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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
March 31, 2003
{ } 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.)
1033 SKOKIE BOULEVARD, SUITE 600
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of May 5, 2003, there were outstanding 6,764,289 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, March 31,
2002 2003
------- -------
ASSETS
Current assets:
Cash $ 1,336 $ 1,595
Accounts receivable, net of allowance for doubtful accounts
of $170 and $169, respectively 6,322 5,303
Inventory 5,362 5,553
Prepaid expenses and other current assets 1,041 1,064
------- -------
Total current assets 14,061 13,515
Property, plant and equipment, net 11,707 11,766
Goodwill, net 10,478 10,478
Other assets, net 850 848
------- -------
Total assets $37,096 $36,607
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks outstanding $ 1,441 $ 2,131
Notes payable under line of credit 2,527 2,331
Current maturities of long-term debt 1,416 1,416
Deferred income taxes 742 742
Accounts payable 5,997 5,210
Accrued expenses 1,883 1,760
------- -------
Total current liabilities 14,006 13,590
Long-term debt, net of current maturities 10,276 9,978
Deferred income taxes 845 845
------- -------
Total liabilities 25,127 24,413
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;
6,764,289 shares issued and outstanding 67 67
Additional paid-in capital 10,481 10,481
Retained earnings 1,421 1,646
------- -------
Total stockholders' equity 11,969 12,194
------- -------
Total liabilities and stockholders' equity $37,096 $36,607
======= =======
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
March 31,
2002 2003
----------- -----------
Net sales $ 29,863 $ 30,085
Cost of goods sold 24,009 24,344
----------- -----------
Gross profit 5,854 5,741
----------- -----------
Selling, general and administrative expenses:
Salaries and benefits 2,477 2,386
Other operating expenses 1,980 2,260
Depreciation and amortization 438 494
----------- -----------
Total selling, general and administrative expenses 4,895 5,140
----------- -----------
Income from operations 959 601
Other income (expense):
Interest expense (494) (260)
Fair value adjustment to put warrants (195) --
Other income, net 63 36
----------- -----------
Income before income taxes 333 377
Income tax expense (181) (152)
----------- -----------
Net income $ 152 $ 225
=========== ===========
Weighted average common shares:
Basic 6,734,391 6,764,289
=========== ===========
Diluted 7,037,541 6,993,758
=========== ===========
Net income per common share:
Basic and diluted $ 0.02 $ 0.03
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
2002 2003
------- -------
Cash Flows from Operating Activities:
Net income $ 152 $ 225
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 438 494
Amortization of debt discount 51 --
Fair value adjustment to put warrants 195 --
Decrease in accounts receivable, net 1,077 1,019
(Increase) decrease in inventory 58 (191)
Decrease (increase) in prepaid expenses and other current assets 4,715 (23)
Decrease in accounts payable (1,556) (787)
Decrease in accrued expenses and other
current liabilities (99) (123)
------- -------
Net cash provided by operating activities 5,031 614
------- -------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (340) (515)
Proceeds from disposal of Grogan's assets 906 --
------- -------
Net cash provided by (used in) investing activities 566 (515)
------- -------
Cash Flows from Financing Activities:
Increase in checks outstanding 645 690
Repayments under line of credit, net (4,247) (196)
Payments of term debt and notes payable (2,034) (298)
Debt refinancing costs -- (36)
------- -------
Net cash (used in) provided by financing activities (5,636) 160
------- -------
Net increase (decrease) in cash (39) 259
Cash, beginning of period 560 1,336
------- -------
Cash, end of period $ 521 $ 1,595
======= =======
These accompanying notes are an integral part of these consolidated financial
statements.
ATLANTIC PREMIUM BRANDS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2003
(in thousands)
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 2002 financial statements to conform to
the 2003 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 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, 2002 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 31, 2003.
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, March 31,
2002 2003
------------ -------------
Raw materials $ 324 $ 466
Finished goods 3,240 3,274
Packaging and supplies 1,216 1,225
Production parts 582 588
------ ------
Total inventory $5,362 $5,553
====== ======
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. During the
quarter ended March 31, 2003, the Company removed equipment included in the Food
Processing segment from service with a net carrying value of $0.3 million. The
Company is actively seeking to sell this equipment. The Company believes that
the fair value of this asset approximates its carrying value.
OTHER ASSETS
Other assets consist mainly of cash surrender value of life insurance and
deferred financing costs. Deferred financing costs are being amortized over 5
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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 we incur 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 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 is 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 adopted SFAS No. 143 on January 1, 2003, and there was no
material impact on our financial position or results of operations.
The FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" in April 2002.
Under SFAS No. 4, all gains and losses from extinguishment of debt were required
to be aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. SFAS No. 145 eliminates SFAS No. 4 and thus, the
criteria in APB Opinion No. 30 should be applied to determine the classification
of gains and losses related to the extinguishment of debt. We adopted the
provisions of this statement in the fourth quarter of 2002 and classified the
2002 fourth quarter loss on the extinguishment of debt in the amount of $0.5
million as a component of other income (expense) in the statement of operations
for the year ended December 31, 2002.
In June 2002, the FASB 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. The Company did not have
any exit or disposal activities for the three month period ended March 31, 2003.
In November 2002, the FASB released FASB Interpretation (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires that a guarantor
recognize a liability for the fair value of an obligation assumed under a
guarantee. This interpretation also discusses additional disclosures to be made
in the interim and annual financial statements of the guarantor about
obligations under certain guarantees. The initial measurement and recognition
requirements of FIN 45 are effective for guarantees issued or modified after
December 31, 2002. However, the disclosure requirements were effective in the
consolidated financial statements for the year ended December 31, 2002. The
Company adopted the measurement and recognition requirements of FIN 45 on
January 1, 2003, and the adoption did not have a material effect on our
financial position, results of operation, or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications were required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
STOCK BASED COMPENSATION
The Company applies the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations including FASB Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation", an
interpretation of APB Opinion No. 25, issued in March 2000, to account for its
fixed-plan stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying stock
exceeds the exercise price. SFAS No. 123 "Accounting for Stock-Based
Compensation", established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has elected to continue to apply
the intrinsic-value-based method of accounting described above, and has adopted
only the disclosure requirements of SFAS No. 123. The following table
illustrates the effect on net income if the fair-value-based method had been
applied to all outstanding and unvested awards in each period.
2002 2003
---- ----
Net income, as reported $ 152 $ 225
Deduct total stock-based employee
compensation expense determined under fair-
value-based method for all awards, net of tax (70) (60)
------- -------
Pro forma net income $ 82 $ 165
======= =======
2002 2003
---- ----
Basic and diluted income per common share, as reported $ 0.02 $ 0.03
Deduct total stock-based employee
compensation expense determined under fair-
value-based method for all awards, net of tax (0.01) (0.01)
------- -------
Pro forma basic and diluted income per common share $ 0.01 $ 0.02
The following assumptions were used for option grants:
2002 2003
---- ----
Risk-free interest rate (range) 5.00 -- 5.13% 3.50 -- 3.65%
Expected dividend yield 0.00% 0.00%
Expected lives 5-6 years 5-6 years
Expected volatility 51.5% 51.5%
INCOME PER COMMON SHARE
The weighted average shares used to calculate basic and diluted income per
common share for the three-month periods ended March 31, 2002 and 2003, are as
follows:
Three Months Ended
March 31,
----------------------
2002 2003
----------------------
Weighted average shares outstanding for basic
income per common share 6,734,391 6,764,289
Dilutive effect of common stock options 310,360 229,469
--------- ---------
Weighted average shares outstanding for dilutive
income per common share 7,044,751 6,993,758
========= =========
Options to purchase 1,171,718 and 1,329,137 shares of common stock at prices
ranging from $2.00 to $6.50 per share were outstanding during the first quarter
of 2002 and 2003, respectively, but were not included in the computation of
diluted income per common share because the options' exercise prices were
greater than the average weighted market price of the common stock during the
quarter.
2. GOODWILL, NET:
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 quarter ended March 31, 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.
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 market
value is generally measured with discounted estimated future cash flows.
3. CONTINGENCIES:
Lawsuits and claims are filed against the Company from time to time in the
ordinary course of business. These actions are in various preliminary stages and
no judgments or decisions have been rendered by hearing boards or courts.
Management, after reviewing developments to date with legal counsel, is of the
opinion that the outcome of such matters will not have a material adverse effect
on the Company's financial position or results of operations.
4. DEBT:
At March 31, 2003, the Company's credit facility consists of a $5,377 term note,
a $2,500 term note, a $8,500 line of credit (of which $2,331 was outstanding at
March 31, 2003), a $709 senior subordinated note and $2,690 in junior
subordinated notes.
