S-1/A 1 ds1a.htm AMENDMENT NO. 2 TO FORM S-1 Amendment No. 2 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on October 16, 2003

Registration No. 333-105499

 


 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

AMENDMENT NO. 2

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


 

American Seafoods Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   6719   01-0781250
(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial Classification Code Number)  

(I.R.S. Employer

Identification Number)

 


 

Market Place Tower

2025 First Avenue

Suite 1200

Seattle, Washington 98121

(206) 374-1515

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

 


Co-Registrants

See Next Page


Brad Bodenman

Chief Financial Officer

American Seafoods Group LLC

Market Place Tower

2025 First Avenue

Suite 900

Seattle, Washington 98121

(206) 374-1515

(Name, address, including zip code, and telephone

number, including area code, of agent for service)

 


 

Copies to:

Jeffrey J. Rosen, Esq.

Debevoise & Plimpton

919 Third Avenue

New York, New York 10022

(212) 909-6000

 

David J. Goldschmidt, Esq.

Skadden, Arps, Slate,

Meagher & Flom LLP

Four Times Square

New York, New York 10036

(212) 735-3000

 

Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.

 


 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, check the following box.  ¨


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CALCULATION OF REGISTRATION FEE


Title of Each Class of Securities to be Registered   

Proposed Maximum Aggregate

Offering Price(1)

   Amount of Registration Fee

Income Deposit Securities (IDSs)(2)

   $675,235,361    $3,400(3)

Shares of Common Stock, par value 0.01 per share(4)

       38,918,465     

    % Notes(5)(6)

   $301,618,101     

Guarantees

   *    None(7)

(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes an indeterminate number of IDSs of the same series of the IDSs offered hereby, which may be received by holders of IDSs in the future on one or more occasions in replacement of the IDSs offered hereby in the event of a subsequent issuance of IDSs. The IDS units represent 38,918,465 shares of the common stock and $301.6 million aggregate principal amount of     % notes of American Seafoods Corporation, including 4,971,182 IDSs subject to the underwriters’ over-allotment option. Assuming the underwriters’ over-allotment option is exercised, 38,112,392 IDSs will be sold to the public in connection with this initial public offering and 806,073 IDSs will be issued to certain affiliates and members of management in connection with the transactions described in this registration statement under “Detailed Transaction Steps.”
(3) $36,405 and $15,124 were previously paid in connection with the initial filing of this Registration Statement on May 22, 2003 and the filing of Amendment No. 1 on July 9, 2003, respectively.
(4) Including 4,971,182 common shares subject to the underwriters’ over-allotment option, 38,112,392 common shares will be sold to the public in connection with this initial public offering and 806,073 common shares will be issued to certain affiliates and members of management in connection with the transactions.
(5) Including $38.5 million principal amount subject to the underwriters’ over-allotment option. $295.4 million     % notes will be sold to the public in connection with this initial public offering and $6.2 million     % notes will be issued to certain affiliates and members of management in connection with the transactions.
(6) Includes an indeterminate principal amount of notes of the same series as the notes offered hereby, which will be received by holders of notes offered hereby in the future on one or more occasions in the event of a subsequent issuance of IDSs, upon an automatic exchange of portions of the notes offered hereby for identical portions of such additional notes.
(7) Pursuant to Rule 457(n), no separate filing fee is required for the guarantees.

 


 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 



Table of Contents

Exact Name of Co-Registrant

as Specified in its Charter


  

State or Other
Jurisdiction of
Incorporation or
Organization


   Primary Standard
Industrial
Classification
Code Number


   I.R.S.
Employer
Identification
No.


  

Code, and Telephone Number,
Including Area Code, of Principal
Executive Office


American Seafoods

Holdings LLC

   Delaware    6719    13-4097209   

Market Place Tower

2025 First Avenue,

Suite 1200

Seattle, WA 98121

Phone: (206) 374-1515

American Seafoods

Group LLC

   Delaware    6719    22-3702647   

Market Place Tower

2025 First Avenue,

Suite 1200

Seattle, WA 98121

Phone: (206) 374-1515

American Seafoods

International LLC

   Delaware    2092    22-3702872   

40 Herman Melville Blvd.

P.O. Box 2087

New Bedford, MA 02741

Phone: (508) 997-0031

New Bedford Seafoods LLC

   Delaware    2092    22-3702925   

40 Herman Melville Blvd.

P.O. Box 2087

New Bedford, MA 02741

Phone: (508) 997-0031

The Hadley Group LLC

   Delaware    2092    04-2918779   

40 Herman Melville Blvd.

P.O. Box 2087

New Bedford, MA 02741

Phone: (508) 997-0031

American Seafoods

Processing LLC

   Delaware    2092    04-3540757   

40 Herman Melville Blvd.

P.O. Box 2087

New Bedford, MA 02741

Phone: (508) 997-0031

American Seafoods

Company LLC

   Delaware    2092    22-3702875   

Market Place Tower

2025 First Avenue,

Suite 900

Seattle, WA 98121

Phone: (206) 374-1515

American Challenger LLC

   Delaware    0912    22-3702876   

Market Place Tower

2025 First Avenue,

Suite 900

Seattle, WA 98121

Phone: (206) 374-1515

American Dynasty LLC

   Delaware    0912    22-3702909   

Market Place Tower

2025 First Avenue,

Suite 900

Seattle, WA 98121

Phone: (206) 374-1515

American Triumph LLC

   Delaware    0912    22-3702882   

Market Place Tower

2025 First Avenue,

Suite 900

Seattle, WA 98121

Phone: (206) 374-1515


Table of Contents

Exact Name of Co-Registrant

as Specified in its Charter


  

State or Other
Jurisdiction of
Incorporation or
Organization


   Primary Standard
Industrial
Classification
Code Number


   I.R.S.
Employer
Identification
No.


  

Code, and Telephone Number,
Including Area Code, of Principal
Executive Office


Ocean Rover LLC

   Delaware    0912    22-3702880   

Market Place Tower

2025 First Avenue,

Suite 900

Seattle, WA 98121

Phone: (206) 374-1515

Northern Eagle LLC

   Delaware    0912    22-3702900   

Market Place Tower

2025 First Avenue,

Suite 900

Seattle, WA 98121

Phone: (206) 374-1515

Northern Hawk LLC

   Delaware    0912    22-3702905   

Market Place Tower

2025 First Avenue,

Suite 900

Seattle, WA 98121

Phone: (206) 374-1515

Northern Jaeger LLC

   Delaware    0912    22-3702901   

Market Place Tower

2025 First Avenue,

Suite 900

Seattle, WA 98121

Phone: (206) 374-1515

Katie Ann LLC

   Delaware    0912    22-3702906   

Market Place Tower

2025 First Avenue,

Suite 900

Seattle, WA 98121

Phone: (206) 374-1515

Southern Pride Catfish LLC

   Delaware    0912    42-1563059   

Market Place Tower

2025 First Avenue,

Suite 900

Seattle, WA 98121

Phone: (206) 374-1515

Southern Pride Catfish

Trucking, Inc.

   Delaware    0912    42-1563057   

Market Place Tower

2025 First Avenue,

Suite 900

Seattle, WA 98121

Phone: (206) 374-1515


Table of Contents

 

Subject to Completion, Dated October 16, 2003

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS

33,141,210

Income Deposit Securities (IDSs)

LOGO


We are selling 33,141,210 IDSs in respect of 33,141,210 shares of our common stock and $256.8 million aggregate principal amount of our     % notes. Each IDS represents:

 

  Ÿ one share of our common stock; and
  Ÿ $7.75 aggregate principal amount of our     % notes.

 

Assuming we make our scheduled interest payments and pay dividends in the amount contemplated by our current dividend policy, you will receive in the aggregate approximately $1.80 per year in dividends and interest on the common stock and notes represented by each IDS.

 

This is the initial public offering of our common stock and notes. We anticipate that the public offering price will be between $16.70 and $18.00 per IDS. We have applied to list our IDSs on the American Stock Exchange under the trading symbol “SEA”. We do not anticipate that the notes will be separately listed on any exchange.

 

Holders of IDSs will have the right to separate IDSs into the shares of common stock and notes represented thereby at any time after the earlier of 90 days from the closing of this offering or the occurrence of a change of control. Separation of IDSs will occur automatically upon a repurchase, redemption or maturity of the notes. Similarly, holders of our common stock and notes may, at any time, unless the IDSs have automatically separated, combine the applicable number of shares of common stock and principal amount of notes to form IDSs.

 

Under specified circumstances, we will be permitted to defer interest payments on our notes initially represented by the IDSs. Interest payments will not be deferred for more than 24 months in the aggregate or at any time after                     , 2008. We will also have the ability to defer interest payments on our notes on one occasion for not more than 10 months between                     , 2008 and                     , 2013. Deferred interest on our notes will bear interest at an annual rate of     %. Our notes mature on                     , 2013, subject to our right to extend their maturity for two additional successive five-year terms under specified circumstances.

 

Upon a subsequent issuance by us of IDSs, a portion of your notes may be automatically exchanged for an identical principal amount of the notes issued in such subsequent issuance and, in such event, your IDSs will be replaced with new IDSs. For more information regarding these automatic exchanges and the effect they may have on your investment, see “Risk Factors—Subsequent issuances of notes pursuant to an offering by us or following an exercise of exchange rights by partners of ASLP may cause you to recognize original issue discount and other adverse consequences” and “Description of Notes—Additional Notes” on page 123 and “Material U.S. Federal Tax Considerations—Exchange Rights and Additional Issuances” on page 177.

 

We are subject to foreign ownership provisions of the American Fisheries Act as a result of which each owner of 5% or more of our common stock (including purchasers in this offering) must certify to us that such person is a U.S. citizen, and at least 95% of all of our beneficial owners will be required to have U.S. addresses. These requirements, and the remedies we may need to invoke to satisfy them, may have an adverse effect on the market for and trading price of IDSs or shares of our common stock.

 

Investing in the shares of our common stock and our notes represented by IDSs involves risks. See “Risk Factors” beginning on page 24.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

     Per IDS

   Total

Public offering price

   $              $                     

Underwriting discount

   $      $  

Proceeds to American Seafoods Corporation (before expenses)(1)

   $      $  

(1) Approximately $155.0 million of those proceeds will be paid to the current owners of our business before this offering and approximately $33.8 million will be paid to a related party to repay indebtedness and redeem preferred stock.

We have granted the underwriters an option to purchase up to 4,971,182 additional IDSs at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. We will use all of the proceeds from the sale of any additional IDSs under the underwriters’ over-allotment option indirectly to redeem additional equity from the persons who owned our affiliate, American Seafoods, L.P., before this offering, which will increase our percentage ownership in Holdings. This prospectus also relates to 1,265,464 IDSs being issued concurrently with this offering to certain indirect holders of equity interests in Holdings in exchange for a portion of those interests.

 

The underwriters expect to deliver the IDSs to purchasers on or about                     , 2003.

 

CIBC World Markets

     Credit Suisse First Boston

UBS Investment Bank

RBC Capital Markets

Legg Mason Wood Walker

Incorporated

McDonald Investments Inc.

SunTrust Robinson Humphrey

U.S. Bancorp Piper Jaffray

Wells Fargo Securities, LLC

Morgan Joseph & Co. Inc.

Scotia Capital

                    , 2003


Table of Contents

Table Of Contents

 

     Page

Summary

   1

Risk Factors

   24

Cautionary Statement Regarding Forward-Looking Statements 

   39

Use of Proceeds

   40

Dividend Policy and Restrictions

   41

Capitalization

   43

Pro Forma Dilution

   44

Selected Historical and Pro Forma Financial Information for Holdings

   45

Selected Pro Forma Financial Information for the Issuer

   48

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   49

Industry and Regulatory Overview

   67

Business

   74

Management

   92

Security Ownership of Certain Beneficial Owners and Management

   99

Related Party Transactions

   102

Detailed Transaction Steps

   107

Description of Certain Indebtedness

   111

Description of IDSs

   117

Description of Notes 

   121

Description of Capital Stock

   168

IDSs Eligible for Future Sale

   173

Material U.S. Federal Income Tax Considerations

   174

Certain ERISA Considerations

   183

Underwriting

   185

Legal Matters

   188

Change in Accountants

   188

Experts

   188

Where You Can Find More Information

   189

Index to Financial Statements

   F-1

Glossary

   G-1

 

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Table of Contents

Summary

 

The following is a summary of the principal features of this offering of IDSs and should be read together with the more detailed information and financial data and statements contained elsewhere in this prospectus.

 

Throughout this prospectus, we refer to American Seafoods Corporation, a Delaware corporation, as the “Issuer.” The Issuer will be the sole general partner of American Seafoods Holdings, L.P., a Delaware limited partnership (together with its predecessor, American Seafoods Holdings LLC, “Holdings”), which owns the operating entities described below, including American Seafoods Group LLC, a Delaware limited liability company (“ASG”). References in this prospectus to “we,” “our” and “us” refer to the Issuer, Holdings and its direct and indirect subsidiaries and their predecessors, unless the context otherwise requires. The current owner of our business is American Seafoods, L.P., a Delaware limited partnership (“ASLP”), which is controlled by its general partner, ASC Management, Inc.

 

Our Company

 

We are one of the largest integrated seafood companies in the U.S. in terms of revenues. We harvest and process a variety of fish, either on board our sophisticated catcher-processor vessels or at our land-based processing facilities, and market our products to a diverse group of customers in North America, Asia and Europe. We are the largest harvester and at-sea processor of pollock and the largest processor of catfish in the U.S. Pollock is the world’s highest-volume whitefish harvested for human consumption and accounts for a majority of our revenues. According to the Food and Agriculture Organization of the United Nations, catfish accounted for approximately 50% of the value of all aquaculture in the U.S. in 2001. In addition, we harvest and/or process other seafood, including scallops, hake and cod. We maintain an international marketing network through our U.S., Japanese and European offices and have developed long-term relationships with a U.S. and international customer base.

 

We own and operate a premier modern fleet of seven catcher-processor vessels, which average over 300 feet in length and carry crews of 90 to 125 persons. We produce a variety of products at sea, such as pollock roe (fish eggs), surimi (a fish protein paste used in products such as imitation lobster and crabmeat), fillet blocks, headed and gutted fish and fishmeal. We harvest pollock primarily in the U.S. Bering Sea pollock fishery. According to the Marine Conservation Alliance, this fishery is among the largest and most conservatively managed in the world.

 

We own and operate two catfish processing facilities in Alabama. We have strong relationships with catfish farmers and we distribute fresh and frozen catfish products to both retailers and foodservice customers throughout several regions in the U.S. In addition, we conduct other seafood processing operations at our facility in Massachusetts, where we manufacture products such as breaded seafood portions, fillets and scallops.

 

We operate in two principal business segments, ocean harvested whitefish and other seafood products. The ocean harvested whitefish segment includes the harvesting and processing of pollock, cod and hake. Processing of ocean harvested whitefish occurs on our vessels while at sea and at our facilities in Massachusetts. The other seafood products segment includes the processing of catfish and scallops at our facilities in Alabama and Massachusetts.

 

Industry Overview

 

Our pollock harvesting and at-sea processing operations benefit from a favorable statutory and regulatory environment. The American Fisheries Act specifically identifies the catcher-processor vessels that are eligible to participate in the U.S. Bering Sea pollock fishery, prohibits the entry of additional vessels and prohibits any

 

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single entity from harvesting more than 17.5% of the annual directed pollock catch. We own and operate seven of the 19 catcher-processor vessels permitted to participate in the catcher-processor sector of the U.S. Bering Sea pollock fishery. Under the American Fisheries Act, this sector is allocated 40% of the annual directed pollock catch. Within the catcher-processor sector, our allocation for pollock under the Pollock Conservation Cooperative agreement, a contractual arrangement among the seven companies that own the catcher-processors named in the statute, is nearly 2.5 times larger than that of the second largest Pollock Conservation Cooperative member. In addition to harvesting and processing pollock, we also participate in the catcher-processor sector of U.S. fisheries for hake and cod.

 

Catcher-processors, such as the vessels we own, harvest and process fish into frozen products, such as roe, fillets and surimi, within hours of catching them.

 

As part of our other seafood products processing operations, we process approximately 100 million pounds of catfish per year, making us the largest catfish processor by volume in the U.S. We do not own any of the farms from which we source catfish, reducing our exposure to catfish price volatility. In the U.S., the catfish market has evolved over the last decade from being a regional commodity, locally produced and consumed predominantly in the southern U.S., to a large, commercial aquaculture industry serving major U.S. markets.

 

Competitive Strengths

 

  Ÿ Abundant, Stable Pollock Fishery.    Our pollock harvesting operations target the U.S. Bering Sea pollock fishery, which, according to the Marine Conservation Alliance, is one of the healthiest and most responsibly managed fisheries in the world.

 

  Ÿ Attractive Regulatory Environment; Barriers to Entry.    The American Fisheries Act provides us with key competitive benefits, among other things limiting participation in the catcher-processor sector of the U.S. Bering Sea pollock fishery to 19 specifically named catcher-processor vessels, of which we own and operate seven.

 

  Ÿ Efficient Large-Scale Operator.    We own and operate the largest fleet of catcher-processors in the U.S. Bering Sea pollock fishery. In 2002, our fleet included the industry’s top five catcher-processors in terms of metric tons harvested. Each of our catcher-processors is a floating factory equipped with flexible manufacturing platforms and an integrated computer system, enabling constant communication among vessels, the corporate office and our sales representatives, and the ability to shift production based on current market demand.

 

  Ÿ Catfish Processor Leader.    We are the largest catfish processor in the U.S., processing approximately 100 million pounds of catfish per year in our two Alabama facilities, which represents a leading market share in the catfish processing sector of over 15%.

 

  Ÿ Strong Customer Relationships and Distribution Network.    We have established long-standing relationships with a diverse base of customers worldwide, including industrial importers, foodservice distributors, food retailers, restaurant chains and reprocessing companies.

 

  Ÿ Experienced Management Team.    Our senior management team members average more than 20 years of industry experience.

 

Business Strategy

 

Over the past decade, we have become one of the largest integrated seafood companies in the U.S.  Today we are committed to building on our existing harvesting, processing and marketing platforms.

 

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The primary components of our business strategy include the following:

 

  Ÿ Maximize Pollock Revenues.    Our pollock harvesting and at-sea processing operations provide a majority of our revenues. Our strategy to maximize pollock revenues includes continuing to increase our share of the total allowable catch in the U.S. Bering Sea pollock fishery by purchasing community development quota from Alaska Community Development Groups and optimizing our product mix based on global demand and pricing.

 

  Ÿ Continue to Diversify Sources of Revenues.    We participate in a number of other fisheries besides pollock, such as those for hake and cod. With the recent acquisition of Southern Pride, we became the largest catfish processor in the U.S. and therefore have significant market positions in pollock, catfish and cod, the top three whitefish species in terms of U.S. human consumption.

 

  Ÿ Leverage International Marketing Network.    We are currently expanding our presence in worldwide seafood markets, with a particular focus on the Asian and European markets, to increase and diversify our customer base and global seafood market share.

 

  Ÿ Continually Improve Operating Efficiencies.    We believe that there may be significant synergies created by integrating Southern Pride, our recently acquired Alabama catfish processing operations, with our secondary processing operations in Massachusetts, leading to improved profitability for both businesses.

 

  Ÿ Pursue Strategic Acquisitions.    We intend to evaluate and selectively pursue accretive opportunities that we believe are strategically important based on their potential to diversify our product and customer base, broaden our distribution network and increase cash flow.

 

New Credit Facility

 

Simultaneously with consummating this offering, our subsidiary ASG will enter into $300.0 million of senior secured debt facilities with a syndicate of financial institutions, which we refer to as the “new credit facility.”  We expect that the new credit facility will include an $80.0 million senior secured revolving credit facility, which we refer to as the “new revolver,” a term loan in a total principal amount of $80.0 million, which we refer to as the “new term loan,” and $140.0 million of senior secured notes, which we refer to as the “new senior notes.” The Issuer will not be a party to the new credit facility. The new credit facility will contain restrictions on ASG’s ability to make distributions to Holdings and the Issuer. Such distributions are the projected sources of cash to allow the Issuer to make interest and dividend payments to IDS holders. We expect that the new credit facility will have a 5-year maturity. CIBC World Markets Corp., the lead underwriter of this offering, is also the sole placement agent, lead arranger and bookrunner of the new credit facility. The closing of the IDSs offering is conditioned upon the closing of the proposed new credit facility. See “Use of Proceeds” and “Description of Certain Indebtedness—New Credit Facility.”

 

Existing Senior Subordinated Notes

 

In conjunction with this offering, ASG commenced a consent solicitation with respect to its outstanding $175.0 million 10.125% senior subordinated notes due 2010, which we refer to as our “existing senior subordinated notes” and a tender offer for such notes. As of October 10, 2003, all of our existing senior subordinated notes had been validly and irrevocably tendered. The tender offer will expire on October 24, 2003, unless we extend it. ASG intends to use a portion of the net proceeds from this offering and borrowings under the new credit facility (1) to acquire our existing senior subordinated notes in the tender offer and (2) to pay fees, expenses and premiums associated with the consent solicitation and tender offer. The closing of the consent solicitation and tender offer is conditioned on the consummation of this offering. Credit Suisse First Boston is the dealer manager of the tender offer and the solicitation agent in the consent solicitation.

