SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 15, 1996
ATLANTIC BEVERAGE COMPANY, INC.
(Exact name of registrant as specified in its
charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 0-22614 36-3761400
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) Identification No.)
</TABLE>
1587 Sulphur Spring Road
Baltimore, Maryland 21227
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 247-5857
(Former name or former address, if changed since last report)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ATLANTIC BEVERAGE COMPANY, INC.
Dated: May 29, 1996 By: /s/ ERIC D. BECKER
-----------------------
Eric D. Becker, Chairman of the Board
<PAGE>
ATLANTIC BEVERAGE COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS AND RELATED NOTES
<TABLE>
<CAPTION>
Page
<S> <C>
PRO FORMA CONSOLIDATED FINANCIAL DATA:
Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1995........................................................ F-2
Notes to Pro Forma Consolidated Statement of Operations....................... F-3
FINANCIAL STATEMENTS OF PREFCO, INC.:
Report of Independent Public Accountants...................................... F-4
Balance Sheets - as of January 1, 1995 and December 31, 1995.................. F-5
Statements of Income - for the Years Ended January 1, 1994, January 1,
1995 and December 31, 1995................................................ F-6
Statements of Changes in Stockholders' Equity - for the Years Ended
January 1, 1994, January 1, 1995 and December 31, 1995..................... F-7
Statements of Cash Flows - for the Years Ended January 1, 1994,
January 1, 1995 and December 31, 1995...................................... F-8
Notes to Financial Statements.................................................. F-9
FINANCIAL STATEMENTS OF CARLTON FOODS, INC.:
Report of Independent Public Accountants....................................... F-12
Balance Sheets - as of December 31, 1994 and 1995.............................. F-13
Statements of Operations - for the Years Ended December 31, 1993,
1994 and 1995.............................................................. F-14
Statements of Changes in Stockholders' Equity (Deficit) - for the Years
Ended December 31, 1993, 1994 and 1995..................................... F-15
Statements of Cash Flows - for the Years Ended December 31, 1993,
1994 and 1995.............................................................. F-16
Notes to Financial Statements.................................................. F-17
</TABLE>
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following Pro Forma Consolidated Financial Data includes the
unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1995. No unaudited Pro Forma Consolidated Balance Sheet is
included, as the balances are reflected in Atlantic Beverage Company, Inc.'s
("Atlantic Beverage") March 31, 1996 balance sheet included in the Company's
Form 10-Q for the quarter ended March 31, 1996. The unaudited Pro Forma
Consolidated Statement of Operations is adjusted to give effect to (i) the
consummation of the acquisition of the common stock of Prefco, Inc. ("Prefco"),
(ii) the consummation of the merger of Carlton Foods, Inc. ("Carlton Foods")
with Atlantic Beverage, (iii) the issuance of additional shares of Atlantic
Beverage common stock through private placement, (iv) the issuance of additional
shares of Atlantic Beverage common stock to the sellers of Prefco and Carlton
Foods (v) the incurrence of revolver and term debt in amounts sufficient to
complete the transactions described in (i) and (ii) above, as if such
transaction had occurred on January 1, 1995.
The pro forma adjustments are based upon available information and
certain assumptions that the Company believes are reasonable. The Pro Forma
Consolidated Financial Data should be read in conjunction with the Company's
Financial Statements and related notes thereto and the financial statements and
related notes of Prefco and Carlton Foods. The unaudited Pro Forma Consolidated
Financial Data do not purport to represent what the Company's results of
operations or financial position would have been had any of the above events
occurred on January 1, 1995 or to project the Company's results of operations or
financial position for or at any future period or date.
F-1
<PAGE>
ATLANTIC BEVERAGE COMPANY, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Atlantic Carlton Pro Forma Pro Forma
Beverage Prefco Foods Adjustments Combined
<S> <C> <C> <C> <C> <C>
Net Sales $20,596,436 $112,057,226 $7,586,254 $(3,815,855)(a) $136,424,061
Cost of goods sold 14,743,435 103,939,174 6,172,681 (3,815,855)(a) 121,039,435
Gross Profit 5,853,001 8,118,052 1,413,573 -- 15,384,626
Selling, general and administrative:
Salaries and benefits 3,087,421 3,419,763 511,973 (126,000)(b) 6,893,157
Other operating expense 2,367,239 3,664,743 493,537 6,525,519
Depreciation and amortization 388,321 93,883 437,169 (119,448)(c)
225,046 (d) 1,024,971
Management and consulting fees 148,200 -- 115,973 75,000 (e) 339,173
Total selling, general and administrative 5,991,181 7,178,389 1,558,652 54,598 14,782,820
Income (loss) from operations (138,180) 939,663 (145,079) (54,598) 601,806
Other Income (Expenses):
Interest expense (25,394) -- (251,218) (702,736)(f) (979,348)
Interest income 11,654 -- -- 11,654
Other -- 102,110 (47,182) 54,928
Income (loss) before income tax provision (151,920) 1,041,773 (443,479) (757,334) (310,960)
Income tax provision
Net (loss) income from continuing
operations $ (151,920) $ 1,041,773 $ (443,479) $ (757,334) $ (310,960)
</TABLE>
F-2
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(a) Adjustment to eliminate sales between Prefco and Carlton Foods.
