<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 March 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------- -------------
Commission File Number: 1-13747
ATLANTIC PREMIUM BRANDS, LTD.
- --------------------------------------------------------------------------------
(Exact Name of registrant as specified in its charter)
DELAWARE 36-3761400
- ----------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 DUNDEE ROAD, SUITE 370
NORTHBROOK, ILLINOIS 60062
- ----------------------------------------- --------------------------------
(Address of principal executive office) (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 May 7, 1999, there were outstanding 7,412,583 shares of Common Stock, par
value $.01 per share, of the Registrant.
<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Audited) (Unaudited)
December 31, March 31,
(in thousands, except shares and par value) 1998 1999
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 1,774 $ 1,038
Accounts receivable, net of allowance for doubtful accounts
of $247 and $240, respectively 10,437 10,212
Inventory 4,457 5,232
Prepaid expenses and other current assets 235 258
Deferred income taxes 544 544
Net assets of discontinued operations 1,240 267
----------- -----------
Total current assets 18,687 17,551
Property, plant and equipment, net 12,288 12,184
Goodwill, net 13,517 13,426
Other assets, net 605 561
Deferred income taxes 568 568
----------- -----------
Total assets $ 45,665 $ 44,290
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 4,073 $ 1,883
Notes payable under line of credit 1,579 2,694
Current maturities of long-term debt 1,378 1,498
Accounts payable 5,609 6,584
Income taxes payable 79 26
Accrued expenses 4,602 3,095
----------- -----------
Total current liabilities 17,320 15,780
Long-term debt, net of current maturities 17,079 16,710
Put warrants 1,435 1,435
----------- -----------
Total liabilities 35,834 33,925
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issued or outstanding -- --
Common stock, $.01 par value; 30,000,000 shares authorized;
7,412,583 shares issued and outstanding at December 31, 1998 and March
31, 1999 74 74
Additional paid-in capital 12,260 12,260
Accumulated deficit (2,503) (1,969)
----------- -----------
Total stockholders' equity 9,831 10,365
----------- -----------
Total liabilities and stockholders' equity $ 45,665 $ 44,290
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 3
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
(in thousands, except per share data) 1998 1999
---------- ----------
<S> <C> <C>
Net sales $ 36,861 $ 45,907
Cost of goods sold 32,821 39,331
---------- ----------
Gross profit 4,040 6,576
---------- ----------
Selling, general and administrative expenses:
Salaries and benefits 1,311 2,067
Other operating expenses 1,654 2,609
Depreciation and amortization 302 488
---------- ----------
Total selling, general and administrative expenses 3,267 5,164
---------- ----------
Income from operations 773 1,412
Interest expense (341) (584)
Other income, net 123 77
---------- ----------
Income from continuing operations before income taxes 555 905
Income tax benefit (expense) 254 (371)
---------- ----------
Income from continuing operations 809 534
Loss from discontinued operations (65) --
---------- ----------
Income before extraordinary loss 744 534
Extraordinary loss (195) --
---------- ----------
Net income $ 549 $ 534
========== ==========
Income per common share:
Basic:
Income from continuing operations $ 0.11 $ 0.07
Loss from discontinued operations (0.01) --
Extraordinary loss (0.03) --
Net income $ 0.07 $ 0.07
Diluted:
Income from continuing operations $ 0.10 $ 0.07
Loss from discontinued operations (0.01) --
Extraordinary loss (0.02) --
Net income $ 0.07 $ 0.07
Weighted average common shares:
Basic 7,373,574 7,412,583
========== ==========
Diluted 7,621,156 7,598,844
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in thousands) --------------------
1998 1999
------ ------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 549 $ 534
Adjustments to reconcile net income to net cash provided
by (used in) operating activities, net of assets and liabilities
of acquired businesses:
Loss from discontinued operations 65 --
Extraordinary loss 195 --
Depreciation and amortization 344 549
Deferred income taxes (463) --
Decrease in accounts receivable, net 527 224
Increase in inventory (106) (777)
Increase in prepaid expenses and other assets (271) (23)
(Decrease) increase in accounts payable (1,633) 975
Increase (decrease) in accrued expenses and other
current liabilities 77 (945)
------- -------
Net cash provided by (used in) operating activities (716) 537
------- -------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (102) (243)
Cash paid for businesses acquired including deferred acquisition
fees, net of cash acquired (11,671) --
Other (162) --
------- -------
Net cash used in investing activities (11,935) (243)
------- -------
