10-Q 1 c72978e10vq.txt QUARTERLY REPORT DATED 9/30/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q {X} Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2002 { } Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number: 1-13747 ATLANTIC PREMIUM BRANDS, LTD. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 36-3761400 ----------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 650 DUNDEE ROAD, SUITE 370 NORTHBROOK, ILLINOIS 60062 ---------------------------------------- ----------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 412-6200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of November 8, 2002, there were outstanding 6,734,391 shares of Common Stock, par value $.01 per share, of the Registrant. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. ATLANTIC PREMIUM BRANDS, LTD. CONSOLIDATED BALANCE SHEETS (in thousands, except shares and par value)

The accompanying notes are an integral part of these consolidated financial statements. ATLANTIC PREMIUM BRANDS, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts) Three Months Ended September 30,

The accompanying notes are an integral part of these consolidated financial statements. ATLANTIC PREMIUM BRANDS, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30,

These accompanying notes are an integral part of these consolidated financial statements. ATLANTIC PREMIUM BRANDS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 AND 2002 (in thousands, except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accompanying consolidated financial statements present the accounts of Atlantic Premium Brands, Ltd. and subsidiaries (the "Company"). All significant intercompany transactions have been eliminated in consolidation. The Company is engaged in the processing, marketing and distribution of packaged meat and other food products in Texas, Louisiana, Oklahoma and surrounding states. The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In management's opinion, the interim financial data presented includes all adjustments necessary for a fair presentation. Certain reclassifications have been made in the 2001 financial statements to conform to the 2002 presentation. Certain information and note disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to understand the information presented. The results of operations for interim periods are not necessarily indicative of the operating results expected for an entire year. It is suggested that these consolidated financial statements be read in conjunction with the Company's December 31, 2001 consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2002. INVENTORY Inventory is stated at the lower of cost or market and is comprised of raw materials, finished goods, production parts and packaging supplies. Cost is determined using the first-in, first-out method (FIFO). Inventory consisted of the following as of: December 31, September 30, (in thousands) 2001 2002 ----------- ------------ Raw materials $ 343 $ 383 Finished goods 3,077 3,081 Packaging supplies 1,348 1,244 Production parts 523 556 ------ ------ Total inventory $5,291 $5,264 ====== ====== PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, net of applicable depreciation. Depreciation is computed using the straight-line method at annual rates of 3% to 20% for buildings and building improvements, and 10% to 20% for equipment, furniture and vehicles. Leasehold improvements are amortized over the lesser of the lease term or asset life. Additions and improvements that substantially extend the useful life of a particular asset are capitalized. Repair and maintenance costs are charged to expense. Upon sale, the cost and related accumulated depreciation are removed from the accounts. OTHER ASSETS Other assets consist of deferred acquisition costs, cash surrender value of life insurance, and deferred financing costs. Deferred acquisition costs are being amortized over 5 years. Deferred financing costs are being amortized over 5 to 7 years, representing the term of the related debt, using the effective interest method. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME PER COMMON SHARE The weighted average shares used to calculate basic and diluted income per common share for the three-month and nine-month periods ended September 30, 2001 and 2002, are as follows:

Options to purchase 1,634,959 and 1,209,268 shares of common stock at prices ranging from $2.40 to $6.50 per share were outstanding during the third quarter of 2001 and 2002 respectively, and options to purchase 1,798,859 shares of common stock at prices ranging from $1.50 to $6.50 per share were outstanding during the nine months ended September 30, 2001 and September 30, 2002, respectively, but were not included in the computation of diluted income per common share because the options' exercise price was greater than the average market price of the common shares during the quarter. Warrants with a put option to purchase up to a maximum of 1,095,700 shares of common stock, as of September 30, 2001 and 2002 at $3.38 per share were outstanding during the third quarter of 2001 and 2002 but were not included in the computation of diluted income per common share because the warrants' exercise price was greater than the average market price of the common shares during the quarter and the nine months ended September 30, 2001 and 2002. 2. CHANGES IN ACCOUNTING PRINCIPLES: On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with finite lives and addresses impairment testing and recognition for goodwill and intangible assets. The Company was required to perform an initial impairment review of goodwill by June 30, 2002 and is required to perform an annual impairment review thereafter. No impairment charges resulted from the required impairment evaluations. The decrease in goodwill of $900 for the nine months ended September 30, 2002 relates to the sale of Grogan's assets which were sold in February 2002 and were included in the Company's food processing segment. The following reflects the impact that SFAS No. 142 would have had on prior year net income and earnings per common share if adopted in 2001:

