<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------
FORM 10-K/A
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 26, 1997
|_| 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 1-09559
COLORADO PRIME CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2826129
(State or other jurisdiction of incorporation or (I.R.S Employer
organization) Identification No.)
1 Michael Avenue, Farmingdale, New York, 11735
Registrant's telephone number, including area code: (516) 694-1111
--------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The number of shares of Common Stock of the registrant outstanding as of
December 18, 1997 was 1,000.
Documents Incorporated by Reference
None
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PART I
Item 1. Business
Certain information set forth herein contains forward-looking statements, as
such term is defined in Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Such statements are subject to
certain risks and uncertainties discussed herein, which could cause actual
results to differ materially from those in the forward-looking statements.
Colorado Prime Corporation (the "Company" or "CPC") is a Delaware corporation
and was incorporated in 1986. The Company is a wholly owned subsidiary of
Colorado Prime Holdings Inc. ("CPH"), formerly KPC Holdings Corporation
("Holdings"). On May 9, 1997, pursuant to a merger agreement between Holdings
and Thayer Equity Investors III, L.P., a private equity investment limited
partnership ("Thayer"), Colorado Prime Acquisition Corp. ("CPAC"), a transitory
acquisition company established by Thayer prior to the consummation of the
merger, merged with and into Holdings (the "Merger") following which Holdings
was the surviving corporation and was renamed CPH.
General
The Company is a leading direct marketer of high quality, value-added food
programs and products related to in-home dining and entertainment. Using a
combination of telemarketing and in-home selling, Colorado Prime believes that
it is the only company to offer this type of in-home shopping service on a broad
scale, serving 31 states through 78 sales offices. The Company sells
individually packaged, top quality meats and poultry, seafood, assorted pasta
dishes and a wide selection of prepared entrees for direct delivery to consumer
households. The Company's food products are of a quality generally found only in
specialty gourmet shops and high-end restaurants and require simple preparation
using a microwave, conventional oven or grill. As a complement to its food
products, the Company also sells food-related and home entertainment appliances
and accessories with unique features not generally available in traditional
retail channels. The purchase of non-food items enables customers to earn a
lifetime discount on food purchases.
The Company has employed approximately 1,000 telemarketers and approximately 500
sales representatives over the past two fiscal years. The Company's
telemarketers schedule in-home sales presentations. During a sales presentation,
the Company's sales representative presents the Company's product offerings and
designs a customized food program for the customer. In fiscal 1997, a customer's
average initial food order was approximately $1,500. The average food order is
designed to meet approximately two-thirds of a family's evening meal needs for a
six-month period. In addition, approximately 70% of initial orders in fiscal
1997 included the purchase of non-food items at an average cost of approximately
$1,600. After a customer places an order, a Company representative delivers and
stores the food directly into the customer's freezer. To facilitate the purchase
of its products, the Company offers convenient financing options through a
wholly-owned finance subsidiary.
Products and Services
The Company offers a selected mix of food and non-food products.
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Food Products
The Company's food product line consists of approximately 300 items, with
entrees of a grade and quality comparable to those available only through
specialty butchers, fine gourmet shops or specialty catalogs. These products
range from select cuts of top quality beef, pork, veal, lamb and poultry, to
prepared gourmet dishes such as stuffed chicken breast, marinated pork chops and
Mexican and Italian entrees. The Company's frozen entrees may be prepared using
a microwave, conventional oven or grill, with 70% of such products requiring
only 20 minutes or less for preparation. As a service to its customers, the
Company also sells a selected line of brand name grocery items and other
household products generally available in local retail food outlets. The Company
refines its menu to accommodate changing customer demands.
With the exception of brand name grocery items, the Company's food items are
produced either by the Company or by premium food wholesalers according to the
Company's stringent specifications. Approximately 50% of the Company's food
revenue consists of items that are processed in the Company's processing
facility. Most food products carry the Company's trademark and all food products
are sold with a 100% customer satisfaction guarantee that the Company will
replace any product that does not completely satisfy the customer's
expectations. Food revenues for each of the three years in the period ended
September 26, 1997 were approximately 62% of product sales.
Non-Food Products
As a complement to the customer's food purchases, the Company sells a diverse
line of non-food items related to in-home dining and entertainment. The purchase
of non-food items enables customers to receive a lifetime discount on their food
purchases through the discount marketing program. The Company currently offers
approximately 20 food-related appliances or accessories, such as freezers,
microwave ovens, barbecue grills, cookware, china and crystal, imported
stainless flatware and cutlery. The Company recently expanded its appliance line
to include home entertainment products such as large screen televisions,
camcorders, and personal computers. The Company's non-food items are purchased
by special arrangements with manufacturers and have unique features that are not
generally available in typical retail channels. Non-food revenues for each of
the three years in the period ended September 26, 1997 were approximately 38% of
product sales.
Customer Financing
As an additional source of revenue and as a service to its customers, the
Company offers the option to finance purchases through the Company's
wholly-owned finance subsidiary. Most customer purchases are financed on a
revolving credit account. Generally, food products may be paid in six monthly
installments without additional cost to the consumer except for a nominal
monthly service charge. Non-food products are financed using open-end credit
accounts with balances, which are typically paid over a period of 24 to 36
months at market interest rates. Customers are billed separately for food and
non-food purchases.
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Marketing
Customer Acquisition
The Company purchases telemarketing target lists from a variety of sources.
Donnelley Marketing, Inc. is the primary source of outside lists, accounting for
23% of the Company's new customers in fiscal 1997. Additional sources include
JAMI Marketing Services, Inc., recent home buyer lists and neighborhood and zip
code canvassing. The screened lists of potential customers are distributed to
the Company's telemarketing forces who contact the prospective customers to
introduce the Company's product offerings and schedule an in-home presentation.
The Company also identifies potential customers through recommendations from
existing customers. During fiscal 1997, the Company's referral customers were
the source of approximately 31% of all new customers. Referrals are particularly
valuable to the Company due to the reduced marketing and sales costs associated
with the sale.
Discount Marketing Program
The Company's marketing efforts are facilitated by its discount marketing
program which provides customers with a lifetime discount on food products when
they purchase the Company's non-food products. The discount on the food products
generally offsets a customer's incremental monthly payments on non-food
purchases. The discount increases with each subsequent non-food purchase up to a
maximum possible discount of 50%. During fiscal 1997, 87% of the Company's
customers participated in the discount marketing program.
Sales
The Company believes that the key to strong sales force performance is a
talented, motivated sales management team coupled with ongoing recruiting,
training and retention programs. The Company has an ongoing sales training
process conducted at the local and corporate level. New representatives are
trained in the hiring office by experienced sales personnel using standardized
Company training procedures and materials. Additionally, the Company runs
regular food and non-food training seminars to educate all sales personnel on
the Company's full complement of products. The Company also maintains a
corporate management training program for management candidates demonstrating
high potential. Sales personnel are compensated by commission, earning a
percentage of each new sale and a lower percentage on subsequent reorder sales.
Sales representatives call on prospective customers in their home at pre-set
appointment times scheduled by the telemarketers, often on weekends and at
night. The in-home sales presentation is generally delivered with both adult
family members present. It consists of a food-related presentation, the
development of a monthly budget and a custom-designed menu as well as a
presentation of non-food merchandise. Sales representatives also cover reorder
appointments. The reorder presentation focuses on additional food products and
the Company's full complement of non-food merchandise.
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Distribution and Delivery
One of the Company's key competitive advantages is the efficient distribution of
perishable foods to its customers' homes. All food items are shipped from the
Company's Farmingdale, New York plant. Products are transported either by
Company-operated 48-foot freezer tractor trailers or independent carriers who
pick up shipments from Farmingdale and off-load them to the Company's delivery
trucks at one of 17 leased regional depots for delivery to customers. An
appointment is made with each customer for delivery of an order at the
customer's convenience, including evening hours and Saturdays. Orders are
delivered into the home and packed into the customer's freezer by Company
employees. With the exception of a customer service follow-up call, this serves
as the final step in the Company's quality control process. Generally, non-food
items are stored regionally by the Company's suppliers and are delivered by UPS
or other delivery service. This significantly reduces the Company's direct
storage, shrinkage, handling and inventory carrying costs.
Suppliers
The Company purchases its food and non-food products from a variety of vendors.
The Company strives to maintain relationships with several suppliers for each of
its major food and non-food items to ensure product availability and to maintain
flexibility with regard to cost control. In fiscal 1997, the Company's two
largest suppliers, Broich Enterprises (a freezer supplier) and Beef America,
accounted for 12% and 11%, respectively, of total non-food and food purchases.
The Company believes it has a good relationship with each of its suppliers and
that alternate suppliers are readily available.
The Company generally does not enter into purchasing agreements with any of its
vendors and does not hedge commodity prices in the futures market. However,
since management expected beef prices to increase in 1997, the Company entered
into one year fixed-price supply contracts with its two largest beef suppliers.
As these contracts proved to be beneficial in 1997 and as management believes
there will continue to be upward pressure on beef prices in 1998, the Company
has entered into one year fixed-price supply contracts with four beef suppliers
in fiscal 1998.
Competition
The Company's primary competition is local supermarkets and specialty food
retailers. Although the Company competes in each of those markets, the Company
operates in a niche market, providing benefits and services in addition to those
of each of the above businesses. The Company believes that it competes
effectively with these other businesses on the basis of service, product variety
and quality, marketing, convenience and the availability of credit.
Employees
The Company has employed approximately 2,300 individuals over the past two
fiscal years. Approximately 130 manufacturing and delivery personnel located at
its Farmingdale, New York facility are represented in collective bargaining
agreements by Local 210 of the Warehouse and Production Employees Union. The
Company believes it has a satisfactory relationship with unionized labor. The
current contract expires on September 30, 1998 and provides for a 3% per year
increase in wages.
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Intellectual Property
The Company seeks trademark protection from the United States Patent and
Trademark Office for many trade names, which the Company uses to market its
products and services. The Company presently holds nine registered trademarks
covering trade names and designs including Colorado Prime(R) and Colorado Prime
Foods(R). The Company also has trademarks currently pending registration
including Home Restaurant, Chef's Finest and Maria Nesta. Although the Company
considers its trademarks to be important to its business and continues to seek
trademark protection when deemed appropriate, the Company does not consider its
trademarks to be material to its business operations.
Governmental Regulation
The Company is subject to extensive regulation by a number of federal and state
regulatory agencies with respect to the preparation and sale of its food and
durable goods and the provision of financing to its customers. The Company's
Farmingdale, New York facility has USDA approval, which permits the Company to
ship its meat products nationwide without being subject to numerous state and
local inspection procedures. In the absence of USDA approval, the Company's sale
and delivery of meat products would become subject to state and local
inspection. The Company's telemarketing activities and practices are subject to
Federal and various state authorities and its direct marketing activities are
subject to federal and state regulation including the home sales solicitation
laws. Additionally, the Company's extension of credit to its customers is
subject to federal and state truth-in-lending laws, licensing and regulation
under retail installment sales acts, usury laws and similar statutes enacted by
the states in which it does business.
From time to time the Company is the subject of inquiries from regulatory
agencies in various states in which it conducts business. The Company is often
required to provide information concerning its business practices. Such
inquiries have generally not resulted in any material change in the Company's
business practices. The Company has agreed in the form of a settlement
agreement, consent decree, voluntary compliance or other similar agreement to
adjust individual customer accounts, replace merchandise, modify sales and
credit practices and/or pay costs, fines and penalties. None of these matters
have had a material adverse effect on the Company.
Item 2. Properties
The Company believes that its corporate headquarters, processing facility,
storage facilities, regional sales offices and equipment are adequate for its
current needs. The Company believes all facilities are adequately insured.
The following table summarizes the Company's primary facilities by location.
Company Facilities
Lease
Location Owned/Leased Description of Facility Expiration
- -------- ------------ ----------------------- ----------
Farmingdale, NY Leased Headquarters August 1998
Farmingdale, NY Owned Preparation, storage and --
shipping plant
Pompano Beach, FL Leased Office, warehouse and vehicle November 2006
repair depot
Farmingdale, NY Owned Vehicle repair depot --
Farmingdale, NY Owned Grocery warehouse --
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In addition to those facilities indicated in the table above, the Company leases
space for its 78 regional sales offices and 17 regional delivery depots under
short-term commercial leases, which typically have terms of three to five years.
The Company has entered into a lease agreement for its new corporate
headquarters in Farmingdale, N.Y. and expects to occupy the new facility
concurrent with the expiration of the existing headquarters lease.
