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 June 30,
2000
{ } Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 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
NORTHBROOK, ILLINOIS 60062
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 412-6200
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 August 7, 2000, there were outstanding 6,696,858 shares of Common Stock,
par value $.01 per share, of the Registrant.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and par value)
DECEMBER 31, JUNE 30,
1999 2000
--------------- ----------
ASSETS (Unaudited)
------
Current assets:
Cash $ 1,841 $ 1,229
Accounts receivable, net of allowance for doubtful accounts
of $348 and $196, respectively 9,623 10,677
Inventory 5,610 6,755
Prepaid expenses and other current assets 475 481
Deferred income taxes 587 587
Net assets of discontinued operations 78 67
------- --------
Total current assets 18,214 19,796
Property, plant and equipment, net 12,549 12,417
Intangible assets, net 13,153 12,971
Other assets, net 437 378
------- --------
Total assets $44,353 $45,562
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 2,963 $ 3,843
Notes payable under line of credit 751 6,015
Current maturities of long-term debt 1,964 3,594
Accounts payable 10,572 7,581
Accrued expenses 1,024 162
------- --------
Total current liabilities 17,274 21,195
Long-term debt, net of current maturities 15,986 13,558
Deferred income
taxes 5 5
Put warrants 1,435 1,435
------- --------
Total liabilities 34,700 36,193
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.01 par value; 30,000,000 shares authorized;
6,845,069 and 6,751,358 shares issued and outstanding, respectively 68 68
Additional paid-in capital 10,898 10,662
Accumulated deficit (1,313) (1,361)
------- --------
Total stockholders' equity 9,653 9,369
------- --------
Total liabilities and stockholders' equity $44,353 $45,562
======= ======
The accompanying notes are an integral part of these
consolidated financial statements.
3
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
THREE MONTHS ENDED
JUNE 30,
-----------------------
1999 2000
----------- ---------
Net sales $ 47,393 $ 54,341
Cost of goods sold 41,396 48,486
----------- ---------
Gross profit 5,997 5,855
----------- ---------
Selling, general and administrative expenses:
Salaries and benefits 2,177 2,572
Other operating expenses 2,378 2,333
Depreciation and amortization 513 590
----------- ---------
Total selling, general and
administrative expenses 5,068 5,495
----------- ---------
Income from operations 929 360
Interest expense 634 705
Other income, net 95 107
----------- ---------
Income (loss) before income taxes 390 (238)
Income tax expense (benefit) 94 (7)
----------- ---------
Net income (loss) $ 296 $ (231)
=========== =========
Income (loss) per common share
Basic and diluted: $ 0.04 $ (0.03)
=========== =========
Weighted average common shares:
Basic 7,100,175 6,751,358
=========== =========
Diluted 7,259,650 6,751,358
=========== =========
The accompanying notes are an integral part of these
consolidated financial statements.