We assess goodwill for impairment annually unless events occur that require more frequent reviews. Long-lived assets, including amortizable intangibles, are tested for impairment if impairment triggers occur. Discounted cash flow analysis is used to assess nonamortizable intangible impairment while undiscounted cash flow analysis is used to assess amortizable intangible assets. If an assessment indicates impairment, the impaired asset is written down to its fair market value based on the best information available. Estimated fair value is generally measured with discounted estimated future cash flows. The useful lives of amortizable intangibles are evaluated periodically, and subsequent to impairment reviews, to determine whether revision is warranted. The carrying amount, net of related accumulated amortization of the Company's amortizable intangibles, which are primarily deferred financing and acquisition costs, amounted to $291 and $182, respectively, at December 31, 2001 and September 30, 2002. Such amounts are included in other assets in the accompanying consolidated balance sheets. On January 1, 2002 the Company adopted SFAS No. 144, "Accounting for the Impairment and the Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of", it retains many of the fundamental provisions of that Statement. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APB No. 30), for the disposal of a segment of a business. However, it retains the requirement in APB No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. The adoption of SFAS No. 144 did not have any impact on the Company's financial statements. In April 2001, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) reached a consensus on Issue 2 of Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products", as codified by EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)". This issue addresses the income statement classification of consideration paid from a vendor to an entity that purchases the vendor's products for resale. The Company adopted the consensus in the first quarter of 2002. The adoption of this consensus, including required retroactive adjustments of prior periods, resulted in a decrease of net sales and a corresponding decrease of cost of goods sold of $562 for the nine months ended September 30, 2001 and $620 for the nine months ended September 30, 2002. The above reclassifications have no impact on gross profit, income from operations or net income. The Company does not use nor hold derivative positions for trading purposes. In 1998, however, the Company entered into a derivative financial instrument in connection with the issuance of put warrants to purchase shares of common stock. On January 1, 2001, the Company was required to adopt the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". On adoption of SFAS No. 133, the Company recorded a cumulative effect of change in accounting principle of $1,402 (net of zero income taxes) to reduce the carrying value of the liability related to the put warrants to fair value. Subsequent changes in the fair value of the put warrants estimated using the Black-Scholes option valuation model have been recorded as components of net income. 3. GROGAN'S FIRE: On October 13, 2000, the Grogan's manufacturing plant located in Arlington, Kentucky was totally destroyed by fire. During fiscal 2001, the insurance settlement on the building and equipment destroyed in the fire was finalized at $6,800 and the Company recorded a pretax gain, net of costs incurred, in the amount of $4,800. The Company had collected $1,800 of the settlement as of December 31, 2001 and recorded a receivable in the amount of $5,000 which was included in the prepaid expenses and other assets at December 31, 2001. This amount was subsequently collected in February 2002. Additionally, the Company has outstanding claims for inventory destroyed, continuing expenses, business interruption and other coverages which are in process. Based on communications with the insurance carrier, management and its insurance consultants believe, with reasonable certainty, that the Company will receive at least $750 in insurance proceeds related to such claims. The receivable for the anticipated proceeds of $750 was recorded in the fourth quarter of 2001 and are included in prepaid expenses and other current assets. 4. CONTINGENCIES: Lawsuits and claims are filed against the Company from time to time in the ordinary course of business. These actions are in various preliminary stages and no judgments or decisions have been rendered by hearing boards or courts. Management, after reviewing developments to date with legal counsel, is of the opinion that the outcome of such matters will not have a material adverse effect on the Company's financial position or results of operations. 