Cash Flows from Financing Activities:
Increase (decrease) in bank overdraft 813 (2,191)
Borrowings under line of credit 357 1,115
Payments of term debt and notes payable (5,087) (311)
Payments of financing costs (279) --
Borrowings under senior subordinated note 5,065 --
Issuance of common stock warrants 1,435 --
Issuance of common stock options 13 --
Borrowings under term loan 11,000 --
------- -------
Net cash flows provided by (used in) financing
activities 13,317 (1,387)
------- -------
Net cash provided by discontinued operations 765 357
------- -------
Net increase (decrease) in cash 1,431 (736)
Cash, beginning of period 1,184 1,774
------- -------
Cash, end of period $ 2,615 $ 1,038
======= =======
</TABLE>
These accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 5
ATLANTIC PREMIUM BRANDS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements present the accounts of
Atlantic Premium Brands, Ltd. and subsidiaries (the "Company"). All significant
intercompany transactions have been eliminated in consolidation. The Company's
financial statements have been restated to classify the results of operations
and net assets of the beverage division as discontinued operations. Accordingly,
all amounts included in the Notes to Consolidated Financial Statements pertain
to continuing operations except where otherwise noted. See further discussion in
Note 3 - "Discontinued Operations".
The Company is engaged in the manufacturing, marketing and distribution of
packaged meat and other food products in Texas, Louisiana, Kentucky, Oklahoma
and surrounding states. The operating results of the Company are impacted by
changes in food commodity markets.
The consolidated financial statements included herein 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 three
months ending March 31, 1999, 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,
1998, consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K dated March 26, 1999.
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 March 31, 1999, $235,000 was restricted to meet minimum
balance funding requirements.
<PAGE> 6
Inventory
Inventory is stated at the lower of cost or market and is comprised of raw
materials, finished goods and packaging supplies. Cost is determined using the
first-in, first-out method (FIFO). Inventory consisted of the following as of:
<TABLE>
<CAPTION>
December 31, March 31,
(in thousands) 1998 1999
------------ ----------
<S> <C> <C>
Raw materials $ 140 $ 235
Finished goods 2,998 3,449
Packaging supplies 1,319 1,548
------------ ----------
Total inventory $ 4,457 $ 5,232
============ ==========
</TABLE>
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of applicable
depreciation. Depreciation is computed using the straight-line method at annual
rates of 3% to 20% for buildings and building improvements, and 10% to 20% for
equipment, furniture and vehicles. Leasehold improvements are amortized over the
lesser of the lease term or asset life. Additions and improvements that
substantially extend the useful life of a particular asset are capitalized.
Repair and maintenance costs are charged to expense. Upon sale, the cost and
related accumulated depreciation are removed from the accounts.
Other Assets
Other assets consist of deferred acquisition costs, cash surrender value of life
insurance, and deferred financing costs. Deferred financing costs are being
amortized over 5 to 7 years, representing the term of the related debt, using
the effective interest method.
Goodwill
Goodwill recorded in connection with business combinations is being amortized
using the straight-line method over 5 to 40 years.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
<PAGE> 7
Income Per Common Share
The weighted average shares used to calculate basic and diluted income per
common share for the three months ended March 31, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Weighted average shares outstanding for basic income per common share 7,373,574 7,412,583
Dilutive effect of common stock options 247,582 186,261
---------- ----------
Weighted average shares outstanding for dilutive income per common
share 7,621,156 7,598,844
---------- ----------
</TABLE>
Options to purchase 126,050 and 1,281,192 shares of common stock at $3.63 and
prices ranging from $2.65 to $4.00 per share were outstanding during the first
quarter of 1998 and 1999, respectively, but were not included in the computation
of diluted income per common share because the options' exercise price was
greater than the average market price of the common shares during the quarter.
Warrants with a put option to purchase up to a maximum of 1,095,700 shares of
common stock, as of March 31, 1998 and 1999 at $3.38 per share were outstanding
during the first quarter of 1999 but were not included in the computation of
diluted income per common share because the warrants' exercise price was greater
than the average market price of the common shares during the quarter.
