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, 1999
[ ] 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 November 8, 1999, there were outstanding 6,811,869 shares of Common Stock,
par value $.01 per share, of the Registrant.
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ATLANTIC PREMIUM BRANDS, LTD.
-----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands, except shares and par value)
(Unaudited)
December 31, September 30,
1998 1999
------------ -------------
ASSETS
Current assets:
Cash $ 1,774 $ 820
Accounts receivable, net of allowance for doubtful accounts
of $247 and $275, respectively 10,437 9,465
Inventory 4,457 5,454
Prepaid expenses and other current assets 235 395
Deferred income taxes 544 544
Net assets of discontinued operations 1,240 249
------- -------
Total current assets 18,687 16,927
Property, plant and equipment, net 12,288 12,807
Goodwill, net 13,517 13,243
Other assets, net 605 451
Deferred income taxes 568 568
------- -------
Total assets $45,665 $43,996
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Bank overdraft $ 4,073 $ 3,076
Notes payable under line of credit 1,579 4,697
Current maturities of long-term debt 1,378 1,766
Accounts payable 5,609 6,006
Income taxes payable 79 65
Accrued expenses 4,602 1,591
------- -------
Total current liabilities 17,320 17,201
Long-term debt, net of current maturities 17,079 15,816
Put warrants 1,435 1,435
------- -------
Total liabilities 35,834 34,452
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;
7,412,583 shares and 6,838,773 shares issued and
outstanding at December 31, 1998 and September 30, 1999,
respectively 74 68
Additional paid-in capital 12,260 10,889
Accumulated deficit (2,503) (1,413)
------- -------
Total stockholders' equity 9,831 9,544
------- -------
Total liabilities and stockholders' equity $45,665 $43,996
======= =======
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
September 30,
----------------------------
1998 1999
----------- ----------
Net sales $ 46,745 $ 48,990
Cost of goods sold 40,215 42,479
----------- ----------
Gross profit 6,530 6,511
----------- ----------
Selling, general and administrative expenses:
Salaries and benefits 2,367 2,118
Other operating expenses 2,640 2,824
Depreciation and amortization 406 544
----------- ----------
Total selling, general and administrative expenses 5,413 5,486
----------- ----------
Income from operations 1,117 1,025
Interest expense 638 648
Other income (expense), net (32) 109
----------- ----------
Income from continuing operations before income taxes 447 486
Income tax expense 192 226
----------- ----------
Income from continuing operations 255 260
Loss from discontinued operations 46 --
----------- ----------
Net income $ 209 $ 260
=========== ==========
Income per common share:
Basic:
Income from continuing operations $ 0.03 $ 0.04
Loss from discontinued operations (0.01) --
----------- ----------
Net income $ 0.02 $ 0.04
=========== ==========
Diluted:
Income from continuing operations $ 0.03 $ 0.04
Loss from discontinued operations (0.01) --
----------- ----------
Net income $ 0.02 $ 0.04
=========== ==========
Weighted average common shares:
Basic 7,432,109 6,838,773
=========== ==========
Diluted 7,607,239 6,963,012
=========== ==========
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 per share amounts)
Nine Months Ended
September 30,
--------------------------
1998 1999
---------- ----------
Net sales $ 129,416 $ 142,289
Cost of goods sold 112,567 123,206
---------- ----------
Gross profit 16,849 19,083
---------- ----------
Selling, general and administrative expenses:
Salaries and benefits 5,933 6,518
Other operating expenses 6,755 7,653
Depreciation and amortization 1,103 1,546
---------- ----------
Total selling, general and administrative expenses 13,791 15,717
---------- ----------
Income from operations 3,058 3,366
Interest expense 1,710 1,866
Other income, net 189 281
---------- ----------
Income from continuing operations before income taxes 1,537 1,781
Income tax expense 135 691
---------- ----------
Income from continuing operations 1,402 1,090
Loss from discontinued operations 173 --
---------- ----------
Income before extraordinary loss 1,229 1,090
Extraordinary loss on early extinguishment of debt 195 --
---------- ----------
Net income $ 1,034 $ 1,090
========== ==========
Income per common share:
Basic:
Income from continuing operations $ 0.19 $ 0.15
Loss from discontinued operations (0.02) --
Extraordinary loss (0.03) --
---------- ----------
Net income $ 0.14 $ 0.15
========== ==========
Diluted:
Income from continuing operations $ 0.18 $ 0.15
Loss from discontinued operations (0.02) --
Extraordinary loss (0.03) --
---------- ----------
Net income $ 0.13 $ 0.15
========== ==========
Weighted average common shares:
Basic 7,402,977 7,117,177
========== ==========
Diluted 7,627,637 7,279,042
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
ATLANTIC PREMIUM BRANDS, LTD.
