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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 September 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 November 8, 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, September 30,
2001 2002
------------ -------------
ASSETS
Current assets:
Cash $ 560 $ 814
Accounts receivable, net of allowance for doubtful accounts
of $208 and $170, respectively 7,184 5,579
Inventory 5,291 5,264
Prepaid expenses and other current assets 5,982 1,268
------- -------
Total current assets 19,017 12,925
Property, plant and equipment, net 11,152 11,039
Goodwill, net 11,378 10,478
Other assets, net 317 207
------- -------
Total assets $41,864 $34,649
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks outstanding $ 1,293 $ 1,853
Notes payable under line of credit 4,976 1,390
Current maturities of long-term debt 5,127 6,257
Deferred income taxes 742 742
Accounts payable 5,561 4,183
Accrued expenses 2,288 2,226
------- -------
Total current liabilities 19,987 16,651
Long-term debt, net of current maturities 9,561 5,217
Deferred income taxes 463 463
Put warrants 329 72
------- -------
Total liabilities 30,340 22,403
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 issued and
outstanding 67 67
Additional paid-in capital 10,452 10,452
Retained earnings 1,005 1,727
------- -------
Total stockholders' equity 11,524 12,246
------- -------
Total liabilities and stockholders' equity $41,864 $34,649
======= =======
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
September 30,
2001 2002
----------- -----------
Net sales $ 34,588 $ 30,313
Cost of goods sold 29,238 24,586
----------- -----------
Gross profit 5,350 5,727
----------- -----------
Selling, general and administrative expenses:
Salaries and benefits 2,457 2,406
Other operating expenses 2,378 2,324
Depreciation and amortization 517 506
----------- -----------
Total selling, general and administrative expenses 5,352 5,236
----------- -----------
Income (loss) from operations (2) 491
Other income (expense):
Interest expense (651) (519)
Fair value adjustment to put warrants 57 189
Other income, net 9 83
----------- -----------
Income (loss) before income taxes (587) 244
Income tax expense (benefit) (321) 125
----------- -----------
Net income (loss) $ (266) $ 119
=========== ===========
Weighted average common shares:
Basic 6,658,863 6,734,391
=========== ===========
Diluted 6,658,863 7,006,626
=========== ===========
Income (loss) per common share
Basic $ (0.04) $ 0.02
Diluted $ (0.04) $ 0.02
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)
Nine Months Ended
September 30,
2001 2002
----------- -----------
Net sales $ 99,010 $ 90,268
Cost of goods sold 82,198 72,502
----------- -----------
Gross profit 16,812 17,766
----------- -----------
Selling, general and administrative expenses:
Salaries and benefits 7,348 7,334
Other operating expenses 6,710 6,747
Depreciation and amortization 1,546 1,402
----------- -----------
Total selling, general and administrative expenses 15,604 15,483
----------- -----------
Income from operations 1,208 2,283
Other income (expense):
Interest expense (1,946) (1,479)
Fair value adjustments to put warrants (12) 257
Other income, net 2,314 166
----------- -----------
Income before income tax expense and
change in accounting principle 1,564 1,227
Income tax expense 640 505
----------- -----------
Income before change in accounting principle $ 924 $ 722
Change in accounting principle 1,402 --
----------- -----------
Net Income $ 2,326 $ 722
=========== ===========
Weighted average common shares:
Basic 6,658,863 6,734,391
=========== ===========
Diluted 6,692,061 7,060,680
=========== ===========
Income per common share:
Basic:
Income before change in
accounting principle $ 0.14 $ 0.11
Change in accounting principle 0.21 --
----------- -----------
Net income $ 0.35 $ 0.11
----------- -----------
Diluted:
Income before change in
accounting principle $ 0.14 $ 0.10
Change in accounting principle 0.21 --
----------- -----------
Net income 0.35 $ 0.10
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
2001 2002
------- -------
Cash flows from operating activities:
Net income $ 2,326 $ 722
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,546 1,402
Amortization of debt discount and deferred
financing costs 190 154
Change in accounting principle (1,402) --
Fair value adjustment to put warrants 12 (257)
Decrease in accounts receivable, net 470 1,605
(Increase) decrease in inventory (524) 27
(Increase) decrease in prepaid expenses and other current assets (2,469) 4,714
Decrease in income taxes receivable 802 --
Decrease in accounts payable (37) (1,378)
(Decrease) increase in accrued expenses and other current liabilities 74 (62)
------- -------
Net cash provided by operating activities 988 6,927
------- -------
Cash flows from investing activities:
Acquisition of property, plant and equipment (1,198) (706)
Investment in plant construction in progress -- (492)
Insurance proceeds related to property, plant and equipment 1,000 --
Proceeds from disposition of plant, property and equipment -- 919
------- -------
Net cash used in investing activities (198) (279)
------- -------
Cash flows from financing activities:
(Decrease) increase in checks outstanding (1,197) 560
Net borrowings (repayments) under line of credit 1,341 (3,586)
Payments of term debt and notes payable (1,789) (3,368)
Proceeds from financing of capital items 750 --
Cost of bank negotiations (143) --
------- -------
Net cash used in financing activities (1,038) (6,394)
------- -------
Net cash used in discontinued operations (6) --
------- -------
Net (decrease) increase in cash (254) 254
Cash, beginning of period 780 560
------- -------
Cash, end of period $ 526 $ 814
======= =======
These accompanying notes are an integral part of these consolidated financial
statements.
