<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
September 30, 2000
{ } Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 1-13747
ATLANTIC PREMIUM BRANDS, LTD.
--------------------------------------------------------------------------------
(Exact Name of registrant as specified in its charter)
DELAWARE 36-3761400
--------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 DUNDEE ROAD, SUITE 370
NORTHBROOK, ILLINOIS 60062
---------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 412-6200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
---
As of November 10, 2000, there were outstanding 6,603,374 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
(in thousands, except shares and par value)
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
1999 2000
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,841 $ 814
Accounts receivable, net of allowance for doubtful accounts
of $348 and $198, respectively 9,623 6,945
Inventory 5,610 6,155
Prepaid expenses and other current assets 475 775
Income taxes receivable 390 790
Deferred income taxes 587 587
Net assets of discontinued operations 78 77
-------- --------
Total current assets 18,604 16,143
Property, plant and equipment, net 12,549 12,215
Intangible assets, net 13,153 12,879
Other assets, net 437 358
-------- --------
Total assets $ 44,743 $ 41,595
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 2,963 $ 2,096
Notes payable under line of credit 751 7,052
Current maturities of long-term debt (Note 5) 1,964 16,699
Accounts payable 10,572 4,749
Accrued expenses 1,414 941
-------- --------
Total current liabilities 17,664 31,537
Long-term debt, net of current maturities 15,986 --
Deferred income taxes 5 5
Put warrants 1,435 1,435
-------- --------
Total liabilities 35,090 32,977
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;
6,845,069 and 6,604,174 shares issued and outstanding, respectively
68 66
Additional paid-in capital 10,898 10,323
Accumulated deficit (1,313) (1,771)
-------- --------
Total stockholders' equity 9,653 8,618
-------- --------
Total liabilities and stockholders' equity $ 44,743 $ 41,595
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE> 3
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1999 2000
----------- -----------
<S> <C> <C>
Net sales $ 48,990 $ 39,658
Cost of goods sold 42,479 33,963
----------- -----------
Gross profit 6,511 5,695
----------- -----------
Selling, general and administrative expenses:
Salaries and benefits 2,317 2,665
Other operating expenses 2,625 2,623
Depreciation and amortization 544 585
----------- -----------
Total selling, general and administrative expenses 5,486 5,873
----------- -----------
Income (loss) from operations 1,025 (178)
Interest expense 648 695
Other income, net 109 92
----------- -----------
Income (loss) from continuing operations before income taxes 486 (781)
Income tax expense (benefit) 226 (286)
----------- -----------
Income (loss) from continuing operations $ 260 $ (495)
Loss from discontinued operations -- (114)
----------- -----------
Net income (loss) 260 (609)
----------- -----------
Income (loss) per common share:
Basic and diluted:
Income (loss) from continuing operations $ 0.04 $ (0.07)
Loss from discontinued operations -- (0.02)
----------- -----------
Net income (loss) $ 0.04 $ (0.09)
=========== ===========
Weighted average common shares:
Basic 6,838,773 6,632,683
=========== ===========
Diluted 6,963,012 6,632,683
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE> 4
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Net sales $ 142,289 $ 145,407
Cost of goods sold 123,206 127,377
----------- -----------
Gross profit 19,083 18,030
----------- -----------
Selling, general and administrative expenses:
Salaries and benefits 7,076 7,953
Other operating expenses 7,095 7,227
Depreciation and amortization 1,546 1,712
----------- -----------
Total selling, general and administrative expense 15,717 16,892
----------- -----------
Income from operations 3,366 1,138
Interest expense 1,866 2,026
Other income, net 281 312
----------- -----------
Income (loss) from continuing operations before income
taxes and change in accounting principle 1,781 (576)
Income tax expense (benefit) 691 (91)
----------- -----------
Income (loss) from continuing operations before
change in accounting principle $ 1,090 $ (485)
Loss from discontinued operations -- (114)
----------- -----------
Income (loss) before change in accounting principle 1,090 (599)
Change in accounting principle -- 141
----------- -----------
Net income (loss) $ 1,090 $ (458)
=========== ===========
Income (loss) per common share:
Basic and diluted:
Income (loss) from continuing operations before
change in accounting principle $ 0.15 $ (0.07)
Loss from discontinued operations -- (0.02)
Change in accounting principle -- 0.02
----------- -----------
Net income (loss) $ 0.15 $ (0.07)
=========== ===========
Weighted average common shares:
Basic 7,117,177 6,732,076
=========== ===========
Diluted 7,279,042 6,732,076
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE> 5
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1999 2000
