<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter ended June 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 1-13747
ATLANTIC PREMIUM BRANDS, LTD.
- -------------------------------------------------------------------------------
(Exact Name of registrant as specified in its charter)
DELAWARE 36-3761400
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 DUNDEE ROAD, SUITE 370
NORTHBROOK, ILLINOIS 60062
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 480-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes _X_ No ___
As of August 3, 1998, there were outstanding 7,385,679 shares of Common Stock,
par value $.01 per share, of the Registrant.
<PAGE> 2
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------- -----------
<S> <C> <C>
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 1,262,805 $ 2,603,812
Accounts receivable, net of allowance for doubtful accounts
of $117,000 and $178,000, respectively 9,448,489 9,715,837
Inventory 4,213,026 6,471,741
Prepaid expenses and other 672,386 778,778
------------ -----------
Total current assets 15,596,706 19,570,168
PROPERTY, PLANT AND EQUIPMENT, net 4,939,536 13,496,953
GOODWILL, net 12,790,619 12,757,730
OTHER ASSETS, net 1,626,831 1,756,504
------------ -----------
Total Assets $ 34,953,692 $47,581,355
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 1,491,557 $ 2,598,335
Line of credit 6,839,323 5,829,921
Current portion of long-term debt 1,659,310 1,168,092
Accounts payable 8,216,422 6,602,809
Accrued expenses 1,061,338 2,045,372
------------ -----------
Total current liabilities 19,267,950 18,244,529
LONG-TERM DEBT, net of current portion 6,297,288 17,593,540
PUT WARRANTS - 1,470,000
------------ -----------
Total Liabilities 25,565,238 37,308,069
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issued - -
Common stock, $.01 par value; 30,000,000 shares authorized;
7,373,574 shares issued in 1997 and 7,432,109 shares
issued in 1998 73,770 74,355
Additional paid-in capital 12,141,176 12,200,124
Accumulated deficit (2,826,492) (2,001,193)
------------ -----------
Total Stockholders' Equity 9,388,454 10,273,286
------------ -----------
Total Liabilities and Stockholders' Equity $ 34,953,692 $47,581,355
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE> 3
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $84,055,733 $92,861,453 $42,654,363 $51,512,039
COST OF GOODS SOLD, exclusive of
depreciation shown below 74,153,311 79,526,311 37,581,484 43,577,233
----------- ----------- ----------- -----------
Gross profit 9,902,422 13,335,142 5,072,879 7,934,806
----------- ----------- ----------- -----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Salaries and benefits 4,154,423 5,277,880 2,101,465 3,160,166
Other operating expenses 3,971,961 5,240,637 1,996,600 3,055,793
Depreciation and amortization 590,808 951,127 305,207 523,070
----------- ----------- ----------- -----------
Total selling, general and
administrative expenses 8,717,192 11,469,644 4,403,272 6,739,029
----------- ----------- ----------- -----------
Income from operations 1,185,230 1,865,498 669,607 1,195,777
INTEREST EXPENSE (843,875) (1,182,390) (447,554) (818,563)
OTHER INCOME, net 127,950 221,684 78,210 99,102
----------- ----------- ----------- -----------
Income before income tax benefit
(provision) 469,305 904,792 300,263 476,316
INCOME TAX BENEFIT (PROVISION) - 115,500 - (200,000)
----------- ----------- ----------- -----------
Net income before extraordinary
loss 469,305 1,020,292 300,263 276,316
=========== =========== =========== ===========
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, net of
income tax benefit of $122,000 - 194,993 - -
----------- ----------- ----------- -----------
Net income $ 469,305 $ 825,299 $ 300,263 $ 276,316
=========== =========== =========== ===========
INCOME PER COMMON SHARE DATA
BASIC EPS:
Net income before extraordinary loss $.07 $.14 $.05 $.04
Extraordinary loss, net of tax - (.03) - -
----------- ----------- ----------- -----------
Net income $.07 $.11 $.05 $.04
=========== =========== =========== ===========
DILUTED EPS:
Net income before extraordinary loss $.07 $.14 $.05 $.04
Extraordinary loss, net of tax - (.03) - -
----------- ----------- ----------- -----------
Net income $.07 $.11 $.05 $.04
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic calculation 6,396,610 7,388,169 6,396,610 7,402,603
=========== =========== =========== ===========
Diluted calculation 6,664,031 7,621,937 6,670,803 7,620,369
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 4
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 469,305 $ 825,299
Adjustments to reconcile net income to cash flows provided
by operating activities, net of non-cash items and
effect of business combinations-
Extraordinary loss on early extinguishment of debt,net - 194,993
Depreciation and amortization 590,808 951,127
Deferred income tax benefit - (115,500)
Amortization of debt discount and deferred financing costs 101,689 165,416
Non-cash compensation expense - 47,033
Accretion of put warrants - 35,000
Changes in operating assets and liabilities:
Decrease in accounts receivable, net 2,040,517 1,267,719
Increase in inventory (2,001,657) (506,249)
Increase in other assets (62,526) (12,500)
(Increase) decrease in prepaid expenses and other (327,623) 40,825
Increase (decrease) in accounts payable 2,578,186 (1,887,057)
(Decrease) increase in accrued expenses (248,261) 689,754
------------- -------------
Net cash flow provided by (used in) operating activities of-
Continuing operations 3,140,438 1,695,860
Discontinued operations (129,960) -
------------- -------------
Net cash provided by operating activities 3,010,478 1,695,860
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment (515,184) (578,188)
Purchase of distribution rights (267,885) -
Cash paid for acquisition, including related costs - (11,667,181)
Proceeds from disposals of equipment - 121,688
------------- -------------
Net cash used in investing activities (783,069) (12,123,681)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in bank overdraft, net (329,931) 1,106,778
Repayment of long-term debt (813,254) (5,335,714)
Cash paid for financing fees - (505,334)
Borrowings (payments) under line of credit 346,123 (1,009,402)
Borrowings under senior subordinated note - 5,065,000
Issuance of put warrants - 1,435,000
Issuance of common stock options - 12,500
Borrowings under term loan - 11,000,000
------------- -------------
Net cash flows (used in) provided by financing
activities (797,062) 11,768,828
------------- -------------
NET INCREASE IN CASH 1,430,347 1,341,007
CASH, beginning of period 1,248,963 1,262,805
------------- -------------
CASH, end of period $ 2,679,310 $ 2,603,812
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 5
ATLANTIC PREMIUM BRANDS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements present the accounts of
Atlantic Premium Brands, Ltd. (formerly Atlantic Beverage Company, Inc.) and
subsidiaries (the "Company"). All significant intercompany transactions have
been eliminated in consolidation.
The Company is engaged in the distribution of specialty nonalcoholic beverages
to the retail trade in the Baltimore and Washington, D.C. metropolitan areas
and, as a result of business combinations consummated, is engaged in the
manufacturing, marketing and distribution of meat products in Texas, Louisiana,
Kentucky, Oklahoma and surrounding states. The operating results of the
Company's food division are impacted by changes in commodity markets.
The consolidated financial statements included herein for Atlantic Premium
Brands, Ltd. have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. In
management's opinion, the interim financial data presented includes all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation. Certain information and footnote disclosures normally
included in the consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. However, the Company believes that the
disclosures are adequate to understand the information presented. The results
of operations for the six months ending June 30, 1998, are not necessarily
indicative of the operating results expected for the entire year. It is
suggested that these consolidated financial statements be read in conjunction
with the Company's December 31, 1997, consolidated financial statements and
notes thereto included in the Company's annual report on Form 10-K dated March
31, 1998.
Revenue Recognition
The Company records sales when product is delivered to the customers. Discounts
provided, principally volume, are accrued at the time of the sale.
Cash
Cash consists of cash held in various deposit accounts with financial
institutions. As of June 30, 1998, $175,000 was restricted to meet minimum
balance funding requirements.
<PAGE> 6
-2-
Inventory
Inventory is stated at the lower of cost or market. It is comprised of raw
materials, finished goods and inventory supplies. Cost is determined using the
first-in, first-out method (FIFO). Inventory consisted of the following as of:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------- ----------
<S> <C> <C>
Raw materials $ 297,297 $ 544,303
Finished goods 3,380,766 4,599,331
Packaging supplies 534,963 1,328,107
----------- ----------
Total inventory $ 4,213,026 $6,471,741
=========== ==========
</TABLE>
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of applicable
depreciation. Depreciation is provided using the straight-line method over the
following useful lives.
Buildings and building improvements 5-30 years
Machinery and equipment 5-10 years
Furniture and fixtures 5 years
Leasehold improvements 2-5 years
Vehicles 5-10 years
Other Assets
Other assets consist of noncompete agreements, deferred acquisition costs, cash
surrender value of life insurance, distribution, exclusivity and license
agreements and deferred financing costs (see Note 4). Noncompete agreements and
distribution, exclusivity and license agreements are being amortized over 2-5
years using the straight-line method. The deferred financing costs, net of
related accumulated amortization, related to extinguished debt were written off
in March 1998 (see Note 4).