 

The Transactions and Use of Proceeds

 

Prior to and in connection with this offering, we will consummate various internal restructuring and realignment transactions, the principal effects of which will be to rationalize the existing structure and recapitalize ASLP’s

 

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equity interest in Holdings into an interest consisting of part equity and part notes issued by Holdings. In this offering, we expect that the Issuer will sell 33,141,210 IDSs and receive approximately $546.3 million in net proceeds after underwriting discounts, assuming an initial public offering price of $17.35 per IDS, which represents the mid-point of the range set forth on the cover page of this prospectus. In addition, the Issuer will issue 1,265,464 IDSs, and pay approximately $14.3 million of the net proceeds it receives from the offering, to certain indirect holders of equity interests in Holdings in exchange for those interests.

 

The remaining net proceeds will be invested, directly or indirectly, in equity interests in Holdings and in the notes to be issued by Holdings. The Issuer will become the managing general partner of Holdings (which will convert to a limited partnership).

 

Holdings will use the proceeds it receives from the Issuer, as well as proceeds from the repayment of a management loan:  to repay related party indebtedness and to redeem preferred equity interests (a total of approximately $33.8 million); to make a distribution to ASLP in redemption of Holdings equity held by ASLP (approximately $140.7 million); and to make an investment of approximately $357.5 million in equity of ASG.

 

ASLP will use the funds it receives from Holdings as well as amounts it receives in repayment of management loans and from the exercise of various options to make a distribution to the existing owners of our business. ASG will use the funds it receives from Holdings, as well as the proceeds from the new credit facility, to repay its outstanding indebtedness as well as expenses associated with such repayment and these transactions. In addition, ASG will escrow approximately $25.0 million to pre-fund the first four monthly interest payments on the notes, the first four monthly distributions on the junior preferred units and the first three monthly distributions on the Holdings regular and junior common equity units. The escrow account will be pledged to secure the new credit facility.

 

Holdings will guarantee on a subordinated basis the Issuer’s notes represented by the IDSs. ASG and its principal operating subsidiaries will also guarantee, on a subordinated basis, the Issuer’s notes represented by the IDSs, as well as the notes issued by Holdings and held by the Issuer and ASLP. For a more detailed outline of these steps and transactions, see “Detailed Transaction Steps.”

 

After giving effect to these transactions, the Issuer will own directly or indirectly approximately 73.5% of the economic interests in Holdings and, indirectly, in ASG, and ASLP will own the remaining 26.5%. In addition, members of management will have unvested options to acquire equity interests in ASLP, a portion of which will vest based either on the option holders’ continued employment or on a combination of such continued employment and the achievement by Holdings of performance targets. The options that vest in this compensatory manner will be structured so that the resulting dilution is shared ratably by the Issuer and ASLP. Other management options to acquire equity interests in ASLP will dilute only the owners of ASLP.

 

Following the completion of these transactions, approximately 34.3% of ASLP’s retained economic interest in Holdings will initially be in the form of junior equity units, consisting of $33.0 million stated amount of     % junior preferred units and a number of junior common equity units. Unless and until certain performance and dividend targets are met or certain time periods have elapsed, the distributions otherwise allocable to the junior equity units will be subordinated to the distributions on the regular Holdings equity units held by the Issuer and ASLP. For more information about the subordination of distributions on ASLP’s junior equity units, see “Summary of the Capital Stock—Subordination of Distributions on ASLP’s Junior Equity Units” and “Related Party Transactions—Agreements Relating to ASLP and Holdings—Holdings Partnership Agreement.”

 

In connection with the offering, the Issuer will issue to all ASLP partners and option holders exchange warrants permitting such holders to exchange their regular ASLP limited partnership units for IDSs representing the Issuer’s common stock and notes. Upon any such exchange, the Issuer would then have the right to exchange the ASLP units received by it for equity interests in Holdings and Holdings notes. See “Related Party Transactions—ASLP Exchange and Registration Rights Agreement.” If all such exchange warrants, other than those associated with compensatory options, were exercised in full (assuming that all ASLP junior units were converted into

 

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regular ASLP units), the ASLP partners and option holders would receive an aggregate of 12,428,426 IDSs (or 26.5% of the total IDSs that would be outstanding following such exercise) and the Issuer would own 100% of the economic interests in Holdings.

 

The Issuer will also issue, for nominal consideration, preferred stock to three partners of ASLP—Centre Partners Management LLC, or Centre Partners, Bernt O. Bodal, our chairman and chief executive officer, and Coastal Villages Pollock LLC. The preferred stock will entitle each such holder to elect one member of the Issuer’s board of directors for so long as such holder meets minimum indirect ownership levels in Holdings. Following this offering, our board will consist of five members, which will be increased to at least seven members shortly thereafter, a majority of whom will be independent. See “American Seafoods Corporate Structure after IDS Offering” in the “Detailed Transaction Steps” section.

 

The following chart reflects our capital structure immediately following this offering:

 

LOGO

 

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The Issuer was formed as a holding company under Delaware law in May 2003 and has not conducted any independent operations. Following this offering, Holdings will own 100% of the economic interests in ASG. The Issuer will not have direct operations but, as the sole general partner of Holdings, it will have management responsibility for Holdings and its subsidiaries, including ASG.

 

Our principal executive office is located at Market Place Tower, 2025 First Avenue, Suite 1200, Seattle, Washington 98121, and our telephone number is (206) 374-1515. Our internet address is www.americanseafoods.com.  www.americanseafoods.com is a textual reference only, meaning that the information contained on the website is not part of this prospectus and is not incorporated in this prospectus by reference.

 

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The Offering

 

Summary of the IDSs

 

What are IDSs?

 

We are offering 33,141,210 IDSs at an initial public offering price of $17.35 per IDS, which represents the mid-point of the range set forth on the cover page of this prospectus. As described below, assuming we make our scheduled interest payments and pay dividends in the amount contemplated by our current dividend policy, you will receive in the aggregate approximately $1.80 per year in dividends and interest on the common stock and notes represented by each IDS.

 

Each IDS represents:

 

  Ÿ one share of our common stock; and

 

  Ÿ $7.75 aggregate principal amount of our     % notes.

 

The ratio of common stock to principal amount of notes represented by an IDS is subject to change in the event of a stock split, recombination or reclassification of our common stock. For example, if we elect to effect a two-for-one stock split, from and after the effective date of the stock split, each IDS will represent two shares of common stock and the same principal amount of notes as it previously represented. Likewise, if we effect a recombination or reclassification of our common stock, each IDS will thereafter represent the appropriate number of shares of common stock on a recombined or reclassified basis, as applicable, and the same principal amount of notes as it previously represented.

 

What payments can I expect to receive as a holder of IDSs?

 

You will be entitled to receive monthly interest payments at an annual rate of     % of the aggregate principal amount of notes represented by your IDSs or approximately $1.01 per IDS per year, subject to our right, under specified circumstances, to defer interest payments on the Issuer’s notes for no more than 24 months in the aggregate and no later than        , 2008; and subject further to our right, on one occasion for not more than 10 months between             , 2008 and             , 2013, to defer interest payments on the Issuer’s notes; in each case, so long as the Issuer is not in default under such notes and (if the default is not a payment default) the notes have not been accelerated as a result of such default at the time or during the pendency of such deferral.

 

You will also receive monthly dividends on the shares of our common stock represented by your IDSs, if and to the extent dividends are declared by our board of directors and permitted by applicable law and the terms of our then existing indebtedness. The indenture governing the notes contains restrictions on our ability to declare and pay dividends on our common stock. We have adopted a dividend policy which contemplates that initial annual dividends will be approximately $0.79 per share of our common stock. However, our board of directors may, in its discretion, modify or repeal our dividend policy. We cannot assure you that we will pay dividends at this level in the future or at all.

 

ASG will use a portion of the proceeds from this offering to escrow approximately $25.0 million to pre-fund the first four monthly interest payments on the notes, the first four monthly distributions on the junior preferred units and the first three monthly dividend payments on our common stock. The escrow account will be pledged to secure the new credit facility.

 

We expect to make interest and dividend payments on or about the last day of each month to holders of record on the 25th day of such month. The cash used to make such interest and dividend payments is expected to come from interest payments and distributions by Holdings, and those are expected to be funded out of distributions made to Holdings by ASG. The new credit facility will contain provisions limiting ASG’s ability to make distributions to Holdings in the event various financial tests are not met. See “Description of Certain Indebtedness—New Credit Facility—Limitations on Distributions to Holdings and the Issuer.”

 

 

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Will my rights as a holder of IDSs be any different than the rights of a direct holder of the common stock and notes?

 

No. As a holder of IDSs you are the beneficial owner of the common stock and notes represented by your IDSs. As such, you will have exactly the same rights, privileges and preferences, including voting rights, rights to receive distributions, rights and preferences in the event of a default under the notes indenture, ranking upon bankruptcy and rights to receive communications and notices as a direct holder of the common stock and notes, as applicable.

 

Will the IDSs be listed on an exchange?

 

We have applied to list the IDSs on the American Stock Exchange under the trading symbol “SEA”.

 

Will the notes and shares of our common stock represented by the IDSs be listed on an exchange?

 

The notes represented by the IDSs will not be listed on any exchange. Our shares of common stock will not be listed for separate trading on the American Stock Exchange until a required number of shares is held separately and not in the form of IDSs. If more than such required number of our outstanding shares of common stock is no longer held in the form of IDSs for a period of 30 consecutive trading days, we will apply to list the shares of our common stock for separate trading on the American Stock Exchange. The notes and shares of our common stock represented by the IDSs will be freely tradable without restriction or further registration under the Securities Act, unless they are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act of 1933.

 

In what form will IDSs and the securities represented by the IDSs be issued?

 

The IDSs and the securities represented by the IDSs will be issued in book-entry form only. This means that you will not be a registered holder of IDSs or the securities represented by the IDSs, and you will not be entitled to receive a certificate for your IDSs or the securities represented by your IDSs. You must rely on your broker or other financial institution that will maintain your book-entry position to receive the benefits and exercise the rights of a holder of IDSs.

 

How can I separate my IDSs into shares of common stock and notes or combine shares of common stock and notes to form IDSs?

 

Holders of IDSs, whether purchased in this offering or in subsequent offerings of IDSs of the same series, may, at any time after the earlier of 90 days from the closing of this offering or the occurrence of a change of control, through a broker or other financial institution, separate each of their IDSs into the shares of common stock and notes represented thereby. Similarly, any holder of shares of our common stock and notes may, at any time, through a broker or other financial institution, combine the applicable number of shares of common stock and principal amount of notes to form IDSs. Separation and recombination of IDSs may involve transaction fees charged by your broker and/or other financial intermediaries. See “Description of IDSs—Book Entry, Settlement and Clearance—Separation and Recombination.”

 

What will happen if we issue additional IDSs of the same series in the future?

 

We may conduct future financings by selling additional IDSs of the same series. Additional IDSs will have terms that are identical to those of the IDSs being sold in this offering, except that if they are issued 90 days or more from the closing of this offering, they will be immediately separable, and if they are issued less than 90 days from the closing of this offering, they will be separable on the same date as the IDSs issued hereunder may separate. Additional IDSs will also represent the same proportions of common stock and notes as are represented by the then outstanding IDSs. In addition, we will be required to issue additional IDSs in the future upon the

 

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exercise of exchange rights by our existing owners. Although the notes represented by such IDSs will have terms that are substantially identical (except for the issuance date) to the notes being sold in this offering and will be part of the same series of notes for all purposes under the indenture, it is possible that the new notes will be sold with original issue discount (referred to as OID) for U.S. federal income tax purposes. If such notes are issued with OID, all holders of IDSs of the same series (including the IDSs being offered hereby) and of outstanding notes not held in IDSs will automatically exchange a ratable portion of their outstanding notes for a portion of the new notes, whether held directly or in the form of IDSs, and will thereafter hold a unit consisting of new notes and old notes with a new CUSIP number or a new IDS (consisting of such note unit and common stock) with a new CUSIP number. As a result of such exchanges, we intend to allocate and report the OID associated with the sale of the new notes among all holders of notes on a pro rata basis, which may adversely affect your tax treatment. See “What will be the U.S. federal income tax considerations in connection with a subsequent issuance of notes?” In addition, if such notes are issued with OID, holders of such notes may not be able to recover the portion of their principal amount treated as unaccrued OID in the event of an acceleration of the notes or a bankruptcy of the Issuer prior to the maturity of the notes. See “Risk Factors—Subsequent issuances of notes pursuant to an offering by us or following an exercise of exchange rights by partners of ASLP may cause you to recognize original issue discount and other adverse consequences.”

 

We will file as soon as practicable a Current Report on Form 8-K (or any other applicable form) to announce and quantify any changes in the ratio of IDS components or changes in OID attributed to the notes.

 

What will be the U.S. federal income tax considerations in connection with an investment in the IDSs?

 

Certain aspects of the U.S. federal income tax consequences of the purchase, ownership and disposition of IDSs in this offering are not entirely clear. We intend to treat the purchase of IDSs in this offering as the purchase of shares of our common stock and notes and, by purchasing IDSs, you will agree to such treatment. You must allocate the purchase price of the IDSs between those shares of common stock and notes in proportion to their respective initial fair market values, which will establish your initial tax basis. We expect to report the initial fair market value of each share of common stock as $9.60 and the initial fair market value of each $7.75 aggregate principal amount of our notes as $7.75 and, by purchasing IDSs, you will agree to and be bound by such allocation, assuming an initial public offering price of $17.35 per IDS, which represents the mid-point of the range set forth on the cover page of this prospectus.

 

We believe that the notes should be treated as debt for U.S. federal income tax purposes. However, this conclusion is not free from doubt. If the notes were treated as equity rather than debt for U.S. federal income tax purposes, then the stated interest on the notes would generally be treated as a dividend, and interest on the notes would not be deductible by us for U.S. federal income tax purposes, which could materially increase our taxable income and significantly reduce our future cash flow. In addition, payments on the notes to foreign holders would be subject to U.S. federal withholding taxes at rates of up to 30%. Payments to foreign holders would not be grossed-up on account of any such taxes.

 

Dividends paid by us, to the extent paid out of our tax “earnings and profits,” will generally be taxable to you at long-term capital gains rates under recently-enacted legislation, which is scheduled to sunset in 2008. Interest income on the notes will generally be taxable to you at ordinary income rates. See “Material U.S. Federal Income Tax Considerations.”

 

What will be the U.S. federal income tax considerations in connection with a subsequent issuance of notes?

 

The U.S. federal income tax consequences to you of the subsequent issuance of notes with OID upon a subsequent sale of IDSs pursuant to an offering by us or upon an exercise of exchange rights by partners of ASLP are not entirely clear. The indenture governing the notes and the agreements with the Depository Trust Company, or DTC, will provide that, in the event there is a subsequent issuance of notes by the Issuer having substantially identical terms as the notes, each holder of notes or IDSs (as the case may be) agrees that a portion of such holder’s notes will be automatically exchanged for a portion of the notes acquired by the holders of such

 

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subsequently issued notes, and the records of any record holders of notes will be revised to reflect such exchanges. Consequently, following each such subsequent issuance and exchange, without any further action by such holder, each holder of notes or IDSs (as the case may be) will own an indivisible unit composed of notes of each separate issuance in the same proportion as each other holder (and, for any such holder of IDSs, such indivisible unit composed of notes will be included in such holder’s IDSs). However, the aggregate stated principal amount of notes owned by each holder will not change as a result of such subsequent issuance and exchange. It is unclear whether the exchange of notes for subsequently issued notes results in a taxable exchange for U.S. federal income tax purposes, and it is possible that the IRS might successfully assert that such an exchange should be treated as a taxable exchange. Even if the exchange is not treated as a taxable event, such exchange may result in holders having to include OID in taxable income prior to the receipt of cash and other potentially adverse U.S. federal income tax consequences to holders. Because a subsequent issuance will affect the notes in the same manner regardless of whether the notes are held as part of IDSs or directly, the recombination of notes and shares of common stock to form IDSs or the separation of IDSs should not affect your tax treatment. See “Material U.S. Federal Income Tax Considerations.”

 

Following the subsequent issuance and exchange, we (and our agents) will report any OID on the subsequently issued notes ratably among all holders of notes and IDSs, and each holder of notes and IDSs will, by purchasing IDSs, agree to report OID in a manner consistent with this approach. However, the IRS may assert that any OID should be reported only to the persons that initially acquired such subsequently issued notes (and their transferees) and thus may challenge the holders’ reporting of OID on their tax returns. Such a challenge could create significant uncertainties in the pricing of IDSs and notes and could adversely affect the market for IDSs and notes.

 

Because there is no statutory, judicial or administrative authority directly addressing the tax treatment of the IDSs or instruments similar to the IDSs, we urge you to consult your own tax advisor concerning the tax consequences of an investment in the IDSs. For additional information, see “Material U.S. Federal Income Tax Considerations.”

 

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Summary of the Notes

 

Issuer

American Seafoods Corporation.

 

Notes to be outstanding following the offering


$266.7 million aggregate principal amount of     % notes (or $301.6 million aggregate principal amount assuming the underwriters’ over-allotment option is exercised in full), which includes $9.8 million aggregate principal amount of notes issued to certain of our existing direct and indirect equity investors upon consummation of this offering in connection with our internal restructuring and realignment transactions.

 

Interest rate

    % per year.

 

Interest payment dates

Interest will be paid monthly in arrears on the last day of each month, commencing                  , 2003 to holders of record on the twenty fifth day of such month.

 

Interest deferral

We will be permitted to defer interest payments on the notes if and for so long as the most recently calculated (i) fixed charge coverage ratio of Holdings for the twelve-month period ended on any June 30, September 30 or December 31, or (ii) adjusted fixed charge coverage ratio of Holdings for the twelve-month period ended on any March 31, in each case, is less than the applicable interest deferral threshold described under “Description of Notes – Certain Definitions,” unless, in each case, a default in payment of interest, principal or premium, if any, on the notes has occurred and is continuing, or any other event of default with respect to the notes has occurred and is continuing and the notes have been accelerated as a result of the occurrence of such event of default. Interest payments will not be deferred under this provision for more than 24 months in the aggregate or at any time after             , 2008. In addition, on one occasion for not more than 10 months between             , 2008 and             , 2013, interest payments may again be deferred, at our option, on the notes, unless a default in payment of interest, principal or premium, if any, has occurred and is continuing, or any other event of default with respect to the notes has occurred and is continuing and the notes have been accelerated as a result of the occurrence of such event of default. Deferred interest on the notes will bear interest at an annual rate of     %. After the end of any deferral period occurring before             , 2008, we will repay deferred interest (together with accrued interest thereon) in one or more equal quarterly installments payable through             , 2008. We may prepay deferred interest at any time, except when an interest deferral period is in effect. At the end of any interest deferral period occurring between 2008 and 2013, we must pay all deferred interest and accrued interest on deferred interest in full.

 

 

In the event that interest payments on the notes are deferred, you would be required to include interest in your income for U.S. federal

 

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income tax purposes on an economic accrual basis even if you do not receive any cash interest payments.

 

Maturity date

The notes will mature on             , 2013. We may extend the maturity of the notes for two additional successive five-year terms if the fixed charge coverage ratio or the adjusted fixed charge coverage ratio, as applicable, of Holdings for the most recent twelve-month period ended on the last day of the fiscal quarter ended at least 45 days before the end of the then current term is equal to or greater than              and so long as we are not in default under our notes or any of our other outstanding indebtedness and there are no overdue payments of interest on our notes or any of our other outstanding indebtedness for borrowed money in excess of $1 million.

 

Ranking

The notes will be senior secured indebtedness of the Issuer and will rank pari passu in right of payment with all existing and future unsubordinated obligations of the Issuer. As of June 30, 2003, after giving pro forma effect to the IDSs offering and the use of proceeds as contemplated in this prospectus, the Issuer had no indebtedness other than the notes. Because the Issuer is a holding company, the notes will be structurally subordinated to all indebtedness of the Issuer’s subsidiaries, including indebtedness under the new credit facility. However, to the extent the holders of the notes are able to exercise their rights and remedies under the note guarantees and the pledge, and indirectly under the guarantees of the Holdings notes, they should be effectively in the same position as if the notes ranked pari passu with all indebtedness of Holdings, ASG and its subsidiaries that is not senior or subordinate to the note guarantees, other than indebtedness of foreign subsidiaries.

 

 

As a holding company, we will rely entirely on payments of interest and principal on the notes issued by Holdings to us and dividends, distributions and other payments from our subsidiaries to make payments on the notes. In addition, Holdings is also a holding company and must rely entirely on equity distributions from ASG to make such payments to us. The new credit facility contains limitations on the ability of our subsidiaries to make distributions to us. See “Description of Certain Indebtedness.”

 

Acceleration Forbearance Periods

So long as the notes are guaranteed by at least one of the guarantors and until the earlier of             , 2008 and the time when no designated senior indebtedness of any guarantors is outstanding, without in any way limiting the right of holders to exercise any other remedies they may have (including the right to bring suit against the Issuer or any guarantor for payment of all amounts of principal, premium and interest due and payable), upon the occurrence of an event of default (other than bankruptcy defaults), the principal of the notes may not be accelerated for a period of up to 90 days (subject to earlier termination in certain circumstances). See “Description of Notes—Acceleration Forbearance Periods.”

