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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission File Number 1-13747
ATLANTIC PREMIUM BRANDS, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 36-3761400
(STATE OF INCORPORATION) (I.R.S. EMPLOYER ID NO.)
650 Dundee Road, Suite 370, Northbrook, Illinois 60062
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(847) 412-6200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported closing price of
the registrant's Common Stock on March 14, 2002: $16,768,634
The number of shares outstanding of the registrant's Common Stock, par
value $.01, as of March 14, 2002: 6,734,391.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
GENERAL
Our company, through our subsidiaries' operations in Texas, Louisiana and
Oklahoma, processes, markets and distributes branded and unbranded food products
for customers in a nineteen state region. Our subsidiaries are: Carlton Foods
Corp. ("Carlton"), Grogan's Farm, Inc. ("Grogan's"), Potter Sausage Co.
("Potter"), Prefco Corp. ("Prefco"), and Richard's Cajun Foods Corp.
("Richard's").
Through Carlton, we process a variety of smoked sausage products.
Approximately 50% of the total volume processed is sold through Prefco under the
Blue Ribbon(R) brand name. Approximately 13% of the total volume processed is
sold through Potter under the J.C. Potter(R) brand name. Approximately 26% of
the total volume processed reflects private label products processed for other
regional sausage brands and retail grocery chains, or is sold by Carlton under
the brand names Carlton and Country Boy(TM). These branded products are marketed
on a regional basis, principally in south and west Texas.
Through Prefco, we engage in the marketing and distribution of branded and
unbranded meats to the retail grocery trade. We market and distribute our
branded meat products under the brand name Blue Ribbon(R) and Blue Ribbon Texas
Traditions. These products, which include ready to eat entrees, smoked sausages,
bacon and packaged, sliced luncheon meats, account for approximately 29% of the
sales of Prefco and are processed by Carlton as well as by third party contract
processing companies. Blue Ribbon(R) is currently the best selling brand of
bacon in the Houston market. In addition to marketing our own branded products,
we are also a leading regional distributor of unbranded products including boxed
beef, pork, chicken and related items.
Through Potter, we process, market and distribute premium, branded
breakfast sausage, primarily in Oklahoma, Arkansas and Texas. These products are
sold under the J.C. Potter brand name and are generally delivered to the retail
grocery trade through our distribution system. In addition, Potter processes
products for other branded food companies on a private-label basis. Potter is a
supplier to Prefco and a customer of Carlton.
Through Richard's, we process, market and distribute Cajun-style, cooked,
pork sausage products and specialty foods for customers in Louisiana under the
brand name Richard's(TM) and Richard's Cajun Favorites(TM).
CORPORATE HISTORY
In September 1991, Maryland Beverage, L.P. (the "Partnership") was formed
with our company and Strategic Investment Corporation ("Strategic"), a wholly
owned subsidiary of T. Rowe Price Strategic Partners Fund, L.P., as its sole
partners. In September 1993, our company was reincorporated in Delaware and
adopted the name "Atlantic Beverage Company, Inc." In November 1993, in
connection with our initial public offering, Strategic (whose only asset was its
interest in the Partnership) merged with and into us.
In the first quarter of 1996, a newly formed, wholly-owned subsidiary of
our company, Prefco, acquired the outstanding common stock of Prefco, Inc. Also
in the first quarter of 1996, Carlton Foods, Inc. was merged into another newly
formed, wholly-owned subsidiary of our company, Carlton.
In August 1996, a newly formed, wholly-owned subsidiary of our company,
Richard's, acquired certain of the assets of Richard's Cajun Country Food
Processors.
In October 1996, Grogan's Merger Corp. ("GMC"), our newly formed,
wholly-owned subsidiary, acquired and merged with the distribution and
processing business of Grogan's Sausage, Inc. and Grogan's Farm, Inc.,
respectively, based in Arlington, Kentucky. In February 2002, we sold
substantially all of this subsidiary's assets which remained after the October
13, 2000 fire as discussed more fully in Note 16 to our Consolidated Financial
Statements.
In March 1998, our company and Potter, a newly-formed subsidiary, acquired
substantially all of the assets of J.C. Potter Sausage Company, a branded food
processing company based in Durant, Oklahoma.
During the end of the fourth quarter of 1998 and the beginning of the
first quarter of 1999, we completed the sale of substantially all the assets of
our beverage division. We classified the beverage division's historic results of
operations and the loss incurred upon the disposal of assets as a discontinued
operation. As a result of the disposition of our beverage division, our
operations now consist solely of the food businesses.
INDUSTRY
Following the disposition of our beverage division, our operations have
consisted of two business segments: food processing and food distribution. Note
17 to our Consolidated Financial Statements provides summarized financial
information by business segment for continuing operations for the last three
fiscal years. We participate in these two segments of the food industry through
our Carlton, Prefco, Richard's and Potter subsidiaries.
The food processing segment, which includes cooking, slicing, mixing,
grinding and similar functions, is generally capital intensive. Unbranded raw
material typically comes from packing companies. In some instances in the
packaged meat industry, packing and processing are vertically integrated. In
other instances, as is the case with our company, processing and distribution
are vertically integrated. Because of the cost of transportation and shelf-life
of the products, processing facilities tend to serve a regional clientele. Large
national meat companies therefore tend to establish strategically located
processing facilities in different geographic regions.
The food distribution segment, which serves several different classes of
customers including retail, restaurant and institutional customers, is generally
not capital intensive but provides lower gross margins and is subject to intense
price competition. Product is generally invoiced and priced according to weight.
Successful distributors typically distinguish themselves through customer
service and lower prices. Price, product selection, reliability, in-stock rate,
promptness of delivery and weekend delivery options are among the benefits which
are most highly valued. It is not uncommon for a grocery retailer to have one
primary supplier in addition to one or more secondary suppliers. Food
distribution companies typically serve a local or regional clientele.
We market our branded packaged meat business. The branded packaged meat
business is generally not capital intensive. Strong retail brands exist at
local, regional or national levels and include bacon, hot dogs, cooked and
uncooked sausage, cooked hams, chicken and turkey products. Advertising and
promotion are generally critical to the maintenance of brand equity. Companies
which market branded meat products can exist on a stand-alone basis as well as
be vertically integrated with processing and/or distribution. We reflect, to a
limited extent, both forms of vertical integration.
STRATEGY
Our operating strategy is to grow our food businesses profitably, while
identifying and exploiting synergies among them. Key elements of this operating
strategy include increasing sales to existing customers, adding new customers
and identifying opportunities to add new products. In addition, we may acquire
businesses which are complementary to our existing subsidiaries.
PRODUCTS
Through Prefco, we distribute a wide variety of unbranded, boxed meat
products. We maintain an inventory of over 200 different stock keeping units of
unbranded products, which include beef, turkey, pork and chicken. Products are
stored in our refrigerated warehouses in Houston and are delivered on
refrigerated vehicles to several hundred customers including chain and
independent supermarkets and discount clubs. We purchase products from
approximately ten meat packing companies. Purchases of the same products may be
spread among several suppliers over the course of a year, and purchasing
decisions are frequently driven by price and availability, both of which are
likely to vary. Two suppliers accounted for approximately 15.9% and 10.7% of our
boxed meat purchases during 2001 and 11.6% and 10.8% of such purchases during
2000. No other supplier accounted for more than 10% of such purchases during
either year.
Also through Prefco, we market and distribute our own branded dinner
entrees, sausage, bacon and packaged, sliced luncheon meats. These products are
stored in our refrigerated warehouses in Houston. Products are delivered on our
refrigerated trucks, and customers typically include the same retail
establishments that purchase our unbranded meat products. The majority of Blue
Ribbon(R) sausage product is processed by Carlton. The balance of the sausage
product as well as the dinner entrees, bacon and luncheon meats are purchased
from a number of other contract food processing companies.
In addition to processing product for Prefco, Carlton processes, markets
and distributes its own branded smoked sausage products for the retail grocery
trade. Carlton processes similar products on a private label basis for other
branded food companies.
Through Richard's, we process, market and distribute Cajun-style, cooked
pork sausage products and specialty foods for customers in Louisiana under the
brand names Richard's(TM) and Richard's Cajun Favorites(TM).
Through our Potter subsidiary, we process, market and distribute premium,
branded breakfast sausage, primarily in Oklahoma, Arkansas and Texas. These
products are sold under the J.C. Potter brand name and are generally delivered
to the retail grocery trade through our distribution system. In addition, Potter
processes products for other branded food companies on a private-label basis.
Potter is a supplier to Prefco and a customer of Carlton.
SALES, MARKETING AND DISTRIBUTION
Prefco distributes unbranded boxed beef, pork, and poultry to chain and
independent retail grocery customers, most of whom are located in the Houston
metropolitan area, and all of whom are within a 400-mile radius of our
distribution facilities. We serve several hundred customers as either their
primary or secondary fresh meat supplier. Prefco's direct sales force contacts
its customers on a daily basis. We deliver product using refrigerated trucks,
generally within one to three days of receiving an order.
Prefco also markets and distributes its own Blue Ribbon(R) and Blue Ribbon
Texas Traditions dinner entrees, bacon, sausage and sliced luncheon meats to the
retail grocery trade. Orders are received by the direct sales force and from the
sales force managing the route sales vehicles. The business has historically
engaged in significant radio and television advertising in the Houston market.
Carlton solicits and receives customer orders for branded product through
direct salespeople as well as through third-party food brokers and by telephone
and facsimile transmission. Relationships with private label customers are
generally established at the senior management level, although recurring orders
from these customers are normally received over the telephone or facsimile
machine by clerical staff. Branded and private label orders are generally filled
within one to seven days and are either delivered on one of Carlton's
refrigerated vehicles, by common carrier, or are picked up by customers.
Richard's employs a route delivery sales force. Orders are taken by the
route salespeople and filled immediately from stock on board the route sales
trucks. Richard's engages in promotions, including in-store sampling, as well as
print advertising. All customers are located within the state of Louisiana.
Potter also employs a route delivery sales force. Orders are taken by the
route salespeople and filled immediately from stock on board the route sales
trucks. Potter engages in promotions, including in-store sampling, as well as in
print, radio and television advertising. Customers are located in Arkansas,
Oklahoma and Texas.
One food distribution customer, Sam's Club Inc., accounted for
approximately 30% of our total net sales during 2000 and 1.1% during 2001.
Another customer accounted for 14% of our total net sales during 2001. No other
customer accounted for more than 10% of total net sales during either year. On
August 22, 2000, we announced the termination of our distribution arrangement
with Sam's Club Inc. While Sam's Club Inc. accounted for a significant
percentage of net sales in 2000 and prior years, the gross margin on sales to
Sam's has been significantly lower than our sales to other customers.
ASSET MANAGEMENT
Accounts Receivable. Sales are made almost exclusively on account, and
accounts receivable typically average 15 to 20 days.
Inventory. We maintain our inventory at our distribution and processing
facilities operated by Prefco in Houston, Texas, by Carlton in New Braunfels,
Texas, by Richard's in Church Point, Louisiana and by Potter in Durant,
Oklahoma, and Malvern, Arkansas. We generally maintain an average of 7 to 9 days
of inventory on hand, which reflects approximately 4 to 6 days of inventory at
Prefco, approximately 10 to 12 days of inventory at Carlton, approximately 14 to
16 days of inventory at Richard's and approximately 12 to 14 days of inventory
at Potter. We typically place purchase orders with our suppliers
by telephone and by facsimile on a daily basis. Orders are placed both on an
as-needed basis and on a scheduled basis in anticipation of future demand.
Orders are usually filled within one to ten days, and products are transported
to our warehouses by common carrier.
COMPETITION
Food Distribution. Through Prefco, we believe that we are the second
largest of four major boxed meat distributors in the Houston market. Although
this segment of the food industry is extremely competitive, we believe that we
have generally succeeded in distinguishing ourselves through a high level of
customer service.
Food Processing. Through Potter, Prefco, Carlton and Richard's, we compete
with several branded meat companies, and our brands compete with a wide variety
of both regional and national brands. Among the competitive brands are Decker,
J. Bar B., Hilshire Farms, Hormel, Bryan, Bob Evans and Jimmy Dean. Our
Carlton(TM) and Country Boy(TM) brands of smoked sausage are sold principally in
the Dallas, San Antonio and Austin markets and currently have limited market
share. The Company's Blue Ribbon(R) brand currently represents the best selling
brand of bacon in the Houston market. Our packaged, sliced luncheon meats and
entrees were introduced to the Houston market in 1995 and 1998, respectively,
and currently have limited market share. Our Richard's(TM) and Richard's Cajun
Favorites brands enjoy a strong regional share within their respective markets.
Through Carlton and Potter, we process smoked sausage and meat products on a
private label basis for other branded food companies and, on a limited basis,
for supermarkets and restaurants. We believe that we enjoy a strong reputation
for innovation and responsiveness in creating original recipes for these
customers. We compete with a wide variety of processors, many of whom are
significantly larger and may have greater processing capacity and capital.
GOVERNMENT REGULATION
We are subject to various federal, state and local statutes, including
federal occupational safety and health laws. Furthermore, we and our suppliers
are subject to various rules and regulations including those of the United
States Department of Agriculture, the United States Food and Drug Administration
and similar state agencies that relate to processing, nutritional disclosure,
labeling requirements and product names.
PRODUCT LIABILITY AND INSURANCE
We believe that our present insurance coverage is sufficient for our
current level of business operations, although there is no assurance that the
present level of coverage will be available in the future or at a reasonable
cost. Further, there can be no assurance that such insurance will be available
in the future as we expand our operations, that insurance, if available, will be
sufficient to cover one or more large claims, or that the applicable insurer
will be solvent at the time of any covered loss.
EMPLOYEES
We currently have a total of approximately 497 employees, including five
corporate employees, 55 employees at Prefco, 65 employees at Carlton, 93
employees at Richard's and 276 employees at Potter. In addition, we use
temporary employees from time to time.
We believe that our relations with employees are good. We have never
suffered a material work stoppage or slow down.
RISK FACTORS
In addition to other information contained in this Form 10-K, the
following factors should be considered in evaluating our company and our
business. These factors may have a significant impact on our business, operating
results and financial condition.
INDUSTRY RISK
Commodity price fluctuations have a significant impact on our business.
We are a purchaser of pork and other meat products. Pork prices have a
significant impact on our cost of goods sold. We buy pork and other meat
products based upon market prices that are established with the vendor as part
of the purchase process. The market price is determined in the marketplace based
on factors outside our control. We may not be able to pass the effect of raw
material price increases onto our customers for any extended period of time, if
at all. As a result, increases in pork prices may have a materially adverse
effect on our operating results. We do not use commodity financial instruments
to hedge pork and other meat product prices.
As a participant in the food industry, we are subject to various risks
which may affect our business.
The food industry, and the markets within the food industry in which we
compete, are subject to various risks, including:
- federal, state and local food inspection and processing controls;
- the limited shelf life of food products;
- evolving consumer preferences;
- nutritional and health-related concerns;
- risks of product tampering;
- consumer product liability claims;
- the availability and expense of liability insurance; and
- adverse changes in general economic conditions.
We may not compete effectively with competitors that have more resources
and greater market share than us.
Our business is highly competitive. We compete with a wide variety of
processors, many of whom are significantly larger and may have greater
processing capacity and financial resources. Our
brands also compete with a wide variety of both regional and national brands.