Goodwill
Goodwill recorded in connection with business combinations is being amortized
using the straight-line method over 5 to 40 years.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
<PAGE> 7
-3-
Earnings Per Share
The weighted average shares used to calculate basic and diluted earnings per
share for the three months ended June 30, 1997 and 1998, in accordance with SFAS
No. 128 are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Common stock outstanding 6,396,610 7,432,109
========= =========
Weighted average shares outstanding for basic EPS 6,396,610 7,402,603
Dilutive effect of common stock equivalents 274,193 217,766
--------- ---------
Weighted average shares outstanding for dilutive EPS 6,670,803 7,620,369
========= =========
</TABLE>
Options to purchase 229,050 shares of common stock at prices ranging from $3.30
to $3.63 per share were outstanding during the second quarter of 1998 but were
not included in the computation of diluted EPS because the options' exercise
price was greater than the average market price of the common shares during the
quarter.
Put warrants to purchase up to a maximum of 1,095,700 shares of common stock, as
of June 30, 1998 at $3.38 per share were outstanding during the second quarter
of 1998 but were not included in the computation of diluted EPS because the
warrants' exercise price was greater than the average market price of the common
shares during the quarter.
The weighted average shares used to calculate basic and diluted earnings per
share for the six months ended June 30, 1997 and 1998, in accordance with SFAS
No. 128 are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Common stock outstanding 6,396,610 7,432,109
========= =========
Weighted average shares outstanding for basic EPS 6,396,610 7,388,169
Dilutive effect of common stock equivalents 267,421 233,768
--------- ---------
Weighted average shares outstanding for dilutive EPS 6,664,031 7,621,937
========= =========
</TABLE>
Options to purchase 229,050 shares of common stock at prices ranging from $3.30
to $3.63 per share were outstanding during the six months ended June 30, 1998,
but were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common shares
during the six month period.
Put warrants to purchase up to a maximum of 1,095,700 shares of common stock, as
of June 30, 1998 at $3.38 per share were outstanding during a portion of the six
months ended June 30, 1998, but were not included in the computation of diluted
EPS because the warrants' exercise price was greater than the average market
price of the common shares during the six month period.
Reclassifications
Certain reclassifications have been made to the prior quarter amounts in order
to conform to current quarter presentation.
<PAGE> 8
-4-
Accounting Pronouncements
During June 1997, the FASB issued Statement No. 130 (SFAS No. 130), "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Management has determined that the implementation of
SFAS No. 130 will not have any impact on the Company's financial statements.
During July 1997, the FASB issued Statement No. 131 (SFAS No. 131), "Disclosures
About Segments of an Enterprise and Related Information," which establishes a
new approach for determining segments within a company and reporting information
on those segments. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. Management has not yet determined whether the implementation
of SFAS No. 131 will have any impact on the Company's current method of
disclosing business segment information.
2. CONTINGENCIES:
Lawsuits and claims are filed against the Company from time to time in the
ordinary course of business. These actions are in various preliminary stages
and no judgments or decisions have been rendered by hearing boards or courts.
Management, after reviewing developments to date with legal counsel, is of the
opinion that the outcome of such matters will not have a material adverse effect
on the Company's financial position or results of operations.
3. BUSINESS COMBINATIONS:
As of March 20, 1998, the Company acquired substantially all of the assets and
certain liabilities of J.C. Potter, a food processing business in Durant,
Oklahoma, specializing in a line of premium products including breakfast
sausage, link sausage and sausage and biscuits. In connection with the Potter
transaction, the Company paid $11,667,181 in cash, plus related transaction
costs. The business combination was accounted for using the purchase method of
accounting, whereby the purchase price is allocated to the assets acquired and
liabilities assumed based upon fair value. The purchase price was allocated as
follows:
<TABLE>
<S> <C>
Cash paid $10,495,407
Transaction costs 1,171,774
-----------
Total purchase price $11,667,181
===========
Current assets acquired $ 3,572,750
Noncurrent assets acquired 8,720,693
Current liabilities acquired (626,262)
-----------
Net assets acquired $11,667,181
===========
</TABLE>
4. DEBT REFINANCING:
On March 20, 1998, the Company refinanced its senior revolver and term debt. The
new debt consists of an $11 million term note, a $15 million line of credit and
$6.5 million Senior Subordinated Note with detachable put warrants.
<PAGE> 9
-5-
The new term debt bears interest at either the bank's prime rate plus 1% or
Adjusted LIBOR plus 2.5%, at the Company's option. This loan is due in varying
amounts monthly through March 2003 and is secured by all assets of the Company.
Under the terms of the new line of credit agreement, the Company is permitted to
borrow up to $15,000,000, subject to advance formulas based on accounts
receivable, inventory and letter of credit obligations outstanding through March
2003. Amounts borrowed are due on demand and bear interest at either the bank's
prime rate plus 1% or adjusted LIBOR plus 2.5%. Interest is payable monthly and
amounts are secured by all assets of the Company.