Item 3. Legal Proceedings
The Company is a party to various litigation matters incidental to the conduct
of its business. Management believes that such proceedings would not,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on the financial position or results of operations of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
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Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Not applicable.
As of December 18, 1997, there was one holder of record of the Company's Common
Stock.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7 of this report and the consolidated financial
statements of the Company and the related notes included in Item 8 of this
report, which consolidated financial statements have been audited and reported
on by Arthur Andersen LLP, independent public accountants.
New Basis of Accounting
As a result of the merger described in Item 1 a new basis of accounting under
the "push down" method was adopted effective May 9, 1997. Under this method, the
assets and liabilities of the Company were revalued to reflect CPH's new cost
basis in the Company, which is based on the fair values of such assets and
liabilities on May 9, 1997. Financial data for the period subsequent to May 9,
1997, reflect the adoption of this new basis of accounting and, accordingly,
data for all annual fiscal periods presented herein may not be comparable with
the data presented which includes the period subsequent to May 9, 1997.
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<TABLE>
<CAPTION>
Fiscal Year Ended September
Twenty Thirty-two
Weeks Ended Weeks Ended
September 26, 1997 May 9, 1997 1996 1995 1994 1993
------------------ ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dollars in thousands
Operating Data
Product Sales $54,407 $85,510 $142,651 $144,966 $134,025 $126,171
Finance income earned 5,600 8,637 12,792 11,524 11,201 10,725
------- ------- -------- -------- -------- --------
Total revenue 60,007 94,147 155,443 156,490 145,226 136,896
Cost of goods sold 21,195 32,949 56,387 59,906 58,640 59,371
------- ------- -------- -------- -------- --------
Gross Profit 38,812 61,198 99,056 96,584 86,586 77,525
Selling, general and
administrative 31,923 48,749 80,901 80,988 75,326 69,450
Amortization of goodwill 540 713 1,164 1,164 1,187 1,164
Interest expense 6,222 5,713 9,130 8,017 6,783 9,745
Other expense 245 426 7,089(a) 767(a) 559 6,357(a)
------- ------- -------- -------- -------- --------
Income (loss) before
provision (benefit) for
income taxes (118) 5,597 772 5,648 2,731 (9,191)
Provision (benefit) for
income taxes 130 2,414 1,262 2,738 1,781 (2,929)
------- ------- -------- -------- -------- --------
Net income (loss) $ (248) $ 3,183 $ (490) $ 2,910 $ 950 $ (6,262)
======= ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of Fiscal Year Ended September
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Working capital $ 51,235 $52,902 $48,065 $44,826 $45,674
Total assets 169,773 150,784 143,841 136,525 141,303
Long-term debt (including
current portion) (b) 118,675 93,541 82,102 76,897 78,097
Stockholder's equity $ 25,625 $40,669 $44,278 $43,606 $45,115
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended September
Twenty Thirty-two
Weeks Ended Weeks Ended
September 26, 1997 May 9, 1997 1996 1995 1994 1993
------------------ ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Other Financial Data
EBITDA (c) $7,396 $13,397 $20,062 $17,424 $13,031 $9,932
EBITDA margin (c) 12.3% 14.2% 12.9% 11.1% 9.0% 7.3%
</TABLE>
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(a) Fiscal 1996 includes debt financing expenses of $624 and payments to
management of $4,177 under a management incentive plan related to the
issuance of senior notes in December of 1995 and also includes a charge
for unused office and warehouse space of $1,698. Fiscal 1995 includes a
write-off of capitalized software costs of $162. Fiscal 1993 also includes
a charge for unused office and warehouse space and severance of $5,973.
(b) Long-term debt (including current portion) includes obligations under
capital leases.
(c) EBITDA is defined as net income before interest, income taxes,
depreciation and amortization and certain nonrecurring expenses (as
discussed in Note (a) above). EBITDA is presented because Management
believes it is a widely accepted financial indicator of the Company's
ability to incur and service debt. However, EBITDA should not be
considered in isolation as a substitute for net income or cash flow data
prepared in accordance with generally accepted accounting principles or as
measure of a company's profitability or liquidity. In addition, this
measure of EBITDA may not be comparable to similar measures reported by
other companies.
EBITDA margin is calculated as the ratio of EBITDA to total revenues for
the period.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The following discussion should be read in conjunction with the "Selected
Financial and Operating Data," the audited Consolidated Financial Statements and
accompanying notes thereto included
elsewhere in this report.
New Basis of Accounting
As a result of the merger, a new basis of accounting under the "push down"
method was adopted effective May 9, 1997. Under this method, the assets and
liabilities of the Company were revalued to reflect Holdings' new cost basis in
the Company, which is based on the fair values of such assets and liabilities on
May 9, 1997. Financial data for the period subsequent to May 9, 1997, reflects
the adoption of this new basis of accounting as if the merger occurred at the
beginning of the period and, accordingly, data for all annual fiscal periods
presented herein may not be comparable with the data presented which includes
the period subsequent to May 9, 1997.
Presentation of Data for Combined Periods
The pro forma results of operations for the fiscal year ended September 26, 1997
are presented for comparative purposes only, and not as combined or consolidated
results of operations in accordance with Generally Accepted Accounting
Principles ("GAAP") nor as a replacement for the separate period results of
operations presented in the Company's audited consolidated financial statements
presented elsewhere in this report.
These changes affect the comparability of operating data principally with
respect to amortization of intangible assets associated with the "push-down"
accounting basis revaluation and interest expense on the new debt. Management
believes that the presentation and assessment of results of operations for the
fifty-two weeks ended September 26, 1997 on a pro forma basis provides the most
meaningful analysis of the Company's operating results on a comparable basis.
Results of Operations
The following table summarizes the Company's historical results of operations as
a percentage of total revenue. All fiscal years presented herein are 52 weeks.
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Pro
forma 52
weeks
ended
September Fiscal Year Ended
1997 1996 1995
---- ---- ----
Statement of Operations
and Other Financial Data:
Total revenue 100.0% 100.0% 100.0%
Gross Profit 64.9 63.7 61.7
Selling, general and
administrative expenses 52.4 52.0 51.7
Interest expense 7.7 5.9 5.1
Amortization of goodwill 0.8 0.7 0.7
Other expense 0.4 4.6 0.5
Provision for income taxes 1.6 0.8 1.7
Net income (loss) 1.9 (0.3) 2.0
Depreciation and amortization 2.2 2.3 2.3
EBITDA 13.4 12.9 11.1
Fifty-two Weeks Ended September 26, 1997 (Pro Forma) Compared to Fiscal Year
ended September 27, 1996.
Total revenue for the fifty-two weeks ended September 26, 1997 decreased by $1.2
million, or 0.8%, to $154.2 million from $155.4 million for the fifty-two weeks
ended September 27, 1996. Food revenue for the fifty-two weeks ended September
26, 1997 decreased by $2.6 million, or 3.0%, to $86.1 million from $88.7 million
for the fifty-two weeks ended September 27, 1996. The decrease was primarily due
to difficulties experienced by the Company locating and hiring qualified sales
representatives in a low unemployment environment. The Company continues to
refine test programs designed to improve the recruitment and retention of sales
representatives. Food revenue was positively affected by price increases
commensurate with inflation. Non-food revenue for the fifty-two weeks ended
September 26, 1997 decreased by $0.1 million, or 0.2%, to $53.9 million from
$54.0 million for the fifty-two weeks ended September 27, 1996. Non-food revenue
was positively affected by price increases commensurate with inflation and the
sale of higher value appliances such as large screen televisions and camcorders,
offset by the impact of reduction in food orders as non-food sales are only
consummated if a food sale is made. Finance income for the fifty-two weeks ended
September 26, 1997 increased by $1.4 million, or 11.3%, to $14.2 million from
$12.8 million for the fifty-two weeks ended September 27, 1996. The increase in
finance income earned resulted from larger customer account receivable balances
due primarily to the sale of higher value appliances and selective use of
extended financing terms.
Gross profit for the fifty-two weeks ended September 26, 1997 increased by $1.0
million, or 1.0%, to $100.0 million from $99.0 million for the fifty-two weeks
ended September 27, 1996. Gross profit margin increased to 64.9% for the
fifty-two weeks ended September 26, 1997 from 63.7% for the fifty-two weeks
ended September 27, 1996. The increase in gross profit margin was the result of
shifting processing for the Company's poultry items to its in-house facility,
lower overhead costs and an increase in finance income. Additionally, gross
profit margin benefited from a favorable mix of non-food product sales toward
items which generally have a higher profit margin.
SG&A expenses are principally comprised of selling, telemarketing, delivery and
general and administrative expenses. For the fifty-two weeks ended September 26,
1997, these expenses decreased by $0.2 million, or 0.2%, to $80.7 million from
$80.9 million. As a percentage of total
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revenues, SG&A expenses increased to 52.3% for the fifty-two weeks ended
September 26, 1997, from 52% for the fifty-two weeks ended September 27, 1996.
Interest expense for the fifty-two weeks ended September 26, 1997 increased to
$11.9 million from $9.1 million for the fifty-two weeks ended September 27,
1996. The increase was primarily attributable to a greater level of borrowing
(as a result of the debt issued in connection with the merger) at a higher rate
of interest during 1997, as compared to the financing in effect during the
previous period.
Other expense for the fifty-two weeks ended September 26, 1997 decreased by $6.4
million to $0.7 million from $7.1 million for fiscal 1996. The decrease is
primarily attributable to the payment in fiscal 1996 of refinancing-related
bonuses of $3.0 million, redemption of management stock of $1.2 million,
unrecovered costs of $0.6 million related to the issuance of debt and a charge
of $1.7 million for lease obligations of unused office and warehouse space.
Provision for income tax for the fifty-two weeks ended September 26, 1997
increased by $1.2 million to $2.5 million from $1.3 million for fiscal 1996. The
increase is primarily attributable to higher pretax earnings for the fifty-two
weeks ended September 26, 1997 partially offset by certain non-deductible
expenses in fiscal 1996.
Net income increased to $2.9 million or 1.9% of total revenue for the fifty two
weeks ended September 26, 1997 from a loss of $0.5 million, or 0.3% of total
revenues for fiscal 1996 for the reasons stated above.
Depreciation and amortization decreased to $3.3 million, or 2.2% of total
revenue, for the fifty-two weeks ended September 26, 1997 from $3.6 million, or
2.3% of total revenue, for the fifty-two weeks ended September 27, 1996. The
decrease is primarily attributable to a reduction in capital spending offset by
additional goodwill.
EBITDA for the fifty-two weeks ended September 26, 1997 increased by $0.6
million, or 3.0%, to $20.7 million from $20.1 million for fiscal 1996. EBITDA
margin as a percentage of total revenue increased to 13.4% for the fifty-two
weeks ended September 26, 1997 from 12.9% for fiscal 1996 for the reasons stated
above. See footnote (c) to "Selected Financial Data".
Fiscal Year Ended September 27, 1996 Compared to Fiscal Year Ended September 29,
1995
Total revenue for fiscal 1996 decreased by $1.1 million, or 0.7%, to $155.4
million from $156.5 million for fiscal 1995. Food revenue for fiscal 1996
decreased by $0.6 million, or 0.7%, to $88.7 million from $89.3 million for
fiscal 1995. The decrease was primarily due to difficulties in hiring qualified
sales representatives in a low unemployment environment, which resulted in fewer
orders from new customers than in the prior period. Additionally, the number of
in-home appointments which were cancelled as a result of inadequate staffing
increased by 28% in fiscal 1996. New programs designed to improve the
recruitment and retention of sales representatives were initiated to respond to
this staffing issue at the close of the year. In addition, the decrease was due
to an increase in rejected orders for credit reasons resulting from rising
consumer debt levels. Food revenue was positively affected by price increases
commensurate with inflation and larger order sizes. The Company experienced a
larger average order size principally due to a change in the Company's sales
presentation from one based upon five months of anticipated food requirements to
one based upon six months. The change had been introduced in some markets during
fiscal 1995 and continued to be implemented throughout the Company during fiscal
1996. Non-food revenue for fiscal 1996 decreased by $1.6 million, or 2.9%, to
$54.0 million from $55.6 million for fiscal 1995. The decrease was primarily due
to the reduction in food orders. Non-food revenue was positively affected by
price increases commensurate with inflation and the sale of higher value
appliances such as large screen televisions and camcorders. Finance income for
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fiscal 1996 increased by $1.3 million, or 11.0%, to $12.8 million from $11.5
million for fiscal 1995. The increase in finance income earned resulted from
larger customer accounts receivable balances due to the sale of higher value
appliances.