In November 2002, the Company entered into a new senior secured credit facility
with Merrill Lynch Capital (the Merrill Facility). As of March 31, 2003 the
Company had outstanding under the Merrill Facility approximately $7.9 million in
term debt and approximately $2.3 million in line-of-credit borrowings. A portion
of the funds provided under the Merrill Facility was used to pay off Fleet
Capital (the Fleet Facility) and the senior subordinated debt owed to Banc One
Capital Partners, LLC. The terms of the $0.7 million in senior subordinated debt
owed to Sterling BOCP, LLC, now known as BOCP ABR Mezz, LLC (the LLC), were
amended concurrently with the refinancing. The LLC is owned by a group of
individuals including Merrick Elfman (an executive officer, director and 5%
beneficial owner), Steven Taslitz (a director and 5% beneficial owner), Eric
Becker (a director and 5% beneficial owner), John Miller (a director ), Douglas
Becker (a 5% beneficial owner), Rudolf Christopher Hoehn-Saric (a 5% beneficial
owner) and Bruce Goldman (a 5% beneficial owner). In connection with the
refinancing, the LLC and Banc One Capital Partners agreed to cancel the warrants
with a put option to purchase 1.1 million shares of our common stock, which were
granted in connection with the issuance of the senior subordinated debt. In
addition to canceling the warrants, the amended terms of the senior subordinated
debt owed to the LLC changed the maturity date from March 31, 2005 to December
31, 2007 and increased the interest rate from 15% to 18%, with 10% interest paid
quarterly and the remaining 8% compounded monthly and paid at maturity. The
senior subordinated debt owed to the LLC continues to be secured by
substantially all of our assets, but is subordinated to the Merrill Facility.
The line of credit agreement under the Merrill Facility bears annual interest at
either the bank's prime rate plus 1.25% (5.5% at March 31, 2003) or adjusted
LIBOR plus 3.00% at our option. The term debt is comprised of two notes, Term
Loan A and Term Loan B. They bear interest at either the bank's prime rate plus
1.5% and 2.0% (5.75% and 6.25%, respectively, at March 31, 2003), or adjusted
LIBOR plus 3.25% and 3.75%, respectively, at our option. At March 31, 2003, the
Company is in compliance with the covenants contained in the Merrill Facility.
As part of the refinancing transaction, three of the notes comprising the junior
subordinated debt in the amounts of $1.4 million, $0.9 million and $0.2 million,
which were earning interest at the rates of 11%, 8.35% and 10%, respectively,
were amended to reset the maturity dates on each note to February 2008 and to
reset the stated interest rate on the $0.9 million note to 11%.
5. RESIGNATION OF CHIEF EXECUTIVE OFFICER
Alan Sussna resigned from the position of Chief Executive Officer and President
of the Company on January 9, 2003. In connection with his resignation, the
Company agreed to pay Mr. Sussna $0.18 million over six months in accordance
with the Company's payroll policies and continue his employee benefits for the
maximum period permitted by law. The $0.18 million payment was expensed in the
statement of operations for the three months ended March 31, 2003 and is
included as a component of salaries and benefits.
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 branded food products to distributors and retailers in
Oklahoma, Louisiana, Texas, and other surrounding states. The food distribution
segment includes the purchasing, marketing, and distribution of packaged meat
products to retailers and restaurants, located primarily in Texas.
Summarized financial information, by business segment, for the three months
ended are as follows: (in thousands)
Three Months Ended
----------------------------------
March 31, 2002 March 31, 2003
-------------- --------------
Net sales:
Food Processing $ 13,387 $ 12,924
Food Distribution 16,476 17,161
-------- --------
$ 29,863 $ 30,085
======== ========
Interest expense:
Food Processing $ 30 $ 40
Food Distribution 39 39
Corporate 425 181
-------- --------
$ 494 $ 260
======== ========
Depreciation and amortization:
Food Processing $ 377 $ 437
Food Distribution 19 14
Corporate 42 43
-------- --------
$ 438 $ 494
======== ========
Income before income taxes:
Food Processing $ 1,264 $ 1,001
Food Distribution 457 276
Corporate (1,388) (900)
-------- --------
$ 333 $ 377
======== ========
------------------------------------
December 31, 2002 March 31, 2003
----------------- --------------
Total assets:
Food Processing $ 25,396 $ 25,147
Food Distribution 10,039 9,370
Corporate 1,661 2,090
------- -------
$ 37,096 $ 36,607
======= =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2002 COMPARED TO QUARTER ENDED MARCH 31, 2003
Net Sales. Net sales increased by $0.2 million or 0.7% from $29.9 million for
the quarter ended March 31, 2002 to $30.1 million for the quarter ended March
31, 2003. The increase in net sales during the quarter was due to higher selling
prices on certain products, primarily resulting from higher raw material prices
and new product introductions. These gains more than offset the reduction in
sales which resulted from the sale of the Grogan's business in the first quarter
of 2002.
