,946) (55,730)
Preferred dividends ............................................. (360) (332)
------------ -------------
Net loss available to common stockholders ................. $ (15,306) $ (56,062)
============ =============
Basic and diluted loss per share available to common stockholders $ (0.20) $ (0.78)
============ =============
Weighted average number of shares outstanding ................... 77,155 71,823
============ =============
See accompanying notes to consolidated financial statements.
3
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Six Months Ended June 30,
-------------------------------
2003 2002
-------------- --------------
(restated -
See Note 2)
Net sales ....................................................... $ 351,299 $ 367,020
Cost of goods sold .............................................. (215,724) (246,550)
------------ -------------
Gross profit .............................................. 135,575 120,470
------------ -------------
Brokerage, distribution and marketing expenses:
Brokerage and distribution ................................ (47,948) (50,867)
Consumer marketing ........................................ (6,749) (15,819)
------------ -------------
Total brokerage, distribution and marketing expenses... (54,697) (66,686)
Amortization of intangibles ..................................... (6,445) (5,027)
Selling, general and administrative expenses .................... (28,881) (32,350)
Administrative restructuring and retention costs ................ (4,440) -
Financial restructuring and divestiture costs ................... (4,174) -
Plant closures .................................................. 2,674 (29,900)
------------ -------------
Total operating expenses .............................. (95,963) (133,963)
------------ -------------
Operating income (loss) ................................... 39,612 (13,493)
Interest and financing expenses:
Interest expense, net ..................................... (44,170) (45,162)
Excess leverage fee ....................................... (4,633) -
Adjustment to value of derivatives ........................ (1,622) (5,180)
Issuance of warrants ..................................... - (4,259)
Amortization of discount, premium and financing costs ..... (2,408) (3,749)
------------ -------------
Total interest and financing expenses ................. (52,833) (58,350)
------------ -------------
Loss before income taxes and cumulative effect of change
in accounting.......................................... (13,221) (71,843)
Income tax expense .............................................. (9,674) (109,578)
------------ -------------
Net loss before cumulative effect of change in accounting.. (22,895) (181,421)
Cumulative effect of change in accounting, net of tax of $21,466. - (228,150)
------------ -------------
Net loss .............................................. (22,895) (409,571)
Preferred dividends ............................................. (718) (663)
------------ -------------
Net loss available to common stockholders ................. $ (23,613) $ (410,234)
============ =============
Basic and diluted loss per share available to common stockholders
before cumulative effect of change in accounting .......... $ (0.31) $ (2.54)
Cumulative effect of change in accounting, net of tax.. - (3.17)
------------ -------------
Basic and diluted loss per share available to
common stockholders ................................. $ (0.31) $ (5.71)
============ =============
Weighted average number of shares outstanding ................... 77,155 71,788
============ =============
See accompanying notes to consolidated financial statements.
4
AURORA FOODS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
(in thousands)
(unaudited)
Accumulated
Other
Preferred Common Paid-in Accumulated Comprehensive
Stock Stock Capital Deficit Loss Total
--------- ------- --------- ----------- ------------- ---------
Balance at December 31, 2002
(restated - See Note 2) $ 37 $ 772 $ 684,773 $ (739,598) $ (56) $ (54,072)
Net loss - - - (22,895) - (22,895)
Cumulative preferred dividends - - - (718) - (718)
Net deferred hedging adjustment - - - - 56 56
--------- ------- --------- ----------- ------------- ---------
Balance at June 30, 2003 $ 37 $ 772 $ 684,773 $ (763,211) $ - $ (77,629)
========= ======= ========= =========== ============= =========
See accompanying notes to consolidated financial statements.
5
AURORA FOODS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
---------------------------
2003 2002
------------ -----------
(restated -
Cash flows from operations: See Note 2)
Net loss .................................................. $ (22,895) $ (409,571)
Cumulative effect of change in accounting, net of tax ..... - 228,150
Adjustments to reconcile net loss to cash from
operating activities:
Depreciation .......................................... 10,720 16,158
Amortization .......................................... 8,853 8,776
Deferred income taxes ................................. 9,674 109,578
Recognition of loss on derivatives .................... 1,622 5,180
Issuance of warrants .................................. - 4,259
Non-cash plant closure items .......................... (2,368) 26,000
Excess leverage fee ................................... 4,633 -
Other, net ............................................ 215 2
Changes to operating assets and liabilities:
Accounts receivable ............................... 1,872 25,437
Accounts receivable sold .......................... (32) (2,053)
Inventories ....................................... 30,885 11,548
Prepaid expenses and other assets ................. (4,146) (16,057)
Accounts payable .................................. (22,011) (15,842)
Accrued expenses .................................. 5,340 6,138
Other non-current liabilities ..................... (3,267) (3,500)
------------ -----------
Net cash from operations ........................................ 19,095 (5,797)
------------ -----------
Cash flows from investing activities:
Asset additions .......................................... (4,203) (11,548)
Proceeds from sale of assets ............................. 2,058 404
------------ -----------
Net cash from investment activities ............................ (2,145) (11,144)
------------ -----------
Cash flows from financing activities:
Proceeds from senior secured revolving debt facility, net. 13,400 30,300
Repayment of debt ........................................ (21,630) (16,463)
Senior unsecured financing from related parties........... - 14,550
Other, net ............................................... (58) 391
------------ -----------
Net cash from financing activities ............................. (8,288) 28,778
------------ -----------
Increase in cash and cash equivalents .......................... 8,662 11,837
Cash and cash equivalents, beginning of period ................. 12,904 184
------------ -----------
Cash and cash equivalents, end of period ....................... $ 21,566 $ 12,021
============ ===========
See accompanying notes to consolidated financial statements.
6
AURORA FOODS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Interim Financial Statements
The interim consolidated 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 in accordance with the rules and regulations
of the Securities and Exchange Commission regarding the preparation of interim
financial statements. 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 consolidated
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, 2002,
however, certain amounts in the prior period financial statements relating to
income taxes are being restated, as discussed in Note 2 - Restatement and an
amended Form 10-K will be filed by the Company.
The Company
The Company has acquired premium, well recognized brands with strong
brand equity that had been undermarketed, undermanaged, non-core businesses to
their previous 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 had
lacked. 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.
Financial Restructuring and Divestiture Activities
In July 2003, the Company announced that it is undertaking a
comprehensive financial restructuring (the "Restructuring"), designed to
reduce the Company's outstanding indebtedness, strengthen its balance sheet
and improve its liquidity. As part of the Restructuring, the Company entered
into a definitive agreement with J.W. Childs Equity Partners III, L.P. (the
"Investor"), an affiliate of J.W. Childs Associates, L.P., pursuant to which
the Investor will make a $200 million investment in the Company for a 65.6%
equity interest in the reorganized company, subject to the terms and
conditions contained therein. The equity transaction is contemplated to be
effected through a pre-negotiated bankruptcy reorganization case under Chapter
11 of the U.S. Bankruptcy Code which the Company expects to commence during
the second half of 2003. Under the terms of the definitive agreement with the
Investor, the Restructuring would include the following proposed elements:
o The Company's existing bank lenders will be paid in full, receiving
approximately $458 million in cash and approximately $197 million in new
senior unsecured notes with a 10-year maturity. Aurora and J.W. Childs
intend to raise approximately $441 million of new bank financing in
connection with the restructuring, including a $50 million revolving
credit facility, and will seek to effect a high yield offering in an
amount sufficient to pay cash to the bank lenders in lieu of the new
senior unsecured notes. The definitive agreement
7
contemplates that the Company's existing bank lenders will waive any
right to the excess leverage fee and the asset sale fee, which are
provided for in the Company's credit agreement.
o The Company's existing accounts receivable sales facility will be
terminated.
o Holders of the Company's 12% senior unsecured notes due 2006 will be
paid in full, receiving approximately $29 million of new senior
unsecured notes with a 10-year maturity, unless J.W. Childs effects a
high yield offering in an amount sufficient to pay cash in lieu of such
unsecured notes.
o Holders of the Company's outstanding 8.75% and 9.875% senior
subordinated notes due 2008 and 2007, respectively, will receive a 50%
recovery through cash in the aggregate amount of approximately $110
million and approximately 29.5% (approximately $90 million) of the
common stock of the reorganized Company.
o Existing common and preferred stockholders will receive approximately
4.9% (approximately $15 million) of common stock of the reorganized
Company, and the existing common and preferred shares will be cancelled
in connection with the restructuring.
The Company also launched, with the support of its senior lenders, a
vendor lien program under which the Company is offering vendors and carriers
of its goods the ability to obtain a junior lien on substantially all of the
Company's assets for shipments made to the Company on agreed terms. In excess
of 125 vendors with estimated annual purchases of $250 million are
participating in the vendor lien program.
The closing of the Restructuring is subject to a number of
conditions, including the consent of the Company's senior lenders and
bondholders to the plan of reorganization, bankruptcy court approval of the
plan of reorganization, completion of the refinancing of the Company's
existing indebtedness in accordance with the terms of the Restructuring, and
customary regulatory approvals. Subject to the satisfaction of these
conditions, the Company expects to complete the Restructuring in the fourth
quarter of 2003.
The Company is currently in discussions with its bank group and
bondholders regarding the terms of the restructuring. However, no assurance
can be given that these discussions will lead to an agreement, that the
conditions to closing will be satisfied, or that the restructuring will
ultimately be consummated.
As of June 30, 2003, the Company had incurred and expensed
approximately $1.9 million of related legal, consulting and investment banking
costs related to the Restructuring.