 

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Note guarantees

The notes will be guaranteed by Holdings, ASG and its subsidiaries on an unsecured subordinated basis on the terms set forth in the indenture. The note guarantees will be subordinated in right of payment to all existing and future senior indebtedness of the guarantors that does not expressly provide that it ranks pari passu with or subordinate to the guarantees, including indebtedness and guarantees of Holdings, ASG and its subsidiaries under our new credit facility. The note guarantees issued by ASG and its subsidiaries will rank senior to ASG’s 10 1/8% senior subordinated notes due 2010, if any, outstanding after the consummation of this offering, and related guarantees of such notes by ASG’s subsidiaries, and to all existing and future debt of our subsidiaries that expressly provides that it is subordinated to the guarantees. See “Description of Notes—Guarantees and Pledge.”

 

 

As of June 30, 2003, after giving pro forma effect to the IDSs offering and the other transactions contemplated in this prospectus, including the tender offer and consent solicitation and the new credit facility, and the use of proceeds as contemplated in this prospectus, the guarantors had approximately $585.0 million of indebtedness, excluding trade payables, of which $255.0 million is indebtedness under our new credit facility and other senior indebtedness of the guarantors.

 

Collateral

The Issuer will pledge all of its interest in the Holdings notes and related guarantees as security for the notes. We will be required to provide additional collateral of the same type if we issue additional notes in the future.

 

Optional redemption

On and after             , 2008, we may redeem for cash all or part of the notes upon not less than 30 or more than 60 days’ notice by mail to the owners of notes, at redemption prices described under “Description of Notes—Optional Redemption.” If the notes are redeemed in part on a pro rata basis, the notes and stock represented by each IDS will be automatically separated.

 

 

In addition, at any time before         , 2008, we may redeem all or part of the notes at a redemption price equal to the sum of the present values of the redemption price of the notes at the first optional redemption date pursuant to the preceding paragraph and all required interest payments on the notes through the first optional redemption date, discounted at the treasury rate plus 50 basis points, plus accrued and unpaid interest. See “Description of Notes—Optional Redemption.”

 

Change of control

Upon the occurrence of a change of control, as defined under “Description of Notes—Change of Control,” unless we have exercised our right to redeem all notes as described above, each holder of the notes will have the right to require us to repurchase that holder’s notes at a price equal to 101% of the principal amount of the notes being repurchased, plus any accrued but unpaid interest to the

 

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date of repurchase. In order to exercise this right, a holder must separate the notes and common stock represented by such holder’s IDSs.

 

Procedures relating to subsequent Issuances

The indenture governing the notes will provide that, in the event there is a subsequent issuance of notes by the Issuer having substantially identical terms as the notes but a different CUSIP number, each holder of notes or IDSs (as the case may be) agrees that a portion of such holder’s notes (whether held directly in book-entry form or held as part of IDSs) will be automatically exchanged for a portion of the notes purchased by the holders of such subsequently issued notes, and the records of any record holders of notes will be revised to reflect such exchanges. Consequently, following each such subsequent issuance and automatic exchange, without any action by such holder, each holder of notes or IDSs (as the case may be) will own an indivisible unit composed of notes of each separate issuance in the same proportion as each other holder. However, the aggregate stated principal amount of notes owned by each holder will not change as a result of such subsequent issuance and exchange. The indenture governing the notes will permit issuances of additional notes upon exercise of exchange warrants by holders of ASLP units for notes and common stock and, subject to compliance with restrictive covenants contained in the indenture, for other permitted purposes in connection with issuances of the Issuer’s IDSs or common stock. However, we may not issue additional notes if and for so long as an event of default with respect to the notes has occurred and is continuing. Any subsequent issuance of notes by the Issuer may adversely affect the tax and non-tax treatment of the holders of notes and IDSs. See “Risk Factors—Subsequent issuances of notes pursuant to an offering by us or following an exercise of exchange rights by partners of ASLP may cause you to recognize original issue discount and other adverse consequences” and “Material U.S. Federal Income Tax Considerations—Exchange Rights and Additional Issuances.”

 

Restrictive covenants

The indenture governing the notes will contain covenants with respect to us and our restricted subsidiaries that will restrict:

 

  Ÿ the incurrence of additional indebtedness and the issuance of preferred stock and certain redeemable capital stock;

 

  Ÿ dividends or distributions on or redemptions of capital stock;

 

  Ÿ a number of other restricted payments, including investments;

 

  Ÿ specified sales of assets;

 

  Ÿ specified transactions with affiliates;

 

  Ÿ the creation of a number of liens;

 

  Ÿ consolidations, mergers and transfers of all or substantially all of our assets; and

 

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  Ÿ certain restrictions on distributions from our restricted subsidiaries.

 

 

The limitations and prohibitions described above are subject to a number of other important qualifications and exceptions described under “Description of Notes—Certain Covenants.”

 

Use of Proceeds; Intercompany Notes

The aggregate gross cash proceeds from the issuance of the notes will be approximately $256.8 million (or $295.4 million if the underwriters’ overallotment option is exercised in full). The Issuer will lend these proceeds and a portion of the proceeds from the issuance of the common stock to Holdings pursuant to intercompany notes, such that the aggregate principal amount of Holdings notes issued to the Issuer will be the same as the principal amount of the notes. Holdings will also issue identical notes to ASLP in redemption of a portion of the Holdings’ equity interests held by ASLP and may issue notes to ASLP in the future in redemption of ASLP’s junior preferred equity units in Holdings. The notes issued by Holdings will be unsecured subordinated indebtedness of Holdings and will have the same payment and interest terms and substantially similar other provisions as the notes and will contain cross-default provisions such that an event of default under the notes will trigger an event of default under the Holdings notes. The Holdings notes will be guaranteed by ASG and its subsidiaries on the same basis as the notes. The Issuer will pledge all of its interest in the Holdings notes to secure the notes as described above. See “Description of Certain Indebtedness —Holdings Intercompany Notes.”

 

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Summary of the Capital Stock

 

Issuer

American Seafoods Corporation.

 

Shares of common stock to be outstanding following the offering

34,406,674 shares (or 38,918,465 shares assuming the underwriters’ over-allotment option is exercised in full), which include 1,265,464 shares to be issued to certain of our existing direct or indirect equity investors upon consummation of this offering in connection with our internal restructuring and realignment transactions.

 

Voting rights

Subject to applicable law, each outstanding share of our common stock will carry one vote per share and the common stock will vote as a class on all matters presented to the shareholders for a vote.

 

Listing

The shares of our common stock will be freely tradable without restriction or further registration under the Securities Act, unless they are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act of 1933. Our shares of common stock will not be listed for separate trading on the American Stock Exchange until a required number of shares is held separately and not in the form of IDSs. If such required number of our outstanding shares of common stock is no longer held in the form of IDSs for a period of 30 consecutive trading days, we will apply to list the shares of our common stock for separate trading on the American Stock Exchange.

 

Foreign ownership provisions

We are subject to complex foreign ownership limitations applicable to companies that participate in U.S. fisheries. We will put in place governance provisions (i) requiring each owner of 5% or more of the Issuer’s capital stock (including purchasers in this offering) to certify to us that such person is a U.S. citizen, (ii) limiting to 20% the aggregate percentage ownership of the Issuer’s capital stock by non-U.S. citizens, (iii) requiring that at least 95% of all of the Issuer’s capital stock be held by beneficial owners with U.S. addresses, and (iv) declaring any holding in violation of the foregoing null and void, or voidable, and providing the Issuer with various remedies including mandatory redemptions and sales. See “Business—Government Regulation.”

 

Equity interest in Holdings

The Issuer will be the sole general partner of Holdings and, through Holdings, will have management control of all of its subsidiaries. Three wholly-owned subsidiaries of the Issuer will hold limited partnership interests in Holdings. The Issuer’s direct and indirect interests in Holdings at the closing will constitute 73.5% of the equity of Holdings (assuming conversion of ASLP’s junior equity into regular equity and Holdings notes). The balance of the equity of Holdings will be held by ASLP.

 

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Subordination of Distributions on ASLP’s Junior Equity Units

Under the limited partnership agreement of Holdings, a portion of ASLP’s retained economic interest in Holdings (approximately 34.3% of its total retained economic interest in the debt and equity of Holdings) will initially be in the form of junior equity units, consisting of $33.0 million of     % junior preferred units and a number of junior common equity units. The junior equity units will not be entitled to monthly distributions, and all amounts otherwise distributable on the junior equity units will be distributed in respect of the regular Holdings equity units held by the Issuer and ASLP, if and to the extent necessary to permit the Issuer to pay dividends on its common stock at a rate of $0.79 per year per share. The junior equity units will be entitled to quarterly distributions if the Issuer is paying dividends on its common stock at a rate of $0.79 per year per share. The junior common equity units will be recapitalized into regular Holdings equity units, and the junior preferred units will be redeemed for an equivalent amount of Holdings notes, if certain performance and dividend targets are met or certain time periods have elapsed. See “Related Party Transactions—Agreements Relating to ASLP and Holdings—Holdings Partnership Agreement.”

 

Preferred Stock

The Issuer will issue 100 shares of each of its Class A, Class B and Class C preferred stock directly or indirectly by Coastal Villages Pollock LLC, Bernt O. Bodal and Centre Partners Management LLC respectively for nominal consideration. Each class of preferred shares will entitle the holder thereof to elect one member of our board of directors, which will be increased to at least seven members shortly after this offering, a majority of whom will be independent. Our organizational documents will limit the size of our board to not more than 13 members. The shares of preferred stock will not entitle the holders thereof to any voting rights other than the right to block any increase in the size of the board to more than 13 members and other changes to our organizational documents that would be detrimental to the specific rights, privileges and preferences of the preferred holders and as required by applicable law. The shares of preferred stock will not be transferable except to a limited class of affiliates of the original owners. The preferred shares of each class will be redeemable by us for nominal consideration (i) if the holders thereof sell shares of our common stock or equity in ASLP such that their indirect equity interest in Holdings is reduced below 5% (or, following any sale, their indirect equity interest in Holdings has otherwise been reduced below 5%) or (ii) at such time as, for any reason, the indirect equity interest in Holdings of the holders of such class falls below 2%. The preferred shares will not entitle the holders thereof to receive dividends or distributions of any kind, other than nominal redemption consideration.

 

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Risk Factors

 

You should carefully consider the information under the heading “Risk Factors” and all other information in this prospectus before investing in the shares of our common stock and notes represented by IDSs.

 

General Information About This Prospectus

 

Unless we specifically state otherwise, the information in this prospectus does not take into account the exercise by the underwriters of their over-allotment option with respect to IDSs.

 

Throughout this prospectus, we have assumed (i) the purchase of all of the existing senior subordinated notes pursuant to the consent solicitation and tender offer for aggregate consideration of $210.2 million, (ii) a     % interest rate on the notes, which is subject to change depending on market conditions and (iii) an initial public offering price of $17.35 per IDS (comprised of $7.75 allocated to each note and $9.60 allocated to each share of common stock).

 

Unless we specifically state otherwise, the information and computations in this prospectus do not take into account the exercise by members of our management of compensatory options to acquire interests in ASLP that, if exercised, would cause ASLP to receive additional interests in Holdings, resulting in dilution for all holders of IDSs and ASLP units. If all of such options and mirror options were exercised immediately following the offering, the Issuer’s percentage ownership in Holdings would decline from 73.5% to 69.1%.

 

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Table of Contents

Summary Consolidated Financial Information for Holdings

 

The following summary historical consolidated financial information for Holdings for the years ended December 31, 2001 and 2002 has been derived from our audited consolidated financial statements included elsewhere in this prospectus and the summary historical consolidated financial information for Holdings as of June 30, 2003 and for the six month periods ended June 30, 2002 and 2003 has been derived from our unaudited consolidated financial statements included elsewhere in this prospectus.

 

The following summary unaudited pro forma financial information for Holdings has been derived by the application of pro forma adjustments to Holdings’ historical financial statements included elsewhere in this prospectus. The summary pro forma financial information for Holdings gives pro forma effect to (i) the distribution by Holdings to the equityowners of ASLP and the Corporate Partners of Holdings’ 80% interest in PLC and (ii) the acquisition of Southern Pride as if such transactions occurred on January 1, 2002 and, in the case of balance sheet data, as of June 30, 2003. The pro forma financial information for Holdings does not reflect any adjustments that give effect to this offering or any of the other transactions contemplated hereby, which adjustments are reflected in the pro forma financial information for the Issuer appearing elsewhere in this prospectus.

 

                            Pro Forma

 
    Year Ended
December 31,


   

Six Months

Ended
June 30,


    Year Ended
December 31,


   

Six Months
Ended

June 30,


    Six Months
Ended
June 30,


 
    2001

    2002

    2002

    2003

    2002

    2002

    2003

 
    (dollars in thousands)  

Statement of Operations Data:

                                                       

Total revenue

  $ 336,839     $ 332,872       182,710       232,963     $ 419,293     $ 228,259     $ 228,062  

Gross profit

    127,239       126,481       78,178       88,166       146,628       88,525       87,323  

Gross margin

    37.8 %     38.0 %     42.8 %     37.8 %     35.0 %     38.8 %     38.3 %

Operating profit

    35,436       58,975       47,514       51,481       63,629       49,682       51,484  

Income before income taxes and minority interest

    18,180       23,012       21,064       38,246       24,858       21,982       38,340  

Net income

    20,078       22,253       20,541       35,800       24,099       21,355       35,927  

Statement of Cash Flows Data:

                                                       

Cash flows from operating activities

    84,588       96,678       75,178       39,954                          

Cash flows from investing activities

    (13,648 )     (58,634 )     (4,840 )     (7,881 )                        

Purchases of property, vessels and equipment

    (9,171 )     (9,431 )     (5,069 )     (6,708 )                        

Cash flows from financing activities

    (73,014 )     (34,736 )     (53,767 )     (32,778 )                        

Other Financial Data:

                                                       

EBITDA(1)

  $ 121,385     $ 103,150     $ 57,262       $ 79,042     $ 111,614     $ 61,559     $   78,339  

Adjusted EBITDA(1)

    108,765       113,297       72,870       75,250       122,512       77,271       74,514  

Ratio of earnings to fixed charges(2)

    1.53       1.59       2.24       2.77       1.59       2.21       2.79  

 

    

June 30,

2003


   

Pro Forma
June 30,

2003


 
     (dollars in thousands)  

Balance Sheet Data:

                

Current assets

   $ 110,901     $ 106,582  

Current liabilities

     56,434       54,653  

Property, vessels and equipment, net

     240,306       230,330  

Cooperative rights, net

     83,830       82,563  

Total assets

     554,076       538,465  

Total interest bearing obligations

     543,209       535,972  

Members deficit

     (83,098 )     (86,134 )

 

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(1) EBITDA represents net income from continuing operations before interest expense, income tax provision (benefit) and depreciation and amortization. EBITDA is not a measure of operating income, operating performance or liquidity under GAAP. We include EBITDA because we understand it is used by some investors to determine a company’s historical ability to service indebtedness and fund ongoing capital expenditures, and because certain covenants in our borrowing agreements are tied to similar measures. Nevertheless, this measure should not be considered in isolation or as a substitute for operating income (as determined in accordance with GAAP) as an indicator of our operating performance, or of cash flows from operating activities (as determined in accordance with GAAP), or as a measure of liquidity. The consummation of the transactions contemplated by this offering will not have an impact on EBITDA before minority interest. EBITDA as calculated here differs from Adjusted EBITDA as defined in our note indenture and credit agreements. Adjusted EBITDA as defined in our note indenture and credit agreements means net income from continuing operations before interest expense, income tax provision or benefit, depreciation, amortization, net unrealized foreign exchange gains or losses, net gains and losses from derivatives relating to our equity and debt, minority interest in income or loss of consolidated entities, equity-based compensation, fees and expenses related to acquisition, merger or restructuring transactions, and any loss from debt repayments and related write-offs. If our Adjusted EBITDA were to decline below certain levels, covenants in our indebtedness that are based on Adjusted EBITDA, including our interest coverage ratio and fixed charge coverage ratio covenants could result in, among other things, a default or mandatory prepayment under our senior credit facility, our inability to pay dividends or a requirement that we defer interest payments on the notes. These covenants are summarized under “Description of Certain Indebtedness” and “Description of Notes.” A reconciliation of EBITDA to Adjusted EBITDA is as follows:

 

                             Pro Forma

 
     Year Ended
December 31,


    Six Months
Ended
June 30,


    Year Ended
December 31,
2002


    Six Months
Ended
June 30,
2002


    Six Months
Ended
June 30,
2003


 
     2001

    2002

    2002

    2003

       
     (dollars in thousands)  

EBITDA

   $ 121,385     $ 103,150     $ 57,262     $ 79,042     $ 111,614     $ 61,559     $ 78,339  

Unrealized foreign exchange gains/losses, net

     (12,976 )     (10,763 )     (1,508 )     (4,037 )     (10,763 )     (1,508 )     (4,037 )

Equity-based compensation

     527       5,600       1,509       212       5,600       1,509       212  

Loss from debt repayment and related write-offs

           15,711       15,711             15,711       15,711        

Transaction costs related to the acquisition of Southern Pride

                             350              

Minority interest in income (loss) of subsidiary

     (171 )     (401 )     (104 )     33                    
    


 


 


 


 


 


 


Adjusted EBITDA

   $ 108,765     $ 113,297     $ 72,870     $ 75,250     $ 122,512     $ 77,271     $ 74,514  
    


 


 


 


 


 


 


 

We consider EBITDA to be a measure of liquidity. Accordingly, EBITDA is reconciled to operating cash flows as follows:

 

    

Year Ended

December 31,


    Six Months
Ended
June 30,


 
     2001

    2002

    2002

    2003

 
     (dollars in thousands)  

Cash flows from operating activities

   $ 84,588     $ 96,678     $ 75,178     $ 39,954  

Interest expense, net of non-cash interest

     18,715       35,051       11,203       18,938  

Net change in operating assets and liabilities

     899       (15,495 )     (14,138 )     12,999  

Income tax provision (benefit)

     (1,898 )     759       627       2,413  

Deferred income tax provision (benefit)

     6,607       (3,696 )            

Other

     25       401       104       913  

Unrealized foreign exchange gains/losses, net

     12,976       10,763       1,508       4,037  

Equity-based compensation

     (527 )     (5,600 )     (1,509 )     (212 )

Loss from debt repayment and related write-offs

           (15,711 )     (15,711 )      
    


 


 


 


EBITDA

   $ 121,385     $ 103,150     $ 57,262     $ 79,042  
    


 


 


 


 

(2) Ratio of earnings to fixed charges is calculated as the total of income before income taxes, minority interest, fixed charges, amortization of capitalized interest, less interest capitalized, divided by the total of interest capitalized and interest expense, including amortization of deferred financing fees and discounts on debt securities.

 

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Table of Contents

Summary Pro Forma Financial Information for the Issuer

 

The following summary pro forma financial information has been derived by the application of pro forma adjustments to the Issuer’s historical consolidated financial statements included elsewhere in this prospectus. The summary pro forma consolidated balance sheet and statement of operations data gives effect to (1) the distribution by Holdings to the equityowners of ASLP and the Corporate Partners of Holdings’ 80% interest in PLC, (2) the acquisition of Southern Pride and (3) the financing transactions described under “Capitalization” and the application of the proceeds therefrom as if the Issuer was formed and all these transactions had been consummated on June 30, 2003 for the consolidated balance sheet data and January 1, 2002 for the consolidated statement of operations data.

 

Assumptions underlying the pro forma adjustments are described in the notes to the unaudited pro forma condensed consolidated financial statements, which should be read in conjunction with this summary pro forma financial information. We believe that the assumptions used provide a reasonable basis for presenting the significant effects directly attributable to these transactions; however, this summary pro forma financial information should not be considered indicative of actual results that would have been achieved had the PLC distribution, the acquisition of Southern Pride and the financing transactions been consummated on the date or for the periods indicated and do not purport to indicate consolidated balance sheet data or results of operations as of any future date or for any future period.