The $6.5 million Senior Subordinated Note, maturing on June 30, 2005, bears
interest at 10%. Principal is payable in quarterly installments beginning June
30, 2003. The subordinated debt was issued with detachable put warrants to
purchase 666,947 shares of nonvoting common stock at $3.38 per share and a
contingent put warrant to purchase up to a maximum of 428,753 shares of
nonvoting common stock at $3.38 per share based upon the equity value of the
Company on certain dates. The warrants have been recorded at an estimated fair
value of $1,435,000, resulting in a discount on the Senior Subordinated Note of
the same amount. This discount is being amortized over the seven year term of
the note as additional interest expense. For the six months ended June 30,
1998, amortization of the debt discount was approximately $56,950.
In connection with this debt refinancing, the Company recorded an extraordinary
loss of $194,993 related to the write off of deferred financing costs, net of
an income tax benefit of $122,000. Also, the Company incurred additional
financing costs which have been deferred and are being amortized over the terms
of the related debt.
5. INCOME TAXES:
As of December 31, 1997, the Company had recorded a valuation allowance of
$462,500 against its net deferred tax assets in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." However,
after considering the Company's recent historical results and the weight of all
other available information, the Company believes that it is more likely than
not that the deferred tax assets will be realized prior to expiration of such
assets. As a result, the Company has reversed this allowance as of March 31,
1998, by recording a benefit for deferred income taxes.
<PAGE> 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
In 1996, the Company implemented a new corporate strategy that resulted in
the acquisition of five food businesses. Each of these businesses represents a
local or regional branded processed meat company. In addition to significantly
increasing the Company's size, the newly acquired businesses have created a
broader platform for future growth.
In order to acquire and operate its food businesses, the Company formed
four new subsidiaries during 1996: Prefco Corp., Carlton Foods Corp., Richards
Cajun Foods Corp., and Grogan's Farm, Inc. On March 20, 1998, the Company formed
a fifth new subsidiary to operate the business of the J.C. Potter Sausage
Company ("Potters").
The Company continues to operate as a distributor of non-alcoholic
beverages in the Baltimore and Washington D.C. metropolitan areas. This business
represents the Company's Beverage Division, while the five subsidiaries
collectively represent the Company's Food Division.
ACQUISITION
On March 20, 1998, the Company acquired substantially all of the assets of
Potters, a branded food processing company based in Durant, Oklahoma, in
consideration for approximately $13.0 million cash plus related transaction
costs. In connection with this acquisition, the Company borrowed approximately
$6.5 million in subordinated debt from Banc One Capital Corporation. The
subordinated debt included detachable common stock put warrants. The Company
also refinanced its senior revolver and term debt through Fleet Capital. The new
senior debt facility (the "Fleet Facility") provided a term loan of $11.0
million, which was approximately $6.0 million greater than the balance
previously outstanding under the Company's former senior debt facility with
LaSalle National Bank ("LaSalle Facility").
RESULTS OF OPERATIONS
All of the acquisitions were recorded utilizing the purchase method of
accounting. Therefore, results of the acquired businesses prior to the effective
date of such acquisitions are not included in the Company's Results of
Operations.
During 1996, 1997 and 1998, each of the Company's Carlton subsidiary and
the Company's Grogan's subsidiary sold product to the Company's Prefco
subsidiary. During 1998, the Company's Potter subsidiary sold product to the
Company's Carlton and Prefco subsidiaries and purchased product from the
Company's Grogan's subsidiary. The Company's financial statements do not reflect
these activities, as they are eliminated on a consolidated basis.
Quarter Ended June 30, 1998 Compared To Quarter Ended June 30, 1997
Net Sales. Net sales increased by approximately $8.8 million or 20.6% from
approximately $42.7 million for the quarter ended June 30, 1997 to approximately
$51.5 million for the quarter ended June 30, 1998. Net sales of the Company's
Food Division increased by approximately 25.3%, while net sales of the Company's
Beverage Division decreased by approximately 5.8%.
<PAGE> 11
The increase in net sales for the Food Division was primarily attributable
to the acquisition of Potters, which the Company did not own during the second
quarter of 1997. The decrease in the Beverage Division's net sales reflected
increasing price competition and an overall decline in the product category
demand.