Gross profit for fiscal 1996 increased by $2.5 million, or 2.6%, to $99.1
million from $96.6 million for fiscal 1995. Gross profit margin increased to
63.7% for fiscal 1996 from 61.7% for fiscal 1995. The increase in gross profit
margin was primarily due to an increase in finance income, lower beef costs and
the impact of the Company's cost reduction activities.
For fiscal 1996, SG&A expenses remained relatively flat at $80.9 million
compared to $81.0 million for fiscal 1995. As a percentage of total revenues,
SG&A expenses were 52.0% for fiscal 1996 compared to 51.7% for fiscal 1995. The
increase was primarily due to an increase in bad debt expense due to the higher
level of customer payment delinquencies, offset by lower selling costs as a
result of lower revenues.
Interest expense for fiscal 1996 increased by $1.1 million, or 13.9%, to $9.1
million from $8.0 million for fiscal 1995. The increase was primarily
attributable to higher average debt balance and higher interest expense as a
result of the recapitalization in December of 1995.
Other expense for fiscal 1996 increased by $6.3 million, to $7.1 million, from
$0.8 million for fiscal 1995. The increase was primarily due to payment of
refinancing-related bonuses of $3.0 million, redemption of management stock of
$1.2 million, and unrecovered costs of $0.6 million related to the
recapitalization in December of 1995. In addition, the increase was due to a
charge of $1.7 million for lease obligations on unused office and warehouse
space for fiscal 1996.
Provision for income taxes for fiscal 1996 decreased by $1.4 million, to $1.3
million, from $2.7 million for fiscal 1995. The decrease is primarily
attributable to lower earnings as a result of certain non-deductible expenses
associated with the recapitalization in December of 1995.
Net income decreased to a loss of $0.5 million, or 0.3% of total revenue, for
fiscal 1996 from net income of $2.9 million, or 2.0% of total revenue for fiscal
1995 for the reasons discussed above.
Depreciation and amortization for fiscal 1996 increased by $0.1 million to $3.7
million from $3.6 million for fiscal 1995.
EBITDA for fiscal 1996 increased by $2.7 million, or 15.5%, to $20.1 million
from $17.4 million for fiscal 1995. EBITDA margin as a percentage of total
revenue increased to 12.9% for fiscal 1996 from 11.1% for fiscal 1995 for the
reasons stated above. See footnote (c) to "Selected Financial Data."
13
<PAGE> 15
Liquidity and Capital Resources
Net cash provided by operating activities for the fifty two weeks ended
September 26, 1997 was $1.6 million, primarily comprised of net income of $2.9
million, non-cash charges of $4.5 and an increase in income taxes payable of
$1.6 million, partially offset by an increase in accounts receivable of $3.2
million, an increase in other assets of $0.6 million, an increase in inventory
of $0.9 million, a decrease in accounts payable of $0.5 million and a decrease
in accruals of $1.9 million.
Cash used in financing activities for the fifty two weeks ended September 26,
1997 was $2.7 primarily comprised of payments of the working capital revolver of
$4.7 million partially offset by net cash proceeds from the merger.
The Company's primary use of cash in investing activities is the purchase of
property and equipment. Capital expenditures in fiscal 1997 and 1996, were $1.0
million and $2.0 million, respectively. The Company expects that capital
expenditure requirements will be approximately $1.8 million for fiscal 1998.
The Company's average working capital borrowings for the fiscal 1997 and 1996
years was $43.1 million and $58.4 million, respectively. The decline is due
primarily to a change in the debt structure resulting from the merger. The
Company's maximum working capital borrowings outstanding during such periods
were $58.4 million and $64.9 million, respectively.
The Company has a $50.0 million working capital revolver, with $29.7 million of
available borrowings as of September 26, 1997. The working capital revolver
contains certain covenants requiring the Company to meet certain financial test
including a minimum fixed charge coverage ratio, a minimum interest coverage
ratio, a maximum leverage ratio, the maintenance of a minimum net worth and a
limitation on capital expenditures. The working capital revolver and the notes
impose certain other restrictions on the Company, including restrictions on its
ability to incur indebtedness, pay dividends, make investments, grant liens,
sell its assets and engage in certain other activities. In addition, the
indebtedness of the Company under its working capital revolver is secured by all
of the assets of the Company, including the Company's real and personal
property, inventory, accounts receivable, intellectual property and other
intangibles.
Management believes that cash flow from operations, together with other
available sources of funds including the availability of borrowings under its
working capital revolver will be adequate for at least the next twelve months to
make required payments of principal and interest on the Company's indebtedness
and to fund anticipated capital expenditures and working capital requirements.
The ability of the Company to meet its debt service obligations and reduce its
total debt will be dependent, however, upon the future performance of the
Company which, in turn, will be subject to general economic conditions and to
financial, business and other factors, including factors beyond the Company's
control. Debt outstanding under the working capital revolver will bear interest
at floating rates; therefore, the Company's financial condition is and will
continue to be affected by changes in prevailing interest rates.
Inflation
The Company believes that inflation has not had a material impact on its results
of operations for the three fiscal years ended September 26, 1997.
Other - Year 2000
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date-sensitive systems
14
<PAGE> 16
will recognize the year 2000 as 1099, or not at all. This inability to recognize
or properly treat the Year 2000 may cause systems to process critical financial
and operation information incorrectly. The Company has assessed and continues to
assess the impact of the Year 2000 on its operations, including the development
of cost estimates for, and the extent of programming changes required to address
this issue. The Company believes, based upon its internal reviews and other
factors, the future external and internal costs to be incurred relating to the
modification of internal use software for the Year 2000 will not have a material
effect on the Company, results of operations or financial position.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are listed under Item 14 in this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
15
<PAGE> 17
Part III
Item 10. Directors, Executive Officers and Key Employees of the Registrant.
The following table sets forth the names, ages as of September 26, 1997 and
positions of each person who is a director, executive officer or key employee of
the Company.
- --------------------------------------------------------------------------------
Name Age Position
- --------------------------------------------------------------------------------
William Dordelman 57 Chairman of the Board and Chief Executive
Officer
William Willett (1) 60 President, Chief Operating Officer and
Director
Thomas Taylor 39 Chief Financial Officer, Vice President
and Director
Ricardo DeSantis 54 Vice President of Marketing
Steven Lachenmeyer 31 Vice President, Controller and Secretary
Charles Montanino 69 Vice President of Plant Operations
Kenneth Payne 49 Vice President of Operations
Joseph Ugenti 52 Vice President Customer Acquisition
Brian Mulvehill 40 Vice President-East Coast Division
Ronald Mel 31 Vice President-Midwest Division
John DeMaio 42 Vice President-Southwest Division
Joseph Billi 33 Vice President-Northeast Division
Lawrence Scuderi 56 Vice President-Management, Development and
Training
Donald Keller 65 Director
Frederic Malek 60 Director
Dr. Paul Stern 58 Director
V. Frank Pottow (1) 34 Director
Daniel J. Altobello 56 Director
William Nicholson 54 Director
(1) On October 29, 1997, V. Frank Pottow resigned as Director. On November 28,
1997, William Willett resigned as Director, President and Chief Operating
Officer.
William Dordelman has been Chairman of the Board and Chief Executive Officer of
CPC since March 1993. Prior to joining CPC, Mr. Dordelman served as Co-Chief
Executive Officer of The B. Manischewitz Company from May 1992 to March 1993.
Previously, Mr. Dordelman was employed 22 years with General Foods Corporation
("General Foods"), where he was President of the Foods Products Division and
Group Vice President, overseeing General Foods' six U.S. packaged food
divisions.
William Willett had been President, Chief Operating Officer and Director of CPC
since June 1994 until his resignation on November 28, 1997. From 1992 until
1994, Mr. Willett was principal owner and President of Brights Creek, a direct
response children's clothing business. From 1987 through 1992, Mr. Willett
served as Chairman and Chief Executive Officer of New Hampton, a leveraged
buyout of Avon's former women's fashion catalog business. Previously, Mr.
Willett was corporate Executive Vice President at Avon where he led its effort
to build a mail-order fashion business. Before joining Avon, Mr. Willett was
Vice President of Downe Communications and National Sales Manager for Time
Telemarketing.
Thomas Taylor was appointed Vice President, Chief Financial Officer and Director
in April 1996. Previously, Mr. Taylor served as Vice President of Finance and
Sales Strategy at Kraft Foods for five years. Prior to joining Kraft, Mr. Taylor
was Vice President and Controller of Central Soya
16
<PAGE> 18
Company, Inc., a $2.3 billion agribusiness company, and audit manager at Price
Waterhouse in Chicago.
Ricardo DeSantis was appointed Vice President of Marketing in June 1993.
Previously, Mr. DeSantis was Senior Vice President of Marketing for Cigna
Healthcare. From 1989 to 1991, Mr. DeSantis was President of the Consumer
Division of Pendaflex Corporation. Prior to that, Mr. DeSantis was a business
unit manager at General Foods.
Steven Lachenmeyer was appointed Vice President and Controller in June 1997 and
Secretary in December 1997. Prior to that, Mr. Lachenmeyer was an audit manager
with Arthur Andersen LLP.
Charles Montanino has been Vice President of Plant Operations since March 1987.
Mr. Montanino joined CPC in April 1973 and served as plant manager from 1980
through March 1987.
Kenneth Payne joined CPC as Credit Collections Manager in August 1976. From 1981
until 1987, Mr. Payne served as Operations Manager of CPC. In 1987 Mr. Payne was
elected Vice President of Operations.
Joseph Ugenti began in CPC's sales department in 1975 and was elected Vice
President of Customer Acquisition in August 1991. From June 1983 to July 1991,
Mr. Ugenti was Director of Telemarketing of CPC.
Brian Mulvehill has held the position of Vice President of the East Coast
Division since 1991. Mr. Mulvehill began his career with CPC in 1985. From 1988
until 1991, Mr. Mulvehill served as Divisional Sales Manager. Previously, Mr.
Mulvehill held the position of Sales Manager of Don Rich Industries from 1978 to
1985.
Ronald Mel was appointed Vice President of the Midwest Division in May 1997. Mr.
Mel joined CPC in 1992 as branch manager. In 1994, Mr. Mel served as East Coast
Divisional Trainer. From 1995 through 1997, Mr. Mel served as Divisional Manager
for the Florida region.
John DeMaio has been Vice President of the Southwest Division since 1984. Mr.
DeMaio joined CPC in 1982 and served as Divisional Manager of the Mid-Atlantic
Area from 1982 to 1984. Previously, Mr. DeMaio served as General Sales Manager
of American Frozen Foods from 1974 to 1981.
Joseph Billi was appointed Vice President of the New York/New Jersey Division in
May 1997. Mr. Billi joined CPC in 1990. He held the positions of Corporate
Trainer, Field Manger, Branch Sales Manager and sales representative.
Lawrence Scuderi was appointed Vice President of Management Development and
Training in May 1997. Prior to that, Mr. Scuderi served as Vice President of the
Midwest Division since 1993. Mr. Scuderi joined CPC in 1980 and held the
position of Divisional Sales Manager from 1992 to 1993. From 1980 to 1992, Mr.
Scuderi served as Branch Sales Manager and Corporate Training Director.
Donald Keller has been Vice Chairman of CPC since April 1993. Mr. Keller also
serves as Chairman of Vlasic Foods. Since 1993, Mr. Keller has also served as
Chairman of Mano Holdings, a holding company for The B. Manischewitz Company,
and Non Executive Chairman of Prestone Products. From May 1992 to April 1993,
Mr. Keller served as Co-Chief Executive Officer of The B. Manischewitz Company.
From April 1989 until May 1992, Mr. Keller was a
17
<PAGE> 19
consultant and private investor. Prior to that time, Mr. Keller was President
and Chief Operating Officer of Westpoint Pepperell and earlier served as
Executive Vice President of General Foods.
Frederic Malek became a Director of CPC and CPH following the consummation of
the Merger. Mr. Malek founded Thayer Capital Partners in 1991 and co-founded
Thayer Equity Investors III, L.P. in 1995. From 1989 to 1991, Mr. Malek was
President and then Vice Chairman of Northwest Airlines. Prior to that time, Mr.
Malek served as President of Marriott Hotels and Resorts from 1980 through 1988.
Mr. Malek currently serves as director of several publicly-traded companies,
including Automatic Data Processing Corp., American Management Systems, Manor
Care Inc., FPL Group and Northwest Airlines.
