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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission File Number 1-13747
ATLANTIC PREMIUM BRANDS, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 36-3761400
(STATE OF INCORPORATION) (I.R.S. EMPLOYER ID NO.)
650 Dundee Road, Suite 370, Northbrook, Illinois 60062
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(847) 480-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported closing price of
the registrant's Common Stock on March 24, 1999: $18,994,744
The number of shares outstanding of the registrant's Common Stock, par
value $.01, as of March 24, 1999: 7,412,583
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on May 19, 1999 are incorporated by reference into Part
III of this report.
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PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
Atlantic Premium Brands, Ltd. (the "Company") has completed the sale of
substantially all the assets of its beverage division. The operations of the
beverage division consisted of the wholesale purchasing, marketing and
distribution of nonalcoholic beverages to retail trade accounts in the greater
Baltimore and Washington D.C. metropolitan areas.
The disposition of the beverage division's distribution rights and
inventories for the Mistic(R), Stewart's(R) and AriZona(TM) brands, along with
certain other related assets, occurred in two stages on December 1, 1998 and
January 11, 1999. The purchaser of these assets was Canada Dry Potomac
Corporation. The remaining accounts receivable and inventory, and substantially
all the remaining furniture and equipment of the beverage division, were sold to
Master Distributors, Inc. on February 2, 1999.
The consideration received by the Company from these transactions
totaled approximately $3.5 million and consisted of approximately $3.1 million
in cash, a promissory note payable to the Company for $0.26 million and the
assumption by the purchasers of approximately $0.14 million in liabilities and
obligations of the beverage division.
As a result of the disposition of the Company's beverage division, the
Company's operations now consist solely of its food manufacturing and
distribution businesses. Therefore, the description of the Company set forth
below in this Item 1 focuses on the Company's food manufacturing and
distribution operations.
GENERAL
The Company, through its subsidiaries' operations in Texas, Louisiana,
Kentucky and Oklahoma, manufactures, markets and distributes branded and
unbranded food products for customers in a twelve state region.
Through its Prefco subsidiary, the Company is engaged in the marketing
and distribution of branded and unbranded meats to the retail grocery trade. The
Company markets and distributes its branded meat products under the brand name
Blue Ribbon(R) and Blue Ribbon Texas Traditions. These products, which include
ready to eat entrees, smoked sausages, bacon and packaged, sliced luncheon
meats, account for approximately 16% of the sales of Prefco and are manufactured
by the Company's Carlton subsidiary as well as by third party contract
manufacturing companies. Blue Ribbon is currently the best selling brand of
bacon in the Houston market. In addition to marketing its own branded products,
the Company is also a leading regional distributor of unbranded products
including boxed beef, pork, chicken and related items.
Through its Carlton subsidiary, the Company manufactures a variety of
smoked sausage products. Approximately 46% of the total volume manufactured is
sold through the Prefco subsidiary under the Blue Ribbon brand name.
Approximately 43% of total volume manufactured reflects private label products
manufactured for other regional sausage brands and selected chain supermarket
house brands, and approximately 11% of total volume manufactured is sold by the
Carlton subsidiary under the brand names Carlton and Country Boy(TM). These
branded products are marketed on a regional basis, principally in south and west
Texas.
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Through its Richards subsidiary, the Company manufactures, markets and
distributes Cajun-style, cooked, pork sausage products and specialty foods for
customers in Louisiana under the brand name Richard's(TM) and Richard's Cajun
Favorites.
Through its Grogan's subsidiary, the Company manufactures, markets and
distributes fresh pork sausage products for customers in a six state region.
These products are sold under the brand names Grogan's Farm(TM) and Partin's
Country Sausage(TM).
Through its Potter subsidiary, the Company manufactures, markets and
distributes premium, branded breakfast sausage, primarily in Oklahoma, Arkansas
and Texas. These products are sold under the J.C. Potter brand name and are
generally delivered to the retail grocery trade through its own distribution
system. In addition, the Company's Potter subsidiary manufactures products for
other branded food companies on a private-label basis. The Potter subsidiary is
a supplier to the Company's Prefco subsidiary and a customer of its Carlton
subsidiary.
CORPORATE HISTORY
In April 1991, MB Acquisition Corp. ("MB Acquisition"), a corporation
owned by a group of individuals including the Company's Chairman of the Board
and certain of the Company's directors and stockholders, acquired the business
of the Company from a company now known as S&B Ventures, Inc. (the
"Predecessor") for a purchase price of $1,158,000 (the "Acquisition"). In
connection with the Acquisition, MB Acquisition also assumed certain obligations
to pay the owners of the Predecessor $2,000,000 pursuant to a non-compete
agreement and $829,000 pursuant to consulting agreements. MB Acquisition
financed the Acquisition through a bridge loan provided by nine of its current
stockholders, including an officer and certain directors. In September 1991,
Maryland Beverage, L.P. (the "Partnership") was formed with the Company and
Strategic Investment Corporation ("Strategic"), a wholly owned subsidiary of T.
Rowe Price Strategic Partners Fund, L.P., as its sole partners, and MB
Acquisition was merged with and into the Company, and its assets and liabilities
were contributed to the Partnership. In September 1993 the Company was
reincorporated in Delaware and adopted the name "Atlantic Beverage Company,
Inc." In November 1993, in connection with the Company's initial public
offering, Strategic (whose only asset was its partnership interest in the
Partnership) merged with and into the Company. Subsequently, the Partnership was
dissolved and the Company succeeded to the Partnership's assets and liabilities.
On April 27, 1994, the Company entered into and consummated an
agreement to acquire certain assets and marketing rights from Flying Fruit
Fantasy, USA, Inc. ("FF") for total consideration of approximately $1.2 million.
Under the terms of this agreement, the Company obtained worldwide marketing and
distribution rights to a frozen beverage served through automated dispensing
machines. In December 1995, the Company adopted a plan to discontinue this
business.
In the first quarter of 1996, a newly formed, wholly-owned subsidiary
of the Company acquired the outstanding common stock of Prefco, Inc. ("Prefco").
Prefco, based in Houston, Texas, markets and distributes its own branded meat
products as well as unbranded meat products to the retail grocery trade in
Texas. Also in the first quarter of 1996, Carlton Foods, Inc. ("Carlton") was
merged into another newly formed, wholly-owned subsidiary of the Company.
Carlton, based in New Braunfels, Texas, is a manufacturer of branded and private
label meat products. The combined purchase price for these entities
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was approximately $11 million, which included approximately $3.0 million in
Carlton refinanced and assumed debt.
In August 1996, a newly formed, wholly-owned subsidiary of the Company
acquired certain of the assets of Richard's Cajun Country Food Processors
("Richards"). Richards, based in Church Point, Louisiana, is engaged in the
manufacturing, marketing and distribution of Cajun-style processed meat and
specialty food products. The consideration for these assets was $2.5 million
cash and a subordinated promissory note in the amount of $0.875 million (the
"Richards Note").
In October 1996, Grogan's Merger Corp. ("GMC"), a newly formed,
wholly-owned subsidiary of the Company, acquired and merged with the
distribution and manufacturing business of Grogan's Sausage, Inc. and Grogan's
Farm, Inc. respectively (collectively "Grogan's"), based in Arlington, Kentucky
for total consideration of approximately $3.8 million, consisting of $1.9
million cash, a $0.2 million note (the "Grogan's Note") and 573,810 shares
(approximately $1.7 million) of common stock of the Company.
In November 1996, GMC acquired the assets of Partin's Sausage
("Partin's") for consideration of $0.4 million cash, a $0.225 million note
(the "Partin's Note"), and 78,310 shares of common stock of the Company.
Partin's, based in Cunningham, Kentucky, is engaged in the manufacturing,
marketing and distribution of pork sausage products.
In March 1998, the Company and Potter Sausage Co., a newly-formed
subsidiary, acquired substantially all of the assets of J.C. Potter Sausage
Company ("Potter"), a branded food processing company based in Durant, Oklahoma,
for consideration of $13.0 million in cash, assumed liabilities and related
transaction costs.
As discussed above under the caption "Recent Developments," the Company
recently disposed of its beverage division for consideration of $3.5 million and
has classified the beverage division, as a discontinued operation in the
consolidated financial statements included elsewhere herein.
INDUSTRY
Following the disposition of its beverage division, the Company's
operations consist of two business segments: food processing and food
distribution. Note 16 to the Company's Consolidated Financial Statements
provides summarized financial information by business segment for continuing
operations for the last three fiscal years. The Company participates in these
two segments of the food industry through its Carlton, Prefco, Richards,
Grogan's and Potter subsidiaries.