The Company will determine whether to continue with its previously
announced divestiture process after the Restructuring is complete. As of June
30, 2003, the Company had incurred and deferred in other assets approximately
$2.3 million of related legal, accounting and investment banking costs related
to the divestiture process. Such costs have been expensed in the accompanying
consolidated statement of operations during the second quarter due to the
uncertainty that a divestiture transaction will be completed.
Liquidity
The Company continues to be highly leveraged. As of June 30, 2003,
the Company had outstanding, approximately $1.08 billion in aggregate
principal indebtedness for borrowed money, and had approximately $26.3 million
of cash and available borrowing capacity under its accounts receivable sales
facility. The Company has no availability under its revolving credit facility.
The degree to which the Company is leveraged results in significant cash
interest expense and principal repayment obligations and such interest expense
may increase with respect to its senior secured credit facilities based on
changes in prevailing interest rates. The Company believes its liquidity is
sufficient to fund its operations up to the projected bankruptcy filing.
In connection with the Restructuring, the Company elected not to pay
the $8.8 million interest payment due on July 1, 2003, on the 2008
Subordinated Notes, which resulted in a default under its debt agreements. The
June Bank Amendment also included a forbearance by the senior lenders under
the Senior Secured Debt Facility providing that such lenders would not
exercise any remedies available under any of the Loan Documents (as such
8
term is defined in the Senior Secured Debt Facility) solely as a result of any
potential or actual event of default arising under the terms of the Senior
Secured Debt Facility by virtue of the Company's failure to make the scheduled
interest payment on the 2008 Subordinated Notes. As a result of this
non-payment, the Company reclassified all outstanding debt to current
liabilities as of June 30, 2003.
Accounting Changes
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 a result, the Company recorded an impairment charge of
$228.2 million, net of tax of $21.5 million, as restated, effective January 1,
2002. See Note 2 - Restatement.
Stock Option Plans
At June 30, 2003, the Company has two stock-based employee
compensation plans. The Company accounts for those plans under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25 (APB
25), "Accounting for Stock Issued to Employees," and its related
interpretations. No stock-based employee compensation costs are reflected in
net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The Restructuring contemplates that all currently outstanding stock options
will be cancelled. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123 (FAS 123),
"Accounting for Stock Based Compensation," to stock-based employee
compensation (in thousands, except per share).
Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------- ------------- -------------
(restated - (restated -
See Note 2) See Note 2)
Reported net loss available to
common stockholders ..................... $ (15,306) $ (56,062) $ (23,613) $ (410,234)
Total stock-based employee compensation
expense determined under fair value based
method for all awards ................... (341) (905) (1,027) (1,810)
------------ ------------- ------------- -------------
Pro forma net loss available to
common stockholders ..................... $ (15,647) $ (56,967) $ (24,640) $ (412,044)
============ ============= ============= =============
Reported basic and diluted loss per share
available to common stockholders ......... $ (0.20) $ (0.78) $ (0.31) $ (5.71)
============ ============= ============= =============
Pro forma basic and diluted loss per
share available to
common stockholders .................... $ (0.20) $ (0.79) $ (0.32) $ (5.74)
============ ============= ============= =============
NOTE 2 - RESTATEMENT
The Company reevaluated its deferred tax accounting and determined
that its valuation allowance for net deferred tax assets, which had been
recorded by the Company at December 31, 2002, should have been recorded at
December 31, 2001, and that the Company should have provided for ongoing
deferred tax liabilities subsequent to
9
January 1, 2002 (the effective date of the adoption of FAS 142) for certain of
the differences between the book and tax amortization of the Company's
goodwill and indefinite lived intangibles as defined by FAS 142. The impact of
the adjustments for the year ended December 31, 2001, was to increase income
tax expense and net loss by $65.4 million. For the year ended December 31,
2002, the impact was to decrease tax expense by $30.9 million, increase the
expense recorded for the cumulative effect of the change in accounting
principle by $60.8 million, all of which increased the net loss by $29.9
million. In addition, the impact on the statement of operations for the three
months ended March 31, 2003 was to increase income tax expense and the net
loss by $3.6 million. These adjustments do not affect previously recorded net
sales, operating income (loss) or past or expected future cash tax
obligations. While provision for this deferred liability is required by
existing accounting literature, due to the existence of net operating tax loss
carry forwards, which expire at various times through the year 2022, the
Company does not expect that these potential taxes will be payable in the
foreseeable future, if ever.
The following tables summarize, in a condensed format, the annual
financial statements as previously reported and as restated as of and for the
years ended December 31, 2002 and 2001(in thousands):
Years Ended December 31
----------------------------------------------------------
2002 2001
--------------------------- ----------------------------
As previously As previously
reported As restated reported As restated
-------------- ----------- ------------- ------------
Loss before income taxes and
cumulative effect of change in
accounting ........................ $ (169,015) $ (169,015) $ (24,407) $ (24,407)
Income tax benefit (expense).... (146,756) (115,918) 6,828 (58,574)
-------------- ----------- ------------- ------------
Net loss before cumulative effect
of accounting change ........ (315,771) (284,933) (17,579) (82,981)
Cumulative effect of change in
accounting, net of tax of $82,237
and $21,466, as restated.......... (167,379) (228,150) - -
-------------- ----------- ------------- ------------
Net loss ..................... (483,150) (513,083) (17,579) (82,981)
Preferred dividends ............... (1,353) (1,353) (1,253) (1,253)
-------------- ----------- ------------- ------------
Net loss available to common
stockholders ............... $ (484,503) $(514,436) $ (18,832) $ (84,234)
============= ========== -============= ============
Basic and diluted net loss per
share available to common
stockholders before cumulative
change in accounting ............. $ (4.31) $ (3.10) $ (0.26) $ (1.16)
Cumulative effect of change in
accounting .................. (2.28) (3.90) - -
-------------- ----------- ------------- ------------
Basic and diluted loss per share
available to common
stockholders................. $ (6.59) $ (7.00) $ (0.26) $(1.16)
============= ========== -============= ============
10
December 31, 2002 December 31, 2001
------------------------------------- -------------------------------------
As previously As previously
reported As restated reported As restated
--------------- -------------- -------------- -------------
ASSETS
------
Deferred tax asset ............................ $ - $ - $ 18,563 $ -
Other current assets .......................... 145,512 145,512 163,195 163,195
--------------- -------------- -------------- -------------
Current assets .................... 145,512 145,512 181,758 163,195
Property, plant and equipment, net ............ 171,570 171,570 232,650 232,650
Deferred tax asset ............................ - - 47,799 -
Goodwill and other intangible assets, net ..... 903,870 903,870 1,229,652 1,229,652
Other assets .................................. 30,470 30,470 31,181 31,181
--------------- -------------- -------------- -------------
Total assets ........................ $ 1,251,422 $ 1,251,422 $ 1,723,040 $ 1,656,678
=============== ============== ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities ........................... $ 152,202 $ 152,202 $ 192,974 $ $ 192,974
Deferred tax liabilities ...................... - 94,491 - -
Other liabilities ............................. 15,421 15,421 16,683 16,683
Long term debt ................................ 1,021,429 1,021,429 1,003,931 1,003,931
Long term debt from related parties ........... 21,951 21,951 - -
-------------- -------------- -------------- -------------
Total liabilities ................... 1,211,003 1,305,494 1,213,588 1,213,588
Stockholders' equity (deficit):
Preferred stock .......................... 37 37 37 37
Common stock ............................. 772 772 743 743
Paid-in capital .......................... 684,773 684,773 685,582 685,582
Treasury stock ........................... - - (13,266) (13,266)
Accumulated deficit ...................... (644,263) (739,598) (159,760) (225,162)
Promissory notes ......................... - - (40) (40)
Accumulated other comprehensive loss ..... (900) (56) (3,844) (4,804)
--------------- -------------- -------------- -------------
Total stockholders' equity (deficit). 40,419 (54,072) 509,452 443,090
Total liabilities and stockholders'.. --------------- -------------- -------------- -------------
equity (deficit) ................... $ 1,251,422 $ 1,251,422 $ 1,723,040 $ 1,656,678
=============== ============== ============== =============
11
The following tables summarize, in a condensed format, the quarterly
statements of operations as previously reported and restated for the quarters
affected by the restatement (in thousands):
Three Months Ended
March 31, 2003
--------------------------------
As previously
reported As restated
--------------- ----------------
Loss before income taxes............. $ (4,307) $ (4,307)
Income tax expense ............... - (3,642)
--------------- ----------------
Net loss ......................... (4,307) (7,949)
Preferred dividends ................. (358) (358)
--------------- ----------------
Net loss available to common
stockholders...................... $ (4,665) $ (8,307)
=============== ================
Basic and diluted net loss per share
available to common stockholders ..... $ (0.06) $ (0.11)
=============== ================
Three Months Ended
------------------------------------------------------------------------
March 31, 2002 June 30, 2002
------------------------------- ------------------------------
As As
previously As previously As
reported restated reported restated
---------- ---------- ---------- ----------
Loss before income taxes
and cumulative effect of
change in accounting ............................ $ (21,173) $ (21,173) $ (50,670) $ (50,670)
Income tax benefit(expense) .................. 8,249 (104,518) 19,614 (5,060)
---------- ---------- ---------- ----------
Net loss before
cumulative effect of
accounting change ..................... (12,924) (125,691) (31,056) (55,730)
Cumulative effect of change in
accounting, net of tax of $82,237