2. CONTINGENCIES:
Lawsuits and claims are filed against the Company from time to time in the
ordinary course of business. These actions are in various preliminary stages and
no judgments or decisions have been rendered by hearing boards or courts.
Management, after reviewing developments to date with legal counsel, is of the
opinion that the outcome of such matters will not have a material adverse effect
on the Company's financial position or results of operations.
3. DISCONTINUED OPERATIONS:
During the fourth quarter of 1998, the Company decided to sell substantially all
the assets of its beverage division. The beverage division has been accounted
for as a discontinued operation and prior years' financial statements have been
restated. Interest expense has been allocated to the beverage division based on
its net assets as a percentage of total consolidated net assets.
The sale was recorded in three separate transactions. Effective December 1,
1998, certain assets were sold for cash of approximately $2.2 million. Effective
January 11, 1999, additional assets were sold for cash of approximately
$900,000. The Company completed its disposition of the beverage division on
February 2, 1999 when it sold the remaining assets for approximately $400,000 in
cash and notes. The estimated loss of $293,040, net of income taxes, related to
the asset disposals in January and February 1999, was accrued for in the fourth
quarter of 1998, and, therefore, is not reflected in the accompanying
consolidated statements of income.
<PAGE> 8
In connection with these transactions, the Company recorded expenses in the
fourth quarter of 1998 related to severance; legal, investment banking and
accounting fees; and lease obligations which have no future benefit. These
expenses totalled $1.3 million, of which $0.7 million remains in accrued
expenses in the accompanying consolidated balance sheet at March 31, 1999.
4. ACQUISITION:
As of March 20, 1998, the Company acquired substantially all of the assets and
certain liabilities of J.C. Potter Sausage Company (Potter), a food processing
business in Durant, Oklahoma, specializing in a line of premium products
including breakfast sausage, link sausage and sausage and biscuits. In
connection with the Potter transaction, the Company paid approximately $10.5
million in cash plus related transaction costs. The business combination was
accounted for using the purchase method of accounting, whereby the purchase
price is allocated to the assets acquired and liabilities assumed based upon
fair value.
5. DEBT REFINANCING:
On March 20, 1998, the Company refinanced its senior revolver and term debt. The
new debt consists of an $11 million term note, a $15 million line of credit and
$6.5 million senior subordinated note with detachable put warrants.
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 March 31, 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 and a contingent
warrant to purchase up to a maximum of 428,753 shares of nonvoting common stock
at $3.38 per share based upon the equity value of the Company on certain dates.
The warrants have been recorded at an estimated fair value of $1,435,000,
resulting in a discount on the senior subordinated note of the same amount. This
discount is being amortized over the seven year term of the note as additional
interest expense. For the period ended March 31, 1999, amortization of the debt
discount was approximately $51,250.
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.
6. SEGMENTS
The Company's operations have been classified into two business segments: food
processing and food distribution. The food processing segment includes the
processing and sales of sausages and related
<PAGE> 9
food products to distributors and retailers in Louisiana, Texas, Kentucky and
other surrounding states. The food distribution segment includes the purchasing,
marketing, and distribution of packaged meat products to retailers and
restaurants, located primarily in Texas.
Summarized financial information, by business segment, for continuing operations
in the three months ended are as follows:
(in thousands)
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1999
-------------- --------------
<S> <C> <C>
Net sales to external customers:
Food Processing $ 4,514 $ 11,447
Food Distribution 32,347 34,460
------- --------
36,861 45,907
======= ========
Interest expense:
Food Processing 35 35
Food Distribution 32 32
Corporate 274 517
------- --------
341 584
------- --------
Depreciation and amortization:
Food Processing 244 425
Food Distribution 58 63
------- --------
302 488
------- --------
Income from continuing operations
before income taxes:
Food Processing 344 1,144
Food Distribution 576 718
Corporate (365) (957)
------- --------
$ 555 $ 905
======= ========
</TABLE>
<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 preeminent local or regional branded processed meat company. In addition to
significantly increasing the Company's size, the newly acquired businesses
created a broader platform for future growth.
In order to acquire and operate its food businesses, the Company formed
four new subsidiaries during 1996: Prefco Corp, Carlton Foods Corp., Richards
Cajun Foods Corp., and Grogan's Farm, Inc. In March of 1998, the Company formed
a fifth new subsidiary to acquire the business of J.C. Potter Sausage Company
and affiliates.