Some of our larger national, regional and local competitors have multiple
product lines and greater brand name recognition. Competition in the markets we
serve is based primarily on quality, service and price. There can be no
assurance that we can compete successfully with other competitor companies and
maintain adequate market share. We do not have long term contracts with any of
our customers. Competitive pressures or other factors could cause our products
to lose market share or result in significant price erosion, which would have a
material adverse effect on our results of operations.
As a participant in the food industry, we are subject to extensive
governmental regulations.
Our production facilities and products are subject to numerous federal,
state and local laws and regulations concerning among other things, health and
safety matters, food processing, product labeling, advertising and the
environment. There can be no assurance that we will be able to maintain
compliance with existing laws or regulations or that we will be able to comply
with any future laws or regulations. Our failure to comply with applicable laws
and regulations would subject us to civil remedies, including withdrawal of the
necessary United States Department of Agriculture approvals, inspection, fines,
injunctions, recalls or seizures, as well as potential criminal sanctions, any
of which would have a material adverse affect on us.
Consumer demand for our products is reduced when there are outbreaks of
illness associated with meat or poultry products.
The meat and poultry industries have recently been subject to increasing
scrutiny due to the association of meat and poultry products with recent
outbreaks of illness, and on rare occasions even death, caused by foodborne
pathogens such as E. coli, Salmonella and others which are found in raw and
improperly cooked meat. Consumer demand for meat and poultry fluctuates as the
result of such outbreaks of illness. Product recalls are sometimes required in
the meat and poultry industries to withdraw contaminated products from the
market. Product recalls would cause our expenses to be higher and the reduction
in demand for our products would adversely affect our results of operations and
financial condition.
COMPANY RISK
If consumers do not like our products, our prospects for growth will be
limited.
Our business is dependent upon continued growth in consumer interest in
our products. There can be no assurance that the demand for our products can be
sustained in the future. In addition, part of our operating strategy is to
identify opportunities to add new products. There can be no assurance that
consumers will accept new products we develop or that we can attain sufficient
market share for our products.
Customer and supplier concentration subjects our company to risks related
to these third parties.
We derive most of our sales from retail grocery customers situated near
our local and regional operations. Adverse developments affecting these
customers or a decision by a corporate owner or franchisor to revoke its
approval of us as a distributor of branded or unbranded meat products could have
a material adverse effect on our operating results. In addition, our continued
growth is dependent in part
8
on the continued growth and expansion of our customers. The loss of any of our
major customers could have a material adverse effect on our business.
We purchase product from approximately ten meat packing companies. There
can be no assurance that meat availability will be maintained at a sufficient
level or that any of our suppliers will make timely delivery of their products
to us. Failure to receive products in a timely manner for these or other reasons
could have a material adverse effect on us. We do not have long-term contracts
with our suppliers.
Loss of services of principal members of management could make it
difficult to implement our business plan.
We are highly dependent on the principal members of our management. The
loss of certain key management personnel, in particular Alan F. Sussna and
Thomas M. Dalton, could have a material adverse effect on us.
Our ability to integrate acquired businesses will impact our ability to
grow.
We have achieved a significant portion of our growth through acquisitions
and may continue to pursue acquisitions. We will have to integrate acquired
businesses into our existing business, including our prior acquisitions. There
can be no assurance that we will be able to meet performance expectations or
successfully integrate these businesses on a timely basis without disruption in
the quality and reliability of service to our customers or diversion of
management resources.
INVESTMENT RISK
A large percentage of our common stock is concentrated in a small number
of stockholders who can influence matters requiring stockholder approval.
Our directors and officers, and persons related to them, hold in excess of
35% of the outstanding shares of our common stock. Accordingly, these
stockholders have the ability to substantially influence the outcome of all
corporate actions requiring stockholder approval, including the election of the
directors, and to influence our policies and direction.
It may be difficult for a stockholder to sell his or her stock due to the
illiquid market for our stock.
Because there are relatively few stockholders and a substantial percentage
of the shares of our common stock are held by a few persons, our common stock is
relatively illiquid. As a result, a stockholder wishing to sell may find it
difficult to do so expeditiously. In addition, no predictions can be made as to
stability or volatility of our stock price.
If our common stock is delisted from the American Stock Exchange, the
liquidity, visibility and price of our common stock may decrease.
Since December 31, 1997, our common stock has been listed on the American
Stock Exchange (AMEX). Shares of our common stock could be delisted from AMEX if
we fail to satisfy the continued listing requirements of AMEX. If our common
stock is delisted from AMEX, we would be forced to list
our common stock on the OTC Bulletin Board or some other quotation medium,
depending on our ability to meet the specific listing requirements of those
quotation systems. If this happens, an investor might find it more difficult to
buy and sell, or to obtain accurate price quotations for, shares of our common
stock. This lack of visibility and liquidity could further decrease the price of
our common stock. In addition, delisting from AMEX might negatively impact our
reputation and, as a consequence, our business.
Our financial condition depends on our ability to comply with the terms of
our bank debt.
Our ability to fund our working capital requirements and capital
expenditures will depend in large part on our ability to comply with covenants
in our agreements with our lenders, Fleet Capital Corporation and Banc One
Capital Partners, LLC. If we fail to comply with any covenants in the future and
our lenders fail to waive non-compliance, it would have a materially adverse
effect on us.
It is unlikely that any cash dividends will be paid on our common stock.
We anticipate that future earnings, if any, will be retained for use in
the business or for other corporate purposes, and it is not anticipated that any
cash dividends on our common stock will be paid in the foreseeable future.
ITEM 2. PROPERTIES
Prefco. We lease a 20,000 square foot refrigerated warehouse in Houston.
The lease for this facility expires in November 2002. In addition, Prefco also
leases a 5,000 square foot office facility, the lease for which expires March
31, 2003.
Carlton. We lease a 20,000 square foot processing facility and a 2,000
square foot office facility in New Braunfels, Texas. The lease on the processing
facility expires in September 2005, with one five-year renewal option, and the
lease on the office facility is on a month to month basis.
Richard's. We own a 12,500 square foot processing facility in Church
Point, Louisiana.
Potter. We own a 120,000 square foot rendering, processing, distribution,
warehouse and administrative facility in Durant, Oklahoma. In addition, we own a
6,800 square foot distribution facility in Malvern, Arkansas.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is principally traded on the American Stock Exchange
("AMEX") under the symbol "ABR." The following table sets forth, for the periods
indicated, the high and low closing sales prices of our common stock as reported
by AMEX.
STOCK PRICES
High Low
2000
1st Quarter 3 1/8 1 5/8
2nd Quarter 3 1/8 2
3rd Quarter 2 7/16 1 5/8
4th Quarter 1 1/2 7/8
2001
1st Quarter 1 1/2 1 3/16
2nd Quarter 1 1/2 1 1/16
3rd Quarter 1 1/2 1 1/8
4th Quarter 2 3/4 1 1/8
As of March 14, 2002, there were approximately 150 shareholders of record
of our common stock. We have not paid any cash dividends since our initial
public offering. We anticipate that earnings, if any, will be retained for use
in the business or for other corporate purposes, and it is not anticipated that
any cash dividends on the common stock will be paid in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data is based on our consolidated
financial statements. Our financial statements as of December 31, 2000 and 2001
and for each of the years in the three-year period ended December 31, 2001,
including the notes thereto and the related report of KPMG LLP, independent
certified public accountants, are included elsewhere in this Form 10-K.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements contained elsewhere in
this Form 10-K.
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
YEARS ENDED DECEMBER 31,
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
INCOME STATEMENT DATA
Net sales $ 151,204 $ 181,023 $ 196,998 $ 177,743 $134,589
Income (loss) from continuing operations 434 1,820 1,261 (856) 1,784
Income (loss) from discontinued operations, including
loss on disposal (77) (1,301) (72) (153) --
Changes in accounting principles -- -- -- 141 1,402
Net income (loss) 357 324 1,189 (868) 3,186
Basic income (loss) per common share from continuing
operations 0.06 0.25 0.18 (0.13) 0.27
Diluted income (loss) per common share from continuing
operations 0.06 0.24 0.18 (0.13) 0.27
Diluted net income (loss) per common share 0.05 0.04 0.17 (0.13) 0.47
BALANCE SHEET DATA
Total assets 33,245 45,665 44,743 41,531 41,864
Long-term obligations 6,270 18,514 17,426 12,800 9,890
During the fourth quarter of 1998, we decided to dispose of our beverage
division. This disposition was completed in 1999. The beverage division has been
treated as a discontinued operation and prior years' financial statements have
been restated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
In 1996 we implemented a new corporate strategy that resulted in the
acquisition of five food businesses. Each of these businesses represented a
preeminent local or regional branded processed meat company. In addition to
significantly increasing our size, the newly acquired businesses created a
broader platform for future growth.
In order to acquire and operate our food businesses, we formed four new
subsidiaries during 1996: Prefco Corp., Carlton Foods Corp., Richard's Cajun
Foods Corp., and Grogan's Farm, Inc. In 1998, we formed a fifth new subsidiary,
Potter Sausage Company, to acquire the business of J.C. Potter Sausage Company
and affiliates. In 2002, we sold substantially all the assets of Grogan's that
remained after the October 13, 2000 fire that destroyed the plant and equipment
located in Arlington, Kentucky.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net Sales. Net sales decreased by $43.1 million or 24.3% from $177.7
million for the year ended December 31, 2000 to $134.6 million for the year
ended December 31, 2001. The decrease in net sales during the year was primarily
due to the loss of a major customer (Sam's Club) that built and began using its
own warehouse and distribution system in August 2000. Sam's Club accounted for
approximately 30% of our total net sales for fiscal 2000 as compared to 1.1% of
our total net sales during fiscal 2001.
Gross Profit. Gross profit decreased by approximately $0.7 million or
2.8% from $24.7 million for the year ended December 31, 2000 to approximately
$24.0 million for the year ended December 31, 2001. Gross profit as a percentage
of net sales increased from 13.9% for the year ended December 31, 2000 to 17.8%
for the year ended December 31, 2001. 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. That business earned a gross margin percentage significantly lower
than our sales to other customers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.4 million or 1.8% from $22.7 million for
the year ended December 31, 2000 to $22.3 million for the year ended December
31, 2001. This decrease reflects a reduction in our costs resulting from the
loss of the Sam's Club distribution business discussed in Net Sales. This cost
reduction was offset by higher salaries and benefits, and a $1 million goodwill
adjustment resulting from our decision to dispose of the Grogan's business after
the fire. As a percentage of net sales,
selling, general and administrative expenses increased from 12.8% for the year
ended December 31, 2000 to 16.6% for the year ended December 31, 2001. In
addition to the specific items discussed above, 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 our other customers.
Income from Operations. Income from operations decreased $0.3 million
from $2.0 million for the year ended December 31, 2000 to $1.7 million for the
year ended December 31, 2001. This decrease is attributable to factors discussed
above.
Interest Expense. Interest expense decreased $0.4 million from $2.8
million for the year ended December 31, 2000 to $2.4 million for the year ended
December 31, 2001. This decrease was primarily due to a decrease in our cost of
variable-rate borrowings and the related outstanding balances.
We issued warrants with a put option in conjunction with the debt
incurred at the time of the Potter acquisition. Commencing on January 1, 2001 we
are required to mark-to-market the estimated fair value of the put option. Any
change to such value is charged or credited to earnings as a fair value
adjustment to put warrants. For purposes of these calculations, the fair value
of the warrants is estimated using a Black-Scholes option-pricing model. During
the year ended December 31, 2001, we recorded additional expense of $0.3 million
as a fair value adjustment to put warrants.
Other Income. Other income increased by $4.8 million to $4.8 million
for the year ended December 31, 2001. On October 13, 2000, the Grogan's
manufacturing plant located in Arlington, Kentucky was totally destroyed by fire
and the impacted assets net book value of $1.2 million was written off. At
December 31, 2000, we recorded a $1.4 million receivable from the insurance
carrier for the net book value of the plant and equipment destroyed plus other
related costs incurred. During fiscal 2001, the insurance settlement on the
building and equipment destroyed in the fire was finalized at $6.8 million and
the Company recorded a pretax gain, net of additional costs incurred, in the
amount of $4.8 million.
Income (Loss) from Continuing Operations before Income Taxes. Income
(loss) from continuing operations before income taxes increased $4.5 million
from a loss of $(0.7 million) for the year ended December 31, 2000 to income of
$3.8 million for the year ended December 31, 2001. This increase is attributable
to the factors discussed above.
Income Taxes. 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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Sales. Net sales decreased by $19.3 million or 9.8% from $197.0
million for the year ended December 31, 1999 to $177.7 million for the year
ended December 31, 2000. The decrease in net sales during the year was primarily
due to the loss of a major customer (Sam's Club) that built and began using its
own warehouse and distribution system in August 2000. Sam's Club accounted for
approximately 30% of our total net sales for fiscal 2000 as compared to 43% of
our total net sales during fiscal 1999.
Gross Profit. Gross profit decreased by approximately $1.5 million or
5.7% from $26.2 million for the year ended December 31, 1999 to approximately
$24.7 million for the year ended December 31, 2000. Gross profit as a percentage
of net sales increased from 13.3% for the year ended December 31, 1999 to 13.9%
for the year ended December 31, 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. That business earned a gross margin percentage significantly lower
than our sales to other customers. The decrease in gross profit dollars also
reflects the increase in the prices of certain of our raw materials over those
paid in fiscal 1999 for both the food processing segment and the food
distribution segment. Pork prices have a significant impact on our cost of goods
sold and higher pork prices in fiscal 2000 negatively impacted gross profit as
compared to 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million or 6.0% from $21.4 million for
the year ended December 31, 1999 to $22.7 million for the year ended December
31, 2000. This increase reflects an increase in the size of the direct store
delivery fleet, higher salaries and benefits, the costs incurred in the launch
phase of a new product line and increases in the costs of distributing our
products, primarily related to the cost of fuel. As a percentage of net sales,
selling, general and administrative expenses increased from 10.9% for the year
ended December 31, 1999 to 12.8% for the year ended December 31, 2000. In
addition to the increased costs discussed, 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 our other customers.
Income from Operations. Income from operations decreased $2.8 million
from $4.8 million for the year ended December 31, 1999 to $2.0 million for the
year ended December 31, 2000. This decrease is attributable to factors discussed
above.
Interest Expense. Interest expense increased $0.3 million from $2.5
million for the year ended December 31, 1999 to $2.8 million for the year ended
December 31, 2000. This increase was primarily due to an increase in our cost of
variable-rate borrowings and the related outstanding balances.
Income (Loss) from Continuing Operations. Income (loss) from continuing
operations decreased from $2.3 million for the year ended December 31, 1999 to a
loss of $(0.7 million) for the year ended December 31, 2000. This decrease is
attributable to the factors discussed above.
Income Taxes. 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.
CHANGES IN ACCOUNTING PRINCIPLES
During the year ended December 31, 2000, we changed our method of
accounting for production 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 year ended December 31, 2000.
On January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("the Statement"). On adoption of the Statement, the
Company recorded a cumulative effect of change in accounting principle in the
amount of $1.402 million (net of zero income taxes). The cumulative effect of
change in accounting principle was recorded to reduce the carrying value of the
liability related to the put warrants to fair value. The fair value of the
warrants is estimated using a Black-Scholes option-valuation model. Subsequent
changes in the fair value of the put warrants are recorded as a component of net
income. The Company does not have any other derivative instruments.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the year ended December 31,
1999 was $5.0 million. This amount was principally the result of income from
continuing operations, depreciation and amortization, an increase in accounts
payable and a decrease in accounts receivable. This was partially offset by an
increase in inventory and a decrease in accrued expenses. Net cash used in
operating activities for the year ended December 31, 2000 was $1.3 million. This
was principally the result of a loss from continuing operations and a decrease
in accounts payable that was partially offset by depreciation and amortization
and a decrease in accounts receivable. Net cash provided by operating activities
for the year ended December 31, 2001 was $4.9 million. This amount was
principally the result of net income, depreciation and amortization and a
non-cash adjustment to goodwill. This was partially offset by an increase in
prepaid expenses and other current assets and the non-cash change in accounting
principle to record the put warrants at fair value.