Dr. Paul Stern became a Director of CPC following the consummation of the
Merger. Dr. Stern co-founded Thayer Equity Investors III, L.P. in 1995. Prior to
that, Dr. Stern was a Special Limited Partner at Forstmann Little & Co. From
1989 until 1993, Dr. Stern served as the Chairman and Chief Executive Officer of
Northern Telecom Ltd. Prior to that, Dr. Stern served as President and Chief
Operating Officer of Burroughs (later Unisys) Corporation, Corporate Vice
President and later President of Commercial Electronics Operations at Rockwell
International Corporation and Chairman and Chief Executive Officer of Braun AG
in Germany. Dr. Stern serves on the Board of Dow Chemical Company, LTV
Corporation and Whirlpool Corporation.
V. Frank Pottow served as Director of CPC and CPH following the consummation of
the Merger until his resignation on October 29, 1997. Mr. Pottow joined Thayer
Capital Partners as a Managing Director in 1996. From 1992 through 1996, Mr.
Pottow was a Principal at Odyssey Partners, L.P, a private investment
partnership. Prior to joining Odyssey Partners, L.P., Mr. Pottow was an
Associate with Wasserstein Perella & Co.
Daniel J. Altobello became a Director of CPC in June, 1997. He has been Chairman
of the Board of Directors of Onex Food Services, Inc., the world's largest
airline catering group since September 1995. From 1989 to 1995, Mr. Altobello
was the Chairman and CEO of Caterair Holdings Corporation, the leveraged buyout
of the In-Flite Services Division of Marriott Corporation. He is a former
Executive Vice President of Marriott Corporation and President of Marriott's
Airport Operations Group. Mr. Altobello currently serves as a director of
American Management Systems, Inc. and Blue Cross Blue Shield of Maryland, Inc.
Willliam Nicholson became a Director of CPC in June, 1997. Mr. Nicholson has
been a private investor since September 1992. Prior to that, he served for eight
years as the Chief Operating Officer of Amway Corporation, the world's largest
multilevel marketing company, based in Ada, Michigan. He remains an advisor to
Amway Corporation's Policy Board.
Board Committees
The Board of Directors of the Company has established a compensation committee
(the "Compensation Committee") and an audit committee (the "Audit Committee").
The Compensation Committee, which consists of Dr. Stern and Messrs. Malek and
Nicholson determines the compensation of the Company's executive officers. The
Compensation Committee will also administer the Company's Stock Option Plan (the
"Option Plan"). The Audit Committee recommends the appointment of auditors and
oversees the accounting and audit functions of the Company. Messrs. Keller and
Altobello currently serve as members of the Audit Committee.
18
<PAGE> 20
Item 11. Executive Compensation
The following table sets forth certain information concerning the compensation
paid or earned during fiscal 1997 by the Company's Chief Executive Officer and
the four other most highly paid executive officers whose total salary and bonus
exceeded $100,000 for services rendered to the Company during fiscal 1997. The
Company did not maintain any long-term incentive plans nor did it grant stock
appreciation rights or restricted stock awards.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation for Year Ended
September 26, 1997
Other Annual Other
Name and Principal Position Salary Bonus Compensation(1) Compensation(2)(3)
- --------------------------- ------ ----- --------------- ------------------
<S> <C> <C> <C> <C>
William Dordelman ........................... $420,000 $315,000 -- $325,000
Chairman of the Board and Chief
Executive Officer
William Willett ............................. $300,000 $225,000 -- $250,000
President, Chief Operating Officer
and Director
Ricardo DeSantis ............................ $185,000 $115,000 -- $100,000
Vice President of Marketing
Thomas Taylor ............................... $187,000 $ 51,000 -- $100,000
Chief Financial Officer
Vice-President and Director
Kenneth Payne ............................... $129,000 $ 45,000 -- $ 30,000
Vice President of Operations
</TABLE>
(1) Represents perquisites and other personal benefits, if such benefit
exceeds the lesser of $50,000 or 10% of the total annual salary and bonus
for the executive officer.
(2) Represents amounts awarded based upon performance incentives which
provided certain senior managers with a nonrecurring cash bonus earned and
paid in fiscal 1997 in connection with the Merger.
(3) Amount excludes proceeds from the sale of stock as follows; $207,000 to
William Dordelman, $639,000 to William Willett, $214,000 to Ricardo
DeSantis, $291,000 to Thomas Taylor, and $84,000 to Kenneth Payne.
Director Compensation
Directors are reimbursed for certain expenses incurred by them in connection
with attendance at meetings of the Board. Other than with respect to
reimbursements for expenses, directors who are also officers of the Company do
not receive compensation to serve as directors. The Company compensated
non-employee directors for services provided in such capacity in the aggregate
of $24,000 in fiscal 1997.
Employment Agreements
In connection with the Merger, the Company entered into employment agreements
with Messrs. William Dordelman, William Willett, Thomas Taylor and Ricardo
DeSantis. The employment agreements are for a one year rolling term. The
employment agreements provide for (i) payment of a base annual salary of
$420,000 to William Dordelman, $300,000 to William Willett, $195,000 to Thomas
Taylor and $195,000 to Ricardo DeSantis; (ii) a minimum annual base
19
<PAGE> 21
salary increase to reflect the consumer price index; (iii) payment of bonuses
based upon achievement of certain profitability targets of the Company; and (iv)
certain fringe benefits. Each employment agreement provides that the executive
may be terminated by the Company only with cause or upon payment of a full
year's salary and benefits (excluding bonus) following notice of termination.
Each employment agreement provides that the executive will not compete with the
Company during the period of employment and for a period of two years following
termination of employment for good cause and one year following termination of
employment other than for good cause.
Management Equity Investment
In connection with the Merger, certain management ("Management Investors")
exchanged certain of their existing shares of common stock of Holdings (valued
for such purpose at the amount that would otherwise be payable for such shares
in connection with the merger) and contributed cash in the aggregate amount of
$2.1 million in exchange for an aggregate of 21,200 shares of common stock of
CPAC. Upon consummation of the Merger, each share of common stock of CPAC was
converted into one share of common stock of CPH. Pursuant to a shareholders'
agreement, the Management Investors have incidental registration rights,
tag-along rights, antidilution protection and in certain circumstances a
mandatory redemption right, and are subject to certain restrictions on the
transfer of their shares, a bring-along right and certain call provisions
exercisable by CPH or Thayer.
Stock Option Plan
In connection with the Merger, the Board of Directors will adopt and the
stockholders of CPH will approve the 1997 Stock Option Plan. Options of up to
approximately 15% of CPH's common equity may be granted to the Company under
such plan. The options will become vested based upon service or the achievement
of certain performance objectives of the Company. Two-thirds of the options will
become fully vested upon a change of control or other similar transaction
involving CPH.
Employees' Pension Plan
Since 1976, the Company has maintained a defined contribution pension plan (the
"Plan"). Employees who have completed six months of service and have reached the
age of 20 1/2 are eligible to participate in the Plan. The Company contributes
annually to a participant's account based upon a variable percentage of a
participant's annual compensation. The Plan also permits eligible employees to
make voluntary contributions within specified limits. The contributions for
employees who became participants prior to January 1, 1989 are 30% vested after
three years of service and the contributions for employees who become
participants after January 1, 1989 are 20% vested after three years of service.
Contributions become vested thereafter at a rate of 20% for each additional full
year of service, until fully vested. Benefits are distributed at the time of the
employee's death, disability, termination or retirement after age 55 and may be
distributed in the form of an annuity or, in some circumstances, other methods
of payment, such as lump sum or in installments over a fixed period.
Contributions are forfeited when a participant's employment is terminated prior
to full vesting under the Plan. Such forfeited amounts are used to reduce the
Company's contributions to the Plan.
401(k) Plan
The Company sponsors a 401(k) Plan available for all non-union employees who
have attained the age of 21 and have completed one year of service with the
Company. The plan was adopted effective February 1, 1986 and was amended
effective February 1, 1988 and January 1, 1989, as hereinafter described. Under
the plan's qualified cash or deferred arrangement, a participant may,
20
<PAGE> 22
under an arrangement with the Company, elect to have up to 20% of their annual
compensation paid to the plan on behalf of the participant, in lieu of the
participant's current receipt of such compensation. In addition to the
employee's contribution, the Company may, but need not, make discretionary
contributions to the plan in such amounts as it determines. A participant's
contributions made under the qualified cash or deferred arrangement are 100%
vested at all times. For employees who became participants of the plan prior to
January 1, 1989, discretionary contributions made under the plan are 20% vested
after three years of service. Discretionary contributions become vested
thereafter at the rate of 20% for each additional full year of service, until
100% vested. Benefits are payable upon a participant's termination of employment
for any reason, in the form of one lump sum payment or in installments extending
over a fixed period of years, depending upon the employee's election.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
All of the Company's issued and outstanding capital stock is owned by CPH. The
issued and outstanding capital stock of each of the Company's subsidiaries is
owned by the Company. The table sets forth, as of September 26, 1997, the Common
Stock of CPH owned beneficially or of record (i) by any person in an amount in
excess of five percent of such Common Stock; (ii) by each director of the
Company who is a shareholder; (iii) by each executive officer of the Company;
and (iv) by all directors and executive officers of the Company as a group. In
addition, Thayer owns 100% of CPH's 10,000 outstanding shares of 15%
payable-in-kind redeemable preferred stock, par value $0.01 per share.
Number of Percentage of
Shares of Outstanding
Common Stock of Common Stock of
Name and Address of Beneficial Owner CPH(1)(3) CPH (1)(3)
- ------------------------------------ --------- ----------
Thayer Equity Investors III, L.P. (2) 128,800(3)(4) 85.9%
1455 Pennsylvania Avenue N.W.
Washington, D.C. 20004
William Dordelman 10,000 6.7%
Colorado Prime Corporation
One Michael Avenue
Farmingdale, NY 11735
William Willett 5,000 3.3%
Colorado Prime Corporation
One Michael Avenue
Farmingdale, NY 11735
Thomas Taylor 2,300 1.5%
Colorado Prime Corporation
One Michael Avenue
Farmingdale, NY 11735
Ricardo DeSantis 1,650 1.1%
Colorado Prime Corporation
One Michael Avenue
Farmingdale, NY 11735
Other Executive Officers 2,250 1.5%
All directors and executive officers as a 21,200(2) 14.1%
group (2)
21
<PAGE> 23
(1) Excludes 19,608 shares of CPH Common Stock that may be acquired upon the
exercise of warrants which represent 10% of CPH Common Stock on a
fully-diluted basis (without taking into account shares of CPH Common
Stock which will be subject to CPH's 1997 Stock Option Plan).
(2) Thayer Equity Investors III, L.P. is a Delaware limited partnership whose
general partner is TC Equity Partners, L.L.C. ("TC Equity Partners"). The
members of TC Equity Partners are Fredric Malek, Dr. Paul Stern and Rick
Rickertsen. Mr. Malek and Dr. Stern are directors of CPC and may be deemed
to be the beneficial owners of the shares of CPH Common Stock owned and
controlled by Thayer. Mr. Malek and Dr. Stern disclaim beneficial
ownership of such shares.
(3) Excludes 26,471 shares of CPH Common Stock that may be acquired upon the
exercise of warrants held by Thayer, which represent 13.5% of CPH Common
Stock on a fully-diluted basis (without taking into account shares of CPH
Common Stock which will be subject to CPH's 1997 Stock Option Plan).
(4) Includes shares of CPH Common Stock owned by TC Co-Investors, LLC
("Co-Investors"). Co-Investors is a Delaware limited liability which is
controlled by TC Equity Partners.
Item 13. Certain Relationships and Related Transactions
Management advisory and Transaction Fees
In connection with the Merger, the Company paid a transaction fee of $1.4
million to TC Management L.L.C. ("TC Management"), an affiliate of Thayer, in
consideration for services in arranging the financing for the Merger.
In May, 1997 following the consummation of the Merger, the Company and TC
Management entered into a management and consulting agreement pursuant to which
TC Management will provide management advisory and consulting services to the
Company for which it will receive a payment of $0.5 million plus expenses
annually.
The Company believes that the management advisory and transaction fees paid or
to be paid to TC Management are comparable to fees that would be paid to
unaffiliated third parties for similar services.
Management Equity Incentive Plan
In January 1995, the Company implemented an equity incentive plan to provide a
performance incentive to the Company's management. An aggregate of approximately
747,000 shares of Class A, Class B and Class C management Common Stock of
Holdings ("Management Stock") were purchased by certain members of management,
including Messrs. Dordelman, Willett, DeSantis and Taylor. All outstanding
shares of Management Stock were redeemed in connection with the closing of the
Merger for an aggregate consideration of approximately $7.3 million of which
approximately $2.1 million was reinvested in CPAC as discussed below.