5. DEBT: The Company's debt consists of an $11,000 term note, a $15,000 line of credit and $6,500 senior subordinated note with detachable warrants with a put option. The term debt bears interest at either the bank's prime rate plus 1% or Adjusted LIBOR plus 2.5%, at the Company's option. This loan is due in varying amounts monthly through March 2003 and is secured by substantially all assets of the Company. Under the terms of the line of credit agreement, which expires in March 2003, the Company is permitted to borrow up to $15,000, subject to advance formulas based on accounts receivable, inventory and letter of credit obligations outstanding. Amounts borrowed are due on demand and bear interest at either the bank's prime rate plus 1% or adjusted LIBOR plus 2.5%. Interest is payable monthly and amounts are secured by substantially all assets of the Company. The $6,500 senior subordinated note, maturing on March 31, 2005, bears interest at 15% per annum. A loan amendment dated April 13, 2001 and effective January 17, 2001, increased the interest rate by 5% to 15% per annum. This incremental amount of interest is accrued on a periodic basis and will be payable on June 30, 2003. The other 10% of interest cost is paid monthly. Principal is payable in quarterly installments beginning June 30, 2003. Concurrent with the signing of the loan amendment, an entity owned by some of our directors, officers and 5% stockholders purchased 10% of the senior subordinated debt holder's interest in the senior subordinated notes and the related warrants. The senior subordinated note was issued with detachable warrants with a put option to purchase 666,947 shares of nonvoting common stock at $3.38 per share and a contingent warrant to purchase up to a maximum of 428,753 shares of nonvoting common stock at $3.38 per share based upon the equity value of the Company on certain dates. The warrants were recorded at an estimated fair value of $1,435 and the related discount on the senior subordinated note was recorded for the same amount. This discount is being amortized over the seven-year term of the note as additional interest expense. The fair value of the warrants is marked-to-market at the end of each reporting period. Junior subordinated notes in the principal amounts of $1,400, $875 and $190 were due on March 31, 2001, July 31, 2001 and September 30, 2001, respectively, but were not paid because of restrictive covenants under the credit facilities. Payment on each of these notes will be made when such payment will not violate the covenants under our credit facilities. Under the terms of an inter-creditor subordination agreement, the junior subordinated debt holders are prohibited from exercising any remedy with respect to this debt until the obligations under the credit facilities are paid in full; however, the interest rates of 9%, 6.35% and 8%, respectively, on these notes increased by 2% per annum after their respective due dates. 6. SEGMENTS The Company's operations have been classified into two business segments: food processing and food distribution. The food processing segment includes the processing and sales of sausages and related food products to distributors and retailers in Louisiana, Texas, Oklahoma and other surrounding states. The food distribution segment includes the purchasing, marketing, and distribution of packaged meat products to retailers and restaurants, located primarily in Texas. Summarized financial information, by business segment, for the three months ended are as follows: (in thousands) Three Months Ended --------------------------------------- September 30, 2001 September 30, 2002 ------------------ ------------------ Net sales to external customers: Food Processing $ 14,737 $ 12,832 Food Distribution 19,851 17,481 -------- -------- 34,588 30,313 ======== ======== Interest expense: Food Processing 36 30 Food Distribution 39 39 Corporate 576 450 -------- -------- 651 519 -------- -------- Depreciation and amortization: Food Processing 413 445 Food Distribution 61 18 Corporate 43 43 -------- -------- 517 506 -------- -------- Income (loss) before income taxes: Food Processing 342 777 Food Distribution 227 203 Corporate (1,156) (736) -------- -------- $ (587) $ 244 ======== ======== Summarized financial information, by business segment, for the nine months ended are as follows: (in thousands) Nine Months Ended ---------------------------------------- September 30, 2001 September 30, 2002 ------------------ ------------------ Net sales to external customers: Food Processing $ 42,863 $ 38,973 Food Distribution 56,147 51,295 --------- --------- 99,010 90,268 ========= ========= Interest expense: Food Processing 114 88 Food Distribution 109 116 Corporate 1,723 1,275 --------- --------- 1,946 1,479 ========= ========= Depreciation and amortization: Food Processing 1,243 1,222 Food Distribution 185 54 Corporate 118 126 --------- --------- 1,546 1,402 ========= ========= Income (loss) before income taxes: Food Processing 4,115(a) 3,156 Food Distribution 1,067 1,002 Corporate (3,618) (2,931) --------- --------- $ 1,564 $ 1,227 ========= ========= (a) Includes $2.3 million of other income related to the Grogan's fire (see note 3). ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 2002 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2001 Net Sales. Net sales decreased by $4.3 million or 12.4% from $34.6 million for the quarter ended September 30, 2001 to $30.3 million for the quarter ended September 30, 2002. The decrease in net sales during the quarter was primarily due to the sale of the Grogan's business during the first quarter of 2002 and lower selling prices on many products, which resulted from lower meat prices. Gross Profit. Gross profit increased by $0.3 million or 7.0% from $5.4 million for the quarter ended September 30, 2001 to $5.7 million for the quarter ended September 30, 2002. Gross profit as a percentage of net sales increased from 15.5% for the quarter ended September 30, 2001 to 18.9% for the quarter ended September 30, 2002. The increase in the gross profit percentage was primarily attributable to the favorable raw material pricing (i.e., lower pork prices) realized in the third quarter of 2002. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $0.2 million or 2.2% from $5.4 million for the quarter ended September 30, 2001 to $5.2 for the quarter ended September 30, 2002. Selling, general and administrative expenses as a percentage of net sales increased from 15.5% for the quarter ended September 30, 2001 to 17.3% for the quarter ended September 30, 2002. Increases in salaries and other expenses were offset by the elimination of goodwill amortization and lower selling, general and administrative expenses due to the sale of the Grogan's business. Income (loss) from Operations. Income from operations increased $0.5 million from a loss of $2 thousand for the quarter ended September 30, 2001 to income of $0.5 million for the quarter ended September 30, 2002. This increase is attributable to factors discussed above. Interest Expense. Interest expense decreased $0.2 million from $0.7 million for the quarter ended September 30, 2001 to $0.5 million for the quarter ended September 30, 2002. This decrease was primarily due to a decrease in the cost of our variable-rate borrowings and the related outstanding balances. We issued warrants with a put option in conjunction with the debt incurred at the time of the Potter acquisition. Commencing on January 1, 2001, we were required to mark-to-market the estimated fair value of the put option. Any change to such value is charged or credited to earnings as a fair value adjustment to put warrants. For purposes of these calculations, the fair value of the warrants is estimated using a Black-Scholes option-pricing model. During the quarter ended September 30, 2002, we recorded additional income of $0.2 million as a fair value adjustment to put warrants. Other Income. Other income increased from $9 thousand for the quarter ended September 30, 2001 to $83 thousand for the quarter ended September 30, 2002. Income (loss) before Income Taxes. Income (loss) before income taxes increased $0.8 million from a loss of $0.6 million for the quarter ended September 30, 2001 to income of $0.2 million for the quarter ended September 30, 2002. This increase is attributable to the factors discussed above. Income Taxes. The effective tax rate differs from the statutory rate primarily because of state income taxes, the non-deductibility of the fair value adjustment to the put warrant, and for the three months ended September 30, 2001, the non-deductibility of goodwill amortization. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001 Net Sales. Net sales decreased by $8.7 million or 8.8% from $99.0 million for the nine months ended September 30, 2001 to $90.3 million for the nine months ended September 30, 2002. The decrease in net sales during the period was primarily due to the sale of the Grogan's business during the first quarter of 2002 and lower selling prices on many products which resulted from lower meat prices. Gross Profit. Gross profit increased by $1.0 million or 5.7% from $16.8 million for the nine months ended September 30, 2001 to $17.8 million for the nine months ended September 30, 2002. Gross profit as a percentage of net sales increased from 17.0% for the nine months ended September 30, 2001 to 19.7% for the nine months ended September 30, 2002. Both the increase in gross profit dollars and the increase in the gross profit percentage margin are primarily attributable to the favorable raw material pricing (i.e., lower pork prices) realized in the first nine months of 2002. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $0.1 million or 0.6% from $15.6 million for the nine months ended September 30, 2001 to $15.5 million for the nine months ended September 30, 2002. Increases in salaries and fleet operating expenses were offset by the elimination of goodwill amortization and lower selling, general and administrative expenses due to the sale of the Grogan's business. Selling, general and administrative expenses as a percentage of net sales increased from 15.8% for the nine months ended September 30, 2001 to 17.2% for the nine months ended September 30, 2002. The increase in the selling, general and administrative expenses as a percentage of sales resulted primarily from the sale of the Grogan's business where selling, general and administrative expenses relative to sales were historically lower than the continuing businesses. Income from Operations. Income from operations increased $1.1 million from $1.2 million for the nine months ended September 30, 2001 to $2.3 million for the nine months ended September 30, 2002. This increase is attributable to the factors discussed above. Interest Expense. Interest expense decreased $0.4 million from $1.9 million for the nine months ended September 30, 2001 to $1.5 million for the nine months ended September 30, 2002. This decrease was primarily due to a decrease in the cost of our variable-rate borrowings and the related outstanding balances. We issued warrants with a put option in conjunction with the debt incurred at the time of the Potter acquisition. Commencing on January 1, 2001, we were required to mark-to-market the estimated fair value of the put option. Any change to such value is charged or credited to