------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 1,090 $ (458)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,742 1,902
Decrease in accounts receivable, net 972 2,678
Increase in inventory (997) (545)
Increase in prepaid expenses and other current assets (160) (300)
Increase in income taxes receivable (145) (400)
Increase (decrease) in accounts payable 397 (5,823)
Decrease in accrued expenses and other current liabilities (2,880) (473)
------- -------
Net cash provided by (used in) operating activities 19 (3,419)
------- -------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (1,764) (1,004)
Purchase of common stock (1,376) (577)
Proceeds from disposals of equipment 122 --
------- -------
Net cash used in investing activities (3,018) (1,581)
------- -------
Cash Flows from Financing Activities:
Decrease in bank overdraft (997) (867)
Borrowings under line of credit 3,118 6,301
Payments of term debt and notes payable (1,056) (1,439)
Payments of financing costs
(11) --
------- -------
Net cash provided by financing activities 1,054 3,995
------- -------
Net cash provided by (used in) discontinued operations 991 (22)
------- -------
Net decrease in cash (954) (1,027)
Cash, beginning of period 1,774 1,841
------- -------
Cash, end of period $ 820 $ 814
======= =======
</TABLE>
These accompanying notes are an integral part of
these consolidated financial statements.
<PAGE> 6
ATLANTIC PREMIUM BRANDS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
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 is engaged in the manufacturing, marketing and distribution of
packaged meat and other food products in Texas, Louisiana, Kentucky, Oklahoma
and surrounding states. The operating results of the Company are impacted by
changes in food commodity markets.
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. In management's opinion, the interim financial data
presented includes all adjustments necessary for a fair presentation. Certain
reclassifications have been made in the 1999 financial statements to conform to
the 2000 presentation. Certain information and note disclosures normally
included in the consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to understand the information
presented. The results of operations for interim periods are not necessarily
indicative of the operating results expected for an entire year. It is suggested
that these consolidated financial statements be read in conjunction with the
Company's December 31, 1999 consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K and Form 10-K/A dated March
26, 2000 and April 28, 2000, respectively.
Inventory
Inventory is stated at the lower of cost or market and is comprised of raw
materials, finished goods and packaging and supplies. Cost is determined using
the first-in, first-out method (FIFO). Inventory consisted of the following as
of:
December 31, September 30,
(in thousands) 1999 2000
------------ -------------
Raw materials $ 423 $ 402
Finished goods 3,821 3,608
Packaging and supplies 1,366 2,145
------ ------
Total inventory $5,610 $6,155
====== ======
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%
<PAGE> 7
to 20% for equipment, furniture and vehicles. Leasehold improvements are
amortized over the lesser of the lease term or asset life. Additions and
improvements that substantially extend the useful life of a particular asset are
capitalized. Repair and maintenance costs are charged to expense. Upon sale, the
cost and related accumulated depreciation are removed from the accounts.
Other Assets
Other assets consist of deferred acquisition costs, cash surrender value of life
insurance, and deferred financing costs. Deferred financing costs are being
amortized over 5 to 7 years, representing the term of the related debt, using
the effective interest method.
Goodwill
Goodwill recorded in connection with business combinations is being amortized
using the straight-line method over 5 to 40 years.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income (Loss) Per Common Share
The weighted average shares used to calculate basic and diluted income per
common share for the three and nine month periods ended September 30, 1999 and
2000, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
1999 2000 1999 2000
---------------------- ------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding for basic 6,838,773 6,632,683 7,117,177 6,732,076
income per common share
Dilutive effect of common stock options 124,239 -- 161,865 --
--------- --------- --------- ---------
Weighted average shares outstanding for dilutive
income per common share 6,963,012 6,632,683 7,279,042 6,732,076
========= ========= ========= =========
</TABLE>
In calculating the weighted average number of shares outstanding for the
calculation of dilutive income per common share, 98,307 and 177,149 potential
common shares have been excluded because their inclusion would have been
antidilutive for the three and nine months periods ended September 30, 2000.
Options to purchase 1,247,893 and 1,150,409 shares of common stock at prices
ranging from $2.50 to $6.50 per share were outstanding during the third quarter
of 1999 and 2000, 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.