4
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share data)
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 2000
-------- --------
Net sales $ 93,300 $105,750
Cost of goods sold 80,727 93,414
-------- --------
Gross profit 12,573 12,336
-------- --------
Selling, general and administrative expenses:
Salaries and benefits 4,400 5,288
Other operating expenses 4,831 4,717
Depreciation and amortization 1,001 1,127
-------- --------
Total selling, general and 10,232 11,132
administrative expenses -------- --------
Income from operations 2,341 1,204
Interest expense 1,218 1,331
Other income, net 172 219
-------- --------
Income before income taxes 1,295 92
Income tax expense 465 140
-------- --------
Net income (loss) $ 830 $ (48)
======== ========
Income (loss) per common share:
Basic and diluted: $ 0.11 $ (0.01)
======== ========
Weighted average common shares:
Basic 7,256,379 6,781,777
========= =========
Diluted 7,435,513 6,781,777
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
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ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 2000
---------- ---------
Cash Flows from Operating Activities:
Net income (loss) $ 830 $ (48)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,001 1,127
Decrease (increase) in accounts receivable, net 2,174 (1,054)
Increase in inventory (1,416) (1,145)
Decrease (increase) in prepaid expenses and other current assets 1,412 (6)
(Decrease) increase in accounts payable 1,385 (2,991)
Decrease in accrued expenses and
other current liabilities (3,498) (746)
---------- ---------
Net cash provided by (used in) operating activities 1,988 (4,863)
---------- ---------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (1,021) (747)
Purchase of common stock (1,376) (235)
---------- ---------
Net cash used in investing activities (2,397) (982)
---------- ---------
Cash Flows from Financing Activities:
Increase (decrease) in bank overdraft (1,738) 880
Net borrowings under line of credit 2,360 5,264
Payments of term debt and notes payable (650) (922)
---------- ---------
Net cash provided by (used in) financing
activities (28) 5,222
---------- ---------
Net cash (used) provided in discontinued operations (97) 11
---------- ---------
Net decrease in cash (534) (612)
Cash, beginning of period 1,774 1,841
---------- ---------
Cash, end of period $ 1,240 $ 1,229
========== =========
These accompanying notes are an integral part of these
consolidated financial statements.
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ATLANTIC PREMIUM BRANDS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
The accompanying consolidated financial statements present the accounts of
Atlantic Premium Brands, Ltd. and subsidiaries (the "Company"). All significant
intercompany transactions have been eliminated in consolidation.
The Company is engaged in the manufacturing, marketing and distribution of
packaged meat and other food products in Texas, Louisiana, Kentucky, Oklahoma
and surrounding states. The operating results of the Company are impacted by
changes in food commodity markets.
The consolidated financial statements included herein 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 reclassifications have
been made in the 1999 financial statements to conform to the 2000 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 interim
periods are not necessarily indicative of the operating results expected for an
entire year. It is suggested that these consolidated financial statements be
read in conjunction with the Company's December 31, 1999 consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K and Form 10K/A dated March 26, 2000 and April 28, 2000, respectively.
Inventory
Inventory is stated at the lower of cost or market and is comprised of raw
materials, finished goods and packaging supplies. Cost is determined using the
first-in, first-out method (FIFO). Inventory consisted of the following as of:
DECEMBER 31, JUNE 30,
(in thousands) 1999 2000
--------------- ----------
Raw materials $ 423 $ 497
Finished goods 3,821 4,658
Packaging supplies 1,366 1,600
-------------- -----------
Total inventory $5,610 $6,755
============== ===========
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of applicable
depreciation. Depreciation is computed using the straight-line method at annual
rates of 3% to 20% for buildings and building improvements, and 10% to 20% for
equipment, furniture and vehicles. Leasehold improvements are amortized over the
lesser of the lease term or asset life. Additions and improvements that
substantially extend the useful life of a particular asset are capitalized.
Repair and maintenance costs are charged to expense. Upon sale, the
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cost and related accumulated depreciation are removed from the accounts.
Other Assets
Other assets consist of deferred acquisition costs, cash surrender value of life
insurance, and deferred financing costs. Deferred financing costs are being
amortized over 5 to 7 years, representing the term of the related debt, using
the effective interest method.
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.
Income Per Common Share
The weighted average shares used to calculate basic and diluted income per
common share for the three-month and six-month periods ended June 30, 1999 and
2000, are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 2000 1999 2000
---- ---- ---- ----
Weighted average shares outstanding for
basic income per common share 7,100,175 6,751,358 7,256,379 6,781,777
Dilutive effect of common stock options 159,475 234,845 179,134 218,165
------- ------- ------- -------
Weighted average shares outstanding for
diluted income per common share 7,259,650 6,986,203 7,435,513 6,999,942
========= ========= ========= =========
Options to purchase 1,316,763 and 1,194,659 shares of common stock at prices
ranging from $2.81 to $6.50 per share were outstanding during the second quarter
of 1999 and 2000, respectively, but were not included in the computation of
diluted income per common share because the options' exercise price was greater
than the average market price of the common shares during the quarter.
