1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
{X} Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter ended September 30, 1998
{ } 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: 1-13747
ATLANTIC PREMIUM BRANDS, LTD.
- --------------------------------------------------------------------------------
(Exact Name of registrant as specified in its charter)
Delaware 36-3761400
- ------------------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 Dundee Road, Suite 370 60062
Northbrook, Illinois
- ------------------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 480-4000
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
----- -----
As of November 11, 1998, there were outstanding 7,385,679 shares of Common
Stock, par value $.01 per share, of the Registrant.
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PART I -- FINANCIAL INFORMATION
ITEM 1.
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1997 1998
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,262,805 $ 2,453,265
Accounts receivable, net of allowance for doubtful accounts
of $117,000 and $217,000, respectively 9,448,489 9,156,255
Inventory 4,213,026 6,545,753
Prepaid expenses and other 672,386 827,841
------------ ------------
Total current assets 15,596,706 18,983,114
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net 4,939,536 13,507,726
GOODWILL, net 12,790,619 13,168,338
OTHER ASSETS, net 1,626,831 1,745,107
------------ ------------
Total Assets $ 34,953,692 $ 47,404,285
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 1,491,557 $ 3,109,277
Line of credit 6,839,323 4,035,620
Current portion of long-term debt 1,659,310 1,284,110
Accounts payable 8,216,422 7,199,847
Accrued expenses 1,061,338 2,546,728
------------ ------------
Total current liabilities 19,267,950 18,175,582
------------ ------------
LONG-TERM DEBT, net of current portion 6,297,288 17,311,121
PUT WARRANTS -- 1,435,000
------------ ------------
Total liabilities 25,565,238 36,921,703
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issued -- --
Common stock, $.01 par value; 30,000,000 shares authorized;
and 7,373,574 shares issued in 1997 and 7,432,109 issued in
1998 73,770 74,355
Additional paid-in capital 12,141,176 12,200,124
Accumulated deficit (2,826,492) (1,791,897)
------------ ------------
Total Stockholders' Equity 9,388,454 10,482,582
------------ ------------
Total Liabilities and Stockholders' Equity $ 34,953,692 $ 47,404,285
============ ============
The accompanying notes are an integral part of these
consolidated balance sheets.
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Page 1 of 2
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months Ended Three Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
1997 1998 1997 1998
-------------- -------------- -------------- ---------------
NET SALES $ 128,234,946 $ 145,463,948 $ 44,179,213 $ 52,453,537
COST OF GOODS SOLD, exclusive of
depreciation shown below 113,121,840 123,946,263 38,968,529 44,419,952
-------------- -------------- -------------- --------------
Gross Profit 15,113,106 21,517,685 5,210,684 8,033,585
-------------- -------------- -------------- --------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Salaries and benefits 6,437,028 8,555,208 2,282,605 3,277,328
Other operating expenses 6,087,906 8,504,189 2,115,945 3,263,552
Depreciation and amortization 947,666 1,505,918 356,858 554,791
-------------- -------------- -------------- --------------
Total selling, general and
administrative expenses 13,472,600 18,565,315 4,755,408 7,095,671
-------------- -------------- -------------- --------------
Income from operations 1,640,506 2,952,370 455,276 937,914
INTEREST EXPENSE (1,276,373) (1,902,521) (432,498) (720,131)
OTHER INCOME 240,780 189,239 112,830 116,513
-------------- -------------- -------------- --------------
Income before income tax
provision 604,913 1,239,088 135,608 334,296
-------------- -------------- -------------- --------------
INCOME TAX PROVISION (15,000) (9,500) (15,000) (125,000)
-------------- -------------- -------------- --------------
Net income before extraordinary
loss $ 589,913 $ 1,229,588 $ 120,608 $ 209,296
============== ============== ============== ==============
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, net of
income tax benefit of $122,000 - 194,993 - -
-------------- -------------- -------------- -------------
Net income $ 589,913 $ 1,034,595 $ 120,608 $ 209,296
============== ============== ============== ==============
INCOME PER COMMON SHARE DATA
BASIC EPS:
Net income before extraordinary loss $ .09 $ .17 $ .02 $ .03
Extraordinary loss, net of tax - (.03) - -
-------------- --------------- -------------- -----------
Net income $ .09 $ .14 $ .02 $ .03
============== ============== ============== ==============
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Page 2 of 2
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months Ended Three Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1997 1998 1997 1998
-------------- -------------- -------------- --------------
DILUTED EPS:
Net income before extraordinary loss $ .09 $ .17 $ .02 $ .03
Extraordinary loss, net of tax - (.03) - -
-------------- -------------- -------------- --------------
Net income $ .09 $ .14 $ .02 $ .03
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES
OUSTANDING:
Basic calculation 6,668,206 7,402,977 7,207,490 7,432,109
============== ============== ============== ==============
Diluted calculation 6,922,107 7,627,637 7,430,170 7,607,239
============== ============== ============== ==============
The accompanying notes are an integral part of these statements.