Gross Profit. Gross profit increased by approximately $2.8 million or
54.9% from approximately $5.1 million for the quarter ended June 30, 1997 to
approximately $7.9 million for the quarter ended June 30, 1998. This increase
primarily reflects the factors discussed above in Net Sales. As a percentage of
net sales, gross profit increased from 11.9% to 15.3%, reflecting a greater
proportion of branded product sales in 1998 and the availability of certain of
the Company's raw materials at prices below those paid in the same period of
1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $2.3 million or 52.3% from
approximately $4.4 million for the quarter ended June 30, 1997 to approximately
$6.7 million for the quarter ended June 30, 1998. This increase is attributable
to the factors discussed above in Net Sales.
As a percentage of net sales, selling, general and administrative expenses
increased from 10.3% to 13.0%. This increase reflected the addition of new
branded products, which generally involve higher selling, general and
administrative costs per sales dollar. It also reflected significant sales and
marketing expenses incurred in connection with new product development. As a
result of these investments, the Company will be introducing a number of new,
branded products in the third and fourth quarters of 1998.
Income from Operations. Income from operations increased approximately
$0.5 million from approximately $0.7 million for the quarter ended June 30, 1997
to approximately $1.2 million for the quarter ended June 30, 1998. This increase
is attributable to factors discussed above in Net Sales, Gross Profit and
Selling, General and Administrative Expenses.
Interest Expense. Interest expense increased approximately $0.4 million
from approximately $0.4 million for the quarter ended June 30, 1997 to
approximately $0.8 million for the quarter ended June 30, 1998. This increase
was primarily attributable to debt that the Company incurred (and the related
amortization of deferred financing costs, note discounts and the accretion of
interest on the put warrants) in connection with the acquisition of Potters and
the Fleet Facility.
Tax Provision. The income tax provision increased from zero for the quarter
ended June 30, 1997 to approximately $0.2 million for the quarter ended June 30,
1998 primarily due to the increase in non-deductible interest and goodwill
expense.
Net Income. Net income was approximately $0.3 million for both the quarter
ended June 30, 1998 and the comparable period in 1997.
Six Months Ended June 30, 1998 Compared To Six Months Ended June 30, 1997
Net Sales. Net sales increased by approximately $8.8 million or 10.5% from
approximately $84.1 million for the six months ended June 30, 1997 to
approximately $92.9 million for the six months ended June 30, 1998. Sales of the
Company's Food Division increased by approximately 12.6%, while sales of the
Company's Beverage Division decreased by approximately 4.3%. The increase in
food sales was primarily due to the acquisition of Potters, which the Company
acquired on March 20, 1998. The decrease in the Beverage Division's net sales
reflected increasing price competition and an overall decline in the product
category demand.
Gross Profit. Gross profit increased by approximately $3.4 million or
34.3% from approximately $9.9 million for the six months ended June 30, 1997 to
approximately $13.3 million for the six months
<PAGE> 12
ended June 30, 1998. This increase reflects the factors discussed above in Net
Sales and the availability of certain of the Company's raw materials at prices
below those paid in the first six months of 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $2.8 million or 32.2% from
approximately $8.7 million for the six months ended June 30, 1997 to
approximately $11.5 million for the six months ended June 30, 1998. This
increase is attributable primarily to the factors discussed above in Net Sales.
As a percentage of net sales, selling, general and administrative expenses
increased from 10.3% to 12.4%. This increase was primarily attributable to an
increasing proportion of branded product sales, which generally require higher
selling, general and administrative expenses per dollar of sales.
Income from Operations. Income from operations increased approximately
$0.7 million from approximately $1.2 million for the six months ended June 30,
1997 to approximately $1.9 million for the six months ended June 30, 1998. This
increase is attributable to factors discussed above in Net Sales, Gross Profit
and Selling, General and Administrative Expenses.
Interest Expense. Interest expense increased approximately $0.4 million
from approximately $0.8 million for the six months ended June 30, 1997 to
approximately $1.2 million for the six months ended June 30, 1998. This increase
was primarily attributable to debt that the Company incurred (and the related
amortization of deferred financing costs, note discounts and the accretion of
interest on the put warrants) in connection with the acquisition of Potters and
the Fleet Facility.
Other Income. Other income increased approximately $0.1 million from $0.1
million for the six months ended June 30, 1997 to approximately $0.2 million for
the six months ended June 30, 1998. This increase was primarily the result of
the acquisition of Potters.
Extraordinary Item. During the six months ended June 30, 1998, the Company
recorded a one-time extraordinary expense of $0.3 million resulting from the
early extinquishment of debt and the related unamortized cost of acquiring the
LaSalle Facility which was refinanced through the Fleet Facility. This
extraordinary expense was recorded net of the related tax benefit of $0.1
million.