(b) To reflect difference of pre- and post-acquisition salaries of the
former owners of Prefco in accordance with the Stock Purchase
Agreement.
(c) To reflect impact of the different bases of acquired property, plant
and equipment as calculated below:
<TABLE>
<CAPTION>
Prefco Carlton Foods Total
<S> <C> <C> <C>
Depreciation expense on acquired
assets $ 44,490 $ 260,212 $ 304,702
Less: Depreciation expense recorded
by acquired companies (93,883) (330,267) (424,150)
--------- --------- ----------
$(49,393) $ (70,055) $(119,448)
========= ========== ==========
</TABLE>
(d) To record adjusted amortization expense to reflect the Prefco
acquisition and Carlton Foods merger as calculated below:
<TABLE>
<CAPTION>
Prefco Carlton Foods Total
<S> <C> <C> <C>
Amortization expense related to
goodwill of $6,174,332 and
$2,827,483, respectively, to be
amortized over 40 years $ 154,359 $ 70,687 $ 225,046
========= ========= =========
</TABLE>
(e) To record management fees to be paid to Sterling Capital for Prefco.
(f) To record interest expense on acquisition financing and eliminate
interest expense recorded for debt of Carlton Foods and Atlantic
Beverage calculated as follows:
<TABLE>
<CAPTION>
Atlantic Carlton
Beverage Prefco Foods Total
<S> <C> <C> <C> <C>
Interest expense on debt $ 162,000 $ 488,307 $ 175,874 $ 826,181
Interest expense related to
deferred financing costs
of $227,554, $227,554,
and $310,723, respectively,
to be amortized over 5 years 45,511 45,511 62,145 153,167
Less: Interest expense
recorded by entities (25,394) -- (251,218) (276,612)
----------- ---------- ----------- ---------
$ 182,117 $ 533,818 $ (13,199) $ 702,736
========= ========= ========== =========
</TABLE>
F-3
<PAGE>
[ARTHUR ANDERSEN LLP LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
PREFCO, Inc.:
We have audited the accompanying balance sheets of PREFCO, Inc. (a Texas
corporation) as of January 1, 1995, and December 31, 1995, and the related
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 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 audits 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 PREFCO, Inc. as of January 1,
1995, and December 31, 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland,
January 19, 1996
F-4
<PAGE>
PREFCO, INC.
BALANCE SHEETS
AS OF JANUARY 1, 1995, AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
January 1, December 31,
1995 1995
----------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $2,607,682 $ 2,885,485
Short-term investments (Note 1) 608,709 518,197
Accounts receivable, net of allowance for doubtful accounts
of $15,000 3,822,559 5,037,027
Inventory (Note 1) 1,532,300 1,776,325
Prepaid expenses and other 153,467 107,480
---------- -----------
Total current assets 8,724,717 10,324,514
EQUIPMENT, net (Notes 1 and 2) 214,192 222,450
CASH SURRENDER VALUE OF LIFE INSURANCE POLICIES
(Note 8) 114,106 44,579
---------- -----------
Total Assets $9,053,015 $10,591,543
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdrafts $1,386,995 $ 2,821,156
Accounts payable 4,868,377 4,908,042
Accrued expenses (Note 8) 203,357 261,873
---------- -----------
Total Liabilities 6,458,729 7,991,071
---------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 1,000,000 shares authorized;
1,500 shares issued and outstanding 1,500 1,500
Additional paid-in capital 1,167,347 1,167,347
Retained earnings 1,425,439 1,431,625
---------- -----------
Total Stockholders' Equity 2,594,286 2,600,472
---------- -----------
Total Liabilities and Stockholders' Equity 9,053,015 10,591,543
========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-5
<PAGE>
PREFCO, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 1, 1994, JANUARY 1, 1995
AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
January 1, December 31,
1994 1995 1995
------------- ------------- -------------
<S> <C> <C> <C>
NET SALES (Notes 1 and 4) $89,030,440 $93,857,614 $112,057,226
COST OF GOODS SOLD, exclusive of depreciation
shown below 82,774,456 86,579,222 103,939,174
------------- ------------- -------------
Gross profit 6,255,984 7,278,392 8,118,052
------------- ------------- -------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES:
Salaries and benefits 3,016,536 3,141,030 3,419,763
Other operating expenses 2,867,231 3,113,030 3,664,743
Depreciation (Notes 1 and 2) 128,449 100,748 93,883
------------- ------------- -------------
Total selling, general and administrative
expenses 6,012,216 6,354,808 7,178,389
------------- ------------- -------------
Income from operations 243,768 923,584 939,663
OTHER INCOME 54,885 55,604 102,110
INTEREST EXPENSE TO RELATED PARTIES (106,901) (25,756) --