-----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
--------------------------
1998 1999
---------- ---------
Cash Flows from Operating Activities:
Net income $ 1,034 $ 1,090
Adjustments to reconcile net income to net cash provided
by (used in) operating activities, net of assets and liabilities
of acquired businesses:
Loss from discontinued operations 173 --
Extraordinary loss 195 --
Depreciation and amortization 1,445 1,742
Deferred income taxes 9 --
Decrease in accounts receivable, net 2,108 972
Increase in inventory (232) (997)
Increase in prepaid expenses and other current assets (289) (160)
(Decrease) increase in accounts payable (1,640) 397
Increase (decrease) in accrued expenses and other
current liabilities 1,346 (3,025)
-------- -------
Net cash provided by operating activities 4,149 19
-------- -------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (592) (1,764)
Cash paid for businesses acquired including deferred acquisition
fees, net of cash acquired (11,675) --
Purchase of common stock -- (1,376)
Proceeds from disposals of equipment 122 122
-------- -------
Net cash used in investing activities (12,145) (3,018)
-------- -------
Cash Flows from Financing Activities:
Increase (decrease) in bank overdraft 1,690 (997)
Borrowings (payments) under line of credit (2,804) 3,118
Payments of term debt and notes payable (5,565) (1,056)
Payments of financing costs (605) (11)
Borrowings under senior subordinated note 5,065 --
Issuance of put warrants 1,435 --
Issuance of common stock 13 --
Borrowings under term loan 11,000 --
-------- -------
Net cash flows provided by financing activities 10,229 1,054
-------- -------
Net cash (used in) provided by discontinued operations (964) 991
-------- -------
Net increase (decrease) in cash 1,269 (954)
Cash, beginning of period 1,184 1,774
-------- -------
Cash, end of period $ 2,453 $ 820
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
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ATLANTIC PREMIUM BRANDS, LTD.
-----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 1998 AND 1999
---------------------------
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's
financial statements have been restated to classify the results of operations
and net assets of the beverage division as discontinued operations. Accordingly,
all amounts included in the Notes to Consolidated Financial Statements pertain
to continuing operations except where otherwise noted. See further discussion in
Note 3 - "Discontinued Operations".
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 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, 1998 consolidated financial statements and notes thereto included
in the Company's annual report on Form 10-K dated March 26, 1999.
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, September 30,
(in thousands) 1998 1999
------------ -------------
Raw materials $ 140 $ 437
Finished goods 2,998 3,672
Packaging supplies 1,319 1,345
------------ -------------
Total inventory $ 4,457 $ 5,454
============ =============
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-2-
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 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 and nine month periods ended September 30, 1998 and
1999, are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1999 1998 1999
---- ---- ---- ----
Weighted average shares outstanding for basic 7,432,109 6,838,773 7,402,977 7,117,177
income per common share
Dilutive effect of common stock options 175,130 124,239 224,660 161,865
---------- ---------- ---------- ----------
Weighted average shares outstanding for dilutive
income per common share
7,607,239 6,963,012 7,627,637 7,279,042
========== ========== ========== ==========
8
-3-
Options to purchase 542,841 and 1,247,893 shares of common stock at prices
ranging from $2.50 to $4.00 per share were outstanding during the third quarter
of 1998 and 1999, 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 September 30, 1998 and 1999 at $3.38 per share were
outstanding during the third quarter of 1998 and 1999 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.
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 beverage division has been accounted
for as a discontinued operation and prior period financial statements have been
restated. Interest expense has been allocated to the beverage division based on
its net assets as a percentage of total consolidated net assets.
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. The Company completed its disposition of the beverage division on
February 2, 1999 when it sold the remaining assets for approximately $400,000 in
cash and notes. The estimated loss of $293,040, net of income taxes, related to
the asset disposals in January and February 1999, was accrued for in the fourth
quarter of 1998, and, therefore, is not reflected in the accompanying
consolidated statements of income.
In connection with these transactions, the Company recorded expenses in the
fourth quarter of 1998 related to severance; legal, investment banking and
accounting fees; and lease obligations which have no future benefit. These
expenses totalled $1.3 million, of which $0.2 million remains in accrued
expenses in the accompanying consolidated balance sheet at September 30, 1999.
4. ACQUISITION:
------------
As of March 20, 1998, the Company acquired substantially all of the assets and
certain liabilities of J.C. Potter Sausage Company (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 approximately $10.5
million 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.
9
-4-
5. 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 warrants with a put
option.
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 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.
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.