and 21,466, as restated ......................... (167,379) (228,150) - -
---------- ---------- ---------- ----------
Net loss ............................... (180,303) (353,841) (31,056) (55,730)
Preferred dividends (331) (331) (332) (332)
Net loss available to ---------- ---------- ---------- ----------
common stockholders ................. $ (180,634) $(354,172) $ (31,388) $ (56,062)
========== ========== ========== ==========
Basic and diluted net loss
available to common
stockholders before
cumulative effect of
accounting change ............................. $ (0.19) $ (1.76) $ (0.44) $ (0.78)
Cumulative effect of change of
accounting, net of tax ........................ (2.33) (3.18) - -
Basic and diluted loss per share
available to common ---------- ---------- ---------- ----------
stockholders .................................. $ (2.52) $ (4.94) $ (0.44) $ (0.78)
========== ========== ========== ==========
[TABLE CONTINUED]
-------------------------------------------------------------------------
September 30, 2002 December 31, 2002
------------------------------ ------------------------------
As As
previously As previously As
reported restated reported restated
---------- ---------- ---------- ----------
Loss before income taxes
and cumulative effect of
change in accounting ............................ $ (845) $ (845) $ (96,327) $ (96,327)
Income tax benefit(expense) .................. 289 (4,977) (174,908) (1,363)
---------- ---------- ---------- ----------
Net loss before
cumulative effect of
accounting change ..................... (556) (5,822) (271,235) (97,690)
Cumulative effect of change in
accounting, net of tax of $82,237
and 21,466, as restated ......................... - - - -
---------- ---------- ---------- ----------
Net loss ............................... (556) (5,822) (271,235) (97,690)
Preferred dividends (344) (344) (346) (346)
Net loss available to ---------- ---------- ---------- ----------
common stockholders ................. $ (900) $ (6,166) $(271,581) $ (98,036)
========== ========== ========== ==========
Basic and diluted net loss
available to common
stockholders before
cumulative effect of
accounting change ............................. $ (0.01) $ (0.08) $ (3.52) $ (1.27)
Cumulative effect of change of
accounting, net of tax ........................ - - - -
Basic and diluted loss per share
available to common ---------- ---------- ---------- ----------
stockholders .................................. $ (0.01) $ (0.08) $ (3.52) $ (1.27)
========== ========== ========== ==========
12
Three Months Ended
December 31, 2001
------------------------------
As previously
reported As restated
------------- -----------
Income before income taxes ........................... $ 4,698 $ 4,698
Income tax expense ....................... (2,316) (67,718)
------------- -----------
Net income (loss) ........................ 2,382 (63,020)
Preferred dividends .................................. (320) (320)
Net income (loss) available to common ------------ -----------
stockholders ........................... $ 2,062 $ (63,340)
============ ===========
Basic and diluted net income (loss) per share
available to common stockholders ........ $ 0.03 $ (0.88)
============ ===========
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 2003, and December 31, 2002, are
stated net of the proceeds received from the sale of accounts receivable
pursuant to the Company's accounts receivable sales facility in the amount of
$14.8 million at both dates. The Company's accounts receivable sales facility
currently expires September 30, 2003. Under the plans of the Restructuring,
the Company does not intend to seek an extension of this accounts receivable
sales facility.
NOTE 4 - INVENTORIES
Inventories, net of reserves of $2.7 million and $9.9 million,
respectively, consist of the following (in thousands):
June 30, December 31,
2003 2002
------------- --------------
Raw materials........................... $ 6,256 $ 11,966
Work in process......................... 265 281
Finished goods.......................... 49,921 75,480
Packaging and other supplies............ 7,353 6,953
------------- --------------
$ 63,795 $ 94,680
============= ==============
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
common stock warrants. The Company has had net losses available to common
stockholders in each period,
13
therefore the impact of these potentially dilutive common shares has been
antidilutive and excluded from the determination of diluted loss per share.
The net loss available to common stockholders and the weighted average shares
outstanding contained in the consolidated statements of operations were used
to compute both the basic and diluted loss per share.
Common shares outstanding
The number of shares of common stock outstanding and the transactions
during the six-month period ended June 30, 2003, were as follows:
Common
Stock
Outstanding
------------
Shares at December 31, 2002 ....................... 77,155,622
Forfeiture of unvested restricted stock awards .... (600)
------------
Shares at June 30, 2003 ........................... 77,155,022
============
NOTE 6 - SEGMENT INFORMATION
The Company groups its business in three operating segments: retail,
foodservice and other distribution channels. Many of the Company's brands are
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 foodservice segment includes both
branded and non-branded products sold to customers such as restaurants,
business/industry and schools. The other distribution channels segment
includes sales of branded and private label products to club stores, the
military, mass merchandisers, convenience, drug, 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 consolidated 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 and other assets are maintained and managed on a consolidated basis
and generally do not pertain to any particular segment. Inventories include
primarily raw materials and packaged finished goods, which in most
circumstances are sold through any or all of the segments. The Company's
goodwill and other intangible assets, which include its tradenames, are used
by and pertain to the activities and brands sold across all of its segments.
As no segmentation of the Company's assets, depreciation expense (included in
fixed manufacturing costs and general and administrative expenses) or capital
expenditures is maintained by the Company, no allocation of these amounts has
been made solely for purposes of segment disclosure requirements.
Results for the six months ended June 30, 2002, include pretax
adjustments of $20.1 million recorded during the first quarter of 2002
principally from changes in estimates. These adjustments consisted primarily
of net sales adjustments of $17.7 million, principally for trade promotion
costs, 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 executive severance.
14
The following table presents a summary of operations by segment (in
thousands):
Three months ended June 30, Six months ended June 30,
------------------------------ -------------------------------
2003 2002 2003 2002
---------- ---------- ----------- ----------
Net sales:
Retail ........................................... $124,048 $134,718 $270,476 $289,168
Foodservice ...................................... 15,025 15,106 29,339 29,347
Other ............................................ 22,019 23,070 51,484 48,505
---------- ---------- ----------- ----------
Total .................................. $161,092 $172,894 $351,299 $367,020
========== ========== =========== ==========
Segment contribution and operating income:
Retail ........................................... $ 45,260 $ 39,390 $ 94,540 $ 71,794
Foodservice ...................................... 5,656 5,552 11,201 10,373
Other ............................................ 6,120 6,494 13,415 12,440
---------- ---------- ----------- ----------
Segment contribution ................... 57,036 51,436 119,156 94,607
Fixed manufacturing costs ........................ (16,953) (20,456) (38,278) (40,823)
Amortization of intangibles ...................... (3,146) (2,579) (6,445) (5,027)
Selling, general and administrative expenses ..... (13,191) (15,010) (28,881) (32,350)
Administrative restructuring and retention costs.. (4,440) - (4,440) -
Financial restructuring and divestiture costs .... (4,174) - (4,174) -
Plant closures ................................... 2,674 (29,900) 2,674 (29,900)
---------- ---------- ----------- ----------
Operating income (loss) ................ $ 17,806 $ (16,509) $ 39,612 $ (13,493)
========== ========== =========== ==========
NOTE 7 - LITIGATION AND CONTINGENCIES
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 added claims for breach of contract and fiduciary duty, and for negligent
misrepresentation and tortious interference with business expectancy. The case
is set for trial in September 2003. The Company intends to defend the claims
vigorously.
The Company is a defendant in an action filed by the State of
Illinois regarding the Company's St. Elmo facility. The Illinois Attorney
General filed a complaint seeking a restraining order prohibiting further
discharges by the City from its publicly owned wastewater treatment facility
in violation of Illinois law and enjoining the Company from discharging its
industrial waste into the City's treatment facility. The complaint also asked
for fines and penalties associated with the City's discharge from its
treatment facility and the Company's alleged operation of its production
facility without obtaining a state environmental operating permit. On June 19,
2003, the Company and the Illinois Attorney General executed an Agreed
Injunction Order settling all allegations in the complaint against the
Company, other than any potential monetary fine or penalty. The Company
intends to vigorously defend any future claim for fines or penalties.
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
consolidated financial position, results of operations or cash flows.
15
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 Restructuring contemplates that all currently
outstanding preferred stock will be cancelled.
NOTE 9 - DERIVATIVE INSTRUMENTS
During the three and six month periods ended June 30, 2003, the
Company recorded expense of approximately $0.7 million and $1.6 million,
respectively, associated with the change in value of its interest rate collar
agreement with a notional financial amount of $150.0 million, which the
Company has determined is not an effective hedge under Statement of Financial
Accounting Standard No. 133 (FAS 133), "Accounting for Derivative Instruments
and Hedging Activities." 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. In 2002, the expenses related to the collar agreement for the
three and six month periods were $4.3 million and $5.2 million, respectively.
This agreement expires in November 2004. At June 30, 2003, the Company's
liability reflected in the accompanying consolidated balance sheet associated
with this interest rate derivative was approximately $10.9 million.
Upon filing bankruptcy, the Company believes that the net market
value of the derivative becomes due and payable.
The Company's fixed to floating interest rate swap agreement with a
notional principal amount of $150.0 million expired on March 17, 2003, when
the Company made a final payment to the counterparty of $1.7 million.