Warrants with a put option to purchase up to a maximum of 1,095,700 shares of
common stock, as of June 30, 1999 and 2000 at $3.38 per share were outstanding
during the second quarter of 1999 and 2000 but were not included in the
computation of diluted income per common share because the warrants' exercise
price was greater than the average market price of the common shares during the
quarter.
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Reclassifications
Certain prior year amounts have been reclassified from amounts previously
reported to conform with the 2000 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. DISCONTINUED OPERATIONS:
------------------------
During the fourth quarter of 1998, the Company decided to sell substantially all
the assets of its beverage division. The sale was recorded in three separate
transactions. Effective December 1, 1998, certain assets were sold for cash of
approximately $2.2 million. Effective January 11, 1999, additional assets were
sold for cash of approximately $900,000. Effective February 2, 1999 the Company
completed its disposition of the beverage division when it sold the remaining
assets for approximately $400,000 in cash and notes. The remaining net assets of
discontinued operations at June 30, 2000 are comprised of trade receivables and
rent deposits.
4. DEBT REFINANCING:
----------------
On March 20, 1998, the Company refinanced its senior revolver and term debt. The
debt consists of an $11 million term note, a $15 million line of credit and $6.5
million senior subordinated note with detachable warrants with a put option.
The 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 line of credit agreement, the Company is permitted to
borrow up to $15 million 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 an annual rate
equal to 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 March 31, 2005, bears
interest at 10% per annum. Principal is payable in quarterly installments
beginning June 30, 2003. The subordinated debt was issued with detachable
warrants with a put option to purchase 666,947 shares of nonvoting common stock
at $3.38 and a contingent 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.
5. SEGMENTS
--------
The Company's operations have been classified into two business segments: food
processing and food distribution. The food processing segment includes the
processing and sales of sausages and related food
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products to distributors and retailers in Louisiana, Texas, Kentucky, Oklahoma
and other surrounding states. The food distribution segment includes the
purchasing, marketing, and distribution of packaged meat products to retailers
and restaurants, located primarily in Texas.
Summarized financial information, by business segment, for the three months
ended are as follows:
(in thousands)
THREE MONTHS ENDED
------------------
JUNE 30, JUNE 30,
1999 2000
---- ----
Net sales to external customers:
Food Processing $11,841 $15,155
Food Distribution 35,552 39,186
------ ------
47,393 $15,155
====== =======
Interest expense:
Food Processing 47 38
Food Distribution 33 33
Corporate 554 634
--- ---
634 705
=== ===
Depreciation and amortization:
Food Processing 418 488
Food Distribution 63 70
Corporate 32 32
-- --
513 590
=== ===
Income (loss) before income taxes:
Food Processing 979 293
Food Distribution 462 707
Corporate (1,051) (1,238)
------- -------
$ 390 $(238)
======= ======
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Summarized financial information, by business segment, for the six months ended
are as follows:
(in thousands)
SIX MONTHS ENDED
----------------
JUNE 30, 1999 JUNE 30, 2000
------------- -------------
Net sales to external customers:
Food Processing $ 23,288 $ 29,655
Food Distribution 70,012 76,095
------ ------
93,300 105,750
====== =======
Interest expense:
Food Processing 82 76
Food Distribution 65 66
Corporate 1,071 1,189
----- -----
1,218 1,331
===== =====
Depreciation and amortization:
Food Processing 813 922
Food Distribution 126 138
Corporate 62 67
-- --
1,001 1,127
===== =====
Income (loss) before income taxes:
Food Processing 2,123 1,068
Food Distribution 1,180 1,366
Corporate (2,008) (2,342)
------- -------
$ 1,295 $ 92
======= =====
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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 preeminent local or regional branded processed meat company. In addition to
significantly increasing the Company's size, the newly acquired businesses
created a broader platform for future growth.