------------- ------------- -------------
NET INCOME $ 191,752 $ 953,432 $ 1,041,773
============= ============= =============
INCOME PER COMMON SHARE DATA:
NET INCOME PER COMMON SHARE $ 128 $ 636 $ 695
============= ============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING 1,500 1,500 1,500
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
PREFCO, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 1, 1994, JANUARY 1, 1995 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
------- ------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 27, 1992 $1,500 $1,500 $1,167,347 $ 779,392 $1,948,239
Net income -- -- -- 191,752 191,752
Distributions to shareholders -- -- -- (274,291) (274,291)
------- ------- ---------- ------------ -----------
BALANCE, January 1, 1994 1,500 1,500 1,167,347 696,853 1,865,700
Net income -- -- -- 953,432 953,432
Distributions to shareholders -- -- -- (224,846) (224,846)
------- ------- ---------- ------------ -----------
BALANCE, January 1, 1995 1,500 1,500 1,167,347 1,425,439 2,594,286
Net income -- -- -- 1,041,773 1,041,773
Distributions to shareholders -- -- -- (1,035,587) (1,035,587)
------- ------- ---------- ------------ -----------
BALANCE, December 31, 1995 1,500 $1,500 $1,167,347 $ 1,431,625 $ 2,600,472
======= ======= ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
PREFCO, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 1, 1994, JANUARY 1, 1995
AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
January 1,
----------------------------- December 31,
1994 1995 1995
------------ ------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 191,752 $ 953,432 $ 1,041,773
Adjustments to reconcile net income to cash
flows provided by operating activities-
Depreciation and amortization 128,449 100,748 93,883
Increase in accounts receivable, net (94,883) (1,189,603) (1,214,468)
Decrease (increase) in inventory 1,465 (705,987) (244,025)
(Increase) decrease in prepaid
expenses and other assets (15,330) (82,843) 45,987
Increase in accounts payable 136,145 2,388,811 39,665
Increase in accrued expenses 67,440 16,734 58,516
--------- ----------- -----------
Net cash flows (used in)
provided by operating
activities 415,038 1,481,292 (178,669)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) sale of investments (13,385) (95,324) 90,512
Purchase of equipment, net (129,038) (71,706) (102,141)
Increase (decrease) in cash surrender value of
life insurance policy (3,686) (17,030) 69,527
--------- ----------- -----------
Net cash flows used in
investing activities (146,109) (184,060) 57,898
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bank overdraft 67,385 843,889 1,434,161
Distributions to shareholders (274,291) (224,846) (1,035,587)
Decrease in note payable - (383,673) -
--------- ----------- -----------
Net cash flows (used in)
provided by financing
activities (206,906) 235,370 398,574
--------- ---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 62,023 1,532,602 277,803
CASH AND CASH EQUIVALENTS, beginning of period 1,013,057 1,075,080 2,607,682
---------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of period $1,075,080 $ 2,607,682 $ 2,885,485
========== =========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 106,901 $ 25,756 $ -
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
PREFCO, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 1, 1995, AND DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statements present the accounts of PREFCO, Inc.
("PREFCO" or "the Company"), a wholesale distributor of processed meat products,
primarily in Houston, Texas, and the Gulf Coast Region.
Fiscal Year
The year ended January 1, 1994 (fiscal 1993), included 53 weeks and each of the
years ended January 1, 1995 (fiscal 1994), and December 31, 1995 (fiscal 1995),
included 52 weeks.
Revenue Recognition
The Company records sales when product is delivered to the customers. Discounts
provided, principally volume, are accrued at the time of the sale.
Cash and Cash Equivalents
Cash and cash equivalent includes cash on-hand and in banks as well as
certificates of deposits with a maturity of three months or less.
Short-Term Investments
Short-term investments include certificates of deposit with maturities of three
to twelve months. As of December 31, 1995, approximately $318,000 of such
certificates of deposit were pledged as collateral for certain standby letters
of credit (see Note 3).
Inventory
Inventory is stated at the lower of cost or market and is comprised primarily of
packaged meat products. Cost is determined using the first-in, first-out (FIFO)
method.
