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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
June 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 1-13747
ATLANTIC PREMIUM BRANDS, LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3761400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
- ----------------------------------------- -------------------
650 DUNDEE ROAD, SUITE 370
NORTHBROOK, ILLINOIS 60062
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 412-6200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
As of August 12, 2002, there were outstanding 6,734,391 shares of Common Stock,
par value $.01 per share, of the Registrant.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and par value)
(Unaudited)
DECEMBER 31, JUNE 30,
2001 2002
------------ -----------
ASSETS
Current assets:
Cash $ 560 $ 488
Accounts receivable, net of allowance for
doubtful accounts of $208 and $184,
respectively 7,184 6,390
Inventory 5,291 5,808
Prepaid expenses and other current assets 5,982 1,396
------- -------
Total current assets 19,017 14,082
Property, plant and equipment, net 11,152 10,793
Goodwill, net 11,378 10,478
Other assets, net 317 239
------- -------
Total assets $41,864 $35,592
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks outstanding $ 1,293 $ 1,486
Notes payable under line of credit 4,976 1,732
Current maturities of long-term debt 5,127 6,029
Deferred income taxes 742 742
Accounts payable 5,561 4,468
Accrued expenses 2,288 2,230
------- -------
Total current liabilities 19,987 16,687
Long-term debt, net of current maturities 9,561 6,054
Deferred income taxes 463 463
Put warrants 329 261
------- -------
Total liabilities 30,340 23,465
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; 6,734,391 shares issued
and outstanding 67 67
Additional paid-in capital 10,452 10,452
Retained earnings 1,005 1,608
------- -------
Total stockholders' equity 11,524 12,127
------- -------
Total liabilities and stockholders' equity $41,864 $35,592
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
THREE MONTHS ENDED
JUNE 30,
2001 2002
----------- -----------
Net sales $ 33,302 $ 29,927
Cost of goods sold 27,863 23,906
----------- -----------
Gross profit 5,439 6,021
----------- -----------
Selling, general and administrative expenses:
Salaries and benefits 2,417 2,451
Other operating expenses 2,169 2,279
Depreciation and amortization 528 458
----------- -----------
Total selling, general and
administrative expenses 5,114 5,188
----------- -----------
Income from operations 325 833
Other income (expense):
Interest expense (636) (466)
Fair value adjustment to put warrants (34) 263
Other income, net 2,310 20
----------- -----------
Income before income tax expense 1,965 650
Income tax expense 856 199
----------- -----------
Net income $ 1,109 $ 448
=========== ===========
Weighted average common shares:
Basic 6,658,863 6,734,391
=========== ===========
Diluted 6,691,174 7,128,470
=========== ===========
Income per common share
Basic $ .17 $ .07
Diluted $ .17 $ .06
The accompanying notes are an integral part of these consolidated financial
statements.
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share data)
SIX MONTHS ENDED
JUNE 30,
2001 2002
----------- -----------
Net sales $ 64,422 $ 59,955
Cost of goods sold 52,960 47,916
----------- -----------
Gross profit 11,462 12,039
----------- -----------
Selling, general and administrative expenses:
Salaries and benefits 4,891 4,928
Other operating expenses 4,332 4,423
Depreciation and amortization 1,029 896
----------- -----------
Total selling, general and
administrative expenses 10,252 10,247
----------- -----------
Income from operations 1,210 1,792
Other income (expense):
Interest expense (1,295) (960)
Fair value adjustment to put warrants (69) 68
Other income, net 2,305 83
----------- -----------
Income before income tax expense and
change in accounting principle 2,151 983
Income tax expense 961 380
----------- -----------
Income before change in accounting
principle 1,190 603
Change in accounting principle 1,402 -
----------- -----------
Net income $ 2,592 $ 603
=========== ===========
Weighted average common shares:
Basic 6,658,863 6,734,391
=========== ===========
Diluted 6,691,174 7,055,950
=========== ===========
Income per common share:
Basic and diluted:
Income before change in
accounting principle $ .18 $ .09
Change in accounting principle .21 -
----------- -----------
Net income $ .39 $ .09
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
SIX MONTHS ENDED
JUNE 30,
2001 2002
------- -------