In order to acquire and operate its food businesses, the Company
formed four new subsidiaries during 1996: Prefco Corp., Carlton Foods Corp.,
Richard's Cajun Foods Corp., and Grogan's Farm, Inc. In 1998, the Company
formed a fifth new subsidiary to acquire the business of J.C. Potter Sausage
Company and affiliates.
In conjunction with the new corporate strategy, during 1998 the Company
also completed the sale of substantially all the assets of its beverage
division, which operated as a distributor of non-alcoholic beverages in the
Baltimore and Washington D.C. metropolitan areas. The disposition occurred in
three transactions on December 1, 1998, January 11, 1999 and February 2, 1999.
RESULTS OF OPERATIONS
All of the acquisitions in 1996 and 1998 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.
QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999
Net Sales. Net sales increased by $6.9 million or 14.7% from $47.4
million for the quarter ended June 30, 1999 to $54.3 million for the quarter
ended June 30, 2000. The increase in net sales was primarily due to increases in
both the volume and the average selling price of the Company's products. The
increase in the average selling price primarily reflected the increase in the
cost of certain of the Company's raw materials. Sales also increased as a result
of the continuing rollout of new branded product lines in new markets.
Gross Profit. Gross profit decreased by $0.1 million or 2.4% from $6.0
million for the quarter ended June 30, 1999 to $5.9 million for the quarter
ended June 30, 2000. Gross profit as a percentage of net sales decreased from
12.7% for the quarter ended June 30, 1999 to 10.8% for the quarter ended June
30, 2000. This decrease primarily reflects the increase in the prices of certain
of the Company's raw materials over those paid in the second quarter of 1999 for
both the Food Processing segment and the Food Distribution segment. Pork prices
have a significant impact on the Company's cost of goods sold and higher pork
prices in the second quarter of 2000 negatively impacted gross profit as
compared to 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.4 million from $5.1 million for the quarter
ended June 30, 1999 to $5.5 million for the quarter ended June 30, 2000.
Selling, general and administrative expenses as a percentage of net sales
decreased from 10.7% for the quarter ended June 30, 1999 to 10.1% for the
quarter ended June 30, 2000. The dollar increase reflects increased levels of
salaries and benefits, an increase in the size of the direct store delivery
fleet, and increases in the costs of distributing the Company's products,
primarily the cost of fuel.
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Income from Operations. Income from operations decreased $0.5 million
from $0.9 million for the quarter ended June 30, 1999 to $0.4 million for the
quarter ended June 30, 2000. This decrease is attributable to factors discussed
above.
Interest Expense. Interest expense increased $0.1 million from $0.6
million for the quarter ended June 30, 1999 to $0.7 million for the quarter
ended June 30, 2000. The increase was primarily due to an increase in the
Company's cost of variable-rate borrowings and the related outstanding balances.
Warrants with a put option were issued by the Company in conjunction
with the debt incurred at the time of the Potter acquisition. The Company is
required to accrete the value of the warrants and mark-to-market the estimated
fair value of the put option. Any increases to such value are charged to
earnings as additional interest expense. To the extent of any charges to
earnings, any subsequent decreases to the value of the warrants are 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 is estimated using a Black-Scholes option-pricing model. During the
quarters ended June 30, 1999 and 2000, the Company recorded no additional
interest expense, as the fair value of the warrants did not increase.
Income Tax Expense (Benefit). The effective tax rate differs from the
statutory rate primarily because of state income taxes and the non-deductibility
of goodwill amortization.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30,
1999
Net Sales. Net sales increased by approximately $12.5 million or 13.3%
from approximately $93.3 million for the six months ended June 30, 1999 to
approximately $105.8 million for the six months ended June 30, 2000. Sales of
the Company's Food Processing segment increased by approximately 27.3%,
primarily resulting from the acquisition of new customers, while sales of the
Company's Food Distribution segment increased by approximately 8.6% primarily as
a result of the increased average selling price of the Company's products due to
the increased cost of certain of the Company's raw materials.