<PAGE> 8
Warrants with a put option to purchase up to a maximum of 1,095,700 shares of
common stock, as of September 30, 1999 and 2000 at $3.38 per share were
outstanding during the third quarter of 1999 and 2000 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. CHANGE IN ACCOUNTING PRINCIPLE:
During the three months ended September 30, 2000, the Company changed its method
of accounting for supply parts inventory from expensing upon purchase to
capitalization upon purchase and expensing upon installation. In prior years,
the Company has had a low level of supply parts inventory on hand. However, as
production capacity has increased, as well as the necessity of reducing
equipment down-time, the Company now requires a larger amount of supply parts
inventory. Accordingly, the Company believes that the capitalization of supply
parts inventory will result in a better measurement of operating results by
expensing supply parts at the time they are placed into service and start
generating revenues.
The $141,000 cumulative effect of the change on prior years is included in the
net loss for the nine months ended September 30, 2000. The effect of the change
on the three months ended March 31, 2000 was to increase net income by $174,000
to $357,000. Basic and diluted income per common share for the three months
ended March 31, 2000 amount to $ 0.05, an increase in income per common share of
$0.02 from previously reported amounts. The effect of the change on the three
months ended June 30, 2000 was to decrease net loss by $37,000 to $194,000.
Basic and diluted loss per common share for the three months ended June 30, 2000
amount to $0.03, unchanged from previously reported amounts. The effect of the
change on the three months ended September 30, 2000 was to decrease loss from
continuing operations by $68,000. The effect of the change on basic and diluted
loss from continuing operations and loss per common share for the three months
ended September 30, 2000 amounts to $0.01. The effect of the change on the nine
months ended September 30, 2000, including the cumulative effect of change in
accounting principle, was to decrease net loss by $279,000. The effect of the
change on basic and diluted loss from continuing operations and loss per common
share for the nine months ended September 30, 2000 amounts to $0.02.
The effect of the change on the nine months ended September 30, 2000, presented
on a pro forma basis (i.e., excluding the cumulative effect of change in
accounting principle), was to decrease loss from continuing operations and net
loss by $138,000 to $347,000 and $320,000, respectively. Basic and diluted pro
forma loss from continuing operations and net loss per common share for the nine
months ended September 30, 2000 amount to $0.05. The pro forma effect of the
adoption for specific periods prior to January 1, 2000 could not be determined
as the Company did not separately track inventory supplies for such prior
periods. The pro forma amounts reflect the effect of retroactive application on
supplies inventory expense and related income taxes had the new method been in
effect prior to January 1, 2000.
3. 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.
4. DISCONTINUED OPERATIONS:
During the fourth quarter of 1998, the Company decided to sell substantially all
the assets of its beverage division.
<PAGE> 9
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. Effective February 2, 1999 the Company substantially completed its
disposition of the beverage division when it sold the remaining assets for
approximately $400,000 in cash and notes. The loss from discontinued operations
recorded during the three months ended September 30, 2000 relates primarily to
an increase in the estimated liability for the settlement of the remaining lease
obligations. The remaining net assets of discontinued operations at September
30, 2000 are comprised of trade receivables.
5. DEBT:
The debt consists of an $11 million term note, a $15 million line of credit and
$6.5 million senior subordinated note with detachable warrants with a put
option.
The term note 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 line of credit agreement, the Company is permitted to
borrow up to $15 million subject to advance formulas based on accounts
receivable, inventory and letter of credit obligations outstanding through March
2003. Amounts borrowed are due on demand and bear interest at an annual rate
equal to either the bank's prime rate plus 1% or adjusted LIBOR plus 2.5%.
Interest is payable monthly and amounts are secured by all assets of the
Company.
The $6.5 million senior subordinated note, maturing on March 31, 2005, bears
interest at 10% per annum. Principal is payable in quarterly installments
beginning June 30, 2003. The subordinated debt was issued with detachable
warrants with a put option to purchase 666,947 shares of nonvoting common stock
at $3.38 and a contingent warrant to purchase up to a maximum of 428,753 shares
of nonvoting common stock at $3.38 per share based upon the equity value of the
Company on certain dates. The warrants have been recorded at an estimated fair
value of $1,435,000, resulting in a discount on the senior subordinated note of
the same amount. This discount is being amortized over the seven year term of
the note as additional interest expense.