The Company completed the sale of substantially all the assets of its
beverage division, which operated as a distributor of non-alcoholic beverages in
the Baltimore and Washington D.C. metropolitan areas. The disposition occurred
in three stages on December 1, 1998, January 11, 1999 and February 2, 1999.
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. The results of operations of the beverage division have been
classified as a discontinued operation. The discussion of the results of
operations below excludes the results of the beverage division.
The Company's Carlton subsidiary and the Company's Grogan's subsidiary
both sell product to the Company's Prefco subsidiary. The Company's Potter
subsidiary sells product to both the Company's Carlton and Prefco subsidiaries
and purchases product from the Company's Grogan's subsidiary. The Company's
financial statements do not reflect this activity, as it is eliminated on a
consolidated basis.
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998
Net sales. Net sales increased by approximately $9 million or 24.5%
from approximately $36.9 million for the quarter ended March 31, 1998 to
approximately $45.9 million for the quarter ended March 31, 1999. Sales of the
Company's Food Processing segment increased by approximately 153.6% primarily
resulting from the acquisition of the Potter subsidiary on March 20, 1998 while
sales of the Company's Food Distribution segment increased by approximately
6.5%.
Gross Profit. Gross profit increased by approximately $2.6 million or
65.0% from approximately $4.0 million for the quarter ended March 31, 1998 to
approximately $6.6 million for the quarter ended March 31, 1999. Gross profit as
a percentage of net sales increased from 11% for the quarter ended March 31,
1998 to 14.3% for the quarter ended March 31, 1999. These increases primarily
reflect the impact of the Potter acquisition and the availability of certain of
the Company's raw materials at prices below those paid in the first quarter of
1998 for both the Food Processing segment and the Food Distribution segment. Hog
prices have a significant impact on the Company's cost of goods sold and lower
hog prices in the first quarter of 1999 favorably impacted gross profit as
compared to 1998.
<PAGE> 11
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.9 million from approximately $3.3 million
for the quarter ended March 31, 1998 to approximately $5.2 million for the
quarter ended March 31, 1999. As a percentage of net sales, selling, general and
administrative expenses decreased from 31% to 27% for the Food Processing
segment and remained at 5.9% for the Food Distribution segment. The overall
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, primarily related to increased
advertising support.
Income from Operations, Income from operations increased approximately
$0.6 million from approximately $0.8 million for the quarter ended March 31,
1998 to approximately $1.4 million for the quarter ended March 31, 1999. This
increase is attributable to factors discussed above.
Interest Expense. Interest expense increased approximately $0.3
million from approximately $0.3 million for the quarter ended March 31, 1998 to
approximately $0.6 million for the quarter ended March 31, 1999. This interest
was primarily attributable to increased levels of debt (and the related
amortization of deferred financing costs and note discounts) that were necessary
to finance the acquisition of Potter.
Warrants with a put option were issued by the Company in conjunction
with the debt incurred at the time of the Potter acquisition. The Company is
required to accrete the value of the warrants and mark-to-market the estimated
fair value of the put option. Any increases to such value are charged to
earnings as additional interest expense. To the extent of any charges to
earnings, any subsequent decreases to the value of the warrants are added to
earnings as additional interest income. Furthermore, any such additional
interest expense would not be deductible in the Company's federal or state
income tax returns and, therefore, would increase the effective income tax rate
of the Company. For purposes of these calculations, the fair value of the
warrants will be estimated, using a Black-Scholes option-pricing model. During
the quarter ended March 31, 1999, the Company recorded no additional interest
expense, as the value of the warrants did not increase beyond their carrying
value.
Income Tax Benefit (Expense). The effective tax rate differs from the
statutory rate primarily because of state income taxes, the non-deductibility
of goodwill amortization and, for the quarter ended March 31, 1998, the reversal
of a valuation allowance of approximately $0.5 million.
Income from Continuing Operations. Income from continuing operations
decreased approximately $0.3 million from approximately $0.8 million for the
quarter ended March 31, 1998 to approximately, $0.5 million for the quarter
ended March 31, 1999. This decrease is primarily attributable to the factor
discussed above in Income Tax Benefit (Expense).