Gross Profit. Gross profit decreased by approximately $0.3 million or
2.3% from approximately $12.6 million for the six months ended June 30, 1999 to
approximately $12.3 million for the six months ended June 30, 2000. Gross profit
as a percentage of net sales decreased from 13.5% for the six months ended June
30, 1999 to 11.7% for the six months ended June 30, 2000. These decreases
primarily reflect the availability of certain of the Company's raw materials at
prices significantly higher than those paid in the first six months of 1999 for
both the Food Processing segment and the Food Distribution segment. Pork prices
have a significant impact on the Company's cost of goods sold and higher pork
prices in the first half of 2000 negatively impacted gross profit as compared to
1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $0.9 million or 8.8% from
approximately $10.2 million for the six months ended June 30, 1999 to
approximately $11.1 million for the six months ended June 30, 2000. As a
percentage of net sales, selling, general and administrative expenses decreased
from 11.0% for the six months ended June 30, 1999 to 10.5% for the six months
ended June 30, 2000. The dollar increase reflects increased levels of salaries
and benefits, an increase in the size of the direct store delivery fleet, and
increases in the costs of distributing the Company's products, primarily the
cost of fuel.
Income from Operations. Income from operations decreased by
approximately $1.1 million from approximately $2.3 million for the six months
ended June 30, 1999 to approximately $1.2 million for the six months ended June
30, 2000. This decrease is attributable to the factors discussed above.
13
Interest Expense. Interest expense increased by approximately $0.1
million or 9.3% from approximately $1.2 million for the six months ended June
30, 1999 to approximately $1.3 million for the six months ended June 30, 2000.
The increase was primarily due to an increase in the Company's cost of
variable-rate borrowings and the related outstanding balances.
Warrants with a put option were issued by the Company in conjunction
with the debt incurred at the time of the Potter acquisition. The Company is
required to accrete the value of the warrants and mark-to-market the estimated
fair value of the put option. Any increases to such value are charged to
earnings as additional interest expense. To the extent of any charges to
earnings, any subsequent decreases to the value of the warrants are 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 is estimated using a Black-Scholes option-pricing model. During the six
months ended June 30, 1999 and 2000, the Company recorded no additional interest
expense, as the fair value of the warrants did not increase.
Income Tax Expense. The effective tax rate differs from the statutory
rate primarily because of state income taxes and the non-deductibility of
goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the six months ended June 30,
2000 was $4.8 million. The cash used in operating activities was primarily the
result of a decrease in accounts payable and accrued expenses and an increase in
accounts receivable and inventory, partially offset by depreciation and
amortization. Net cash provided by operating activities for the six months ended
June 30, 1999 was $2.0 million. This amount was principally the result of net
income, depreciation and amortization, an increase in accounts payable and a
decrease in accounts receivable and prepaid expenses. This was partially offset
by a decrease in accrued expenses and an increase in inventory.
Cash used in investing activities for the six months ended June 30,
1999 and 2000 were $2.4 million and $1.0 million, respectively, which was
related to capital expenditures and the repurchase of the Company's common
stock.
Cash provided by financing activities in the six months ended June 30,
2000 was $5.2 million, primarily related to borrowings under the Company's line
of credit and an increase in the Company's bank overdraft, partially offset by
payments under term debt and notes payable. Cash used in financing activities in
the six months ended June 30, 1999 was negligible, principally affected by
borrowings under the Company's line of credit, offset by a decrease in the
Company's bank overdraft and payments under term debt and notes payable.
As of June 30, 1999 and 2000, the Company had outstanding under the
Fleet Facility approximately $9.8 million and $8.1 million, respectively, in
term debt and approximately $3.9 million and $6.0 million, respectively, 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 Facility bear annual interest at
either the bank's prime rate plus 1% (9.00% and 10.75% at June 30, 1999 and
2000, respectively) or adjusted LIBOR plus 2.5%, at the Company's option.