 

This summary pro forma financial information should be read in conjunction with the information contained in “Selected Historical and Pro Forma Financial Information for Holdings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Holdings’ consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Pro Forma Issuer

 
     Year Ended
December 31, 2002


    Six Months
Ended
June 30, 2002


    Six Months
Ended
June 30, 2003


 
     (dollars in thousands)  

Statement of Operations Data:

                        

Total revenue

   $ 419,293     $ 228,259     $ 228,062  

Gross profit

     146,628       88,525       87,323  

Gross margin

     35.0 %     38.8 %     38.3 %

Operating profit

     63,629       49,682       51,484  

Other income (expense), net

     (66,050 )     (44,192 )     (24,714 )

Net income (loss)

   $ (2,421 )   $ 5,490     $ 26,770  

Basic earnings (loss) per share

   $ (0.05 )   $ 0.12     $ 0.57  

Diluted earnings (loss) per share

   $ (0.05 )   $ 0.11     $ 0.55  

Other Financial Data:

                        

EBITDA

   $ 111,614     $ 61,559     $ 78,339  

Adjusted EBITDA

     122,512       77,271       74,514  

Unrealized foreign exchange gains/losses, net

     (10,763 )     (1,508 )     (4,037 )

Equity-based compensation

  

 

5,600

 

    1,509       212  

Loss from debt repayment and related write-offs

  

 

15,711

 

    15,711       —    

Transaction costs related to the acquisition of Southern Pride

  

 

350

 

    —         —    

Ratio of earnings to fixed charges

  

 

.97

 

    1.16       1.81  
                 Pro Forma
Issuer as of
June 30, 2003


 
                 (dollars
in thousands)
 

Balance Sheet Data:

                        

Current assets

                   $ 131,583  

Current liabilities

                     36,350  

Property, vessels and equipment, net

                     230,330  

Cooperative rights, net

                     82,503  

Total assets

                     546,493  

Total interest bearing obligations

                     584,975  

Shareholders’ deficit

                   $ (140,053 )

 

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Table of Contents

Interest and Dividend Payments to IDS Holders

 

The table below shows certain information relating to our available cash in 2002 and for the twelve month period ended June 30, 2003 on a pro forma basis for the Issuer to give effect to this offering, including the use of proceeds from this offering, our recapitalization and the consent solicitation and tender offer, and to give effect to ASG’s new credit facility. For purposes of this presentation, we have assumed that all of the existing senior subordinated notes are purchased pursuant to the consent solicitation and tender offer for an aggregate consideration of $210.2 million, the conversion of ASLP’s junior equity in Holdings into regular equity and Holdings notes, the conversion of ASLP junior units into ASLP regular units and the exchange of all ASLP units for IDSs.

 

The information in the table below assumes that these transactions occurred on January 1, 2002.

 

     Pro Forma Issuer

 
     Year Ended
December 31, 2002


    LTM Ended
June 30, 2003


 
     (in thousands)  

Net income (loss)

   $ (2,421 )   $ 18,859  

Additions:

                

Interest expense on existing debt

     69,190       67,620  

Depreciation and amortization

     44,845       41,915  
    


 


EBITDA

   $ 111,614     $ 128,394  

Adjustments:

                

Unrealized foreign exchange gains/losses, net

   $ (10,763 )   $ (13,292 )

Equity-based compensation

     5,600       4,303  

Loss from debt repayment and related write-offs

     15,711       —    

Transaction costs(1)

     350       350  

Deductions:

                

Interest expense(2)

     (63,027 )     (63,027 )
    


 


Available cash before additional public company administrative expenses, capital expenditures and dividend payments

   $ 59,485     $ 56,728  
    


 



(1) Consists of seller’s transaction costs related to the 2002 acquisition of Southern Pride Catfish Company.
(2) Assumes interest at current rates, estimated as 6.93% average interest, on $220.0 million outstanding borrowings under the new term loan and the new senior notes, 4.12% interest on an overall average balance of $5.0 million under the new revolver, 0.5% commitment fee on the average unused balance of $75.0 million under the new revolver and     % interest on $363.0 million of notes represented by the IDSs.

 

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Under the dividend policy we expect to have in place upon consummation of this offering, the pro forma use of the available cash before additional public company administrative expenses, capital expenditures and dividend payments shown in the above table is as follows:

 

     Pro Forma Issuer

 
     Year Ended
December 31, 2002


   

LTM Ended

June 30, 2003


 
     (in thousands)  

Available cash before additional public company administrative expenses, capital expenditures and dividend payments

   $ 59,485     $ 56,728  

Annual maintenance capital expenditures(1)

     (9,500 )     (9,500 )

Estimated additional public company administrative expenses(2)

     (700 )     (700 )

Dividends on shares of common stock

     (37,117 )     (37,117 )
    


 


Remaining cash

   $ 12,168     $ 9,411  
    


 



(1) We use the term “maintenance capital expenditures” to refer to costs we incur that meet capitalization requirements under accounting principles generally accepted in the United States of America that we consider recurring in nature. The majority of our maintenance capital expenditures relate to our catcher-processor fleet and include items such as fishing gear, improvements to vessel factory processing equipment and major scheduled vessel maintenance. Major scheduled vessel maintenance costs relate principally to our periodic overhauls and replacements performed generally on a three- to five-year cycle.
(2) Consist of $50,000 of certain administrative fees being reimbursed to ASLP, estimated incremental audit fees, tax audit fees, director and officer liability insurance, expenses relating to the annual stockholders’ meeting, printing expenses, investor relations expenses, additional filing fees, additional trustee fees, registrar and transfer agent fees, directors’ fees, additional legal fees, listing fees and miscellaneous fees.

 

Dividend payments are discretionary. See “Dividend Policy and Restrictions.”

 

With the recent acquisition of Southern Pride, we estimate that we will have capital expenditure requirements of approximately $9.5 million in each of 2003 and 2004. Interest payments on the notes may be required to be deferred for up to 24 months in the aggregate prior to             , 2008 and may be deferred at our option on one occasion for not more than 10 months between             , 2008 and             , 2013.

 

Based on the foregoing, aggregate payments to IDS holders for the twelve months ended June 30, 2003 would have been as follows:

 

       Aggregate

   Per
IDS


       (in thousands)     

Interest on notes represented by IDSs

     $ 47,186    $ 1.01

Dividends on shares of common stock represented by IDSs

       37,117      0.79
      

  

Total

     $ 84,303    $ 1.80
      

  

 

The payments made to the junior equity of Holdings, included in the table above, for the twelve months ended June 30, 2003 would have been as follows:

 

       Aggregate

   Per
Unit


       (in thousands)     

Dividends on junior preferred units of Holdings

     $ 4,290    $ 1.01

Dividends on junior common units of Holdings

       3,374    $ 0.79
      

  

Total

     $ 7,664    $ 1.80
      

  

 

Payments on junior equity of Holdings are subordinate to dividends on common units of Holdings.

 

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Table of Contents

Risk Factors

 

An investment in the shares of our common stock and our notes represented by the IDSs involves a number of risks. In addition to the other information contained in this prospectus, prospective investors should give careful consideration to the following factors.

 

Risks Relating to Our Industry and Its Regulation

 

The repeal of or adverse amendments to the American Fisheries Act and other industry regulations would likely impair our profitability.

 

The American Fisheries Act restricts the number of vessels operating in the catcher-processor sector of the U.S. Bering Sea pollock fishery to 19 named catcher-processor vessels, of which we own and operate seven, and by allocating 40% of the directed pollock catch to this sector (with 36.6% being allocated to these 19 catcher-processor vessels and 3.4% being allocated to catcher-vessels). In the event that the American Fisheries Act and other related industry regulations were repealed or modified to permit additional large vessels to operate in the catcher-processor sector of the U.S. Bering Sea pollock fishery, we could be subject to new competition that could adversely affect our profitability. In addition, our pollock harvesting rights and profitability would be adversely affected if the American Fisheries Act and other industry regulations were repealed or modified in a manner that decreases the percentage of the total pollock harvest allocated to the 19 catcher-processor vessels named in the Act. A repeal or modification of the American Fisheries Act or other industry regulations could result from changes in the political environment, a significant increase or decrease in the pollock biomass or other factors, all of which are difficult to predict and are beyond our control.

 

The relatively stable and predictable nature of our harvesting operations and our efficiencies would deteriorate if the Pollock Conservation Cooperative agreement were terminated or adversely changed.

 

The members of the Pollock Conservation Cooperative, which is comprised of all participants in the catcher-processor sector of the U.S. Bering Sea pollock fishery, have agreed that each member will catch only an agreed-upon share of the total allowable catch allocated to the catcher-processor sector in that fishery. By establishing allocations among all catcher-processors, the Pollock Conservation Cooperative, which we refer to as the Cooperative, ensures that members will have the opportunity to harvest a fixed percentage of the total pollock harvest and removes the incentives to harvest and process pollock as fast as possible, thereby giving each member a greater opportunity to optimize operational efficiencies. The Cooperative could be terminated as a result of an adverse change in the American Fisheries Act allocations, the bankruptcy of a Cooperative member or the decision of two or more Cooperative members. The termination of the Cooperative or any adverse change to the allocation system currently in place under the agreement could increase the volatility of our operations, cause us to lose operational efficiencies and have an adverse effect on our existing harvesting rights.

 

Growth in our core pollock harvesting operations and our profitability are limited by the American Fisheries Act.

 

The American Fisheries Act imposes a statutory limit on the maximum amount of pollock that we may independently harvest equal to 17.5% of the directed pollock catch. We are allocated 16.8% of the directed pollock catch under our Cooperative agreements, and we lease the right to harvest another 0.7% of the directed pollock catch from other vessels in our fishery, bringing us to the 17.5% limit.

 

Our business could be materially affected if the community development quota we purchase is significantly reduced or eliminated or offered to us at prices we consider unreasonable.

 

We supplement our pollock harvest through the purchase of community development quota, which plays an important part in our strategy of maximizing access to pollock. The primary agreements governing our current arrangements for purchasing community development quota expire at the end of 2005. The Alaska Community

 

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Table of Contents

Development Groups from which we purchase community development quota could decline to continue to sell their quota to us or could offer their quota at prices we consider unreasonable, which could materially adversely affect our business.

 

In addition, every three years the state of Alaska may re-allocate the community development quota allocation among the six Alaska Community Development Groups. The next reallocation is for the period beginning 2006. The Alaska Community Development Groups from which we purchase community development quota could have their quota allocation reduced below current levels. If any significant reduction were to occur, we could experience a significant decline in our revenues, earnings and profitability.

 

Our ocean harvested whitefish operations are subject to regulatory control and political pressure from interest groups that may seek to materially limit our ability to harvest fish.

 

Under the American Fisheries Act, the Magnuson-Stevens Fishery Conservation and Management Act and other relevant statutes and regulations, various regulatory agencies, including the National Marine Fisheries Service and the North Pacific Fishery Management Council, are endowed with the power to control our harvest of pollock and other groundfish in the fisheries of the North Pacific. These regulatory agencies have the authority to materially reduce the Alaska pollock total allowable catch allocated to the catcher-processor sector as well as our allocation of pollock and other groundfish without any compensation to us.

 

These regulators may decrease or eliminate our allocation of the fish supply from a broad spectrum of lobbying interests including:

 

  Ÿ native Alaskan groups seeking a greater allocation of the pollock harvest to be devoted to community development quotas;

 

  Ÿ other sectors of the pollock fishery, such as inshore processors who periodically seek an increased allocation of the pollock harvest devoted to the on-shore sector; and

 

  Ÿ environmental protection groups.

 

The laws and rules that govern the highly-regulated fishing industry could change in a manner that would have a negative impact on our operations. In addition, protests and other similar acts of politically-motivated third party groups could cause substantial disruptions to the ability of our vessels to engage in harvesting activities. These factors may affect a substantial portion of our harvesting and processing operations in any year, which could have a material adverse effect on our business, results of operations or financial condition.

 

Regulations related to our by-catch could impose substantial costs on our operations and reduce our operational flexibility.

 

The National Marine Fisheries Service imposes various operational requirements aimed at limiting our ability to discard unwanted species, or by-catch, in the North Pacific. Regulation regarding by-catch is from time to time debated in various forums, including the United Nations, and is the subject of public campaigns by environmental groups. Any significant change in the by-catch rules resulting from these debates or campaigns could materially increase our costs or decrease the flexibility of our fishing operations.

 

Governmental efforts to protect endangered species, such as Steller sea lions, may significantly restrict our ability to access our primary fisheries and revenues.

 

There is a risk that access to certain areas of the primary fisheries in which we operate could be restricted due to constraints imposed by governmental authorities in response to the listing of endangered species, such as Steller sea lions, for purposes of the Endangered Species Act. Since 1990, the National Marine Fisheries Service has issued various biological opinions as to the impact on Steller sea lions of the pollock and other groundfish fisheries of the U.S. Bering Sea. These opinions have analyzed the effects of the various groundfish fisheries in the waters off Alaska and have recommended actions to avoid jeopardy for the western population of Steller sea

 

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Table of Contents

lions and the adverse modification of its habitat. Based upon these opinions, the National Marine Fisheries Service has adopted several regulations relating to the protection of Steller sea lions which have caused us to harvest our allocation of pollock and other groundfish from less than the full territory of the fisheries in which we have historically operated.

 

The regulations to protect endangered species, such as Steller sea lions, may significantly restrict our fishing operations and revenues. Further, whatever measures that are adopted may be found to be inadequate or not in compliance with the Endangered Species Act. Therefore, as has occurred in the past, a court may in the future force us to modify our fishing operations by restricting our access to certain areas of the primary fisheries in which we operate in order to ensure the protection of the Steller sea lions in compliance with the Endangered Species Act. These restrictions could have an impact on our fishing operations, profitability and revenues which may be material to our business.

 

In addition, the U.S. Fish and Wildlife Service is currently preparing a biological opinion on the effects of the Bering Sea/Aleutian Islands/Gulf of Alaska groundfish fisheries on bird species listed under the Endangered Species Act, in particular the short-tailed albatross. The National Marine Fisheries Service is also conducting an assessment of the potential interactions between short-tailed albatross and equipment used by trawl vessels in these fisheries. The measures that could be imposed as a result of these investigations could have an impact on our fishing operations, profitability and revenues which may be material to our business.

 

If we and members of our crew fail to comply with applicable regulations, our vessels may become subject to liens, foreclosure risks and various penalties and our fishing rights could be revoked.

 

Our industry is subject to highly complex statutes, rules and regulations. For example, we are subject to statutory and contractual limitations on the type and amount of fish we may harvest, as well as restrictions as to where we may fish within our fisheries. If we or members of our crew violate maritime law or otherwise become subject to civil and criminal fines, penalties and sanctions, our vessels could be subject to forfeiture and our fishing rights could be revoked. The violations that could give rise to these consequences include operating a vessel with expired or invalid vessel documentation or in violation of trading restrictions, violating international fishing treaties or fisheries laws or regulations, submitting false reports to a governmental agency, interfering with a fisheries observer or improperly handling or discarding pollock roe. Because our vessels’ harvesting and processing activities take place at sea, outside the day-to-day supervision of senior management, members of the crews of our vessels may have been guilty of infractions or violations that could subject them or us to significant penalties, which could have a material and adverse effect on our results of operations and financial condition.

 

In 2001, we became aware of allegations that certain crew members may have tampered or attempted to tamper with measurement equipment on board one or more of our vessels, principally related to the 2001 fishing season. In 2002, we received additional tampering allegations relating to one of our vessels. The National Marine Fisheries Service conducted an investigation regarding these allegations, and in consultation with the National Marine Fisheries Service, we also conducted an internal investigation regarding these allegations. It is possible that violations may have occurred or may occur in the future.

 

In addition, our vessels may become subject to liens imposed by operation of maritime law in the ordinary course of business. These include liens for unpaid crew wages, liens for damages arising from maritime torts, liens for various services provided to the vessel and liens arising out of the operation, maintenance and repair of the vessel. The holders of these liens may have the right to foreclose on the vessel if the circumstances giving rise to the liens are not adequately addressed.

 

If we do not comply with rules regulating non-U.S. citizen ownership and control of fishing vessels, we could lose our eligibility to participate in U.S. fisheries.

 

The American Fisheries Act requires that vessels engaged in U.S. fisheries be owned by entities that are at least 75% U.S. citizen owned and controlled. This requirement applies at each tier of ownership and must also be examined in the aggregate.

 

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If the provisions and procedures we adopt prove to be inadequate, we could lose our eligibility to harvest pollock, which would have a material adverse effect on our business, financial condition or results of operations. See “Business—Government Regulation.”

 

In addition, the Maritime Administration expressly reserves the right to review the terms of our loan covenants and financing arrangements to determine if they constitute an impermissible shifting of control to a non-U.S. citizen lender. Based on discussions with counsel and with pertinent government officials, we believe the intention of the Maritime Administration is to prevent provisions couched as loan covenants from serving as a device to shift control to non-U.S. citizens, and not to impede conventional market based loans and credit facilities.

 

The American Fisheries Act is relatively new legislation. As a result, no reported judicial cases clearly interpret its meaning. For this reason, the full future impact of the American Fisheries Act on our ownership and debt capital structure remains uncertain.

 

Risks Relating to Our Business

 

A significant decline in the market price of pollock roe or our other products would significantly reduce our profitability.

 

The sale of pollock roe is our highest margin business. Pollock roe prices have experienced significant volatility in recent years and may continue to do so in the future. The price of pollock roe is heavily influenced by the size and condition of roe skeins, its color and freshness, and the maturity of the fish caught. In addition, pollock roe prices are influenced by anticipated Russian and U.S. production and Japanese inventory carryover, as pollock roe is consumed almost exclusively in Japan. A decline in the quality of the pollock roe that we harvest or fluctuations in supply could cause a significant decline in the market price of pollock roe, which would reduce our margins and revenues.

 

Increase of catfish prices charged by farmers may adversely impact our other seafood products operations.

 

If prices at which we purchase catfish increase without a proportionate increase in the prices we sell those products, our ability to maintain profitability in the catfish processing operations will be affected. Recently, many of the farmers from whom we purchase catfish increased their prices to levels that could have jeopardized our ability to maintain satisfactory profit margins in the catfish processing operations. In response to this trend, in September 2003, we temporarily closed for approximately three weeks our catfish processing plant in Demopolis, Alabama. The plant closure involved a layoff of approximately 270 employees, nearly all of whom have been rehired. The plant has now resumed full operations. We have no assurance that the prices at which farmers will be willing or able to sell their catfish to us will remain at levels that enable us to maintain satisfactory margins and to allow us to continue these operations without further shutdowns or interruptions.

 

A material decline in the population and biomass of pollock and catfish stocks in the fisheries in which we operate would materially and adversely affect our business.

 

The population and biomass of pollock stocks are subject to natural fluctuations which are beyond our control and which may be exacerbated by disease, reproductive problems or other biological issues. Pollock stocks are also largely dependent on proper resource management and enforcement. The overall health of a fish stock is difficult to measure and fisheries management is still a relatively inexact science. Since we are unable to predict the timing and extent of fluctuations in the population and biomass of the pollock stocks, we are unable to engage

 

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in any measures that might alleviate the adverse effects of these fluctuations. Any such fluctuation which results in a material decline in the population and biomass of the pollock stocks in the fisheries in which we operate would materially and adversely affect our business. Conversely, a significant increase in Russian pollock stocks could dramatically reduce the market price of our products.

 

Our catfish operations are similarly subject to the risk of variations in supply. For example, disease in catfish ponds could reduce catfish stocks and adversely affect our business.

 

Our business is subject to Japanese currency fluctuations which could materially adversely affect our financial condition.

 

Our profitability depends in part on revenues received in Japanese yen as a result of sales in Japan. During 2002, our Japanese sales represented 39.6% of our total revenues. A decline in the value of the yen against the U.S. dollar would adversely affect our earnings from sales in Japan. Fluctuations in currency are beyond our control and are unpredictable. From January 1 through December 31, 2002, the value of the dollar declined by 9.6% against the yen, from ¥131.26 per $1.00 to ¥118.64 per $1.00.

 

The hedging activities we conduct may not be sufficient to provide complete protection against loss, and accordingly any such fluctuations could adversely affect our revenues.

 

The segments of the fish industry in which we operate are competitive, and our inability to compete successfully could adversely affect our business, results of operations and financial condition.

 

We compete with major integrated seafood companies such as Trident Seafoods, Nippon Suisan and Maruha, as well as with inshore processors that operate inshore on fixed location processing facilities, relying on catcher-vessels to harvest and deliver fish for processing. We also compete with motherships that are solely at-sea processors, relying on catcher-vessels to harvest and deliver fish for processing. We also compete with other pollock fisheries, particularly the Russian pollock fishery in the Sea of Okhotsk. Some of our competitors have the benefit of marketing their products under brand names that have better market recognition than ours, or have stronger marketing and distribution channels than we do. In addition, other competitors may produce better quality products or have more advantageous pricing margins than we do. We may not be able to compete successfully with any of these companies. In addition, production and distribution of substitute products for pollock could have a significant adverse impact on our profitability. Increased competition as to any of our products could result in price reduction, reduced margins and loss of market share, which could negatively affect our profitability. An increase in imported products in the U.S. at low prices could also negatively affect our profitability.

 

All of our business activities are subject to a variety of natural risks, which could have a material adverse effect on our business, financial condition or results of operations.

 

The U.S. Bering Sea pollock fishery, which is the primary fishery in which we operate, is characterized by extreme sea conditions. Unusual weather conditions could materially and adversely affect the quality and quantity of the fish products we produce and distribute.

 

Our vessels are expensive assets that are subject to substantial risks of serious damage or destruction. The sinking or destruction of, or substantial damage to, any of our vessels would entail significant costs to us, including the loss of production while the vessel was being replaced or repaired. Our insurance coverage may prove to be inadequate or may not continue to be available to us. In the event that such coverage proves to be inadequate, the sinking or destruction of, or substantial damage to, any of our vessels could have a material adverse effect on our business, financial condition or results of operations.