The food processing segment which includes cooking, slicing, mixing,
grinding and similar functions is generally capital intensive. Unbranded raw
material typically comes from packing companies. In some instances, in the
packaged meat industry, packing and processing are vertically integrated. In
other instances, as is the case with the Company, processing and marketing are
vertically integrated. Because of the cost of transportation and limited shelf
life for the products, processing facilities tend to serve a regional clientele.
Large national meat companies therefore tend to establish strategically located
processing facilities in different geographic regions.
The food distribution segment which serves several different classes of
customers including retail, restaurant and institutional customers, is generally
not capital intensive but provides lower gross margins and is subject to
intense price competition. Product is generally invoiced and priced according to
weight.
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Successful distributors typically distinguish themselves through customer
service and low cost position. Price, product selection, reliability, in-stock
rate, promptness of delivery and weekend delivery options are among the benefits
which are most highly valued. It is not uncommon for a grocery retailer to have
one primary supplier in addition to one or more secondary suppliers. Food
distribution companies typically serve a local or regional clientele.
The branded packaged meat business is generally not capital intensive.
Strong retail brands exist at local, regional or national levels and include
bacon, hot dogs, cooked and uncooked sausage, cooked hams, chicken and turkey
products. Advertising and promotion is generally critical to the maintenance of
brand equity. Companies which market branded meat products can exist on a
stand-alone basis as well as be vertically integrated with processing and/or
distribution. The Company reflects, to a limited extent, both forms of vertical
integration.
STRATEGY
Operating Strategy. The Company's operating strategy is to grow its
food businesses profitably, while identifying and exploiting synergies among
them. Key elements of this operating strategy include increasing sales to
existing customers, adding new customers, and identifying opportunities to add
new products.
Corporate Growth Strategy. The Company has identified potential
strategies that will use the combination of its food subsidiaries as a platform
for additional corporate growth. These potential strategies may include
acquisition opportunities that complement the subsidiaries' businesses.
PRODUCTS
Through its Prefco subsidiary, the Company distributes a wide variety
of unbranded, boxed meat products. The Company maintains an inventory of over
200 different stock keeping units of unbranded product, which include beef,
turkey, pork and chicken. Product is stored in the Company's refrigerated
warehouses in Houston and is delivered on refrigerated vehicles to several
hundred customers including chain and independent supermarkets and discount
clubs. The Company purchases product from approximately one dozen meat packing
companies. Purchases of the same product may be spread among several suppliers
over the course of a year, and purchasing decisions are frequently driven by
price and availability, both of which are likely to vary. Three suppliers
accounted for approximately 21.6%, 15.6% and 10.8% of the Company's boxed meat
purchases during 1998 and 9%, 8% and 8% of such purchases during 1997. No other
supplier accounted for more than 10% of such purchases during either year.
Also through its Prefco subsidiary, the Company markets and distributes
its own branded dinner entrees, sausage, bacon and packaged, sliced luncheon
meats. These products are stored in the Company's refrigerated warehouses in
Houston. Product is delivered on the Company's refrigerated trucks, and
customers typically include the same retail establishments that purchase the
Company's unbranded meat products. The majority of Blue Ribbon(R) sausage
product is manufactured by the Company's Carlton and Grogan's subsidiaries. The
balance of the sausage product as well as the dinner entrees, bacon and luncheon
meats are purchased from a number of other contract food processing companies.
In addition to manufacturing product for the Prefco subsidiary, the
Company's Carlton subsidiary manufactures, markets and distributes its own
branded smoked sausage products for the retail grocery trade. The Carlton
subsidiary manufactures similar products on a private label basis for other
branded food companies.
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Through its Richards subsidiary, the Company manufactures, markets and
distributes Cajun-style, cooked pork sausage products and specialty foods for
customers in the state of Louisiana under the brand names of Richards(TM) and
Richards Cajun Favorites.
Through its Grogan's subsidiary, the Company manufactures, markets and
distributes fresh pork sausage products for customers in a six state region.
These products are sold under the brand names Grogan's(TM) and Partin's(TM).
Through its Potter subsidiary, the Company manufactures, markets and
distributes premium, branded breakfast sausage, primarily in Oklahoma, Arkansas
and Texas. These products are sold under the J.C. Potter brand name and are
generally delivered to the retail grocery trade through its own distribution
system. In addition, the Company's Potter subsidiary manufactures products for
other branded food companies on a private-label basis. The Potter subsidiary is
a supplier to the Company's Prefco subsidiary and a customer of its Carlton
subsidiary.
SALES, MARKETING AND DISTRIBUTION
The Company's Prefco subsidiary distributes unbranded boxed beef, pork,
and poultry to chain and independent retail grocery customers, most of whom are
located in the Houston metropolitan area, and all of whom are within a 400-mile
radius of the Company's distribution facilities. The Company serves several
hundred such customers as either their primary or secondary fresh meat supplier.
Prefco's direct sales force contacts its customers on a daily basis. The Company
delivers product using refrigerated trucks, generally within one to three days
of receiving an order.
The Company's Prefco subsidiary also markets and distributes its own
Blue Ribbon(R) and Blue Ribbon Texas Traditions dinner entrees, bacon, sausage
and sliced luncheon meats to the retail grocery trade. Orders are received by
the direct sales force and from the sales force managing the route sales
vehicles. The business has historically engaged in significant radio and
television advertising in the Houston market.
The Company's Carlton subsidiary solicits and receives customer orders
for branded product through direct salespeople as well as through third-party
food brokers and by telephone and facsimile transmission. Relationships with
private label customers are generally established at the senior management
level, although recurring orders from such customers are normally received over
the telephone or facsimile machine by clerical staff. Branded and private label
orders are generally filled within one to seven days and are either delivered on
one of the Carlton subsidiary's refrigerated vehicles, by common carrier, or are
picked up by customers.
The Company's Richards subsidiary employs a route delivery sales force.
Orders are taken by the route salespeople and filled immediately from stock on
board the route sales trucks. The subsidiary engages in promotions, including
in-store sampling, as well as in print advertising. All customers are located
within the state of Louisiana.
The Company's Grogan's subsidiary employs a route delivery sales force.
Orders are taken by the route salespeople and filled immediately from stock
onboard the route sales trucks. In addition, the subsidiary sells approximately
30% of its product to third party distributors. The Company engages in
promotions, including in-store sampling, as well as in print, radio and
television advertising. Customers are located in Kentucky, Illinois, Indiana,
Mississippi, Tennessee, and Arkansas.
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The Company's Potter subsidiary employs a route delivery sales force.
Orders are taken by the route salespeople and filled immediately from stock on
board the route sales trucks. In addition, the subsidiary sells approximately
47% of its product to third party distributors. The Company engages in
promotions, including in-store sampling, as well as in print, radio and
television advertising. Customers are located in Arkansas, Oklahoma and Texas.
One food distribution customer, Sam's Club Inc., accounted for
approximately 47% and 43% of the Company's total net sales during 1997 and 1998,
respectively. No other customer accounted for more than 10% of total net sales
during either year.
ASSET MANAGEMENT
Accounts Receivable. Sales are made almost exclusively on account, and
accounts receivable typically average 15 to 20 days.
Inventory. The Company maintains its inventory at the manufacturing
facilities operated by its Carlton subsidiary in New Braunfels, Texas, by its
Richards subsidiary in Church Point, Louisiana, by its Grogan's facility in
Arlington, Kentucky, by its Potter subsidiary in Durant, Oklahoma and Malvern,
Arkansas and at two distribution facilities operated by its Prefco subsidiary in
Houston, Texas. The Company generally maintains an average of eight to ten days
of inventory on hand which reflects approximately six to eight days of inventory
at its Prefco subsidiary, approximately 30 days of inventory at its Carlton,
Richards and Grogan's subsidiaries and approximately 15 days of inventory at its
Potter subsidiary. The Company typically places purchase orders to its suppliers
by telephone and by facsimile on a daily basis. Orders are placed both on an
as-needed basis and on a scheduled basis in anticipation of future demand.
Orders are usually filled within one to ten days, and products are transported
to the Company's warehouses by common carrier.
COMPETITION
Food Distribution. Through its Prefco subsidiary, the Company
believes that it is the second largest of four major fresh meat distributors in
the Houston market. Although this segment of the food industry is extremely
competitive, the Company believes it has generally succeeded in distinguishing
itself through a high level of customer service.
Food Processing. Through its Potter, Prefco, Carlton, Richards and
Grogan's subsidiaries, the Company competes with several branded meat companies,
and its brands compete with a wide variety of both regional and national brands.