Cash flows from operating activities:
Net income $ 2,592 $ 603
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,029 895
Amortization of debt discount and
deferred financing costs 125 104
Change in accounting principle (1,402) -
Fair value adjustment to put warrants 69 (68)
(Increase) decrease in accounts receivable, net (72) 794
Increase in inventory (593) (517)
(Increase) decrease in prepaid expenses and
other current assets (2,397) 4,586
Increase (decrease) in accounts payable 939 (1,093)
Increase (decrease) in accrued expenses and
other current liabilities 1,010 (54)
------- -------
Net cash provided by operating
activities 1,300 5,250
------- -------
Cash flows from investing activities:
Acquisition of property, plant and equipment (940) (564)
Proceeds from disposition of property, plant
and equipment - 1,002
------- -------
Net cash provided by (used in)
investing activities (940) 438
------- -------
Cash flows from financing activities:
Increase (decrease) in bank overdraft (1,196) 193
Net borrowings (repayments) under line of credit 1,853 (3,244)
Payments of term debt and notes payable (1,119) (2,709)
Cost of bank negotiations (143) -
------- -------
Net cash used in financing
activities (605) (5,760)
------- -------
Net decrease in cash (245) (72)
Cash, beginning of period 780 560
------- -------
Cash, end of period $ 535 $ 488
======= =======
These accompanying notes are an integral part of these consolidated financial
statements.
ATLANTIC PREMIUM BRANDS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements present the accounts of
Atlantic Premium Brands, Ltd. and subsidiaries (the "Company"). All significant
intercompany transactions have been eliminated in consolidation. The Company is
engaged in the processing, marketing and distribution of packaged meat and other
food products in Texas, Louisiana, Oklahoma and surrounding states.
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. In management's opinion, the interim financial data
presented includes all adjustments necessary for a fair presentation. Certain
reclassifications have been made in the 2001 financial statements to conform to
the 2002 presentation. Certain information and note disclosures normally
included in annual consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to understand the information
presented. The results of operations for interim periods are not necessarily
indicative of the operating results expected for an entire year. It is suggested
that these consolidated financial statements be read in conjunction with the
Company's December 31, 2001 consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K filed with the Securities
and Exchange Commission on March 29, 2002.
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 (FIFO). Inventory consisted of
the following as of:
DECEMBER 31, JUNE 30,
(in thousands) 2001 2002
------------ --------
Raw materials $ 343 $ 412
Finished goods 3,077 3,582
Packaging supplies 1,348 1,278
Production parts 523 536
------ ------
Total inventory $5,291 $5,808
====== ======
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.
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.
INCOME PER COMMON SHARE
The weighted average shares used to calculate basic and diluted income per
common share for the three-month and six-month periods ended June 30, 2001 and
2002, are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2002 2001 2002
---- ---- ---- ----
Weighted average shares outstanding for
basic income per common share 6,658,863 6,734,391 6,658,863 6,734,391
Dilutive effect of common stock options 32,311 394,079 32,311 321,559
--------- --------- --------- ---------
Weighted average shares outstanding for
dilutive income per common share 6,691,174 7,128,470 6,691,174 7,055,950
========= ========= ========= =========
Options to purchase 1,798,959 and 1,090,268 shares of common stock at prices
ranging from $1.33 to $6.50 per share were outstanding during the second quarter
of 2001 and 2002, respectively, but were not included in the computation of
diluted income per common share because the options' exercise price was greater
than the average market price of the common shares during the quarter.
Warrants with a put option to purchase up to a maximum of 1,095,700 shares of
common stock, as of June 30, 2001 and 2002 at $3.38 per share were outstanding
during the second quarter of 2001 and 2002 but were not included in the
computation of diluted income per common share because the warrants' exercise
price was greater than the average market price of the common shares during the
quarter.