NOTE 10 - OTHER COMPREHENSIVE INCOME (LOSS)
The components of total comprehensive income (loss) for the three and
six month periods ended June 30, 2003 and 2002 (unaudited) were as follows (in
thousands):
Three months ended June 30, Six months ended June 30,
--------------------------------- ------------------------------
2003 2002 2003 2002
----------- ---------- ---------- ----------
(restated - (restated -
See Note 2) See Note 2)
Net loss ............................................ $ (14,946) $ (55,730) $ (22,895) $ (409,571)
----------- ---------- ---------- ----------
Other comprehensive income:
Income deferred on qualifying cash flow hedges - (1,384) - (1,140)
Reclassification adjustment for cash flow
hedging losses realized in net loss ....... - 1,529 56 3,075
----------- ---------- ---------- ----------
Total other comprehensive income .................... - 145 56 1,935
----------- ---------- ---------- ----------
Total comprehensive loss ....................... $ (14,946) $ (55,585) $ (22,839) $ (407,636)
=========== ========== ========== ==========
16
NOTE 11 - DEBT
On February 21, 2003, the Company amended its Fifth Amended and
Restated Credit Agreement, dated as of November 1, 1999, among the Company,
the financial institutions parties thereto and the agents party thereto (as
amended, supplemented or otherwise modified from time to time, the "Senior
Secured Debt Facility"). The terms of this amendment to the Senior Secured
Debt Facility are more fully described in the Company's annual report on Form
10-K for the year ended December 31, 2002. Among other provisions, the
amendment:
o provided for an excess leverage fee of 3.50% of the aggregate amount of
term loan borrowings outstanding and the revolving credit facility on
the amendment date. Such fee will not be required if the Company
receives net cash proceeds from the sale of assets of at least $100.0
million by June 30, 2003, and an additional $125.0 million by September
30, 2003, or failing to meet the June 30, 2003, requirement, if
aggregate net cash proceeds of $325.0 million are received by September
30, 2003; and
o provided for an asset sale fee of 1.75% of the average term loan
borrowings outstanding and the revolving credit facility from the
amendment date through February 10, 2004, if the Company has not
received an aggregate of $325.0 million from the sale of assets by March
31, 2004;
o provided that any excess leverage or asset sale fees that become payable
will be paid at the earlier of certain events of default, the time of sale
of assets from cash proceeds, or on June 30, 2005.
If the Company fails to meet the asset proceeds requirements
described above, the amounts payable to the lenders under the Senior Secured
Debt Facility for the excess leverage and asset sale fees could total
approximately $36.0 million. At June 30, 2003, the Company had not received
any net cash proceeds from the sale of assets. Since the Company has not yet
met the requirements that would allow the Company to avoid paying these fees
(whether in part or in whole), the potential fees are being accrued over the
remaining life of the Senior Secured Debt Facility as excess leverage fees in
interest and financing expenses. Accordingly, in the three and six months
ended June 30, 2003, the Company recorded additional interest expense of $3.2
million and $4.6 million resulting in a current accrued liability related to
the fees of $4.6 million as of June 30, 2003. If the Company does not meet the
requirements to avoid payment of the fees, the interest expense and liability
recorded in 2003 will be approximately $10.9 million and the interest expense
and additional liability to be recorded in 2004, 2005 and 2006 will be $12.0
million, $9.2 million and $3.5 million, respectively. At the time the Company
meets any or all of the asset sale requirements, interest expense will be
adjusted prospectively to reflect the reduction in the fees to be paid. See
"Financial Restructuring and Divestiture Activities" in Note 1.
At June 30, 2003, the Company was in compliance with the provisions
of the Senior Secured Debt Facility and its other debt agreements. On July 1,
2003, the Company elected not to pay the interest due on its outstanding 8.75%
senior subordinated notes due 2008 (the "2008 Subordinated Notes"). However,
the Company entered into an Amendment and Forbearance, dated as of June 30,
2003 (the "June Bank Amendment"), with the lenders holding more than 51% of
the term loan and revolving credit facility borrowings under the Senior
Secured Debt Facility, pursuant to which (among other things) the lenders
under the Senior Secured Debt Facility temporarily agreed not to exercise
remedies with respect to any default arising under any of the Loan Documents
(as such term is defined in the Senior Secured Debt Facility) arising as a
result of the failure to pay the interest due on the 2008 Subordinated Notes.
See Note 16 for further discussion of the June Bank Amendment, the
aforementioned election to withhold payment of interest on the 2008
Subordinated Notes and further amendments and forbearance agreements relating
to the Senior Secured Debt Facility and the Company's outstanding senior
subordinated notes.
NOTE 12 - INCOME TAXES
No net income tax benefit associated with the pretax losses have been
recorded. The Company records deferred tax liabilities for the differences
between the book and tax bases of certain goodwill and indefinite lived
intangible assets. See Note 2 - Restatement.
17
NOTE 13 - PLANT CLOSURES
In May 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 all 204
jobs. Affected employees received severance pay in accordance with the
Company's policies and union agreements. The Company recorded charges of $32.4
million during 2002 in connection with the shutdown of the West Seneca
facility. The non-cash portion of the charges was approximately $28.2 million
and is attributable to the write-down of property, plant and equipment, with
the remaining $4.2 million of cash costs related to severance and other
employee related costs of $3.0 million, and other costs necessary to maintain
and dispose of the facility of $1.2 million. During the six months ended June
30, 2003, the Company paid $0.1 million in severance and related costs and
$0.6 million of other costs related to closing and sale of the facility. No
adjustments were made to recorded liabilities and the remaining accrual is
minimal.
In October 2002, the Company announced its intention to close its
Yuba City, California, facility where the Company manufactured specialty
seafood and Chef's Choice products. As a result of this decision, production
at the Yuba City facility ceased in early 2003. The closing resulted in the
elimination of all 155 jobs. Affected employees received severance pay in
accordance with the Company's policies. As a result, the Company recorded a
charge of $6.7 million during the fourth quarter of 2002. The non-cash portion
of the charge of approximately $4.9 million was attributable to the write-down
of property, plant and equipment. The remaining $1.8 million of cash costs was
related to severance and other employee related costs of $0.9 million and
other costs necessary to maintain and dispose of the facility of $0.9 million.
The facility was sold on June 30, 2003. During the six months ended June 30,
2003, the Company paid $0.6 million in severance and other employee related
costs and $0.6 million in facility related costs. Approximately $2.7 million
was recorded as an adjustment to the recorded liabilities and recorded as
income in plant closures on the consolidated statement of operations as a
result of higher than expected proceeds from the disposition of the assets and
the reversal of reserves on assets previously identified for disposition,
which are now being used in operations. The majority of the remaining
liability of $0.6 million is expected to be paid during the second half of
2003.
NOTE 14 - ADMINISTRATIVE RESTRUCTURING AND RETENTION COSTS
On April 3, 2003, the Company announced that it had restructured its
corporate organization and reduced its corporate staff by approximately 75
positions through terminations and the elimination of open positions. Impacted
employees are receiving severance pay in accordance with the Company's
policies. In addition, retention bonuses will be awarded to certain key
employees who remain with the Company through June 1, 2004. The Company
expects the restructuring, staff reductions and retention bonuses to result in
a charge of approximately $7.0 million during periods through May 2004, and
estimates that the cash impact in 2003 will be approximately $5.0 million. In
the second quarter of 2003, the Company recorded an administrative
restructuring and retention charge of $4.4 million associated with this
program.
NOTE 15 - RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 149 (FAS 149), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." FAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under FAS No. 133. FAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. FAS No. 149 will be
adopted by the Company for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The Company
does not expect the adoption of FAS No. 149 to have a material impact on the
Company's financial condition and results of operations.
In May 2003, the FASB issued FAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity."
FAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. FAS No. 150 is effective
18
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. FAS No. 150 will be adopted by the Company for financial
instruments entered into or modified after May 31, 2003. Due to the
Restructuring, the Company is still evaluating the impact of the adoption of
FAS No. 150 on its financial condition and results of operations.
NOTE 16 - Subsequent Events
As discussed in Note 1, the Company is undertaking a comprehensive
financial restructuring, including entering into a definitive agreement with
the Investor. The closing of the Restructuring is subject to a number of
conditions, including the consent of the Company's bank lenders and
bondholders to the plan of reorganization, bankruptcy court approval of the
plan of reorganization, completion of the refinancing of the Company's
existing indebtedness in accordance with the terms of the Restructuring, and
customary regulatory approvals. Subject to the satisfaction of these
conditions, the Company expects to complete the Restructuring in the fourth
quarter of 2003.
The Company has also launched, with the support of its senior lenders
under the Senior Secured Debt Facility, a vendor lien program under which the
Company is offering vendors and carriers of its goods the ability to obtain a
junior lien on substantially all of the Company's assets for shipments of
goods made to, by or otherwise on behalf of the Company on agreed terms (the
"Secured Trade Credit Program"). On June 30, 2003, the Company entered into
the June Bank Amendment, in order to amend the Senior Secured Debt Facility to
provide for the Secured Trade Credit Program, among other things.
In connection with the Restructuring, the Company elected not to pay
the $8.8 million interest payment due on July 1, 2003, on the 2008
Subordinated Notes, which resulted in a default under its debt agreements. The
June Bank Amendment also included a forbearance by the senior lenders under
the Senior Secured Debt Facility providing that such lenders would not
exercise any remedies available under any of the Loan Documents (as such term
is defined in the Senior Secured Debt Facility) solely as a result of any
potential or actual event of default arising under the terms of the Senior
Secured Debt Facility by virtue of the Company's failure to make the scheduled
interest payment on the 2008 Subordinated Notes. As a result of this
non-payment, the Company reclassified all outstanding debt to current
liabilities as of June 30, 2003.