Warrants issued in conjunction with the Senior Subordinated Note
provide that on the occurrence
14
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.
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, 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 June 30, 2000, 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 2000. 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, 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to certain market risks. These risks relate to
commodity price fluctuations, interest rate changes, fluctuations in the value
of the warrants with the put option, and credit risk.
The Company is a purchaser of pork and other meat products. The Company
buys pork and other meat products based upon market prices that are established
with the vendor as part of the purchase process. The operating results of the
Company are significantly impacted by pork prices. The Company does not use
commodity financial instruments to hedge pork and other meat product prices.
The Company's exposure to interest rate risk relates primarily to its
debt obligations and temporary cash investments. The Company does not use, and
has not in the past year used, any derivative
15
financial instruments relating to the risk associated with changes in interest
rates.
The Company is required to accrete the value of the warrants and
mark-to-market the estimated fair value of the put option. Any increases to such
value are charged to earnings as additional interest expense. To the extent of
any charges to earnings, any subsequent decreases to the value of the warrants
are 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 is estimated using a Black-Scholes option-pricing model. During the six
months ended June 30, 1999 and 2000, the Company recorded no additional interest
expense, as the estimated fair value of the warrants did not exceed the carrying
value of the warrants.
The Company is exposed to credit risk on certain assets, primarily
accounts receivable. The Company provides credit to customers in the ordinary
course of business and performs ongoing credit evaluations. The Company
currently believes its allowance for doubtful accounts is sufficient to cover
customer credit risks.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" establishes
accounting and reporting standards for hedging activities and derivatives. As
issued, SFAS 133 was effective for fiscal quarters beginning after June 15,
1999. In June 1999, SFAS 137 was issued effectively deferring the date of
required adoption of SFAS No. 133 to fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company will adopt SFAS No. 133 and SFAS No.
138, as required, in fiscal year 2001. The Company generally does not use
derivative financial instruments and other than the warrants with a put option
(Note 4), there were no such instruments outstanding as of June 30, 2000.
FORWARD LOOKING STATEMENTS
The Company wants to provide stockholders and investors with more
meaningful and useful information. Therefore, this 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," "will depend," "to continue
to," "intends" 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; customer and supplier
concentration; the impact of competition; the impact of change 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; and sensitivity to such factors
as weather and raw material costs. Readers are encouraged to review the
Company's Current Report on Form 8-K dated June 4, 1997 filed with the
Securities and Exchange Commission for a more complete description of some of
these factors. The Company assumes no obligation to update the information
contained in this Form 10-Q.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the heading "Quantitative and Qualitative Disclosures About Market
Risk" under Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
17
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.
On July 13, 2000, the Company filed a Current Report on Form 8-K which
disclosed that its Board of Directors had authorized the purchase of up to
$400,000 of the Company's common stock in the open market or in privately
negotiated transactions. As part of this stock repurchase program, on July 11,
2000, the Company purchased 130,236 shares from a former director, Rick Inatome,
for $2.35 per share.
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 (1)
3(ii) By-Laws of the Company (2)
27 Financial Data Schedule *
------------------
* Filed herewith.
(1) Filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 and
incorporated herein by reference.
(2) 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.
18
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 August 10, 2000 By: /s/ THOMAS M. DALTON
----------------------------
Thomas M. Dalton, Chief
Financial Officer and Senior
Vice President (On behalf of
Registrant and as Chief
Accounting Officer)
19
INDEX TO EXHIBITS
Exhibit Number Description
3(i) Certificate of Incorporation of the Company, including all
amendments thereto (1)
3(ii) By-Laws of the Company (2)
27 Financial Data Schedule *
- ------------------
* Filed herewith.
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement No. 33-69438
or the amendments thereto and incorporated herein by reference.