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the quarter ended March 31,
1999 was approximately $0.5 million. Income from continuing operations,
depreciation and amortization, non-cash interest and an increase in accounts
payable were the primary factors contributing to the cash generated by operating
activities, which were partially offset by an increase in inventory and prepaid
expenses. Cash used in operating activities for the quarter ended March 31, 1998
was approximately $0.7 million. This amount was principally affected by net
income, the add-back of depreciation, amortization, the deferred income tax
benefit and non-cash interest, increases in inventory, and prepaid expenses, and
decreases in accounts receivable, accounts payable and accrued expenses.
Cash used in investing activities for the quarter ended March 31, 1999
was approximately $0.3 million and reflected the acquisition of equipment. Cash
used in investing activities for the quarter ended
<PAGE> 12
March 31, 1998 was approximately $11.9 million and reflected the acquisition of
equipment, and the payment of cash in connection with the Potter acquisition.
Cash used in financing activities for the quarter ended March 31, 1999
was approximately $1.4 million and was principally affected by an increase in
the bank overdraft balance which was partially offset by borrowings under the
Company's line of credit. Cash provided by financing activities for the quarter
ended March 31, 1998 was approximately $13.3 million and was principally
affected by the refinancing of the existing senior debt with the new term and
revolving loan agreements, the borrowings under the senior subordinated note and
the related common stock warrants with the put option, payments on the Company's
term debt and line of credit and a decrease in the bank overdraft balance.
As of March 31, 1999, the Company had outstanding approximately $10
million in term debt, $6.5 million of Senior Subordinated Debt owed to a bank,
approximately $2.7 million in line-of credit borrowings and approximately $2.7
million of subordinated debt owed to former owners of Prefco, Richard's,
Grogan's and Partin's. Principal on these notes is due in 2001. Monthly interest
payments, currently reflecting in average rate of approximately 7.7%, are being
made on the subordinated debt owed to former owners. The term debt and line of
credit agreement bear interest at either the bank's prime rate plus 1% or
Adjusted LIBOR plus 2.5% at the Company's option. The Senior Subordinated Debt
bears interest at 10% per annum.
The Company has a put option agreement with the holder of certain
warrants described above under "Results of Operations - Interest Expense." If
the holder of the warrants exercises the put option, the Company's ability to
satisfy such obligation will depend on its ability to raise additional
capital. The Company's ability to secure additional capital at such time will
depend upon the Company's overall operating performance, which will be subject
to general business, financial, competitive and other factors affecting the
Company and the processed meat distribution industry, certain of which factors
are beyond the control of the Company. No assurance can be given that the
Company will be able to raise the necessary capital on terms acceptable to the
Company, if at all, to satisfy the put obligation in a timely manner. If the
Company is unable to satisfy such obligation, the Company's business, financial
condition and operations will be materially and adversely effected,
As of March 31, 1999, the Company believes that cash generated from
operations and bank borrowings will be sufficient to fund its debt service,
working capital requirements and capital expenditures as currently contemplated
for 1999. However, the Company's ability to fund its working capital
requirements and capital expenditures will depend in large part on the Company's
ability to continue to comply with covenants in the bank agreements. The
Company's ability to continue to comply with the covenants in the bank
agreements will depend on a number of factors, certain of which are beyond the
Company's control, including but not limited to, successful integration of
acquired businesses and implementation of its business strategy, prevailing
economic conditions, uncertainty as to evolving consumer preferences,
sensitivity to such factors as weather and raw material costs, the impact of
competition and the effect of each of these factors on its future operating
performance. No assurance can be given that the Company will remain in
compliance with such covenants throughout the term of the bank agreements.
The Company, from time to time, reviews the possible acquisition of
other products or businesses. The Company's ability to expand successfully
through acquisition depends on many factors, including the successful
identification and acquisition of products or businesses and the Company's
ability to integrate and operate the acquired products or businesses
successfully. There can be no assurance that the Company will be successful in
acquiring or integrating any such products or businesses.
<PAGE> 13
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is subject to certain market risks. These risks relate to
commodity price fluctuations, interest rate changes, fluctuations in the value
of the warrants with the put option and credit risk.
The Company is a purchaser of pork and other meat products. The Company
buys pork and other meat products based upon market prices that are established
with the vendor as part of the purchase process. The operating results of the
Company are significantly impacted by pork prices. The Company does not use
commodity financial instruments to hedge pork and other meat products prices.