The Company subsequently entered into two other forbearance
agreements in anticipation of future elections by the Company to withhold
payment of interest when due on each series of its outstanding 9.875% senior
subordinated notes due 2007 (the "2007 Subordinated Notes", together with the
2008 Subordinated Notes, the "Subordinated Notes"). On July 30, 2003, the
Company entered into an Amendment, Forbearance and Waiver (the "July Bank
Amendment") that (i) extended the original forbearance granted under the June
Bank Amendment, (ii) provided for the forbearance by the senior lenders from
exercising remedies under the Senior Secured Debt Facility arising from the
potential failure to pay interest on the Subordinated Notes and (iii) provided
for a waiver of any default under the Senior Secured Debt Facility arising
from the failure by the Company to conduct certain conference calls with, and
provide certain progress reports to, the senior lenders with respect to the
Company's asset sales. Additionally, on July 31, 2003, the Company entered
into a forbearance agreement with noteholders possessing a majority in
outstanding principal amount of the Subordinated Notes (the "Noteholder
Forbearance Agreement") whereby such noteholders agreed to forbear from
exercising any remedies available to them under any of the indentures
governing the Subordinated Notes solely as a result of any potential or actual
event of default arising by virtue of the Company's failure to make any
scheduled interest payments on the Subordinated Notes. By their terms, these
forbearance agreements are intended to expire on September 15, 2003, or
earlier upon the happening of certain other events (e.g., the occurrence of
any other potential or actual event of default).
To facilitate the Restructuring, the Company has entered into certain
confidentiality agreements with representatives of an ad hoc unofficial
committee of certain holders of the Subordinated Notes, including Debevoise &
Plimpton and Houlihan Lokey Howard & Zukin. In addition, certain holders of
the Subordinated Notes have also agreed to be bound by confidentiality
agreements in connection with their role as members of the unofficial
committee.
In connection with the Restructuring, the Company has entered into
certain engagement letters with advisors and counsel acting on behalf of the
holders of the Subordinated Notes pursuant to which the Company is
19
obligated to reimburse such advisors and counsel for their reasonable fees and
expenses arising from their involvement with the Restructuring. Similarly, the
Company is obligated under the terms of the Senior Secured Debt Facility to
reimburse the reasonable fees and expenses of the advisors and counsel acting
on behalf of the senior lenders party to the Senior Secured Debt Facility in
connection with their involvement in the Restructuring.
On July 2, 2003, the New York Stock Exchange (the "NYSE") announced
that it was suspending the listing of the Company's common stock as a direct
result of the Company's announcement regarding the Restructuring. Additional
support for the NYSE's action came from the fact that the Company had fallen
below the NYSE's continued listing standards regarding (i) average global
market capitalization over a consecutive 30 day trading period less than $50
million, (ii) total stockholders' equity less than $50 million and (iii)
average closing price less than $1.00 over a consecutive 30 trading day
period. The Company advised the NYSE that it would not challenge the action.
Subsequently, the Company was able to obtain a listing of its common stock on
the OTC Bulletin Board under the ticker symbol, "AURF".
The restatement (as discussed in Note 2) will result in a technical
default under the Senior Secured Debt Facility. However, the Company has had
discussions with the senior lenders under the Senior Secured Debt Facility
about the restatement, and anticipates obtaining a waiver or forbearance
agreement from the senior lenders with respect to any default under the Senior
Secured Debt Facility resulting from the restatement.
NOTE 17 - CONDENSED FINANCIAL STATEMENTS OF SUBSIDIARY
Sea Coast is the Company's only subsidiary and is a guarantor of all of
the Company's indebtedness, except the senior unsecured promissory notes. As a
result, the condensed financial statements as of June 30, 2003 and December 31,
2002, and for the three and six months ended June 30, 2003 and 2002, are
included below:
20
SEA COAST FOODS, INC.
BALANCE SHEET
(dollars in thousands)
(unaudited)
June 30, December 31,
2003 2002
---------- ----------
ASSETS
------
Current assets:
Accounts receivable (net of allowance of $72 and $34, respectively).. $ 3,201 $ 1,845
Inventories .......................................................... 8,594 13,764
------------ ----------
Total current assets ....................................... 11,795 15,609
Property, plant and equipment, net ................................... 1,545 -
Goodwill and intangible assets, net .................................. 6,667 8,000
Other assets ......................................................... 173 168
------------ ---------
Total assets................................................ $ 20,180 $ 23,777
============ ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
-------------------------------------
Current liabilities:
Accounts payable ..................................................... $ 930 $ 206
Accrued expenses ..................................................... 311 443
------------ ----------
Total current liabilities .................................. 1,241 649
Due to parent .................................................................... 72,123 74,695
------------ ----------
Total liabilities .......................................... 73,364 75,344
------------ ----------
Stockholder's deficit:
Common stock ......................................................... 1 1
Paid-in capital ...................................................... 200 200
Accumulated deficit .................................................. (53,385) (51,768)
------------ ----------
Total stockholder's deficit ................................ (53,184) (51,567)
------------ ----------
Total liabilities and stockholder's deficit ................ $ 20,180 $ 23,777
============ ==========
21
SEA COAST FOODS, INC.
STATEMENT OF OPERATIONS
(dollars in thousands)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -------------------------------
2003 2002 2003 2002
---------- ---------- ----------- ----------
Net sales ............................................ $ 7,346 $ 9,606 $ 16,582 $ 23,337
Cost of goods sold ................................... (5,486) (7,730) (11,399) (17,438)
---------- ---------- ----------- ----------
Gross profit ............................. 1,860 1,876 5,183 5,899
---------- ---------- ----------- ----------
Brokerage, distribution and marketing expenses:
Brokerage and distribution ............... (642) (1,250) (1,956) (2,638)
Consumer marketing ....................... (129) (267) (274) (766)
---------- ---------- ----------- ----------
Total brokerage, distribution and marketing
expenses ............................................ (771) (1,517) (2,230) (3,404)
Amortization of goodwill and other intangibles ....... (701) (30) (1,403) (60)
Selling, general and administrative expenses ......... (749) (772) (1,321) (1,583)
Plant closures ....................................... 1,045 - 1,045 -
---------- ---------- ----------- ----------
Total operating expenses ............................. (1,176) (2,319) (3,909) (5,047)
---------- ---------- ----------- ----------
Operating income ......................... 684 (443) 1,274 852
Interest expense, net ................................ (1,446) (1,402) (2,891) (2,827)
---------- ---------- ----------- ----------
Loss before income taxes ................. (762) (1,845) (1,617) (1,975)
Income tax expense ................................... - - - (3,674)
---------- ---------- ----------- ----------
Net loss before cumulative effect of
change in accounting .................... (762) (1,845) (1,617) (5,649)
Cumulative effect of change in accounting ............ - - - (37,298)
---------- ---------- ----------- ----------
Net loss ...................... $ (762) $ (1,845) $ (1,617) $ (42,947)
========== ========== =========== ==========
22
SEA COAST FOODS, INC.
STATEMENT OF CASH FLOWS
(dollars in thousands)
(unaudited)
Six Months Ended June 30,
------------------------------
2003 2002
---------- ----------
Cash flows from operating activities:
Net loss .............................................. $ (1,617) $ (42,947)
Cumulative effect of change in accounting ............. - 37,298
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization ................. 1,485 80
Plant closures ................................ (1,045) -
Change in assets and liabilities:
Accounts receivables ................ (1,356) (815)
Inventories ......................... 5,170 1,809
Accounts payable .................... 724 (1,310)
Accrued expenses .................... (132) (128)
---------- ----------
Net cash from operating activities ............................. 3,229 (6,013)
---------- ----------
Cash flow used in investing activities:
Asset additions ....................................... (74) (959)
---------- ----------
Net cash from investing activities ............................. (74) - (959)
---------- ----------
Cash flows from financing activities:
Intercompany borrowings ............................... (3,155) 6,972
---------- ----------
Net cash from financing activities ............................. (3,155) - 6,972
---------- ----------
Net change in cash ............................................. - -
Beginning cash and cash equivalents ............................ - -
---------- ----------
Ending cash and cash equivalents ............................... $ - $ -
========== ==========
23
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Reference is made to the Notes to the Consolidated 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, 2002.
The Company reevaluated its deferred tax accounting and determined
that its valuation allowance for net deferred tax assets, which had been
recorded by the Company at December 31, 2002, should have been recorded at
December 31, 2001, and that the Company should have provided for ongoing
deferred tax liabilities subsequent to January 1, 2002 (the effective date of
the adoption of FAS 142) for certain of the differences between the book and
tax amortization of the Company's goodwill and indefinite lived intangibles as
defined by FAS 142. The impact of the adjustments for the year ended December
31, 2001, was to increase income tax expense and net loss by $65.4 million.
For the year ended December 31, 2002, the impact was to decrease tax expense
by $30.9 million, increase the expense recorded for the cumulative effect of
the change in accounting principle by $60.8 million, all of which increased
the net loss by $29.9 million. In addition, the impact on the statement of
operations for the three months ended March 31, 2003, was to increase income
tax expense and the net loss by $3.6 million. These adjustments do not affect
previously recorded net sales, operating income (loss) or past or expected
future cash tax obligations. While provision for this deferred liability is
required by existing accounting literature, due to the existence of net
operating tax loss carry forwards, which expire at various times through the
year 2022, the Company does not expect that these potential taxes will be
payable in the foreseeable future, if ever.
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
historical financial information included in the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements in Item 1
included herein. Unless otherwise noted, periods (2003 and 2002) in this
discussion refer to the Company's three and six month periods ended on June
30, respectively. Amounts for the three and six months ended June 30, 2002 and
the three months ended June 30, 2003, have been restated. See Note 2 -
Restatement in Item 1 for additional information.
Results of Operations for the Three Months Ended June 30
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 decreased $11.8 million, or 6.8%, to $161.1 million in 2003
from $172.9 million in 2002. Total unit volume was down 12.0% during 2003
versus the prior year. In the retail segment, volume declined 14.2% from the
prior year, primarily in Duncan Hines, Lender's and syrup. The Company's
shipments to its retail customers materially lagged consumption as the trade
reduced inventory levels and overall weeks of supply versus the previous year.