Tax Benefit. The income tax benefit increased from zero for the six months
ended June 30, 1997 to approximately $0.1 million for the six months ended June
30, 1998. Based on the Company's historical results and the weight of all other
available evidence, management believes it is more likely than not that the
deferred tax asset included in its December 31, 1997 financial statements will
be fully realized. Accordingly, management concluded that the valuation
allowance on its deferred tax asset was no longer necessary. The reversal of the
valuation allowance was recorded as a benefit from income taxes.
Net Income. Net income increased approximately $0.3 million from
approximately $0.5 million for the six months ended June 30, 1997 to
approximately $0.8 million for the six months ended June 30, 1998. This increase
reflects the factors discussed above in Income from Operations, Interest
Expense, Other Income and Tax Provision.
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the six months ended June 30,
1998 was approximately $1.7 million. This amount was principally affected by net
income, the add-back of depreciation, amortization and non-cash interest,
increases in inventory and accrued expenses, and decreases in accounts
receivable and accounts payable. Cash used in investing activities for the six
months ended June 30, 1998 was approximately $12.1 million and reflected the
acquisition of equipment and the payment of cash in connection with business
combinations. Cash provided by financing activities was approximately $11.8
million and was principally affected by the refinancing of the LaSalle Facility
with the Fleet Facility, the borrowings under the senior subordinated note and
the related common stock put warrants, payments on the Company's term debt and
line of credit and an increase in the bank overdraft balance. The net cash
increase during the period was approximately $1.3 million.
As of June 30, 1998, the Company had outstanding under the Fleet Facility
approximately $10.8 million in term debt and approximately $5.8 million in
line-of-credit borrowings. The Company owed $6.5 million of Senior Subordinated
Debt to Bank One, and approximately $2.7 million of subordinated debt to former
owners of Prefco, Richard's, Grogan's and Partin's. The subordinated debt owed
to former owners bears interest at an average rate of approximately 7.7%. The
new term debt and new line of credit agreement (under the Fleet Facility) bear
interest at either the bank's prime rate plus 1% or Adjusted LIBOR plus 2.5% at
the Company's option. The new Senior Subordinated Note bears interest at 10.0%.
The Company believes that cash generated from operations and bank
borrowings will be sufficient to fund its debt service, working capital
requirements and capital expenditures as currently contemplated for 1998. The
Company's ability to fund its working capital requirements and capital
expenditures will depend in large part on the Company's compliance with
covenants in the Fleet Facility. No assurance can be given that the Company will
remain in compliance with such covenants throughout the term of the Fleet
Facility.
The Company's balance sheet as of June 30, 1998 reflected a net deferred
tax asset of approximately $0.6 million. A valuation allowance that existed as
of December 31, 1997 was reversed because, based on the weight of all available
evidence, management believes it is more likely than not that the remaining
deferred tax asset will be fully realized.
In the first quarter of 1998, the Company acquired substantially all of the
assets of Potters, a branded food processing company based in Durant, Oklahoma,
in consideration for approximately $13.0 million cash plus related transaction
costs. In connection with this acquisition, the Company borrowed approximately
$6.5 million in subordinated debt from Banc One Capital Corporation. This
subordinated debt included detachable common stock put warrants. The Company
also refinanced its senior revolver and term debt through Fleet Capital. The new
senior revolver facility provided a line of credit balance, as of June 30, 1998,
of approximately $7.0 million which was $0.4 million greater than the balance
previously outstanding under the LaSalle Facility. The new senior debt facility
(the "Fleet Facility") provided a term loan of $11.0 million, which was
approximately $6.0 million greater than the balance previously outstanding under
the LaSalle Facility.
The Company, from time to time, reviews the possible acquisition of other
products or businesses. The Company's ability to expand successfully through
acquisition depends on many factors, including the successful identification and
acquisition of products or businesses and the Company's ability to integrate and
operate the acquired products or businesses successfully. There can be no
assurance that the Company will be successful in acquiring or integrating any
such products or businesses.
<PAGE> 14
SEASONALITY
Consumer demand for beverage products distributed by the Company tends to
be greater during warmer months although variances are possible as was the case
in May and June of 1998. Accordingly, the Company's beverage sales and profits
are generally highest in the second and third calendar quarters. Management
believes that this effect will be mitigated by the results of its food
operations which are less dependent on seasonal factors.
FORWARD LOOKING STATEMENTS
The Company wants to provide stockholders and investors with meaningful and
useful information. Therefore, this Quarterly Report on Form 10-Q contains
forward looking information and describes the Company's belief concerning future
business conditions and the outlook for the Company based on currently available
information. Whenever possible, the Company has identified these "forward
looking" statements by words such as "believes," "estimates," "will be,"
"currently" and similar expressions. These forward looking statements are
subject to risks and uncertainties which would cause the Company's actual
results or performance to differ materially from those expressed in these
statements. These risks and uncertainties include the following: risks
associated with acquisitions, including integration of acquired businesses; new
product development and other aspects of the Company's business strategy;
uncertainty as to evolving consumer preferences; seasonality of demand for
certain products; customer and supplier concentration; the impact of
competition; and sensitivity to such factors as weather and raw material costs.