ATLANTIC PREMIUM BRANDS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2002
(in thousands, except per share amounts)
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 the 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, September 30,
(in thousands) 2001 2002
----------- ------------
Raw materials $ 343 $ 383
Finished goods 3,077 3,081
Packaging supplies 1,348 1,244
Production parts 523 556
------ ------
Total inventory $5,291 $5,264
====== ======
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 nine-month periods ended September 30, 2001
and 2002, are as follows:
Three Months Ended Nine Months Ended
September 30, September 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 -- 272,235 33,198 326,289
--------- --------- --------- ---------
Weighted average shares outstanding for dilutive
income per common share 6,658,863 7,006,626 6,692,061 7,060,680
========= ========= ========= =========
Options to purchase 1,634,959 and 1,209,268 shares of common stock at prices
ranging from $2.40 to $6.50 per share were outstanding during the third quarter
of 2001 and 2002 respectively, and options to purchase 1,798,859 shares of
common stock at prices ranging from $1.50 to $6.50 per share were outstanding
during the nine months ended September 30, 2001 and September 30, 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 September 30, 2001 and 2002 at $3.38 per share were
outstanding during the third 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 and the nine months ended September 30, 2001 and 2002.
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 nine months ended September 30, 2002
relates to the sale of Grogan's assets which were sold in February 2002 and were
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 Nine months
Ended September 30, Ended September 30,
------------------------ -------------------------
2001 2002 2001 2002
---- ---- ---- ----
Net income (loss) $ (266) $ 119 $ 2,326 $ 722
Cease goodwill amortization, net of taxes of
$28 and $79 for the three and nine month
periods ended September 30, 2001 71 -- 202 --
---------- ---------- ------------ ----------
Adjusted net income (loss) $ (195) $ 119 $ 2,528 $ 722
---------- ---------- ------------ ----------
Net income per common share - Basic $ (0.04) 0.02 $ 0.35 0.11
Cease goodwill amortization 0.01 -- 0.03 --
---------- ---------- ------------ ----------
Adjusted net income per common share - Basic $ (0.03) 0.02 $ 0.38 0.11
Net income per common share - Diluted $ (0.04) 0.02 $ 0.35 0.10
Cease goodwill amortization 0.01 -- 0.03 --
---------- ---------- ------------ ----------
Adjusted net income per common share - Diluted $ (0.03) 0.02 $ 0.38 0.10
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
analysis is used to assess nonamortizable intangible impairment while
undiscounted cash flow analysis is used to assess amortizable intangible assets.
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 $182, respectively, at December 31, 2001 and
September 30, 2002. Such amounts are included in other assets in the
accompanying consolidated balance sheets.
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 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.
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 adjustments of prior periods, resulted
in a decrease of net sales and a corresponding decrease of cost of goods sold of
$562 for the nine months ended September 30, 2001 and $620 for the nine months
ended September 30, 2002. The above reclassifications have no impact on gross
profit, income from operations or net income.