Among the competitive brands are Decker, J. Bar B., Hilshire Farms, Hormel,
Bryan, Bob Evans and Jimmy Dean. The Company's Carlton(TM) and Country Boy(TM)
brands of smoked sausage are sold principally in the Dallas, San Antonio and
Austin markets and currently have limited market share. The Company's Blue
Ribbon(R) brand currently represents the best selling brand of bacon in the
Houston market. The Company's packaged, sliced luncheon meats and entrees were
introduced to the Houston market in 1995 and 1998, respectively, and currently
have limited market share. The Company's Richards(TM), Richards Cajun
Favorites,Grogan's(TM) and Partin's(TM) brands enjoy a strong regional share
within their respective markets. Through its Carlton and Potter subsidiaries,
the Company manufactures smoked sausage and meat products on a private label
basis for other branded food companies and, on a limited basis, for supermarkets
and restaurants. The Company believes that it enjoys a strong reputation for
innovation and responsiveness in creating original recipes for such customers.
The Company competes
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with a wide variety of manufacturers, many of whom are significantly larger and
may have greater manufacturing capacity and capital.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local statutes,
including federal occupational safety and health laws. Furthermore, the Company
and its suppliers are subject to various rules and regulations including those
of the United States Department of Agriculture, the United States Food and Drug
Administration and similar state agencies that relate to manufacturing,
nutritional disclosure, labeling requirements and product names.
PRODUCT LIABILITY AND INSURANCE
The Company believes that its present insurance coverage is sufficient
for its current level of business operations, although there is no assurance
that the present level of coverage will be available in the future or at a
reasonable cost. Further, there can be no assurance that such insurance will be
available in the future as the Company expands its operations, that insurance,
if available, will be sufficient to cover one or more large claims, or that the
applicable insurer will be solvent at the time of any covered loss.
EMPLOYEES
The Company currently has approximately 60 employees in its Prefco
subsidiary, approximately 70 employees in its Carlton subsidiary, approximately
60 employees in its Richards subsidiary, approximately 50 employees in its
Grogan's subsidiary and approximately 225 employees in its Potter subsidiary.
The Company uses temporary employees from time to time.
The Company believes that its relations with employees are good. The
Company has never suffered a material work stoppage or slow down.
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ITEM 2. PROPERTIES
Prefco Subsidiary. The Company leases a 30,000 square foot refrigerated
warehouse in Houston. The lease for this facility expires November 1999. In
addition to the foregoing, the subsidiary also leases a 5,000 square foot office
facility, the lease for which expires Sept. 30, 2000, with a three-year renewal
option.
Carlton Subsidiary. The Company leases a 20,000 square foot
manufacturing facility and a 2,000 square foot office facility in New Braunfels,
Texas. The lease on the manufacturing facility expires in September 2000, with
two five-year renewal options, and the lease on the office facility expires in
October 1999.
Richards Subsidiary. The Company owns a 12,500 square foot
manufacturing facility in Church Point, Louisiana.
Grogan's Subsidiary. The Company owns an 11,000 square foot
manufacturing facility in Arlington, Kentucky.
Potter Subsidiary. The Company owns a 120,000 square foot rendering,
processing, distribution, warehouse and administrative facility in Durant,
Oklahoma. In addition, the Company owns a 6,800 square foot distribution
facility in Malvern, Arkansas.
ITEM 3. LEGAL PROCEEDINGS
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
AGE OF
NAME OF OFFICER OFFICER OFFICES HELD AND BUSINESS EXPERIENCE FOR LAST FIVE YEARS
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Merrick M. Elfman 40 Chairman since July 1996 and a Director since 1993. Mr. Elfman is Chairman of
Gray Supply Company, Inc., a privately-held distributor of specialty lighting
products, and Carlton Foods, which is now a subsidiary of the Company,
Vice-Chairman of International Collectors Society LP, a privately-held
collectibles company, and a director of Becker Group, Ltd., a privately-held
company in the mall decorations business. Mr. Elfman is the founder of Elfman
Venture Partners, Inc., a private investment firm of which he has been
President since 1987.
Alan F. Sussna 42 Director, President and Chief Executive Officer since March 1996. Mr. Sussna
is also a director of International Collectors Society LP, a privately-held
collectibles company, and Becker Group, Ltd., a privately-held company in the
mall decorations business, positions he has held since June 1998 and December
1998, respectively. From October 1991 through October 1995, Mr. Sussna was a
director of Bain & Company, a consulting firm. Through his association with
Bain & Company and as a partner in the consulting firm of McKinsey & Company,
he has opened offices as well as led those firms' Consumer Goods practices.
Mr. Sussna has also held industry positions as Executive Vice President--
Sales and Marketing for Jim Beam Brands and in product management at
Frito-Lay, Inc.
Thomas M. Dalton 50 Senior Vice President and Chief Financial Officer since April 1998. Mr. Dalton
served as Executive Vice President and Chief Financial Officer of the
Richelieu Group in 1993 and 1994, and SNA Inc. from 1994 through 1998, and has
been a director of Duo-Fast Corporation since 1998.
Steve Englander 43 Chief Marketing Officer since August 1998. Prior to his employment with the
Company, Mr. Englander was Vice President of Marketing with Morningstar Foods,
a position he held from September 1995 through March 1998. From September
1991 through June 1995, he was Vice President of Marketing and Sales at Eagle
Snacks, a division of Anheuser Busch.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Since December 31, 1997, the Company's Common Stock has been
principally traded on the American Stock Exchange ("AMEX") under the symbol
"ABR." Prior to December 31, 1997, the Company's Common Stock was principally
traded on the NASDAQ SmallCap Market under the symbol "ABEV." The following
table sets forth, for the periods indicated, the high and low sales prices of
the Company's Common Stock as reported by AMEX or NASDAQ, as applicable.
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STOCK PRICES STOCK PRICES
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High Low High Low
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1997 1998
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1st Quarter 4 1/8 2 7/8 1st Quarter 3 7/8 2 15/16
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2nd Quarter 4 3 3/8 2nd Quarter 3 1/2 2
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3rd Quarter 3 3/4 2 1/2 3rd Quarter 3 1/8 2 1/4
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4th Quarter 4 1/2 3 1/8 4th Quarter 2 7/8 1 7/8
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As of March 24, 1999, there were approximately 155 shareholders of
record of the Company's Common Stock. The Company has not paid any cash
dividends since its initial public offering. The Company anticipates that
earnings, if any, will be retained for use in the business or for other
corporate purposes, and it is not anticipated that any cash dividends on the
Common Stock will be paid in the foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for the Company is based on the
consolidated financial statements of the Company. The Company's financial
statements as of December 31, 1997 and 1998 and for each of the years in the
three-year period ended December 31, 1998, including the notes thereto and the
related reports of KPMG LLP, and Arthur Andersen LLP, independent certified
public accountants, are included elsewhere herein.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of the Company contained elsewhere
herein.
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
YEARS ENDED DECEMBER 31,
1994 1995 1996 1997 1998
---- ---- ----- ----- ----
Income Statement Data
Net sales $ -- $ -- $ 133,878 $ 151,049 $ 180,818
Income from continuing operations -- -- 440 434 1,819
Income (loss) from discontinued operations,
including loss on disposal (38) (3,091) 455 (77) (1,301)
Net income (loss) (38) (3,091) 896 357 324
Basic income per common share from continuing operations -- -- 0.08 0.06 0.25
Diluted income per common share from continuing operations -- -- 0.08 0.06 0.24
Basic and diluted net income (loss) per common share (0.02) (1.23) 0.17 0.05 0.04
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Balance Sheet Data
Total assets $ 4,072 1,320 32,823 33,245 45,665
Long-term obligations -- -- -- 6,270 18,514
During the fourth quarter of 1998, the Company decided to dispose of its
beverage division. The beverage division has been treated as a discontinued
operation and prior years' financial statements have been restated. In 1994 and
1995, the Company consisted solely of the beverage division.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In 1996 the Company implemented a new corporate strategy that resulted
in the acquisition of five food businesses. Each of these businesses represented
a preeminent local or regional branded processed meat company. In addition to
significantly increasing the Company's size, the newly acquired businesses
created a broader platform for future growth.
In order to acquire and operate its food businesses, the Company formed
four new subsidiaries during 1996: Prefco Corp., Carlton Foods Corp., Richards
Cajun Foods Corp., and Grogan's Farm, Inc. In 1998, the Company formed a fifth
new subsidiary, Potter Sausage Co., to acquire the business of J.C. Potter
Sausage Company and affiliates.
In conjunction with the new corporate strategy, during 1998 the Company
completed the sale of substantially all the assets of its beverage division,
which operated as a distributor of non-alcoholic beverages in the Baltimore and
Washington D.C. metropolitan areas. The disposition occurred in three
transactions on December 1, 1998, January 11, 1999 and February 2, 1999.