Under the terms of the debt facilities the Company is required to maintain
certain financial ratios, which the Company does not believe that it will be in
compliance with at December 31, 2000. As a result, the Company has classified
the debt facilities as current liabilities as of September 30, 2000. The Company
is currently in discussion with its lenders. Based on these discussions, the
Company believes appropriate amendments or waivers will be obtained as of
December 31, 2000.
6. SEGMENTS
The Company's operations are classified into two business segments: food
processing and food distribution. The food processing segment includes the
processing and sales of sausages and related food products to distributors and
retailers in Louisiana, Texas, Kentucky and other surrounding states. The food
distribution segment includes the purchasing, marketing, and distribution of
packaged meat products to retailers and restaurants, located primarily in Texas.
Summarized financial information, by business segment, for continuing operations
in the three months ended September 30, 1999 and 2000, are as follows:
<PAGE> 10
(in thousands)
Three Months
---------------------------------------
September 30, 1999 September 30, 2000
------------------ ------------------
Net sales to external customers:
Food Processing $ 12,335 $ 14,118
Food Distribution 36,655 25,540
-------- --------
48,990 39,658
======== ========
Interest expense:
Food Processing 41 40
Food Distribution 33 33
Corporate 574 622
-------- --------
648 695
-------- --------
Depreciation and amortization:
Food Processing 444 481
Food Distribution 68 71
Corporate 32 33
-------- --------
544 585
-------- --------
Income (loss) from continuing
operations before income taxes:
Food Processing 1,114 12
Food Distribution 579 469
Corporate (1,207) (1,262)
-------- --------
$ 486 $ (781)
======== ========
<PAGE> 11
Summarized financial information, by business segment, for continuing operations
in the nine months ended September 30, 1999 and 2000, are as follows:
(in thousands)
<TABLE>
<CAPTION>
Nine Months
------------------------------------------
September 30, 1999 September 30, 2000
------------------ ------------------
<S> <C> <C>
Net sales to external customers:
Food Processing $ 35,623 $ 43,772
Food Distribution 106,666 101,635
--------- ---------
142,289 145,407
========= =========
Interest expense:
Food Processing 123 116
Food Distribution 98 99
Corporate 1,645 1,811
--------- ---------
1,866 2,026
========= =========
Depreciation and amortization:
Food Processing 1,256 1,403
Food Distribution 195 209
Corporate 95 100
--------- ---------
1,546 1,712
========= =========
Income from continuing operations
before income taxes and change in
accounting principle:
Food Processing 3,237 1,193
Food Distribution 1,759 1,835
Corporate (3,215) (3,604)
--------- ---------
$ 1,781 $ (576)
========= =========
</TABLE>
7. SUBSEQUENT EVENTS
On October 13, 2000, a failed thermostat caused a fire at the Company's
processing plant in Arlington, Kentucky, resulting in the total destruction of
the facility and its equipment. There were no injuries. As a result of the fire,
the Company has been attempting to shift some of the production to other
facilities in Texas and Oklahoma. The Company maintains replacement cost
property insurance and business interruption insurance, and while this event
will have an impact on the Company's revenues, the Company does not anticipate
that this event will have a material impact on the Company's financial position
or results of operations.
As of October 1, 2000, the Company entered into a Management Agreement (the
Agreement) with Sterling Advisors, L.P. (Sterling), a partnership owned by
certain stockholders of the Company. Sterling's duties under the Agreement
include (i) analyzing the Company's present and future financing needs and
assisting the Company in procuring such financing, (ii) targeting and assisting
the acquisition of potential acquisition candidates for the Company, and (iii)
such other duties as are reasonably requested by the Company. The initial term
of the Agreement started on October 1, 2000 and continues through April 30,
2002. Payments for the initial term include $200,000 at the inception of the
Agreement and $36,000 monthly. The monthly fee increases 5% at the end of the
initial term (if the Agreement has not been terminated) and on each May 1
<PAGE> 12
thereafter (until terminated). The Agreement also requires the Company to
reimburse Sterling for a reasonable allocation of overhead for use of Sterling's
offices in Baltimore and Northbrook, and reasonable and necessary expenses
incurred by Sterling in connection with the performance of its duties under the
Agreement. The Agreement may be terminated by either party by giving notice
three months prior to specified termination dates.