Cash used in investing activities for the years ended December 31,
1999, 2000 and 2001 was $1.9 million, $1.7 million and $1.6 million,
respectively, which was primarily related to capital expenditures.
Cash used in financing activities in the year ended December 31, 1999
was $4.1 million, principally affected by the payments of term debt and notes
payable under the line of credit, the repurchase of our common stock and a
decrease in the bank overdraft. Cash provided by financing activities in the
year ended December 31, 2000 was $2.0 million, principally affected by
borrowings under the line of credit which were partially offset by the payments
of term debt and the repurchase of our common stock. Cash used in financing
activities in the year ended December 31, 2001 was $3.7 million, principally
affected by the payments of term debt and other notes payable, and a decrease in
the bank overdraft.
In the first quarter of 1998, we borrowed approximately $6.5 million in
senior subordinated debt ("Senior Subordinated Note") from Banc One Capital
Partners, LLC ("BOCP"). In connection with this Senior Subordinated Note we
issued detachable common stock warrants with a put option. We also refinanced
our line of credit and term debt ("Fleet Facility") through Fleet Capital
("Fleet").
As of December 31, 2000 and 2001, we had outstanding under the Fleet
Facility approximately $7.2 million and $4.9 million, respectively, in term debt
and approximately $5.1 million and $5.0 million, respectively, in line-of-credit
borrowings. The Company owed $6.5 million to BOCP and Sterling BOCP, LLC, an
entity owned by some of our directors, officers and 5% shareholders, 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 interest on the
Senior Subordinated Note was 10% per annum for the years ended December 31, 1999
and 2000. Under the terms of an amendment to the Senior Subordinated Note dated
April 13, 2001 and effective January 17, 2001, this interest rate was increased
to 15% per annum. The incremental increase of 5% is accrued, compounded monthly
and payable in full on June 30, 2003. The subordinated debt owed to
former owners bears interest at an average rate of approximately 9.7% 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% (9.75% and 5.75% at December
31, 2000 and 2001, respectively) or adjusted LIBOR plus 2.5%, at our option.
In 2002 we received $5 million as part of the Grogan's fire insurance
settlement. These monies will be used to pay the federal and state taxes and
other expenses associated with the settlement and the remainder will be applied
to the Fleet Facility.
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 our 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 us 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 our assets, or a business combination in which we are not the surviving
corporation.
If the holder of the warrants exercises the put option, our ability to
satisfy such obligation will depend on our ability to raise additional capital.
Our ability to secure additional capital at such time will depend upon our
overall operating performance, which will be subject to general business,
financial, competitive and other factors affecting us and the processed meat
distribution industry, certain of which factors are beyond our control. No
assurance can be given that we will be able to raise the necessary capital on
terms acceptable to us, if at all, to satisfy the put obligation in a timely
manner. If we are unable to satisfy such obligation, our business, financial
condition and operations will be materially and adversely effected.
During fiscal year 2000, we were in violation of some of the financial
ratios we are required to maintain under the terms of the Fleet Facility and the
Senior Subordinated Note. Both Fleet and BOCP waived the non-compliance and
revised our financial covenants. As conditions to the waiver by BOCP, and the
revision to our financial covenants, we agreed to continue the default rate of
interest (effective as of January 17, 2001 and payable as described above) of
15% per annum, which went into effect when we violated the financial covenants,
to obtain the approval of BOCP prior to any renewal of the employment agreement
with our chief executive officer, to terminate our management agreement with
Sterling Advisors, and to use commercially reasonable efforts, subject to our
board of directors' fiduciary duties, to obtain replacement financing for the
Senior Subordinated Note. In addition, Sterling BOCP, LLC purchased 10% of
BOCP's interest in the Senior Subordinated Note and the related warrants with a
put option. Subsequently, as part of BOCP's release of security interests in the
assets of Grogan's in February, 2002, BOCP agreed to amend its warrants with the
put option to provide that BOCP's warrants expire if we obtain BOCP's
replacement financing for the Senior Subordinated Note prior to September 30,
2002.
A junior subordinated note to a former owner in the principal amount of
$1.4 million was due on March 31, 2001, but was not paid because of restrictions
under the Fleet Facility and the Senior Subordinated Note. Two additional junior
subordinated notes to former owners, one in the amount of $0.9 million and
another in the amount of $0.2 million, became due on July 31, 2001 and September
30, 2001, respectively. Payment on each of these notes will be made when such
payment will not violate the covenants under our credit facilities. Under the
terms of an inter-creditor subordination agreement, the former owners are
prohibited from exercising any remedy with respect to this debt until the Fleet
Facility and the Senior Subordinated Note obligations are paid in full; however,
the interest rates of 9%, 6.35% and 8%, respectively, on each note increased by
2% per annum after its due date because the principal was not paid.
We believe that cash generated from operations and bank borrowings will
be sufficient to fund our debt service, working capital requirements and capital
expenditures as currently contemplated for 2002. However, our ability to fund
our working capital requirements and capital expenditures will depend in large
part on our ability to continue to comply with debt covenants. Our ability to
continue to comply with these covenants will depend on a number of factors,
certain of which are beyond our control, including but not limited to,
implementation of our 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 our future operating performance. No assurance can be given
that we will remain in compliance with such covenants throughout the term of
both the Fleet Facility and the Senior Subordinated Note.
We, from time to time, review the possible acquisition of other
products or businesses. Our ability to expand successfully through acquisition
depends on many factors, including the successful identification and acquisition
of products or businesses and our ability to integrate and operate the acquired
products or businesses successfully. There can be no assurance that we will be
successful in acquiring or integrating any such products or businesses.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are 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.
We are a purchaser of pork and other meat products. We buy 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 our Company are
significantly impacted by pork prices. We do not use commodity financial
instruments to hedge pork and other meat product prices.
Our exposure to interest rate risk relates primarily to our debt
obligations and temporary cash investments. We do not use, and have not in the
past year used, any derivative financial instruments relating to the risk
associated with changes in interest rates.
We issued warrants with a put option in conjunction with the debt
incurred at the time of the Potter acquisition. Commencing on January 1, 2001 we
are required to mark-to-market the estimated fair value of the put option. Any
change to such value is charged or credited to earnings as a fair value
adjustment to put warrants. For purposes of these calculations, the fair value
of the warrants is estimated using a Black-Scholes option-pricing model.
We are exposed to credit risk on certain assets, primarily accounts
receivable. We provide credit to customers in the ordinary course of business
and perform ongoing credit evaluations. We currently believe our allowance for
doubtful accounts is sufficient to cover customer credit risks.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period.
On an on-going basis, we evaluate our estimates and judgments,
including those related to bad debts, inventories, investments, intangible
assets, income taxes, financing operations, and contingencies and litigation. We
base our estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies, among others,
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements.
Our critical accounting policies are as follows:
- valuation of accounts receivable;
- valuation of inventories;
- valuation of the warrants with a put option;
- accounting for income taxes; and
- valuation of long-lived, intangible assets and goodwill.
VALUATION OF ACCOUNTS RECEIVABLE.
We must make estimates of the uncollectability of our accounts
receivable. We specifically analyze accounts receivable and analyze historical
bad debts, customer concentrations, customer credit-worthiness, and current
economic trends when evaluating the adequacy of the allowance for doubtful
accounts. A significant change in the liquidity or financial position of any of
our significant customers could have a material adverse impact on the
collectibility of our accounts receivable and future operating results. Our
accounts receivable balance was $7.2 million, net of allowance for doubtful
accounts of $0.2 million, as of December 31, 2001.
VALUATION OF INVENTORIES.
We must make estimates as to the amount of the obsolete or excess
inventory. We specifically analyze historical write-offs, the age and condition
of the inventory, and current economic trends when assessing the valuation of
inventory. Significant management judgments and estimates must be made and used
in connection with valuing these inventories in any accounting period. Material
differences may result in the amount and timing of our expenses for any period
if we made different judgments or utilized different assumptions.
VALUATION OF THE WARRANTS WITH A PUT OPTION.
We issued warrants with a put option in conjunction with the debt
incurred at the time of the Potter acquisition. Commencing on January 1, 2001 we
are required to mark-to-market the estimated fair value of the put option. Any
change to such value is charged or credited to earnings as a fair value
adjustment to put warrants. For purposes of these calculations, the fair value
of the warrants is estimated using a Black-Scholes option-pricing model.
Fluctuations in the assumptions of the Black-Scholes option pricing model can
result in significant fluctuations in profit or loss. Such assumptions include
the risk free interest rate, time to maturity and the standard deviation of the
company's stock
price. During the year ended December 31, 2001, we recorded additional expense
of $0.3 million as a fair value adjustment to the put warrants.
ACCOUNTING FOR INCOME TAXES.
As part of the process of preparing our consolidated financial
statements we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves us estimating our
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations. In the event that
actual results differ from our estimates of future taxable income or we adjust
those estimates in future periods, we may need to revise the valuation allowance
which could materially impact our financial position and results of operations.
VALUATION OF LONG-LIVED ASSETS, INTANGIBLE ASSETS AND GOODWILL.
We assess the potential impairment of long-lived assets, intangible
assets and goodwill whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Factors we consider important which
could trigger an impairment review include the following:
- significant underperformance relative to expected historical
or projected future operating results;
- significant changes in the manner of our use of the acquired
assets or the strategy for our overall business and;
- significant negative long term industry or economic trends.
When we determine that the carrying value of goodwill may not be recoverable
based upon the existence of one or more of the above indicators of impairment,
we measure any impairment based on a projected discounted cash flow method using
a discount rate determined by management to be commensurate with the risk
inherent in our current business model. Net long-lived assets, intangible assets
and goodwill amounted to $22.8 million as of December 31, 2001.
In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, we will
cease to amortize approximately $11.4 million of goodwill. We had recorded
approximately $0.4 million of amortization of this goodwill during 2001 and
would have recorded approximately $0.4 million of amortization during 2002. In
lieu of amortization, we are required to perform an initial impairment review of
our
goodwill in 2002 and an annual impairment review thereafter. We expect to
complete our initial review during the second quarter of 2002.
We currently do not expect to record an impairment charge upon
completion of the initial impairment review. However, there can be no assurance
that at the time the review is completed a material impairment charge will not
be recorded.
RELATED PARTY TRANSACTIONS
In connection with the amendment dated April 13, 2001 to the Senior
Subordinated Note, Sterling BOCP, LLC, an entity owned by certain directors and
stockholders of the Company, purchased a 10% interest in the Senior Subordinated
Note, including a corresponding 10% interest in the detachable put warrants
which were issued in connection with the Senior Subordinated Note.
COMMERCIAL COMMITMENTS
The future maturities of long-term debt as of December 31, 2001, are as
follows:
2002 $ 5,127
2003 5,264
2004 3,896
2005 1,061
-------
$15,348
=======
As of December 31, 2001, future minimum lease payments under operating leases
are as follows:
2002 $ 955
2003 165
2004 100
2005 23
2006 and thereafter -
------
$1,243
======
We have issued letters of credit totaling $0.5 million, all of which expire in
less than 1 year, all in the ordinary course of business to various vendors and
regulatory agencies. These letters of credit are routinely renewed upon
expiration.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," supersedes APB Opinion No. 16, "Business Combinations" and SFAS
No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises."
All business combinations in the scope of this statement are to be accounted for
using the purchase method. The provisions of this statement apply to all
business combinations initiated after June 30, 2001, as well as all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. The Company will apply this statement to
any acquisitions occurring after July 1, 2001.
SFAS No. 142, "Goodwill and Other Intangible Assets," which supercedes
APB Opinion No. 17, "Intangible Assets," establishes financial accounting and
reporting standards for acquired goodwill and other intangible assets. SFAS No.
142 is effective for fiscal years beginning after December 15, 2001. The
Company's intangible assets represent principally deferred financing costs and
goodwill from businesses acquired. The Company is evaluating the new statement's
provisions to assess the impact on its consolidated results of operations and
financial position. The Company plans to adopt the new standard in fiscal year
2002 as required.
SFAS No. 144, "Accounting for the Impairment and the Disposal of
Long-Lived Assets," addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", it retains many of the fundamental provisions of that
Statement. SFAS No. 144 also supersedes the accounting and reporting provisions
of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business. However, it retains the requirement in Opinion 30 to report
separately discontinued operations and extends that reporting to a component of
an entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The Company is in the process of evaluating the
impact that adoption of SFAS No. 144 may have on the financial statements;
however, such impact, if any, is not known or reasonably estimable at this time.
FORWARD LOOKING STATEMENTS
We want to provide stockholders and investors with meaningful and
useful information. Therefore, this Annual Report on Form 10-K contains
forward-looking information and describes our belief concerning future business
conditions and our outlook based on currently available information. Whenever
possible, we have identified these forward looking statements by words such as
"believe," "expect," "will depend" and similar expressions. These
forward-looking statements are subject to risks and uncertainties that would
cause our 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 our 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 warrants with the put option on our net income and effective tax rate;
our ability to raise additional capital; sensitivity to such factors as weather
and raw material costs and the factors discussed above under the caption
"Quantitative and Qualitative Disclosures About Market Risk." Readers are
encouraged to review information in Item 1 under the heading "Risk Factors" and
our 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. We assume
no obligation to update the information contained in this Annual Report on Form
10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion under the caption "Quantitative and Qualitative Disclosures
about Market Risk" in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our 2001 Financial Statements and the related Report of Independent
Auditors are set forth on pages F-1 through F-21 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
CLASS III -- DIRECTORS TO BE ELECTED AT THE 2002 ANNUAL MEETING:
John A. Miller. Mr. Miller, age 48, has served as a director of our
company since September 1993 and is currently a member of the Audit Committee
and the Compensation Committee. Mr. Miller has served as President of North
American Paper Company since 1988. Mr. Miller has been a director of Network
Services Inc. since 1991, where he is a member of the Compensation Committee and
Audit Committee, and he has been a director of the Becker Group, Ltd., a
privately-held company in the mall decorations business ("Becker Group"), since
1998.
Franklin M. Roth. Franklin M. Roth, age 60, was elected to our board of
directors in August 2001. Mr. Roth was employed by Blue Ribbon Packing Co. in
Houston, Texas, for 23 years. In 1986, Mr. Roth resigned as executive vice
president of Blue Ribbon Packing Co. to become founder and president of Prefco
Inc., a meat distribution company in Houston. In 1996, Mr. Roth was appointed
president of Prefco. Corp. in connection with our acquisition of Prefco, Inc.
Alan F. Sussna. Mr. Sussna, age 45, has served as a director, President
and Chief Executive Officer of our company since March 1996. From 1991 through
1995, Mr. Sussna was a director of Bain & Company, a consulting firm. Through
his association with Bain & Company and as a partner in the consulting firm of
McKinsey & Company, he has opened offices as well as led those firms' Consumer
Goods practices. In 1999, Mr. Sussna was elected to the board of directors of
StartSampling, Inc. In 2000, Mr. Sussna was elected to the board of directors of
Opto-Lynx, an Indiana based high technology start-up. Mr. Sussna has also held
industry positions as Executive Vice President -- Sales and Marketing for Jim
Beam Brands and in product management at Frito-Lay, Inc.