 

Should any of our vessels be destroyed or otherwise become inoperable, the American Fisheries Act would limit our ability to replace that vessel. The statute permits the replacement of lost vessels only if the loss is due to an Act of God, an act of war, the result of a collision, or otherwise not an intentional act of the vessel’s owner.

 

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These rules would restrict our ability to replace our vessels on account of obsolescence and, accordingly, could cause us to incur increased costs of maintaining our vessels, including the substantial loss of capacity during times of such maintenance and rebuilding.

 

We may be required to pay significant damages in connection with litigation that is pending against us.

 

Some of the lawsuits against us could require us to pay significant damages which could have a material adverse effect on our business, results of operations or financial condition. See “Business—Litigation.”

 

We may be adversely affected by a pending IRS audit.

 

Currently, the IRS is conducting an audit of two of our subsidiaries, ASG and ASC, Inc., with respect to tax years 2000 for ASG and 1999 and 2000 for ASC, Inc. We do not know what issues will be raised in the course of this audit and such audit could result in adjustments that could have a material adverse effect on our financial condition.

 

We may incur material costs associated with compliance with environmental regulations.

 

We are subject to foreign, federal, state, and local environmental regulations, including those governing discharges to water, the management, treatment, storage and disposal of hazardous substances, and the remediation of contamination. If we do not fully comply with environmental regulations, or if a release of hazardous substances occurs at or from one of our facilities or vessels, we may be subject to penalties and could be held liable for the cost of remediation. For example, an accident involving one of our vessels could result in significant environmental liability, including fines and penalties and remediation costs. If we are subject to these penalties or costs, we may not be covered by insurance, or any insurance coverage that we do have may not cover the entire cost. Compliance with environmental regulations could require us to make material capital expenditures and could have a material adverse effect on our results of operations and financial condition.

 

We produce and distribute food products that are susceptible to contamination and, as a result, we face the risk of exposure to product liability claims and damage to our reputation.

 

As part of the fish processing, small pieces of metal or other similar foreign objects may enter into some of our products. Additionally, our fish products are vulnerable to contamination by disease-producing organisms or pathogens. Shipments of products that contained foreign objects or were so contaminated could lead to an increased risk of exposure to product liability claims, product recalls, adverse public relations and increased scrutiny by federal and state regulatory agencies. If a product liability claim were successful, our insurance might not be adequate to cover all the liabilities we would incur, and we might not be able to continue to maintain such insurance, or obtain comparable insurance at a reasonable cost, if at all. If we did not have adequate insurance or contractual indemnification available, product liability claims relating to defective products could significantly increase our operating costs. In addition, even if a product liability claim was not successful or was not fully pursued, the negative publicity surrounding any such assertion could harm our reputation with our customers.

 

Our operations are labor intensive, and our failure to attract and retain qualified employees may adversely affect us.

 

The segments of the harvesting and processing industry in which we compete are labor intensive and require an adequate supply of qualified production workers willing to work in rough weather and potentially dangerous operating conditions at sea. Some of our operations have from time to time experienced a high rate of employee turnover and could continue to experience high turnover in the future. Labor shortages, the inability to hire or retain qualified employees or increased labor costs could have a material adverse effect on our ability to control expenses and efficiently conduct our operations. We may not be able to continue to hire and retain the sufficiently skilled labor force necessary to operate efficiently and to support our operating strategies, or we may not continue to experience favorable labor relations. In addition, our labor expenses could increase as a result of a continuing shortage in the supply of personnel. Changes in applicable state and federal laws and regulations

 

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could increase labor costs, which could have a material adverse effect on our business, results of operations and financial condition.

 

Risks Relating to the IDSs, our Notes, the New Credit Facility and the Shares of our Common Stock

 

We have substantial indebtedness, which could restrict our ability to pay interest and principal on the notes and to pay dividends with respect to shares of our common stock represented by the IDSs.

 

We have a significant amount of debt. For the twelve months ended June 30, 2003, on a pro forma basis after giving the effect to this offering and related transactions as if they had occurred on January 1, 2002, our ratio of Adjusted EBITDA to interest expense would have been 1.77 times and our ratio of total debt to Adjusted EBITDA would have been 5.15 times. The degree to which we are leveraged on a consolidated basis could have important consequences to the holders of the IDSs, including:

 

  Ÿ make it more difficult for us to satisfy our obligations under the notes and to the lenders under the new credit facility, and to pay dividends on our common stock;

 

  Ÿ our ability in the future to obtain additional financing for working capital, capital expenditures or acquisitions may be limited;

 

  Ÿ we may not be able to refinance our indebtedness on terms acceptable to us or at all;

 

  Ÿ a significant portion of our cash flow from operations is likely to be dedicated to the payment of the principal of and interest on our indebtedness, thereby reducing funds available for future operations, capital expenditures and/or dividends on our common stock;

 

  Ÿ we may be more vulnerable to economic downturns and be limited in our ability to withstand competitive pressures; and

 

  Ÿ limit our flexibility to plan for and react to changes in our business or strategy.

 

We may be able to incur substantially more debt, which would increase the risks described above associated with our substantial leverage.

 

We may be able to incur substantial additional indebtedness in the future, including issuances of additional notes under the indenture. Any additional debt incurred by us could increase the risks associated with our substantial leverage.

 

We are subject to restrictive debt covenants that limit our business flexibility by imposing operating and financial restrictions on our operations.

 

The new credit facility and the indenture governing the notes will impose significant operating and financial restrictions on us. These restrictions prohibit or limit, among other things:

 

  Ÿ the incurrence of additional indebtedness and the issuance of preferred stock and certain redeemable capital stock;

 

  Ÿ the payment of dividends on, and purchase or redemption of, capital stock;

 

  Ÿ a number of other restricted payments, including investments and acquisitions;

 

  Ÿ specified sales of assets;

 

  Ÿ specified transactions with affiliates;

 

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  Ÿ the creation of liens on our assets; and

 

  Ÿ consolidations, mergers and transfers of all or substantially all of our assets.

 

These restrictions could limit our ability to obtain future financing, make acquisitions or needed capital expenditures, withstand downturns in our business or take advantage of business opportunities. Furthermore, the new credit facility will also require us to maintain specified financial ratios and satisfy financial condition tests, including a minimum interest coverage ratio, a maximum leverage ratio and a maximum senior leverage ratio. Our ability to comply with the ratios or tests may be affected by events beyond our control, including prevailing economic, financial and industry conditions.

 

A breach of any of these covenants, ratios or tests could result in a default under the new credit facility and/or the indenture. The occurrence of an event of default under the new credit facility would prohibit ASG from making distributions that would permit us to make payments on the notes, including payments of interest, when due. In addition, upon the occurrence of an event of default under the new credit facility, the lenders could elect to declare all amounts outstanding under the new credit facility, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, the lenders could proceed against the security granted to them to secure that indebtedness. If the lenders accelerate the payment of the indebtedness under the new credit facility, our assets may not be sufficient to repay in full this indebtedness and our other indebtedness, including the notes.

 

We may not be able to refinance our new credit facility at maturity on favorable terms or at all.

 

The new credit facility will mature in full in 2008. We may not be able to renew or refinance the new credit facility, or if renewed or refinanced, the renewal or refinancing may occur on less favorable terms. In particular, some of the terms of the notes underlying the IDSs that may be viewed as favorable to the senior lenders, such as our ability to defer interest for up to 24 months and acceleration forbearance periods, terminate on                 2008 and                     2008, respectively, which may materially adversely affect our ability to refinance or renew our new credit facility beyond such dates. If we are unable to refinance or renew our new credit facility, our failure to repay all amounts due on the maturity date would cause a default under the new credit facility. In addition, our interest expense may increase significantly if we refinance our new credit facility on terms that are less favorable to us than the terms of our new credit facility.

 

We will require a significant amount of cash, which may not be available to us, to service our debt, including the notes, and to fund our liquidity needs.

 

Our ability to make payments on, or to refinance or repay our debt, including the notes underlying the IDSs, to fund planned capital expenditures and expand our business, will depend largely upon our future operating performance. Our future operating performance is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that are beyond our control. We cannot assure you that our business will generate enough cash flow, that future borrowings will be available to us under the new credit facility or otherwise, in an amount sufficient to enable us to pay our debt or fund our other liquidity needs. If we are unable to generate sufficient cash to service our debt requirements, we will be required to refinance our new credit facility. We cannot assure you that we will be able to refinance any of our debt, including the new credit facility, under such circumstances on commercially reasonable terms or at all. If we are unable to refinance our debt or obtain new financing under these circumstances, we would have to consider other options, including:

 

  Ÿ   sales of certain assets to meet our debt service requirements;

 

  Ÿ   sales of equity; and

 

  Ÿ   negotiations with our lenders to restructure the applicable debt.

 

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The new credit agreement and the indenture governing the notes underlying the IDSs could restrict our ability to do some of these things.

 

Compliance with rules regulating non-U.S. citizen ownership and control of fishing vessels may adversely affect the marketability or the price of our IDSs or shares of our common stock.

 

The governance provisions we have adopted and the related steps we will take to comply with the foreign ownership restrictions imposed by federal law on companies that participate in U.S. fisheries are complex and burdensome. They may require beneficial owners of our common stock to execute complex affidavits and provide detailed ownership information and they could require trades of IDSs or shares of our common stock to be reversed or persons who hold IDSs or shares to dispose of them on unfavorable terms. These administrative burdens and requirements and the potential that trades could be unwound or sales required could have an adverse effect on the market for and trading price of IDSs or shares of our common stock. See “Business—Government Regulation.”

 

We are a holding company and rely on dividends, interest and other payments, advances and transfers of funds from our subsidiaries to meet our debt service and other obligations, and our new credit facility will contain significant limitations on such distributions and other payments.

 

We are a holding company and conduct all of our operations through our subsidiaries and currently have no significant assets other than our equity interest in Holdings and our interest in the notes issued by Holdings. As a result, we will rely on interest and principal on the Holdings notes and on dividends, loans and other payments or distributions from our subsidiaries to meet our debt service obligations and enable us to pay interest and dividends. The ability of our subsidiaries to pay interest and dividends or make other payments or distributions to us will depend substantially on their respective operating results and will be subject to restrictions under, among other things, the laws of their jurisdiction of organization (which may limit the amount of funds available for the payment of dividends), agreements of those subsidiaries, the terms of the new credit facility and the covenants of any future outstanding indebtedness we or our subsidiaries incur.

 

In particular, the new credit facility will prohibit distributions from ASG and its subsidiaries to Holdings if the interest coverage ratio of Holdings is less than the dividend suspension thresholds described under “Description of Certain Indebtedness—New Credit Facility,” or if Holdings has any deferred and unpaid interest outstanding on the Holdings notes, other than distributions to pay interest on the Holdings notes and other permitted payments, such as to pay taxes. In addition, if the interest coverage ratio of Holdings is less than the interest deferral thresholds described under “Description of Certain Indebtedness—New Credit Facility,” the new credit facility will prohibit distributions by ASG and its subsidiaries to Holdings to enable it to pay interest on the Holdings notes, as well as all other distributions from ASG to Holdings (other than distributions to pay taxes and certain other exceptions). In addition, during any dividend suspension period or interest deferral period, ASG will be required to prepay the loans under the new credit facility with a portion of its cash available after payments of taxes, scheduled principal and interest payments on its indebtedness, maintenance capital expenditures and other expenses. Such prepayments would reduce the amount of cash available for payments in respect of the notes underlying the IDSs.

 

If the interest coverage ratio of Holdings is less than the interest deferral thresholds described under “Description of Certain Indebtedness—New Credit Facility” and therefore ASG and its subsidiaries are prohibited by the new credit facility from making payments to Holdings to enable it to pay interest on the Holdings notes, the Issuer will be permitted to defer interest on the notes pursuant to the indenture governing the notes. See “Description of Notes—Interest Deferral.” However, the indenture provides that interest on the notes may not be deferred for more than 24 months in the aggregate prior to 2008. The prohibition on distributions by ASG and its subsidiaries contained in our new credit facility will not be subject to the 24-month limitation that is contained in the indenture relating to deferral of interest on the notes. Accordingly, if the Issuer may no longer defer interest on the notes but the interest coverage ratio of Holdings remains below the specified threshold and the new credit

 

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facility prohibits ASG and its subsidiaries from making distributions to the Issuer, we will not have sufficient funds to pay interest on the notes, which would cause a default under the indenture governing the notes, entitling the holders of the notes to demand payment in full of all amounts outstanding under the notes, subject to an acceleration forbearance period of up to 90 days. The acceleration of the notes under such circumstances would cause a default under our new credit facility, and we cannot assure you that ASG and its subsidiaries would have sufficient funds to repay all amounts outstanding under the new credit facility and make distributions to us to repay all amounts outstanding under the notes underlying the IDSs.

 

In addition, if an event of default under the new credit facility has occurred and is continuing, even if the interest coverage ratio of Holdings is not less than the applicable interest deferral threshold or dividend suspension threshold, ASG will not be permitted to make any distributions to Holdings (other than tax distributions and certain other exceptions), including distributions necessary to enable Holdings to pay interest on the Holdings notes, which would leave us with insufficient cash to pay interest on the notes underlying the IDSs. The occurrence of an event of default under the new credit facility by itself does not entitle Holdings and the Issuer to defer interest on the Holdings notes and the notes underlying the IDSs, respectively. Therefore, the failure of Holdings and the Issuer under such circumstances to pay interest on the Holdings notes and the notes underlying the IDSs, respectively, would cause a default under both the intercompany notes and the notes underlying the IDSs.

 

You may not receive the level of dividends provided for in our existing dividend policy or any dividends at all.

 

Our board of directors may, in its discretion, amend or repeal our existing dividend policy. Future dividends with respect to shares of our capital stock, if any, will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, business opportunities, provisions of applicable law and other factors that our board of directors may deem relevant. Our board of directors may decrease the level of dividends provided for in our existing dividend policy or entirely discontinue the payment of dividends. The indenture governing the notes and our new credit facility will contain limitations on our ability to pay dividends. See “Dividend Policy and Restrictions.” The reduction or elimination of dividends may negatively affect the market price of the IDSs.

 

Interest on the notes may not be deductible by us for U.S. federal income tax purposes, which could significantly reduce our future cash flow and impact our ability to make interest and dividend payments.

 

While we believe that the notes should be treated as debt for U.S. federal income tax purposes, this conclusion is not free from doubt. If the notes were treated as equity rather than debt for U.S. federal income tax purposes, then the stated interest on the notes would generally be treated as a dividend, and interest on the notes would not be deductible by us for U.S. federal income tax purposes. Our inability to deduct interest on the notes could materially increase our taxable income and, thus, our U.S. federal and applicable state income tax liability. This would reduce our after-tax cash flow and materially and adversely impact our ability to make interest and dividend payments. In the case of foreign holders, treatment of the notes as equity for U.S. federal income tax purposes would subject payments to such holders in respect of the notes to withholding or estate taxes in the same manner as payments made with regard to common stock and could subject us to liability for withholding taxes that were not collected on payments of interest. Therefore, foreign holders would receive any such payments net of the tax withheld.

 

The indenture governing the notes permits us to pay a significant portion of our free cash flow to stockholders in the form of dividends, which could limit our ability to satisfy our obligations under the notes.

 

The indenture governing the notes permits us, subject to limitations, to pay a significant portion of our free cash flow to stockholders in the form of dividends and following completion of this offering, to the extent that we have cash available for distributions and subject to applicable law, we intend to pay monthly dividends of approximately  1/12 of $0.79 per share. See “Dividend Policy and Restrictions.” Pursuant to the indenture

 

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governing the notes, so long as no default or event of default has occurred and is continuing or would be caused thereby, and so long as our fixed charge coverage ratio, or adjusted fixed charge coverage ratio, as applicable, is equal to or greater than the applicable dividend suspension threshold described under “Description of Notes—Certain Definitions,” we will be allowed to pay dividends on the shares of the Issuer’s common stock per share in an amount not to exceed in any fiscal quarter ¼ of the sum of $0.79 and 90% of the Issuer’s Adjusted EBITDA per share in excess of $             for the twelve-month period ended on the last day of the most recent fiscal quarter for which financial statements are available. See “Description of Notes—Certain Covenants—Limitation on Restricted Payments.” Therefore, we will be permitted to pay dividends in the aggregate amount of up to approximately $             per year so long as no dividend suspension period is in effect, and we will also be permitted to pay out as dividends 90% of the Issuer’s Adjusted EBITDA per year per share in excess of        . Any amounts paid by us in the form of dividends will not be available in the future to satisfy our obligations under the notes.

 

You will be immediately diluted by $18.15 per share of common stock if you purchase IDSs in this offering.

 

If you purchase IDSs in this offering, you will experience an immediate dilution of $18.15 per share of common stock represented by the IDSs ($15.88 assuming all ASLP units have been exchanged for IDSs) which exceeds the entire price allocated to each share of common stock represented by the IDSs in this offering because there will be a net tangible book deficit for each share of common stock outstanding immediately after this offering. Our net tangible book deficit as of June 30, 2003, after giving effect to this offering, was approximately $294.3 million, or $8.55 per IDS ($6.28 assuming all ASLP units have been exchanged for IDSs). As a result of this deficit, the face amount of notes will exceed the net book value of available assets by $329 (or $390 assuming all ASLP units have been exchanged for IDSs) per $1,000 face amount of notes.

 

Deferral of interest payments would have adverse tax consequences for you and may adversely affect the trading price of the IDSs.

 

If interest payments on the notes are deferred, you will be required to recognize interest income for U.S. federal income tax purposes in respect of interest payments on the notes held by you before you receive any cash payment of this interest. See “Material U.S. Federal Income Tax Considerations—Deferral of Interest.” In addition, you will not receive this cash payment if you sell the IDSs or the notes before the end of any deferral period or before the record date relating to interest payments that are to be paid.

 

If interest is deferred, the IDSs may trade at a price that does not fully reflect the value of accrued but unpaid interest on the notes. In addition, the existence of the right and obligation that we defer payments of interest on the notes under certain circumstances may mean that the market price for the IDSs may be more volatile than other securities that do not have these restrictions.

 

Your right to receive payments on the notes and the note guarantees is junior to all senior debt of ASG and its subsidiaries.

 

The Issuer and Holdings are holding companies and conduct all of their operations through ASG and its subsidiaries. The note guarantees and the guarantees of the Holdings notes issued by ASG and its subsidiaries will be unsecured subordinated obligations, junior in right of payment to the senior debt of each subsidiary guarantor, respectively. As a result of the subordinated nature of the guarantees of the notes, upon any distribution to creditors of ASG or the subsidiary guarantors in bankruptcy, liquidation or reorganization or similar proceedings relating to ASG or the subsidiary guarantors or their property or assets, the holders of such entities’ senior indebtedness will be entitled to be paid in full in cash before any payment may be made with respect to the notes or the Holdings notes under the subordinated guarantees (and before any distribution may be made by ASG to Holdings). In the event of a bankruptcy, liquidation or reorganization or similar proceeding relating to ASG or the subsidiary guarantors, the Issuer, ASLP and the noteholders would participate under the subordinated guarantees with other holders of unsecured indebtedness after the payment in full of the senior indebtedness. In any of these cases, there may not be sufficient funds to pay all of our creditors and the holders of the notes may receive less, ratably than the holders of senior indebtedness. In such event the Issuer and the guarantors would not be able to make all principal payments on the notes represented by IDSs.

 

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The subordination provisions of the indenture will also provide that the payments under subordinated note guarantees of Holdings, ASG and its subsidiaries to you may be suspended for up to 179 days if a nonpayment default exists under our senior debt. In addition, so long as the notes are guaranteed by at least one guarantor, upon the occurrence of an event of default under the indenture governing the notes, the principal of and premium, if any, on the notes may not be accelerated for a period of up to 90 days until                 , 2008. See “Description of Notes—Acceleration Forbearance Periods,” and “Description of Notes—Subordination of the Guarantees.”

 

On a pro forma basis as of December 31, 2002, the subordinated guarantees would have ranked junior to $255.0 million of our outstanding senior indebtedness of subsidiary guarantors on a consolidated basis, all of which would have been secured. In addition, as of December 31, 2002, on a pro forma basis, ASG would have had the ability to borrow up to an additional amount of $45.0 million under the new credit facility, which would have been senior in right of payment to the subordinated guarantees of the Holdings notes.

 

The guarantees of the notes by our subsidiaries may not be enforceable because of fraudulent conveyance laws.

 

Under federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debt of the guarantor, if, among other things, the guarantor, at the time that it assumed the guarantee:

 

  Ÿ issued the guarantee to delay, hinder or defraud present or future creditors; or

 

  Ÿ received less than reasonably equivalent value or fair consideration for issuing the guarantee and, at the time it issued the guarantee:

 

  Ÿ was insolvent or rendered insolvent by reason of issuing the guarantee and the application of the proceeds of the guarantee;

 

  Ÿ was engaged or about to engage in a business or a transaction for which the guarantor’s remaining unencumbered assets constituted unreasonably small capital to carry on its business;

 

  Ÿ intended to incur, or believed that it would incur, debts beyond its ability to pay the debts as they mature; or

 

  Ÿ was a defendant in an action for money damages, or had a judgment for money damages docketed against it if, in either case, after final judgment, the judgment is unsatisfied.