RESULTS OF OPERATIONS
All of the acquisitions in 1996 and 1998 were recorded utilizing the
purchase method of accounting. Therefore, results of the acquired businesses
prior to the effective date of such acquisitions are not included in the
Company's results of operations. The beverage division has been accounted for as
a discontinued operation and prior years' financial statements have been
restated. The discussion of results of operations below excludes the results of
the beverage division.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales. Net sales increased by $29.8 million or 19.7% from $151.0
million for the year ended December 31, 1997 to $180.8 million for the year
ended December 31, 1998. The increase in net sales was primarily due to the
impact of the acquisition of Potter, which increased net sales for 1998 by $26.4
million. The remainder of the increase relates primarily to the introduction of
new branded product lines.
Gross Profit. Gross profit increased by $10.5 million or 78.3% from
$13.4 million for the year ended December 31, 1997 to $23.9 million for the year
ended December 31, 1998. Gross profit as a percentage of net sales increased
from 8.9% for the year ended December 31, 1997 to 13.0% for the year ended
December 31, 1998. These increases primarily reflect the impact of acquisitions
and the availability of certain of the Company's raw materials at prices below
those paid in 1997. Hog prices have a significant impact on the Company's cost
of goods sold and lower hog prices during 1998 favorably impacted gross profit
as compared to 1997.
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14
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $8.0 million or 67.9% from $11.8
million for the year ended December 31, 1997 to $19.8 million for the year ended
December 31, 1998. As a percentage of net sales, selling, general and
administrative expenses increased from 7.8% to 10.9%. This increase was
primarily attributable to a larger percentage of branded product sales in 1998,
which generally require higher selling, general and administrative expenses per
dollar of sales, primarily related to increased advertising support.
Income from Operations. Income from operations increased $2.6 million
from $1.6 million for the year ended December 31, 1997 to approximately $4.2
million for the year ended December 31, 1998. This increase is attributable to
the factors discussed above.
Interest Expense. Interest expense increased $0.7 million from $1.5
million for the year ended December 31, 1997 to $2.2 million for the year ended
December 31, 1998. This increase was primarily attributable to increased levels
of debt (and the related amortization of deferred financing costs and debt
discounts) that were necessary to finance the acquisition of Potter.
Warrants with a put option were issued by the Company in conjunction
with the debt incurred at the time of the Potter acquisition. The Company is
required to accrete the value of the warrants and mark-to-market the estimated
fair value of the put option. Any increases to such value are charged to
earnings as additional interest expense. To the extent of any charges to
earnings, any subsequent decreases to the value of the warrants are added to
earnings as additional interest income. Furthermore, any such additional
interest expense would not be deductible in the Company's federal or state
income tax returns and, therefore, would increase the effective income tax rate
of the Company. For purposes of these calculations, the fair value of the
warrants was estimated using a Black-Scholes option pricing model. During the
year ended December 31, 1998, the Company recorded no additional interest
expense due to the decrease in the estimated fair value of the warrants.
14
15
Income from Continuing Operations. Income from continuing operations
increased $1.8 million from $0.5 million for the year ended December 31, 1997 to
$2.3 million for the year ended December 31, 1998. This increase reflects the
factors discussed above.
Income Tax (Expense)Benefit. The effective tax rate differs from the
statutory rate primarily because of state income taxes, the non-deductibility of
goodwill amortization and the reduction of the valuation allowance of $226,000
and $462,500 in 1997 and 1998, respectively.
Extraordinary Item. During the year ended December 31, 1998 the Company
recorded a one-time extraordinary loss of $0.3 million resulting from the early
extinguishment of debt and the write-off of the related unamortized deferred
financing costs that occurred at the time the Company's debt facilities were
refinanced. This extraordinary expense was recorded net of the related tax
benefit of $0.1 million.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales increased by $17.1 million or 12.8% from $133.9
million for the year ended December 31, 1996 to $151.0 million for the year
ended December 31, 1997. The increase in sales reflected increases in the sales
of both Carlton and Prefco. In addition, approximately $8 million of the sales
increase was attributable to a full year of operations for Richards, which the
Company acquired in August 1996, and Grogan's and Partin's, which the Company
acquired during the fourth quarter of 1996.
Gross Profit. Gross profit increased by $2.1 million or 18.5% from
$11.3 million for the year ended December 31, 1996 to $13.4 million for the year
ended December 31, 1997. This increase reflects the factors discussed above in
Net Sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.5 million or 14.6% from $10.3 million for
the year ended December 31, 1996 to $11.8 million for the year ended December
31, 1997. This increase is attributable primarily to the factors discussed above
in Net Sales.
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16
As a percentage of net sales, selling, general and administrative
expenses increased from 7.7% to 7.8%. This increase is primarily attributable to
an increasing proportion of branded product sales, which generally require
higher selling, general and administrative expenses per sales dollar.
Income from Operations. Income from operations increased $0.6 million
from $1.0 million for the year ended December 31, 1996 to $1.6 million for the
year ended December 31, 1997. This increase is attributable to factors discussed
above.
Interest Expense. Interest expense increased $0.4 million from $1.1
million for the year ended December 31, 1996 to $1.5 million for the year ended
December 31, 1997. This increase was primarily attributable to debt that the
Company incurred (and the related amortization of deferred financing costs and
note discounts) in connection with the acquisitions of Richards, Grogan's and
Partin's.
Income From Continuing Operations. Income from continuing operations
was $0.4 million in both the year ended December 31, 1996 and the year ended
December 31, 1997.
Income Tax (Expense) Benefit. The effective tax rate differs from the
statutory rate primarily because of state income taxes, the non-deductibility of
goodwill amortization and the reduction of the valuation allowance of $460,000
and $226,000 in 1997 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the year ended December 31, 1996
was $2.3 million. An increase in accounts receivable and decrease in accounts
payable were the primary factors contributing to the use of cash in operating
activities, which was offset by income from continuing operations and
depreciation and amortization. For the year ended December 31, 1997, cash
provided by operating activities was $5.2 million. The cash generated from
operating activities was primarily the result of income from continuing
operations, depreciation and amortization, decreases in accounts receivable and
increases in accounts payable, partially offset by an increase in inventory. Net
cash provided by operating activities for the year ended December 31, 1998 was
$3.9 million. This amount was principally the result of income from continuing
operations, depreciation and amortization and increases in accrued expenses,
partially offset by increases in accounts receivable and decreases in accounts
payable.
During the years ended December 31, 1996 and 1997, cash used in
investing activities of $9.6 million and $0.8 million, respectively, was
primarily related to capital expenditures and acquisitions. Cash of $11.8
million was used in investing activities during the year ended December 31,
1998, principally as a result of capital expenditures and cash paid for the
acquisition of Potter.
Cash provided by financing activities was $13.5 million for the year
ended December 31, 1996. During 1996, borrowings under the line of credit and
other term debt and notes payable, along with cash received from the issuance
related to these debt agreements. During the year ended December 31, 1997, cash
used in financing activities was $1.8 million, primarily related to the decrease
in the Company's bank overdraft and payments under term debt and notes payable,
offset by cash received from the issuance of common stock. Cash provided by
financing activities of $8.9 million for the year ended December 31, 1998 was
principally affected by the borrowings under the term debt and notes payable to
finance the acquisition of Potter and an increase in the bank overdraft. These
amounts were partially offset by payments of term debt and notes payable under
the line of credit.
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In the first quarter of 1998, the Company acquired substantially all of
the assets of Potter, a branded food processing company located in Durant,
Oklahoma in consideration for approximately $13.0 million cash, assumed
liabilities and related transaction costs. In connection with this acquisition,
the Company borrowed approximately $6.5 million in senior subordinated debt from
Banc One Capital Corporation ("Senior Subordinated Debt"). This Senior
Subordinated Debt included detachable common stock warrants with a put option.
The Company also refinanced its line of credit and term debt through Fleet
Capital ("Fleet Facility"). The Fleet Facility provided a line of credit balance
as of March 31, 1998, of approximately $7 million, which was $0.4 million
greater than the balance previously outstanding under the existing line of
credit facility.
As of December 31, 1998, the Company had outstanding under the Fleet
Facility approximately $10.3 million in term debt and approximately $1.6 million
in line of credit borrowings. The Company owed $6.5 million to Banc One under
the Senior Subordinated Debt, and approximately $2.7 million of subordinated
debt to former owners of Prefco, Richards, Grogan's and Partin's. The Senior
Subordinated Debt bears interest at 10% per annum. The subordinated debt owed to
former owners bears interest at an average rate of approximately 7.7% per annum.