Gross Profit. Gross profit decreased by $0.2 million or 3.4% from $5.9 million
for the quarter ended March 31, 2002 to $5.7 million for the quarter ended March
31, 2003. Gross profit as a percentage of net sales decreased slightly from
19.7% for the quarter ended March 31, 2002 to 18.9% for the quarter ended March
31, 2003. Both the decrease in gross profit dollars and the decrease in gross
profit as a percentage of sales were primarily attributable to the rapidity with
which the prices of certain raw materials, primarily bacon, increased,
preventing us from increasing our pricing to our customers with the same
rapidity. This results primarily from the industry practice of committing to
pricing levels with customers several weeks before shipment occurs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.2 million or 4.1% from $4.9 million for
the quarter ended March 31, 2002 to $5.1 million for the quarter ended March 31,
2003. Selling, general and administrative expenses as a percentage of net sales
increased from 16.4% for the quarter ended March 31, 2002 to 16.9% for the
quarter ended March 31, 2003. The primary causes of the dollar increase in the
selling, general and administrative expenses and the increase in the selling,
general and administrative expenses as a percentage of net sales were the
increased costs of fuel and the cost of our commercial insurance premiums when
compared to the first quarter of 2002.
Income from Operations. Income from operations decreased by $0.4 million or
40.0% from $1.0 million for the quarter ended March 31, 2002 to $0.6 million for
the quarter ended March 31, 2003. This decrease is attributable to the factors
discussed above.
Interest Expense. Interest expense decreased $0.2 million from $0.5 million for
the quarter ended March 31, 2002 to $0.3 million for the quarter ended March 31,
2003. This decrease was primarily due to a decrease in the cost of our
variable-rate borrowings and the related outstanding balances. See discussion of
the November 2002 refinancing of our long-term debt obligations in "Related
Party Transactions" below.
Fair Value Adjustment to Put Warrants. 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 was charged or credited
to earnings as a fair value adjustment to put warrants. For purposes of these
calculations, the fair value of the warrants was estimated using a Black-Scholes
option-pricing model. During the quarter ended March 31, 2002, we recorded
additional expense of $0.2 million as a fair value adjustment to the put
warrants. The warrants with a put option were
acquired and cancelled by us in November 2002 as part of the refinancing of our
long-term debt obligations.
Income Before Income Taxes. Income before income taxes increased $0.1 million
from $0.3 million for the quarter ended March 31, 2002 to $0.4 million for the
quarter ended March 31, 2003. This increase is attributable to the factors
discussed above.
Income Taxes. The effective tax rate differs from the statutory rate primarily
because of state income taxes, and for the quarter ended March 31, 2002, the
exclusion of the fair value adjustment to the put warrant from taxable income.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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 we incur 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 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 is 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 adopted SFAS No. 143 on January 1, 2003, and there was no
material impact on the financial position or results of operations of our
company.
The FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" in April, 2002.
Under SFAS No. 4 all gains and losses from extinguishment of debt were required
to be aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. SFAS No. 145 eliminates SFAS No. 4 and thus, the
criteria in APB Opinion No. 30 should be applied to determine the classification
of gains and losses related to the extinguishment of debt. We adopted the
provisions of this statement in the fourth quarter of 2002 and classified the
fourth quarter of 2002 loss on the extinguishment of debt in the amount of $0.5
million as a component of other income (expenses) in the statement of operations
for the year ended December 31, 2002.
In June 2002, the FASB 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. Our Company did not have
any exit or disposal activities for the three month period ended March 31, 2003.
In November 2002, the FASB released FASB Interpretation ("FIN") 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires that a guarantor
recognize a liability for the fair value of an obligation assumed under a
guarantee. This interpretation also discusses additional disclosures to be made
in the interim and annual financial statements of the guarantor about
obligations under certain guarantees. The initial measurement and recognition
requirements of FIN 45 are effective for guarantees issued or modified after
December 31, 2002. However, the disclosure requirements were effective in the
consolidated financial statements for the year ended December 31, 2002.