 

In addition, any payment by the guarantor under its guarantee could be voided and required to be returned to the guarantor or to a fund for the benefit of the creditors of the guarantor or the guarantee could be subordinated to other debt of the guarantor.

 

The measures of insolvency for the purposes of fraudulent transfer laws vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a person would be considered insolvent if, at the time it incurred the debt:

 

  Ÿ the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

  Ÿ it could not pay its debts as they become due.

 

Whatever standard that a court uses to determine whether or not the subsidiary guarantors were solvent at the relevant time, the court could rule that such guarantors were not solvent.

 

If this were to occur, the guarantee of the notes by Holdings, ASG or any other subsidiary guarantor would be subject to the claim that, since the guarantee was incurred for the benefit of the noteholders, and only indirectly for

 

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the benefit of the guarantor or creditors of the guarantor, the guarantees were incurred for less than fair consideration. A court could therefore void the obligations of Holdings, ASG or the subsidiary guarantor under the guarantees or subordinate these obligations to Holdings’, ASG’s or the subsidiary guarantor’s other debt or take action detrimental to holders of the notes. If the guarantee of Holdings, ASG or any subsidiary guarantor were voided, the holders of the notes would not have a debt claim against Holdings, ASG or that subsidiary guarantor.

 

Seasonality and variability of our businesses may cause volatility in the market value of your investment and may hinder our ability to make timely distributions on the IDSs.

 

Our business is seasonal in nature, and our net sales and operating results vary significantly from quarter to quarter. For example, our revenue per pound of fish harvested tends to be higher in the January-to-April season due to the harvesting of roe. Consequently, results of operations for any particular quarter may not be indicative of results of operations for future quarterly periods, which makes it difficult to forecast our results for an entire year. This variability may cause volatility in the market price of the IDSs.

 

In addition, the seasonality and variability of our business means that at certain times of the year our cash receipts are significantly higher than at other times. Our fishing seasons, including the important January-to-April season, straddle more than one quarter. As a result, the timing of the recognition of sometimes significant amounts of revenue from one quarter to another can be a function of unpredictable factors, such as the timing of roe auctions, weather, the timing of shipments to pollock roe customers, fishing pace and product delivery schedules, all of which are likely to vary from year to year. Given that we are required to make equal monthly interest payments and expect to pay equal monthly dividends to IDS holders throughout the year, there is a risk that we will experience cash shortages, which could hinder our ability to make timely distributions to IDS holders.

 

Subsequent issuances of notes pursuant to an offering by us or following an exercise of exchange rights by partners of ASLP may cause you to recognize original issue discount and other adverse consequences.

 

The indenture governing the notes and the agreements with DTC will provide that, in the event there is a subsequent issuance of notes by the Issuer having substantially identical terms as the notes but with a different CUSIP number, each holder of notes or IDSs (as the case may be) agrees that a portion of such holder’s notes will be automatically exchanged for a portion of the notes acquired by the holders of such subsequently issued notes, and the records of any record holders of notes will be revised to reflect such exchanges. Consequently, following each such subsequent issuance and exchange, without any further action by such holder, each holder of notes or IDSs (as the case may be) will own an indivisible unit composed of notes of each separate issuance in the same proportion as each other holder. However, the aggregate stated principal amount of notes owned by each holder will not change as a result of such subsequent issuance and exchange. It is unclear whether the exchange of notes for subsequently issued notes results in a taxable exchange for U.S. federal income tax purposes, and it is possible that the IRS might successfully assert that such an exchange should be treated as a taxable exchange. Even if the exchange is not treated as a taxable event, such exchange may result in holders having to include OID in taxable income prior to the receipt of cash and other potentially adverse tax consequences to holders. See “Material U.S. Federal Income Tax Considerations.”

 

Following the subsequent issuance and exchange, we (and our agents) will report any OID on the subsequently issued notes ratably among all holders of notes and IDSs, and each holder of notes and IDSs will, by purchasing IDSs, agree to report OID in a manner consistent with this approach. However, the IRS may assert that any OID should be reported only to the persons that initially acquired such subsequently issued notes (and their transferees) and thus may challenge the holders’ reporting of OID on their tax returns. Such a challenge could create significant uncertainties in the pricing of IDSs and notes and could adversely affect the market for IDSs and notes. For these and additional tax-related risks, see “Material U.S. Federal Income Tax Considerations.”

 

Holders of subsequently issued notes having OID may not be able under New York and federal bankruptcy law to collect the portion of their principal amount that represents unaccrued OID in the event of an acceleration of

 

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the notes or a bankruptcy of the Issuer prior to the notes’ maturity date. As a result, an automatic exchange that results in a holder receiving an OID note could have the effect of ultimately reducing the amount such holder can recover from us in the event of an acceleration or bankruptcy.

 

Before this offering, there has not been a public market for our IDSs or shares of our common stock, which may cause the price of the IDSs to fluctuate substantially and negatively affect IDS holders.

 

Neither the IDSs nor the shares of our common stock has a public market history. In addition, there has not been an active market for securities similar to the IDSs. An active trading market for the IDSs might not develop in the future, which may cause the price of the IDSs to fluctuate substantially, and we currently do not expect that an active trading market for the shares of our common stock will develop until the notes mature. If the notes represented by your IDSs mature or are redeemed or repurchased, the IDSs will be automatically separated and you will then hold the shares of our common stock. We do not intend to list our notes on any securities exchange.

 

Future sales or the possibility of future sales of a substantial amount of IDSs, shares of our common stock or our notes may depress the price of the IDSs, the shares of our common stock and our notes.

 

Future sales or the availability for sale of substantial amounts of IDSs or shares of our common stock or a significant principal amount of our notes in the public market could adversely affect the prevailing market price of the IDSs, the shares of our common stock and our notes and could impair our ability to raise capital through future sales of our securities.

 

We may issue shares of our common stock and notes, which may be in the form of IDSs, or other securities from time to time as consideration for future acquisitions and investments. In the event any such acquisition or investment is significant, the number of shares of our common stock and the aggregate principal amount of notes, which may be in the form of IDSs, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be significant. In addition, we may also grant registration rights covering those IDSs, shares of our common stock, notes or other securities in connection with any such acquisitions and investments.

 

Retained ownership by our existing owners may prevent you from receiving a premium in the event of a change of control and may create conflicts of interest.

 

Upon the completion of the transactions contemplated by this offering, the existing owners, through their ownership of ASLP and IDSs will own approximately 29.2% of the economic interests in the business described in this prospectus, or approximately 18.6% if the over-allotment option is exercised in full. If such existing owners, or their permitted transferees, exercise their rights to exchange all of their ownership in ASLP for our IDSs, they will own approximately 29.2% of the voting power of our company. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control, merger or tender offer, which would deprive you of an opportunity to receive a premium for your IDSs and may negatively affect the market price of the IDSs. Moreover, our existing owners could effectively receive a premium for transferring ownership to third parties that would not inure to your benefit.

 

In addition, in connection with this offering, Coastal Villages Pollock LLC, Bernt O. Bodal and Centre Partners Management LLC will acquire shares of our Class A, B and C preferred stock, respectively. Each class of preferred shares will entitle the holder thereof to elect one member of our board of directors, which will be increased to at least seven members shortly after this offering, a majority of whom will be independent. Our organizational documents will limit the size of our board to not more than 13 members. As a result, the existing owners of our business will continue to have the ability to significantly influence numerous matters. Because of their significant ownership position, coupled with the fact that their ownership stake is held through securities with somewhat different terms and characteristics than the IDSs or our common stock, the interests of these parties may conflict with the interests of holders of IDSs or our common stock.

 

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Our organizational documents could limit another party’s ability to acquire us and deprive our investors of the opportunity to obtain a takeover premium for their securities.

 

A number of provisions in our certificate of incorporation and by-laws will make it difficult for another company to acquire us and for you to receive any related takeover premium for your securities. For example, our organizational documents provide that stockholders generally may not act by written consent and only stockholders representing at least 50% in voting power may request that our board of directors call a special meeting. Our organizational documents also provide for a classified board of directors and authorize the issuance of preferred stock without stockholder approval and upon such terms as the board of directors may determine. The rights of the holders of shares of our common stock will be subject to, and may be adversely affected by, the rights of holders of preferred stock and any other class or series of preferred stock that may be issued in the future.

 

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Cautionary Statement Regarding Forward-Looking Statements

 

All statements other than statements of historical fact are “forward-looking statements.” Some of the statements under “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus may include forward-looking statements which reflect our current views with respect to future events and financial performance. Statements which include the words “may,” “estimate,” “continue,” “expect,” “intend,” “plan,” “believe,” “project,” “anticipate” and similar statements of forward-looking nature identify forward-looking statements.

 

Although we believe that the expectations reflected in our forward-looking statements are reasonable, all forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements. We believe that these factors include the following:

 

  Ÿ future results of operations;

 

  Ÿ future capital expenditures;

 

  Ÿ environmental conditions and regulations;

 

  Ÿ plans or intentions relating to acquisitions;

 

  Ÿ our competitive strengths and weaknesses;

 

  Ÿ future financing needs;

 

  Ÿ our business strategy;

 

  Ÿ general economic conditions;

 

  Ÿ trends in the industries and economies in which we operate;

 

  Ÿ proposed new products, services or developments; and

 

  Ÿ any assumptions underlying the foregoing.

 

We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

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Use of Proceeds

 

The table below sets forth our estimate of the sources and uses of funds required to effect the transactions contemplated hereby. See “Detailed Transaction Steps.” The estimated sources and uses are based on an assumed initial public offering price of $17.35 and do not take into account the exercise by the underwriters of their over-allotment option. Actual amounts will vary from the amounts shown below.

 

Sources and Uses

(In millions)

 

Sources


    

New credit facility

   $ 255.0

Repayment of management loan

     6.2

IDSs sold hereby

     575.0
    

Total sources of funds

   $ 836.2
    

 

Uses


    

Repayment of existing credit facility

   $ 364.7

Purchase of existing senior subordinated notes(1)

     175.0

Pay accrued interest on senior subordinated notes

     6.6

Tender premium for existing senior subordinated notes

     35.2

Redemption of preferred equity units and subordinated notes of Holdings

     33.8

Fees and expenses(2)

     40.9

Amount reserved in escrow for dividends and interest

     25.0

Proceeds to the current owners of ASLP and Holdings(3)

     155.0
    

Total uses of funds

   $ 836.2
    

 

(1) Represents the $175.0 million aggregate principal amount of our outstanding 10 1/8% senior subordinated notes due 2010.

 

(2) Includes an estimated $28.8 million payable to the underwriters of our IDS offering, approximately $6.0 million payable to the providers of our new credit facility and approximately $6.2 million in other professional fees.

 

(3) Includes approximately $36.4 million, $36.0 million and $57.4 million payable to Centre Partners, Bernt O. Bodal and Coastal Villages, respectively, out of the proceeds of this offering.

 

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Dividend Policy and Restrictions

 

Upon completion of this offering, our board of directors will adopt a dividend policy pursuant to which, in the event and to the extent we have available cash for distribution to the holders of shares of our common stock as of the end of any calendar month, and subject to applicable law, our board of directors will declare cash dividends per share on our common stock equal to  1/12 of $0.79 per share. We will pay those dividends on or about the 20th day of each month to holders of record on the last business day of the immediately preceding month. In addition, to the extent that our subsidiaries have available cash for distribution, and subject to applicable law and the terms of their indebtedness, we will also cause our subsidiaries to distribute funds to us in respect of our equity interests sufficient to permit us to make the distribution described in the preceding sentence.

 

If we have any remaining cash after the payment of dividends as contemplated above, our board of directors will, in its sole discretion, decide to use that cash to fund capital expenditures or acquisitions, repay indebtedness, pay additional dividends or for general corporate purposes.

 

The indenture governing our notes restricts our ability to declare and pay dividends on our common stock as follows:

 

  Ÿ the aggregate amount of dividends per share paid in any fiscal quarter may not exceed  1/4 of the sum of (i) $0.79, and (ii) 90% of the increase in the Issuer’s adjusted EBITDA above $                     divided by the number of the Issuer’s shares outstanding (assuming all exchange warrants have been exercised) over $         for the twelve-month period ended on the last day of the most recent fiscal quarter for which financial statements are available;

 

  Ÿ the Issuer may not pay any dividends on its capital stock if and for so long as either (x) the fixed charge coverage ratio of Holdings for the twelve-month period ended on any June 30, September 30 or December 31, or (y) the adjusted fixed charge coverage ratio of Holdings for the twelve-month period ended on any March 31, as applicable, in either case for the most recently ended period for which internal financial statements are available, is less than the following dividend suspension thresholds:

 

Period Ended On


   Dividend Suspension
Threshold


 

Issue date through 9/30/04

   1.55:1.00  

12/31/04 – 9/30/05

   1.575:1.00  

12/31/05 and thereafter

   1.60:1.00 ;

 

  Ÿ the Issuer may not pay any dividends while interest on the notes is being deferred or, after the end of any deferral period, so long as any deferred interest has not been paid in full; and

 

  Ÿ the Issuer may not pay any dividends if a default or an event of default under the indenture governing the notes has occurred and is continuing.

 

In addition, our new credit facility will provide that ASG may not make distributions to us to enable us to pay dividends on our common stock if and for so long as (a) an event of default under the new credit facility has occurred and is continuing, (b) Holdings has any deferred and unpaid interest outstanding on the Holdings notes, or (c) the interest coverage ratio of Holdings is less than the dividend suspension thresholds described under “Description of Certain Indebtedness—New Credit Facility.” The dividend suspension thresholds in our new credit facility are on substantially similar levels as the thresholds contained in the indenture governing the notes.

 

Our board of directors may, in its discretion, amend or repeal our dividend policy. Future dividends with respect to shares of our capital stock will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, provisions of applicable law and other factors that our board of

 

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directors may deem relevant. Under Delaware law, our board of directors may declare dividends only to the extent of our “surplus” (which is defined as total assets at fair market value minus total liabilities, minus statutory capital), or if there is no surplus, out of our net profits, if any, for the then current and/or immediately preceding fiscal years. Our board of directors may decrease the level of dividends provided for in our existing dividend policy or discontinue entirely the payment of dividends.

 

During 2001 and 2002, Holdings distributed to its equity owners approximately $11.2 million and $207.8 million, respectively. The 2002 amount included $163.7 million distributed in connection with the April 2002 recapitalization of Holdings and its affiliates.

 

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Capitalization

 

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2003:

 

  Ÿ on a pro forma basis for Holdings to give effect to the PLC distribution to the equityowners of ASLP and the Corporate Partners; and

 

  Ÿ on a pro forma basis for the Issuer to give effect to this offering, including the use of proceeds from this offering, our recapitalization and the consent solicitation and tender offer and to give effect to ASG’s new credit facility. For purposes of this presentation, we have assumed that all of the existing senior subordinated notes are purchased pursuant to the consent solicitation and tender offer for an aggregate consideration of $210.2 million, including $35.2 million of tender costs.

 

     As of June 30, 2003

 
     Pro Forma
Holdings


    Adjustments

    Pro Forma
Issuer


 
     (in thousands)  

Cash

   $ 3,177     $ 1     $ 3,178  
    


 


 


Restricted cash

     —         25,000       25,000  
    


 


 


Long-term debt, including current portion

                        

Current maturities of long-term debt

   $ 14,613       (14,613 )   $ —    

Existing debt

     346,359       (346,359 )     —    

New credit facility

     —         255,000       255,000  

Existing senior subordinated notes

     175,000       (175,000 )     —    

    % notes

     —         329,975       329,975  
    


 


 


Total long-term debt

     535,972       49,003       584,975  
    


 


 


Long term liability for redeemable junior preferred securities

     —         31,397       31,397  
    


 


 


Stockholders’/members’ deficit

                        

Common stock, $0.01 par value per share—issued and outstanding: 34,406,674 shares

     —         344       344  

Additional paid in capital

     —         298,481       298,481  

Preferred stock, $0.01 par value per share—issued and outstanding: 300 shares

     —         —         —    

Accumulated deficit(1)

     (86,294 )     (352,744 )     (439,038 )

Accumulated other comprehensive income

     160       —         160  
    


 


 


Total members’/shareholders’ deficit

     (86,134 )     (53,919 )     (140,053 )
    


 


 


Total capitalization

   $ 453,015     $ 51,482     $ 504,497  
    


 


 



  (1) The accumulated deficit includes the deficit balance attributable to the minority interest holders.

 

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Pro Forma Dilution

 

Dilution is the amount by which the portion of the price paid by purchasers of IDSs in the offering that is allocated to our shares of common stock exceeds the net tangible book value or deficiency per share of our common stock after the offering. Net tangible book value or deficiency per share of our common stock is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date.

 

For purposes of calculating dilution below, we have assumed that as of June 30, 2003 all ASLP units had been exchanged for IDSs simultaneously with the closing of this offering and 46,835,100 shares of our common stock are outstanding.

 

The pro forma net tangible book deficiency of Holdings as of June 30, 2003 was approximately $250.5 million, or $5.35 per unit (which is equivalent to $5.35 per share of the Issuer’s common stock). After giving effect to our receipt and intended use of approximately $540.5 million of estimated net proceeds (after deducting estimated underwriting discounts and commissions and offering expenses) from our sale of IDSs in this offering, the increase in our aggregate consolidated indebtedness, and the issuance and redemption of Holdings units included in the transactions to be consummated in connection with this offering, our pro forma as adjusted net tangible book deficiency as of June 30, 2003 would have been approximately $294.3 million, or $6.28 per unit. This represents an immediate decrease in net tangible book value of $0.93 per Holdings unit (which is equivalent to $0.93 per share of the Issuer’s common stock) to existing owners and an immediate dilution of $15.88 per share of the Issuer’s common stock to new investors purchasing IDSs in this offering. As a result of this deficiency, the face amount of notes will exceed the net book value of available assets by $390 per $1,000 face amount of notes.

 

The following table illustrates this substantial and immediate dilution to new investors:

 

     Per Share of
Common Stock


 

Assumed initial public offering price of common stock represented by IDSs

   $ 9.60  

Pro forma net tangible book deficiency of Holdings as of June 30, 2003

     (5.35 )

Decrease per share attributable to assumed exchange of ASLP units for IDSs

     (2.80 )

Decrease per share attributable to cash distribution made to existing owners

     (3.96 )

Decrease per share attributable to loss on debt repayment, equity offering costs and reduction of deferred/increasing costs, net of reduction of deferred tax liabilities

     (1.00 )

Decrease per share attributable to notes payable, redeemable junior preferred securities, and derivative financial instruments issued to minority interest holders

     (2.77 )
    


Pro forma as adjusted net tangible book value after this offering

   $ (6.28 )
    


Dilution in net tangible book value per share to new investors

   $ 15.88  
    


 

The following table summarizes on a pro forma basis as of June 30, 2003:

 

  Ÿ   the total number of shares of our common stock represented by IDSs (assuming all ASLP units had been exchanged for IDSs);

 

  Ÿ   the total consideration paid to us by our existing owners and new investors, before deducting the estimated underwriting discounts and commissions and offering expenses payable by us in connection with the offering; and

 

  Ÿ   the average price per share of common stock paid by new investors and our existing owners:

 

     Shares of Common
Stock Purchased


   Total
Consideration


   Average Price
Per Share of
Common
Stock


     Number

   Percent

     
               (in thousands)     

New investors

   33,141,210    70.8    318,155,670    9.60

Existing owners

   13,693,890    29.2          

 

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Selected Historical and Pro Forma Financial Information for Holdings

 

The following selected historical consolidated financial information for Holdings as of December 31, 2001 and 2002 and for the period January 28 through December 31, 2000 and the years ended December 31, 2001 and 2002 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. See Note 1 to Holdings’ audited consolidated financial statements. The following selected historical consolidated financial data for Holdings as of December 31, 2000 and for the predecessor business, as of and for the year ended December 31, 1998 and 1999 and the period January 1 through January 27, 2000, has been derived from our consolidated financial statements which are not included in this prospectus.

 

The following selected historical consolidated financial information for Holdings as of June 30, 2003 and for the six month periods ended June 30, 2002 and 2003 has been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Such unaudited consolidated financial statements, in the opinion of our management, include all adjustments necessary for the fair presentation of our financial condition and results of operations for such periods and as of such dates.

 

The audited consolidated financial statements and the unaudited consolidated financial statements do not purport to project our results of operations or financial position for any future period or date.

 

The following selected unaudited pro forma financial information for Holdings has been derived by the application of pro forma adjustments to Holdings’ historical financial statements included elsewhere in this prospectus. The selected pro forma balance sheet information for Holdings was prepared as if the distribution by Holdings to ASLP of Holdings’ 80% interest in PLC had occurred on June 30, 2003. The pro forma statement of operations data for Holdings for the year ended December 31, 2002 and for the six month periods ended June 30, 2002 and 2003 gives effect to the acquisition of Southern Pride and the PLC distribution as if they had occurred as of January 1, 2002. The pro forma financial information for Holdings does not reflect any adjustments that give effect to this offering or any of the other transactions contemplated hereby, which adjustments are reflected in the pro forma financial information for the Issuer appearing elsewhere in this prospectus. The selected pro forma information should not be considered indicative of actual balance sheet data or results that would have been achieved had the transactions been consummated on the dates indicated and do not purport to indicate balance sheet data or results of operations as of any future date or for any future period.