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Page 1 of 2
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months Ended
September 30,
--------------------------------
1997 1998
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 589,913 $ 1,034,595
Adjustments to reconcile net income to cash flows provided
by operating activities, net of non-cash items and effect of
business combinations:
Extraordinary loss on early extinguishment of debt, net - 194,993
Depreciation and amortization 947,666 1,505,918
Deferred income tax provision - 9,500
Amortization of debt discount and deferred financing costs 141,566 261,227
Other - 80,138
Changes in operating assets and liabilities:
Decrease in accounts receivable, net 1,726,578 1,827,301
Increase in inventory (1,444,240) (580,261)
Increase in prepaid expenses and other (667,336) (120,238)
Increase in other assets (426,008) (12,500)
Decrease in accounts payable (884,920) (1,790,019)
Increase in accrued expenses 118,740 1,132,572
Net cash flows provided by (used in) operating activities of -
Continuing operations 101,959 3,543,226
Discontinued operations (171,526) -
-------------- -------------
Net cash flows (used in) provided by operating
activities (69,567) 3,543,226
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment (772,030) (963,457)
Purchase of distribution rights (267,885) -
Cash paid for acquisition, including related costs (11,667,181)
Proceeds from disposals of equipment - 121,688
-------------- --------------
Net cash flows used in investing activities (1,039,915) (12,508,950)
-------------- --------------
The accompanying notes are an integral part of these statements.
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Page 2 of 2
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months Ended
September 30,
--------------------------------
1997 1998
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in bank overdraft, net $ (166,506) $ 1,617,120
Repayment of long-term debt (1,579,930) (5,606,509)
Cash paid for financing fees - (605,077)
Borrowings (payments) under line of credit 1,244,016 (2,803,703)
Borrowings under senior subordinated note - 5,065,000
Borrowings under capital lease obligations - 41,853
Proceeds from private placement of common stock, net 2,428,253 -
Issuance of put warrants - 1,435,000
Issuance of common stock options - 12,500
Borrowings under term loan - 11,000,000
-------------- --------------
Net cash flows provided by financing activities 1,925,833 10,156,184
-------------- --------------
NET INCREASE IN CASH 816,351 1,190,460
CASH, beginning of period 1,248,963 1,262,805
-------------- --------------
CASH, end of period $ 2,065,314 $ 2,453,265
============== ==============
The accompanying notes are an integral part of these statements.
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ATLANTIC PREMIUM BRANDS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements present the accounts of
Atlantic Premium Brands, Ltd. (the "Company") and its wholly-owned subsidiaries.
The Company, together with its subsidiaries, is engaged in the distribution of
specialty nonalcoholic beverages to the retail trade in the Baltimore and
Washington, D.C. metropolitan areas and in the manufacturing, marketing and
distribution of meat products in Texas, Louisiana, Kentucky, Oklahoma and
surrounding states. The operating results of the Company's food division are
impacted by changes in commodity markets.
The consolidated financial statements included herein for Atlantic Premium
Brands, Ltd. have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. In management's
opinion, the interim financial data presented includes all adjustments (which
include only normal recurring adjustments) necessary for a fair presentation.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
understand the information presented. The results of operations for the three
months and nine months ending September 30, 1998, are not necessarily indicative
of the operating results expected for the entire year. It is suggested that
these consolidated financial statements be read in conjunction with the
Company's December 31, 1997, consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K dated March 31, 1998.
Revenue Recognition
The Company records sales when product is delivered to the customers. Discounts
provided, principally volume, are accrued at the time of the sale.
Cash
Cash consists of cash held in various deposit accounts with financial
institutions. As of September 30, 1998, $175,000 was restricted to meet minimum
balance funding requirements.
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Inventory
Inventory is stated at the lower of cost or market. It is comprised of raw
materials, finished goods and inventory supplies. Cost is determined using the
first-in, first-out method (FIFO). Inventory consisted of the following as of:
December 31, September 30,
1997 1998
-------------- --------------
Raw materials $ 297,297 $ 336,014
Finished goods 3,380,766 4,877,933
Packaging supplies 534,963 1,331,806
-------------- --------------
Total inventory $ 4,213,026 $ 6,545,753
============== ==============
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Depreciation is provided using the straight-line method over the
following useful lives.
Buildings and building improvements 5-30 years
Machinery and equipment 5-10 years
Furniture and fixtures 5 years
Leasehold improvements 2-5 years
Vehicles 5-10 years
Other Assets
Other assets consist of noncompete agreements, deferred acquisition costs, cash
surrender value of life insurance, distribution, exclusivity and license
agreements and deferred financing costs (see Note 4). Noncompete agreements and
distribution, exclusivity and license agreements are being amortized over 2-5
years using the straight-line method. The deferred financing costs, net of
related accumulated amortization, related to extinguished debt were written off
in March 1998 (see Note 4).