CLASS I -- DIRECTORS SERVING UNTIL 2003 ANNUAL MEETING:
Eric D. Becker. Mr. Becker, age 38, served as Chairman of our company from
September 1993 through July 1996, and he has been a director since 1991, the
year our Company's business was purchased from a predecessor. Mr. Becker is also
a co-founder and Managing Principal of Sterling Capital, Ltd., a private
investment firm which was founded in 1984 ("Sterling Capital"), and since 1984,
Mr. Becker has also been Chairman and Vice President of Sterling Group, Inc., an
affiliate of Sterling Capital ("Sterling Group"). Mr. Becker is also Chairman of
Becker Group. Mr. Becker has also been a Principal of Sterling Advisors, LP
("Sterling Advisors") since 1984 and Managing Principal of Sterling Venture
Partners since 1999. Additionally, Mr. Becker currently serves as a director and
member of the compensation committee of Argent Trading, a venture backed private
company.
Brian Fleming. Mr. Fleming, age 56, has served as a director of our
company since December 1997 and is currently a member of the Compensation
Committee. Mr. Fleming is Vice Chairman of Knauss Foods, a privately-held
processor of meat products specializing in dried beef and meat snacks, a
position he has held since June 2001. From 1998 to 2001, Mr. Fleming was the
President of Knauss Foods. Prior to 1998, Mr. Fleming was the President and
Chief Operating Officer of Knauss Snack Food Company, a privately-held meat
snack company. Mr. Fleming is presently
a director of The Decal Source, which designs and distributes decals for use in
Nascar motor sports, a position he has held since 1998.
G. Cook Jordan, Jr. Mr. Jordan, age 50, has served as a director of our
company since September 1993 and he is a member of the Audit Committee and the
Compensation Committee. Mr. Jordan is a co-founder and managing principal of
Jordan, Knauff & Company, a private investment bank. From 1998 to 1999, Mr.
Jordan was a general partner at CID Equity Partners, a venture capital
investment fund. From 1996 through 1998, Mr. Jordan was a principal at C3
Holdings, LLC, a private investment firm. From 1988 through 1996, Mr. Jordan
served as a Manager of Allstate Venture Capital, which was affiliated with
Allstate Insurance Company. Mr. Jordan has also been a director at Day's Molding
and Machinery, a plastic injection molder, since 1998, and he was a director at
ACR Systems, Inc., a systems developer, from 1997 to 2001.
CLASS II -- DIRECTORS SERVING UNTIL 2004 ANNUAL MEETING:
Merrick M. Elfman. Mr. Elfman, age 43, is Chairman of our company, a
position he has held since July 1996, and he has been a director of our company
since 1993. Mr. Elfman has been Chairman of Ecom Group, Inc., a privately-held
distributor of specialty lighting products ("Ecom"), since 1998. He is also a
Managing Partner of Sterling Capital Partners L.P., a private investment firm
with which he has been involved since 1987.
John T. Hanes. Mr. Hanes, age 65, has served as a director of our company
since December 1997 and is a member of the Audit Committee. From 1994 to the
present, Mr. Hanes has served as President of The John T. Hanes Company, a
management consulting firm, and he has been a director of Premier Valley Foods,
a privately-held processor and marketer of the DelMonte brand of dried fruits,
since 1998. From 1991 to 1994, Mr. Hanes served as the Chairman and President of
Doskocil Companies/Wilson Foods Corporation, Incorporated, a publicly-held
processor of pizza and other processed meat products, and he retired as its
Chief Executive Officer.
Steven M. Taslitz. Mr. Taslitz, age 43, has served as a director of our
company since 1991. Mr. Taslitz is a co-founder and Managing Principal of
Sterling Capital and Sterling Group, as well as a partner of Sterling Advisors.
He has served as the President of Sterling Group since 1984. Mr. Taslitz is a
director of Ecom and Becker Group.
EXECUTIVE OFFICERS
In addition to Merrick M. Elfman, Alan F. Sussna and Franklin M. Roth,
whose biographies are listed in the directors section above, our company has the
following two executive officers:
Thomas M. Dalton. Mr. Dalton, age 52, has served our company as Chief
Financial Officer and Senior Vice President since April 1998. In March 2001, he
was also elected to the additional position of Chief Operating Officer. From
1994 through 1998, Mr. Dalton served as a director, Chief Executive Officer and
Chief Financial Officer of SNA Inc., a food processing and distribution company,
and he has been a director of Duo-Fast Corporation, a privately-held processor
and distributor of tools and fasteners since 1997. Mr. Dalton also served as a
director, Executive Vice President and Chief Financial Officer of the Richelieu
Group, a privately-held company with nine operating subsidiaries in food
processing and distribution from 1985 to 1993.
Steven E. Englander. Mr. Englander, age 46, has served as our Senior Vice
President - Marketing since August 1998. Prior to his employment with our
company, Mr. Englander was Vice President of Marketing with Morningstar Foods, a
position he held from September 1995 through March 1998. From September 1991
through June 1995, he was Vice President of Marketing and Sales at Eagle Snacks,
a division of Anheuser Busch.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires our officers, directors and certain
beneficial holders of our common stock to file reports about their beneficial
ownership of our common stock. Specific due dates for these reports have been
established and we are required to disclose in this Form 10-K any failure to
file by these dates during 2001. All of these filing requirements were timely
satisfied, except Mr. Miller failed to timely report four transactions and Mr.
Taslitz failed to timely report one transaction. In making these disclosures, we
have relied solely upon written representations of our directors and executive
officers and copies of the reports they filed with the SEC.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth annual and long-term compensation for the
fiscal years ended December 31, 1999, 2000 and 2001 for services in all
capacities to our company of (i) our chairman, (ii) our chief executive officer,
and (iii) our next three most highly compensated executive officers
(collectively, the "Named Officers"). No other executive officer of our company
received total annual salary and bonus in excess of $100,000 during 2001.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- ------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(2)
- ---------------------------------- ---- --------- -------- ------------ ------------
Merrick M. Elfman, 2001 120,000 -- 19,000 --
Chairman (1) 2000 25,385 42,500 10,000 --
1999 -- -- 15,000 --
Alan F. Sussna, 2001 364,820 -- -- 44,100
President and Chief Executive 2000 348,007 100,000 -- 44,250
Officer 1999 335,394 145,500 -- 40,523
Thomas M. Dalton, Senior Vice 2001 183,171 -- 120,000 24,837
President, Chief Operating Officer 2000 172,048 50,000 -- 23,625
and Chief Financial Officer 1999 159,808 33,750 125,000 20,854
Steven E. Englander, 2001 118,373 20,000 -- 15,911
Senior Vice President - Marketing 2000 112,144 6,500 -- 15,724
1999 106,999 10,000 -- 14,060
Franklin M. Roth, 2001 168,980 65,000 -- 11,441
President of Prefco Corp. and 2000 154,348 77,352 25,000 15,066
Director of our company 1999 151,719 68,906 25,000 15,826
- ----------
(1) Effective October 1, 2000, we entered into an employment agreement with
Mr. Elfman pursuant to which Mr. Elfman is compensated for his services.
Prior to October 1, 2000, Mr. Elfman was a non-employee director and was
compensated for his services as director and chairman in the same manner
as other non-employee directors.
(2) These amounts represent $1,523, $5,250 and $5,100 contributed by us in
1999, 2000 and 2001 respectively, to our 401(k) Plan on behalf of Mr.
Sussna; $39,000, $39,000 and $39,000 paid to Mr. Sussna in 1999, 2000 and
2001, respectively, as an allowance for transportation costs and health
related benefits; $18,000, $19,500 and $19,500 paid to Mr. Dalton in 1999,
2000 and 2001, respectively, as an allowance for transportation costs and
health related benefits; $12,000, $12,000 and $12,000 paid to Mr.
Englander in 1999, 2000 and 2001, respectively, as an allowance for
transportation costs and health related benefits; $11,862, $10,556 and
$6,592 paid to Mr. Roth in 1999, 2000 and 2001, respectively, as an
allowance for transportation costs and health related benefits; $2,854,
$2,060 and $3,964 contributed by us in 1999 to our 401(k) Plan on behalf
of Mr. Dalton, Mr. Englander and Mr. Roth, respectively; $4,125, $3,724
and $4,510 contributed by us in 2000 to our 401(k) Plan on behalf of Mr.
Dalton, Mr. Englander and Mr. Roth, respectively; and $5,337, $3,911 and
$4,849 contributed by us in 2001 to our 401(k) Plan on behalf of Mr.
Dalton, Mr. Englander and Mr. Roth, respectively.
OPTION GRANTS
The following table sets forth certain information concerning option
grants to the Named Officers during 2001:
OPTION GRANTS IN 2001
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- --------------------------------------------------------------------------------------------------- -----------------------
PERCENT OF
TOTAL OPTIONS
NUMBER OF GRANTED TO
SECURITIES EMPLOYEES IN EXERCISE
NAME AND UNDERLYING FISCAL PRICE(5) EXPIRATION 5% 10%
PRINCIPAL POSITION OPTIONS GRANTED YEAR(4) ($/SH) DATE ($) ($)
- --------------------------- --------------- ------------- --------- ---------- -------- --------
Merrick M. Elfman, 10,000(1) 6.9% 0.875 1/01/11 $ 5,503 $ 13,945
Chairman 9,000(2) 6.21% 1.33 5/10/11 $ 7,527 $ 19,077
Thomas M. Dalton, 120,000(3) 82.76% 1.33 3/22/11 $100,368 $254,364
Chief Financial Officer and
Chief Operating Officer
- ----------
(1) These options vest 2,500 each quarter so long as the holder remains a
director of our company. As a result, by December 31 of the year in which
they were granted, all 10,000 of theses options are exercisable.
(2) These options vest one-fourth at the end of each calendar quarter in the
year in which they were granted so long as the holder remains a director
of our company. As a result, by December 31 of the year in which they were
granted, all of these options are exercisable.
(3) These options are immediately exercisable.
(4) Based on 145,000 options granted to all of our employees.
(5) Based on the market price on the date of grant.
There were no option exercises by our Named Officers in 2001. Shown below
is information with respect to outstanding options held by our Named Officers as
of December 31, 2001. All options reflected in the chart below were granted
under our Option Plan.
AGGREGATED 2001 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/01 OPTIONS AT 12/31/01
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
------------------- ------------------------- -----------------------------
Merrick M. Elfman 103,500/0 $61,568/$0
Alan F. Sussna 500,000/250,000 $225,000/$0
Thomas M. Dalton 320,000/0 $128,400/$0
Steven E. Englander 30,000/15,000 $4,312/$4,406
Franklin M. Roth 75,000/0 $20,000/$0
- ----------
(1) Based on the closing price of $2.40 per share of our Common Stock on
December 31, 2001, as reported by the American Stock Exchange.
DIRECTORS' FEES
Under our option plan, non-employee directors receive options to purchase
10,000 shares of common stock on January 1 of each year. In addition, in 2001,
the members of our Audit Committee each received options to purchase 1,500
shares, the members of our Compensation Committee each received options to
purchase 2,500 shares and the members of our Executive Committee each received
options to purchase 9,000 shares. On October 1, 2000, we entered into an
employment agreement with our chairman, Merrick M. Elfman. Mr. Elfman's
compensation for his services as chairman pursuant to this agreement are
included above in the "Summary Compensation Table" and a description of the
material terms of this agreement are set forth below.
EMPLOYMENT AGREEMENTS
We have employment agreements with the following Named Officers: Mr.
Elfman, Mr. Sussna, Mr. Dalton and Mr. Englander.
Mr. Elfman's employment agreement is currently in effect until April 30,
2003, and extends for additional one year periods thereafter, unless terminated
by written notice given by either party to the other three months prior to each
April 30th. The employment agreement provides for a signing bonus of $42,500
which was paid upon execution of the employment agreement in October 2000, and a
salary of $115,000 per year, which increases by 5% on May 1 of each year,
beginning May 1, 2002. If Mr. Elfman's employment terminates for any reason
prior to a scheduled expiration date, we remain obligated to pay all amounts and
provide all benefits provided for in his employment agreement through the
scheduled expiration date. In addition, all amounts due under Mr. Elfman's
employment agreement will be immediately due in the event that our company is
sold, whether through a change of control or a sale of substantially all of our
assets, or we are taken private.
Mr. Sussna's employment agreement remains in effect until terminated by
either party and provides for base compensation of $367,593 and eligibility to
receive a bonus of up to 50% of base compensation to be determined by the
Compensation Committee of the Board of Directors based on standards and criteria
they establish. If Mr. Sussna's employment is terminated either (1) by us
without cause, or (2) by the executive due to a reduction in responsibility
without his consent, a reduction in his base salary, relocation of his office
from Chicago, Illinois, our failure to comply with the terms of the employment
agreement, or certain changes of control of our company, then the executive will
receive $183,796.50 payable over six months in accordance with our payroll
policies (the "Termination Payment"), the annual bonus to which the executive
would have been entitled but for the termination, and continued employee
benefits for the maximum period permitted by law. These separation benefits are
also triggered if the aggregate beneficial ownership of the following
individuals is reduced to less than 15% of the number of shares of common stock
outstanding: Douglas L. Becker, Eric D. Becker, Merrick M. Elfman, Bruce L.
Goldman, Rudolf Christopher Hoehn-Saric and Steven M. Taslitz, as well as their
spouses and dependent children or trusts established for their benefit (a
"Stockholder Exit"). In addition, Mr. Sussna's employment agreement provides
that if there is a change of control of our company during
the term of Mr. Sussna's employment with us, or within 120 days after a
termination by us without cause, then Mr. Sussna shall receive $367,593, less
any amounts already received pursuant to the Termination Payment.
Mr. Dalton's employment agreement is currently in effect until April 6,
2003, and extends for additional one year periods unless terminated by written
notice given by either party to the other six months prior to April 5 of each
year. Pursuant to the employment agreement, Mr. Dalton's base compensation is
subject to normal cost of living increases, as well as those increases permitted
by our Compensation Committee. Mr. Dalton's employment agreement provides that
if his employment is terminated either (1) by us without cause, or (2) by the
executive due to a reduction in responsibility without his consent, a reduction
in his base salary, relocation of his office from Chicago, Illinois, our failure
to comply with the terms of the employment agreement, certain changes of control
of our company or a Stockholder Exit, then Mr. Dalton will receive his full base
salary, the annual bonus to which the executive would have been entitled but for
the termination, and continued employee benefits for the maximum period
permitted by law.
Mr. Englander's employment agreement may be terminated by Mr. Englander or
us at any time, subject in some circumstances to our obligation to pay Mr.
Englander's compensation for a period of up to six months after the termination,
which period depends upon the reason for the termination and the duration of Mr.
Englander's employment with us prior to termination. The employment agreement
provides for Mr. Englander's base compensation, which is subject to normal cost
of living increases, and an annual bonus of up to 30% of his base salary, 50% of
which will be based on our overall performance and 50% of which will be based
upon management objectives described by our chief executive officer on an annual
basis.
The employment agreements for Mr. Sussna, Mr. Dalton, Mr. Elfman and Mr.