2. CHANGES IN ACCOUNTING PRINCIPLES:
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets. SFAS No. 142
eliminates the amortization of goodwill and indefinite-lived intangible assets,
addresses the amortization of intangible assets with finite lives and addresses
impairment testing and recognition for goodwill and intangible assets. The
Company was required to perform an initial impairment review of goodwill by June
30, 2002 and is required to perform an annual impairment review thereafter. No
impairment charges resulted from the required impairment evaluations. The
decrease in goodwill of $900 for the six months ended June 30, 2002 relates to
the proceeds from the sale of Grogan's assets which were sold in February 2002
and was included in the Company's food processing segment.
The following reflects the impact that SFAS No. 142 would have had on prior year
net income and earnings per common share if adopted in 2001:
Three months Six months
Ended June 30, Ended June 30,
----------------------- -----------------------
2001 2002 2001 2002
--------- --------- --------- ---------
Net income $ 1,109 $ 451 $ 2,592 $ 603
Cease goodwill amortization, net of taxes of $11 and $22 for
the three and six month periods ended June 30, 2001 80 -- 160 --
--------- --------- --------- ---------
Adjusted net income $ 1,189 $ 451 $ 2,752 $ 603
========= ========= ========= =========
Net income per common share - Basic $ .17 $ .07 $ .39 $ .09
Cease goodwill amortization .02 -- .02 --
--------- --------- --------- ---------
Adjusted net income per common share - Basic $ .19 $ .07 $ .41 $ .09
========= ========= ========= =========
Net income per common share - Diluted $ .17 $ .06 $ .39 $ .09
Cease goodwill amortization .01 -- .02 --
--------- --------- --------- ---------
Adjusted net income per common share - Diluted $ .18 $ .06 $ .41 $ .09
========= ========= ========= =========
We assess goodwill for impairment annually unless events occur that require more
frequent reviews. Long-lived assets, including amortizable intangibles, are
tested for impairment if impairment triggers occur. Discounted cash flow
analyses are used to assess nonamortizable intangible impairment while
undiscounted cash flow analyses are used to assess long-lived asset impairment.
If an assessment indicates impairment, the impaired asset is written down to its
fair market value based on the best information available. Estimated fair value
is generally measured with discounted estimated future cash flows.
The useful lives of amortizable intangibles are evaluated periodically, and
subsequent to impairment reviews, to determine whether revision is warranted.
The carrying amount, net of related accumulated amortization of the Company's
amortizable intangibles, which are primarily deferred financing and acquisition
costs, amounted to $291 and $214, respectively, at December 31, 2001 and June
30, 2002. Such amounts are included in other assets in the accompanying
consolidated balance sheets.
In April 2001, the Financial Accounting Standards Board's Emerging Issues Task
Force (EITF) reached a consensus on Issue 2 of Issue No. 00-25, "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products", as codified by EITF 01-9, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)". This
issue addresses the income statement classification of consideration paid from a
vendor to an entity that purchases the vendor's products for resale. The Company
adopted the consensus in the first quarter of 2002. The adoption of this
consensus, including required retroactive adjustment of prior periods, resulted
in a decrease of net sales and a corresponding decrease of cost of goods sold of
$346 for the six months ended June 30, 2001 and $380 for the six months ended
June 30, 2002. The above reclassifications have no impact on gross profit,
income from operations or net income.
On January 1, 2002 the Company adopted SFAS No. 144, "Accounting for the
Impairment and the Disposal of Long-Lived Assets", which 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" (APB No. 30), for the disposal of a segment of a business.
However, it retains the requirement in APB No. 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. The adoption of SFAS No. 144 did not
have any impact on the Company's financial statements.
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 SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". On adoption
of SFAS No. 133, 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 recorded as components of net income.
3. GROGAN'S FIRE:
On October 13, 2000, the Grogan's manufacturing plant located in Arlington,
Kentucky was totally destroyed by fire. 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 had collected $1,800 of the settlement as of
December 31, 2001 and recorded a receivable in the amount of $5,000 which was
included in the 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.
4. 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.
5. DEBT:
The Company's debt consists of an $11,000 term note, a $15,000 line of credit
and a $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.