Readers are encouraged to review the Company's Annual Report on Form 10-K and
its Report on Form 8-K dated April 17, 1998 as amended by Amendment No. 1 dated
June 5, 1998 filed with the Securities and Exchange Commission for a more
complete description of these factors. The Company assumes no obligation to
update the information contained in this Quarterly Report on Form 10-Q.
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders of the Company held on May 13, 1998,
the following matters were submitted to a vote of the stockholders:
(1) Election of Directors. Merrick M. Elfman, John T. Hanes and Steven
M. Taslitz were reelected as directors of the Company. The following
directors' terms of office continued after the Annual Meeting of
Stockholders: Eric D. Becker, Brian T. Fleming, Rick Inatome, C.
Cook Jordan, Jr., John A. Miller, Alan F. Sussna.
(2) Approval of the Company's Employee Stock Purchase Plan.
(3) Approval of an amendment to the Company's Stock Option Plan to
increase the number of shares authorized to be issued thereunder to
2,500,000.
TABULATION OF VOTES
BROKER
MATTER FOR AGAINST WITHHELD NON-VOTES
Director Election:
----------------------------------------------------------------
Merrick M. Elfman 5,057,360 0 24,264 0
----------------------------------------------------------------
John T. Hanes 5,057,360 0 24,264 0
----------------------------------------------------------------
Steven M. Taslitz 5,057,360 0 24,264 0
----------------------------------------------------------------
Approval of
Employee Stock
Purchase Plan 4,110,293 18,021 3,000 950,310
----------------------------------------------------------------
Approval of
Amendment to Stock
Option Plan 3,804,857 313,654 12,803 950,310
----------------------------------------------------------------
<PAGE> 16
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: The following are filed as Exhibits to this Quarterly Report
on Form 10-Q:
Exhibit
Number Description
----------------------------------
3(i) Certificate of Incorporation of the Company,
including all amendments thereto (1)
3(ii) By-Laws of the Company (2)
4 Amendment dated as of April 15, 1998 to the
Company's Stock Option Plan *
11 Statement Regarding Computation of Per Share Earnings for the
three months and six months ended June 30, 1998 *
27 Financial Data Schedule *
__________________
* Filed herewith.
(1) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 and incorporated
herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement No.
33-69438 or the amendments thereto and incorporated herein by
reference.
(b) Reports on Form 8-K:
A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on April 17, 1998 and an Amendment No. 1 to the Form 8-K was filed on
June 5, 1998. The Form 8-K and Amendment No. 1 were filed in connection with
the Company's acquisition of substantially all of the assets of J.C. Potter
Sausage Company and report Items 2 and 7.
The Form 8-K, as amended, includes the following financial statements of
the Company: (i) Pro Forma Consolidated Statements of Operations for the Three
Months ended March 31, 1998 (unaudited); (ii) Notes to Pro Form Consolidated
Statements of Operations for the Three Months Ended March 31, 1998 (unaudited);
(iii) Pro Forma Consolidated Statements of Operations for the Year Ended
December 31, 1997 (unaudited); and (iv) Notes to Pro Forma Consolidated
Statements of Operations for the Year Ended December 31, 1997 (unaudited).
The Form 8-K, as amended, includes the following financial statements of
J.C. Potter Sausage Company, Inc. and Affiliates: (i) Combined Balance Sheets
as of June 30, 1996 and 1997; (ii) Combined Statements of Income for the Years
Ended June 30, 1995, 1996 and 1997; (iii) Combined Statements of Changes in
Stockholders' Equity for the Years Ended June 30, 1995, 1996 and 1997; (iv)
Combined Statements of Cash Flows for the Years Ended June 30, 1995, 1996 and
1997; (v) Notes to Combined Financial Statements for June 30, 1995, 1996 and
1997; (vi) Combined Balance Sheet as of March 20, 1998 (unaudited); (vii)
Combined Statements of Income for the Nine Months Ended March 31, 1997 and for
the Period July 1, 1997 Through March 20, 1998 (unaudited); (viii) Combined
Statements of Changes in Stockholders' Equity for the Period July 1, 1997
Through March 20, 1998 (unaudited); (ix) Combined Statements of Cash Flows for
the Nine Months Ended March 31, 1997 and for the Period July 1, 1997 Through
March 20, 1998 (unaudited).