The Company's exposure to interest rate risk primarily to its debt
obligations and temporary cash investments. Interest rate risk is managed
through variable rate and fixed rate borrowings with varying maturities. The
Company does not use, and has not in the past 12 months used, any derivative
financial instruments relating to the risk associated with changes in interest
rates.
The Company is required to accrete the value of the warrants and
mark-to-market the estimated fair value of the put option. Any increases to such
value are charged to earnings as additional interest expense. To the extent of
any charges to earnings, any subsequent decreases to the value of the warrants
are added to earnings as additional interest income. Furthermore, any such
additional interest expense is not deductible in the Company's federal or state
income tax returns and, therefore, increases the effective income tax rate of
the Company. For purposes of these calculations, the fair value of the warrants
will be estimated using a Black-Scholes option pricing model. During the
quarters ended March 31, 1999 and 1998, the Company recorded no additional
interest expense resulting from changes in the estimated fair value of the
warrants.
The Company is exposed to credit risk on certain assets, primarily
accounts receivable. The Company provides credit to customers in the ordinary
course of business and performs ongoing credit evaluations. The Company
currently believes its allowance for doubtful accounts is sufficient to cover
customer credit risks.
YEAR 2000
The Year 2000 issue is the result of computer programs using a two-
digit format, as opposed to four digits, to indicate the year. These two-digit
computer systems will be unable to interpret dates beyond the year 1999, which
could cause a system failure or other computer errors, leading to disruptions in
operations. The Company has focused on three major areas in conducting an
assessment of its Year 2000 readiness: (1) information technology, (2) embedded
technology, and (3) third party relationships.
Information Technology. The Company began its assessment of its Year
2000 readiness by conducting a review of the computer hardware and software
applications which comprise the Company's information technology systems. This
review was completed in 1998. As a result of this review, the Company believes
that , with the exception of its Potter susidiary, the information technology
being utilized by each of its six operating subisidiaries is Year 2000
compliant, and the Company has received written confirmation of Year 2000
compliance from its hardware and software vendors. The Company has determined
that its Potter subisdiary requires the installation of a new data processing
system, after which Potter will also be Year 2000 compliant. The Company expects
that this installation will be completed early in the third quarter of 1999.
Through March 31, 1999, the costs paid to third parties in connection with the
Company's review of its information technology were approximately $50,000, and
<PAGE> 14
future estimated expenses are $100,000, consisting primarily of the costs
associated with the new Potters' data processing system,
Embedded Technology. The next phase of the Company's assessment began
in the third quarter of 1998, and included an audit of the non-information
technology systems and embedded technology at its facilities. The Company
completed this audit in the first quarter of 1999, and based on the results,
does not anticipate that the costs to be paid to third parties in connection
with its Year 2000 efforts in this area will be material.
Third Party Relationships. The Company relies on third party suppliers
and vendors for raw materials and other key supplies and services. The Company
is also dependent upon its customers for sales and cash flow. Interruption of
supplier or vendor operations or customer sales due to a failure of those
parties to be Year 2000 compliant could adversely affect the Company's
operations. The Company, however, is not dependent on any particular supplier,
vendor or customer (with the exception of Sam's Clubs Inc. which comprises a
significant portion of sales). The Company does not currently have any formal
information concerning the Year 2000 readiness of all its suppliers and
customers, but has confirmed the Year 2000 readiness with suppliers and
customers with whom the Company has an electronic data interface (EDI). The
Company has also queried its largest customer to ensure that it is Year 2000
compliant. While the Company believes that the impact of isolated occurrences
resulting from the failure of third parties to be Year 2000 compliant would not
be material, a wide-spread Year 2000 interruption throughout the food or
beverage industry or a Year 2000 problem with respect to its largest customer
would have a material adverse effect on the Company's results of operations and
financial position.
Contingency Plan. Although the Company does not currently have a
contingency plan for Year 2000 issues, it does intend to begin developing one in
the second quarter of 1999 to prepare the Company for Year 2000 interruptions
such as delays in its accounting systems or customer sales and the inability of
its lenders or other sources of capital and liquidity to make funds available
when required.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
During 1998, the Financial Accounting Standards Board issued statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (Statement 133). Implementation of Statement
133 is required for periods beginning after June 15, 1999. Statement 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that derivatives be recognized in the balance
sheet at fair value and specifies the accounting for changes in fair value. The
Company is evaluating the effect of Statement 133 on its accounting policy
related to derivative financial instruments.