Equipment
Equipment consists of office and warehouse equipment and delivery vehicles and
is stated at cost. Depreciation is provided for on the double declining balance
method over five year and seven year estimated useful lives of the assets.
F-9
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues, expenses, gains
and losses during the reporting periods. Actual results could differ from these
estimates.
Income Taxes
The Company and its stockholders have elected to be treated as an S corporation
under Subchapter S of the Internal Revenue Code. As such, the Company's taxable
income or loss for the periods was included in the individual income tax returns
of its stockholders for federal and state income tax purposes. As a result, no
provision for income taxes has been included in the accompanying statements of
income.
2. EQUIPMENT:
Equipment as of January 1, 1995, and December 31, 1995 are summarized as
follows:
January 1, December 31,
1995 1995
------------ ------------
Equipment and vehicles ........ $ 692,450 $ 703,780
Less - Accumulated depreciation 478,258 481,330
------- -------
Equipment, net ................ $ 214,192 222,450
======= =======
Depreciation expense for fiscal years 1993, 1994 and 1995 was $128,449, $100,748
and $93,883, respectively.
3. LETTERS OF CREDIT:
PREFCO maintains standby letters of credit for certain of its suppliers to act
as collateral for inventory purchases. As of December 31, 1995, total funds
committed for these letters of credit amounted to $525,000. No funds were drawn
down at December 31, 1995, on these letters of credit.
4. SIGNIFICANT CUSTOMERS:
For fiscal years 1993, 1994 and 1995, approximately 41%, 32% and 43%,
respectively, of the Company's sales were to a single customer. No other
customers accounted for more than 10% of the Company's sales during such
periods.
5. "S" CORPORATION SHAREHOLDER DISTRIBUTIONS:
The Company made distributions to its shareholders during 1993, 1994 and 1995 to
enable them to pay estimated taxes on their respective share of the Company's
taxable income.
F-10
<PAGE>
6. OPERATING LEASE COMMITMENTS:
The Company leases its warehouse, office building and most of its delivery
vehicles under operating leases. These leases have remaining terms from one to
five years. Rental expense under these leases for the fiscal years 1993, 1994
and 1995 was $298,601, $307,334 and $783,894, respectively. As of December 31,
1995, future minimum lease payments under these operating leases are as follows:
1996 $220,150
1997 86,554
1998 25,680
1999 25,680
2000 7,565
-------
$365,629
7. RELATED PARTY TRANSACTIONS:
In 1993, the Company began doing business with an entity owned by the
stockholders of PREFCO which provided advertising services. During fiscal years
1993, 1994 and 1995, PREFCO incurred expenses to this entity totaling
approximately $104,000, $251,000 and $18,000, respectively.
The Company also leased a refrigeration facility from another entity owned by
the stockholders of PREFCO through June 1994. During fiscal years 1993 and 1994,
PREFCO incurred expenses to this entity of approximately $120,000 and $60,000,
respectively.
8. EMPLOYMENT AGREEMENT:
The Company has entered into an employment agreement with one employee which
provides for pension benefits to be distributed upon the attainment of a
determined retirement age, if the individual is still under the employ of the
Company. Under the provisions of the agreement, the employee will receive a
fixed amount for each year of service to the Company, each year for a period of
10 years following retirement. Pension expense of $14,848, $15,285 and $14,446
was recognized in 1993, 1994 and 1995, respectively, related to this agreement
and is included in other operating expenses in the accompanying statements of
income.
9. CONTINGENCIES:
Lawsuits and claims are filed against the Company from time to time in the
ordinary course of business. These actions are in various preliminary stages,
and no judgments or decisions have been rendered by hearing boards or courts.
Management, after reviewing developments to date with legal counsel, is of the
opinion that the outcome of such matters will not have a material adverse effect
on the Company's' financial position or results of operations.
10. SUBSEQUENT EVENT:
On March 15, 1996, but effective January 1, 1996, all of the Company's
outstanding common stock was acquired by a wholly-owned subsidiary of Atlantic
Beverage Company, Inc.