<PAGE> 13
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 subsidiaries during 1996: Prefco Corp., Carlton Foods Corp.,
Richard's Cajun Foods Corp., and Grogan's Farm, Inc. In 1998, the Company
formed a fifth subsidiary to acquire the business of J.C. Potter Sausage
Company and affiliates.
In conjunction with the new corporate strategy, during 1998 the Company
also 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 transactions on December 1, 1998, January 11, 1999 and February 2, 1999.
RECENT EVENTS
On October 13, 2000, a failed thermostat caused a fire at the Company's
processing plant in Arlington, Kentucky resulting in the total destruction of
the facility and its equipment. There were no injuries. As a result of the
fire, the Company has been attempting to shift some of the production to other
facilities in Texas and Oklahoma. The Company is currently in the process of
evaluating its options to permanently replace the capacity, including the
possibility of rebuilding the plant. The Company maintains replacement cost
property insurance and business interruption insurance, and while this event
will have an impact on the Company's revenues, the Company does not anticipate
that this event will have a long term material impact on the Company's financial
position or results of operations.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999
Net Sales. Net sales decreased by $9.3 million or 19.0% from $49.0
million for the quarter ended September 30, 1999 to $39.7 million for the
quarter ended September 30, 2000. The decrease in net sales during the quarter
was primarily due to the loss of a major customer (Sam's Club) that built and
began using its own warehouse and distribution system. Sam's Club accounted
for approximately 43% of the Company's total net sales during fiscal 1999.
Gross Profit. Gross profit decreased by $0.8 million or 12.3% from $6.5
million for the quarter ended September 30, 1999 to $5.7 million for the quarter
ended September 30, 2000. Gross profit as a percentage of net sales increased
from 13.3% for the quarter ended September 30, 1999 to 14.4% for the quarter
ended September 30, 2000. Both the decrease in gross profit dollars and the
increase in the gross profit percentage margin are primarily attributable to the
loss of the Sam's Club distribution business discussed in Net Sales. This
business earned a gross margin percentage significantly lower than the Company's
sales to other customers. The decrease in gross profit dollars also reflects the
increase in the prices of certain of the Company's raw materials over those paid
in the third quarter of 1999 for both the Food Processing segment and the Food
Distribution segment. Pork prices have a significant impact on the Company's
cost of goods sold and higher pork prices in the third quarter of 2000
negatively impacted gross profit as compared to 1999.
<PAGE> 14
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $0.4 million from $5.5 million
for the quarter ended September 30, 1999 to $5.9 million for the quarter ended
September 30, 2000. Selling, general and administrative expenses as a percentage
of net sales increased from 11.2% for the quarter ended September 30, 1999 to
14.8% for the quarter ended September 30, 2000. This increase was partially
attributable to the fact that the Sam's Club distribution business did not incur
the same level of selling, general and administrative expenses per sales dollar
as the Company's other customers. The increase also reflects the increased
levels of salaries and benefits, an increase in the size of the direct store
delivery fleet, and increases in the costs of distributing the Company's
products, primarily related to the cost of fuel.
Income (Loss) from Operations. Income from operations decreased $1.2
million from $1.0 million for the quarter ended September 30, 1999 to an
operating loss of $0.2 million for the quarter ended September 30, 2000. This
decrease is attributable to the factors discussed above.
Interest Expense. Interest expense increased approximately $0.05
million from $0.65 million for the quarter ended September 30, 1999 to $0.70
million for the quarter ended September 30, 2000. This increase was primarily
due to an increase in the Company's cost of variable-rate borrowings and the
related outstanding balances.
Warrants with a put option were issued by the Company in conjunction
with the debt incurred at the time of the Potter acquisition. The Company is
required to accrete the value of the warrants and mark-to-market the estimated
fair value of the put option. Any increases to such value are charged to
earnings as additional interest expense. To the extent of any charges to
earnings, any subsequent decreases to the value of the warrants are added to
earnings as additional interest income. Furthermore, any such additional
interest expense would not be deductible in the Company's federal or state
income tax returns and, therefore, would increase the effective income tax rate
of the Company. For purposes of these calculations, the fair value of the
warrants is estimated using a Black-Scholes option-pricing model. During the
quarters ended September 30, 1999 and 2000, the Company recorded no additional
interest expense, as the fair value of the warrants did not increase.