10
-5-
6. 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 products to distributors and
retailers in Louisiana, Texas, Kentucky 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 continuing operations
in the three months ended are as follows:
(in thousands) Three Months
------------
September 30, 1998 September 30, 1999
------------------ ------------------
Net sales to external customers:
Food Processing $ 12,504 $ 12,335
Food Distribution 34,241 36,655
-------- --------
46,745 48,990
-------- --------
Interest expense:
Food Processing 35 41
Food Distribution 32 33
Corporate 571 574
-------- --------
638 648
======== ========
Depreciation and amortization:
Food Processing
Food Distribution 345 476
61 68
-------- --------
406 544
======== ========
Income from continuing
operations before income taxes:
Food Processing 1,326 1,114
Food Distribution 196 579
Corporate (1,075) (1,207)
-------- --------
$ 447 $ 486
======== ========
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-6-
Summarized financial information, by business segment, for continuing operations
in the nine months ended are as follows:
(in thousands) Nine Months
-----------
September 30, 1998 September 30, 1999
------------------ ------------------
Net sales to external customers:
Food Processing $ 29,102 $ 35,623
Food Distribution 100,314 106,666
-------- --------
129,416 142,289
======== ========
Interest expense:
Food Processing 105 123
Food Distribution 108 98
Corporate 1,496 1,645
-------- --------
1,710 1,866
======== ========
Depreciation and amortization:
Food Processing 916 1,351
Food Distribution 187 195
-------- --------
1,103 1,546
======== ========
Income from continuing operations before
income taxes:
Food Processing 3,500 3,237
Food Distribution 1,059 1,759
Corporate (3,022) (3,215)
-------- --------
$ 1,537 $ 1,781
======== ========
7. PURCHASE OF COMMON STOCK
------------------------
On May 13, 1999, the Company completed the purchase of 573,810 shares of the
Company's Common Stock at a purchase price of $2.40 per share, for an aggregate
purchase price of $1,377,144. The Company purchased these shares from Bobby L.
and Betty Ruth Grogan, who received the shares in connection with the Company's
October 1996 acquisition of Grogan's Sausage, Inc. and Grogan's Farms, Inc.
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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., Richards
Cajun Foods Corp., and Grogan's Farm, Inc. In March of 1998, the Company formed
a fifth new subsidiary to acquire the business of J.C. Potter Sausage Company
and affiliates (Potter).
The Company 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 stages on December 1, 1998, January 11, 1999 and February 2, 1999. The
results of operations of the beverage division have been classified as a
discontinued operation.
RESULTS OF OPERATIONS
The Company's Carlton subsidiary and the Company's Grogan's subsidiary both
sell product to the Company's Prefco subsidiary. The Company's Potter subsidiary
sells product to both the Company's Carlton and Prefco subsidiaries and
purchases 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, 1999 COMPARED TO QUARTER ENDED
SEPTEMBER 30, 1998
Net Sales. Net sales increased by approximately $2.3 million or 4.8% from
approximately $46.7 million for the quarter ended September 30, 1998 to
approximately $49.0 million for the quarter ended September 30, 1999. Sales of
the Company's Food
13
Distribution segment increased by approximately 7.1% primarily as a result of
the strong growth being experienced by the segment's major customer while sales
of the Company's Food Processing segment decreased by approximately 1.4%.
Gross Profit. Gross profit was approximately $6.5 million for the quarter
ended September 30, 1998 and for the quarter ended September 30, 1999. Gross
profit as a percentage of net sales decreased from 14.0% for the quarter ended
September 30, 1998 to 13.3% for the quarter ended September 30, 1999. This
decrease primarily reflects the impact of the improvement in the sales of the
Company's Food Distribution segment, which earns a lower gross profit margin on
net sales than the Food Processing segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were approximately $5.4 million for both the quarter
ended September 30, 1998 and the quarter ended September 30, 1999. As a
percentage of net sales, selling, general and administrative expenses decreased
from 6.3% to 5.5% for the Food Distribution segment. This decrease was primarily
attributable to the ability of this segment to add revenue without a
corresponding increase in selling, general and administrative expenses. As a
percentage of net sales, selling, general and administrative expenses increased
from 20.5% to 21.8% for the Food Processing segment. This increase was primarily
attributable to the Company's ongoing program to expand its marketing territory.
The revenue generated in certain new markets is currently insufficient to cover
the start-up costs associated with building market share.
Income from Operations. Income from operations decreased by approximately
$0.1 million or 17.0% from approximately $1.1 million for the quarter ended
September 30, 1998 to approximately $1.0 million for the quarter ended September
30, 1999. This decrease was attributable to the factors discussed above.