 

The following selected historical and unaudited pro forma financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Holdings’ consolidated financial statements and related notes and the unaudited condensed consolidated pro forma financial statements and related notes included elsewhere in this prospectus.

 

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Selected Historical and Pro Forma Financial Information for Holdings

 

    Predecessor Business(1)

    American Seafoods Holdings LLC

 
                                                    Pro Forma

 
    Year Ended
December 31,


    January 1
Through
January 27,


    January 28
Through
December 31,


    Year Ended
December 31,


    Six Months
Ended
June 30,


    Year Ended
December 31,


    Six
Months
Ended
June 30,


    Six
Months
Ended
June 30,


 
    1998

    1999

    2000

    2000

    2001

    2002

    2002

    2003

    2002

    2002

    2003

 
    (dollars in thousands)     (dollars in thousands)        

Statement of Operations Data:

                                                                                       

Total revenue

  $ 278,306     $ 240,715     $ 9,719     $ 252,346     $ 336,839     $ 332,872     $ 182,710     $ 232,963     $ 419,293     $ 228,259     $ 228,062  

Gross profit

    62,288       89,346       (1,953 )     100,370       127,239       126,481       78,178       88,166       146,628       88,525       87,323  

Gross margin

    22.4 %     37.1 %     (20.1 )%     39.8 %     37.8 %     38.0 %     42.8 %     37.8 %     35.0 %     38.8 %     38.3 %

Operating profit

    3,849       49,179       (4,334 )     29,596       35,436       58,975       47,514       51,481       63,629       49,682       51,484  

Income (loss) before income taxes and minority interest

    (33,769 )     9,923       1,828       10,448       18,180       23,012       21,064       38,246       24,858       21,982       38,340  

Net income

    (21,389 )     6,262       1,190       7,220       20,078       22,253       20,541       35,800       24,099       21,355       35,927  

Statement of Cash Flows Data:

                                                                                       

Cash flows from operating activities

    17,476       18,510       20,685       44,174       84,588       96,678       75,178       39,954                          

Cash flows from investing activities

    49,965       255       (626 )     (369,847 )     (13,648 )     (58,634 )     (4,840 )     (7,881 )                        

Purchases of property, vessels and equipment

    (10,147 )     (6,506 )     (626 )     (7,363 )     (9,171 )     (9,431 )     (5,069 )     (6,708 )                        

Cash flows from financing activities

    (70,012 )     (18,752 )     (4,973 )     330,042       (73,014 )     (34,736 )     (53,767 )     (32,778 )                        

Other Financial Data:

                                                                                       

EBITDA(2)

    12,869       47,122       7,809       106,209       121,385       103,150       57,262       79,042       111,614       61,559       78,339  

Adjusted EBITDA(2)

    28,738       60,234       (2,572 )     86,221       108,765       113,297       72,870       75,250       122,512       77,271       74,514  
    December 31,

          December 31,

    June 30,

    ProForma
June 30,


                   
    1998

    1999

          2000

    2001

    2002

    2003

    2003

                   
    (dollars in thousands)           (dollars in thousands)                    

Balance Sheet Data:

                                           

Property, vessels, and equipment, net

  $ 307,173     $ 239,333             $ 267,868     $ 254,341     $ 253,090     $ 240,306     $ 230,330                          

Total assets

    407,281       342,516               527,179       522,846       529,550       554,076       538,465                          

Total interest bearing obligations

    311,436       248,092               369,072       326,499       573,141       543,209       535,972                          

Equity (deficit)

    13,023       (8,334 )             92,959       119,235       (125,201 )     (83,098 )     (86,134 )                        

 

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(1) Our business was acquired by Centre Partners and others through ASLP in a transaction accounted for as a purchase on January 28, 2000. The purchase accounting resulted in all assets and liabilities being recorded at their estimated fair values. Also, the method of accounting for major scheduled vessel maintenance and derivative instruments was changed effective with the purchase. Accordingly, the predecessor business amounts are not comparable to Holdings amounts.
(2) EBITDA represents net income from continuing operations before interest expense, income tax provision (benefit) and depreciation and amortization. EBITDA is not a measure of operating income, operating performance or liquidity under GAAP. We include EBITDA because we understand it is used by some investors to determine a company’s historical ability to service indebtedness and fund ongoing capital expenditures, and because certain covenants in our borrowing agreements are tied to similar measures. Nevertheless, this measure should not be considered in isolation or as a substitute for operating income (as determined in accordance with GAAP) as an indicator of our operating performance, or of cash flows from operating activities (as determined in accordance with GAAP), or as a measure of liquidity. The consummation of the transactions contemplated by this offering will not have an impact on EBITDA before minority interest. EBITDA as calculated here differs from Adjusted EBITDA as defined in our note indenture and credit agreements. Adjusted EBITDA as defined in our note indenture and credit agreements means net income from continuing operations before interest expense, income tax provision or benefit, depreciation, amortization, net unrealized foreign exchange gains or losses, net gains and losses from derivatives relating to our equity and debt, minority interest in income or loss of consolidated entities, equity-based compensation, fees and expenses related to acquisition, merger or restructuring transactions, and any loss from debt repayments and related write-offs. If our Adjusted EBITDA were to decline below certain levels, covenants in our indebtedness that are based on Adjusted EBITDA, including our interest coverage ratio and fixed charge coverage ratio covenants, could result in, among other things, a default or mandatory prepayment under our senior credit facility, our inability to pay dividends or a requirement that we defer interest payments on the notes. These covenants are summarized under “Description of Certain Indebtedness” and “Description of Notes.” A reconciliation of EBITDA to Adjusted EBITDA is as follows:

 

                             Pro Forma

 
    

Year Ended

December 31,


   

Six Months

Ended
June 30,


   

Year Ended

December 31,


    Six Months
Ended
June 30,


    Six Months
Ended
June 30,


 
     2001

    2002

    2002

    2003

    2002

    2002

    2003

 
     (dollars in thousands)  

EBITDA

   $ 121,385     $ 103,150     $ 57,262     $ 79,042     $ 111,614     $ 61,559     $ 78,339  

Unrealized foreign exchange gains/losses, net

     (12,976 )     (10,763 )     (1,508 )     (4,037 )     (10,763 )     (1,508 )     (4,037 )

Equity-based compensation

     527       5,600       1,509       212       5,600       1,509       212  

Loss from debt repayment and related write-offs

           15,711       15,711             15,711       15,711        

Transaction costs related to the acquisition of Southern Pride

                             350              

Minority interest in income (loss) of subsidiary

     (171 )     (401 )     (104 )     33                    
    


 


 


 


 


 


 


Adjusted EBITDA

   $ 108,765     $ 113,297     $ 72,870     $ 75,250     $ 122,512     $ 77,271     $ 74,514  
    


 


 


 


 


 


 


 

     We consider EBITDA to be a measure of liquidity. Accordingly, EBITDA is reconciled to operating cash flows as follows:

 

    

Year Ended

December 31,


    Six Months
Ended
June 30,


 
     2001

    2002

    2002

    2003

 
     (dollars in thousands)  

Cash flows from operating activities

   $ 84,588     $ 96,678     $ 75,178     $ 39,954  

Interest expense, net of non-cash interest

     18,715       35,051       11,203       18,938  

Net change in operating assets and liabilities

     899       (15,495 )     (14,138 )     12,999  

Income tax provision (benefit)

     (1,898 )     759       627       2,413  

Deferred income tax benefit (provision)

     6,607       (3,696 )            

Other

     25       401       104       913  

Unrealized foreign exchange gains/losses, net

     12,976       10,763       1,508       4,037  

Equity-based compensation

     (527 )     (5,600 )     (1,509 )     (212 )

Loss from debt repayment and related write-offs

           (15,711 )     (15,711 )      
    


 


 


 


EBITDA

   $ 121,385     $ 103,150     $ 57,262     $ 79,042  
    


 


 


 


 

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Selected Pro Forma Financial Information for the Issuer

 

The following pro forma financial information has been derived by the application of pro forma adjustments to our historical consolidated financial statements included elsewhere in this prospectus. The pro forma consolidated statement of operations data assumes the Issuer was formed on January 1, 2002 and gives effect to (1) the distribution by Holdings of its interest in PLC to ASLP, (2) the acquisition of Southern Pride and (3) the financing transactions described under “Capitalization” and the application of the proceeds therefrom as if all these transactions had been consummated on January 1, 2002. The unaudited pro forma balance sheet data assumes (1) the distribution by Holdings of its interest in PLC to the equityowners of ASLP and the Corporate Partners and (2) the financing transactions described under “Capitalization” and the application of the proceeds therefrom as if these transactions had been consummated on June 30, 2003.

 

Assumptions underlying the pro forma adjustments are described in the notes to the unaudited pro forma condensed consolidated financial statements, which should be read in conjunction with this pro forma financial information. We believe that the assumptions used provide a reasonable basis for presenting the significant effects directly attributable to these transactions; however, this pro forma financial information should not be considered indicative of actual results that would have been achieved had the PLC distribution and the financing transactions been consummated on the date or for the periods indicated and do not purport to indicate consolidated balance sheet data or results of operations as of any future date or for any future period.

 

The pro forma financial information should be read in conjunction with the information contained in “Selected Historical and Pro Forma Financial Information for Holdings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Holdings’ consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Pro Forma Issuer

 
     Year Ended
December 31, 2002


    Six Months
Ended
June 30, 2002


    Six Months
Ended
June 30, 2003


 
     (dollars in thousands)  

Statement of Operations Data

                        

Total revenue

   $ 419,293     $ 228,259     $ 228,062  

Gross profit

     146,628       88,525       87,323  

Gross margin

     35.0 %     38.8 %     38.3 %

Operating profit

     63,629       49,682       51,484  

Other income (expense), net

     (66,050 )     (44,192 )     (24,714 )

Net income

   $ (2,421 )   $ 5,490     $ 26,770  

Basic earnings (loss) per share

   $ (0.05 )   $ 0.12     $ 0.57  

Diluted earnings (loss) per share

   $ (0.05 )   $ 0.11     $ 0.55  

Other Financial Data

                        

EBITDA

   $ 111,614     $ 61,559     $ 78,339  

Adjusted EBITDA

     122,512       77,271       74,514  

Unrealized foreign exchange gains/losses, net

     (10,763 )     (1,508 )     (4,037 )

Equity-based compensation

     5,600       1,509       212  

Loss from debt repayment and related write-offs

     15,711       15,711       —    

Transaction costs related to the acquisition of Southern Pride

     350       —         —    

Ratio of earnings to fixed charges

     .97       1.16       1.81  
                

Pro Forma

June 30, 2003


 

Balance Sheet Data

                        

Property, vessels, and equipment, net

                   $ 230,330  

Total assets

                     546,493  

Total interest bearing obligations

                     584,975  

Shareholders’ deficit

                   $ (140,053 )

 

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Management’s Discussion and Analysis of Financial Condition  and Results of Operations

 

The following discussion should be read in conjunction with Holdings’ consolidated financial statements and the notes to those statements and other financial information appearing elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.”

 

Overview

 

We are one of the largest integrated seafood companies in the U.S. in terms of revenues. We harvest and process a variety of fish, either on board our sophisticated catcher-processor vessels or at our land-based processing facilities, and market our products to a diverse group of customers in North America, Asia and Europe. We are the largest harvester and at-sea processor of pollock and the largest processor of catfish in the U.S. In addition, we harvest and/or process other seafood, including scallops, hake and cod. We maintain an international marketing network through our U.S., Japanese and European offices and have developed long-term relationships with a U.S. and international customer base.

 

We operate in two principal business segments, ocean harvested whitefish and other seafood products. The ocean harvested whitefish segment includes the harvesting and processing of pollock, cod and hake. Processing of ocean harvested whitefish occurs on our vessels while at sea and at our facilities in Massachusetts. The other seafood products segment includes the processing of catfish and scallops at our facilities in Alabama and Massachusetts.

 

Corporate Structure

 

The Issuer was formed under Delaware law in May 2003.

 

Upon the completion of the transactions contemplated by this offering, the Issuer will be the sole general partner of Holdings. The Issuer will own 73.5% of the equity of Holdings and 80.8% of the notes issued by Holdings, and ASLP will own the remainder of the equity, junior equity and the notes issued by Holdings. Holdings will own 100% of the economic interests of ASG; American Seafoods Company LLC, through which we conduct our at-sea pollock harvesting and processing operations; Southern Pride Catfish LLC through which we harvest and process catfish; and American Seafoods International LLC, through which we conduct our secondary processing activities. The Hadley Group LLC, or Hadley Group, a wholly-owned subsidiary of American Seafoods International LLC, purchases frozen fish products and re-sells them into the U.S., Canadian and European markets.

 

Corporate History

 

In January 2000, ASLP purchased from Norway Seafoods all of the outstanding stock of American Seafoods Company. The acquisition also involved the purchase of six additional catcher-processors, one catcher-vessel and certain assets of Frionor USA (now called American Seafoods International LLC). ASG was formed in connection with the acquisition. The acquisition was accounted for as a purchase, and all of the debt, assets and goodwill relating to the acquisition have been “pushed down” to ASG’s and Holdings’ balance sheets. The purchase accounting resulted in all assets and liabilities being recorded at their estimated fair values on that date. The aggregate purchase price for the acquisition was $477.9 million, including acquisition costs. The acquisition was financed through short-term seller financing ($21.9 million), long-term debt ($280.0 million) and seller long-term subordinated promissory notes ($95.0 million). In addition, ASLP issued a warrant ($3.5 million) for the purchase, at a future date, of additional partnership interests in ASLP to an affiliate of Norway Seafoods. The warrant entitled the holder to purchase ASLP partnership units at a price per unit equal to the amount per unit contributed at that time by the ASLP partners. The warrant was redeemed on October 4, 2002.

 

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In August 2001, we, along with two other partners, formed PLC in order to acquire three longline vessels. Our initial ownership through this transaction was 60% of PLC. We subsequently increased our ownership to 80%. PLC harvests and processes ocean harvested whitefish, primarily comprised of cod, in the U.S. Bering Sea. Because it is in an early stage investment, Holdings will distribute the interest in PLC to ASLP and the Corporate Partners prior to the completion of the transactions contemplated by this offering.

 

Effective as of December 16, 2002, we purchased substantially all of the assets of Southern Pride Catfish LLC and Southern Pride Catfish Trucking, Inc., or collectively Southern Pride, an Alabama corporation engaged in the business of catfish harvesting, processing and distribution. The acquired assets included, among other things, certain real property, fixtures, equipment, accounts receivable, intellectual property, customer and other contracts, and cash on hand. The purchase price was approximately $41.8 million in cash. In addition, we assumed substantially all of the liabilities of Southern Pride, other than certain specifically excluded liabilities, and paid bank debt of Southern Pride in the amount of approximately $2.4 million. The acquisition was financed with additional indebtedness under our existing credit facility.

 

Revenues and Expenses

 

Ocean Harvested Whitefish Revenues.    Revenues in our ocean harvested whitefish segment are primarily driven by the following factors:

 

  Ÿ the volume of pollock harvested annually by our catcher-processors;

 

  Ÿ the quantity of finished product we are able to produce (determined by the flesh and roe recovery rates);

 

  Ÿ the prevailing market prices for the pollock products we sell, such as roe, surimi (a fish protein paste used in products such as imitation lobster and crabmeat) and fillet block;

 

  Ÿ the yen-dollar exchange rate; and

 

  Ÿ volume throughput for our secondary processing of ocean harvested whitefish.

 

Harvest volumes.    In addition to the portion of the directed pollock catch allocated to us under the Pollock Conservation Cooperative agreement, we historically have purchased additional pollock quota from other industry participants up to the 17.5% limit of the directed pollock catch. In addition, we supplemented our harvest in 2001, 2002 and 2003 by purchasing 28.0%, 28.0% and 36.0%, respectively, of the community development quota from Alaska Community Development Groups, which does not count against the 17.5% limitation. See “Industry and Regulatory Overview—Groundfish—Pollock Allocation.”

 

Recovery rates.    Increases in flesh and roe recovery rates, which represent the percentage of finished product produced from a whole fish, result in higher finished product volumes. Flesh recovery rate means the weight of at-sea processed products, other than fishmeal and roe, relative to the weight of fish harvested, expressed as a percentage. Roe recovery rate means the weight of at-sea processed roe, relative to the weight of fish harvested, expressed as a percentage.

 

Market prices.    Market prices are mainly a function of the aggregate supply of pollock products produced in any given year, the anticipated inventory carry over for that year and changes in demand. The supply is determined primarily by the U.S. and Russian pollock harvest levels.

 

Prices for surimi and roe products generally fluctuate year to year and do not necessarily follow a typical price cycle trend. For example, the 29.7% increase in our surimi prices, denominated in Japanese yen, from year 2001 to 2002 was primarily due to market conditions, but also due to producing a slightly higher grade mix of surimi in year 2002. The 2003 “A” season roe price of ¥1,778 per kilogram, which we consider to be a normalized roe price level, declined from the 2002 “A” season roe price of ¥1,906 per kilogram due primarily to a higher grade

 

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mix produced in 2002. On a grade by grade basis, roe prices have remained relatively stable to strengthening for the past several years with the exception of year 2000, which was an unusual year due largely to market misperceptions of supply. With the introduction of long-term supply contracts for deepskin product in early 2000, the price for deepskin dropped from an annual average price of $1.59 per pound for 1999, to $1.32 per pound for 2000, and has leveled out at about $1.25 per pound for 2001 through 2003.

 

Below is a chart illustrating our average prices achieved for the years 1999, 2000, 2001 and 2002 and for the first six months of 2003 for pollock surimi, pollock roe, deepskin and pollock block pin bone out products. The surimi and roe prices are noted in yen per kilogram, which is the price unit we receive from our Japanese customers.

 

     Average annual price

  

Six months ended

June 30, 2003


     1999

   2000

   2001

   2002

  

Pollock surimi ¥/kg

   ¥ 285    ¥ 218    ¥ 212    ¥ 275    ¥ 239

Pollock roe ¥/kg

   ¥ 1,865    ¥ 2,856    ¥ 2,247    ¥ 1,906    ¥ 1,777

Deepskin $/lb

   $ 1.59    $ 1.32    $ 1.25    $ 1.24    $ 1.25

Pollock block pin bone out $/lb

   $ 1.33    $ 0.80    $ 0.88    $ 1.04    $ 1.11

 

Exchange rate effects.    Because we sell large quantities of roe to Japanese customers, a significant portion of our revenue is denominated in Japanese yen. This means that we could be at risk that any increase or decrease in the value of the yen relative to the dollar would increase or reduce, respectively, the amount of dollar revenues we record on the sales of our products in Japan. In order to mitigate the potentially adverse effect of fluctuations in the yen to U.S. dollar spot exchange rate, we enter into forward currency contracts. It is our risk management policy to hedge approximately 80% of our forecasted yen sales over the next 12 months, 65% over months 13 to 24, 50% over months 25 to 36, and 35% over months 37 to 48.

 

Other Seafood Products Revenues.    Revenues from our other seafood products segment are primarily a function of the volume of catfish and scallops that we process. The key performance driver for our other seafood products operations are the purchase price of raw materials and the volume of production.

 

Ocean Harvested Whitefish Expenses.    The operating cost structure of the ocean harvested whitefish operations include four main cost categories:

 

  Ÿ variable costs driven by revenue or product volume, such as crew compensation, quota purchases, product freight and storage, marketing commissions and packaging and additives;

 

  Ÿ vessel-related depreciation;

 

  Ÿ fixed costs that are assumed to be incurred whether or not the vessel is deployed, such as insurance, repair and maintenance, nets and gear supplies, moorage, equipment rental, crew travel and general supplies; and

 

  Ÿ daily operating costs driven by vessel operating days, such as fuel, galley supplies, observers and technicians.

 

Costs of sales includes operating costs such as crew and factory personnel compensation, fish purchases, vessel fuel, raw material purchases, packaging, insurance and other operating related expenses and depreciation applicable to property, vessels and equipment used in production. Selling costs include product freight, storage, and marketing costs. General and administrative expenses include employee compensation and benefits, rent expense, professional fees, association dues and other expenses, such as business development, office equipment and supplies.

 

Excluding depreciation expense, crew compensation represents the largest operating cost for the vessel operations and is a variable cost, structured to reward each crew based upon a pre-season estimated value per product applied to actual production and actual roe value achieved by their vessel. Quota purchase costs, the

 

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second largest operating cost excluding depreciation expense, are calculated as an amount per ton harvested and are incurred when we purchase quota amounts from our Alaska Community Development Group partners, catcher vessel owners and other third party fishery participants. Product freight is incurred when we transport the product to either our customer or a cold storage facility. Storage costs are incurred for product entering a cold storage facility.

 

Excluding production-related depreciation of $32.5 million in 2002, approximately 12.7% of our total harvesting operating costs are fixed in that we assume that we would incur them even if a vessel were inactive for the season. As a result of our relatively low fixed harvesting cost base, we have the ability to manage our cost structure by matching vessel harvesting capacity with the available harvest amount for any given season.