Goodwill
Goodwill recorded in connection with business combinations is being amortized
using the straight-line method over 5 to 40 years.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
9
Earnings Per Share
The weighted average shares used to calculate basic and diluted earnings per
share for the three months ended September 30, 1997 and 1998, in accordance with
SFAS No. 128 are as follows:
1997 1998
--------- ---------
Common stock outstanding 7,207,490 7,432,109
========= =========
Weighted average shares outstanding for basic EPS 7,207,490 7,432,109
Dilutive effect of common stock equivalents 222,680 175,130
--------- ---------
Weighted average shares outstanding for dilutive EPS 7,430,170 7,607,239
========= =========
Options to purchase 542,841 shares of common stock at prices ranging from $2.81
to $4.00 per share were outstanding during the third quarter of 1998 but were
not included in the computation of diluted EPS because the options' exercise
price was greater than the average market price of the common shares during the
quarter.
Put warrants to purchase up to a maximum of 1,095,700 shares of common stock, as
of September 30, 1998 at $3.38 per share were outstanding during the third
quarter of 1998 but were not included in the computation of diluted EPS because
the warrants' exercise price was greater than the average market price of the
common shares during the quarter.
The weighted average shares used to calculate basic and diluted earnings per
share for the nine months ended September 30, 1997 and 1998, in accordance with
SFAS No. 128 are as follows:
1997 1998
--------- ---------
Common stock outstanding 6,668,206 7,432,109
========= =========
Weighted average shares outstanding for basic EPS 6,668,206 7,402,977
Dilutive effect of common stock equivalents 253,901 224,660
--------- ---------
Weighted average shares outstanding for dilutive EPS 6,922,107 7,627,637
========= =========
Options to purchase 309,991 shares of common stock at prices ranging from $3.30
and $4.00 per share were outstanding during the nine months ended September 30,
1998, but were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market price of the common
shares during the nine month period.
Put warrants to purchase up to a maximum of 1,095,700 shares of common stock, as
of September 30, 1998 at $3.38 per share were outstanding during a portion of
the nine months ended September 30, 1998, but were not included in the
computation of diluted EPS because the warrants' exercise price was greater than
the average market price of the common shares during the nine month period.
10
Accounting Pronouncements
During June 1997, the FASB issued Statement No. 130 (SFAS No. 130), "Reporting
Comprehensive Income", which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The Company has had no items of other comprehensive income in
the nine months ended September 30, 1997 or 1998.
During July 1997, the FASB issued Statement No. 131 (SFAS No. 131), "Disclosures
About Segments of an Enterprise and Related Information", which establishes a
new approach for determining segments within a company and reporting information
on those segments. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. Management has not yet determined whether the implementation
of SFAS No. 131 will have any significant impact on the Company's current method
of disclosing business segment information.
Reclassifications
Certain reclassifications have been made to the prior period amounts in order to
conform with the current period presentation.
2. CONTINGENCIES:
Lawsuits and claims are filed against the Company from time to time in the
ordinary course of business. These actions are in various preliminary stages and
no judgments or decisions have been rendered by hearing boards or courts.
Management, after reviewing developments to date with legal counsel, is of the
opinion that the outcome of such matters will not have a material adverse effect
on the Company's financial position or results of operations.
3. BUSINESS COMBINATIONS:
As of March 20, 1998, the Company acquired substantially all of the assets and
certain liabilities of J.C. Potter, a food processing business in Durant,
Oklahoma, specializing in a line of premium products including breakfast
sausage, link sausage and sausage and biscuits. In connection with the Potter
transaction, the Company paid $11,667,181 in cash, plus related transaction
costs. The business combination was accounted for using the purchase method of
accounting, whereby the purchase price is allocated to the assets acquired and
liabilities assumed based upon fair value. A
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preliminary purchase price allocation was performed as of March 31, 1998. As of
September 30, 1998, the revised allocation has taken into account additional
liabilities assumed, resulting in additional goodwill of $500,000.
Cash paid $ 10,495,407
Transaction costs 1,801,774
--------------
Total purchase price $ 12,297,181
==============
Current assets acquired $ 3,572,750
Noncurrent assets acquired 8,720,693
Current liabilities acquired (626,262)
--------------
Net assets acquired 11,667,181
--------------
Goodwill $ 630,000
==============
4. DEBT REFINANCING:
On March 20, 1998, the Company refinanced its senior revolver and term debt. The
new debt consists of an $11 million term note, a $15 million line of credit and
$6.5 million Senior Subordinated Note with detachable put warrants.
The new term debt bears interest at either the bank's prime rate plus 1% or
Adjusted LIBOR plus 2.5%, at the Company's option. This loan is due in varying
amounts monthly through March 2003 and is secured by all assets of the Company.
Under the terms of the new line of credit agreement, the Company is permitted to
borrow up to $15,000,000, subject to advance formulas based on accounts
receivable, inventory and letter of credit obligations outstanding through March
2003. Amounts borrowed are due on demand and bear interest at either the bank's
prime rate plus 1% or adjusted LIBOR plus 2.5%. Interest is payable monthly and
amounts are secured by all assets of the Company.