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATLANTIC PREMIUM BRANDS, LTD.
Date: August 12, 1998 By: /s/ THOMAS M. DALTON
-------------------------------------
Thomas M. Dalton, Chief Financial
Officer and Senior Vice President
(On behalf of Registrant and as
Chief Accounting Officer)
<PAGE> 1
EXHIBIT 4
AMENDMENT TO THE COMPANY'S STOCK OPTION PLAN
RESOLVED, that the Company's Stock Option Plan (the "Option Plan") be and
hereby is amended, subject to and effective upon stockholders' approval at the
Annual Meeting of Stockholders on May 13, 1998, as follows:
Section 3 of the Option Plan is amended to read as follows:
"3. STOCK
The stock that may be issued pursuant to Options granted under the Plan
shall be shares of Common Stock, par value $.01 per share, of the Company
(the "Stock"), which shares may be treasury shares or authorized but unissued
shares. The number of shares of Stock that may be issued pursuant to Options
granted under the Plan shall not exceed in the aggregate 2,500,000 shares, of
which 120,000 shares may be issued pursuant to options granted to
Non-Employee Directors and 2,380,000 shares may be issued pursuant to options
granted to other eligible individuals. The foregoing number of shares are
subject to adjustment as provided in Section 18 below. If any Option expires,
terminates, or is terminated or canceled for any reason prior to exercise in
full, the shares of Stock that were subject to the unexercised portion of
such Option shall be available for future Options granted under the Plan and
such number of shares shall be restored to the number of shares available for
issuance under Options granted to Non-Employee Directors or to other eligible
individuals, whichever is applicable, except that such shares shall not be so
available whenever such Option has been surrendered as a result of the
exercise of the related SAR."
Section 4 of the Option Plan is amended to read as follows:
"4. ELIGIBILITY
(a) Employees and Subsidiary Directors. Options or SARs may be granted
under the Plan to any employee of the Company or any Subsidiary (including
any such employee who is an officer or director of the Company or any
Subsidiary) or to any Subsidiary Director as the Board shall determine and
designate from time to time prior to expiration or termination of the Plan.
The maximum number of shares of Stock subject to Options that may be granted
under the Plan to any executive officer or other employee of the Company or
any Subsidiary is 2,380,000 shares (subject to adjustment as provided in
Section 18 hereof)."
Except as herein amended, the Option Plan shall remain in full force and
effect.
Dated: As of April 15, 1998
ATLANTIC PREMIUM BRANDS, LTD.
By: /s/ ALAN F. SUSSNA
-----------------------
Alan F. Sussna
Chief Executive Officer
<PAGE> 1
EXHIBIT 11
ATLANTIC PREMIUM BRANDS, LTD.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Six
Months
Ended
June 30,
1998
------------
<S> <C>
INCOME BEFORE EXTRAORDINARY LOSS $ 1,020,292
EXTRAORDINARY LOSS, net 194,993
------------
Net income $ 825,299
============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,621,937
============
INCOME PER COMMON SHARE BEFORE EXTRAORDINARY LOSS $ .14
EXTRAORDINARY LOSS PER COMMON SHARE (.03)
------------
Net income per common share $ .11
============
COMPUTATION OF WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (DILUTED CALCULATION):
Shares outstanding as of June 30, 1998 7,388,169
Impact of dilutive stock options as of June 30, 1998 233,768
------------
7,621,937
============
</TABLE>
<PAGE> 2
ATLANTIC PREMIUM BRANDS, LTD.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Three
Months
Ended
June 30,
1998
-------------
<S> <C>
NET INCOME $ 276,316
===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,620,369
===========
NET INCOME PER COMMON SHARE $ .04
===========
COMPUTATION OF WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (DILUTED CALCULATION):
Shares outstanding as of June 30, 1998 7,402,603
Impact of dilutive stock options as of June 30, 1998 217,766
-----------
7,620,369
===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,603,812
<SECURITIES> 0
<RECEIVABLES> 9,893,837
<ALLOWANCES> 178,000
<INVENTORY> 6,471,741
<CURRENT-ASSETS> 19,570,168
<PP&E> 15,825,840
<DEPRECIATION> 2,328,887
<TOTAL-ASSETS> 47,581,355
<CURRENT-LIABILITIES> 18,244,529
<BONDS> 0
0
0
<COMMON> 74,355
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 47,581,355
<SALES> 51,512,039
<TOTAL-REVENUES> 51,512,039
<CGS> 43,577,233
<TOTAL-COSTS> 6,739,029
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 818,563
<INCOME-PRETAX> 476,316
<INCOME-TAX> 200,000
<INCOME-CONTINUING> 276,316
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 276,316
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