Under the terms of the line of credit agreement, which expires in March 2003,
the Company is permitted to borrow up to $15,000, 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 assets of the Company.
The $6,500 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 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. The fair value of the warrants is
marked-to-market at the end of each reporting period.
Junior subordinated notes in the principal amount of $1,400, $875 and $190 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 our 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.
6. SEGMENTS:
The Company's operations have been classified into two business segments: food
processing and food distribution. The food processing segment includes the
processing and sales of sausages and related food products to distributors and
retailers in Louisiana, Texas, Oklahoma and other surrounding states. The food
distribution segment includes the purchasing, marketing, and distribution of
packaged meat products to retailers and restaurants, located primarily in Texas.
Summarized financial information, by business segment, for the three months
ended are as follows: (in thousands)
THREE MONTHS ENDED
------------------
JUNE 30, JUNE 30,
2001 2002
-------- --------
Net sales:
Food Processing $ 13,916 $ 12,606
Food Distribution 19,386 17,321
-------- --------
33,302 29,927
======== ========
Interest expense:
Food Processing 41 28
Food Distribution 38 38
Corporate 557 400
-------- --------
636 466
======== ========
Depreciation and amortization:
Food Processing 425 400
Food Distribution 62 17
Corporate 41 41
-------- --------
528 458
======== ========
Income (loss) before income taxes:
Food Processing 2,864(a) 1,115
Food Distribution 411 342
Corporate (1,310) (807)
-------- --------
$ 1,965 $ 650
======== ========
(a) Includes $2.3 million of other income related to the insurance settlement
for the Grogan's fire.
Summarized financial information, by business segment, for the six months ended
are as follows: (in thousands)
SIX MONTHS ENDED
----------------
JUNE 30, JUNE 30,
2001 2002
-------- --------
Net sales:
Food Processing $ 28,126 $ 26,141
Food Distribution 36,296 33,814
-------- --------
64,422 59,955
======== ========
Interest expense:
Food Processing 78 58
Food Distribution 70 77
Corporate 1,147 825
-------- --------
1,295 960
======== ========
Depreciation and amortization:
Food Processing 830 777
Food Distribution 124 36
Corporate 75 83
-------- --------
1,029 896
======== ========
Income before income taxes and change
in accounting principle:
Food Processing 3,773(a) 2,379
Food Distribution 840 799
Corporate (2,462) (2,195)
-------- --------
$ 2,151 $ 983
======== ========
(a) Includes $2.3 million of other income related to the insurance settlement
for the Grogan's fire.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2002 COMPARED TO QUARTER ENDED JUNE 30, 2001
Net Sales. Net sales decreased by $3.4 million or 10.0% from $33.3 million for
the quarter ended June 30, 2001 to $29.9 million for the quarter ended June 30,
2002. The decrease in net sales during the quarter was primarily due to the sale
of the Grogan's business during the first quarter of 2002 and lower selling
prices on many products, which resulted from lower meat prices.
Gross Profit. Gross profit increased by $0.6 million or 11.0% from $5.4 million
for the quarter ended June 30, 2001 to $6.0 million for the quarter ended June
30, 2002. Gross profit as a percentage of net sales increased from 16.0% for the
quarter ended June 30, 2001 to 20.0% for the quarter ended June 30, 2002. The
increase in the gross profit percentage was primarily attributable to the
favorable raw material pricing (i.e., lower hog costs) realized in the second
quarter of 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.1 million or 2.0% from $5.1 million for
the quarter ended June 30, 2001 to $5.2 for the quarter ended June 30, 2002.
Selling, general and administrative expenses as a percentage of net sales
increased from 15.4% for the quarter ended June 30, 2001 to 17.3% for the
quarter ended June 30, 2002. Increases in salaries and other expenses were
offset by the elimination of goodwill amortization and lower selling, general
and administrative expenses due to the sale of the Grogan's business.
Income from Operations. Income from operations increased $0.5 million from $0.3
million for the quarter ended June 30, 2001 to $0.8 million for the quarter
ended June 30, 2002. This increase is attributable to factors discussed above.