Income Tax Expense (Benefit). The effective tax rate differs from the
statutory rate primarily because of state income taxes and the non-deductibility
of a portion of the goodwill amortization.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Net Sales. Net sales increased by approximately $3.1 million or 2.2%
from $142.3 million for the nine months ended September 30, 1999 to $145.4
million for the nine months ended September 30, 2000. Sales of the Company's
Food Processing segment increased by approximately 14.3%, primarily resulting
from the acquisition of new customers and an increase in the average selling
price of the Company's products due to the increased cost of certain of the
Company's raw materials. Sales of the Company's Food Distribution segment
decreased by approximately 30.3% primarily due to the loss of a major customer
(Sam's Club) that built and began using its own warehouse and distribution
system. Sam's Club accounted for approximately 43% of the Company's total net
sales during fiscal 1999.
Gross Profit. Gross profit decreased by approximately $1.1 million or
5.7% from approximately $19.1 million for the nine months ended September 30,
1999 to approximately $18.0 million for the nine months ended September 30,
2000. Gross profit as a percentage of net sales decreased from 13.4% for the
nine months ended September 30, 1999 to 12.4% for the nine months ended
September 30, 2000. These decreases primarily reflect the availability of
certain of the Company's raw materials at prices significantly higher than those
paid in the first nine months of 1999 for both the Food Processing segment and
the Food Distribution segment. Pork prices have a significant impact on the
Company's cost of goods sold and higher pork prices in the first three quarters
of 2000 negatively impacted gross profit as compared
<PAGE> 15
to 1999. The decrease in gross profit dollars is also attributed to the loss of
the Sam's Club distribution business discussed in Net Sales. This business
earned a gross margin percentage significantly lower than the Company's sales to
other customers. The loss of this lower margin business partially offset the
percentage decrease in gross profit resulting from higher raw material costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $1.2 million or 7.6% from
approximately $15.7 million for the nine months ended September 30, 1999 to
approximately $16.9 million for the nine months ended September 30, 2000. As a
percentage of net sales, selling, general and administrative expenses increased
from 11.0% for the nine months ended September 30, 1999 to 11.6% for the nine
months ended September 30, 2000. These increases reflect increased levels of
salaries and benefits, an increase in the size of the direct store delivery
fleet, and increases in the costs of distributing the Company's products,
primarily related to the cost of fuel.
Income from Operations. Income from operations decreased by
approximately $2.2 million from approximately $3.4 million for the nine months
ended September 30, 1999 to approximately $1.1 million for the nine months ended
September 30, 2000. This decrease is attributable to the factors discussed
above.
Interest Expense. Interest expense increased by approximately $0.160
million or 8.6% from approximately $1.866 million for the nine months ended
September 30, 1999 to approximately $2.026 million for the nine months ended
September 30, 2000. The increase was primarily due to an increase in the
Company's cost of variable-rate borrowings and the related outstanding balances.
Warrants with a put option were issued by the Company in conjunction
with the debt incurred at the time of the Potter acquisition. The Company is
required to accrete the value of the warrants and mark-to-market the estimated
fair value of the put option. Any increases to such value are charged to
earnings as additional interest expense. To the extent of any charges to
earnings, any subsequent decreases to the value of the warrants are added to
earnings as additional interest income. Furthermore, any such additional
interest expense would not be deductible in the Company's federal or state
income tax returns and, therefore, would increase the effective income tax rate
of the Company. For purposes of these calculations, the fair value of the
warrants is estimated using a Black-Scholes option-pricing model. During the
nine months ended September 30, 1999 and 2000, the Company recorded no
additional interest expense, as the fair value of the warrants did not increase.
Income Tax Expense. The effective tax rate differs from the statutory
rate primarily because of state income taxes and the non-deductibility of a
portion of the goodwill amortization.