Englander also contain certain non-competition and confidentiality provisions
pursuant to which they agree not to compete with our company for a period of two
years following termination of their employment with us, nor will they solicit
for employment any director, stockholder or certain employees of our company
during such period (except for Mr. Sussna, who may not solicit such persons for
three years). The employment agreements also provide that Mr. Sussna, Mr.
Dalton, Mr. Elfman and Mr. Englander will not disclose any confidential
information concerning our company and our business to any other person or
entity except as may be required by law.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of our common stock as of March 14, 2002, by each person known by us to be the
beneficial owner of more than five percent (5%) of the outstanding shares of our
common stock, each director of our company, each Named Officer, and all
executive officers and directors as a group. The information presented in the
table is based upon the most recent filings with the Securities and Exchange
Commission, the "SEC", by such persons or upon information otherwise provided by
such persons to us.
SHARES BENEFICIALLY
NAMES OF BENEFICIAL OWNERS OWNED(1) PERCENTAGE OWNED
---------------------------------------------------- ------------------- ----------------
Douglas L. Becker .................................. 405,957(2) 6.00%
Eric D. Becker ..................................... 518,457(3) 7.59%
Merrick M. Elfman .................................. 560,359(4) 8.19%
Philip L. Glass .................................... 424,268(5) 6.30%
Bruce L. Goldman ................................... 647,076(6) 9.61%
Rudolf Christopher Hoehn-Saric ..................... 436,699(7) 6.46%
Alan F. Sussna ..................................... 730,215(8) 10.09%
Steven M. Taslitz .................................. 592,629(9) 8.59%
Thomas M. Dalton ................................... 382,438(10) 5.42%
Steven Englander ................................... 40,559(11) *
Brian T. Fleming ................................... 60,500(12) *
John T. Hanes ...................................... 57,900(13) *
G. Cook Jordan, Jr. ................................ 105,607(14) 1.55%
John A. Miller ..................................... 224,905(15) 3.30%
Franklin M. Roth ................................... 173,000(16) 2.54%
All directors and executive officers as a group
(11 persons) ....................................... 3,446,569(17) 41.67%
- ----------
*Less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. Shares of Common Stock subject to options or warrants
currently exercisable or exercisable within 60 days are deemed outstanding
for purposes of computing the percentage ownership of the person holding
such option or warrant but are not deemed outstanding for purposes of
computing the percentage ownership of any other person. Except where
indicated otherwise, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) Includes 30,000 shares underlying currently exercisable options. The
address for this shareholder is c/o 650 Dundee Road, Suite 370,
Northbrook, IL 60062.
(3) Includes 392,293 shares held by Mr. Becker's wife and 92,500 shares
underlying currently exercisable options or options exercisable within 60
days. The address for this shareholder is c/o 650 Dundee Road, Suite 370,
Northbrook, IL 60062.
(4) Includes 106,000 shares underlying currently exercisable options or
options exercisable within 60 days. Of the remaining 454,359 shares,
433,805 are held by Mr. Elfman and his wife jointly. The address for this
shareholder is c/o 650 Dundee Road, Suite 370, Northbrook, IL 60062.
(5) Includes 145,740 shares held by the Glass International Ltd. Profit
Sharing Plan and Trust dated July 1, 1983 (the "Trust"). Mr. Glass and his
wife, Ellen V. Glass, are co-trustees and also the beneficiaries of the
Trust. The remaining 278,528 shares are held by Mr. Glass and his wife
jointly, either as joint tenants or tenants in common. The address for
this shareholder is 20 N. Wacker, #3400, Chicago, IL 60606-3102.
(6) Includes 250,346 shares held by Mr. Goldman and Mr. Taslitz as co-trustees
of the KJT Gift Trust. Mr. Goldman disclaims beneficial ownership of the
shares held by the KJT Gift Trust. The address for this shareholder is c/o
650 Dundee Road, Suite 370, Northbrook, IL 60062.
(7) Includes 24,593 shares held by Mr. Hoehn-Saric as Trustee for the benefit
of Gabriella Hoehn-Saric and 21,519 shares held by him as Trustee for the
benefit of Rudolph Christopher Hoehn-Saric, Jr. Also includes 30,000
shares underlying currently exercisable options or options exercisable
within 60 days. The address for this shareholder is c/o 650 Dundee Road,
Suite 370, Northbrook, IL 60062.
(8) Includes 175,528 shares held by Mr. Sussna as trustee of the Alan F.
Sussna Trust and 9,803 shares held by Mr. Sussna's wife, Brenda B. Sussna,
as trustee of the Brenda B. Sussna Trust. Mr. Sussna disclaims beneficial
ownership of all 9,803 shares held by his wife as trustee of the Brenda B.
Sussna Trust. Also includes 500,000 shares underlying currently
exercisable options, or options exercisable within 60 days, which are held
by Mr. Sussna as Trustee of the Alan F. Sussna Trust. The address for this
shareholder is c/o 650 Dundee Road, Suite 370, Northbrook, IL 60062.
(9) Includes 144,923 shares held by Mr. Taslitz as trustee of the Kathy J.
Taslitz Trust and 250,346 shares held by Mr. Taslitz and Mr. Goldman as
co-trustees of the KJT Gift Trust. Mr. Taslitz disclaims beneficial
ownership of the 250,346 shares held by him as co-trustee of the KJT Gift
Trust. Also includes 161,195 shares underlying currently exercisable
options or warrants or options exercisable within 60 days, of which
warrants 66,695 are indirectly held by Mr. Taslitz as the Manager of
Sterling BOCP, LLC, the warrant holder. The address for this shareholder
is c/o 650 Dundee Road, Suite 370, Northbrook, IL 60062.
(10) Includes 320,000 shares underlying currently exercisable options or
options exercisable within 60 days. The address for this shareholder is
c/o 650 Dundee Road, Suite 370, Northbrook, IL 60062.
(11) Includes 30,000 shares underlying currently exercisable options with
options exercisable within 60 days.
(12) Includes 54,000 shares underlying currently exercisable options or options
exercisable within 60 days.
(13) Includes 53,000 shares underlying currently exercisable options or options
exercisable within 60 days.
(14) Includes 71,000 shares underlying currently exercisable options or options
exercisable within 60 days. Also includes 19,607 shares held by Mr.
Jordan's IRA.
(15) Includes 71,000 shares underlying currently exercisable options or options
exercisable within 60 days.
(16) Includes 75,000 shares underlying currently exercisable options or options
exercisable within 60 days.
(17) Includes 1,533,695 shares underlying currently exercisable options or
options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 1, 2000, we entered into a management agreement with Sterling
Advisors pursuant to which Sterling Advisors was to provide us with management
and advisory services, including assisting our executives in making management,
financial and strategic decisions, during the initial term ending April 30,
2002. Messrs. Douglas Becker (a 5% beneficial owner of our common stock), Eric
Becker (a director and 5% beneficial owner), Rudolph Christopher Hoehn-Saric (a
5% beneficial owner), and Steven Taslitz (a director and 5% beneficial owner)
own Sterling Advisors. During the initial term of the management agreement, we
were to pay Sterling Advisors a consulting fee of $36,000 per month.
Additionally, we were to pay $200,000 to Sterling Advisors on the date of
execution of the management agreement. The management agreement also contains
certain non-competition and confidentiality provisions pursuant to which
Sterling Advisors agrees not to compete with us or disclose any confidential
information for a period of two years following termination of the agreement,
nor will it solicit for employment any director, stockholder or certain
employees of our company during such period. In connection with the April 2001
restructuring of our senior subordinated debt to Banc One Capital Partners,
described in Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, this management agreement was terminated and all
amounts payable thereunder were waived.
Also in connection with the April 2001 restructuring of our senior
subordinated debt to Banc One Capital Partners, Sterling BOCP, LLC purchased a
10% interest in the senior subordinated debt from Banc One Capital Partners,
including a corresponding 10% interest in the warrants with a put option which
were issued in connection with the senior subordinated debt. These warrants with
a put option are described in the "Liquidity and Capital Resources" section of
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations. Sterling BOCP is owned by Messrs. Douglas Becker (a 5% beneficial
owner), Eric Becker (a director and 5% beneficial owner), Merrick Elfman (an
executive officer, director and 5% beneficial owner), Bruce Goldman (a 5%
beneficial owner), John Miller (a director) and Steven Taslitz (a director and
5% beneficial owner).
Our Company, Sterling Group and Messrs. Eric Becker, Steven Taslitz,
Douglas Becker and Christopher Hoehn-Saric entered into a non-compete and
non-disclosure agreement containing certain non-competition and confidentiality
provisions pursuant to which Sterling Group and Messrs. E. Becker, Taslitz, D.
Becker and Hoehn-Saric agreed not to compete with us for a period ending one
year after Sterling Group's consulting relationship with our Company is
terminated, nor will they solicit for employment any director, stockholder or
certain employees of our Company during such period. This agreement also
provides that neither Sterling Group nor these individuals will disclose any
confidential information concerning us and our business to any other person or
entity except as may be required by law.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. The consolidated financial statements of the Company and its
subsidiaries, together with the applicable reports of independent
public accountants:
Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets - as of December 31,
2000 and 2001 F-2
Consolidated Statements of Operations - for the years
ended December 31, 1999, 2000 and 2001 F-3
Consolidated Statements of Stockholders' Equity - for the years
ended December 31, 1999, 2000 and 2001 F-4
Consolidated Statements of Cash Flows - for the years ended
December 31, 1999, 2000 and 2001 F-5
Notes to Consolidated Financial Statements F-6
2. The following exhibits are filed with this report or incorporated
by reference as set forth below:
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of Atlantic Premium Brands, Ltd. (the
"Company"), including all amendments thereto (1)
3.2 By-Laws of the Company (1)
4.1 Specimen Stock Certificate (1)
4.2 $1.4 million Subordinated Note made by ABEV Acquisition Corp. in
favor of Franklin Roth and Allen Pauly (3)
4.3 6.35% Subordinated Non-Negotiable Promissory Note due July 31, 2001
made by Richard's Cajun Foods Corp. and the Company in favor of J.L.
Richard in the original principal amount of $850,000 (4)
4.4 8% Subordinated Non-Negotiable Promissory Note due September 30,
2001 made by Grogan's Merger Corp. in favor of Bobby L. Grogan and
Betty R. Grogan in the original principal amount of $219,593 (4)
4.5 8% Subordinated Non-Negotiable Promissory Note due December 31, 2003
made by Grogan's Farm, Inc. in favor of Jefferson Davis and Roger
Davis in the original principal amount of $219,593 (4)
4.6 Secured Promissory Note dated as of March 20, 1998 of the Company
and certain of its subsidiaries payable to Fleet Capital Corporation
in the original principal amount of $11,000,000 (4)
4.7 Loan and Security Agreement dated as of March 20, 1998 among Fleet
Capital Corporation, the Company and certain of its subsidiaries (4)
4.8 First Amendment to Loan and Security Agreement dated as of December
20, 1999 among Fleet Capital Corporation, the Company and certain of
its subsidiaries (9)
4.9 Second Amendment to Loan and Security Agreement dated as of April
13, 2001 among Fleet Capital Corporation, the Company and certain of
its subsidiaries (9)
4.10 Stock Pledge Agreement dated as of March 20, 1998 between the
Company and Fleet Capital Corporation (4)
4.11 Atlantic Premium Brands, Ltd. and Subsidiaries Senior Subordinated
Note and Warrant Purchase Agreement dated as of March 20, 1998 among
the Company, certain of its subsidiaries and Banc One Capital
Partners, LLC ("Banc One") (4)
4.12 Limited Waiver of Covenants Under and Amendment to Senior
Subordinated Note and Warrant Purchase Agreement dated as of April
13, 2001 among the Company, certain of its subsidiaries and Banc One
(9)
4.13 Note and Warrant Purchase Agreement dated as of April 13, 2001 among
the Company, certain of its subsidiaries, Banc One, Sterling BOCP,
LLC ("Sterling") and Fleet Capital Corporation (9)
4.14 Intercreditor and Collateral Agency Agreement dated April 13, 2001
among Banc One, Sterling, the Company and certain of its
subsidiaries (9)
4.15 Senior Subordinated Note due March 31, 2005 of the Company payable
to Banc One dated as of April 13, 2001 in the original principal
amount of $5,850,000 (9)
4.16 Senior Subordinated Note due March 31, 2005 of the Company payable
to Sterling dated as of April 13, 2001 in the original principal
amount of $650,000 (9)
4.17 Atlantic Premium Brands, Ltd. Amended and Restated Warrant
Certificate Common Stock Purchase Warrant of Banc One dated as of
February 1, 2002 (*)
4.18 Atlantic Premium Brands, Ltd. Warrant Certificate Common Stock
Purchase Warrant to Sterling dated as of April 13, 2001 (9)
4.19 Atlantic Premium Brands, Ltd. Amended and Restated Warrant
Certificate Contingent Common Stock Purchase Warrant of Banc One
dated as of February 1, 2002 (*)
4.20 Atlantic Premium Brands, Ltd. Warrant Certificate Contingent Common
Stock Purchase Warrant of Sterling dated as of April 13, 2001 (9)
4.21 Amended and Restated Put Option Agreement dated as of April 13, 2001
among the Company, Banc One and Sterling (9)
4.22 Amended and Restated Registration Rights Agreement dated as of April
13, 2001 among the Company, Banc One and Sterling (9)
4.23 Amended and Restated Shareholders Agreement dated as of April 13,
2001 among the Company, certain of its shareholders, Banc One and
Sterling (9)
4.24 Amended and Restated Preemptive Rights Agreement dated as of April
13, 2001 among the Company, Banc One and Sterling (10)
4.25 Debt Subordination Agreement dated as of March 20, 1998 among Banc
One Capital Partners, LLC, the Company, certain of its subsidiaries
and Fleet Capital Corporation (4)
4.26 Lien Subordination Agreement dated as of March 20, 1998 between
Fleet Capital Corporation and Banc One Capital Partners, LLC (4)
10.1 Non-Compete and Non-Disclosure Agreement dated September 24, 1993
among the Company, Sterling Group, Inc., Eric D. Becker, Steven M.
Taslitz, Douglas L. Becker and R. Christopher Hoehn-Saric (1)
10.2 Form of Tax Indemnification Agreement (1)
10.3 Stock Purchase Agreement dated April 23, 1999 among the Company and
Bobby L. Grogan and Betty Ruth Grogan (5)
10.4 Atlantic Premium Brands, Ltd. Employee Stock Purchase Plan dated
November 1, 1997 (2)
10.5 The Company's 1999 Amended and Restated Stock Option Plan (6)
10.6 Amended and Restated Employment Agreement dated January 10, 2002
between the Company and Alan. F. Sussna (*).
10.7 Employment Agreement dated as of April 6, 1998 between the Company
and Thomas M. Dalton (7)
10.8 Employment Agreement dated August 10, 1998 between the Company and
Steven Englander (8)
10.9 Employment Agreement dated October 1, 2000 between the Company
and Merrick M. Elfman. (9)
10.10 Management Agreement dated October 1, 2000 by and between the
Company and Sterling Advisors, L.P. (9)
21 Subsidiaries of the Company (*)
23 Consent of KPMG LLP (*)
- ----------
*Filed herewith
(1) Filed as an exhibit to the Company's Registration Statement No. 33-69438
or the amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement No. 33-39561
and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Current Report on Form 8-K dated
March 15, 1996, filed with the Securities and Exchange Commission on April
1, 1996, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Current Report on Form 8-K dated May
21, 1999, filed with the Securities and Exchange Commission on May 24,
1999, and incorporated herein by reference.