The term debt and line of credit agreement under the Fleet Facility bear annual
interest at either the bank's prime rate plus 1% (9.00% at December 31, 1998) or
adjusted LIBOR plus 2.5%, at the Company's option.
Warrants issued in conjunction with the Senior Subordinated Debt
provide that on the occurrence of a Put Trigger Event (defined below), if the
average trading volume of the Company's stock for four consecutive weeks is less
than 15% of the number of shares issuable to the holder of the put warrants,
such holders would have a thirty day right to require the Company to redeem the
warrants for a cash amount equal to the greater of a cash flow formula (defined
in the Warrant Agreement) or the fair market value of the underlying shares
based upon an appraisal, in each case, net of an exercise price of $3.38 per
share. For these purposes, a "Put Trigger Event" would occur upon the earlier of
certain events, including the fifth anniversary of the warrants, a sale of all
or substantially all of the assets of the Company, or a business combination in
which the Company is not the surviving corporation.
If the holder of the warrants exercises the put option, the Company's
ability to satisfy such obligation will depend on its ability to raise
additional capital. The Company's ability to secure additional capital at such
time will depend upon the company's overall operating performance, which will be
subject to general business, financial, competitive and other factors affecting
the Company and either the processed meat distribution industry certain of which
factors are beyond the control of the Company. No assurance can be given that
the Company will be able to raise the necessary capital on terms acceptable to
the Company, if at all, to satisfy the put obligation in a timely manner. If the
Company is unable to satisfy such obligation, the Company's business, financial
condition and operations will be materially and adversely effected.
As of December 31, 1998, the Company believes that cash generated from
operations and bank borrowings will be sufficient to fund its debt service,
working capital requirements and capital expenditures as currently contemplated
for 1999. However, the Company's ability to fund its working capital
requirements and capital expenditures will depend in large part on the Company's
ability to continue to comply with covenants in the Fleet Facility. The
Company's ability to continue to comply with the covenants in the Fleet Facility
will depend on a number of factors, certain of which are beyond the Company's
control, including but not limited to, successful integration of acquired
businesses and implementation of its business strategy, prevailing economic
conditions, uncertainty as to evolving consumer preferences, sensitivity to such
factors as weather and raw material costs, the impact of competition and the
effect of each of these factors on its future operating performance. No
assurance can be given that the Company will remain in compliance with such
covenants throughout the term of the Fleet Facility.
The Company, from time to time, reviews the possible acquisition of
other products or businesses. The Company's ability to expand successfully
through acquisition depends on many factors, including the successful
identification and acquisition of products or businesses and the Company's
ability to integrate and operate the acquired products or businesses
successfully. There can be no assurance that the Company will be successful in
acquiring or integrating any such products or businesses.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to certain market risks. These risks relate to
commodity price fluctuations, interest rate changes and fluctuations in the
value of the warrants with the put option.
The Company is a purchaser of pork and other meat products. The Company
buys pork and other meat products based upon market prices that are established
with the vendor as part of the purchase process. The operating results of the
Company are significantly impacted by pork prices. The Company does not use
commodity financial instruments to hedge pork and other meat products prices.
The Company's exposure to interest rate risk relates primarily to its
debt obligations and temporary cash investments. Interest rate risk is managed
through variable rate borrowings with varying maturities. The Company does not
use, and has not in the past fiscal year used, any derivative financial
instruments relating to the risk associated with changes in interest rates.
The Company is required to accrete the value of the warrants and
mark-to-market the estimated fair value of the put option. Any increases to such
value would be charged to earnings as additional interest expense. To the extent
of any charges to earnings, any subsequent decreases to the value of the
warrants would be added to earnings as additional interest income. Furthermore,
any such additional interest expense would not be deductible in the Company's
federal or state income tax returns and, therefore, would increase the effective
income tax rate of the Company. For purposes of these calculations, the fair
value of the warrants will be estimated using a Black-Scholes option pricing
model. During the year ended December 31, 1998, the Company recorded no
additional interest expense resulting from the changes in the estimated fair of
the warrants.
The Company is exposed to credit risk on certain assets, primarily
accounts receivable. The Company provides credit to customers in the ordinary
course of business and performs ongoing credit evaluations. The Company
currently believes its allowance for doubtful accounts is sufficient to cover
customer credit risks.
YEAR 2000
The Year 2000 issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. These
two-digit computer systems will be unable to interpret dates beyond the year
1999, which could cause a system failure or other computer errors, leading to
disruptions in operations. The Company has focused on three major areas in
conducting an assessment of its Year 2000 readiness: (1) information technology,
(2) embedded technology, and (3) third party relationships.
Information Technology. The Company began its assessment of its Year
2000 readiness by conducting a review of the computer hardware and software
applications which comprise the Company's information technology systems. This
review was completed by the end of the third quarter of 1998. As a result of
this review, the Company believes that, with the exception of its Potter
subsidiary, the information technology being utilized by each of its six
operating subsidiaries is Year 2000 compliant, and the Company has received
written confirmation of Year 2000 compliance from its hardware and software
vendors. The Company has determined that its Potter subsidiary requires the
installation of a new data processing system, after which Potter will also be
Year 2000 compliant. The Company expects that this installation will be
completed in the second quarter of 1999. Through the end of the 1998, the costs
paid to third parties in connection with the Company's review of its information
technology were approximately $50,000, and future estimated expenses are
$100,000, consisting primarily of the costs associated with the new Potter data
processing system.
Embedded Technology. The next phase of the Company's assessment began
in the third quarter of 1998 and is expected to be completed by the end of the
second quarter of 1999. This phase involves an audit of the non-information
technology systems and embedded technology at its facilities. The Company does
not anticipate that the costs paid to third parties in connection with its Year
2000 efforts in this area will be material.
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19
Third Party Relationships. The Company relies on third party suppliers
and vendors for raw materials and other key supplies and services. The Company
is also dependent upon its customers for sales and cash flow. Interruption of
supplier or vendor operations or customer sales due to a failure of those third
parties to be Year 2000 compliant could adversely affect the Company's
operations. The Company, however, is not dependent on any particular supplier,
vendor or customer (with the exception of Sam's Club, Inc., which comprises a
significant portion of sales). The Company does not currently have written
documentation concerning the Year 2000 readiness of all its suppliers and
customers, but has surveyed the Year 2000 readiness of suppliers and customers
with whom the Company has an electronic data interface (EDI) and is awaiting
certain responses. While the Company believes that the impact of isolated
occurrences resulting from the failure of third parties to be Year 2000
compliant would not be material, a wide-spread Year 2000 interruption throughout
the food industry or a Year 2000 problem with respect to Sam's Club, Inc., its
largest customer, could have a material adverse effect on the Company's results
of operations and financial position.
Contingency Plan. Although the Company does not currently have a
contingency plan for Year 2000 issues, it does intend to begin developing one in
the second quarter of 1999 to prepare the Company for Year 2000 interruptions
in processing accounting or operational information and the inability of
its lenders or other sources of capital and liquidity to make funds available
when required.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
During 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
requires capitalization of certain costs of computer software developed or
obtained for internal use, provided that those costs are not related to research
and development. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. The AICPA also issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" during 1998. SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. The Company is currently
evaluating the requirements of SOP 98-1 and SOP 98-5 and the effects, if any, on
the current policies of the Company.
Also in 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement 133"). Implementation of
Statement 133 is required for periods beginning after June 15, 1999. Statement
133 establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that derivative be recognized in the balance
sheet at fair value and specifies the accounting for changes in fair value. The
Company is evaluating the effect of Statement 133 on its accounting policy
related to derivative financial instruments.