F-11
<PAGE>
[ARTHUR ANDERSEN LLP LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Carlton Foods, Inc.:
We have audited the accompanying balance sheets of Carlton Foods, Inc. (a
Wyoming corporation) as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years ended December 31, 1993, 1994 and 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 audits 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 Carlton Foods, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for the years ended December 31, 1993, 1994 and 1995.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
March 15, 1996
F-12
<PAGE>
CARLTON FOODS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
---------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 4,492 $ 22,959
Accounts receivable 254,732 464,445
Inventory (Notes 1 and 2) 278,881 418,547
Prepaid expenses and other 13,964 1,400
----------- -----------
Total current assets 552,069 907,351
PROPERTY, PLANT AND EQUIPMENT, net (Notes 1 and 3) 1,369,046 1,301,062
OTHER ASSETS, net 118,062 94,195
----------- -----------
Total Assets 2,039,177 2,302,608
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank overdrafts $ 80,023 $ 262,543
Accounts payable 129,689 246,712
Accrued expenses (Note 4) 400,604 316,896
Note payable - line of credit (Note 5) 294,532 155,843
Current portion of long-term debt (Note 6) 338,592 253,939
Current portion of obligations under capital leases (Note 7) 73,876 54,877
---------- -----------
Total current liabilities 1,317,316 1,290,810
LONG-TERM DEBT, net of current portion (Note 6) 5,220,187 5,013,395
OBLIGATIONS UNDER CAPITAL LEASES, net of
current portion (Note 7) 179,555 96,208
NET LIABILITIES OF DISCONTINUED OPERATIONS (Note 13) 411,890 --
---------- ----------
Total liabilities 7,128,948 6,400,413
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 7, 10 and 12)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value; 1,000,000 shares authorized;
18,000 and 20,700 shares issued and outstanding,
respectively 905,040 910,458
Accumulated deficit (5,994,811) (5,008,263)
Total Stockholders' Equity (Deficit) (5,089,771) (4,097,805)
Total Liabilities and Stockholders' Equity (Deficit) $ 2,039,177 $ 2,302,608
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-13
<PAGE>
CARLTON FOODS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------------------------------------------
<S> <C> <C> <C>
NET SALES $7,198,235 $7,021,808 $7,586,254
COST OF GOODS SOLD, exclusive of depreciation
shown below 6,011,576 5,603,000 6,172,681
--------- --------- ---------
Gross profit 1,186,659 1,418,808 1,413,573
--------- --------- ---------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES:
Salaries and benefits 502,656 578,243 511,973
Other operating expenses 427,395 497,724 493,537
Depreciation and amortization 321,278 352,578 437,169
Management and consulting fees to related
parties 108,150 93,750 115,973
-------- ---------- --------
Total selling, general and
administrative expenses 1,359,479 1,522,295 1,558,652
--------- --------- ---------
Loss from operations (172,820) (103,487) (145,079)
INTEREST EXPENSE 271,061 278,709 251,218
OTHER EXPENSES, net -- 71,098 47,182
--------- ---------- ----------
NET LOSS FROM CONTINUING OPERATIONS (443,881) (453,294) (443,479)
DISCONTINUED OPERATIONS (Note 1):
Income (loss) from discontinued operations 742,290 248,798 (312,843)
Gain on sale of division -- -- 1,742,870
------- --------- -----------
NET INCOME (LOSS) $ 298,409 $(204,496) $ 986,548
======== ========= ==========
INCOME (LOSS) PER COMMON SHARE DATA:
Net loss from continuing operations $ (22.42) $(22.89) $ (21.42)
Income (loss) from discontinued operations,
including gain on sale of division 37.49 12.57 69.08
---------- ---------- ----------
Net income (loss) $ 15.07 $ (10.32) $ 47.66
========== ========== ==========
Weighted average common and common
equivalent shares outstanding (Note 8) 19,800 19,800 20,700
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-14
<PAGE>
CARLTON FOODS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
Total
Common Stock Stockholders'
------------------------- Accumulated Equity
Shares Amount Deficit (Deficit)
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992 18,000 $905,040 $(6,088,724) $(5,183,684)
Net income - - 298,409 298,409
------- ------- --------- ---------
BALANCE, December 31, 1993 18,000 905,040 (5,790,315) (4,885,275)
Net loss - - (204,496) (204,496)
------- ------- -------- ---------
BALANCE, December 31, 1994 18,000 905,040 (5,994,811) (5,089,771)
Issuance of common stock (Note 8) 2,700 5,418 - 5,418
Net income - - 986,548 986,548
------- ------- --------- ---------
BALANCE, December 31, 1995 20,700 $910,458 $(5,008,263) $(4,097,805)
======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-15
<PAGE>
CARLTON FOODS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
-------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 298,409 $(204,496) $ 986,548
Adjustments to reconcile net income (loss) to cash
flows provided by operating activities-
Gain on sale of division - - (1,742,870)
Discontinued operations (742,290) (248,798) 312,843
Depreciation and amortization 321,278 352,578 437,169