earnings as a fair value adjustment to put warrants. For purposes of these calculations, the fair value of the warrants is estimated using a Black-Scholes option-pricing model. During the nine months ended September 30, 2002, we recorded additional income of $0.3 million as a fair value adjustment to put warrants. Other Income. Other income decreased $2.1 million from $2.3 million for the nine months ended September 30, 2001 to $0.2 million for the nine months ended September 30, 2002. This change was primarily due to our recognition of a gain for the excess of the estimated proceeds from the insurance policy that was carried on the Grogan's facility over the carrying value of the related property and equipment during the nine months ended September 30, 2001. Income Tax Expense. The effective tax rate differs from the statutory rate primarily because of state income taxes and, for the nine months ended September 30, 2001, the non-deductibility of goodwill amortization. IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires us to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. We would also record a corresponding asset, which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation would be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. We are required to adopt SFAS No. 143 on January 1, 2003 and do not expect that it will have a material impact on our financial position or results of operations. In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Prior guidance required that a liability for an exit cost be recognized at the date of an entity's commitment to an exit plan. This Statement also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the nine months ended September 30, 2001 was $1.0 million. This amount was principally the result of income from operations, depreciation and amortization, and a decrease in income taxes receivable. This was partially offset by an increase in inventory and prepaid expenses, and the effect of the change in accounting principle. Net cash provided by operating activities for the nine months ended September 30, 2002 was $6.9 million. This amount was principally the result of income from operations, depreciation and amortization, a decrease in accounts receivable and a decrease in prepaid expenses and other current assets resulting from the receipt of insurance proceeds related to the Grogan's fire. This was partially offset by a decrease in accounts payable. Cash used in investing activities for the nine months ended September 30, 2001 was $0.2 million, which was related to capital expenditures, partially offset by receipt of insurance proceeds. Cash used in investing activities for the nine months ended September 30, 2002 was $0.3 million, which was related to capital expenditures, partially offset by the proceeds from the sale of Grogan's plant, property and equipment. Cash used in financing activities in the nine months ended September 30, 2001 was $1.0 million, principally affected by a decrease in the bank overdraft and payments of term debt and other notes payable, partially offset by borrowings under the line of credit. Cash used in financing activities in the nine months ended September 30, 2002 was $6.4 million, and it was principally affected by repayments under the line of credit and the payments of term debt and other notes payable. In the first quarter of 1998, we borrowed approximately $6.5 million in senior subordinated debt ("Senior Subordinated Note") from Banc One Capital Partners, LLC ("BOCP"). In connection with this Senior Subordinated Note we issued detachable common stock warrants with a put option. We also refinanced our line of credit and term debt ("Fleet Facility") through Fleet Capital ("Fleet"). As of September 30, 2001 and 2002, we had outstanding under the Fleet Facility approximately $5.6 million and $1.8 million, respectively, in term debt and approximately $6.4 million and $1.4 million, respectively, in line-of-credit borrowings. We owed $6.5 million to BOCP and Sterling BOCP, LLC, an entity owned by some of our directors, officers and 5% shareholders, under the Senior Subordinated Note, and approximately $2.7 million of subordinated debt to former owners of Prefco, Richard's, Grogan's and Partin's. Under the terms of an amendment to the Senior Subordinated Note dated April 13, 2001 and effective January 17, 2001, the interest rate was increased from 10% to 15% per annum. The incremental increase of 5% is accrued, compounded monthly and payable in full on June 30, 2003. The subordinated debt owed to former owners bears interest at an average rate of approximately 9.7% per annum. The term debt and line of credit agreement under the Fleet Facility bear annual interest at either the bank's prime rate plus 1% (7.00% and 5.75% at September 30, 2001 and 2002, respectively) or adjusted LIBOR plus 2.5%, at our option. At September 30, 2002 we had the capacity to borrow $5.2 million under the Fleet Facility. In the first nine months of 2002, we received $5 million as part of the Grogan's fire insurance settlement. These monies will be used to pay the federal and state taxes and other expenses associated with the settlement and the remainder has been applied to the Fleet Facility. Warrants issued in conjunction with the Senior Subordinated Note provide that on the occurrence of a Put Trigger Event (defined below), if the average trading volume of our stock for four consecutive weeks is less than 15% of the number of shares issuable to the holder of the put warrants, such holders would have a thirty day right to require us