FORWARD LOOKING STATEMENTS
The Company wants to provide stockholders and investors with more
meaningful and useful information. Therefore, this Form 10-Q contains forward
looking information and describes the Company's belief concerning future
business conditions and the outlook for the Company based on currently available
information. Whenever possible, the Company has identified these "forward
looking" statements by words such as "believes," "will depend," "to continue to"
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
<PAGE> 15
as to evolving consumer preferences; customer and supplier concentration; the
impact of competition; the impact of change in the valuation of the put warrants
on the Company's net income and effective tax rate; the Company's ability to
raise additional capital; sensitivity to such factors as weather and raw
material costs; and the factors discussed above under the captions "Quantitative
and Qualitative Disclosure About Market Risk" and "Year 2000." Readers are
encouraged to review the Company's Current Report on Form 8-K dated June 4, 1997
filed with the Securities and Exchange Commission for a more complete
description of these factors. The Company assumes no obligation to update the
information contained in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion under the caption "Quantitative and Qualitative
Disclosures About Market Risk" in Item 2, "Management's Discussion and Analysis
of Financial Condition and Result of Operations."
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES
NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following are filed as Exhibits to this Quarterly
Report On Form 10-Q:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3(i) Certificate of Incorporation of the Company, including all
amendments thereto (1)
3(ii) By-Laws of the Company (2)
27 Financial Data Schedule*
---------------------------
* Filed herewith.
(1) Filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement No.
33-69438 or the admendments thereto and incorporated herein by
reference.
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated January 25, 1999 was filed with
the Securities and Exchange Commission (the "SEC") on February 1, 1999. The Form
8-K was filed in connection with the Company's replacement of Arthur Andersen
LLP with KPMG LLP as its independent certified public accountants and reports
Item 4.
In addition, a Current Report on Form 8-K dated February 2, 1999 was
filed with the SEC on February 16, 1999 (the "Beverage 8-K") in connection with
the Company's disposition of its beverage division and reports Items 2 and 7.
<PAGE> 17
The Beverage 8-K includes the following financial statements of the
Company: (i) Pro Forma Consolidated Balance Sheet as of September 30, 1998
(unaudited), (ii) Pro Forma Consolidated Statement of Operations for the Year
Ended December 31, 1997 (unaudited), (iii) Pro Forma Consolidated Statement of
Operations for the Nine Months Ended September 30, 1998 (unaudited) and (iv)
Notes to Pro Forma Financial Information.
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATLANTIC PREMIUM BRANDS, LTD.
Dated as of May 14, 1999 By: /s/ THOMAS M. DALTON
-------------------------------------------
Thomas M. Dalton, Chief Financial Officer
and Senior Vice President (On behalf of
Registrant and as Chief Accounting Officer)
<PAGE> 19
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
NUMBER
------ -------------------------------------------------------------
3(i) Certificate of Incorporation of the Company, including all
amendments thereto (1)
3(ii) By-Laws of the Company (2)
27 Financial Data Schedule*
- -----------------------
* Filed herewith.
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, 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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-30-1999
<CASH> 1,038,000
<SECURITIES> 0
<RECEIVABLES> 10,452,000
<ALLOWANCES> 240,000
<INVENTORY> 5,232,000
<CURRENT-ASSETS> 17,551,000
<PP&E> 14,741,000
<DEPRECIATION> 2,557,000
<TOTAL-ASSETS> 44,290,000
<CURRENT-LIABILITIES> 15,780,000
<BONDS> 0
0
0
<COMMON> 74,000
<OTHER-SE> 12,260,000
<TOTAL-LIABILITY-AND-EQUITY> 44,290,000
<SALES> 45,907,000
<TOTAL-REVENUES> 45,907,000
<CGS> 39,331,000
<TOTAL-COSTS> 5,164,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 584,000
<INCOME-PRETAX> 905,000
<INCOME-TAX> 371,000
<INCOME-CONTINUING> 534,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 534,000
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