CHANGE IN ACCOUNTING PRINCIPLE
During the three months ended September 30, 2000, the Company changed
its method of accounting for supply parts inventory from expensing upon purchase
to capitalizing upon purchase and expensing upon installation. The $141,000
cumulative effect of the change on prior years is included in the net loss for
the nine months ended September 30, 2000. The effect of the change on the three
and nine months ended September 30, 2000 was to decrease the loss from
continuing operations by $68,000 and $138,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine months ended
September 30, 1999 was $0.02 million. This amount was principally the result of
net income, depreciation and amortization, an increase in accounts payable and a
decrease in accounts receivable. This was partially offset by a decrease in
accrued expenses and an increase in inventory. Cash used in operating activities
for the nine months ended September
<PAGE> 16
30, 2000 was $3.4 million. The cash used in operating activities was primarily
the result of the net loss, a decrease in accounts payable and accrued expenses
and an increase in inventory and income taxes receivable, partially offset by
depreciation and amortization and a decrease in accounts receivable.
Cash used in investing activities for the nine months ended September
30, 1999 and 2000 were $3.0 million and $1.6 million, respectively, which was
related to capital expenditures and the repurchase of the Company's common
stock.
Cash provided by financing activities in the nine months ended
September 30, 1999 was $1.1 million, primarily related to borrowings under the
Company's line of credit, offset by a decrease in the Company's bank overdraft
and payments under term debt and notes payable. Cash provided by financing
activities in the nine months ended September 30, 2000 was $4.0 million,
primarily related to borrowings under the Company's line of credit, partially
offset by payments under term debt and notes payable and a decrease in the bank
overdraft.
As of September 30, 1999 and 2000, the Company had outstanding under
the Fleet Facility approximately $9.3 million and $7.7 million, respectively, in
term debt and approximately $4.7 million and $7.1 million, respectively, in line
of credit borrowings. The Company owed $6.5 million to Banc One under the Senior
Subordinated Note, and approximately $2.7 million of subordinated debt to former
owners of Prefco, Richard's, Grogan's and Partin's. The Senior Subordinated Note
bears interest at 10% per annum. The subordinated debt owed to former owners
bears interest at an average rate of approximately 7.7% per annum. The term debt
and line of credit agreement under the Fleet Facility bear annual interest at
either the bank's prime rate plus 1% (9.25% and 10.75% at September 30, 1999 and
2000, respectively) or adjusted LIBOR plus 2.5%, at the Company's option.
Under the terms of the debt facilities the Company is required to
maintain certain financial ratios which the Company does not believe that it
will be in compliance with at December 31, 2000. As a result, the Company has
classified the debt facilities as current liabilities as of September 30, 2000.
The Company is currently in discussions with its lenders. Based on these
discussions, the Company believes appropriate amendments or waivers will be
obtained as of December 31, 2000.
Warrants issued in conjunction with the Senior Subordinated Note
provide that on the occurrence of a Put Trigger Event (defined below), if the
average trading volume of the Company's stock for four consecutive weeks is less
than 15% of the number of shares issuable to the holder of the put warrants,
such holders would have a thirty day right to require the Company to redeem the
warrants for a cash amount equal to the greater of a cash flow formula (defined
in the Warrant Agreement) or the fair market value of the underlying shares
based upon an appraisal, in each case, net of an exercise price of $3.38 per
share. For these purposes, a "Put Trigger Event" would occur upon the earlier of
certain events, including the fifth anniversary of the warrants, a sale of all
or substantially all of the assets of the Company, or a business combination in
which the Company is not the surviving corporation.
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 September 30, 2000, 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
<PAGE> 17
as currently contemplated for the remainder of 2000 and fiscal 2001. 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 Fleet Facility. The Company's ability to continue
to comply with the covenants in the Fleet Facility 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
Fleet 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 product prices.
The Company's exposure to interest rate risk relates primarily to its
debt obligations and temporary cash investments. The Company does not use, and
has not in the past year used, any derivative financial instruments relating to
the risk associated with changes in interest rates.
The Company is required to accrete the value of the warrants and
mark-to-market the estimated fair value of the put option. Any increases to such
value are charged to earnings as additional interest expense. To the extent of
any charges to earnings, any subsequent decreases to the value of the warrants
are added to earnings as additional interest income. Furthermore, any such
additional interest expense would not be deductible in the Company's federal or
state income tax returns and, therefore, would increase the effective income tax
rate of the Company. For purposes of these calculations, the fair value of the
warrants is estimated using a Black-Scholes option-pricing model. During the
nine months ended September 30, 1999 and 2000, the Company recorded no
additional interest expense, as the estimated fair value of the warrants did not
exceed the carrying 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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and SFAS No. 138 "Accounting
for Certain Derivative Instruments and Certain Hedging Activities" establishes
accounting and reporting standards for hedging activities and derivatives. As
issued, SFAS 133 was effective for fiscal quarters beginning after June 15,
1999. In June 1999, SFAS 137 was issued effectively deferring the date of
required adoption of SFAS No. 133 to fiscal
<PAGE> 18
quarters of all fiscal years beginning after June 15, 2000. The Company will
adopt SFAS No. 133 and SFAS No. 138, as required, in fiscal year 2001. The
Company generally does not use derivative financial instruments and other than
the warrants with a put option (Note 5), there were no such instruments
outstanding as of September 30, 2000.