FORWARD LOOKING STATEMENTS
The Company wants to provide stockholders and investors with more
meaningful and useful information. Therefore, this Annual Report on Form 10-K
contains forward looking information and describes the Company's belief
concerning future business conditions and the outlook for the Company based on
currently available information. Whenever possible, the Company has identified
these "forward looking" statements by words such as "believes," "estimates,"
"expects," "intends" and similar expressions. These forward looking statements
are subject to risks and uncertainties which would cause the Company's actual
results or performance to differ materially from those expressed in these
statements. These risks and uncertainties include the following: risks
associated with acquisitions, including integration of acquired businesses; new
product development and other aspects of the Company's business strategy;
uncertainty as to evolving consumer preferences; customer and supplier
concentration; the impact of competition; the impact of change in the valuation
of the warrants with the put option on the Company's net income and effective
tax rate; the Company's ability to raise additional capital; sensitivity to such
factors as weather and raw material costs; and the factors discussed above under
the captions "Quantitative and Qualitative Disclosures About Market Risk" and
"Year 2000." Readers are encouraged to review the Company's Current Report on
Form 8-K dated June 4, 1997 filed with the Securities and Exchange Commission
for a more complete description of these factors. The Company assumes no
obligation to update the information contained in this Annual Report on Form
10-K.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion under the caption "Quantitative and Qualitative
Disclosures about Market Risk" in Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operation."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's 1998 Financial Statements and the related Reports of
Independent Auditors are set forth on pages F-1 through F-21 of this Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported on a Current Report on Form 8-K dated December
14, 1998 (filed with the Securities and Exchange Commission on December 21,
1998) and a Current Report on Form 8-K dated January 25, 1999 (filed with the
Securities and Exchange Commission on February 1, 1999), the Company replaced
Arthur Andersen LLP with KPMG LLP as its independent certified public
accountants.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held on May 19, 1999 (the "1999 Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to "Compensation" in the 1999 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to "Security Ownership of Certain Beneficial
Owners and Management" in the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to "Certain Transactions with Management and
Others" in the 1999 Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. The consolidated financial statements of the Company and its
subsidiaries, together with the applicable report of independent
public accountants:
Page
----
Independent Auditors Report F-2
Report of Independent Public Accountants F-3
Consolidated Balance Sheets - as of December 31, 1997 and 1998 F-4
Consolidated Income Statements - for the years
ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Stockholders' Equity - for the years
ended December 31, 1996, 1997 and 1998 F-6
Consolidated Statements of Cash Flows - for the years
ended December 31, 1996, 1997 and 1998 F-7
Notes to Consolidated Financial Statements F-8
2. The following exhibits are filed with this report or
incorporated by reference as set forth below:
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of the Company,
including all amendments thereto (9)
3.2 By-Laws of the Company (1)
4.1 Specimen Stock Certificate (1)
4.2 Registration Rights Agreement between T. Rowe Price
Strategic Partners Fund, L.P. and the Company (1)
4.3 Stock Option Plan (1)
4.4 Amendment dated as of April 15, 1998 to the Company's
Stock Option Plan (8)
4.5 Atlantic Premium Brands, Ltd. Employee Stock Purchase
Plan dated November 1, 1997 (2)
4.6 $1.4 million Subordinated Note made by ABEV
Acquisition Corp. in favor of Franklin Roth and Allen
Pauly (4)
4.7 6.35% Subordinated Non-Negotiable Promissory Note due
July 31, 2001 made by Richards Cajun Foods Corp. and
the Company in favor of J.L. Richard in the original
principal amount of $850,000 (6)
22
23
4.8 8% Subordinated Non-Negotiable Promissory Note due
September 30, 2001 made by Grogan's Merger Corp. in
favor of Bobby L. Grogan and Betty R. Grogan in the
original principal amount of $219,593 (6)
4.9 8% Subordinated Non-Negotiable Promissory Note due
December 31, 2003 made by Grogan's Farm, Inc. in
favor of Jefferson Davis and Roger Davis in the
original principal amount of $219,593 (6)
4.10 Secured Promissory Note dated as of March 20, 1998 of
the Company and certain of its subsidiaries payable
to Fleet Capital Corporation in the original
principal amount of $11,000,000 (6)
4.11 Loan and Security Agreement dated as of March 20,
1998 among Fleet Capital Corporation, the Company and
certain of its subsidiaries (6)
4.12 Stock Pledge Agreement dated as of March 20, 1998
between the Company and Fleet Capital Corporation (6)
4.13 Atlantic Premium Brands, Ltd. and Subsidiaries Senior
Subordinated Note and Warrant Purchase Agreement
dated as of March 20, 1998 among the Company, certain
of its subsidiaries and Banc One Capital Partners,
LLC ("Banc One") (6)
4.14 Senior Subordinated Note due March 31, 2005 of the
Company payable to Banc One dated as of March 20,
1998 in the original principal amount of $6,500,000
(6)
4.15 Atlantic Premium Brands, Ltd. Warrant Certificate
Common Stock Purchase Warrant of Banc One dated as of
March 20, 1998 (6)
4.16 Atlantic Premium Brands, Ltd. Warrant Certificate
Contingent Common Stock Purchase Warrant of Banc One
dated as of March 20, 1998 (6)
4.17 Put Option Agreement dated as of March 20, 1998
between the Company and Banc One (6)
4.18 Registration Rights Agreement dated as of March 20,
1998 between the Company and Banc One (6)
4.19 Shareholders Agreement dated as of March 20, 1998
among the Company, certain of its shareholders and
Banc One (6)
4.20 Preemptive Rights Agreement dated as of March 20,
1998 between the Company and Banc One (6)
4.21 Debt Subordination Agreement dated as of March 20,
1998 among Banc One Capital Partners, LLC, the
Company, certain of its subsidiaries and Fleet
Capital Corporation (6)
4.22 Lien Subordination Agreement dated as of March 20,
1998 between Fleet Capital Corporation and Banc One
Capital Partners, LLC (6)
10.1 Non-Compete and Non-Disclosure Agreement dated
September 24, 1993 among the Company, Sterling Group,
Inc., Eric D. Becker, Steven M. Taslitz, Douglas L.
Becker and R. Christopher Hoehn-Saric (1)
10.2 Consulting Agreement dated March 15, 1996 by and
between the Company, Sterling Advisors, L.P. and
Elfman Venture Partners, Inc. (3)
10.3 Amendment to Consulting Agreement dated as of October
16, 1996 among the Company, Sterling Advisors, L.P.
and Elfman Venture Partners, Inc. (6)
10.4 Second Amendment to Consulting Agreement dated as of
September 7, 1997 among the Company, Sterling
Advisors, L.P. and Elfman Venture Partners, Inc. (6)
10.5 Third Amendment to Consulting Agreement dated as of
December 1, 1998 among the Company, Sterling
Advisors, L.P. and Elfman Venture Partners, Inc. (*)
10.6 Form of Tax Indemnification Agreement (1)
10.7 Stock Purchase Agreement dated as of January 23, 1996
among the Company, ABEV Acquisition Corp., Franklin
Roth and Allen Pauly (4)
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10.8 Asset Purchase Agreement dated as of March 6, 1998
among Potter's Acquisition Corp., J.C. Potter Sausage
Company, Potter's Farm, Inc., Potter Rendering Co.
and Potter Leasing Company, Ltd. (6)
10.9 Asset Purchase Agreement dated as of November 24,
1998 between the Company and Canadry Dry Potomac
Corporation (10)
10.10 Asset Purchase Agreement dated February 2, 1999
between the Company and Master Distributors, Inc.
(10)
10.11 Employment Agreement dated October 29, 1996 between
the Company and Alan F. Sussna (5)
10.12 Employment Agreement dated as of April 6, 1998
between the Company and Thomas M. Dalton (7)
10.13 Employment Agreement dated August 10, 1998 between
the Company and Steven Englander (9)
21 Subsidiaries of the Company (6)
23.1 Consent of KPMG LLP (*)
23.2 Consent of Arthur Andersen LLP (*)
27 Financial Data Schedule (*)
- ------------------
* Filed herewith.
(1) Filed as an exhibit to the Company's Registration Statement No.
33-69438 or the amendments thereto and incorporated herein by
reference.
(2) Filed as an exhibit to the Company's Form S-8 Registration Statement
No. 333-39561 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Current Report on Form 8-K dated
March 15, 1996, filed with the Securities and Exchange Commission on
April 1, 1996, and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 and incorporated herein by
reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, and incorporated herein by
reference.
(10) Filed as an exhibit to the Company's Current Report on Form 8-K dated
February 2, 1999, filed with the Securities and Exchange Commission on
February 16, 1999, and incorporated herein by reference.
(b) Reports on Form 8-K:
On December 21, 1998, the Company filed a Current Report on
Form 8-K dated December 14, 1998 disclosing Item 4, a change in its
certifying accountants from Arthur Andersen LLP to KPMG LLP.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ATLANTIC PREMIUM BRANDS, LTD.