to redeem the warrants for a cash amount equal to the greater of a cash flow formula (defined in the Warrant Agreement) or the fair market value of the underlying shares based upon an appraisal, in each case, net of an exercise price of $3.38 per share. For these purposes, a "Put Trigger Event" would occur upon the earlier of certain events, including the fifth anniversary of the warrants, a sale of all or substantially all of our assets, or a business combination in which we are not the surviving corporation. If the holder of the warrants exercises the put option, our ability to satisfy such obligation will depend on our ability to raise additional capital. Our ability to secure additional capital at such time will depend upon our overall operating performance, which will be subject to general business, financial, competitive and other factors affecting us and the processed meat distribution industry, certain of which factors are beyond our control. No assurance can be given that we will be able to raise the necessary capital on terms acceptable to us, if at all, to satisfy the put obligation in a timely manner. If we are unable to satisfy such obligation, our business, financial condition and operations will be materially and adversely affected. A junior subordinated note to a former owner in the principal amount of $1.4 million was due on June 30, 2001, but was not paid because of restrictions under the Fleet Facility and the Senior Subordinated Note. Two additional junior subordinated notes to former owners, one in the amount of $0.9 million and another in the amount of $0.2 million, became due on July 31, 2001 and September 30, 2001, respectively. Payment on each of these notes will be made when such payment will not violate the covenants under our credit facilities. Under the terms of an inter-creditor subordination agreement, the former owners are prohibited from exercising any remedy with respect to this debt until the Fleet Facility and the Senior Subordinated Note obligations are paid in full; however, the interest rates of 9%, 6.35% and 8%, respectively, on each note increased by 2% per annum after its due date because the principal was not paid. We believe that cash generated from operations and bank borrowings will be sufficient to fund our debt service, working capital requirements and capital expenditures as currently contemplated for 2003. Our ability to fund our working capital requirements and capital expenditures however, will depend in large part on our ability to continue to comply with debt covenants. Our ability to continue to comply with these covenants will depend on a number of factors, certain of which are beyond our control, including but not limited to, implementation of our business strategy, prevailing economic conditions, uncertainty as to evolving consumer preferences, sensitivity to such factors as weather and raw material costs, the impact of competition and the effect of each of these factors on our future operating performance. No assurance can be given that we will remain in compliance with such covenants throughout the term of both the Fleet Facility and the Senior Subordinated Note. We, from time to time, review the possible acquisition of other products or businesses. Our ability to expand successfully through acquisition depends on many factors, including the successful identification and acquisition of products or businesses and our ability to integrate and operate the acquired products or businesses successfully. There can be no assurance that we will be successful in acquiring or integrating any such products or businesses. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are subject to certain market risks. These risks relate to commodity price fluctuations, interest rate changes, fluctuations in the value of the warrants with the put option, and credit risk. We are a purchaser of pork and other meat products. We buy pork and other meat products based upon market prices that are established with the vendor as part of the purchase process. Our operating results are significantly impacted by pork prices. We do not use commodity financial instruments to hedge pork and other meat product prices. Our exposure to interest rate risk relates primarily to our debt obligations and temporary cash investments. We do not use, and have not in the past quarter used, any derivative financial instruments relating to the risk associated with changes in interest rates. We issued warrants with a put option in conjunction with the debt incurred at the time of the Potter acquisition in 1998. Commencing on January 1, 2001, we were required to mark-to-market the estimated fair value of the put option. Any change to such value is charged or credited to earnings as a fair value adjustment to put warrants. For purposes of these calculations, the fair value of the warrants is estimated using a Black-Scholes option-pricing model. We are exposed to credit risk on certain assets, primarily accounts receivable. We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. We currently believe our allowance for doubtful accounts is sufficient to cover customer credit risks. FORWARD LOOKING STATEMENTS We want to provide stockholders and investors with meaningful and useful information. Therefore, this Quarterly Report on Form 10-Q contains forward-looking information and describes our belief concerning future business conditions and our outlook based on currently available information. Whenever possible, we have identified these forward looking statements by words such as "believe," "expect," "will