(6) 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.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, and incorporated herein by reference.
(8) 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.
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000, and incorporated herein by reference.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Thomas M. Dalton
-------------------------------------
Thomas M. Dalton
Chief Operating Officer, Senior
Vice President and Chief Financial
Officer
Dated as of March 25, 2002.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Eric D. Becker Director March 21, 2002
- --------------------------
Eric D. Becker
Chief Operating Officer, Senior Vice President and
Chief Financial Officer (principal financial and
/s/ Thomas M. Dalton accounting officer) March 25, 2002
- --------------------------
Thomas M. Dalton
/s/ Merrick M. Elfman Director March 21, 2002
- --------------------------
Merrick M. Elfman
/s/ Brian Fleming Director March 21, 2002
- --------------------------
Brian Fleming
/s/ John T. Hanes Director March 21, 2002
- --------------------------
John T. Hanes
/s/ G. Cook Jordan, Jr.
- -------------------------- Director March 25, 2002
G. Cook Jordan, Jr.
/s/ John A. Miller Director March 25, 2002
- --------------------------
John A. Miller
- -------------------------- Director ______________, 2002
Franklin M. Roth
Chief Executive Officer and Director
/s/ Alan F. Sussna (principal executive officer) March 25, 2002
- --------------------------
Alan F. Sussna
/s/ Steven M. Taslitz Director March 25, 2002
- --------------------------
Steven M. Taslitz
Independent Auditors' Report
To the Stockholders of
Atlantic Premium Brands, Ltd.:
We have audited the accompanying consolidated balance sheets of Atlantic Premium
Brands, Ltd. (a Delaware Corporation) and subsidiaries as of December 31, 2000
and 2001, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic Premium
Brands, Ltd. and subsidiaries as of December 31, 2000 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 13 to the consolidated financial statements, the Company
changed its method of accounting for production parts inventory in 2000 and for
derivative instruments in 2001.
/s/ KPMG LLP
Chicago, Illinois
March 20, 2002
F-1
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
2000 2001
-------- --------
ASSETS
Current assets:
Cash $ 780 $ 560
Accounts receivable, net of allowance for doubtful
accounts of $206 and $203, respectively 7,791 7,184
Inventory 5,453 5,291
Prepaid expenses and other current assets 1,707 5,982
Income taxes receivable 802 --
Deferred income taxes 375 --
Net assets of discontinued operations 124 --
-------- --------
Total current assets 17,032 19,017
Property, plant and equipment, net 11,293 11,152
Intangible assets, net 12,788 11,378
Deferred income taxes 101 --
Other assets, net 317 317
-------- --------
Total assets $ 41,531 $ 41,864
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 3,167 $ 1,293
Notes payable under line of credit 5,053 4,976
Current maturities of long-term debt 4,882 5,127
Deferred income taxes -- 742
Accounts payable 5,645 5,561
Accrued expenses 1,721 2,288
-------- --------
Total current liabilities 20,468 19,987
Long-term debt, net of current maturities 11,365 9,561
Deferred income taxes -- 463
Put warrants 1,435 329
-------- --------
Total liabilities 33,268 30,340
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; 6,658,863 and 6,734,391 shares
issued and outstanding, respectively 67 67
Additional paid-in-capital 10,377 10,452
Retained earnings (accumulated deficit) (2,181) 1,005
-------- --------
Total stockholders' equity 8,263 11,524
-------- --------
Total liabilities and stockholders' equity $ 41,531 $ 41,864
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended December 31,
1999 2000 2001
----------- ----------- -----------
Net sales $ 196,998 $ 177,743 $ 134,589
Cost of goods sold 170,751 153,008 110,598
----------- ----------- -----------
Gross profit 26,247 24,735 23,991
Selling, general and administrative expenses:
Salaries and benefits 9,875 10,479 9,967
Other operating expenses 9,449 9,982 9,183
Depreciation and amortization 2,123 2,258 2,073
Goodwill adjustment (See Note 16) -- -- 1,044
----------- ----------- -----------
Total selling, general and
administrative expenses 21,447 22,719 22,267
----------- ----------- -----------
Income from operations 4,800 2,016 1,724
Other income (expense):
Interest expense (2,491) (2,788) (2,443)
Fair value adjustment to put warrants -- -- (296)
Other income, net 38 41 4,808
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes 2,347 (731) 3,793
Income tax expense (1,086) (125) (2,009)
----------- ----------- -----------
Income (loss) from continuing
operations 1,261 (856) 1,784
Loss from discontinued operations (72) (153) --
----------- ----------- -----------
Income (loss) before changes in accounting
principles 1,189 (1,009) 1,784
Changes in accounting principles -- 141 1,402
----------- ----------- -----------
Net income (loss) $ 1,189 $ (868) $ 3,186
=========== =========== ===========
Weighted average common shares:
Basic 7,054,284 6,707,908 6,671,451
----------- ----------- -----------
Diluted 7,193,748 6,707,908 6,709,071
----------- ----------- -----------
Income (loss) per common share:
Basic:
Income (loss) from continuing
operations $ 0.18 $ (0.13) $ 0.27
Loss from discontinued operations (0.01) (0.02) --
Changes in accounting principles -- 0.02 0.21
----------- ----------- -----------
Net income (loss) $ 0.17 $ (0.13) $ 0.48
----------- ----------- -----------
Diluted:
Income (loss) from continuing
operations $ 0.18 $ (0.13) $ 0.27
Loss from discontinued operations (0.01) (0.02) --
Changes in accounting principles -- 0.02 0.20
----------- ----------- -----------
Net income (loss) $ 0.17 $ (0.13) $ 0.47
----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
RETAINED
ADDITIONAL EARNINGS TOTAL
COMMON STOCK PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 7,413 $ 74 $ 12,260 $ (2,502) $ 9,832
Repurchase and Retirement of Common Stock (579) (6) (1,381) -- (1,387)
Issuance of Common Stock in
Connection With Employee Stock
Purchase Plan 11 -- 19 -- 19
Net Income -- -- -- 1,189 1,189
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 6,845 68 10,898 (1,313) 9,653
Repurchase and Retirement of Common Stock (241) (2) (578) -- (580)
Issuance of Common Stock in
Connection With Employee Stock
Purchase Plan 55 1 57 -- 58
Net Loss -- -- -- (868) (868)
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2000 6,659 67 10,377 (2,181) 8,263
Issuance of Common Stock in
Connection With Employee Stock
Purchase Plan 75 -- 75 -- 75
Net Income -- -- -- 3,186 3,186
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2001 6,734 $ 67 $ 10,452 $ 1,005 $ 11,524
======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1999 2000 2001
------- ------- -------
Cash flows from operating activities:
Net income (loss) $ 1,189 $ (868) $ 3,186
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities
Depreciation and amortization 2,123 2,258 2,073
Goodwill adjustment -- -- 1,044
Amortization of debt discount 246 250 245
Fair value adjustment to put warrant -- -- 296
Deferred income taxes 44 106 1,727
Changes in accounting principles -- (141) (1,402)
Decrease in accounts receivable, net 814 1,832 607
Decrease (increase) in inventory (1,153) 298 162
Decrease (increase) in prepaid expenses and
other current assets 243 (12) (4,275)
Decrease (increase) in income taxes receivable -- (412) 802
Increase (decrease) in accounts
payable 4,964 (4,927) (84)
Increase (decrease) in accrued
expenses and other (3,459) 307 527
------- ------- -------
Net cash provided by (used in)
operating activities 5,011 (1,309) 4,908
------- ------- -------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (1,954) (1,254) (1,400)
Investment in plant construction in progress -- (524) (82)
Proceeds from disposals of equipment 105 69 65
Other (7) (28) (155)
------- ------- -------
Net cash used in investing activities (1,856) (1,737) (1,572)
------- ------- -------
Cash flows from financing activities:
Increase (decrease) in bank overdraft (1,110) 204 (1,874)
(Payments) borrowings under line of credit (175) 4,302 (77)
Payments of term debt and notes payable (1,399) (1,953) (2,554)
Borrowings under equipment loan facility -- -- 750
Issuance of common stock 19 58 75
Repurchase of common stock (1,387) (580) --
------- ------- -------
Net cash provided by (used in)
financing activities (4,052) 2,031 (3,680)
------- ------- -------
Net cash provided by (used in) discontinued
operations 964 (46) 124
------- ------- -------
Net increase (decrease) in cash 67 (1,061) (220)
Cash, beginning of period 1,774 1,841 780
------- ------- -------
Cash, end of period $ 1,841 $ 780 $ 560
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ATLANTIC PREMIUM BRANDS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. BASIS OF PRESENTATION AND DESCRIPTION OF COMPANY:
The accompanying consolidated financial statements present the accounts of
Atlantic Premium Brands, Ltd. and subsidiaries (the Company). All significant
inter-company transactions have been eliminated in consolidation. The Company is
engaged in the processing, marketing and distribution of packaged meat and other
food products in Texas, Louisiana, Oklahoma and surrounding states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
The Company records sales when product is delivered to the customers. Discounts
provided, principally based on volume, are recorded as reductions of sales at
the time of the sale.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in salaries and benefits and other
operating expenses. These costs totaled $3,874, $3,944 and $3,075 for the years
ended December 31, 1999, 2000 and 2001, respectively.
CASH
Cash consists of cash held in various deposit accounts with financial
institutions.
INVENTORY
Inventory is stated at the lower of cost or market and is comprised of raw
materials, finished goods, production parts and packaging supplies. Cost is
determined using the first-in, first-out method. See Note 13 for information
concerning the change in accounting for production parts in 2000.
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 acquisition costs are being
amortized over 5 years. Deferred financing costs are being amortized over 5
to 7 years, representing the term of the related debt, using the effective
interest method.
INTANGIBLE ASSETS
The excess of cost over the fair market value of tangible net assets of acquired
businesses is amortized on a straight-line basis over the period of expected
benefit which is 40 years. Amortization expense for the years ended December 31,
1999, 2000 and 2001 was $366 per year. Additionally, in fiscal 2001 an
adjustment to reduce goodwill by $1,044 was recognized (see Note 16).
Accumulated amortization as of December 31, 2000 and 2001 was $1,680 and $2,046,
respectively. Subsequent to an acquisition, the Company continually evaluates
whether events and circumstances have occurred that indicate the remaining
estimated useful life of an intangible asset may warrant revision or whether the
remaining balance of an intangible asset may not be recoverable. When factors
indicate that an intangible asset should be evaluated for possible impairment,
the Company uses an estimate of the related business' undiscounted future cash
flows over the remaining life of the asset in measuring whether the intangible
asset is recoverable.
F-6
ADVERTISING
Advertising expenditures are expensed in the period in which the advertising
occurs. Advertising expenditures for each of the years ended December 31, 1999,
2000 and 2001 were approximately $2,700 per year.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
INCOME PER COMMON SHARE
Basic income per common share is based upon the weighted-average number of
common shares outstanding. Diluted income per common share assumes the exercise
of all options which are dilutive, whether exercisable or not. The dilutive
effect of stock options is measured under the treasury stock method.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use nor hold derivative positions for trading purposes. In
1998, however, the Company entered into a derivative financial instrument in
connection with the issuance of put warrants to purchase shares of common stock.
On January 1, 2001, the Company was required to adopt the provisions of
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("the Statement"). On adoption of the
Statement, the Company recorded a cumulative effect of change in accounting
principle of $1,402 (net of zero income taxes) to reduce the carrying value of
the liability related to the put warrants to fair value. Subsequent changes in
the fair value of the put warrants estimated using the Black-Scholes option
valuation model have been and will be recorded as components of net income.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," supersedes APB Opinion No. 16, "Business Combinations" and SFAS
No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises".
All business combinations in the scope of this statement are to be accounted for
using the purchase method. The provisions of this statement apply to all
business combinations initiated after June 30, 2001, as well as all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. The Company will apply this statement to
any acquisitions occurring after July 1, 2001.
SFAS No. 142, "Goodwill and Other Intangible Assets," which supersedes APB
Opinion No. 17, "Intangible Assets," establishes financial accounting and
reporting standards for acquired goodwill and other intangible assets. SFAS No.
142 is effective for fiscal years beginning after December 15, 2001. The
Company's intangible assets represent principally deferred financing costs and
goodwill from businesses acquired. The Company is evaluating the new statement's
provisions to assess the impact on its consolidated results of operations and
financial position. The Company plans to adopt the new standard in fiscal year
2002 as required.
SFAS No. 144, "Accounting for the Impairment and the Disposal of Long-Lived
Assets," addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", it retains many of the fundamental provisions of that
Statement. SFAS No. 144 also supersedes the accounting and reporting provisions
of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business. However, it retains the requirement in Opinion 30 to report
separately discontinued operations and extends that reporting to a component of
an entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The Company is in the process of evaluating the
impact the adoption of SFAS No. 144 may have on the financial statements;
however, such impact, if any, is not known or reasonably estimable at this time.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value-based method of accounting for its fixed
plan stock options. As such, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeds the
exercise price.
F-7
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID CASH PAID
FOR TAXES FOR INTEREST
Year ended December 31, 1999
Related parties $ -- $ 200
Other 974 2,045
Year ended December 31, 2000
Related parties -- 215
Other 373 2,320
Year ended December 31, 2001
Related parties -- 262
Other 114 1,937
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform to the current year's presentation.
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. The loss from discontinued operations for the
years ended December 31, 1999 and 2000 in the amounts of $72 and $153,
respectively, relate to current assets that were determined not to be
realizable.
4. INVENTORY:
Inventory consisted of the following as of December 31:
2000 2001
---- ----
Raw materials $ 662 $ 343
Finished goods 2,712 3,077
Packaging supplies 1,582 1,348
Production parts 497 523
------ ------
Total $5,453 $5,291
====== ======
F-8
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment as of December 31, 2000 and 2001 are summarized as
follows:
2000 2001
-------- --------
Land $ 664 $ 664
Buildings and building improvements 6,627 7,277
Equipment and furniture 5,493 6,468
Leasehold improvements 507 507
Vehicles 2,242 2,325
Construction in process 524 82
-------- --------
16,057 17,323
Less - accumulated depreciation and amortization (4,764) (6,171)
-------- --------
Property, plant and equipment, net $ 11,293 $ 11,152
======== ========
Depreciation expense for the years ended December 31, 1999, 2000 and 2001 was
$1,563, $1,760 and $1,555, respectively.
6. OTHER ASSETS:
Other assets are comprised of the following as of December 31, 2000 and 2001:
2000 2001
---- ----
Deferred financing and acquisition costs, and
other intangible assets $ 572 $ 715
Cash surrender value of life insurance and other assets 121 130
----- -----
693 845
Less - accumulated amortization (376) (528)
----- -----
Other assets, net $ 317 $ 317
===== =====
Amortization of deferred financing and acquisition costs, and other intangible
assets of $129, $133, and $152 has been included within depreciation and
amortization expense in the accompanying consolidated statements of operations
for the years ended December 31, 1999, 2000, and 2001, respectively.
7. SIGNIFICANT SUPPLIERS AND CUSTOMERS:
For the year ended December 31, 1999, a single supplier provided approximately
17% of the Company's total product purchases. A single customer accounted for
approximately 43% of the Company's net sales.
For the year ended December 31, 2000, two suppliers provided approximately 12%
and 11%, respectively, of the Company's total product purchases. A single
customer accounted for approximately 30% of the Company's net sales.