Equity Contribution of CPAC
In connection with and immediately prior to the Merger, Thayer contributed cash
in the amount of $22.9 million in exchange for 128,800 shares of common stock,
$0.01 par value per share, of CPAC, 10,000 shares of 15% payable-in-kind
redeemable preferred stock, $0.01 par value per
22
<PAGE> 24
share, of CPAC and warrants to purchase 26,471 common shares of CPAC at an
exercise price of $0.01 per share. Certain senior managers of CPC including
Messrs. Dordelman, Willett, Taylor and DeSantis exchanged certain of their
existing common shares of Holdings (valued for such purpose at the amount that
would otherwise be payable for such shares in connection with the merger) and
contributed cash in the aggregate amount of $2.1 million in exchange for an
aggregate of 21,200 shares of common stock of CPAC.
Shareholders' Agreement
In connection with the Merger, Thayer, CPH and the Management Investors entered
into a shareholders agreement which provides the Management Investors with
incidental registration rights, tag-along rights, antidilution protection and in
certain circumstances mandatory redemption rights. The Management Investors are
subject to a bring-along right and certain call provisions exercisable by CPH or
Thayer.
23
<PAGE> 25
Part IV
Item 14. Exhibits, Financial Statements and Reports on Form 10-K
a. (1)-(2) Financial Statements:
The Financial Statements and Schedules listed in the accompanying index to
Consolidated Financial Statements and Supplemental Data on page F-1 are
filed as part of this report.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
See Index to Exhibits on page E-1.
24
<PAGE> 26
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly insured this report to be signed on its
behalf by the undersigned, thereto duly authorized.
Colorado Prime Corporation
Date: December 18, 1997
By: /s/ Thomas S. Taylor
------------------------------
Thomas S. Taylor
Chief Financial Officer
Vice President and Director
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
Signatures Title Date
---------- ----- ----
____________________ *Chief Executive Officer and December 18, 1997
William F. Dordelman Chairman of the Board
(Principal Executive Officer)
____________________ Chief Financial Officer, Vice December 18, 1997
Thomas S. Taylor President and Director
(Principal Accounting Officer)
____________________ *Director December 18, 1997
Donald Keller
____________________ *Director December 18, 1997
Frederic Malek
____________________ *Director December 18, 1997
Dr. Paul Stern
____________________ *Director December 18, 1997
Daniel J. Altobello
____________________ *Director December 18, 1997
William Nicholson
*By: /s/ Thomas S. Taylor
--------------------- Attorney-in-Fact
Thomas S. Taylor
25
<PAGE> 27
Colorado Prime Corporation and Subsidiaries
Index to Consolidated Financial Statements
and Supplemental Data
The following financial statements of the registrant and its subsidiaries
required to be included in Item 14. (a) (1) and (2) of Form 10-K are listed
below:
Report of Independent Public Accountants.
Consolidated Balance Sheet as of September 26, 1997.
Statement of Consolidated Operations for the twenty week period ended September
26, 1997.
Statement of Consolidated Stockholder's Equity for the twenty week period ended
September 26, 1997.
Statement of Consolidated Cash Flows for the twenty week period ended September
26, 1997.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
Consolidated Balance Sheet as of September 27, 1996.
Statements of Consolidated Operations for the thirty-two week period ended May
9, 1997 and the years ended September 27, 1996 and September 29, 1995.
Statements of Consolidated Stockholder's Equity for the thirty-two week period
ended May 9, 1997 and the years ended September 27, 1996 and September 29, 1995.
Statements of Consolidated Cash Flows for the thirty-two week period ended May
9, 1997 and the years ended September 27, 1996 and September 29, 1995.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants on Schedules.
Schedule II for the twenty weeks ended September 26, 1997.
Report of Independent Public Accountants on Schedules.
Schedule II for the thirty-two weeks ended May 9, 1997 and the years September
27, 1996 and September 29, 1995.
All other schedules not listed above have been omitted as not applicable or
because the required information is included in the Consolidated Financial
Statements or in the notes thereto. Columns omitted from schedules filed have
been omitted because the information is not applicable.
F-1
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Colorado Prime Corporation:
We have audited the accompanying consolidated balance sheet of Colorado Prime
Corporation (a Delaware corporation) and subsidiaries as of September 26, 1997,
and the related statements of consolidated operations, stockholder's equity and
cash flows for the twenty week period ended September 26, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Colorado Prime Corporation and
Subsidiaries as of September 26, 1997, and the results of their operations and
their cash flows for the twenty week period then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
November 26, 1997
F-2
<PAGE> 29
Colorado Prime Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in Thousands)
September 26,
1997
----
Assets
Current assets:
Cash $ 972
Accounts receivable - net 57,482
Inventories - net 4,538
Prepaid expenses and other current assets 1,399
Refundable income taxes 2,483
Deferred income tax benefit 6,992
---------
Total current assets 73,866
---------
Property, plant and equipment - net 5,905
---------
Noncurrent accounts receivable - net 36,503
---------
Goodwill-net 44,744
---------
Other assets - net 8,755
---------
Total assets $ 169,773
=========
Liabilities and Stockholder's Equity Current liabilities:
Accounts payable $ 5,998
Accrued expenses 15,191
Income and other taxes payable 1,184
Current portion of capital lease obligations 258
---------
Total current liabilities 22,631
---------
Revolver 20,339
---------
Senior unsecured notes, net of discount 98,059
---------
Long-term portion of capital lease obligations 19
---------
Other liabilities 3,100
---------
Commitments and contingent liabilities (Note 13)
Stockholder's equity:
Common stock--par value, $.01, per share;
1,000 shares authorized, issued
and outstanding --
Paid-in capital 25,873
Accumulated deficit (248)
---------
Total stockholder's equity 25,625
Total liabilities and stockholder's equity $ 169,773
=========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 30
Colorado Prime Corporation and Subsidiaries
Statement of Consolidated Operations
(Dollars in Thousands)
20 Weeks
Ended
September 26,
1997
----
Product sales $ 54,407
Finance income earned 5,600
--------
Total revenue 60,007
Cost of goods sold 21,195
--------
Gross profit 38,812
--------
Other costs and expenses:
Selling, general and 31,923
administrative
Amortization of goodwill 540
Interest expense 6,222
Other expense 245
--------
Total costs and expenses 38,930
--------
Loss before provision
for income taxes (118)
Provision for income taxes 130
--------
Net loss $ (248)
========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 31
Colorado Prime Corporation and Subsidiaries
Statement of Consolidated Stockholder's Equity
For the twenty weeks ended
September 26, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock
------------
Number of Total
Outstanding Dollar Paid-in Accumulated Stockholder's
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at May 9, 1997 1,000 $ -- $ 25,873 $ -- $ 25,873
Net loss for the twenty
weeks ended September
26, 1997 (248) (248)
------ --------- ----------- ---------- ----------
Balance at September 26,
1997 1,000 $ -- $ 25,873 $ (248) $ 25,625
====== ========= =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 32
Colorado Prime Corporation and Subsidiaries
Statement of Consolidated Cash Flows
(Dollars in Thousands)
Twenty weeks ended
September 26, 1997
------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (248)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,043
Deferred income taxes (706)
Provision for doubtful accounts 3,017
Change in operating assets and liabilities:
Accounts receivable (3,057)
Inventories (153)
Prepaid expenses and other current assets (102)
Other assets (518)
Accounts payable 1,082
Accrued expenses (1,705)
Income and other taxes payable 183
Other liabilities (235)
--------
Total adjustments (151)
--------
Net cash used in operating activities (399)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in property, plant and equipment (409)
Net assets acquired (2,352)
--------
Net cash used in investing activities (2,761)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of revolver (3,661)
Decrease in capital lease obligation (103)
Net proceeds from senior unsecured notes 87,566
Proceeds from issuance of revolver 24,000
Capital contribution from parent 25,873
Repayment of note payable (58,707)
Repayment of senior notes (43,260)
Distribution to former shareholders (33,120)
--------
Cash used in financing activities (1,412)
NET DECREASE IN CASH (4,572)
CASH, BEGINNING OF PERIOD 5,544
--------
CASH, END OF PERIOD $ 972
========
Supplemental Cash Flow Data
Income tax payments totaled approximately $13 for the twenty weeks ended
September 26, 1997.
Interest payments totaled approximately $630 for the twenty weeks ended
September 26, 1997.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 33
Colorado Prime Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
1. Company Background
Colorado Prime (the "Company") is a wholly owned subsidiary of Colorado Prime
Holdings, Inc., formally KPC Holdings Corporation. Pursuant to the merger
agreement dated March 25, 1997, between the Company's then parent corporation,
KPC Holdings Corporation ("Holdings") and Thayer Equity Investors III, L.P., a
private equity investment limited partnership ("Thayer"), Colorado Prime
Acquisition Corp., a transitory acquisition subsidiary established by Thayer
prior to the consummation of the merger, merged with and into Holdings,
following which Holdings was the surviving corporation and was renamed Colorado
Prime Holdings Inc. ("CPH"). The Company is a leading direct marketer of high
quality, value-added food programs and products related to in home dining and
entertainment.
As a result of the transaction above, a new basis of accounting under the "push
down" method was adopted effective May 9, 1997. Under this method, the assets
and liabilities of the Company were revalued to reflect CPH's new cost basis in
the Company, which is based on the fair values of such assets and liabilities on
May 9, 1997. Financial data for the period subsequent to May 9, 1997 reflect the
adoption of this new basis of accounting and, accordingly, may not be comparable
with the data presented, which includes the period prior to May 9, 1997.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue on the sale of food, appliances and accessories
at the time of delivery and on finance charges earned under the effective
interest method.
Company's Year End
The Company's fiscal year ends on the last Friday of September. The financial
statements through September 26, 1997 include only the twenty week period
subsequent to the merger on May 9, 1997.
Principles of Consolidation
The consolidated financial statements include the accounts of the "Company" and
its wholly-owned subsidiaries; Kal-Mar Properties Corp. ("Kal-Mar"), Concord
Financial Services, Inc. ("Concord") and Prime Foods Development Corporation
("Prime"). Intercompany accounts and transactions have been eliminated in
consolidation.
Fair Value of Financial Instruments
At September 26, 1997 the recorded and estimated fair values of the Company's
financial instruments are as follows:
Estimated
Recorded Fair Value
-------- ----------
Accounts receivable-net 57,482 57,482(a)
Noncurrent accounts receivable-net 36,503 36,503(a)
Revolver 20,339 20,339(b)
Senior unsecured notes, net of discount 98,059 98,059(b)
Interest rate cap -- 71(c)
F-7
<PAGE> 34
(a) Based on the Company's credit policies and the terms of its receivables,
management believes that the fair value of the Company's receivables
approximates the recorded amounts. Since these receivables arise solely in
connection with the sale of the Company's products and are an integral
part of the Company's marketing program, it is not practical to obtain an
appraisal.
(b) Based on terms of the Company's debt instruments as compared to credit
market conditions at September 26, 1997, management believes that the
carrying value of its debt instruments approximates its fair value.
(c) Based on dealer's quotation of the approximate cost to exit the interest
rate cap arrangement.
Accounts Receivable
The term of accounts receivable related to food sales is less than one year. The
term of accounts receivable related to appliance sales is generally greater than
one year. As a result, the financial statements reflect a current and noncurrent
portion of these accounts receivable. The Company's customers are families and
individuals located throughout the United States, resulting in no significant
concentration of credit risk. Management closely monitors the aging of the
accounts receivable balances and reserves for account balances and discontinues
the accrual of finance charges on accounts based upon pre-established criteria.
Inventories
Inventories are stated at the lower of cost or market, with the cost determined
on the first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation and amortization (Note 6). Depreciation and amortization are
computed using primarily the straight-line method over the estimated useful
lives of the related assets or the life of the related leases, if less, as
follows:
Buildings 17-25 years
Assets under capital leases 5-14 years
Machinery and equipment 5-8 years
Software 7 years
Furniture and fixtures 5-8 years
Delivery equipment 4-8 years
Automobiles 4 years
Leasehold improvements 5-19 years
Goodwill
Goodwill is amortized using the straight-line method over a period of thirty
years. At September 26, 1997, goodwill is shown net of accumulated amortization
of $540. Goodwill is reviewed for impairment based upon estimated undiscounted
future cash flows from operations.
Long-lived Assets
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. The adoption of SFAS No. 121, in fiscal 1997
did not have a material effect on the Company's results of operations, cash
flows or financial position.