Also, the Company's unit volume was affected by reduced marketing spending and
increased competitive activity in the baking mix category as well as planned
changes in the pricing strategy for the Company's syrup business. Unit volume
for the foodservice segment increased 3.4% during 2003 versus the prior year,
primarily due to increased shipments of Duncan Hines.
Gross profit increased $2.4 million, or 4.0%, to $63.2 million in
2003 from $60.8 million in 2002. Gross profit in 2003 as compared to 2002 was
impacted by the decline in net sales described above. Relative improvement in
gross profit was realized due to more efficient trade spending and reduced
slotting costs. In addition, manufacturing efficiencies and cost savings from
plant closures positively impacted gross profit, offset by increased prices of
flour and cocoa.
Brokerage and distribution expenses decreased $2.5 million, or 10.8%,
to $21.2 million from $23.7 million in 2002. Brokerage and distribution
expenses were lower than the prior year due to reduced brokerage costs,
principally due to the lower sales volumes and lower costs of storing
inventory at third party distributors due to the Company's efforts to reduce
inventory, offset by higher per unit freight costs resulting from higher fuel
costs.
24
Consumer marketing expenses declined $4.1 million, or 67.6%, to $2.0
million in 2003 from $6.1 million in 2002. This decrease was due largely to
reduced consumer spending on seafood, Lenders and Duncan Hines including less
media advertising and reduced couponing activity as the Company introduced
fewer new products in 2003.
Amortization expense increased $0.6 million, primarily due to
amortization of the Chef's Choice trademark, which was not amortized during
2002. During the fourth quarter of 2002, the Company determined that this
trademark had a finite life and it is being amortized over a three-year
period.
Selling, general and administrative expenses decreased $1.8 million,
or 12.1%, to $13.2 million in 2003 from $15.0 million in 2002 primarily due to
corporate staff reductions and reduction in costs for market research and
share data, offset in part by an increase in consulting costs.
Administrative restructuring and retention costs of $4.4 million were
recorded during 2003 related to the corporate staff reductions. Affected
employees are receiving severance pay in accordance with the Company's
policies. In addition, retention bonuses were awarded to certain key employees
who remain with the Company through June 1, 2004, which are being charged to
expense ratably over that period. The Company expects the restructuring and
retention costs to result in a total charge by June 1, 2004, of approximately
$7.0 million and estimates that the cash impact in 2003 will be approximately
$5.0 million. Management expects annualized savings of approximately $10
million.
Financial restructuring and divestiture costs. As of June 30, 2003,
the Company had incurred and expensed approximately $1.9 million of related
legal, consulting and investment banking costs related to the Restructuring.
As of June 30, 2003, the Company had incurred approximately $2.3
million of legal, accounting and investment banking costs related to the
divestiture process. Such costs were expensed in the accompanying consolidated
statement of operations during the second quarter due to the uncertainty that
a divestiture transaction will be completed.
Plant closures. During October 2002, the Company announced its
intention to close its Yuba City, California, facility where the Company
manufactured specialty seafood and Chef's Choice products. As a result of this
decision, production at the Yuba City facility ceased in early 2003. The
closing resulted in the elimination of all 155 jobs. Affected employees
received severance pay in accordance with the Company's policies. As a result
the Company recorded a charge of $6.7 million during the fourth quarter of
2002. The non-cash portion of the charge of approximately $4.9 million was
attributable to the write-down of property, plant and equipment. The remaining
$1.8 million of cash costs related to severance and other employee related
costs of $0.9 million and other costs necessary to maintain and dispose of the
facility of $0.9 million. The facility was sold on June 30, 2003. During the
three months ended June 30, 2003, the Company paid $0.2 million in severance
and other employee related costs and $0.4 million in facility related costs.
Approximately $2.7 million was recorded as an adjustment to the recorded
liabilities and recorded as income in plant closures on the consolidated
statement of operations as a result of higher than expected proceeds from the
disposition of the assets and the reinstatement of assets previously
anticipated to be sold. The majority of the remaining liability of $0.6
million is expected to be paid during the second half of 2003.
During the second quarter of 2002, the Company announced its
intention to close its West Seneca, New York, Lender's bagel manufacturing
facility. As a result of this decision, production at West Seneca ceased on
May 31, 2002, with the formal closing on July 2, 2002. The closing resulted in
the elimination of 204 jobs. Affected 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 is
approximately $26 million and is primarily attributable to the write-down of
property, plant and equipment, with the remaining $4 million primarily related
to severance and other employee related costs.
Interest and financing expenses. Total interest and financing expemses
decreased $7.4 million, or 21.8%, to $26.7 million in 2003 from $34.2 million
last year primarily as a result of a decrease in the net market adjustment
25
associated with the Company's derivative instrument, which was not effective
as a hedge as determined by FAS 133 and $4.2 million of expense recorded in
2002 related to the value of warrants issued on May 1, 2002, offset by $3.2
million of interest expense associated with potential additional senior debt
fees. See Note 10 to the Consolidated Financial Statements included in Item 1
of this Form 10-Q.
Income tax expense. Income tax expense increased $1.0 million to $6.0
million in 2003, from $5.0 million in 2002, due to additional expense for
deferred tax liabilities related to goodwill and certain other indefinite
lived intangibles.
Results of Operations for the Six Months Ended June 30
Results for the six months ended June 30, 2002, include pretax
adjustments of $20.1 million principally from changes in estimates. These
adjustments consisted primarily of net sales adjustments of $17.7 million,
principally for trade promotion costs, 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 executive severance.
Net sales decreased $15.7 million, or 4.3%, to $351.3 million in 2003
from $367.0 million in 2002. The 2002 net sales included $17.7 million in net
sales adjustments, principally for retail trade promotion costs, which were a
result of updated evaluations of the Company's reserves and assumptions for
such costs. Total unit volume was down 10.6% in 2003 versus the prior year. In
the retail segment, volume declined 14.3% from the prior year, primarily in
Duncan Hines, Lender's, and syrup due to reduced marketing spending and
increased competitive activity in the baking mix category as well as planned
changes in the pricing strategy for the Company's syrup business. Net sales in
other distribution channels remained consistent with the prior year.
Gross profit increased $15.1 million, or 12.5%, to $135.6 million in
2003 from $120.5 million in 2002. Gross profit in 2003 as compared to 2002 was
impacted by the decline in net sales and the net sales adjustments described
above. Relative improvement in gross profit was realized due to more efficient
trade spending and reduced slotting costs. In addition, manufacturing
efficiencies and cost savings from plant closures positively impacted gross
profit, offset by increased prices of flour and cocoa.
Brokerage and distribution expenses decreased $2.9 million to $48.0
million in 2003 from $50.9 million in prior year. Brokerage and distribution
expenses were lower than the prior year due to reduced brokerage costs,
principally due to the lower sales volumes and lower costs of storing
inventory at third-party distributors due to the Company's efforts to reduce
inventory, offset by higher per unit freight costs from higher fuel costs.
Consumer marketing expenses declined $9.1 million to $6.7 million in
2003 from $15.8 million in 2002. This decrease was due largely to reduced
consumer spending on seafood, Lenders, syrups and Duncan Hines including less
media advertising, less couponing activity as the Company introduced fewer new
products in 2003, and a reduction of in-store seafood promotional events.
Amortization expense increased $1.4 million, primarily due to
amortization of the Chef's Choice trademark, which was not being amortized
during 2002. During the fourth quarter of 2002, the Company determined that
this trademark had a finite life and it is being amortized over a three-year
period.
Selling, general and administrative expenses decreased $3.5 million,
or 10.7%, to $28.9 million in 2003 from $32.4 million in 2002 primarily due to
corporate staff reductions and reduction in costs for market research and
share data, offset in part by an increase in consulting costs.
Administrative restructuring and retention costs of $4.4 million were
recorded during 2003 related to the reduction of corporate staff by
approximately 75 positions through terminations and the elimination of open
positions. Affected employees are receiving severance pay in accordance with
the Company's policies. In addition, retention bonuses were awarded to key
employees.
26
Financial restructuring and divestiture costs. As of June 30, 2003,
the Company had incurred and expensed approximately $1.9 million of related
legal, consulting and investment banking costs related to the Restructuring.
As of June 30, 2003, the Company had incurred approximately $2.3
million of related legal, accounting and investment banking costs related to
the divestiture process. Such costs were expensed in the accompanying
consolidated statement of operations during the second quarter due to the
uncertainty that a divestiture transaction will be completed.
Plant closures. During October 2002, the Company announced its
intention to close its Yuba City, California, facility where the Company
manufactured specialty seafood and Chef's Choice products. As a result of this
decision, production at the Yuba City facility ceased in early 2003. The
closing resulted in the elimination of all 155 jobs. Impacted employees
received severance pay in accordance with the Company's policies. As a result
the Company recorded a charge of $6.7 million during the fourth quarter of
2002. The non-cash portion of the charge of approximately $4.9 million was
attributable to the write-down of property, plant and equipment. The remaining
$1.8 million of cash costs related to severance and other employee related
costs of $0.9 million and other costs necessary to maintain and dispose of the
facility of $0.9 million. The facility was sold on June 30, 2003. During the
six months ended June 30, 2003, the Company paid $0.6 million in severance and
other employee related costs and $0.6 million in facility related costs.
Approximately $2.7 million was recorded as an adjustment to the recorded
liabilities and recorded in plant closures on the consolidated statement of
operations as a result of higher than expected proceeds from the disposition
of the assets and the reinstatement of assets previously anticipated to be
sold. The majority of the remaining liability of $0.6 million is expected to
be paid during the second half of 2003.