For the year ended December 31, 2001, two suppliers provided approximately 16%
and 11%, respectively, of the Company's total product purchases. A single
customer accounted for approximately 14% of the Company's net sales.
F-9
8. INCOME TAXES:
Income tax (expense) benefit for the years ended December 31, 1999, 2000 and
2001, was allocated as follows:
1999 2000 2001
------- ------- -------
Income tax expense of continuing operations $(1,086) $ (125) $(2,009)
Income tax benefit included in loss from discontinued operations -- 73 --
------- ------- -------
$(1,086) $ 52 $(2,009)
======== ======= ========
Income tax (expense) benefit of continuing operations consisted of the
following:
1999 2000 2001
--------- ------- -------
Current:
Federal $ (853) $ 141 $ --
State (190) (160) (282)
Deferred:
Federal (38) (85) (1,616)
State (6) (21) (111)
------- ------ -------
Income tax expense of continuing
operations $(1,086) $ (125) $(2,009)
======= ====== =======
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 2000 and 2001 are
presented below:
2000 2001
------- -------
Deferred tax assets attributable to:
Net operating loss carryforwards $ 543 $ 654
Inventory 65 78
Accrued expenses 87 69
Accounts receivable 81 79
Other 397 363
------- -------
Deferred tax assets 1,173 1,243
------- -------
Deferred tax liabilities attributable to:
Property, plant and equipment 448 522
Net gain from insurance settlement -- 1,715
Other 249 211
------- -------
Deferred tax liabilities 697 2,448
------- -------
Net deferred tax assets (liabilities) $ 476 $(1,205)
======= =======
F-10
As of December 31, 2001, the Company has approximately $1,290 of net operating
loss carryforwards for tax purposes, expiring through 2011.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities and projected future taxable
income in making this assessment. Based upon the level of projected future
taxable income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize the
benefits of these deductible differences at December 31, 2001. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the net operating loss
carryforward periods are reduced.
The items which gave rise to differences between income tax expense of
continuing operations and income taxes computed at the Federal statutory rate
are summarized below:
1999 2000 2001
---- ---- ----
Statutory Federal income tax rate 34.0% (34.0)% 34.0%
State income taxes, net of
Federal income tax effect 5.5 20.4 6.8
Nondeductible amortization of goodwill 7.1 26.0 10.3
Other (0.3) 4.7 1.9
---- ---- ----
Total 46.3% 17.1% 53.0%
==== ==== ====
F-11
9. DEBT:
Long-term debt as of December 31, 2000 and 2001, consisted of the following:
2000 2001
-------- --------
Subordinated promissory note to former
shareholders of Prefco, bearing interest
at 11% annually, 9% payable in quarterly
installments and 2% payable
when the principal is paid $ 1,400 $ 1,400
Subordinated promissory note to former shareholder
of Richard's, bearing interest at 8.35%
annually, 6.35% payable in quarterly installments
and 2% payable when the principal is paid 875 875
Subordinated promissory note to former
shareholders of Grogan's, bearing interest at 10%
annually, 8% payable in quarterly installments and
2% payable when the principal is paid 200 200
Subordinated promissory note to former
shareholders of Partin's, bearing interest
at 8% annually, payable in quarterly installments
The principal and any outstanding interest is due in
December 2003 225 225
Senior subordinated note bearing interest at 15% annually,
with 10% payable in monthly installments and 5% payable
on June 30, 2003. Principal due in quarterly installments
beginning June 30, 2003, with all remaining outstanding
principal and interest due March 31, 2005 6,500 6,500
Term note bearing interest at prime rate plus 1% or
adjusted LIBOR plus 2.5%, principal due in varying
amounts payable monthly through March 2003 7,194 4,934
Capital lease obligations and other 758 1,214
-------- --------
Total 17,152 15,348
Less: Current maturities (4,882) (5,127)
Unamortized debt discount (905) (660)
-------- --------
Long-term debt, net of current maturities and
unamortized debt discount $ 11,365 $ 9,561
======== ========
The future maturities of long-term debt as of December 31, 2001, are as follows:
2002 $ 5,127
2003 5,264
2004 3,896
2005 1,061
------
$15,348
=======
F-12
The Company's debt consists of an $11,000 term note, a $15,000 line of credit
and $6,500 senior subordinated note with detachable warrants with a put option.
The 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 substantially all assets of the
Company. The balance at December 31, 2001 was $4.9 million.
Under the terms of the line of credit agreement, which expires in March 2003,
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. 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 substantially all the assets of the Company.
The weighted average interest rates related to the line of credit existing at
December 31, 2000 and 2001, were 10.3% and 8.0%, respectively. As of December
31, 2001, approximately $525 of standby letters of credit were outstanding under
the line of credit facility.
The $6,500 million senior subordinated note, maturing on March 31, 2005, bears
interest at 15% per annum. A loan amendment dated April 13, 2001, and effective
January 17, 2001, increased the interest rate by 5% to 15% per annum. This
incremental amount of interest is accrued on a periodic basis and will be
payable on June 30, 2003. The other 10% of interest cost is paid monthly.
Principal is payable in quarterly installments beginning June 30, 2003.
Concurrent with the signing of the loan amendment, an entity owned by some of
our directors, officers and 5% stockholders agreed to purchase 10% of the senior
subordinated debt holder's interest in the senior subordinated notes and the
related warrants.
The senior subordinated note was issued with detachable warrants with a put
option to purchase 666,947 shares of nonvoting common stock at $3.38 per share
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 were recorded at an estimated fair value
of $1.435 million and the related discount on the senior subordinated note was
recorded for the same amount. This discount is being amortized over the seven
year term of the note as additional interest expense. Amortization of the debt
discount was $246, $250 and $245 for the years ended December 31, 1999, 2000 and
2001, respectively.
Junior subordinated notes in the principal amounts of $1,400, $875 and $200 were
due on March 31, 2001, July 31, 2001 and September 30, 2001 respectively, but
were not paid because of restrictive covenants under the credit facilities.
Payment on each of these notes will be made when such payment will not violate
the covenants under the other credit facilities. Under the terms of an
inter-creditor subordination agreement, the junior subordinated debt holders are
prohibited from exercising any remedy with respect to this debt until the
obligations under the credit facilities are paid in full; however, the interest
rates of 9%, 6.35% and 8%, respectively, on these notes were increased by 2% per
annum after their respective due dates.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts reported in the Consolidated Balance Sheets for accounts
receivable and accounts payable approximate fair value because of the short
maturity of those instruments.
Fair value of the Company's long-term debt is estimated using discounted cash
flow analyses, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements. The aggregate face value of the
Company's long-term debt as of December 31, 2000 and 2001, was $17,152 and
$15,348, respectively. The face amount of the Company's long-term debt
approximated its fair value as of December 31, 2000 and 2001.
F-13
11. INCOME PER COMMON SHARE:
The weighted average shares used to calculate basic and diluted income per
common share for the years ended December 31, 1999, 2000 and 2001 are as
follows:
1999 2000 2001
--------- --------- ---------
Weighted average shares outstanding
for basic income per common share 7,054,284 6,707,908 6,671,451
Dilutive effect of stock options 139,464 -- 37,620
--------- --------- ---------
Weighted average shares outstanding
for diluted income per common share 7,193,748 6,707,908 6,709,071
========= ========= =========
As a result of the loss from continuing operations for the year ended December
31, 2000, the impact of options with an exercise price that was less than the
average weighted market price of the common stock during the year was excluded
due to their antidilutive effect.
Options to purchase 1,199,659, 1,722,042 and 1,654,718 shares of common stock at
prices ranging from $1.50 to $6.50 per share were outstanding during 1999, 2000
and 2001, respectively, but were not included in the computation of diluted
income per common share because the options' exercise price was greater than the
average weighted market price of the common stock during the year.
Put warrants to purchase up to a maximum of 1,095,700 shares of common stock at
$3.38 per share were outstanding as of December 31, 1999, 2000 and 2001, but
were not included in the computation of diluted income per common share because
the warrants' exercise price was greater than the weighted average market price
of the common stock during the year.
12. STOCK OPTIONS:
Prior to April 1999, the Company had a stock option plan (the Old Plan) and a
Director's stock option plan (the Director Plan). In April 1999, the Company
adopted a 1999 Amended and Restated Stock Option Plan (the Option Plan), which
amended and restated both the Old Plan and the Director Plan into the Option
Plan. The Option Plan authorizes the Company to grant, to eligible individuals,
options for the purchase of shares of the Company's common stock.
Under the terms of the Option Plan, the Company may issue up to 3,000,000
options to directors, officers, advisors, full-time employees and other eligible
individuals. In general, the option exercise price equals the stock's market
price on the date of grant and the options vest during periods of up to ten
years. Under the terms of the Option Plan, the Company issues 10,000 options to
eligible outside directors at the beginning of each year of service. These
options vest quarterly over one year. No compensation expense was recognized for
the issuance of options under the Old Plan, the Director Plan or the Option Plan
during 1999, 2000 and 2001.
The Company has elected to account for its stock-based compensation plans using
the intrinsic value method. The Company has computed for pro forma disclosure
purposes the value of all options granted subsequent to 1995, using the
Black-Scholes option pricing model; the following assumptions were used for
option grants:
1999 2000 2001
---------- ---------- ----------
Risk-free interest rate (range) 5.56%-5.75% 5.35%-6.25% 3.90-5.35%
Expected dividend yield 0.00% 0.00% 0.00%
Expected lives 5-6 years 5-6 years 5-6 years
Expected volatility 53% 51.5% 51.5%
F-14
Adjustments were made for options forfeited prior to vesting. Had compensation
expense for this plan been determined based on the fair value at the grant date,
the Company's net income (loss) and income (loss) per common share reflected on
the accompanying consolidated statements of operations would have been reduced
to the following pro forma amounts:
1999 2000 2001
---- ---- ----
Net income (loss):
As reported $1,189 $(868) $ 3,186
Pro forma 848 (1,043) 2,943
Basic income (loss) per common share:
As reported .18 (0.13) 0.48
Pro forma .12 (0.16) 0.44
Diluted income (loss) per common share:
As reported .18 (0.13) 0.47
Pro forma .12 (0.16) 0.44
The following table summarizes option activity and related information.
1999 2000 2001
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding, beginning
of year 1,653,192 $3.01 1,704,659 $2.66 1,722,042 $2.57
Granted 310,571 2.33 113,000 2.05 235,000 1.19
Exercised - - - - - -
Forfeited or expired (259,104) 4.36 (95,617) 2.74 (17,324) 2.74
--------- ----- --------- ----- --------- -----
Outstanding, end
of year 1,704,659 $2.66 1,722,042 $2.57 1,939,718 $2.40
========= ===== ========= ===== ========= =====
Exercisable, end
of year 1,136,852 $2.39 1,236,363 $2.46 1,630,639 $2.39
Weighted average
fair value of
options granted $ .88 $1.37 $ .79
AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE
EXERCISE OPTIONS CONTRACTUAL LIFE EXERCISE
PRICES OUTSTANDING (IN YEARS) PRICE
- ------------- ----------- ----------------- --------
$0.88 - 1.50 555,000 7.6 $1.33
$1.51 - 3.00 1,101,268 6.3 $2.59
$3.01 - 4.50 254,500 6.2 $3.49
$4.51 - 6.00 950 3.5 $4.63
$6.01 - 7.50 28,000 3.5 $6.50
- ------------- ----------- ----------------- --------
$0.88 - 7.50 1,939,718
============ ===========
The Company has a Retirement Savings Plan (401(k) plan) whereby employees may
contribute up to the limits established by the Internal Revenue Service.
Matching contributions are made by the Company equal to 50% of employee
contributions, subject to certain limitations. The Company's matching
contributions during 1999, 2000 and 2001 were $208, $235 and $194, respectively.
During 1997, the Company approved an Employee Stock Purchase Plan (the Stock
Purchase Plan). The Stock Purchase Plan qualified as an employee stock purchase
plan under Section 423 of the Internal Revenue Code. All regular full-time
employees, as defined, of the Company (including officers) are eligible to
participate in the Stock Purchase Plan. Directors who are not employees are not
eligible. A maximum of 250,000 shares of the Company's common stock is reserved
for issuance under the Stock Purchase Plan. The Stock Purchase Plan allows the
eligible employees to purchase common stock of the Company, through payroll
deductions, at a discounted price from the market price. The exercise price
under the plan is 85% of the lesser of the market value of the Company's common
stock on two defined dates during the plan year.
13. CHANGES IN ACCOUNTING PRINCIPLES:
During the year ended December 31, 2000, the Company changed its method of
accounting for production parts inventory from expensing upon purchase to
capitalization upon purchase and expensing upon installation. In prior years,
the Company had a low level of production parts inventory on hand. However, as
production capacity increased, as well as the necessity of reducing equipment
down-time, the Company chose to maintain a larger amount of production parts
inventory. Accordingly, the Company believes that the capitalization of
production parts inventory results in a better measurement of operating results
by expensing production parts at the time they are placed into service and start
generating revenues. The $141 cumulative effect of the change is included in the
Consolidated Statement of Operations for the year ended December 31, 2000.
F-15
On January 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("the Statement"). On adoption of the Statement, the Company
recorded a cumulative effect of change in accounting principle in the amount of
$1,402 (net of zero income taxes). The cumulative effect of change in accounting
principle was recorded to reduce the carrying value of the liability related to
the put warrants to fair value. The fair value of the warrants is estimated
using a Black-Scholes option-valuation model. Subsequent changes in the fair
value of the put warrants are recorded as a component of net income. The Company
does not have any other derivative instruments.
14. COMMITMENTS:
OPERATING LEASES
The Company leases warehouses, office buildings and most of its delivery
vehicles under operating leases. These leases have remaining terms ranging from
one to five years. Rental expense under these leases for the years ended
December 31, 1999, 2000 and 2001 was $1,734, $1,648 and $1,263, respectively. As
of December 31, 2001, future minimum lease payments under these operating leases
are as follows:
2002 $ 955
2003 165
2004 100
2005 23
2006 and thereafter -
------
$1,243
======
It is expected that in the normal course of business most leases that expire
will be renewed or replaced by leases on the same or similar properties; thus,
it is anticipated that future annual rent expense will not be materially less
than the amount shown for 2001.
15. RELATED PARTY TRANSACTIONS:
The Company had a consulting agreement (the Agreement) with Elfman Venture
Partners, Inc. and Sterling Advisors L.P., a partnership owned by certain
stockholders of the Company (the Managers). The term of the Agreement was
through December 31, 2001. The Agreement provided that the Company would pay a
base fee of $300 per year, which would increase 5% for each year the Agreement
remained in effect. The Agreement also stipulated adjustments to the base fee
for future acquisitions or sales. During each year the Agreement was in effect,
the Company was also required to grant options to purchase 25,000 shares of the
Company's $.01 par value common stock. Such options vested on each December 31
at an exercise price equal to the market price on the preceding January 1.
The Agreement was amended effective July 1, 1997 in connection with the J.C.
Potter Sausage Company (Potter) Acquisition. This amendment (the Potter
Amendment) provided for an aggregate payment to the Managers of $750 for
services provided in connection with the Potter acquisition and the related
financing, in lieu of all other fees that would have been payable under the
Agreement for the period July 1, 1997 through December 31, 1998.
The Agreement was further amended effective as of December 1, 1998 in connection
with the Beverage Division disposition (see Note 3). This amendment (the
Beverage Amendment) provided for an aggregate payment to the Managers of $260
for services provided in connection with the disposition of the Beverage
Division, in lieu of all other base fees that would have been payable under the
Agreement for the period from January 1, 1999 through July 15, 1999.