Net loss on disposal of assets - 84,802 39,128
Noncash issuance of common stock - - 5,400
(Increase) decrease in accounts
receivable, net (85,891) 129,375 (209,713)
Decrease (increase) in inventory 144,681 (47,763) (139,666)
Decrease in prepaid expenses and other 20,993 1,534 1,538
Increase in accounts payable 24,574 5,524 117,023
Increase (decrease) in accrued expenes 335,948 13,927 (83,708)
--------- -------- ---------
Net cash flows provided by (used in)
operating activities of-
Continuing operations 317,702 86,683 (276,308)
Discontinued operations 93,655 700,129 844,308
--------- -------- ---------
Net cash flows provided by
operating activities 411,357 786,812 568,000
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (104,871) (681,372) (303,324)
Proceeds from sale of equipment 1,750 2,500 -
Proceeds from sale of division - - 2,725,000
--------- -------- ---------
Net cash flows (used in)
provided by investing
activities (103,121) (678,872) 2,421,676
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank overdraft 53,141 (37,965) 182,520
Net (repayments) borrowings of note payable,
line of credit (334,397) 133,444 (138,689)
Repayments of long-term debt (23,004) (185,844) (2,943,049)
Exercise of stock options - - 18
Deferred financing fees paid - (17,559) (72,009)
-------- ------- ----------
Net cash flows used in
financing activities (304,260) (107,924) (2,971,209)
-------- -------- ----------
NET INCREASE IN CASH 3,976 16 18,467
CASH, beginning of period 500 4,476 4,492
-------- -------- ----------
CASH, end of period $ 4,476 $ 4,492 $ 22,959
========= ========= ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 271,061 $ 278,709 $ 281,530
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-16
<PAGE>
CARLTON FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation - Company
Until March 27, 1995, Carlton Foods, Inc. (previously Western Packing Co.,
previously W-B Acquisition Corp.) was comprised primarily of a cattle packing
division and a sausage processing and packing division. On March 27, 1995, the
company sold its cattle packing division for approximately $2,725,000, resulting
in a gain of $1,742,870 in connection with the sale. The results of operations
for this division for the years ended December 31, 1993 and 1994, and for the
period January 1, 1995 through March 27, 1995, have been presented in the
accompanying financial statements as discontinued operations. In addition, the
net liabilities of the division are presented separately in the accompanying
balance sheet.
The continuing sausage processing and packing operation distributes branded and
private label cooked sausage, primarily in Texas.
Revenue Recognition
The Company records sales when product is delivered to the customers. Discounts
provided, principally volume, are accrued at the time of the sale.
Inventory
Inventory is stated at the lower of cost or market and is comprised of meat
products and supplies. Cost is determined using the first-in, first-out (FIFO)
method.
Property, Plant and Equipment
Property, plant and equipment consist of machinery and equipment, furniture and
fixtures, leasehold improvements and vehicles and are stated at cost.
Depreciation is recorded on the straight-line method over the following
estimated useful lives.
Machinery and equipment 7 years
Furniture and fixtures 5-8 years
Leasehold improvements 5-20 years
Vehicles 3 years
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
F-17
<PAGE>
the date of the financial statements and the reported amounts of revenues,
expenses, gains and losses during the reporting periods. Actual results could
differ from these estimates.
Income Taxes
The Company and its stockholders have elected to be treated as an S corporation
under Subchapter S of the Internal Revenue Code. As such, the Company's taxable
income or loss for the periods was included in the individual income tax returns
of its stockholders for federal and state income tax purposes. As a result, no
provision for income taxes has been included in the accompanying statements of
operations.
2. INVENTORY:
Inventories consisted of the following as of December 31:
1994 1995
-------- --------
Raw meat $ 92,120 $172,592
Finished products 60,148 80,260
Supplies 126,613 165,695
-------- --------
Total $278,881 $418,547
======== ========
3. PROPERTY, PLANT AND EQUIPMENT:
Equipment as of December 31, 1994 and 1995 are summarized as follows:
1994 1995
------------ ------------
Machinery and equipment $1,624,856 $1,510,976
Furniture and fixtures 65,368 72,012
Leasehold improvements 351,193 508,447
Vehicles 142,393 156,644
----------- -----------
2,183,810 2,248,079
Less: Accumulated depreciation 814,764 947,017
----------- ----------
Total property, plant and equipment, net $1,369,046 $1,301,062
=========== ==========
Depreciation expense for the years ended December 31, 1993, 1994 and 1995 was
$239,720, $246,968 and $330,267, respectively.
4. WORKERS' COMPENSATION:
The Company is self-insured for workers' compensation claims. As of December 31,
1995, the Company has recorded a liability of approximately $13,300, which
management believes will be adequate to cover claims incurred as of that date.