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 was recorded in the fourth quarter of 2001 and are 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 $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 purchased 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 amounts 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 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
---------------------------------------
September 30, 2001 September 30, 2002
------------------ ------------------
Net sales to external customers:
Food Processing $ 14,737 $ 12,832
Food Distribution 19,851 17,481
-------- --------
34,588 30,313
======== ========
Interest expense:
Food Processing 36 30
Food Distribution 39 39
Corporate 576 450
-------- --------
651 519
-------- --------
Depreciation and amortization:
Food Processing 413 445
Food Distribution 61 18
Corporate 43 43
-------- --------
517 506
-------- --------
Income (loss) before income taxes:
Food Processing 342 777
Food Distribution 227 203
Corporate (1,156) (736)
-------- --------
$ (587) $ 244
======== ========
Summarized financial information, by business segment, for the nine months ended
are as follows: (in thousands)
Nine Months Ended
----------------------------------------
September 30, 2001 September 30, 2002
------------------ ------------------
Net sales to external customers:
Food Processing $ 42,863 $ 38,973
Food Distribution 56,147 51,295
--------- ---------
99,010 90,268
========= =========
Interest expense:
Food Processing 114 88
Food Distribution 109 116
Corporate 1,723 1,275
--------- ---------
1,946 1,479
========= =========
Depreciation and amortization:
Food Processing 1,243 1,222
Food Distribution 185 54
Corporate 118 126
--------- ---------
1,546 1,402
========= =========
Income (loss) before income taxes:
Food Processing 4,115(a) 3,156
Food Distribution 1,067 1,002
Corporate (3,618) (2,931)
--------- ---------
$ 1,564 $ 1,227
========= =========
(a) Includes $2.3 million of other income related to the Grogan's fire (see
note 3).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2002 COMPARED TO QUARTER ENDED SEPTEMBER
30, 2001
Net Sales. Net sales decreased by $4.3 million or 12.4% from $34.6
million for the quarter ended September 30, 2001 to $30.3 million for the
quarter ended September 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 $0.3 million or 7.0% from $5.4
million for the quarter ended September 30, 2001 to $5.7 million for the quarter
ended September 30, 2002. Gross profit as a percentage of net sales increased
from 15.5% for the quarter ended September 30, 2001 to 18.9% for the quarter
ended September 30, 2002. The increase in the gross profit percentage was
primarily attributable to the favorable raw material pricing (i.e., lower pork
prices) realized in the third quarter of 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $0.2 million or 2.2% from $5.4 million for
the quarter ended September 30, 2001 to $5.2 for the quarter ended September 30,
2002. Selling, general and administrative expenses as a percentage of net sales
increased from 15.5% for the quarter ended September 30, 2001 to 17.3% for the
quarter ended September 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 (loss) from Operations. Income from operations increased $0.5
million from a loss of $2 thousand for the quarter ended September 30, 2001 to
income of $0.5 million for the quarter ended September 30, 2002. This increase
is attributable to factors discussed above.
Interest Expense. Interest expense decreased $0.2 million from $0.7
million for the quarter ended September 30, 2001 to $0.5 million for the quarter
ended September 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 September 30, 2002, we recorded additional income of $0.2
million as a fair value adjustment to put warrants.
Other Income. Other income increased from $9 thousand for the quarter
ended September 30, 2001 to $83 thousand for the quarter ended September 30,
2002.
Income (loss) before Income Taxes. Income (loss) before income taxes
increased $0.8 million from a loss of $0.6 million for the quarter ended
September 30, 2001 to income of $0.2 million for the quarter ended September 30,
2002. 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, the non-deductibility of the fair value
adjustment to the put warrant, and for the three months ended September 30,
2001, the non-deductibility of goodwill amortization.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Net Sales. Net sales decreased by $8.7 million or 8.8% from $99.0
million for the nine months ended September 30, 2001 to $90.3 million for the
nine months ended September 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 $1.0 million or 5.7% from $16.8
million for the nine months ended September 30, 2001 to $17.8 million for the
nine months ended September 30, 2002. Gross profit as a percentage of net sales
increased from 17.0% for the nine months ended September 30, 2001 to 19.7% for
the nine months ended September 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 pork prices)
realized in the first nine months of 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.1 million or 0.6% from $15.6 million for
the nine months ended September 30, 2001 to $15.5 million for the nine months
ended September 30, 2002. Increases in salaries and fleet operating 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.
Selling, general and administrative expenses as a percentage of net sales
increased from 15.8% for the nine months ended September 30, 2001 to 17.2% for
the nine months ended September 30, 2002. The increase in the selling, general
and administrative expenses as a percentage of sales resulted primarily from the
sale of the Grogan's business where selling, general and administrative expenses
relative to sales were historically lower than the continuing businesses.
Income from Operations. Income from operations increased $1.1 million
from $1.2 million for the nine months ended September 30, 2001 to $2.3 million
for the nine months ended September 30, 2002. This increase is attributable to
the factors discussed above.