The adoption of the measurement and recognition requirements of FIN 45 on
January 1, 2003, did not have a material effect on our financial position,
results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications were required for
fiscal years ending after December 15, 2002 and are included in the notes to the
consolidated financial statements included in this form 10Q.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the quarter ended March 31, 2002
was $5.0 million. This was principally the result of a decrease in prepaid
expenses, which primarily resulted from the receipt of a $4.7 million insurance
settlement and a decrease in accounts receivable which were partially offset by
a decrease in accounts payable. Net cash provided by operating activities for
the quarter ended March 31, 2003 was $0.6 million. This amount was principally
the result of net income, depreciation and amortization and a decrease in
accounts receivable. This was partially offset by an increase in prepaid
expenses and other current assets and a decrease in accounts payable.
Cash provided by investing activities for the quarter ended March 31, 2002 was
$0.6 million which relates to the proceeds from the sale of the Grogan's
business, partially offset by capital expenditures. Cash used in investing
activities for the quarter ended March 31, 2003 was $0.5 million which was
related to capital expenditures.
Cash used in financing activities in the quarter ended March 31, 2002 was $5.6
million, principally affected by the repayments of borrowings under the line of
credit and payments of term debt and notes payable, partially offset by an
increase in checks outstanding. Cash provided by financing activities in the
quarter ended March 31, 2003 was $0.2 million, principally affected by an
increase in checks outstanding which was partially offset by borrowings under
the line of credit and payments of term debt and notes payable.
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 the remainder of 2003. However, our
ability to fund our working capital requirements and capital expenditures will
depend in large part on our ability to continue to comply with debt covenants
under the Merrill Facility. 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 the Merrill Facility.
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.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.
On an on-going basis, we evaluate our estimates and judgments, including those
related to bad debts, inventories, intangible assets, income taxes, assets and
liabilities, and contingencies and litigation. We base our estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. We believe the
following critical accounting policies, among others, affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Our critical accounting policies are as follows:
- - valuation of accounts receivable;
- - valuation of inventories;
- - accounting for income taxes; and
- - valuation of long-lived assets and goodwill.
VALUATION OF ACCOUNTS RECEIVABLE
We must make estimates of the bad debts related to our accounts receivable. We
specifically analyze accounts receivable and analyze historical bad debts,
customer concentrations, customer credit-worthiness, and current economic trends
when evaluating the adequacy of the allowance for doubtful accounts. A
significant change in the liquidity or financial position of any of our
significant customers could have a material adverse impact on the collectibility
of our accounts receivable and future operating results. Our accounts receivable
balance was $5.3 million, net of allowance for doubtful accounts of $0.2 million
as of March 31, 2003.
VALUATION OF INVENTORIES
We must make estimates as to the amount of the obsolete or excess inventory. We
specifically analyze historical write-offs, the age and condition of the
inventory, and current economic trends when assessing the valuation of
inventory. Significant management judgments and estimates must be made and used
in connection with valuing these inventories in any accounting period.
ACCOUNTING FOR INCOME TAXES
As part of the process of preparing our consolidated financial statements we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our actual current tax exposure
together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within our consolidated balance sheets. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations. In the event that
actual results differ from our estimates of future taxable income or we adjust
those estimates in future periods, we may need to revise the valuation allowance
which could materially impact our financial position and results of operations.
At December 31, 2002 and March 31, 2003, we had not established a valuation
allowance as we believe it is more likely than not that our deferred tax assets
will be realized.
VALUATION OF LONG-LIVED ASSETS AND GOODWILL
The Company assesses the recoverability of long-lived assets whenever it
determines that events or circumstances indicate that their carrying value may
not be recoverable. The Company's assessments and impairment testing are
primarily based upon management estimates of future cash flows associated with
these assets. We have determined that there has not been an impairment of any of
our long-lived assets. However, should the Company's operating results
deteriorate, we may determine that some portion of our long-lived assets are
impaired. Such determination could result in non-cash charges to income that
could materially affect the Company's consolidated financial position or results
of operations for that period. Net property, plant and equipment amounted to
$11.8 million at March 31, 2003.
Goodwill is tested for impairment at least annually using a two step approach.
First the Company estimates the fair value of the reporting units primarily
using discounted estimated future cash flows. If the carrying value exceeds the
fair value of the reporting unit, the second step of the goodwill impairment
test is performed to measure the amount of the potential loss. Goodwill
impairment is measured by comparing the "implied fair value" of goodwill with
its carrying amount. The Company will estimate the fair value of all assets in
determining the "implied fair value" of goodwill. The impairment valuation
requires the use of considerable management judgment to determine the fair value
of the reporting units using discounted future cash flows, including estimates
and assumptions regarding the amount and timing of cash flows, cost of capital
and growth rates. Net goodwill amounted to $10.5 million at March 31, 2003.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to certain market risks. These risks relate to commodity price
fluctuations, interest rate changes 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 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.