F-8
<PAGE> 35
Income Taxes
The Company files its Federal income tax return on a consolidated basis, while
separate state and local income tax returns are filed for each company that is
part of the consolidated group (except for New York State, for which a combined
tax return is filed).
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, income taxes are recognized using a liability approach
whereby deferred tax assets and liabilities are computed for temporary
differences between taxable income for financial reporting and income tax
purposes, measured by the enacted rates that will be in effect when those
differences reverse (Note 11).
Stock-Based Compensation
The Company currently does not have any stock options plans in place, however
CPH will adopt a stock option plan. When the options are granted, the Company
will comply with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), by continuing to apply the provisions of
Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to
Employees", while providing the required pro forma disclosures as if the fair
value method had been applied.
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 at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
3. Merger
On May 9, 1997, Holdings was acquired by Thayer for approximately $149,000. The
purchase price was financed through the issuance of approximately $124,000 of
long-term debt and approximately $25,000 of contributed capital. The proceeds
were used to repay the existing debt, repay the shareholders of Holdings and pay
merger related fees and expenses. The purchase price exceeded the fair value of
the net assets acquired by approximately $45,000, which is recorded as goodwill
and is being amortized over 30 years. The following unaudited pro forma
information has been prepared assuming the merger had occurred at the beginning
of fiscal 1996. The pro forma information is presented for informational
purposes only and is not necessarily indicative of what would have occurred if
the acquisition had been made as of those dates. In addition, the pro forma
information is not intended to be a projection of future results.
Fiscal Year
-----------
1997 1996
---- ----
Interest expense $15,392 $15,392
Amortization of goodwill 1,405 1,411
Net income (loss) 644 (4,494)
F-9
<PAGE> 36
4. Accounts receivable
Accounts receivable at September 26, 1997 consisted of the following:
Short-term food receivables $ 28,353
Appliance and accessories receivables 73,168
--------
Total accounts receivable 101,521
Less: Allowance for doubtful accounts 7,536
--------
Accounts receivable-net 93,985
Noncurrent accounts receivable 36,503
--------
Current accounts receivable $ 57,482
========
5. Inventories
Inventories, net of allowance for slow moving, excess and obsolete inventory of
$319 at September 26, 1997, consisted of the following:
Food $2,635
Appliances, tableware, entertainment products and cookware 1,903
------
Total $4,538
======
6. Property, Plant and Equipment
Property, plant and equipment at September 26, 1997 consisted of the following:
Land $ 603
Buildings 608
Assets under capital leases 488
Machinery and equipment 713
Software 337
Furniture and fixtures 3,059
Delivery equipment 782
Automobiles 70
Leasehold improvements 313
------
Total 6,973
------
Less: accumulated depreciation and amortization 1,068
------
Property, plant and equipment-net $5,905
======
7. Accrued Expenses
Accrued expenses at September 26, 1997 consisted of the following:
Payroll $ 2,113
Interest 4,934
Other 8,144
-------
Total $15,191
=======
8. Revolver
In connection with the merger discussed in Note 1, the Company entered into a
credit agreement (the "Credit Agreement") with Dresdner Bank AG, as agent, and
certain other financial institutions. The Credit Agreement provides for a
working capital revolver (the "Working Capital Revolver") of $50,000 and has a
final maturity date of April 30, 2002.
F-10
<PAGE> 37
The obligations of the Company under the Credit Agreement are guaranteed by CPH.
Each of the Company's subsidiaries were also required to issue a guarantee under
the Credit Agreement, which is secured by first priority perfected security
interests in all the assets of such subsidiary, and CPC pledged the issued and
outstanding capital stock of each such subsidiary owned by CPC to secure
indebtedness under the Credit Agreement.
Under the Working Capital Revolver, CPC is entitled to draw amounts subject to
availability pursuant to a borrowing base requirement in order to meet the
Company's working capital requirements. The borrowing base consists of the sum
of certain percentages of (i) eligible food-related and non-food-related
accounts receivable (as defined in the Credit Agreement) and (ii) eligible
inventory (as defined in the Credit Agreement).
The Working Capital Revolver accrues interest at the Base Rate (as defined in
the Credit Agreement) or LIBOR (as defined in the Credit Agreement) plus, in
each case, the applicable margin. The applicable margin will vary over the term
of the Credit Agreement based on the Company's achievement of specified
financial ratios. As of September 26, 1997 the weighted average rate of interest
was approximately 7.6%.
The Credit Agreement provides that the Working Capital Revolver will impose
certain covenants and other requirements on the Company. The Credit Agreement
requires the Company to meet certain financial tests including a minimum fixed
charge coverage ratio, a minimum interest coverage ratio, a maximum leverage
ratio, the maintenance of a minimum net worth and a limitation on capital
expenditures.
As of September 26, 1997, the Company had drawn $20,300 against the Working
Capital Revolver and had $29,700 in available borrowings. The Credit Agreement
provides that the Company will pay various fees including fees on the unused
portion of the Working Capital Revolver at an annual rate determined pursuant to
the Credit Agreement. For the twenty weeks ended September 26, 1997, the Company
paid $620 in interest and fees.
In connection with the Credit Agreement, the Company incurred approximately
$1,500 of debt issuance costs, which will be amortized over the life of the
Credit Agreement (5 years).
The Company has entered into an interest rate cap agreement with a bank covering
$55,627 of notional principal. The interest rate cap agreement extends for a
term of 30 months from the date of execution and provided coverage when the 30
day rate for commercial paper (as published by the Federal Reserve Schedule
H.15) exceeds 6.5%. The Company utilizes a contingent premium instrument to
execute the cap which provides for fixed monthly payments if the rate exceeds
6.5% during the term of the agreement. The cap had not been utilized as of
September 26, 1997.
9. Senior Unsecured Notes
In connection with the merger discussed in Note 1, the Company issued $100,000
of Senior Unsecured Notes (the "Notes"), which bear interest at 12.5% and mature
in 2004. Interest on the Notes is payable semi-annually in arrears on May 1 and
November 1 of each year, commencing November 1, 1997. The Notes are redeemable
at the option of the Company, in whole or in part at any time on or after May 1,
2002. The redemption price will be equal to 106.250% of the principal amount of
the Notes together with accrued and unpaid interest at any time on or after May
1, 2002 and prior to May 1, 2003 and the redemption price will be equal to
103.125% of the principal amount of the Notes together with accrued and unpaid
interest on or after May 1, 2003. In addition, prior to May 1, 2000, the Company
may redeem up to 35 % of the aggregate principal amount of the Notes with the
net cash proceeds received by the Company or its parent corporation from one or
more offerings of capital stock (other than Disqualified Stock, as defined) at a
redemption price of 112.50% of the principal amount thereof plus accrued and
unpaid interest provided, however, that at least $65,000 in aggregate principal
amount remains after such redemption.
F-11
<PAGE> 38
In connection with the issuance of the Notes, the Company incurred approximately
$4,800 of debt issuance costs, which will be amortized over the life of the
Notes (7 years).
The Notes were issued at a discount of approximately $2,000, which is being
accreted using the effective interest method over the life of the Notes. The
Notes were issued in units of $1 which consisted of a principal amount senior
notes and one warrant to purchase .19608 shares of common stock of Holdings.
Based on an estimate of the fair market value of a warrant, $979.87 of the issue
price of a unit was allocated to the note and $8.73 was allocated to the
warrant, the aggregate value of which is part of the discount which is being
accreted. For the 20 weeks ended September 26, 1997, $72 of discount had been
accreted.
The Notes impose certain restrictions on the Company, including restrictions on
its ability to incur indebtedness, pay dividends, make investments, grant liens,
sell its assets and engage in certain other activities.
The Notes are guaranteed on a senior unsecured basis by all existing
subsidiaries (there are no non-guarantor subsidiaries) and any future U.S.
subsidiaries of the Company. The guarantees of the subsidiaries are full,
unconditional, joint and several. Summary financial data for Kal-Mar, Concord
and Prime are as follows:
September 26, 1997
Kal-Mar Concord Prime
------- ------- -----
Current assets $ 14 $62,654 $ 12
Non-current assets 811 36,624 0
Current liabilities 86 2,757 1
Non-current liabilities -- 93,062 710
---- ------- -----
Net assets (liabilities) $739 $ 3,459 $(699)
==== ======= =====
For the twenty weeks ended
September 26, 1997
Kal-Mar Concord Prime
------- ------- -----
Net revenues $67 $20,196 $ 0
Gross profit 67 20,196 0
Net income 23 6,002 0
Separate financial statements of the Company's subsidiaries are not presented,
as the Company's management has determined that (i) the data presented above
provides meaningful information (ii) the data in separate financial statements
other than that presented above would not be material to the investors of the
Notes.
10. Pension Plan
The Company maintains a defined contribution pension plan (the "Plan").
Employees who have completed six months of service and have reached the entry
age (twenty and one-half years) are eligible to participate in the Plan. The
Plan provides for 100 percent vesting after seven years of service. The Plan
requires the Company to make annual contributions based upon a variable
percentage of the participant's annual compensation. Forfeitures are created
when participants terminate employment before becoming entitled to their full
benefits under the Plan. Such forfeited amounts are used to reduce the Company's
contributions to the Plan. In addition, the Plan allows for eligible employees
to make voluntary contributions within specified limits. Pension expense under
the Plan was approximately $394 for the twenty weeks ended September 26, 1997.
F-12
<PAGE> 39
11. Income Taxes
The provision for income taxes for the twenty weeks ended September 26, 1997 is
comprised of the following:
Current: $ 692
Federal 144
-----
State 836
-----
Deferred:
Federal (578)
State (128)
-----
(706)
-----
Total $ 130
=====
Significant components of deferred income tax assets and liabilities as of
September 26, 1997 are as follows:
Deferred tax assets:
Allowance for doubtful accounts $ 2,910
Inventory 126
Accrued interest 642
Accrued expenses and other, net 3,755
-------
7,433
Deferred tax liabilities:
Depreciation (441)
-------
Net deferred tax asset $ 6,992
=======
A reconciliation between the federal statutory tax rate and the effective rate
for the twenty weeks ended September 26, 1997 is as follows:
Federal income tax provision at U.S. (34.0%)
statutory rate
State income taxes, net of federal benefit 9.1
Nondeductible goodwill amortization 138.9
Meals and entertainment 15.2
All other, net 29.1
------
Provision for income taxes 100.10%
======
The refundable income taxes reflected in the accompanying balance sheet as of
September 26, 1997 are attributable to interest related to the accelerated
repayment of debt.
12. Capital Lease Obligations
The Company has entered into agreements to lease a building and certain
equipment from non-related parties. These leases are accounted for as capital
leases. The future minimum lease payments, under these capital leases, and the
present value of the future minimum lease payments as of September 26, 1997, are
as follows:
F-13
<PAGE> 40
Fiscal Years Ending September,
1998 $291
1999 16
2000 7
----
Total future minimum lease payments 314
Less: amount representing interest 37
----
Present value of future minimum lease payments
(including $258 payable currently) $277
====
There were no assets acquired under capital leases during the twenty weeks ended
September 26, 1997. Accumulated amortization related to the assets classified as
capital leases was $371 at September 26, 1997.
13. Commitments and Contingent Liabilities
Future minimum operating lease payments at September 26, 1997 are as follows:
Fiscal Years Ending September,
1998 $3,019
1999 2,479
2000 1,823
2001 1,278
2002 786
Thereafter 1,332
Rent expense for the twenty weeks ended September 26, 1997 was $1,217.
The Company entered into employment agreements with certain senior executives,
which provide for aggregate base annual salary of $1,110 plus performance based
incentives. The agreements are for one year rolling terms and are renewable.
The Company has entered into a lease agreement for its new corporate
headquarters in Farmingdale, N.Y. and expects to occupy the new facility in
fiscal 1998, concurrent with the expiration of the existing headquarters lease.
The Company is involved in various legal matters involving claims and
counterclaims arising from the ordinary course of business. In management's
opinion, any unfavorable outcome associated with these matters would not have a
material adverse effect on the Company's financial statements.