By: /s/ THOMAS M. DALTON
---------------------------------------
Thomas M. Dalton
Senior Vice President
and Chief Financial Officer
Dated as of March 31, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ERIC D. BECKER Director March 29, 1999
- -----------------------------------------
Eric D. Becker
Senior Vice President and Chief Financial March 29, 1999
Officer (principal financial and
/s/ THOMAS M. DALTON accounting officer)
- -----------------------------------------
Thomas M. Dalton
/s/ MERRICK M. ELFMAN Director March 29, 1999
- -----------------------------------------
Merrick M. Elfman
Director
March 29, 1999
- -----------------------------------------
Brian Fleming
/s/ JOHN T. HANES Director March 29, 1999
- -----------------------------------------
John T. Hanes
/s/ RICK INATOME Director March 29, 1999
- -----------------------------------------
Rick Inatome
/s/ G. COOK JORDAN, JR. Director March 29, 1999
- -----------------------------------------
G. Cook Jordan, Jr.
/s/ JOHN A. MILLER Director March 29, 1999
- -----------------------------------------
John A. Miller
Chief Executive Officer and Director March 29, 1999
/s/ ALAN F. SUSSNA (principal executive officer)
- --------------------------------------------
Alan F. Sussna
/s/ STEVEN M. TASLITZ Director March 29, 1999
- --------------------------------------------
Steven M. Taslitz
25
26
ATLANTIC PREMIUM BRANDS, LTD.
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report F-2
Report of Independent Public Accountants F-3
Consolidated Balance Sheets - as of December 31, 1997 and 1998 F-4
Consolidated Income Statements - for the years ended
December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Stockholders' Equity - for the years ended
December 31, 1996, 1997 and 1998 F-6
Consolidated Statements of Cash Flows - for the years ended
December 31, 1996, 1997 and 1998 F-7
Notes to Consolidated Financial Statements F-8
F-1
27
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Atlantic Premium Brands, Ltd.:
We have audited the accompanying consolidated balance sheet of Atlantic Premium
Brands, Ltd. (a Delaware corporation), and subsidiaries as of December 31, 1998,
and the related consolidated statements of income, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The consolidated balance sheet of
Atlantic Premium Brands, Ltd. and subsidiaries as of December 31, 1997 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the two-year period ended December 31, 1997, were
audited by other auditors whose report thereon dated March 20, 1998 (except with
respect to the matters discussed in Note 3, as to which the date is March 25,
1999) expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atlantic Premium Brands, Ltd.
and subsidiaries as of December 31, 1998, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
March 26, 1999
F-2
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Atlantic Premium Brands, Ltd.:
We have audited the accompanying consolidated balance sheets of Atlantic Premium
Brands, Ltd. (a Delaware corporation), and subsidiaries as of December 31, 1996
and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atlantic Premium Brands, Ltd.
and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
March 20, 1998 (except with
respect to the matter discussed
in Note 3, as to which the date
is March 25, 1999)
F-3
29
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED BALANCE SHEETS
December 31,
------------
1997 1998
---- ----
ASSETS
Current assets:
Cash $1,183,984 $1,773,813
Accounts receivable, net of allowance for
doubtful accounts of $82,049 and $247,122, respectively 7,379,081 10,437,406
Inventory 3,188,221 4,456,706
Prepaid expenses and other current assets 372,398 235,329
Deferred income taxes 89,500 543,602
Net assets of discontinued operations 3,169,420 1,240,276
-----------------------------------
Total current assets 15,382,604 18,687,132
Property, plant and equipment, net 3,943,818 12,288,196
Goodwill, net 12,745,761 13,516,552
Other assets, net 1,122,340 605,381
Deferred income taxes 50,100 567,808
------------------------------------
Total assets $33,244,623 $45,665,069
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $1,402,792 $ 4,073,100
Notes payable under line of credit 6,839,323 1,579,037
Current maturities of long-term debt 1,659,310 1,377,941
Accounts payable 7,094,865 5,608,538
Income taxes payable 132,460 79,248
Accrued expenses 457,341 4,602,290
------------------------------------
Total current liabilities 17,586,091 17,320,154
Long-term debt, net of current maturities 6,270,078 17,078,550
Put warrants - 1,435,000
------------------------------------
Total liabilities 23,856,169 35,833,704
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; 7,373,574 and 7,412,583 shares
issued and outstanding at December 31, 1997
and 1998, respectively 73,770 74,160
Additional paid-in-capital 12,141,176 12,259,885
Accumulated deficit (2,826,492) (2,502,680)
------------------------------------
Total stockholders' equity 9,388,454 9,831,365
------------------------------------
Total liabilities and stockholders' equity $33,244,623 $45,665,069
====================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
30
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED INCOME STATEMENTS
December 31,
------------
1996 1997 1998
---- ---- ----
Net sales $133,878,234 $151,048,650 $180,817,500
Cost of goods sold 122,606,531 137,617,242 156,869,779
----------------------------------------------------------
Gross profit 11,271,703 13,431,408 23,947,721
Selling, general and administrative
expenses:
Salaries and benefits 4,441,492 4,372,792 8,537,175
Other operating expenses 5,129,541 6,376,960 9,592,661
Depreciation and amortization 693,515 1,040,996 1,663,429
----------------------------------------------------------
Total selling, general and
administrative expenses 10,264,548 11,790,748 19,793,265
----------------------------------------------------------
Income from operations 1,007,155 1,640,660 4,154,456
Interest expense 1,120,454 1,495,155 2,205,931
Other income, net 224,749 368,753 320,878
----------------------------------------------------------
Income from continuing operations
before income taxes 111,450 514,258 2,269,403
Income tax (expense) benefit 329,007 (79,995) (450,000)
----------------------------------------------------------
Income from continuing
operations 440,457 434,263 1,819,403
Discontinued operations:
Income (loss) from discontinued operations 455,302 (77,406) (741,701)
Loss on disposal of discontinued
operations, including provision of
$150,000 for operating losses during
the phase-out period - - (558,897)
----------------------------------------------------------
Income before extraordinary loss 895,759 356,857 518,805
Extraordinary loss - - (194,993)
----------------------------------------------------------
Net income $ 895,759 $ 356,857 $ 323,812
==========================================================
Weighted average common shares:
Basic 5,199,171 6,846,013 7,384,372
==========================================================
Diluted 5,349,539 7,102,850 7,576,236
==========================================================
Income per common share:
Basic
Income from continuing
operations $ 0.08 $ 0.06 $ 0.25
Income (loss) from discontinued operations,
including loss on disposal 0.09 (0.01) (0.18)
Extraordinary loss - - (0.03)
----------------------------------------------------------
Net income $ 0.17 $ 0.05 $ 0.04
----------------------------------------------------------
Diluted:
Income from continuing
operations $ 0.08 $ 0.06 $ 0.24
Income (loss) from discontinued operations,
including loss on disposal 0.09 (0.01) (0.17)
Extraordinary loss - - (0.03)
----------------------------------------------------------
Net income $ 0.17 $ 0.05 $ 0.04
==========================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
31
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
Balance, December 31, 1995 2,320,114 $23,235 $4,618,227 ($4,079,108) $562,354
Issuance of common stock
through private placement, net 2,765,549 27,656 2,754,727 - 2,782,383
Issuance of common stock in
connection with businesses
acquired 1,105,430 11,054 2,043,949 - 2,055,003
Issuance of common stock to
former noteholders 205,517 2,055 306,220 - 308,275
Net income - - - 895,759 895,759
------------------------------------------------------------------------------
Balance, December 31, 1996 6,396,610 64,000 9,723,123 (3,183,349) 6,603,774
Issuance of common stock
through private placement, net 976,964 9,770 2,378,053 - 2,387,823
Issuance of stock options to non-employee - - 40,000 - 40,000
Net income - - - 356,857 356,857
------------------------------------------------------------------------------
Balance, December 31, 1997 7,373,574 73,770 12,141,176 (2,826,492) 9,388,454
Issuance of common stock in
connection with employee stock
purchase plan 26,904 269 59,761 - 60,030
Exercise of stock options 12,105 121 46,448 - 46,569
Issuance of stock options to non-employee - - 12,500 - 12,500
Net income - - - 323,812 323,812
------------------------------------------------------------------------------
Balance, December 31, 1998 7,412,583 $74,160 $12,259,885 ($2,502,680) $9,831,365
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
32
ATLANTIC PREMIUM BRANDS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31,
------------
1996 1997 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $895,759 $356,857 $323,812
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities,
net of assets and liabilities of
acquired businesses
Loss on disposal of discontinued operations - - 558,897
(Income) loss from discontinued operations (455,302) 77,406 741,701
Extraordinary loss - - 194,993
Depreciation and amortization 693,515 1,040,996 1,370,454
Amortization of debt discount
and deferred financing costs 102,217 213,580 292,975
Deferred income taxes 130,993 255,995 (268,600)
Options issued to non-employee - 40,000 12,500
Decrease (increase) in accounts
receivable, net (2,824,527) 1,470,809 (1,273,258)
Decrease (increase) in inventory (167,373) (318,893) 483,981
Decrease (increase) in prepaid
expenses and other current assets (183,488) (144,859) 154,004
Increase (decrease) in accounts
payable (600,738) 2,400,578 (1,486,327)
Increase (decrease) in accrued
expenses and other current liabilities 143,291 (180,259) 2,793,861
----------------------------------------------
Net cash provided by (used in)
operating activities (2,265,653) 5,212,210 3,898,993
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and
equipment (159,882) (375,837) (888,778)
Proceeds from sale of property,
plant and equipment - - 178,821
Cash paid for businesses acquired,
including deferred acquisition fees,
net of cash acquired (9,417,351) (454,912) (12,870,210)
Cash paid for distribution agreements
and exclusivity rights (50,000) 24,679 -
----------------------------------------------
Net cash used in investing
activities (9,627,233) (806,070) (13,580,167)
----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank
overdraft (452,964) (1,227,943) 2,670,308
Borrowings (payments) under line of
credit, net 7,255,984 (416,661) (5,260,286)
Borrowings (payments) under term
debt and notes payable, net 4,658,473 (2,433,809) 11,760,985
Payments of financing costs (706,420) (134,978) (351,815)
Issuance of common stock 2,782,383 2,387,823 106,599
----------------------------------------------
Net cash provided by (used in) financing
activities 13,537,456 (1,825,568) 8,925,791
----------------------------------------------
Net cash provided by (used in) discontinued
operations (516,241) (2,524,917) 1,345,212
----------------------------------------------
NET INCREASE IN CASH 1,128,329 55,655 589,829
Cash, beginning of period - 1,128,329 1,183,984
----------------------------------------------
Cash, end of period $1,128,329 $1,183,984 $1,773,813
==============================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
33
ATLANTIC PREMIUM BRANDS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF COMPANY:
The accompanying consolidated financial statements present the accounts of
Atlantic Premium Brands, Ltd. (formerly Atlantic Beverage Company, Inc.) and
subsidiaries (the "Company"). All significant inter-company transactions have
been eliminated in consolidation. The Company's financial statements have been
restated to classify the results of operations and net assets of the beverage
division as discontinued operations. Accordingly, all amounts included in the
Notes to Consolidated Financial Statements pertain to continuing operations
except where otherwise noted. See further discussion in Note 3 - "Discontinued
Operations".