FORWARD LOOKING STATEMENTS
The Company wants to provide stockholders and investors with
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," "anticipates,"
"intends" and similar expressions. These forward looking statements are subject
to risks and uncertainties which would cause the Company's actual results or
performance to differ materially from those expressed in these statements. These
risks and uncertainties include the following: risks associated with
acquisitions, including integration of acquired businesses; new product
development and other aspects of the Company's business strategy; uncertainty as
to evolving consumer preferences; customer and supplier concentration; the
impact of competition; the impact of change in the valuation of the put warrants
on the Company's net income and effective tax rate; the Company's ability to
raise additional capital; and sensitivity to such factors as weather and raw
material costs. Readers are encouraged to review the Company's Current Report on
Form 8-K dated June 4, 1997 filed with the Securities and Exchange Commission
for a more complete description of some of these factors. The Company assumes no
obligation to update the information contained in this Form 10-Q.
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the heading "Quantitative and Qualitative Disclosures
About Market Risk" in Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Under the terms of its debt facilities the Company is required
to maintain certain financial ratios. During the third
quarter, the Company was in violation of some of these
financial ratios under its agreements with its senior lender,
Fleet, and its subordinated lender, Banc One. Fleet has waived
the violation, however, Banc One has not. The Company does not
believe that it will be in compliance with the financial
ratios at December 31, 2000. As a result, the Company has
classified the debt facilities as current liabilities as of
September 30, 2000. The Company is currently in discussion
with its lenders. Based on these discussions, the Company
believes appropriate amendments or waivers will be obtained as
of December 31, 2000.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders of the Company held on
August 1, 2000, the following matters were submitted to a vote
of the stockholders:
Election of Directors. Eric D. Becker, Brian
Fleming and G. Cook Jordan, Jr. were reelected as
directors of the Company.
The following directors' terms of office continued
after the Annual Meeting of Stockholders: Merrick M.
Elfman, John T. Hanes, John A. Miller, Alan F. Sussna
and Steven M. Taslitz.
Tabulation of Votes
Matter For Against Withheld Broker Non-Votes
--------------------------------------------------------------------------------
Director Election:
Eric D. Becker 5,717,280 0 161,880 2,765
Brian Fleming 5,872,180 0 6,980 0
G. Cook Jordan, Jr. 5,846,344 0 32,816 3,400
ITEM 5. OTHER INFORMATION.
None.
<PAGE> 21
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)
18 Letter regarding change in accounting principles *
27 Financial Data Schedule *
------------------
* Filed herewith.
(1) Filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration
Statement No. 33-69438 or the amendments thereto and
incorporated herein by reference.
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated July 12, 2000 was filed
with the Securities and Exchange Commission on July 13, 2000
in connection with the Company's announcement of a stock
repurchase program for up to $400,000 of the Company's Common
Stock and of the resignation of Rick Inatome from its Board of
Directors. This Form 8-K reports Items 5 and 7.
A Current Report on Form 8-K dated August 22, 2000 was filed
with the Securities and Exchange Commission on August 23, 2000
in connection with the Company's announcement of the
termination of its distribution arrangement with one of its
Prefco division's food distribution customers, Sam's Club,
Inc., and reports Items 5 and 7.
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated as of November 20, 2000
ATLANTIC PREMIUM BRANDS, LTD.
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> 23
INDEX TO EXHIBITS
Exhibit Description
Number
----------- ----------------------------------------------------------------
3(i) Certificate of Incorporation of the Company, including all
amendments thereto (1)
3(ii) By-Laws of the Company (2)
18 Letter regarding change in accounting principles *
27 Financial Data Schedule *
------------------
* Filed herewith.
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement No. 33-69438 or
the amendments thereto and incorporated herein by reference.