depend" and similar expressions. These forward-looking statements are subject to risks and uncertainties that would cause our actual results or performance to differ materially from those expressed in these statements. These risks and uncertainties include the following: risks associated with acquisitions, including integration of acquired businesses; new product development and other aspects of our business strategy; uncertainty as to evolving consumer preferences; customer and supplier concentration; the impact of competition; the impact of change in the valuation of the warrants with the put option on our net income and effective tax rate; our ability to raise additional capital; and sensitivity to such factors as weather and raw material costs and the factors discussed above under the caption "Quantitative and Qualitative Disclosures About Market Risk." Readers are encouraged to review the information in Item 1 under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2001 and our Current Report on Form 8-K dated June 4, 1997 filed with the Securities and Exchange Commission for a more complete description of these factors. We assume no obligation to update the information contained in this Quarterly Report on Form 10-Q. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See the heading "Quantitative and Qualitative Disclosures About Market Risk" under Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 4. CONTROLS AND PROCEDURES. We maintain a system of disclosure controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. Within 90 days prior to the filing date of this report, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed under the supervision of the our management, including the principal executive officer and principal financial officer. Based on that evaluation, our management, including the principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation described above. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Annual Meeting of Stockholders of the Company held on July 31, 2002, the following matters were submitted to a vote of the stockholders: Election of Directors. John A. Miller, Franklin M. Roth and Alan F. Sussna were reelected as directors of the Company. The following directors' terms of office continued after the Annual Meeting of Stockholders: Eric D. Becker, Brian Fleming, G. Cook Jordan, Jr., John T. Hanes, Merrick M. Elfman and Steven M. Taslitz. Tabulation of Votes Matter For Against Withheld Broker Non-Votes -------------------------------------------------------------------------------- Director Election: John A. Miller 4,694,195 0 1,400 0 Franklin M. Roth 4,693,695 0 1,900 0 Alan F. Sussna 4,602,617 0 92,978 0 ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: The following are filed as Exhibits to this Quarterly Report on Form 10-Q: Exhibit Number Description -------------------- 3.1 Certificate of Incorporation of the Company, including all amendments thereto (1) 3.2 By-Laws of the Company (2) 4.1 Acknowledgement Letter, dated August 20, 2002, by and between the Company and Banc One Capital Partners, LLC relating to the Amended and Restated Warrant Certificate Common Stock Purchase Warrant 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: None. ------------------------ (1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference. (2) Filed as an exhibit to the Company's Registration Statement No. 33-69438 or the amendments thereto and incorporated herein by reference. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ATLANTIC PREMIUM BRANDS, LTD. Dated as of November 13, 2002 By: /s/ Thomas M. Dalton ------------------------------------------ Thomas M. Dalton, Chief Financial Officer, Chief Operating Officer and Senior Vice President (On behalf of Registrant and as Chief Accounting Officer) CERTIFICATION (PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED) I, Alan F. Sussna, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Atlantic Premium Brands, Ltd.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a.) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b.) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c.) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a.) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Alan F. Sussna ----------------------------- Alan F. Sussna Chief Executive Officer CERTIFICATION (PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED) I, Thomas M. Dalton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Atlantic Premium Brands, Ltd.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a.) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b.) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c.) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a.) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Thomas M. Dalton ----------------------------- Thomas M. Dalton Chief Financial Officer INDEX TO EXHIBITS Exhibit Number Description --------------------- 3.1 Certificate of Incorporation of the Company, including all amendments thereto (1) 3.2 By-Laws of the Company (2) 4.1 Acknowledgement Letter, dated August 20, 2002, by and between the Company and Banc One Capital Partners, LLC relating to the Amended and Restated Warrant Certificate Common Stock Purchase Warrant 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 --------------------- (1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference. (2) Filed as an exhibit to the Company's Registration Statement No. 33-69438 or the amendments thereto and incorporated herein by reference.

ATLANTIC PREMIUM BRANDS LTD 10-Q