F-14
<PAGE> 41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Colorado Prime Corporation:
We have audited the accompanying consolidated balance sheet of Colorado Prime
Corporation (a Delaware corporation) and subsidiaries as of September 27, 1996,
and the related statements of consolidated operations, stockholder's equity and
cash flows for the thirty-two week period ended May 9, 1997 and the fiscal years
ended September 27, 1996 and September 29, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Colorado Prime Corporation and
Subsidiaries as of September 27, 1996, and the results of their operations and
their cash flows for the thirty-two week period ended May 9, 1997 and the fiscal
years ended September 27, 1996 and September 29, 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
November 26, 1997
F-15
<PAGE> 42
Colorado Prime Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in Thousands)
September 27, 1996
------------------
Assets
Current assets:
Cash $ 1,716
Accounts receivable - net 56,773
Inventories-net 3,638
Prepaid expenses and other current assets 1,665
Deferred income tax benefit 4,429
---------
Total current assets 68,221
---------
Property, plant and equipment - net 7,240
---------
Noncurrent accounts receivable-net 33,416
---------
Goodwill-net 38,414
---------
Other assets-net 3,493
---------
Total assets $ 150,784
=========
Liabilities and Stockholder's Equity Current liabilities:
Accounts payable $ 6,651
Accrued expenses 7,135
Income and other taxes payable 1,172
Current portion of capital lease obligations 361
Total current liabilities 15,319
---------
Note Payable 58,343
---------
Senior notes payable 34,560
---------
Long-term portion of capital lease obligations 277
---------
Other liabilities 1,616
---------
Commitments and contingent liabilities (Note 13)
Stockholder's equity:
Common stock-par value, $.01, per share;
1,000 shares authorized, issued
and outstanding
Paid-in capital 51,291
Accumulated deficit (10,622)
---------
Total stockholder's equity 40,669
---------
Total Liabilities and Stockholder's equity $ 150,784
=========
The accompanying notes are an integral part of the consolidated financial
statements.
F-16
<PAGE> 43
Colorado Prime Corporation and Subsidiaries
Statements of Consolidated Operations
(Dollars in Thousands)
Fiscal Year Ended
32 weeks ended September 27, September 29,
May 9, 1997 1996 1995
----------- ---- ----
Product sales $85,510 $ 142,651 $144,966
Finance income earned 8,637 12,792 11,524
------- --------- --------
Total revenue 94,147 155,443 156,490
Cost of goods sold 32,949 56,387 59,906
------- --------- --------
Gross profit 61,198 99,056 96,584
------- --------- --------
Other costs and expenses:
Selling, general and
administrative 48,749 80,901 80,988
Amortization of goodwill 713 1,164 1,164
Interest expense 5,713 9,130 8,017
Other expense 426 7,089 767
------- --------- --------
Total costs and expenses 55,601 98,284 90,936
------- --------- --------
Income before provision
for income taxes 5,597 772 5,648
Provision for income taxes 2,414 1,262 2,738
------- --------- --------
Net income (loss) $ 3,183 $ (490) $ 2,910
======= ========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-17
<PAGE> 44
Colorado Prime Corporation and Subsidiaries
Statements of Consolidated Stockholder's Equity
For the fiscal years ended
September 29, 1995 and September 27, 1996 and the thirty-two weeks ended
May 9, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock
-----------------------
Number of Total
Outstanding Dollar Paid-in Accumulated Stockholder's
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 1,000 $ -- $54,964 $(11,358) $ 43,606
Reversal of prior year accrued
dividend 906 906
Payment of dividend to Holdings (2,400) (2,400)
Accrued dividend (900) (900)
Capital contribution from Holdings 156 156
Net income 2,910 2,910
------ ------- ------- -------- --------
Balance at September 29, 1995 1,000 -- 55,120 (10,842) 44,278
Reversal of prior year accrued
dividend 900 900
Payment of dividend to Holdings (190) (190)
Net return of capital to Holdings (3,829) (3,829)
Net loss (490) (490)
------ ------- ------- -------- --------
Balance at September 27, 1996 1,000 -- 51,291 (10,622) 40,669
Net income 3,183 3,183
------ ------- ------- -------- --------
Balance at May 9, 1997 1,000 $ -- $51,291 $ (7,439) $ 43,852
====== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-18
<PAGE> 45
Colorado Prime Corporation and Subsidiaries
Statements of Consolidated Cash Flows
(Dollars in Thousands)
Fiscal Year Ended
32 Weeks
ended September September
May 9, 1997 27, 1996 29, 1995
----------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,183 $ (490) $ 2,910
------- -------- --------
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,992 3,661 3,598
Amortization of deferred loan costs 300 611 476
Deferred income taxes 845 (337) (237)
Provision for doubtful accounts 3,073 5,280 4,596
Change in operating assets and liabilities:
Accounts receivable (6,225) (11,554) (12,951)
Inventories-net (747) 587 (1,054)
Prepaid expenses and other current assets (77) (274) 838
Other assets (33) 232 247
Accounts payable (1,560) 909 961
Accrued expenses (232) (859) 682
Other liabilities 37 869 (1,017)
Income and other taxes payable 1,407 (906) 819
------- -------- --------
Total adjustments (1,220) (1,781) (3,042)
------- -------- --------
Net cash provided by (used in) operating
activities 1,963 (2,271) (132)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investments in property,
plant and equipment (580) (1,958) (2,534)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in notes payable (1,051) 2,426 5,784
Decrease in capital lease obligations (258) (547) (579)
Decrease in loan payable to affiliate -- (25,000) --
Issuance of senior notes payable -- 34,508 --
Payment of dividend -- (190) (2,400)
Payment of fees related to debt refinancing -- (3,253) --
Net return of capital to Holdings -- (3,829) 156
------- -------- --------
Net cash (used in) provided by financing (1,309) 4,115 2,961
activities
NET INCREASE (DECREASE) IN CASH 74 (114) 295
CASH, BEGINNING OF PERIOD 1,716 1,830 1,535
------- -------- --------
CASH, END OF PERIOD $ 1,790 $ 1,716 $ 1,830
======= ======== ========
Supplemental Disclosure of Cash Flow Information
Income tax payments totaled approximately $496, $2,490 and $2,045 for the
thirty-two weeks ended May 9, 1997 and fiscal years 1996 and 1995, respectively.
Interest payments totaled approximately $5,534, $9,138 and $6,056 for the
thirty-two weeks ended May 9, 1997 and fiscal years 1996 and 1995, respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
F-19
<PAGE> 46
Colorado Prime Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
1. Company Background
Colorado Prime Corporation (the "Company") is a wholly owned subsidiary of KPC
Holdings Corporation ("Holdings"). Holdings is owned by KPC Acquisition Co.
L.P., a partnership which includes Kohlberg Associates L.P. ("Kohlberg") as the
general and controlling partner. The Company is a leading direct marketer of
high quality, value-added food programs and products related to in-home dining
and entertainment.
The accompanying consolidated financial statements give effect to the
acquisition of Holdings by Kohlberg in 1989. The excess of the aggregate
purchase price over the fair value of the net assets acquired, after recording
purchase adjustments to adjust the carrying value of the Company's assets and
liabilities to fair value (substantially related to fixed assets and deferred
income taxes), was recorded as goodwill.
Effective May 9,1997, the Company was acquired by Thayer Equity Investors III,
L.P., in a transaction that resulted in a new basis of accounting.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue on the sale of food, appliances and accessories
at the time of delivery and on finance charges earned under the effective
interest method.
Company's Year End
The Company's fiscal year ends on the last Friday of September. The financial
statements for 1996 and 1995 contain fifty-two weeks. The financial statements
for the period through the acquisition on May 9, 1997 contain 32 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the "Company" and
its wholly-owned subsidiaries; Kal-Mar Properties Corp. ("Kal-Mar"), Concord
Financial Services, Inc. ("Concord") and Prime Foods Development Corporation
("Prime"). Intercompany accounts and transactions have been eliminated in
consolidation.
Fair Value of Financial Instruments
At September 27, 1996, the recorded and estimated fair values of the Company's
financial instruments are as follows:
Estimated
Recorded Fair Value
-------- ----------
Accounts receivable-net 56,773 56,773(a)
Noncurrent accounts receivable-net 33,416 33,416(a)
Note payable 58,343 58,343(b)
Senior notes payable 34,560 34,560(b)
Interest rate cap -- 450(c)
F-20
<PAGE> 47
(a) Based on the Company's credit policies and the terms of its receivables,
management believes that the fair value of the Company's receivables
approximates the recorded amounts. Since these receivables arise solely in
connection with the sale of the Company's products and are an integral
part of the Company's marketing program, it is not practical to obtain an
appraisal.
(b) Based on the terms of the Company's debt instruments as compared to credit
market conditions at September 27, 1996, management believes that the
carrying value of its debt instruments approximates its fair value.
(c) Based on dealer's quotations of the approximate cost to exit the interest
rate cap arrangement (Note 7).
Accounts Receivable
The term of accounts receivable related to food sales is less than one year. The
term of accounts receivable related to appliance sales is generally greater than
one year. As a result, the financial statements reflect a current and noncurrent
portion of these accounts receivable. The Company's customers are families and
individuals located throughout the United States, resulting in no significant
concentration of credit risk. Management closely monitors the aging of the
accounts receivable balances and reserves for account balances and discontinues
the accrual of finance charges on accounts based upon pre-established criteria.
Inventories
Inventories are stated at the lower of cost or market, with the cost determined
on the first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation and amortization (Note 5). Depreciation and amortization are
computed using primarily the straight-line method over the estimated useful
lives of the related assets or the life of the related leases, if less, as
follows:
Buildings 17-25 years
Assets under capital leases 5-14 years
Machinery and equipment 5-8 years
Software 7 years
Furniture and fixtures 5-8 years
Delivery equipment 4-8 years
Automobiles 4 years
Leasehold improvements 5-19 years
Goodwill
Goodwill is amortized using the straight-line method over forty years. At
September 27, 1996, goodwill is shown net of accumulated amortization of $8,163.
Goodwill is reviewed for impairment based upon estimated undiscounted future
cash flows from operations.
F-21
<PAGE> 48
Income Taxes
The Company files its Federal income tax return on a consolidated basis, while
separate state and local income tax returns are filed for each company that is
part of the consolidated group (except for New York State, for which a combined
tax return is filed).
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, income taxes are recognized using a liability approach
whereby deferred tax assets and liabilities are computed for temporary
differences between taxable income for financial reporting and income tax
purposes, measured by the enacted rates that will be in effect when those
differences reverse (Note 11).
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 at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications
Certain prior year balances have been reclassified to conform with the current
presentation.
3. Accounts Receivable
Accounts receivable at September 27, 1996 consisted of the following:
Short-term food receivables $27,766
Appliance and accessories receivables 69,867
-------
Total accounts receivable 97,633
Less: Allowance for doubtful accounts 7,444
-------
Accounts receivable--net 90,189
Noncurrent accounts receivable 33,416
-------
Current accounts receivable $56,773
=======
4. Inventories
Inventories, net of allowance for slow moving, excess and obsolete inventory of
$309 at September 27, 1996, consisted of the following:
Food $2,412
Appliances, tableware, entertainment products and cookware 1,226
------
Total $3,638
======
F-22
<PAGE> 49
5. Property, Plant and Equipment
Property, plant and equipment at September 27, 1996 consisted of the following:
Land $ 603
Buildings 1,650
Assets under capital leases 3,846
Machinery and equipment 6,659
Software 506
Furniture and fixtures 1,296
Delivery equipment 3,085
Automobiles 114
Leasehold improvements 801
-------
Total 18,560
Less: accumulated depreciation and amortization 11,320
-------
Property, plant and equipment--net $ 7,240
=======
6. Accrued Expenses
Accrued expenses at September 27, 1996 consisted of the following:
Payroll $2,251
Other 4,884
------
Total $7,135
======
7. Note Payable
During March 1993, the Company refinanced its bank indebtedness with Triple-A
Funding Corporation ("Triple-A") as lender and Capital Markets Assurance
Corporation ("CapMAC") as the surety provider, through a receivables financing
facility reflecting various agreements hereinafter referred to as the "CapMAC
Agreements". During March 1994, the CapMAC Agreements were amended to transfer
and assign all rights and obligations of Triple-A to Triple-A One Funding
Corporation ("Triple-A One"). During December 1995, the Company amended the
CapMAC Agreements to extend the term to December 2000 and modify certain of the
financial covenants. Pursuant to the terms of the CapMAC Agreements, the
Company's accounts receivable are pledged to Triple-A One. From the proceeds of
issuing commercial paper, Triple-A One makes loans to the Company based upon
eligible accounts receivable and other factors as defined in the CapMAC
Agreements, up to a maximum of $70,000. Such loans bear interest at the
commercial paper rate available to Triple-A One. The commercial paper rate at
September 27, 1996 was approximately 5.38%.