The $6.5 million Senior Subordinated Note, maturing on June 30, 2005, bears
interest at 10%. Principal is payable in quarterly installments beginning June
30, 2003. The subordinated debt was issued with detachable put warrants to
purchase 666,947 shares of nonvoting common stock at $3.38 per share and a
contingent put warrant to purchase up to a maximum of 428,753 shares of
nonvoting common stock at $3.38 per share based upon the equity value of the
Company on certain dates. The warrants have been recorded at an estimated fair
value of $1,435,000, resulting in a discount on the Senior Subordinated Note of
the same amount. This discount is being amortized over the seven year term of
the note as additional interest expense. For the nine months ended September 30,
1998, amortization of the debt discount was approximately $108,250.
On the occurrence of a Put Trigger Event (defined below), if the average trading
volume of the Company's stock for four consecutive weeks is less than 15% of the
number of shares issuable to the holder of the put warrants, such holders would
have a thirty day right to require the Company to redeem the warrants for a cash
amount equal to the greater of a cash flow formula (defined in the Warrant
Agreement) or the fair market value of the underlying shares based upon an
appraisal, in each case, net of an exercise price of $3.38 per share. For these
purposes, a "Put Trigger Event" would occur upon the earlier of certain events,
including the fifth anniversary of the warrants, a sale of all or substantially
all of the assets of the Company, or a business combination in which the Company
is not the surviving corporation.
In accordance with EITF 96-13, the Company is required to accrete the value of
the warrants and mark-to-market the estimated fair value of the put option
described above. Any increases to such value would be charged to earnings as
additional interest expense. To the extent of any charges to earnings, any
subsequent decreases to the value of the warrants would be added to earnings as
additional interest income. Furthermore, any such additional interest expense
would not be deductible in the Company's federal or state income tax returns
and, therefore, would increase the effective income tax rate of the Company. For
purposes of these calculations, the fair value of the warrants will be estimated
using a Black-Scholes option pricing model. During the quarter ended September
30, 1998, the Company recorded thirty-five thousand dollars of interest income
representing the decrease in the estimated fair value of the warrants.
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During the nine months ended September 30, 1998, the Company did not record
additional interest expense as the estimated fair value of the warrants did not
increase.
In connection with this debt refinancing, the Company recorded an extraordinary
loss of $194,993 related to the write off of deferred financing costs, net of an
income tax benefit of $122,000. Also, the Company incurred additional financing
costs which have been deferred and are being amortized over the terms of the
related debt.
5. INCOME TAXES:
As of December 31, 1997, the Company had recorded a valuation allowance of
$462,500 against its net deferred tax assets in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." However,
after considering the Company's recent historical results and future projections
of taxable income, the Company believes that it is more likely than not that the
deferred tax assets will be realized prior to expiration of such assets. As a
result, the Company has reversed this allowance as of March 31, 1998, by
recording a benefit for deferred income taxes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
In 1996, the Company implemented a new corporate strategy that resulted
in the acquisition of five food businesses. Each of these businesses represents
a local or regional branded processed meat company. In addition to significantly
increasing the Company's size, the newly acquired businesses have created a
broader platform for future growth.
In order to acquire and operate its food businesses, the Company formed
four subsidiaries during 1996: Prefco Corp., Carlton Foods Corp., Richards Cajun
Foods Corp., and Grogan's Farm, Inc. On March 20, 1998, the Company formed a
fifth subsidiary to operate the business of the J.C. Potter Sausage Company
("Potters").
The Company continues to operate as a distributor of non-alcoholic
beverages in the Baltimore and Washington D.C. metropolitan areas. This business
represents the Company's Beverage Division, while the five subsidiaries
collectively represent the Company's Food Division.
ACQUISITION
On March 20, 1998, the Company acquired substantially all of the assets
of Potters, a branded food processing company based in Durant, Oklahoma, in
consideration for approximately $13.0 million cash plus related transaction
costs. In connection with this acquisition, the Company borrowed approximately
$6.5 million in senior subordinated debt (the "Senior Subordinated Note") from
Banc One Capital Corporation ("BancOne"). The Senior Subordinated Note included
detachable common stock put warrants. The Company also refinanced its senior
revolver and term debt through Fleet Capital. The new senior debt facility (the
"Fleet Facility") provided a term loan of $11 million, which was approximately
$6.0 million greater than the balance previously outstanding under the Company's
former senior debt facility with LaSalle National Bank (the "LaSalle Facility").
RESULTS OF OPERATIONS
All of the acquisitions were recorded utilizing the purchase method of
accounting. Therefore, results of the acquired businesses prior to the effective
date of such acquisitions are not included in the Company's results of
operations.
During 1997 and 1998, the Company's Carlton subsidiary and the
Company's Grogan's subsidiary both sold product to the Company's Prefco
subsidiary. During 1998, the Company's Potter subsidiary sold product to both
the Company's Carlton and Prefco subsidiaries and purchased product from the
Company's Grogan's subsidiary. The Company's financial statements do not reflect
this activity, as it is eliminated on a consolidated basis.