Interest Expense. Interest expense was approximately $0.6 million for the
quarter ended September 30, 1998 and for the quarter ended September 30, 1999.
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
quarter ended September 30, 1998, the Company recorded $35,000 of interest
income representing the decrease in the estimated
14
fair value of the warrants and during the quarter ended September 30, 1999, the
Company recorded no interest income or expense, as the value of the warrants
remained below their carrying value.
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.
Income from Continuing Operations. Income from continuing operations was
approximately $0.3 million for the quarter ended September 30, 1998 and for the
quarter ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net Sales. Net sales increased by approximately $12.8 million or 9.9% from
approximately $129.4 million for the nine months ended September 30, 1998 to
approximately $142.3 million for the nine months ended September 30, 1999. Sales
of the Company's Food Processing segment increased by approximately 22.0%,
primarily resulting from the acquisition of the Potter subsidiary on March 20,
1998, while sales of the Company's Food Distribution segment increased by
approximately 6.4% primarily as a result of the strong growth being experienced
by the segment's major customer.
Gross Profit. Gross profit increased by approximately $2.3 million or 13.7%
from approximately $16.8 million for the nine months ended September 30, 1998 to
approximately $19.1 million for the nine months ended September 30, 1999. Gross
profit as a percentage of net sales increased from 13.0% for the nine months
ended September 30, 1998 to 13.4% for the nine months ended September 30, 1999.
These increases primarily reflect the impact of the Potter acquisition and the
availability of certain of the Company's raw materials at prices below those
paid in the first nine months of 1998 for both the Food Processing segment and
the Food Distribution segment. Hog prices have a significant impact on the
Company's cost of goods sold.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $1.9 million or 13.8% from
approximately $13.8 million for the nine months ended September 30, 1998 to
approximately $15.7 million for the nine months ended September 30, 1999. As a
percentage of net sales, selling, general and administrative expenses increased
from 18.9% to 21.8% for the Food Processing segment. This increase was primarily
attributable to the acquisition of Potter in the first quarter of 1998 and the
Company's ongoing program to expand its marketing territory. The revenue
generated in certain new markets is currently insufficient to cover the start-up
costs associated with building market share. As a percentage of net sales,
selling,
15
general and administrative expenses decreased from 6.1% to 5.7% for the Food
Distribution segment. This decrease was primarily attributable to this segment's
ability to add additional revenue without a corresponding increase in selling,
general and administrative expenses.
Income from Operations. Income from operations increased by approximately
$0.3 million from approximately $3.1 million for the nine months ended September
30, 1998 to approximately $3.4 million for the nine months ended September 30,
1999. This increase is attributable to the factors discussed above.
Interest Expense. Interest expense increased by approximately $0.2 million
from approximately $1.7 million for the nine months ended September 30, 1998 to
approximately $1.9 million for the nine months ended September 30, 1999. This
increase was primarily attributable to the additional debt incurred in
conjunction with the Potter acquisition in the first quarter of 1998.
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 nine months ended
September 30, 1998 and during the nine months ended September 30, 1999, the
Company recorded no additional interest expense, as the value of the warrants
did not increase beyond their carrying value.
Income tax benefit (expense). The effective tax rate differs from the
statutory rate primarily because of state income taxes, the non-deductibility of
goodwill amortization and the reversal of a valuation allowance for deferred
income taxes of approximately $0.5 million, which was recorded as an income tax
benefit during the nine months ended September 30, 1998.
Income from Continuing Operations. Income from continuing operations was
approximately $1.4 million for the nine months ended September 30, 1998 and $1.1
million for the nine months ended September 30, 1999. This decrease is primarily
attributable to the factors discussed above.
16
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the nine months ended September
30, 1999 was approximately $0.8 million. Income from continuing operations,
depreciation and amortization, an increase in accounts payable and a decrease in
accounts receivable were the primary factors contributing to the cash generated
by operating activities, which were partially offset by an increase in prepaid
expenses and inventory and a decrease in accrued expenses. Cash provided by
operating activities for the nine months ended September 30, 1998 was
approximately $4.1 million. This amount was principally affected by net income,
depreciation and amortization, a decrease in accounts receivable and an increase
in accrued expenses, and was partially offset by a decrease in accounts payable.
Cash used in investing activities for the nine months ended September 30,
1999 was approximately $3.0 million and reflected the acquisition of equipment
and the repurchase of 573,810 shares of the Company's common stock at a purchase
price of $2.40 per share. Cash used in investing activities for the nine months
ended September 30, 1998 was approximately $12.1 million and reflected the
acquisition of equipment and the payment of cash in connection with the
acquisition of Potter.