The Company is also required to pay various fees to CapMAC and Triple-A One for
administration and maintenance of the credit facility. The Company incurred fees
payable to CapMAC and Triple-A One of approximately $406, $696 and $780 for the
thirty-two weeks ended May 9, 1997 and the fiscal years ended September 27, 1996
and September 29, 1995, respectively. Such amounts are included in interest
expense in the accompanying statements of consolidated operations. Interest
expense for the thirty-two weeks ended May 9, 1997 and the fiscal years ended
September 27, 1996 and September 29, 1995 amounted to $ 1,973, $3,199 and
$3,246, respectively. The Company's available unused credit facility with CapMAC
was approximately $8,600 at September 27, 1996.
F-23
<PAGE> 50
The Company has entered into an interest rate cap agreement with a bank covering
$55,627 of notional principal. The interest rate cap agreement extends for a
term of 30 months from the date of execution and provides coverage when the 30
day rate for commercial paper (as published by the Federal Reserve Schedule
H.15) exceeds 6.5%. The Company utilizes a contingent premium instrument to
execute the cap which provides for fixed monthly payments if the rate exceeds
6.5% during the term of the agreement. The cap had not been utilized as of
September 27, 1996.
The CapMAC Agreements contain certain financial covenants which: (i) require the
maintenance of a specified minimum level of net worth, as defined, (ii) require
the maintenance of a specified minimum ratio of indebtedness to net worth, as
defined, and (iii) require the maintenance of a specified minimum ratio of
earnings before interest, taxes, depreciation, amortization and other expenses,
as defined, to cash interest paid. As of September 27, 1996, the Company was in
compliance with all such financial covenants.
In connection with the December 1995 amendment discussed above, the Company
incurred $617 of debt issuance costs, which will be amortized over the life of
the agreement (5 years).
In connection with the acquisition discussed in Note 1, the note payable was
satisfied in full.
8. Senior Notes Payable
In December 1995, the Company entered into the Senior Note Agreement (the
"Senior Agreement") in which the Company issued to unrelated investors $35,000
of 13% Senior Secured Notes which mature in December 2002 along with a warrant
to purchase 1,234,839 shares of common stock of Holdings for $.001 per share.
The warrant was valued at approximately $494 and recorded as a discount and will
be amortized over the life of the Senior Secured Notes. With the proceeds of the
issuance, the Company repaid a $25,000 note due to an affiliated company plus
accrued interest of approximately $1,700, retired 800,000 shares of cumulative
preferred stock of Holdings for $4,000 and paid other related fees and expenses,
including amounts paid to an affiliated company, of approximately $8,400.
Included in the $8,400 is approximately $2,600 of debt issuance costs which the
Company capitalized and will amortize over the life of the Senior Secured Notes
and a $3,000 payment to certain members of Management under an incentive
compensation arrangement which the Company expensed in fiscal 1996.
The Senior Agreement contains certain financial covenants which: (i) require the
maintenance of a specified minimum level of net worth, as defined, and (ii)
require the maintenance of a specified minimum ratio of earnings before
interest, taxes, depreciation, amortization and other expenses, as defined, to
interest paid. As of September 27, 1996, the Company was in compliance with all
such financial covenants.
In connection with the acquisition, the senior notes payable were satisfied in
full.
9. Related Party Transactions
During fiscal 1996 and 1995 the Company paid interest of $600 and $2,900,
respectively, on $25,000 aggregate principal amount of its 11.5% Senior
Subordinated Notes due May 17, 1998 to KPC Acquisition Company L.P. ("KPC").
KPC, the controlling shareholder of Holdings, purchased the Notes as part of a
series of transactions resulting from the purchase of Holdings. These Notes were
repaid on December 20, 1995.
10. Pension Plan
The Company maintains a defined contribution pension plan (the "Plan").
Employees who have completed six months of service and have reached the entry
age (twenty and one-half years) are eligible to participate in the Plan. The
Plan provides for 100 percent vesting after seven years of service. The Plan
requires the Company to make annual contributions based upon a variable
percentage of the participant's annual compensation. Forfeitures are created
when participants terminate employment before becoming entitled to
F-24
<PAGE> 51
their full benefits under the Plan. Such forfeited amounts are used to reduce
the Company's contributions to the Plan. In addition, the Plan allows for
eligible employees to make voluntary contributions within specified limits.
Pension expense under the Plan was approximately $615, $908 and $885 for the
thirty-two weeks ended May 9, 1997 and the fiscal years ended September 27, 1996
and September 29, 1995, respectively.
11. Income Taxes
The provision for income taxes is comprised of the following:
Fiscal Year Ended
32 weeks -----------------
ended September 27, September 29,
May 9, 1997 1996 1995
----------- ---- ----
Current:
Federal $ 1,419 $ 1,301 $ 2,560
State 150 299 416
------- ------- -------
1,569 1,600 2,976
------- ------- -------
Deferred:
Federal 692 (277) (384)
State 153 (61) 146
------- ------- -------
845 (338) (238)
------- ------- -------
Total $ 2,414 $ 1,262 $ 2,738
======= ======= =======
Significant components of deferred income tax assets and liabilities are as
follows:
As of
September 27,
1996
----
Deferred tax assets
Leases $ 20
Allowance for doubtful accounts 2,873
Inventory 108
Accrued interest --
Accrued expenses and other, net 1,857
-------
4,858
Deferred tax liabilities:
Depreciation (429)
-------
Net deferred tax asset $ 4,429
=======
F-25
<PAGE> 52
A reconciliation between the federal statutory tax rate and the effective rate
is as follows:
<TABLE>
<CAPTION>
32 weeks Fiscal Year Ended
ended -----------------
May 9, September 27, September 29,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal income tax provision at U.S. 34.0% 34.0% 34.0%
statutory rate
State income taxes, net of federal benefit 3.6 25.6 4.9
Nondeductible goodwill amortization 4.7 51.3 7.0
Nondeductible compensation -- 51.8 --
Meals and entertainment 0.5 5.4 0.8
All other, net 0.3 (4.7) 1.8
----- ----- -----
Provision for income taxes 43.1% 163.4% 48.5%
===== ===== =====
</TABLE>
12. Capital Lease Obligations
The Company has entered into agreements to lease a building and certain
equipment from non-related parties. These leases are accounted for as capital
leases. The future minimum lease payments under these capital leases and the
present value of the future minimum lease payments as of September 1996 are as
follows:
Fiscal Years Ending September,
- ------------------------------
1997 $453
1998 291
1999 16
2000 6
----
Total future minimum lease payments 766
Less: amount representing interest 128
----
Present value of future minimum lease payments (including $361
payable currently) $638
====
No assets were acquired under capital leases in fiscal 1996 or the 32 weeks
ended May 9, 1997. Accumulated amortization related to the assets classified as
capital leases was $3,235 at September 27, 1996.
13. Commitments and Contingent Liabilities
Future minimum operating lease payments at September 27, 1996 are as follows:
Fiscal Years Ending September,
- ------------------------------
1997 $2,787
1998 2,336
1999 1,752
2000 1,227
2001 794
Thereafter 2,198
F-26
<PAGE> 53
Rent expense for the thirty-two weeks ended May 9, 1997 and fiscal 1996 and 1995
was approximately $1,864, $3,040 and $2,717, respectively. The Company expensed
$1,698 in fiscal 1996 to record estimated losses on unused office and warehouse
space.
The Company is involved in various legal matters involving claims and
counterclaims arising from the ordinary course of business. In management's
opinion, any unfavorable outcome associated with these matters would not have a
material adverse effect on the Company's financial statements.
F-27
<PAGE> 54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE
To Colorado Prime Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated balance sheet of Colorado Prime Corporation and Subsidiaries as of
September 26, 1997, and the related statements of consolidated operations,
stockholder's equity and cash flows for the twenty week period ended September
26, 1997 included in this Annual Report on Form 10-K and have issued our report
thereon dated November 26, 1997. Our audit was made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The accompanying
schedule is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Melville, New York
November 26, 1997
S-1
<PAGE> 55
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
COLORADO PRIME CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to
Beginning Cost and Balance at
Description of Period Expenses Deductions (1) end of Period
--------- -------- -------------- -------------
<S> <C> <C> <C> <C>
For the twenty weeks ended September 26, 1997
Allowance for Doubtful Accounts $7,275 $3,017 $(2,756) $7,536
</TABLE>
(1) Write-offs, net of recovery of amounts previously written off.
S-2
<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE
To Colorado Prime Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated balance sheet of Colorado Prime Corporation and Subsidiaries as of
September 27, 1996, and the related statements of consolidated operations,
stockholder's equity and cash flows for the thirty-two week period ended May 9,
1997 and the fiscal years ended September 27, 1996 and September 29, 1995 and
included in this Annual Report on Form 10-K and have issued our report thereon
dated November 26, 1997. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The accompanying
schedule is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Melville, New York
November 26, 1997
S-3
<PAGE> 57
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
COLORADO PRIME CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to
Beginning Cost and Balance at
Description of Period Expenses Deductions (1) end of Period
--------- -------- -------------- -------------
<S> <C> <C> <C> <C>
For the thirty-two weeks ended May 9, 1997
Allowance for Doubtful Accounts $7,444 $3,073 $(3,242) $7,275
Year ended September 27, 1996
Allowance for Doubtful Accounts $7,336 $5,280 $(5,172) $7,444
Year ended September 29, 1995
Allowance for Doubtful Accounts $6,501 $4,596 $(3,761) $7,336
</TABLE>
(1) Write-offs, net of recovery of amounts previously written off.
S-4
<PAGE> 58
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
3.1. Certificate of Incorporation of CPC, with Amendments. (1)
3.2. Bylaws of CPC, as amended. (1)
3.3. Certificate of Incorporation of Kal-Mar Properties Corp., with
Amendments. (1)
3.4. Bylaws of Kal-Mar Properties Corp., as amended. (1)
3.5. Certificate of Incorporation of Concord Financial Services, Inc.,
with Amendments. (1)
3.6. Bylaws of Concord Financial Services, Inc., as amended. (1)
3.7. Certificate of Incorporation of Prime Foods Development Corporation,
with Amendments. (1)
3.8. Bylaws of Prime Foods Development Corporation, as amended. (1)
4.1. Indenture for the Notes dated as of May 9, 1997 among CPC, the Subsidiary
Guarantors and The Bank of New York, as Trustee (including form of Note).
(1)
10.1. Exchange Agent Agreement between CPC and The Bank of New York, as
Exchange Agent.
10.2. Stock Option Plan of CPH.
10.3. Stock Purchase Agreement between CPH and certain executive officers. (1)
E-1
<PAGE> 59
10.4. Shareholders' Agreement between CPH and certain executive officers. (1)
10.5. Employment Agreement between CPC, CPH and William F. Dordelman. (1)
10.6. Employment Agreement between CPC, CPH and Ricardo DeSantis. (1)
10.7. Employment Agreement between CPC, CPH and Thomas S. Taylor. (1)
10.9. Lease dated September 1, 1983 between Thrift-Pak Food Service, Inc., and
Masciandaro, Kalpakjian & Masciandaro Co., and Sublease dated October 15,
1984 between Colorado Prime, Inc., formerly known as Thrift-Pak Food
Service, Inc., and Masciandaro, Kalpakjian & Masciandaro Co., regarding
the space at One Michael Avenue, Farmingdale, New York. (1)
10.10. Lease dated November 1, 1985 between Colorado Prime (Florida), Inc., and
Kalpakjian, Masciandaro and Masciandaro Partnership and Amendment to
Lease dated December 26, 1986, regarding the office, warehouse and
vehicle repair depot in Pompano Beach, Florida. (1)
10.11. Credit Agreement among CPC, the institutions party thereto as Lenders and
Dresdener AG, New York and Cayman Branches, as the Agents, dated May 9,
1997, with Amendment No. 1 dated as of May 9, 1997. (1)
10.12 Lease dated September 18, 1997 between CPC and Blumenfeld Development
Group, Ltd. regarding the headquarters property located at 500 Bi-County
Boulevard, Farmingdale NY.
10.13 Amendment No.2 dated as of October 9, 1997 to Credit Agreement among CPC,
the institutions party thereto as Lenders and Dresdner AG, New York and
Cayman Branches, as the Agents, dated May 9, 1997.
10.14 Amendment No. 3 dated as of December 11, 1997 to Credit Agreement among
CPC, the institutions party thereto as Lenders and Dresdner AG, New York
and Cayman Branches, as the Agents, dated May 9, 1997.
10.15 Form of Stock Option Agreement of CPH.
21. List of subsidiaries of the Company. (1)
24. Power of Attorney. (1)
27. Financial Data Schedule.
- --------
(1) Incorporated by reference to Registration Statement No. 333-30249 on
Form S-4, dated June 27, 1997.
E-2