Interest Expense. Interest expense decreased $0.4 million from $1.9
million for the nine months ended September 30, 2001 to $1.5 million for the
nine months ended September 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 nine months ended September 30, 2002, we recorded additional income of $0.3
million as a fair value adjustment to put warrants.
Other Income. Other income decreased $2.1 million from $2.3 million for
the nine months ended September 30, 2001 to $0.2 million for the nine months
ended September 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 nine months ended September 30, 2001.
Income Tax Expense. The effective tax rate differs from the statutory
rate primarily because of state income taxes and, for the nine months ended
September 30, 2001, the non-deductibility of goodwill amortization.
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 us 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. We would also record a corresponding asset, which is depreciated
over the life of the asset. Subsequent to the initial measurement of the asset
retirement obligation, the obligation would 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. We are required to adopt SFAS No. 143 on
January 1, 2003 and do not expect that it will have a material impact on our
financial position or results of operations.
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 nine months ended
September 30, 2001 was $1.0 million. This amount was principally the result of
income from operations, depreciation and amortization, and a decrease in income
taxes receivable. This was partially offset by an increase in inventory and
prepaid expenses, and the effect of the change in accounting principle. Net cash
provided by operating activities for the nine months ended September 30, 2002
was $6.9 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 nine months ended September
30, 2001 was $0.2 million, which was related to capital expenditures, partially
offset by receipt of insurance proceeds. Cash used in investing activities for
the nine months ended September 30, 2002 was $0.3 million, which was related to
capital expenditures, partially offset by the proceeds from the sale of Grogan's
plant, property and equipment.
Cash used in financing activities in the nine months ended September
30, 2001 was $1.0 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
nine months ended September 30, 2002 was $6.4 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 September 30, 2001 and 2002, we had outstanding under the Fleet
Facility approximately $5.6 million and $1.8 million, respectively, in term debt
and approximately $6.4 million and $1.4 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% (7.00% and 5.75% at September
30, 2001 and 2002, respectively) or adjusted LIBOR plus 2.5%, at our option. At
September 30, 2002 we had the capacity to borrow $5.2 million under the Fleet
Facility.
In the first nine 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.
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 2003. 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. Our operating results 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; and 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."
ITEM 4. CONTROLS AND PROCEDURES.
We maintain a system of disclosure controls and procedures designed to
provide reasonable assurance as to the reliability of the financial statements
and other disclosures included in this report, as well as to safeguard assets
from unauthorized use or disposition. Within 90 days prior to the filing date of
this report, an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures was performed under the supervision of
the our management, including the principal executive officer and principal
financial officer. Based on that evaluation, our management, including the
principal executive officer and principal financial officer, concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic Securities and
Exchange Commission filings. There have been no significant changes in our
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of the evaluation described above.
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 MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders of the Company held on July 31,
2002, the following matters were submitted to a vote of the stockholders:
Election of Directors. John A. Miller, Franklin M. Roth and Alan
F. Sussna were reelected as directors of the Company.
The following directors' terms of office continued after the
Annual Meeting of Stockholders: Eric D. Becker, Brian Fleming, G.
Cook Jordan, Jr., John T. Hanes, Merrick M. Elfman and Steven M.
Taslitz.
Tabulation of Votes
Matter For Against Withheld Broker Non-Votes
- --------------------------------------------------------------------------------
Director Election:
John A. Miller 4,694,195 0 1,400 0
Franklin M. Roth 4,693,695 0 1,900 0
Alan F. Sussna 4,602,617 0 92,978 0
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)
4.1 Acknowledgement Letter, dated August 20, 2002, by and
between the Company and Banc One Capital Partners, LLC
relating to the Amended and Restated Warrant Certificate
Common Stock Purchase Warrant
99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
None.
- ------------------------
(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.
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 November 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)
CERTIFICATION
(PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED)
I, Alan F. Sussna, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Atlantic Premium
Brands, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a.) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b.) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c.) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a.) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b.) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Alan F. Sussna
-----------------------------
Alan F. Sussna
Chief Executive Officer
CERTIFICATION
(PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED)
I, Thomas M. Dalton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Atlantic Premium
Brands, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a.) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b.) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c.) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a.) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b.) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Thomas M. Dalton
-----------------------------
Thomas M. Dalton
Chief Financial 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)
4.1 Acknowledgement Letter, dated August 20, 2002, by and between
the Company and Banc One Capital Partners, LLC relating to
the Amended and Restated Warrant Certificate Common Stock
Purchase Warrant
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
- ---------------------
(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.