Cash provided by financing activities for the nine months ended September
30, 1999 was approximately $1.1 million and was principally affected by a
decrease in the bank overdraft balance and payments of term debt and other notes
payable, which was partially offset by borrowings under the Company's line of
credit. Cash provided by financing activities for the nine months ended
September 30, 1998 was approximately $10.1 million and was principally affected
by the refinancing of the existing senior debt with the new term and revolving
loan agreements, the borrowings under the senior subordinated note and the
related common stock warrants with the put option and payments on the Company's
term debt and line of credit.
As of September 30, 1999, the Company had outstanding approximately $9.3
million in term debt, $6.5 million of Senior Subordinated Debt owed to a bank,
$4.7 million in line-of-credit borrowings and $2.7 million of subordinated debt
owed to former owners of Prefco, Richard's, Grogan's and Partin's. Monthly
interest payments, currently reflecting an average annual rate of approximately
7.7%, are being made on the subordinated debt owed to former owners and the
principal on these notes is due in 2001. The term debt and line of credit
agreement bear interest at an annual rate equal to either the bank's prime rate
plus 1% or Adjusted LIBOR plus 2.5% at the Company's option. The Senior
Subordinated Debt bears interest at 10% per annum.
The Company has entered into a put option agreement with the holder of
certain warrants described above under "Results of Operations - Interest
Expense." If the holder
17
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 September 30, 1999, 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 balance of 1999 and fiscal 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 bank
agreements. The Company's ability to continue to comply with the covenants in
the bank agreements 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 bank agreements.
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 RISKS
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 hog and other meat products. The Company buys
hogs and other meat products based upon market prices that are established with
the
18
vendor as part of the purchase process. The operating results of the Company
are significantly impacted by pork prices. The Company does not use, and has not
in the past fiscal year used, commodity financial instruments to hedge hog and
other meat product prices.
The Company's exposure to interest rate risk relates primarily to its debt
obligations and temporary cash investments. Interest rate risk is managed
through variable rate and fixed rate borrowings with varying maturities. The
Company does not use, and has not in the past fiscal year used, any derivative
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 is not deductible in the Company's federal or state
income tax returns and, therefore, increases 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. No interest expense was
required to be recorded during the nine months ended September 30, 1998 or
September 30, 1999.
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.
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 in 1998. As a result of this review and the installation of
a new data processing system at its Potter subsidiary, the Company believes that
the information technology being utilized by each of its six operating
subsidiaries is Year 2000 compliant,
19
and the Company has received written confirmation of Year 2000 compliance
from its hardware and software vendors. Through September 30, 1999, the costs
paid to third parties in connection with the Company's review of its information
technology were approximately $200,000, and future estimated expenses are
$25,000.
Embedded Technology. The next phase of the Company's assessment began in
the third quarter of 1998, and included an audit of the non-information
technology systems and embedded technology at its facilities. The Company
completed this audit in the first quarter of 1999 and the costs paid to third
parties in connection with its Year 2000 efforts in this area were not 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 Sam's Clubs Inc. which comprises a
significant portion of sales). The Company does not currently have any formal
information concerning the Year 2000 readiness of all its suppliers and
customers, but has confirmed the Year 2000 readiness with suppliers and
customers with whom the Company has an electronic data interface (EDI),
including its largest customer. 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 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.
Contingency Plan. Although the Company does not currently have a
contingency plan for Year 2000 issues, it does intend to complete one in the
fourth quarter of 1999 to prepare the Company for Year 2000 interruptions such
as delays in the vendor supply chain, electrical supply and the inability of its
lenders or other sources of capital and liquidity to make funds available when
required.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
During 1998, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("Statement 133"). Implementation of Statement 133 is
required for periods beginning after June 15, 2000. Statement 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that derivatives be recognized in the balance sheet at
fair value and specifies the accounting for changes in fair value. The Company
is evaluating the effect of Statement 133 on its accounting policy related to
derivative financial instruments.
20
FORWARD LOOKING STATEMENTS
THE COMPANY WANTS TO PROVIDE STOCKHOLDERS AND INVESTORS WITH 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,"
"CONTINUE TO" 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 WARRANTS WITH A PUT OPTION 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 CAPTIONS "QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK" AND
"YEAR 2000." 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.
21
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 (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.
22
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 11, 1999 By: /s/ THOMAS M. DALTON
----------------------------------------
Thomas M. Dalton, Chief Financial
Officer and Senior Vice President
(On behalf of Registrant and as Chief
Accounting Officer)
23
INDEX TO EXHIBITS
Exhibit Description
Number
- ------- ----------------------------------------------------------------
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.