F-18
<PAGE>
5. NOTE PAYABLE - LINE OF CREDIT:
On March 27, 1995, the Company refinanced its line of credit with Creekwood
Capital Group ("Creekwood"). The line is secured by accounts receivable and
inventory and is limited to the lesser of $1.0 million or a percentage of
certain eligible accounts receivable and inventory, as defined in the loan
agreement. Principal and interest are due monthly, with interest charged at the
prime rate, as defined, plus two percent. The loan agreement also calls for a
monthly collateral management fee equal to $2,000 and an annual commitment fee
of $10,000. The line of credit is subject to the terms of an Intercreditor
Agreement and a Subordination Agreement as discussed in Note 6 below. The Loan
Agreement also contains convenants relative to the maintenance of certain levels
of tangible net worth, operating income, ratios of debt to net worth, solvency
and other items (see Note 14).
6. LONG-TERM DEBT:
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Note payable to FINOVA Capital Corporation ("FINOVA"),
collateralized by the outstanding shares of the Company's
common stock and by substantially all of the Company's assets
except receivables and inventory securing the Creekwood debt;
interest is due monthly at 2.25% above the prime rate; payments
of $20,000 plus accrued and unpaid interest are due and payable
monthly with the remaining outstanding balance due
September 30, 1997. This principal balance includes defaulted
interest of $264,676 payable September 30, 1997. $ 4,176,048 $1,856,270
Subordinated notes payable to individuals and to a trust (the
"Pattons"), collateralized primarily by real estate and the
outstanding shares of the company's common stock, principal
due in annual payments based upon a cash flow formula as
defined in the note agreements. See discussion below. 3,198,718 3,143,124
Unsecured notes payable to shareholders bearing interest at 9% 219,960 219,960
Equipment notes payable 14,053 47,980
--------- ---------
7,608,779 5,267,334
Less: Amount related to discontinued operations (2,050,000) -
Current portion (338,592) (253,939)
----------- ----------
Long-term portion $ 5,220,187 $5,013,395
=========== ==========
</TABLE>
The Company's note agreements with FINOVA and with the Pattons contain various
affirmative and negative covenants, including the maintenance of certain cash
flow ratios. As of December 31, 1995, the Company was in violation of certain of
these covenants. Violation of the covenants is considered an event of default
which could cause the loans to be immediately due and payable (see Note 14).
F-19
<PAGE>
FINOVA and Creekwood have also entered into an Intercreditor Agreement with the
Company's consent whereby FINOVA and Creekwood each have granted the other a
second and subordinate security interest in collateral in which each has a first
and prior security interest.
The Company has entered into an Equity Fee Participation Agreement with FINOVA
whereby the Company has agreed to pay FINOVA a fee. The payment date and the
amount of the fee may be triggered by the exercise of various options available
to both the Company or FINOVA under the terms of the agreement. Had FINOVA
exercised its rights to call the fee at December 31, 1995 the total fee would
have been $-0-.
Effective January 15, 1993, the Company restructured its notes payable to the
Pattons whereby the Pattons, in exchange for the release from certain provisions
of the Stock Purchase Agreement pursuant to which the Pattons sold the Company
in 1990 and in consideration of receiving a release of all claims against them,
forgave a portion of the outstanding principal and interest due to them under
the terms of certain notes originally issued to them by the Company as partial
payment of the purchase price. A summary of the debt restructuring effective
January 15, 1993, is as follows:
Outstanding
Principal
and
Interest
-----------
Prior to debt restructuring $ 3,198,718
Amount forgiven (unrealized gain) (2,673,375)
----------
Restated debt $ 525,343
==========
The restructured note does not state a maturity date and is subordinate to the
FINOVA and Creekwood debt. In accordance with SFAS No. 15, the Company has not
recorded a gain in connection with the restructuring because of the
indeterminate nature of the period of repayment (see Note 14). Therefore, no
interest expense was recognized on these notes since the date of restructuring
and any payments made were recorded as a reduction of the outstanding debt and
the balance of the notes as stated in the accompanying financial statements does
not reflect the amount forgiven. Future payments to the Pattons will also be
recorded as a reduction of the carrying amount of the debt until the amount
forgiven has been fully recognized.
7. OBLIGATIONS UNDER CAPITALIZED LEASES:
The Company leases certain equipment under capital leases expiring in various
years through 1999. The assets and liabilities under capital leases are recorded
at the lower of the present value of the minimum lease payments or the fair
value of the asset. The assets are depreciated over the shorter of their related
lease terms or their estimated productive lives. Depreciation of assets under
capital lease is included in depreciation expense.
F-20
<PAGE>
Minimum future lease payments under capital leases as of December 31, 1995, are
as follows:
1996 $ 54,877
1997 54,877
1998 54,877
1999 11,261
2000 and thereafter -
--------
Total minimum lease payments 175,892
Less amount representing interest 24,807
--------
Present value of net minimum lease payments $151,085
========
8. ISSUANCE OF COMMON STOCK:
In February 1994, the shareholders approved the issuance of stock to the
Company's president. In January 1995, the president received 900 shares of the
Company's common stock valued at $5,400. This amount was recorded during 1995 as
compensation expense.