Interest Expense. Interest expense decreased $0.1 million from $0.6 million for
the quarter ended June 30, 2001 to $0.5 million for the quarter ended June 30,
2002. This decrease was primarily due to a decrease in the cost of our
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 were
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 quarter ended June 30, 2002, we recorded additional income of $0.3 million
as a fair value adjustment to put warrants.
Other Income. Other income decreased from $2.3 million for the quarter ended
June 30, 2001 to $20 thousand for the quarter ended June 30, 2002. This change
was primarily due
to the recognition of a gain for the excess of the estimated proceeds from the
insurance policy that was carried on the Grogan's facility over the carrying
value of the related property and equipment during the quarter ended June 30,
2001.
Income before Income Taxes and Change in Accounting Principle. Income
before income taxes and change in accounting principle decreased $1.4 million
from $2.0 million for the quarter ended June 30, 2001 to $0.6 million for the
quarter ended June 30, 2002. 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 the fair value
adjustment to the put warrant.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net Sales. Net sales decreased by $4.4 million or 7.0% from $64.4 million for
the six months ended June 30, 2001 to $60.0 million for the six months ended
June 30, 2002. The decrease in net sales during the period was primarily due to
the sale of the Grogan's business during the first quarter of 2002 and lower
selling prices on many products, which resulted from lower meat prices.
Gross Profit. Gross profit increased by $0.5 million or 4.3% from $11.5 million
for the six months ended June 30, 2001 to $12.0 million for the six months ended
June 30, 2002. Gross profit as a percentage of net sales increased from 18.0%
for the six months ended June 30, 2001 to 20.0% for the six months ended June
30, 2002. Both the increase in gross profit dollars and the increase in the
gross profit percentage margin are primarily attributable to the favorable raw
material pricing (i.e., lower hog costs) realized in the first six months of
2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $10.25 million for both the six months ended June
30, 2001 and for the six months ended June 30, 2002. Selling, general and
administrative expenses as a percentage of net sales increased from 15.9% for
the six months ended June 30, 2001 to 17.1% for the six months ended June 30,
2002. The increase in the selling, general and administrative expenses as a
percentage of sales resulted from increases in salaries and fleet operating
expenses which were not entirely offset by the elimination of goodwill
amortization and lower selling, general and administrative expenses due to the
sale of the Grogan's business.
Income from Operations. Income from operations increased $0.6 million from $1.2
million for the six months ended June 30, 2001 to $1.8 million for the six
months ended June 30, 2002. This increase is attributable to the factors
discussed above.
Interest Expense. Interest expense decreased $0.3 million from $1.3 million for
the six months ended June 30, 2001 to $1.0 million for the six months ended June
30, 2002. This
decrease was primarily due to a decrease in the cost of our 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 were
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 six months ended June 30, 2002, we recorded additional income of $0.1
million as a fair value adjustment to put warrants.
Other Income. Other income decreased $2.2 million from $2.3 million for the six
months ended June 30, 2001 to $0.1 million for the six months ended June 30,
2002. This change was primarily due to our recognition of a gain for the excess
of the estimated proceeds from the insurance policy that was carried on the
Grogan's facility over the carrying value of the related property and equipment
during the quarter ended June 30, 2001.
Income Tax Expense. The effective tax rate differs from the statutory rate
primarily because of state income taxes and, for the six months ended June 30,
2001, the non-deductibility of goodwill amortization.
CHANGES IN ACCOUNTING PRINCIPLES
On January 1, 2001, we adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities". Upon our adoption of SFAS No. 133, we recorded a cumulative
effect of change in accounting principle in the amount of $1.4 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. We do not have any
other derivative instruments.
On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 eliminates the amortization of goodwill and
indefinite-lived intangible assets, addresses the amortization of intangible
assets with finite lives and addresses impairment testing and recognition for
goodwill and intangible assets. We were required to perform an initial
impairment review of goodwill, which did not result in any change in the
carrying value of the assets. Goodwill amortization, net of income taxes,
recorded in the quarter and six months ended June 30, 2001 totaled $0.1 million
and $0.2 million, respectively. As a result of the adoption of SFAS No. 142, no
goodwill amortization was recorded in the six months ended June 30, 2002.
IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development and/or normal use of
the assets. The Company also records a corresponding asset, which is depreciated
over the life of the asset. Subsequent to the initial measurement of the asset
retirement obligation, the obligation will be adjusted at the end of each period
to reflect the passage of time and changes in the estimated future cash flows
underlying the obligation. The Company is required to adopt SFAS No. 143 on
January 1, 2003 and does not expect that it will have a material impact on the
financial position or results of operations of the Company.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Prior guidance required
that a liability for an exit cost be recognized at the date of an entity's
commitment to an exit plan. This Statement also establishes that fair value is
the objective for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended June 30, 2001
was $1.3 million. This amount was principally the result of income from
operations, depreciation and amortization, and an increase in accrued expenses
and other current liabilities. This was partially offset by an increase in
inventory and prepaid expenses. Net cash provided by operating activities for
the quarter ended June 30, 2002 was $5.3 million. This amount was principally
the result of income from operations, depreciation and amortization, a decrease
in accounts receivable and a decrease in prepaid expenses and other current
assets resulting from the receipt of insurance proceeds related to the Grogan's
fire. This was partially offset by a decrease in accounts payable.
Cash used in investing activities for the quarter ended June 30, 2001 was $0.9
million, which was related to capital expenditures. Cash provided by investing
activities for the quarter ended June 30, 2002 was $0.4 million, which was
primarily related to the sale of Grogan's. This amount was partially offset by
capital expenditures.
Cash used in financing activities in the quarter ended June 30, 2001 was $0.6
million, principally affected by a decrease in the bank overdraft and payments
of term debt and other notes payable, partially offset by borrowings under the
line of credit. Cash used in financing activities in the quarter ended June 30,
2002 was $5.8 million, and it was principally affected by repayments under the
line of credit and the payments of term debt and other notes payable.
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 June 30, 2001 and 2002, we had outstanding under the Fleet Facility
approximately $6.2 million and $2.4 million, respectively, in term debt and
approximately $6.9 million and $1.7 million, respectively, in line-of-credit
borrowings. We 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. Under the terms of an
amendment to the Senior Subordinated Note dated April 13, 2001 and effective
January 17, 2001, the interest rate was increased from 10% 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 June 30, 2001 and 2002, respectively) or
adjusted LIBOR plus 2.5%, at our option. At June 30, 2002 we had the capacity to
borrow $5.2 million under the Fleet Facility.
In the first six months of 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
has been 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 affected.
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 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 June 30, 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. Our ability to fund our working
capital requirements and capital expenditures, however, 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 quarter
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 in 1998. Commencing on January 1, 2001, we
were 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.
FORWARD LOOKING STATEMENTS
We want to provide stockholders and investors with meaningful and useful
information. Therefore, this Quarterly Report on Form 10-Q 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 the information in Item 1 under the heading "Risk Factors"
in our Annual Report on Form 10-K for the year ended December 31, 2001 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 Quarterly Report on
Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the heading "Quantitative and Qualitative Disclosures About Market
Risk" under Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: The following are filed as Exhibits to this Quarterly
Report on Form 10-Q:
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company, including
all amendments thereto (1)
3.2 By-Laws of the Company (2)
99.1 Certification Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 (*)
- ----------------
(*) Filed herewith.
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement No.
33-69438 or the amendments thereto and incorporated herein by
reference.
(b) Reports on Form 8-K:
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATLANTIC PREMIUM BRANDS, LTD.
Dated as of August 13, 2002 By: /s/ Thomas M. Dalton
--------------------------------
Thomas M. Dalton, Chief
Financial Officer, Chief
Operating Officer and Senior
Vice President (On behalf of
Registrant and as Chief
Accounting Officer)
INDEX TO EXHIBITS
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company, including all amendments
thereto (1)
3.2 By-Laws of the Company (2)
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (*)
- ----------------
(*) Filed herewith.
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement No.
33-69438 or the amendments thereto and incorporated herein by
reference.