During the second quarter of 2002, the Company announced its
intention to close its West Seneca, New York, Lender's bagel manufacturing
facility. As a result of this decision, production at West Seneca ceased on
May 31, 2002, with the formal closing on July 2, 2002. The closing resulted in
the elimination of 204 jobs. Impacted employees 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 is
approximately $26 million and is primarily attributable to write-down of
property, plant and equipment, with the remaining $4 million primarily related
to severance and other employee related costs.
Interest and financing expenses. Total interest and financing
expenses decreased $5.5 million to $52.8 million in 2003 from $58.3 million
last year primarily as a result of a decrease in the net market adjustment
associated with the Company's derivative instrument, which was not effective
as a hedge as determined by FAS 133 and $4.3 million of expense recorded in
2002 related to the value of warrants issued on May 1, 2002, offset by $4.6
million of interest expense associated with potential additional senior debt
fees. See Note 10 to the Consolidated Financial Statements included in this
Form 10-Q.
Income tax expense. Income tax expense decreased $99.9 million from
$109.6 million to $9.7 million. The decrease is primarily due to a non-cash
tax adjustment in the first quarter of 2002 to establish a valuation allowance
against the deferred tax assets, as it was considered no longer reasonable to
estimate the period of reversal, if any, for deferred tax liabilities related
to goodwill as the result of the adoption of FAS 142. No income tax benefit
was recorded in 2003. The Company records deferred tax liabilities for
differences between certain goodwill and indefinite lived intangible assets.
Liquidity and Capital Resources
For the six months ended June 30, 2003, the Company generated $19.1
million from operations versus using $5.8 million in the prior year. This
$24.9 million improvement in cash provided by operations was primarily the
result of an increase in operating earnings of $53.1 million over the prior
year to $39.6 million from an operating loss of $13.5 million in 2002. The
2002 operating loss included non-cash plant closure charges of $26.0 million,
while the 2003 operating earnings included a non-cash plant closure gain of
$2.4 million. After taking into account these non-cash items, the difference
in cash generated from operating activities between years is $24.7 million.
Working capital changes provided $8.6 million in 2003 versus $5.7 million in
2002.
27
Cash used for asset additions declined to $4.2 million in 2003 from
$11.5 million in the first half of 2002. There were no major capital
expenditures in 2003, while 2002 included expenditures related to the move of
syrup production to the Company's St. Elmo, Illinois, facility. The proceeds
from the sale of assets increased to $2.1 million from $0.4 million in 2002
primarily due to the sale of the Company's Yuba City, California, facility in
the second quarter of 2003.
In the six months ended June 30, 2003, the Company repaid a total of
$21.6 million of borrowings for scheduled senior secured debt repayments and
borrowed an additional $13.4 million under its revolving credit facility. In
2002, the Company borrowed an additional $30.3 million under the revolving
credit facility and $14.6 million from the issuance of senior unsecured
promissory notes to related parties, while repaying $16.4 million of scheduled
senior secured debt payments.
The Company continues to be highly leveraged. At August 6, 2003, the
Company had outstanding approximately $1.08 billion in aggregate principal
indebtedness for borrowed money and had approximately $24.1 million of cash
and available borrowing capacity under its accounts receivable sales facility.
The Company has no availability under its revolving credit facility. The
degree to which the Company is leveraged results in significant cash interest
expense and principal repayment obligations and such interest expense may
increase with respect to its senior secured credit facilities based on changes
in prevailing interest rates. As discussed in Note 1 of the consolidated
financial statements, the Company has announced that it is undertaking a
comprehensive financial restructuring ("Restructuring"), designed to reduce
the Company's outstanding indebtedness, strengthen its balance sheet and
improve its liquidity. As part of the Restructuring the Company entered into a
definitive agreement with J.W. Childs Equity Partners III, L.P. ("Investor"),
an affiliate of J.W. Childs Associates, L.P. Under the definitive agreement,
the Investor will make a $200 million investment in the Company for a 65.6%
equity interest in the reorganized company, subject to the terms and
conditions contained therein. The equity transaction is contemplated to be
effected through a pre-negotiated bankruptcy reorganization case under Chapter
11 of the U.S. Bankruptcy Code which the Company expects to commence during
the second half of 2003. The Company believes its liquidity is sufficient to
fund its operations up to the projected bankruptcy filing.
In connection with the Restructuring, the Company elected not to pay
the $8.8 million interest payment due on July 1, 2003, on the 2008
Subordinated Notes, which resulted in a default under its debt agreements. The
June Bank Amendment also included a forbearance by the senior lenders under
the Senior Secured Debt Facility providing that such lenders would not
exercise any remedies available under any of the Loan Documents (as such term
is defined in the Senior Secured Debt Facility) solely as a result of any
potential or actual event of default arising under the terms of the Senior
Secured Debt Facility by virtue of the Company's failure to make the scheduled
interest payment on the 2008 Subordinated Notes. As a result of this
non-payment, the Company reclassified all outstanding debt to current
liabilities as of June 30, 2003.
The Company subsequently entered into two other forbearance
agreements in anticipation of future elections by the Company to withhold
payment of interest when due on each series of its outstanding 9.875% senior
subordinated notes due 2007 (the "2007 Subordinated Notes", together with the
2008 Subordinated Notes, the "Subordinated Notes"). On July 30, 2003, the
Company entered into an Amendment, Forbearance and Waiver (the "July Bank
Amendment") that (i) extended the original forbearance granted under the June
Bank Amendment, (ii) provided for the forbearance by the senior lenders from
exercising remedies under the Senior Secured Debt Facility arising from the
potential failure to pay interest on the Subordinated Notes and (iii) provided
for a waiver of any default under the Senior Secured Debt Facility arising
from the failure by the Company to conduct certain conference calls with, and
provide certain progress reports to, the senior lenders with respect to the
Company's asset sales. Additionally, on July 31, 2003, the Company entered
into a forbearance agreement with noteholders possessing a majority in
outstanding principal amount of the Subordinated Notes (the "Noteholder
Forbearance Agreement") whereby such noteholders agreed to forbear from
exercising any remedies available to them under any of the indentures
governing the Subordinated Notes solely as a result of any potential or actual
event of default arising by virtue of the Company's failure to make any
scheduled interest payments on the Subordinated Notes. By their terms, these
forbearance agreements are intended to expire on September 15, 2003, or
earlier upon the happening of certain other events (e.g., the occurrence of
any other potential or actual event of default). Upon expiration of the
forbearance agreements or earlier termination thereof, an aggregate of $1.1
billion of outstanding indebtedness would become due and payable by the
Company.
The restatement will result in a technical default under the Senior
Secured Debt Facility. However, the Company has had discussions with the senior
lenders under the Senior Secured Debt Facility about the restatement, and
anticipates obtaining a waiver or forbearance agreement from the senior lenders
with respect to any default under the Senior Secured Debt Facility resulting
from the restatement.
28
Interest Rate Agreements
At June 30, 2003, the Company was party to a single interest rate
collar agreement. On March 17, 2003, the Company's fixed to floating interest
rate swap agreement with a notional principal amount of $150.0 million
expired. Risks associated with the interest rate collar agreement include
those associated with changes in the market value and interest rates. The
Company has determined that the interest rate collar agreement is not
effective as a hedge under FAS 133 and changes in its fair value are
recognized in current period earnings. The Company is generally a beneficiary
of lower interest rates. To reduce the risk associated with rising interest
rates, the Company has 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, 2002, the risks associated with fluctuations
in market interest rates have not changed significantly in 2003 except to the
extent that $150 million of variable rate debt is no longer subject to the
interest rate swap which expired on March 17, 2003.
Financial Restructuring and Divestiture Activities
In July 2003, the Company announced that it is undertaking a
comprehensive financial restructuring designed to reduce the Company's
outstanding indebtedness, strengthen its balance sheet and improve its
liquidity. As part of the restructuring, the Company entered into the
definitive agreement with the Investor pursuant to which the Investor will
make a $200 million equity investment in the Company, subject to the terms and
conditions contained therein. See "Financial Restructuring and Divestiture
Activities" under Note 1 to the Company's notes to the Consolidated Financial
Statements.
Immediately following the closing under the definitive agreement, the
Investor will own 65.6% of the Company's outstanding common stock on a fully
diluted basis, subject to adjustment as described in the definitive agreement.
In addition, the Investor will have certain rights under an investor
agreement, including the right to designate a majority of the members of the
Board of Directors of the Company.
Plant Closures
In May 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 all 204
jobs. Affected employees received severance pay in accordance with the
Company's policies and union agreements. The Company recorded charges of $32.4
million during 2002 in connection with the shutdown of the West Seneca
facility. The non-cash portion of the charges was approximately $28.2 million
and is attributable to the write-down of property, plant and equipment, with
the remaining $4.2 million of cash costs related to severance and other
employee related costs of $3.0 million, and other costs necessary to maintain
and dispose of the facility of $1.2 million. During the six months ended June
30, 2003, the Company paid $0.1 million in severance and related costs and
$0.6 million of other costs related to closing and sale of the facility. No
adjustments were made to recorded liabilities and the remaining accrual is
minimal.