The Company is engaged in the manufacturing, marketing and distribution of
packaged meat and other food products in Texas, Louisiana, Kentucky, Oklahoma
and surrounding states. The operating results of the Company are impacted by
changes in food commodity markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
The Company records sales when product is delivered to the customers. Discounts
provided, principally volume, are accrued at the time of the sale.
CASH
Cash consists of cash held in various deposit accounts with financial
institutions. As of December 31, 1998, $234,265 was restricted to meet minimum
balance funding requirements.
INVENTORY
Inventory is stated at the lower of cost or market and is comprised of raw
materials, finished goods and packaging supplies. Cost is determined using the
first-in, first-out method.
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 financing costs are being
amortized over 5 to 7 years, representing the term of the related debt, using
the effective interest method.
INTANGIBLE ASSETS
The excess of cost over the fair market value of tangible net assets and
trademarks of acquired businesses is amortized on a straight-line basis over the
periods of expected benefit, which range from 10 years to 40 years. Amortization
expense for each of the years ended December 31, 1996, 1997 and 1998 was
$280,141, $350,268 and $465,451,
F-8
34
respectively. Accumulated amortization as of December 31, 1996, 1997 and 1998
was $280,141, $611,501 and $1,095,538, respectively. Subsequent to an
acquisition, the Company continually evaluates whether events and circumstances
have occurred that indicate the remaining estimated useful life of an intangible
asset may warrant revision or that the remaining balance of an intangible asset
may not be recoverable. When factors indicate that an intangible asset should be
evaluated for possible impairment, the Company uses an estimate of the related
business' undiscounted future cash flows over the remaining life of the asset in
measuring whether the intangible asset is recoverable.
ADVERTISING
Advertising expenditures are expensed in the year in which the advertising first
takes place.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
INCOME PER COMMON SHARE
Basic income per common share is based upon the weighted-average number of
common shares outstanding. Diluted income per common share assumes the exercise
of all options which are dilutive, whether exercisable or not. The dilutive
effect of stock options is measured under the treasury stock method.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company selectively uses derivative financial instruments to manage its
market and interest rate risk and does not hold derivative positions for trading
purposes. In 1998, the Company entered into a derivative financial instrument in
connection with the issuance of warrants to purchase shares of common stock. The
structure of the transaction, as discussed further in Note 10, requires that
increases in the value of the common stock underlying the warrants be recognized
currently as interest expense in the income statement. Subsequent to the
effective date of this transaction, the market price of the Company's common
stock was generally lower than the exercise price for the warrants, and
accordingly, no interest expense was recorded for these warrants.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value-based method of accounting for its fixed
plan stock options. As such, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeds the
exercise price.
F-9
35
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID CASH PAID
FOR TAXES FOR INTEREST
--------- ------------
Year ended December 31, 1996
Related parties - 103,642
Other - 1,012,307
Year ended December 31, 1997
Related parties - 291,752
Other 112,000 1,170,648
Year ended December 31, 1998
Related parties - 199,888
Other 413,648 1,968,212
UNREGISTERED SHARES
During 1996, the Company issued 655,429 unregistered shares of its common stock
as part of the consideration paid in connection with the acquisitions of
Grogan's and Partin's (see Note 6). In July 1997, the Company sold approximately
1,000,000 unregistered shares of its common stock at a price of $2.55 per share
through a private placement (see Note 18).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform to the current year's presentation.
3. DISCONTINUED OPERATIONS:
During the fourth quarter of 1998, the Company decided to sell substantially all
the assets of its beverage division. The beverage division has been accounted
for as a discontinued operation and prior years' financial statements have been
restated. Interest expense has been allocated to the beverage division based on
its net assets as a percentage of total consolidated net assets.
The sale was recorded in three separate transactions. Effective December 1,
1998, certain assets were sold for cash of approximately $2.2 million. Effective
January 11, 1999, additional assets were sold for cash of approximately
$900,000. Effective February 2, 1999, the Company completed its disposition of
the beverage division when it sold the remaining assets for approximately
$400,000 in cash and notes. The estimated loss of $293,040, net of income taxes,
related to the asset disposals in January and February 1999, is included as a
component of loss on disposal in the accompanying consolidated statement of
income for the year ended December 31, 1998.
In connection with these transactions, the Company recorded expenses related to
severance; legal, investment banking and accounting fees; and lease obligations
which have no future benefit. These expenses total $1.3 million, and include
investment banking fees of $260,000 which were paid to related parties, Sterling
Advisors, LP and Elfman Venture Partners, Inc., and the related liabilities are
classified in accrued expenses in the accompanying consolidated balance sheet at
December 31, 1998.
F-10
36
Selected statements of income data for discontinued operations is as follows:
FOR THE YEARS ENDED DECEMBER 31,
1996 1997 1998
- ----------------------------------------------------------------------------------------------------
Net sales $19,401,759 $21,149,844 $19,597,364
Operating income (loss) 631,108 77,598 (729,309)
Income tax (expense) benefit (351,007) 29,995 341,238
Income (loss) from discontinued
operations 455,302 (77,406) (741,701)
- ----------------------------------------------------------------------------------------------------
Net assets of discontinued operations are as follows:
DECEMBER 31,
1997 1998
- ----------------------------------------------------------------------------------------------------
Current assets $ 3,361,157 $ 1,296,591
Property, plant and equipment, net 995,718 333,689
Other assets 522,249 369,722
Current liabilities (1,709,704) (759,726)
- ----------------------------------------------------------------------------------------------------
Net assets of discontinued operations $ 3,169,420 $1,240,276
- ----------------------------------------------------------------------------------------------------
In the accompanying consolidated balance sheet at December 31, 1997, property,
plant and equipment and non-current other assets of the beverage division are
classified as net current assets of discontinued operations to conform to the
presentation at December 31, 1998.
4. INVENTORY:
Inventory consisted of the following as of December 31:
1997 1998
---- ----
Raw materials $ 297,297 $ 139,655
Finished goods 2,377,914 2,998,362
Packaging supplies 513,010 1,318,689
---------- ----------
Total $3,188,221 $4,456,706
========== ==========
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment as of December 31, 1997 and 1998 are summarized as
follows:
1997 1998
---- ----
Land $ 85,000 $ 663,731
Buildings and building improvements 1,567,368 7,398,286
Equipment and furniture 2,255,914 4,564,003
Leasehold improvements 535,064 474,756
Vehicles 531,520 1,396,534
----------- -----------
4,974,866 14,497,310
Less - accumulated depreciation and amortization (1,031,048) (2,209,114)
----------- -----------