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1997
Net Sales. Net sales increased by approximately $8.3 million or 18.7%
from approximately $44.2 million for the quarter ended September 30, 1997 to
approximately $52.5 million for the quarter ended September 30, 1998. Net sales
of the Company's Food Division increased by approximately 24.9%, while net sales
of the Company's Beverage Division decreased by approximately 14.6%. The
increase in net sales of the Food Division was primarily attributable to the
acquisition of Potters, which the Company did not own during the third quarter
of 1997.
14
Gross Profit. Gross profit increased by approximately $2.8 million or
54.2% from approximately $5.2 million for the quarter ended September 30, 1997
to approximately $8.0 million for the quarter ended September 30, 1998. This
increase primarily reflects the factor discussed above in Net Sales. As a
percentage of net sales, gross profit increased from 11.8% to 15.3%, reflecting
a greater proportion of the sales being generated by the Food Division in 1998,
whose product lines include branded products, and the availability of certain of
the Food Division's raw materials at prices below those paid in the same period
of 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $2.3 million or 49.2% from
approximately $4.8 million for the quarter ended September 30, 1997 to
approximately $7.1 million for the quarter ended September 30, 1998. This
increase is primarily attributable to the factor discussed above in Net Sales.
As a percentage of net sales, selling, general and administrative expenses
increased from 10.8% to 13.5%. This increase reflected the addition of new
branded products, which generally involve higher selling, general and
administrative costs per sales dollar. It also reflected significant sales and
marketing expenses incurred in connection with new product development and the
launch of new branded products in the third quarter of 1998.
Income from Operations. Income from operations increased approximately
$1.4 million from approximately $0.5 million for the quarter ended September 30,
1997 to approximately $1.9 million for the quarter ended September 30, 1998.
This increase is attributable to the factors discussed above in Net Sales, Gross
Profit and Selling, General and Administrative Expenses.
Interest Expense. Interest expense increased approximately $0.3 million
from approximately $0.4 million for the quarter ended September 30, 1997 to
approximately $0.7 million for the quarter ended September 30, 1998. This
increase was primarily attributable to debt that the Company incurred (and the
related amortization of deferred financing costs, and note discounts) in
connection with the acquisition of Potters and the Fleet Facility. On the
occurrence of a Put Trigger Event (defined below), if the average trading
volume of the Company's stock for four consecutive weeks is less than 15% of
the number of shares issuable to the holder of the put warrants, such holders
would have a thirty day right to require the Company to redeem the warrants for
a cash amount equal to the greater of a cash flow formula (defined in the
Warrant Agreement) or the fair market value of the underlying shares based upon
an appraisal, in each case, net of an exercise price of $3.38 per share. For
these purposes, a "Put Trigger Event" would occur upon the earlier of certain
events, including the fifth anniversary of the warrants, a sale of all or
substantially all of the assets of the Company, or a business combination in
which the Company is not the surviving corporation.
In accordance with EITF 96-13, the Company is required to accrete the value of
the warrants and mark-to-market the estimated fair value of the put option
described above. Any increases to such value would be charged to earnings as
additional interest expense. To the extent of any charges to earnings, any
subsequent decreases to the value of the warrants would be added to earnings as
additional interest income. Furthermore, any such additional interest expense
would not be deductible in the Company's federal or state income tax returns
and, therefore, would increase the effective income tax rate of the Company. For
purposes of these calculations, the fair value of the warrants will be estimated
using a Black-Scholes option pricing model. During the quarter ended September
30, 1998, the Company recorded thirty-five thousand dollars of interest income
representing the decrease in the estimated fair value of the warrants.
Tax Provision. The income tax provision increased from fifteen thousand
for the quarter ended September 30, 1997 to approximately $0.1 million for the
quarter ended September 30, 1998 primarily due to increases in book income and
non-deductible expenses such as goodwill. Additionally, the Company's federal
income tax provision in the quarter ended September 30, 1997 was entirely offset
by the reversal of a valuation allowance.
15
Net Income. Net income increased by approximately $0.1 million from
approximately $0.1 million for the quarter ended September 30,1997 to
approximately $0.2 million for the quarter ended September 30, 1998. This
increase is attributable to factors discussed above in Net Sales, Gross Profit,
Selling, General and Administrative Expenses, Interest Expense and Tax
Provision.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Net Sales. Net sales increased by approximately $17.2 million or 13.4%
from approximately $128.2 million for the nine months ended September 30, 1997
to approximately $145.5 million for the nine months ended September 30, 1998.
Sales of the Company's Food Division increased by approximately 16.5%, while
sales of the Company's Beverage Division decreased by approximately 5.9%. The
increase in food sales was primarily due to the acquisition of Potters, which
the Company acquired on March 20, 1998. The decrease in the Beverage Divisions
net sales reflected increasing price competition and an overall decline in the
product category demand.