RELATED PARTY TRANSACTIONS
In November 2002, we entered into the Merrill Facility. A portion of the funds
provided under the Merrill Facility was used to pay off the senior subordinated
debt owed to Banc One Capital Partners. The $0.7 million in senior subordinated
debt owed to Sterling BOCP, LLC, now known as BOCP ABR Mezz, LLC (the LLC),
remains outstanding, but the terms of this debt were amended concurrently with
the refinancing. The LLC is owned by some of our directors, officers and 5%
shareholders. Also in connection with the refinancing, the LLC and Banc One
Capital Partners agreed to cancel the warrants with a put option for 1.1 million
shares of our common stock which were issued in connection with the senior
subordinated debt. The amended terms of the senior subordinated debt included a
change in the maturity date from March 31, 2005 to December 31, 2007 and an
increase in the interest rate from 15% to 18%, with 10% interest paid quarterly
and the remaining 8% interest compounded monthly and paid at maturity. The
senior subordinated debt owed to LLC continues to be secured by substantially
all of our assets, but is subordinated to the Merrill Facility.
Also in connection with the refinancing of our long term obligations through the
Merrill Facility in November 2002, a group of individuals, including Eric Becker
(a director and 5% beneficial owner), Thomas Dalton (an executive officer and 5%
beneficial owner), Merrick M. Elfman (an executive officer, director and 5%
beneficial owner), Bruce Goldman (a 5% beneficial owner), John Miller (a
director), Alan Sussna (a former director and executive officer and current 5%
beneficial owner) and Steven Taslitz (a director and 5% beneficial owner),
purchased $0.8 million of the junior subordinated debt owed to former owners. As
a result of the purchase, we now owe this $0.8 million of junior subordinated
debt to this group of individuals on the same terms and conditions as we owe the
remainder of this junior subordinated debt to the former owners.
In November 2002, we also entered into a consulting agreement with Sterling
Advisors LP, an entity owned by Messrs. Douglas Becker (a 5% beneficial owner),
Eric Becker (a director and 5% beneficial owner), Rudolf Christopher Hoehn-Saric
(a 5% beneficial owner) and Steven Taslitz (a director and 5% beneficial owner).
The initial two-year term of the consulting agreement began on January 1, 2003,
with one year renewal periods thereafter, unless it is terminated by either
party twelve months prior to the applicable termination date. Under the terms of
the consulting agreement Sterling Advisors LP will be paid $0.2 million per year
for consulting services relating to financial, strategic and operational
matters. In addition, Sterling Advisors LP received $0.15 million for services
rendered in connection with procurement of the Merrill Facility and the related
transactions.
RESIGNATION OF CHIEF EXECUTIVE OFFICER
Alan Sussna resigned from the position of Chief Executive Officer and President
of our company on January 9, 2003. In connection with his resignation, we agreed
to pay Mr. Sussna $0.18 million over six months in accordance with our payroll
policies and continued employee benefits for the maximum period permitted by
law. The $0.18 million payment was expensed in the statement of operations for
the three months ended March 31, 2003 and is included as a component of salaries
and benefits.
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; 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, 2002 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
our management, including the principal executive and financial officer. Based
on that evaluation, our management, including the principal executive and
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 AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS 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
(b) Reports on Form 8-K:
On January 10, 2003, we filed a Current Report on Form 8-K dated
January 9, 2003 disclosing in Item 5 that Alan F. Sussna resigned as our
President and Chief Executive Officer. Mr. Sussna also resigned from our Board
of Directors. This Current Report on Form 8-K further disclosed that Thomas M.
Dalton, who then held the offices of Chief Financial Officer and Chief Operating
Officer, was appointed to the additional position of President.
- ------------------------
(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.
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
- ---------------------
(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 May 13, 2003 By: /s/ Thomas M. Dalton
--------------------------------------------
Thomas M. Dalton, President, Chief Financial
Officer and Chief Operating Officer (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, Thomas M. Dalton, President, Chief Financial Officer and Chief Operating
Officer, 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. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I 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 me 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 my conclusions about the
effectiveness of the disclosure controls and procedures based on my evaluation
as of the Evaluation Date;
5. I have disclosed, based on my 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. 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 my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Thomas M. Dalton
-----------------------------------
Thomas M. Dalton,
President, Chief Financial Officer and
Chief Operating Officer