Subsequent to July 15, 1999, and up until October 1, 2000, there was no
agreement in place. As of October 1, 2000, the Company entered into a Management
Agreement (the Second Agreement) with Sterling Advisors, L.P. (Sterling), which
was subsequently rescinded in connection with the amendment to the senior
subordinated note dated April 13, 2001 (See Note 9). No expenses were incurred
nor payments made to Sterling under the Second Agreement.
Also in connection with the amendment dated April 13, 2001 to the senior
subordinated note, Sterling BOCP, LLC, an entity owned by certain directors and
stockholders of the Company, purchased a 10% interest in the senior subordinated
note, including a corresponding 10% interest in the detachable put warrants
which were issued in connection with the senior subordinated note.
F-16
16. GROGAN'S FIRE and GOODWILL ADJUSTMENT:
On October 13, 2000, the Grogan's manufacturing plant located in Arlington,
Kentucky was totally destroyed by fire and the impacted assets' net book value
of $1,200 was written off. At December 31, 2000, the Company recorded a $1,400
receivable from the insurance carrier for the net book value of the plant and
equipment destroyed plus other related costs incurred. During fiscal 2001, the
insurance settlement on the building and equipment destroyed in the fire was
finalized at $6,800 and the Company recorded a pretax gain, net of costs
incurred, in the amount of $4,800. The Company has collected $1,800 of the
settlement as of December 31, 2001 and recorded a receivable in the amount of
$5,000 which is included in prepaid expenses and other assets at December 31,
2001. This amount was subsequently collected in February 2002. Additionally, the
Company has outstanding claims for inventory destroyed, continuing expenses,
business interruption and other coverages which are in process. Based on
communications with the insurance carrier, management and its insurance
consultants believe, with reasonable certainty, that the Company will receive at
least $750 in insurance proceeds related to such claims. The receivable for the
anticipated proceeds of $750 is included in prepaid expenses and other current
assets.
As a result of the fire, the Company began to explore its options relative to
the Grogan's business. The Company made the decision to divest the Grogan's
business which consisted of certain intangible assets, accounts receivable,
inventory, fixed assets, and certain liabilities. In connection with this
decision, the Company performed a review of the goodwill associated with the
Grogan's business for possible impairment. The Company estimated its future cash
flows from the sale of the business and compared the future cash flows to the
carrying value of the goodwill. The future cash flows utilized in this analysis
were realized upon the sale of the Grogan's business in February 2002. This
analysis resulted in the write-down of goodwill in the amount of $1,044, which
is classified as Goodwill adjustment in the accompanying statement of operations
for the year ended December 31, 2001.
17. BUSINESS SEGMENT INFORMATION:
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 sausage and related food products to distributors and
retailers in Oklahoma, Louisiana, Texas, and other surrounding states. The food
distribution segment includes the purchasing, marketing and distribution of
packaged meat products to retailers and restaurants, primarily in Texas.
Summarized financial information, by business segment, for continuing operations
in 1999, 2000 and 2001 is as follows (corporate overhead not specifically
associated with a segment has been presented separately):
F-17
1999 2000 2001
Net sales:
Food processing $ 59,861 $ 71,637 $ 72,560
Food distribution 147,791 119,960 75,737
-------- -------- --------
$207,652 $191,597 $148,297
======== ======== ========
Depreciation and amortization:
Food processing $ 1,732 $ 1,847 $ 1,676
Food distribution 264 277 240
-------- -------- --------
$ 1,996 $ 2,124 $ 1,916
======== ======== ========
Interest expense:
Food processing $ 128 $ 156 $ 152
Food distribution 130 130 151
-------- -------- --------
$ 258 $ 286 $ 303
======== ======== ========
Income from continuing
operations before income taxes:
Food processing $ 4,204 $ 2,296 $ 7,010
Food distribution 2,531 2,598 1,888
-------- -------- --------
$ 6,735 $ 4,894 $ 8,898
======== ======== ========
Capital expenditures:
Food processing $ 1,791 $ 1,712 $ 1,465
Food distribution 137 61 -
-------- -------- --------
$ 1,928 $ 1,773 $ 1,465
======== ======== ========
Segment assets:
Food processing $ 27,510 $ 29,971
Food distribution 11,631 10,322
-------- --------
$ 39,141 $ 40,293
======== ========
Inter-segment sales and related receivables and payables among the segments
during 1999, 2000, and 2001, for the purpose of this presentation, have not been
eliminated.
F-18
The following are reconciliations of reportable segment revenues, profit or
loss, assets, and other significant items to the Company's consolidated totals:
1999 2000 2001
Net sales:
Total for reportable
segments $ 207,652 $ 191,597 $ 148,297
Elimination of inter-segment
net sales (10,654) (13,854) (13,708)
--------- --------- ---------
Total consolidated net sales $ 196,998 $ 177,743 $ 134,589
========= ========= =========
Depreciation and amortization:
Total for reportable
segments $ 1,996 $ 2,124 $ 1,916
Corporate 127 134 157
--------- --------- ---------
Consolidated depreciation
and amortization $ 2,123 $ 2,258 $ 2,073
========= ========= =========
Interest expense
Total for
reportable segments $ 258 $ 286 $ 303
Corporate 2,233 2,502 2,140
--------- --------- ---------
Consolidated interest expense $ 2,491 $ 2,788 $ 2,443
========= ========= =========
Income from continuing
operations before income taxes:
Total for reportable
segments $ 6,735 $ 4,894 $ 8,898
Corporate (4,388) (5,625) (5,105)
--------- --------- ---------
Total consolidated income
from continuing operations $ 2,347 $ (731) $ 3,793
========= ========= =========
Capital expenditures:
Total for
reportable segments $ 1,928 $ 1,773 $ 1,465
Corporate 26 5 17
--------- --------- ---------
Consolidated capital
expenditures $ 1,954 $ 1,778 $ 1,482
========= ========= =========
Assets:
Total for reportable
segments $ 39,141 $ 40,293
Corporate 2,266 1,571
Net assets of discontinued
operations 124 --
--------- ---------
Consolidated total assets $ 41,531 $ 41,864
========= =========
F-19
18. 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.
19. ACCRUED EXPENSES:
Accrued expenses consist of the following at December 31:
2000 2001
Compensation and benefits $ 816 $ 783
Other 905 1,505
------ -------
Total $1,721 $ 2,288
====== =======
F-20
20. QUARTERLY FINANCIAL DATA (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE
DATA):
Quarter Ended
-------------
2000 March 31 June 30 September 30 December 31
- ---- -------- ------- ------------ -----------
Net sales ...................... $ 51,491 $ 54,434 $ 39,751 $ 32,067
======== ======== ======== ========
Gross profit ................... $ 6,563 $ 5,948 $ 5,788 $ 6,436
======== ======== ======== ========
Income (loss) from continuing
operations .................... $ 216 $ (206) $ (495) $ (371)
Loss from discontinued
operations .................... -- -- (114) (39)
Change in accounting principle . 141 -- -- --
-------- -------- -------- --------
Net income (loss) .............. $ 357 $ (206) $ (609) $ (410)
======== ======== ======== ========
Weighted average shares:
Basic ........................ 6,812 6,751 6,633 6,708
Effect of stock options ...... 201 -- -- --
-------- -------- -------- --------
Diluted ...................... 7,013 6,751 6,633 6,708
======== ======== ======== ========
Basic income (loss) per share:
Continuing operations ........ $ .03 $ (.03) $ (.07) $ (.06)
Discontinued operations ...... -- -- (.02) (.00)
Change in accounting principle .02 -- -- --
Net income (loss) ............ $ .05 $ (.03) $ (.09) $ (.06)
Diluted income (loss) per share:
Continuing operations ........ $ .03 $ (.03) $ (.07) $ (.06)
Discontinued operations ...... -- -- (.02) (.00)
Change in accounting principle .02 -- -- --
Net income (loss) ............ $ .05 $ (.03) $ (.09) $ (.06)
Quarter Ended
-------------
2001 March 31 June 30 September 30 December 31
- ---- -------- ------- ------------ -----------
Net sales ....................... $ 31,277 $ 33,491 $ 34,804 $ 35,017
======== ======== ======== ========
Gross profit .................... $ 6,023 $ 5,439 $ 5,350 $ 7,179
======== ======== ======== ========
Income from continuing operations $ 81 $ 1,109 $ (266) $ 860
Change in accounting principle .. 1,402 -- --
-------- -------- -------- --------
Net income ...................... $ 1,483 $ 1,109 $ (266) $ 860
======== ======== ======== ========
Weighted average shares:
Basic ......................... 6,659 6,659 6,659 6,671
Effect of stock options ....... 32 32 -- 38
-------- -------- -------- --------
Diluted ....................... 6,691 6,691 6,659 6,709
======== ======== ======== ========
Basic income (loss) per share:
Continuing operations ......... $ .01 $ .17 $ (.04) $ .13
Change in accounting principle .21 -- -- --
Net income (loss) ............. $ .22 $ .17 $ (.04) $ .13
Diluted income (loss) per share:
Continuing operations ......... $ .01 $ .17 $ (.04) $ .13
Change in accounting principle .21 -- -- --
Net income (loss) ............. $ .22 $ .17 $ (.04) $ .13
The sum of the quarterly income per share amounts do not equal the annual income
per share amount due to rounding.
F-21
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation of Atlantic Premium Brands, Ltd. (the
"Company"), including all amendments thereto (1)
3.2 By-Laws of the Company (1)
4.1 Specimen Stock Certificate (1)
4.2 $1.4 million Subordinated Note made by ABEV Acquisition Corp. in
favor of Franklin Roth and Allen Pauly (3)
4.3 6.35% Subordinated Non-Negotiable Promissory Note due July 31, 2001
made by Richard's Cajun Foods Corp. and the Company in favor of J.L.
Richard in the original principal amount of $850,000 (4)
4.4 8% Subordinated Non-Negotiable Promissory Note due September 30,
2001 made by Grogan's Merger Corp. in favor of Bobby L. Grogan and
Betty R. Grogan in the original principal amount of $219,593 (4)
4.5 8% Subordinated Non-Negotiable Promissory Note due December 31, 2003
made by Grogan's Farm, Inc. in favor of Jefferson Davis and Roger
Davis in the original principal amount of $219,593 (4)
4.6 Secured Promissory Note dated as of March 20, 1998 of the Company
and certain of its subsidiaries payable to Fleet Capital Corporation
in the original principal amount of $11,000,000 (4)
4.7 Loan and Security Agreement dated as of March 20, 1998 among Fleet
Capital Corporation, the Company and certain of its subsidiaries (4)
4.8 First Amendment to Loan and Security Agreement dated as of December
20, 1999 among Fleet Capital Corporation, the Company and certain of
its subsidiaries (9)
4.9 Second Amendment to Loan and Security Agreement dated as of April
13, 2001 among Fleet Capital Corporation, the Company and certain of
its subsidiaries (9)
4.10 Stock Pledge Agreement dated as of March 20, 1998 between the
Company and Fleet Capital Corporation (4)
4.11 Atlantic Premium Brands, Ltd. and Subsidiaries Senior Subordinated
Note and Warrant Purchase Agreement dated as of March 20, 1998 among
the Company, certain of its subsidiaries and Banc One Capital
Partners, LLC ("Banc One") (4)
4.12 Limited Waiver of Covenants Under and Amendment to Senior
Subordinated Note and Warrant Purchase Agreement dated as of April
13, 2001 among the Company, certain of its subsidiaries and Banc One
(9)
4.13 Note and Warrant Purchase Agreement dated as of April 13, 2001 among
the Company, certain of its subsidiaries, Banc One, Sterling BOCP,
LLC ("Sterling") and Fleet Capital Corporation (9)
4.14 Intercreditor and Collateral Agency Agreement dated April 13, 2001
among Banc One, Sterling, the Company and certain of its
subsidiaries (9)
4.15 Senior Subordinated Note due March 31, 2005 of the Company payable
to Banc One dated as of April 13, 2001 in the original principal
amount of $5,850,000 (9)
4.16 Senior Subordinated Note due March 31, 2005 of the Company payable
to Sterling dated as of April 13, 2001 in the original principal
amount of $650,000 (9)
4.17 Atlantic Premium Brands, Ltd. Amended and Restated Warrant
Certificate Common Stock Purchase Warrant of Banc One dated as of
February 1, 2002 (*)
4.18 Atlantic Premium Brands, Ltd. Warrant Certificate Common Stock
Purchase Warrant to Sterling dated as of April 13, 2001 (9)
4.19 Atlantic Premium Brands, Ltd. Amended and Restated Warrant
Certificate Contingent Common Stock Purchase Warrant of Banc One
dated as of February 1, 2002 (*)
4.20 Atlantic Premium Brands, Ltd. Warrant Certificate Contingent Common
Stock Purchase Warrant of Sterling dated as of April 13, 2001 (9)
4.21 Amended and Restated Put Option Agreement dated as of April 13, 2001
among the Company, Banc One and Sterling (9)
4.22 Amended and Restated Registration Rights Agreement dated as of April
13, 2001 among the Company, Banc One and Sterling (9)
4.23 Amended and Restated Shareholders Agreement dated as of April 13,
2001 among the Company, certain of its shareholders, Banc One and
Sterling (9)
4.24 Amended and Restated Preemptive Rights Agreement dated as of April
13, 2001 among the Company, Banc One and Sterling (9)
4.25 Debt Subordination Agreement dated as of March 20, 1998 among Banc
One Capital Partners, LLC, the Company, certain of its subsidiaries
and Fleet Capital Corporation (4)
4.26 Lien Subordination Agreement dated as of March 20, 1998 between
Fleet Capital Corporation and Banc One Capital Partners, LLC (4)
10.1 Non-Compete and Non-Disclosure Agreement dated September 24, 1993
among the Company, Sterling Group, Inc., Eric D. Becker, Steven M.
Taslitz, Douglas L. Becker and R. Christopher Hoehn-Saric (1)
10.2 Form of Tax Indemnification Agreement (1)
10.3 Stock Purchase Agreement dated April 23, 1999 among the Company and
Bobby L. Grogan and Betty Ruth Grogan (5)
10.4 Atlantic Premium Brands, Ltd. Employee Stock Purchase Plan dated
November 1, 1997 (2)
10.5 The Company's 1999 Amended and Restated Stock Option Plan (6)
10.6 Amended and Restated Employment Agreement dated January 10, 2002
between the Company and Alan. F. Sussna (*).
10.7 Employment Agreement dated as of April 6, 1998 between the Company
and Thomas M. Dalton (7)
10.8 Employment Agreement dated August 10, 1998 between the Company and
Steven Englander (8)
10.9 Employment Agreement dated October 1, 2000 between the Company and
Merrick M. Elfman. (9)
10.10 Management Agreement dated October 1, 2000 by and between the
Company and Sterling Advisors, L.P. (9)
21 Subsidiaries of the Company (*)
23 Consent of KPMG LLP (*)
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*Filed herewith
(1) Filed as an exhibit to the Company's Registration Statement No. 33-69438
or the amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement No. 33-39561
and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Current Report on Form 8-K dated
March 15, 1996, filed with the Securities and Exchange Commission on April
1, 1996, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Current Report on Form 8-K dated May
21, 1999, filed with the Securities and Exchange Commission on May 24,
1999, and incorporated herein by reference.
(6) 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.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-K for the
quarter ended September 30, 1998, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000, and incorporated herein by reference.