Gross Profit. Gross profit increased by approximately $6.2 million or
41.1% from approximately $15.1 million for the nine months ended September 30,
1997 to approximately $21.5 million for the nine months ended September 30,
1998. This increase reflects the factors discussed above in Net Sales and the
availability of certain of the Company's raw materials at prices below those
paid in the first nine months of 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $5.1 million or 37.8% from
approximately $13.5 million for the nine months ended September 30, 1997 to
approximately $18.6 million for the nine months ended September 30, 1998. This
increase is attributable primarily to the factors discussed above in Net Sales.
As a percentage of net sales, selling, general and administrative expenses
increased from 10.5% to 12.8%. This increase was primarily attributable to an
increasing proportion of branded product sales, which generally require higher
selling, general and administrative expenses per dollar of sales.
Income from Operations. Income from operations increased approximately
$1.4 million from approximately $1.6 million for the nine months ended September
30, 1997 to approximately $3.0 million for the nine months ended September 30,
1998. This increase is attributable to factors discussed above in Net Sales,
Gross Profit and Selling, General and Administrative Expenses.
Interest Expense. Interest expense increased approximately $0.6 million
from approximately $1.3 million for the nine months ended September 30, 1997 to
approximately $1.9 million for the nine months ended September 30, 1998. This
increase was primarily attributable to debt that the Company incurred (and the
related amortization of deferred financing costs and note discounts in
connection with the acquisition of Potters and the Fleet Facility. On the
occurrence of a Put Trigger Event (defined below), if the average trading volume
of the Company's stock for four consecutive weeks is less than 15% of the number
of shares issuable to the holder of the put warrants, such holders would have a
thirty day right to require the Company to redeem the warrants for a cash amount
equal to the greater of a cash flow formula (defined in the Warrant Agreement)
or the fair market value of the underlying shares based upon an appraisal, in
each case, net of an exercise price of $3.38 per share. For these purposes, a
"Put Trigger Event" would occur upon the earlier of certain events, including
the fifth anniversary of the warrants, a sale of all or substantially all of the
assets of the Company, or a business combination in which the Company is not the
surviving corporation.
In accordance with EITF 96-13, the Company is required to accrete the
value of the warrants and mark-to-market the estimated fair value of the put
option described above. Any increases to such value
16
would be charged to earnings as additional interest expense. To the extent of
any charges to earnings, any subsequent decreases to the value of the warrants
would be added to earnings as additional interest income. Furthermore, any such
additional interest expense would not be deductible in the Company's federal or
state income tax returns and, therefore, would increase the effective income tax
rate of the Company. For purposes of these calculations, the fair value of the
warrants will be estimated using a Black-Scholes option pricing model. During
the nine month period ended September 30, 1998, the Company recorded no
additional interest expense resulting from the changes in the estimated fair
value of the warrants.
Other Income. Other income was approximately $0.2 million for the nine
months ended September 30, 1997 and September 30, 1998.
Extraordinary Item. During the nine months ended September 30, 1998 the
Company recorded a one-time extraordinary expense of $0.3 million resulting from
the early extinquishment of debt and the related unamortized cost of acquiring
the LaSalle Facility which was refinanced through the Fleet Facility. This
extraordinary expense was recorded net of the related tax benefit of $0.1
million.
Tax Provision. The Income tax provision decreased from $15,000 for the
nine months ended September 30, 1997 to approximately $9,500 for the nine months
ended September 30, 1998. Based on the Company's historical results, and the
weight of all other available evidence, management believes it is more likely
than not that the deferred tax asset included in it's September 30, 1998
financial statements will be fully realized. Accordingly, management concluded
that the valuation allowance on its deferred tax asset was no longer necessary.
The reversal of the valuation allowance was recorded as a benefit from income
taxes during the three months ended March 31, 1998.
Net Income. Net income increased approximately $0.4 million from
approximately $0.6 million for the nine months ended September 30, 1997 to
approximately $1.0 million for the nine months ended September 30, 1998. This
increase reflects the factors discussed above in Income from Operations,
Interest Expense, Other Income and Tax Benefit.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the nine months ended
September 30, 1998 was approximately $3.5 million. This amount was principally
affected by net income, the add-back of depreciation, amortization and non-cash
interest; increases in inventory and accrued expenses, and decreases in accounts
receivable, and accounts payable. Cash used in investing activities for the nine
months ended September 30, 1998 was approximately $12.5 million and reflected
the acquisition of equipment and the payment of cash in connection with business
combinations. Cash provided by financing activities was approximately $10.2
million and was principally affected by the refinancing of the LaSalle Facility
with the Fleet Facility, the borrowings under the Senior Subordinated Note and
the related common stock put warrants, payments on the Company's term debt and
line of credit under the Fleet Facility and an increase in the bank overdraft
balance. Net cash increase during the period was approximately $1.2 million.