Also in January 1995, certain stockholders exercised stock options which granted
them 1,800 shares of common stock at an exercise price of $.01 per share. These
options were considered common stock equivalents during 1993 and 1994.
9. SIGNIFICANT CUSTOMERS AND SUPPLIERS:
For the years ended December 31, 1993, 1994 and 1995, approximately 50%, 51% and
50%, respectively, of Carlton's sales were to a single customer and
approximately 13%, 14% and 13%, respectively, were to another customer. No other
customers accounted for more than 10% of the Company's sales during such
periods.
10. OPERATING LEASE COMMITMENTS:
The Company leases its plant, office building and certain vehicles under
operating leases. These leases have remaining terms from one to five years.
Rental expense under these leases for the years ended December 31, 1993, 1994
and 1995 was $58,948, $61,048 and $46,663, respectively. As of December 31,
1995, future minimum lease payments under these operating leases are as follows:
1996 $ 49,893
1997 49,893
1998 41,493
1999 41,493
2000 27,662
2001 and thereafter -
--------
$210,434
========
F-21
<PAGE>
11. RELATED PARTY TRANSACTIONS:
The Company has a management agreement with Sterling Group, Ltd. ("Sterling")
and Elfman Venture Partners, Inc. ("Elfman"), entities owned by certain of the
Company's shareholders. The Company is also indebted to several of these
shareholders (see Note 6). Under the terms of the agreement, Sterling and Elfman
are to provide management services to the Company for a base combined annual fee
of $75,000. If the Company meets certain debt coverage ratios, Sterling and
Elfman are due an additional combined $75,000 in bonus fees. Both the base fees
and the bonus fees are subject to annual increases of as much as 6% under
certain conditions. Payment of certain of the fees are subject to a
subordination agreement (see Note 6). Management fees for 1995 were $75,000 and
as of December 31, 1995, $112,500 of management fees were owed to Sterling and
Elfman.
During 1993, 1994 and 1995, Carlton incurred $33,150, $48,241 and $40,973,
respectively, in fees to a consulting firm owned by certain stockholders of the
Company.
12. CONTINGENCIES:
The Company has an employee welfare benefit plan whereby it provides health
insurance to its employees. The plan has been self-insured over the 1993, 1994
and 1995 years fluctuating within a range of $10,000 to $30,000 for each
employee annually. Expenses over the insured amount in effect for each employee
annually are covered by an insurance policy. As of December 31, 1993, 1994 and
1995, the Company has recorded an accrued liability of approximately $14,300,
$39,500 and $13,300, respectively, which it believes will be adequate to cover
claims incurred.
The Company has been sued for allegedly breach of contract, implied contract,
and unjust enrichment in an unspecified amount. No discovery has yet been
conducted and the Company's counsel has given representation that it is unable
to form a judgment whether it is probable or remote that the outcome of this
claim will be unfavorable to the Company nor, in the event of an unfavorable
outcome, the range of any possible loss. An answer was filed on behalf of the
client generally denying each and every allegation made against it. It is the
Company's intent to vigorously defend this action.
Other lawsuits and claims are filed against the Company from time to time in the
ordinary course of business. These actions are in various preliminary stages,
and no judgments or decisions have been rendered by hearing boards or courts.
Management, after reviewing developments to date with legal counsel, is of the
opinion that the outcome of such matters will not have a material adverse effect
on the Companies' financial position or results of operations.
13. DISCONTINUED OPERATIONS:
On March 27, 1995, the Company completed the sale of substantially all of the
net assets of its cattle packing division. Accordingly, the results of
operations for the years ended December 31, 1993, 1994 and 1995, are presented
separately in the accompanying statements of operations. The net liabilities of
the discontinued operation have been reclassified as noncurrent in the
accompanying balance sheet as of December 31, 1994. Net sales from the
discontinued operations were approximately $39,396,000, $41,716,000 and
$9,448,000 for the years ended December 31, 1993 and 1994, and for the period
ended March 27, 1995, respectively. Interest expense of $681,573, $674,806 and
$187,998 for the years ended December 31, 1993 and 1994, and for the period
ended March 27, 1995, respectively, was allocated to discontinued operations,
based upon the relative amount of debt between the operations.
F-22
<PAGE>
14. SUBSEQUENT EVENT:
On March 15, 1996, but effective January 1, 1996, all of the outstanding common
stock of the Company was acquired by a wholly-owned subsidiary of Atlantic
Beverage Company, Inc. and a new basis of accounting was established in
accordance with the purchase method. In connection with this transaction, all of
the Company's outstanding debt to Creekwood and FINOVA, and a portion of the
Patton notes (see Note 6), were refinanced.
F-23