On October 30, 2002, the Company announced its intention to close
its Yuba City, California, facility where the Company manufactured specialty
seafood and Chef's Choice products. As a result of this decision, production
at the Yuba City facility ceased in early 2003. The closing resulted in the
elimination of all 155 jobs. Affected employees received severance pay in
accordance with the Company's policies. As a result, the Company recorded a
charge of $6.7 million during the fourth quarter of 2002. The non-cash
portion of the charge of approximately $4.9 million was attributable to the
write-down of property, plant and equipment. The remaining $1.8 million of
cash costs was related to severance and other employee related costs of $0.9
million and other costs necessary to maintain and dispose of the facility of
$0.9 million. During the six months ended June 30, 2003, the Company paid
$0.6 million in severance and other employee related costs and $0.6 million
in facility related costs. Approximately $2.7 million was recorded as an
adjustment to the recorded liabilities and recorded in plant closures on the
consolidated statement of operations as a result of higher than expected
proceeds from the disposition of the assets and the
29
reinstatement of assets previously anticipated to be sold. The majority of the
remaining liability of $0.6 million is expected to be paid during the second
half of 2003.
Recently Issued Accounting Standards
In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 149 (FAS 149), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." FAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under FAS No. 133. FAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. FAS No. 149 will be
adopted by the Company for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The Company
does not expect the adoption of FAS No. 149 to have a material impact on the
Company's financial condition and results of operations.
In May 2003, the FASB issued FAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity."
FAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. FAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. FAS No. 150 will be
adopted by the Company for financial instruments entered into or modified
after May 31, 2003. Due to the Restructuring, the Company is still evaluating
the impact of the adoption of FAS No. 150 on its financial condition and
results of operations.
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: the Company's ability to successfully complete the
amount and timing of required asset divestitures; Company's ability to
complete its financial restructuring; 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; 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 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 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.
30
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has entered into interest rate swap and collar agreements
for non-trading purposes. At June 30, 2003, the Company was party to a single
interest rate collar agreement, as its interest rate swap agreement with a
notional principal amount of $150.0 million expired on March 17, 2003. Risks
associated with the collar agreement 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, 2002, the risks associated with fluctuations
in market interest rates have not changed significantly in 2003 except to the
extent that $150 million of variable rate debt is no longer subject to the
interest rate swap which expired on March 17, 2003.
ITEM 4: CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's
interim chief executive officer and chief financial officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of the end of the period
covered by this report. Based on such evaluation, the Company's interim chief
executive officer and chief financial officer have concluded that, as of the
end of such period, the Company's disclosure controls and procedures are
effective.
There have not been any changes in the Company's internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this
report relates that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
31
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 added claims for breach of contract and fiduciary duty, and for negligent
misrepresentation and tortious interference with business expectancy. The case
is set for trial in September 2003. The Company intends to defend the claims
vigorously.
The Company is a defendant in an action filed by the State of
Illinois regarding the Company's St. Elmo facility. The Illinois Attorney
General filed a complaint seeking a restraining order prohibiting further
discharges by the City from its publicly owned wastewater treatment facility
in violation of Illinois law and enjoining the Company from discharging its
industrial waste into the City's treatment facility. The complaint also asked
for fines and penalties associated with the City's discharge from its
treatment facility and the Company's alleged operation of its production
facility without obtaining a state environmental operating permit. On June 19,
2003, the Company and the Illinois Attorney General executed an Agreed
Injunction Order settling all allegations in the complaint against the
Company, other than any potential monetary fine or penalty. The Company
intends to vigorously defend any future claim for fines or penalties.
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.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
In connection with the Restructuring, the Company elected not to pay
the $8.8 million interest payment due on July 1, 2003, on the 2008
Subordinated Notes, which resulted in a default under its debt agreements. The
June Bank Amendment also included a forbearance by the senior lenders under
the Senior Secured Debt Facility providing that such lenders would not
exercise any remedies available under any of the Loan Documents (as such term
is defined in the Senior Secured Debt Facility) solely as a result of any
potential or actual event of default arising under the terms of the Senior
Secured Debt Facility by virtue of the Company's failure to make the scheduled
interest payment on the 2008 Subordinated Notes. As a result of this
non-payment, the Company reclassified all outstanding debt to current
liabilities as of June 30, 2003. As of August 14, 2003, the total arrearage is
$8.8 million.
The Company subsequently entered into two (2) other forbearance
agreements in anticipation of future elections by the Company to withhold
payment of interest when due on each series of its outstanding 9.875% senior
subordinated notes due 2007 (the "2007 Subordinated Notes", together with the
2008 Subordinated Notes, the "Subordinated Notes"). On July 30, 2003, the
Company entered into an Amendment, Forbearance and Waiver (the "July Bank
Amendment") that (i) extended the original forbearance granted under the June
Bank Amendment, (ii) provided for the forbearance by the senior lenders from
exercising remedies under the Senior Secured Debt Facility arising from the
potential failure to pay interest on the Subordinated Notes and (iii) provided
for a waiver of any default under the Senior Secured Debt Facility arising
from the failure by the Company to conduct certain conference calls with, and
provide certain progress reports to, the senior lenders with respect to the
Company's asset sales. Additionally, on July 31, 2003, the Company entered
into a forbearance agreement with noteholders possessing a majority in
outstanding principal amount of the Subordinated Notes (the "Noteholder
Forbearance Agreement") whereby such noteholders agreed to forbear from
exercising any remedies available to them under any
32
of the indentures governing the Subordinated Notes solely as a result of any
potential or actual event of default arising by virtue of the Company's
failure to make any scheduled interest payments on the Subordinated Notes. By
their terms, these forbearance agreements are intended to expire on September
15, 2003, or earlier upon the happening of certain other events (e.g., the
occurrence of any other potential or actual event of default).
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting on May 6, 2003, stockholders voted
for the election of all nominees for the Board of Directors, approval of a
proposal to authorize the Board of Directors, in its sole discretion, to
effect a reverse split at one of three ratios and the approval of an amendment
to the Company's 2000 Equity Incentive Plan to increase the number of shares
of common stock reserved for issuance under the Plan and to increase the
maximum number of shares as to which awards may be granted to any participant
in any one calendar year, as described in the Company's Proxy Statement for
such meeting.
Vote tabulations were as follows:
Board of Directors:
Name For Against Withheld
- --------------------------- ------------- ------------ -------------
William B. Connell 62,109,682 - 4,311,313
Richard C. Dresdale 62,079,515 - 4,341,480
Andrea Geisser 62,117,471 - 4,303,524
Robert B. Hellman, Jr. 62,122,162 - 4,298,833
Thomas M. Hudgins 62,829,194 - 3,591,801
Stephen L. Key 62,841,385 - 3,579,610
Peter Lamm 62,100,644 - 4,320,351
George E. McCown 62,113,903 - 4,307,092
Dale F. Morrison 61,984,423 - 4,436,572
John E. Murphy 62,102,074 - 4,318,921
Amendment to the Certificate of Incorporation:
For Against Abstained
------------- ------------ -------------
65,162,520 1,207,585 50,890
Amendment to the 2000 Equity Incentive Plan:
For Against Abstained Not Voted
------------- ------------- ------------- -------------
43,531,362 6,971,944 77,549 15,840,140
ITEM 5: OTHER INFORMATION
None.
33
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K during the quarter ended June 30, 2003:
April 4, 2003 Press release issued by Aurora Foods Inc. on April
3, 2003, announcing its restructuring of its
organization and reduction of its corporate staff.
May 1, 2003 Press release issued by Aurora Foods Inc. on April
30, 2003, announcing its financial results for the
first quarter ended March 31, 2003.
34
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 and
Interim Chief Executive Officer
(Principal 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: August 14, 2003
35
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------ -------
3.1 Certificate of Incorporation of Aurora Foods Inc., as amended.
(Incorporated by reference to Exhibit 3.1 to the Aurora Foods Inc.
Form 10-K for the year ended December 31, 2001).
3.2 Amended and Restated By-laws of Aurora Foods Inc. (Incorporated by
reference to Exhibit 3.2 to the Aurora Foods Inc. Form 10-Q for
the quarter ended June 30, 2000).
3.3 Certificate of Designation for the Company's Series A Preferred
Stock filed with the Secretary of State of Delaware on September
7, 2000. (Incorporated by reference to Exhibit 3.1 to the Aurora
Foods Inc. Form 8-K filed on September 21, 2000).
10.1 Amendment and Forbearance, dated as of June 30, 2003, to the Fifth
Amended and Restated Credit Agreement, dated as of November 1,
1999, among Aurora Foods Inc., the financial institutions parties
thereto and the Agents. (Incorporated by reference to Exhibit 10.2
to Aurora Foods Inc.'s Form 8-K, dated July 3, 2003).
10.2 Amendment, Forbearance and Waiver, dated as of July 30, 2003, to
the Fifth Amended and Restated Credit Agreement, dated as of
November 1, 1999, among Aurora Foods Inc., the financial
institutions parties thereto and the Agents.
10.3 Noteholder Forbearance Agreement, dated as of July 31, 2003, among
Aurora Foods Inc., Sea Coast Foods, Inc. and the holder of the
Subordinated Notes party thereto.
10.4 Change of Control Agreement, made as of June 2, 2003, between
Aurora Foods Inc. and Richard A. Keffer.
10.5 Indemnity Agreement, made and entered into as of March 17, 2003,
by and between Aurora Foods Inc. and Richard A. Keffer.
10.6 Change of Control Agreement, made as of March 25, 2003, between
Aurora Foods Inc. and Michael J. Hojnacki.
10.7 Employment Agreement, made as of July 1, 2003, between
Aurora Foods Inc. and Ronald B. Hutchison.
31.1 Certification of Chairman of the Board and Interim Chief Executive
Officer pursuant to Rule 13a-14(a) under the Securities Exchange
Act of 1934, as amended.
31.2 Certification of Executive Vice President and Chief Financial
Officer pursuant to Rule 13a-14(a) under the Securities Exchange
Act of 1934, as amended.
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.