As of September 30, 1998, the Company had outstanding under the Fleet
Facility approximately $10.5 million in term debt and approximately $4.0 million
in line-of-credit borrowings. The Company owed $6.5 million to Bank One under
the Senior Subordinated Note, and approximately $2.7 million of subordinated
debt to former owners of Prefco, Richard's, Grogan's and Partin's. The Senior
Subordinated Note bears interest at 10% per annum. The subordinated debt owed to
former owners bears interest at an average rate of approximately 7.7% per annum.
The term debt and line of credit agreement under the Fleet
17
Facility bear annual interest at either the bank's prime rate plus 1% or
adjusted LIBOR plus 2.5% at the Company's option. Currently, the interest rate
under the Fleet Facility is based on the bank's prime rate, which was 8.25% at
September 30, 1998.
The Company has entered a put option agreement with the holder of
certain warrants described above under "Results of Operations - Interest
Expense." If the holder of the warrants exercises the put option, the Company's
ability to satisfy such obligation will depend on its ability to raise
additional capital. The Company's ability to secure additional capital at such
time will depend upon the Company's overall operating performance, which will be
subject to general business, financial, competitive and other factors affecting
the Company and the processed meat distribution industry or the beverage
distribution industry, certain of which factors are beyond the control of the
Company. No assurance can be given that the Company will be able to raise the
necessary capital on terms acceptable to the Company, if at all, to satisfy the
put obligation in a timely manner. If the Company is unable to satisfy such
obligation, the Company's business, financial condition and operations will be
materially and adversely effected.
As of September 30, 1998, the Company believes that cash generated from
operations and bank borrowings will be sufficient to fund its debt service,
working capital requirements and capital expenditures as currently contemplated
for the remainder of 1998 and 1999. However, the Company's ability to fund its
working capital requirements and capital expenditures will depend in large part
on the Company's ability to continue to comply with covenants in the Fleet
Facility. The Company's ability to continue to comply with the covenants in the
Fleet Facility will depend on a number of factors, certain of which are beyond
the Company's control, including but not limited to, successful integration of
acquired businesses and implementation of its business strategy, prevailing
economic conditions, uncertainty as to evolving consumer preferences,
sensitivity to such factors as weather and raw material costs, the impact of
competition and the effect of each of these factors on its future operating
performance. No assurance can be given that the Company will remain in
compliance with such covenants throughout the term of the Fleet Facility.
The Company's balance sheet as of September 30, 1998 reflected a net
deferred tax asset of approximately $0.6 million. A valuation allowance that
existed as of December 31, 1997 was reversed because, based on the weight of all
available evidence, management believes it is more likely than not that the
remaining deferred tax asset will be fully realized.
In the first quarter of 1998, the Company acquired substantially all of
the assets of Potters, a branded food processing company based in Durant,
Oklahoma in consideration for approximately $13.0 million cash plus related
transaction costs. In connection with this acquisition, the Company borrowed
approximately $6.5 million in Senior Subordinated debt from Banc One. This
subordinated debt included detachable common stock put warrants. The Company
also refinanced its senior revolver and term debt through Fleet Capital. The
Fleet Facility provided a line of credit balance as of March 31, 1998, of
approximately $7 million, which was $0.4 million greater than the balance
previously outstanding under the LaSalle Facility. The Fleet Facility provided a
term loan of $11 million, which was approximately $6.0 million greater than the
balance previously outstanding under the LaSalle Facility.
The Company, from time to time, reviews the possible acquisition of
other products or businesses. The Company's ability to expand successfully
through acquisition depends on many factors, including the successful
identification and acquisition of products or businesses and the Company's
ability to integrate and operate the acquired products or businesses
successfully. There can be no assurance that the Company will be successful in
acquiring or integrating any such products or businesses.
18
YEAR 2000
The Year 2000 issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. These
two-digit computer systems will be unable to interpret dates beyond the year
1999, which could cause a system failure or other computer errors, leading to
disruptions in operations. The Company has focused on three major areas in
conducting an assessment of its Year 2000 readiness: (1) information technology,
(2) embedded technology, and (3) third party relationships.
Information Technology. The Company began its assessment of its Year
2000 readiness by conducting a review of the computer hardware and software
applications which comprise the Company's information technology systems. This
review was completed by the end of the third quarter of 1998. As a result of
this review, the Company believes that, with the exception of its Potters
subsidiary, the information technology being utilized by each of its six
operating subsidiaries is Year 2000 compliant, and the Company has received
written confirmation of Year 2000 compliance from its hardware and software
vendors. The Company has determined that its Potters subsidiary requires the
installation of a new data processing system, after which Potters will also be
Year 2000 compliant due to the system's recent implementation. The Company
expects that this installation will be completed in the first quarter of 1999.
Through the end of the third quarter, the historical costs paid to third parties
in connection with the Company's review of its information technology were
approximately fifty thousand dollars, and future estimated expenses are
$100,000, consisting of the costs associated with the new Potters data
processing system.
Embedded Technology. The next phase of the Company's assessment began
recently and involves an audit of the non-information technology systems and
embedded technology at its facilities. The Company expects to complete this
audit in the first quarter of 1999 and does not anticipate that the costs paid
to third parties in connection with its Year 2000 efforts in this area will be
material.
Third Party Relationships. The Company relies on third party suppliers
and vendors for raw materials and other key supplies and services. The Company
is also dependent upon its customers for sales and cash flow. Interruption of
supplier or vendor operations or customer sales due to a failure of those third
parties to be Year 2000 compliant could adversely affect the Company's
operations. The Company, however, is not dependent on any particular supplier,
vendor or customer (with the exception of one customer which comprises a
significant portion of the sales of the Food Division). The Company does not
currently have any formal information concerning the Year 2000 readiness of its
suppliers and customers, but will inquire of all suppliers and customers with
whom the Company has an electronic data interface (EDI). The Company intends to
query its largest customer to ensure that it is Year 2000 compliant. While the
Company believes that the impact of isolated occurrences resulting from the
failure of third parties to be Year 2000 compliant would not be material, a
wide-spread Year 2000 interruption throughout the food or beverage industry or a
Year 2000 problem with respect to its largest customer would have a material
adverse effect on the Company's results of operations and financial position.
19
Contingency Plan. Although the Company does not currently have a
contingency plan for Year 2000 issues, it does intend to begin developing one in
the second quarter of 1999 to prepare the Company for Year 2000 interruptions
such as delays in its accounting systems or customer sales and the inability of
its lenders or other sources of capital and liquidity to make funds available
when required.
SEASONALITY
Consumer demand for beverage products distributed by the Company tends
to be greater during warmer months although variances are possible as was the
case in May and June of 1998. Accordingly, the Company's beverage sales and
profits are generally highest in the second and third calendar quarters.
Management believes that this effect will be mitigated by the results of its
Food Division which are less dependent on seasonal factors.
FORWARD LOOKING STATEMENTS
The Company wants to provide stockholders and investors with more
meaningful and useful information. Therefore, this Quarterly Report on Form 10-Q
contains forward looking information and describes the Company's belief
concerning future business conditions and the outlook for the Company based on
currently available information. Whenever possible, the Company has identified
these "forward looking" statements by words such as "believes," "estimated,"
"will be," "tends to be" and similar expressions. These forward looking
statements are subject to risks and uncertainties which would cause the
Company's actual results or performance to differ materially from those
expressed in these statements. These risks and uncertainties include the
following: risks associated with acquisitions, including integration of acquired
businesses; new product development and other aspects of the Company's business
strategy; uncertainty as to evolving consumer preferences; seasonality of demand
for certain products; customer and supplier concentration; the impact of
competition; the impact of changes in the valuation of the put warrants on the
Company's net income and effective tax rate; the Company's ability to raise
additional capital; sensitivity to such factors as weather and raw material
costs; and the factors discussed above under the caption "Year 2000." Readers
are encouraged to review the Company's Annual Report on Form 10-K and its
Current Report on Form 8-K dated June 4, 1997 filed with the Securities and
Exchange Commission for a more complete description of these factors. The
Company assumes no obligation to update the information contained in this
Quarterly Report on Form 10-Q.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: The following are filed as Exhibits to this Quarterly Report
on Form 10-Q:
Exhibit
Number Description
3(i) Certificate of Incorporation of the Company, including all
amendments thereto*
3(ii) By-Laws of the Company (1)
10 Employment Agreement dated August 10, 1998 between the Company
and Steven Englander*
11.1 Statement Regarding Computation of Earnings Per Share for the
three months ended September 30, 1998 *
11.2 Statement regarding Computation of Earnings Per Share for the
nine months ended September 30, 1998*
27 Financial Data Schedule *
------------------
* Filed herewith.
(1) Filed as an exhibit to the Company's Registration Statement No.
33-69438 or the amendments thereto and incorporated herein by
reference.
(b) Reports on Form 8-K:
None.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATLANTIC PREMIUM BRANDS, LTD.
Dated as of November 13, 1998 By: /s/ THOMAS M. DALTON
-----------------------------
Thomas M. Dalton, Chief
Financial Officer and
Senior Vice President (On
behalf of Registrant and as
Chief Accounting Officer)
22
INDEX TO EXHIBITS
Exhibit Description
Number
- ----------- ----------------------------------------------------------------
3(i) Certificate of Incorporation of the Company, including all
amendments thereto*
3(ii) By-Laws of the Company (1)
10 Employment Agreement dated August 10, 1998 between the Company
and Steven Englander*
11.1 Statement Regarding Computation of Earnings Per Share for the
three months ended September 30, 1998 *
11.2 Statement Regarding Computation of Earnings Per Share for the
nine months ended September 30, 1998*
27 Financial Data Schedule *
- ------------------
* Filed herewith.
(1) Filed as an exhibit to the Company's Registration Statement No. 33-69438 or
the amendments thereto and incorporated herein by reference.