 

Other Seafood Products Expenses.    Operating costs related to our other seafood products operations are principally comprised of the cost of raw material purchases and labor. In addition, these costs include depreciation expense related to equipment and facilities used for processing and transportation.

 

Our other main expenses include general and administrative expenses, amortization of cooperative rights and other intangible assets, interest expense and losses, if any, on foreign currency contracts.

 

We recognize revenues and record accounts receivable balances when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured. The allowance for doubtful accounts reflects management’s estimate of potential losses inherent in the accounts receivable balance. Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. It is our policy to write off accounts as collectibility becomes remote. We have three valuation accounts recorded on our balance sheet. The allowance for doubtful accounts balance was approximately $0.4 million at June 30, 2003 and $0.5 million at December 31, 2002, December 31, 2001 and December 31, 2000. Total bad debt write-offs for the six months ended June 30, 2003 and 2002 were less than $0.1 million and $0.2 million, respectively. Bad debt write-offs for the year ended December 31, 2002 and the year ended December 31, 2001 were less than $0.1 million. Bad debts write-offs for the year ended December 31, 2000 were $2.2 million. We also had an allowance of $1.9 million, $1.8 million and $0.9 million recorded at June 30, 2003, December 31, 2002 and December 31, 2001, respectively, for a receivable due from one of our insurance providers, which filed for bankruptcy in March 2001. $0.1 million of this allowance was recorded during the six months ended June 30, 2003 while $0.9 million of this allowance was recorded in each of the years ended December 31, 2002 and December 31, 2001. In addition, we established an allowance account related to a miscellaneous receivable from a fuel hedge provider, which filed for bankruptcy during 2002. This allowance is recorded at $0.2 million, which represents approximately 80% of the recorded balance.

 

Results of Operations

 

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

 

Revenues.    Revenues for the six months ended June 30, 2003 increased $50.3 million, or 27.5%, to $233.0 million from $182.7 million for the six months ended June 30, 2002, and other seafood products revenues for such period increased $61.0 million to $66.9 million from $5.9 million for the six months ended June 30, 2002, in each case primarily due to the inclusion of catfish sales for the current year as a result of the December 2002 acquisition of Southern Pride. Ocean harvested whitefish revenues for the six months ended June 30, 2003 decreased $10.7 million to $166.1 million from $176.8 million for the six months ended June 30, 2002, primarily due to lower sales of surimi.

 

Cost of Sales.    Cost of sales for the six months ended June 30, 2003 increased $40.3 million, or 38.6%, to $144.8 million from $104.5 million for the six months ended June 30, 2002, and other seafood products cost of sales for such period increased $50.1 million to $55.7 million from $5.6 million for the six months ended June 30, 2002, in each case primarily due to the inclusion of cost of sales for the catfish operations in the

 

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current year. Ocean harvested whitefish cost of sales for the six months ended June 30, 2003 decreased $9.8 million to $89.1 million from $98.9 million for the six months ended June 30, 2002, primarily due to the lower sales of these products in the current period and a larger proportion of these sales being attributable to roe when compared to the same period in the prior year. Gross profit for the six months ended June 30, 2003 increased $10.0 million, or 12.8%, to $88.2 million from $78.2 million for the six months ended June 30, 2002. Gross margins as a percent of sales for the six months ended June 30, 2003 decreased to 37.8% from 42.8% for the six months ended June 30, 2002, primarily due to a higher proportion of lower margin other seafood products sales for the current period as compared to the same period in the prior year. Other seafood products gross margins for the six months ended June 30, 2003 increased to 16.7% from 5.1% for the six months ended June 30, 2002, primarily due to the inclusion of catfish sales and the growth in volume of scallops sold and fresh sales product mix. Ocean harvested whitefish gross margins increased to 46.4% from 44.1% primarily due to a higher proportion of higher margin roe sales to total sales as compared to the same period in the prior year.

 

Selling, General and Administrative Expenses.    For the six months ended June 30, 2003, selling, general and administrative expenses including equity based compensation increased $5.4 million, or 19.8%, to $32.7 million from $27.3 million for the six months ended June 30, 2002. This increase was primarily due to the inclusion of catfish operations in the current year. Other seafood products selling, general and administrative costs increased by $9.4 million to $10.0 million for the six months ended June 30, 2003 from $0.6 million for the six months ended June 30, 2002 as a result of the inclusion of catfish sales to our results of operations in the current year. Ocean harvested whitefish selling, general and administrative costs decreased by $4.0 million to $22.7 million from $26.7 million for the six months ended June 30, 2002. This decrease was principally due to higher non-cash equity based compensation charges in the prior year related to the April 2002 recapitalization. Selling, general and administrative costs, excluding equity-based compensation, as a percent of sales for the six months ended June 30, 2003 decreased to 13.9% from 14.1% for the six months ended June 30, 2002.

 

Amortization of Cooperative Rights and Intangibles, and Depreciation of Other Assets.    Amortization includes the amortization related to the cooperative rights and other intangibles. Amortization and depreciation of other assets for the six months ended June 30, 2003 increased $0.6 million, or 17.6%, to $4.0 million from $3.4 million for the six months ended June 30, 2002. This increase was primarily due to the amortization of other intangibles, which were purchased in connection with the acquisition of Southern Pride in December 2002.

 

Interest Expense, Net (Including Related Party Interest).    Net interest expense for the six months ended June 30, 2003 increased $4.7 million, or 27.8%, to $21.6 million from $16.9 million for the six months ended June 30, 2003. The increase in net interest expense was mainly attributable to the amendment to the term loan increasing amounts borrowed by $50.0 million related to the acquisition of Southern Pride.

 

Foreign Exchange Gains, Net.    For the six months ended June 30, 2003, the net foreign exchange gain increased $1.7 million, or 25.8%, to $8.3 million from $6.6 million for the comparable period in 2002. This increase was primarily attributable to unrealized gains recognized during the period related to the ineffective, or time value, portion of our financial derivatives designated as hedges resulting from increased notional amounts of derivatives designated as hedges, compared to the comparable period in 2002.

 

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001.

 

Revenue.    Revenue for the year ended December 31, 2002 decreased $3.9 million, or 1.2%, to $332.9 million from $336.8 million for the year ended December 31, 2001. The revenue decrease in 2002 was primarily due to lower roe pricing and lower Hadley Group related trade sales, partially offset by higher pricing of our block and surimi products. The price of roe achieved during our 2002 “A”-season was ¥1,906 as compared to ¥2,247 in 2001, or a decrease of approximately 15.2%. Hadley Group trade sales decreased by $13.8 million or approximately 49.5% due to global product supply constraints. We believe these same constraints that influenced the Hadley Group’s inability to obtain product for resale also contributed to our increased pricing for our pin

 

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bone out block products. Production of finished goods in metric tons decreased in 2002 compared to 2001 primarily as a result of lower hake production in 2002. Pollock production in 2002 decreased by less than 1% as compared to the 2001 pollock production.

 

Cost of Sales.    Cost of sales for the year ended December 31, 2002 decreased $3.2 million, or 1.5%, to $206.4 million from $209.6 million for the year ended December 31, 2001. This decrease was primarily attributable to lower variable product costs such as packaging and additives resulting from selling approximately 9,300 fewer metric tons of at-sea processed finished product in 2002, as compared to a total of 100,200 metric tons in 2001, lower fuel costs due to a decrease in fuel prices, and lower fish cost for the Hadley Group due to a decline in fish purchases, partially offset by an increase in crew compensation due to the higher value per metric ton produced as a result of the higher surimi and block prices. The gross profit for the year ended December 31, 2002 decreased $0.7 million to $126.5 million from $127.2 million for the year ended December 31, 2001. Gross margin for the year ended December 31, 2002 increased to 38.0% from 37.8% for the year ended December 31, 2001 due principally to the decrease in Hadley Group trade sales which generate lower gross margins.

 

Selling, General and Administrative Expenses.    Selling, general and administrative expenses for the year ended December 31, 2002, including equity based compensation, increased $2.8 million, or 4.8%, to $60.7 million from $57.9 million for the year ended December 31, 2001. These expenses increased primarily due to an increase in non-cash equity-based compensation expenses from $0.5 million for the year ended December 31, 2001 to $5.6 million for the year ended December 31, 2002, partially offset by lower freight related costs resulting from selling approximately 9,300 less metric tons of at-sea processed finished product in 2002 combined with lower logistical costs per unit achieved in 2002.

 

Amortization of Cooperative Rights, Intangibles and Goodwill and Depreciation of Other Assets.    Amortization includes the amortization related to the cooperative rights, depreciation of office related assets and, through December 2001, goodwill recorded in connection with the January 2000 acquisition and depreciation of office related assets. Amortization expense for the year ended December 31, 2002 decreased $27.1 million, or 79.9%, to $6.8 million from $33.9 million for year ended December 31, 2001. This decrease was primarily attributable to an extension of the amortization schedule for cooperative rights, an intangible asset representing our allocation rights as a member of the Pollock Conservation Cooperative. From January 28, 2000 to October 31, 2001, the cooperative rights were amortized on a straight-line basis over 59 months, which was the remaining life of the Pollock Conservation Cooperative agreement. Beginning in November 2001, as a result of changes to the American Fisheries Act, we changed the amortizable life of the cooperative rights to 23.2 years, which matches the average remaining depreciable lives of our vessels. As of January 1, 2002, we adopted “Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets,” and ceased amortization of goodwill.

 

Interest Expense, Net (including related party interest).    Interest expense is net of interest income of $0.2 

million and $0.4 million in 2001 and 2002, respectively. Net interest expense for the year ended December 31, 2002 increased $4.6 million, or 13.2%, to $39.5 million from $34.9 million for the year ended December 31, 2001. The increase in net interest expense was mainly attributable to the increase in the principal balance on the senior bank debt resulting from the April 2002 recapitalization, the addition of $175.0 million principal amount related to the private offering of the existing senior subordinated notes, partially offset by declining variable interest rates applied to the senior bank debt. Interest expense for our revolving credit facility for the years ended December 31, 2002 and December 31, 2001 was $0.9 million and $1.6 million, respectively, including commitment fees. Interest expense for our two term loans was $14.1 million for the year ended December 31, 2002 and $15.1 million for the year ended December 31, 2001. In connection with the April 2002 recapitalization, we repaid all amounts outstanding under the bank credit facility that was in place at the time of the recapitalization, and entered into our existing credit facility. See “—Liquidity and Capital Resources—Our Indebtedness.”

 

Foreign Exchange (Losses) Gains, Net.    Net foreign currency exchange gain attributable to financial derivatives for the year ended December 31, 2002 increased $1.3 million to $19.0 million from $17.7 million for the year

 

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ended December 31, 2001. Beginning January 28, 2000, in compliance with our adoption of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” the existing forward contracts were designated as hedges and the change in value related to the fluctuation in the value of the Japanese yen was not reflected in earnings. The net unrealized gains related to the ineffective portion (the time value) of the derivatives recognized in earnings for the years ended December 31, 2002 and December 31, 2001 were $18.3 million and $16.2 million, respectively. We recorded realized gains of $0.2 million and $3.0 million related to the change in the ineffective portion of the derivatives which settled during the years ended December 31, 2002 and December 31, 2001, respectively.

 

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000.

 

The following discussion and analysis includes the results for the period January 1, 2000 to January 27, 2000 and the results for the period January 28, 2000 to December 31, 2000 where indicated. Management believes this presentation provides useful information; however, there are differences in the accounting for certain items between the periods January 1, 2000 to January 27, 2000, and January 28, 2000 to December 31, 2000. The accounting differences related to derivatives, major scheduled vessel maintenance, and basis changes resulting from the January 28, 2000 acquisition.

 

Revenue.    Revenue for the year ended December 31, 2001 increased $74.8 million, or 28.5%, to $336.8 million from $9.7 million for the period from January 1, 2000 to January 27, 2000 and $252.3 million for the period from January 28, 2000 to December 31, 2000. The revenue increase in 2001 was primarily attributable to harvesting over 60,000 metric tons more pollock in 2001 compared to the 2000 pollock harvest, an increase of 32.9%. This additional harvest led to higher sales volumes resulting in approximately 33,800 more metric tons of at-sea processed frozen pollock product sold in 2001 as compared to 2000. The increase was also driven by an improvement in recovery rates from an average pollock flesh recovery rate of 22.0% in 2000 to 24.5% in 2001, and an increase in the roe recovery rate from 3.9% in 2000 to 4.8% in 2001. These positive factors were partially offset by a less favorable yen exchange rate in 2001 and declines in roe and surimi yen prices by approximately 27.5% and 2.8%, respectively, from 2000 to 2001. The 2001 increase in pollock harvest was the result of a 22.9% increase in the total allowable catch and an increase in community development quota that we acquired from our Alaska Community Development Group partners from 15.3% of the community development pollock quota allocation in 2000 to 28.0% in 2001.

 

Cost of Sales.    Cost of sales for the year ended December 31, 2001 increased $45.9 million, or 28.0%, to $209.6 million from $11.7 million for the period from January 1, 2000 to January 27, 2000 and $152.0 million for the period from January 28, 2000 to December 31, 2000. This increase was primarily attributable to additional variable product costs such as crew compensation and packaging resulting from selling approximately 37,000 more metric tons of at-sea processed finished product in 2001, higher quota purchase cost due to the increase in the volume of quota purchased and higher fuel costs due to an increase in fishing days. The gross profit for the year ended December 31, 2001 increased $28.8 million, or 29.3%, to $127.2 million, from ($2.0) million for the period from January 1, 2000 to January 27, 2000 and $100.4 million for the period from January 28, 2000 to December 31, 2000. Gross margin for the year ended December 31, 2001 increased to 37.8% from 37.5% for the year ended December 31, 2000.

 

Selling, General and Administrative Expenses.    Selling, general and administrative expenses for the year ended December 31, 2001 increased $20.3 million, or 54.0%, to $57.9 million from $2.0 million for the period from January 1, 2000 to January 27, 2000 and $35.6 million for the period from January 28, 2000 to December 31, 2000. These expenses increased primarily due to our selling approximately 37,000 more metric tons of at-sea processed finished product in 2001, which resulted in $10.9 million of higher freight costs; higher general and administrative costs related to increases in salary and bonus expense; non-cash option compensation expense; association dues, which are assessed on the volume of pollock quota allocation; legal fees and professional services.

 

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Amortization of Cooperative Rights, Intangibles and Goodwill and Depreciation of Other Assets.    Amortization includes the amortization related to the cooperative rights and goodwill recorded in connection with the January 2000 acquisition and depreciation of office related assets. Amortization expense for the year ended December 31, 2001 decreased $1.7 million, or 4.8%, to $33.9 million from $0.4 million for the period from January 1, 2000 to January 27, 2000 and $35.2 million for the period from January 28, 2000 to December 31, 2000. This decrease was primarily attributable to an extension of the amortization schedule for cooperative rights, an intangible asset representing our allocation rights as a member of the Pollock Conservation Cooperative. From January 28, 2000 to October 31, 2001, the cooperative rights were amortized on a straight-line basis over 59 months, which was the remaining life of the Pollock Conservation Cooperative agreement. Beginning in November 2001, as a result of changes to the American Fisheries Act, we changed the amortizable life of the cooperative rights to 23.2 years, which matches the average remaining depreciable lives of our vessels. Amortization of cooperative rights was $24.1 million for the period ended December 31, 2001 and $25.9 million for the period from January 28, 2000 to December 31, 2000.

 

Interest Expense, Net (including related party interest).    Interest expense is net of interest income of $0.2 million in 2001. Net interest expense for the year ended December 31, 2001 decreased $7.7 million, or 18.1%, to $34.9 million from $4.3 million for the period from January 1, 2000 to January 27, 2000 and $38.3 million for the period from January 28, 2000 to December 31, 2000. Interest expense for the period from January 1, 2000 to January 27, 2000 included $3.1 million of related party debt guarantee and refinance fees that were recorded as an expense of the Predecessor Business. The decrease in net interest expense was mainly attributable to the absence of related party debt guarantee and refinance fees in 2001 and to lower variable interest rates applied to a declining principal balance on the senior bank debt we incurred in connection with the January 2000 acquisition. Interest expense for our revolving credit facility for the period from January 28, 2000 to December 31, 2000 and the year ended December 31, 2001 was $2.1 million and $1.6 million, respectively, including commitment fees. Interest expense for our two term loans was $21.7 million for the period from January 28, 2000 to December 31, 2000 and $15.1 million in 2001. We repaid all amounts outstanding under this bank credit facility in connection with the recapitalization in April 2002, and entered into our existing credit facility. See “—Liquidity and Capital Resources—Our Indebtedness.”

 

In connection with the January 2000 acquisition, ASC, Inc. and Holdings each issued a long-term subordinated note payable to the seller, Norway Seafoods. The principal amounts of these seller notes totaled $95.0 million at issuance and bore interest at the rate of 10% per annum increasing to 12% to the extent interest was not paid in cash, but rather added to the principal amounts of the notes. No cash interest was paid on these notes in 2000 or 2001. Related party interest expense attributable to these seller notes was $9.2 million in 2000 and $12.6 million in 2001. We repaid these notes in connection with the recapitalization in April 2002. See “—Liquidity and Capital Resources—Our Indebtedness.”

 

Foreign Exchange (Losses) Gains, Net.    Net foreign currency exchange gain attributable to financial derivatives for the year ended December 31, 2001 decreased $11.8 million to $17.7 million from $10.4 million for the period from January 1, 2000 to January 27, 2000 and $19.1 million for the period from January 28, 2000 to December 31, 2000. Of the $11.8 million, $10.4 million was unrealized gain related to the entire change in fair value of derivatives due to a significant decrease in the value of the Japanese yen during the first twenty-seven days of January 2000 prior to our adoption of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” Beginning January 28, 2000, the existing forward contracts were designated as hedges and the change in value related to the fluctuation in the value of the Japanese yen was not reflected in earnings. The net unrealized gains related to the ineffective portion (the time value) of the derivatives recognized in earnings during the period from January 28, 2000 to December 31, 2000 and the twelve months ended December 31, 2001 were $16.4 million and $16.2 million, respectively. We recorded realized gains of $2.6 million and $1.7 million related to the change in the ineffective portion of the derivatives which settled during the period from January 28, 2000 to December 31, 2000 and the twelve months ended December 31, 2001. Due to the accounting effects resulting from our adoption of SFAS No. 133, the foreign currency gains (losses) recorded in periods related to the Predecessor Business are not comparable to the foreign currency gains (losses) recorded in periods related to ASG.

 

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Seasonality

 

The U.S. Bering Sea pollock fishery is split into two distinct seasons, known as the “A” and “B” seasons. The “A” season opens in January and typically ends in April. During the “A” season, pollock carry their maximum quantities of high-value roe, making this season the more profitable one. During the “A” season we also produce other primary products, such as surimi and fillet blocks, although yields on these products are slightly lower in “A” season compared to “B” season due to the high roe content of pollock harvested in the “A” season. Although the “A” season typically accounts for approximately 40% of our year’s total pollock harvest measured by weight, it represents a majority of our revenues generated in the same period due to the higher value of roe that is recovered during the “A” season.

 

The “B” season occurs in the latter half of the year, typically beginning in July and extending through the end of October. The primary products produced in the “B” season are surimi and fillet blocks. The “B” season typically accounts for approximately 60% of our year’s total pollock harvest.

 

The table below shows our quarterly dispersion, in terms of percentage, for revenues and gross profit for the years ended December 31, 2000, 2001 and 2002:

 

     “A” Season

    “B” Season

 
     Q-1

    Q-2

    Q-3

    Q-4

 

Revenues:

                        

2000

   29 %   31 %   17 %   23 %

2001

   33     26     16     25  

2002

   25     30     22     23  

Gross profit:

                        

2000

   41 %   34 %   10 %   15 %

2001

   42     23     12     23  

2002

   36     26     24     14  

 

Our fishing seasons, including the important January-to-April season, straddle more than one quarter. As a result, the timing of the recognition of significant amounts of revenue can vary from one quarter to another.

 

Financing Activities

 

On April 18, 2002, ASG issued and sold $175.0 million principal amount of 10.125% senior subordinated notes due 2010 (the existing senior subordinated notes) pursuant to Rule 144A and Regulation S of the Securities Act of 1933. The offering of these notes was part of a recapitalization involving Holdings and its affiliates. On November 20, 2002, ASG exchanged these notes through an exchange offer for notes registered with the SEC. Concurrently with the offering of these notes, ASG entered into its existing credit facility. Following the completion of the transactions contemplated by this offering, ASG will use the proceeds it receives from Holdings, together with borrowings under the new credit facility, to repay all outstanding borrowings under the existing credit facility and to repurchase all of the existing senior subordinated notes that are validly tendered and not withdrawn pursuant to the consent solicitation and tender offer. As part of the April 2002 recapitalization, we used the proceeds of the notes offering, together with borrowings of $325.9 million under the existing credit facility, to:

 

  Ÿ Repay all outstanding debt under our old credit facilities.

 

  Ÿ   Repay all amounts outstanding (including accrued interest), under two senior subordinated promissory notes issued by our affiliates, ASC, Inc. and Holdings, to Norway Seafoods, the former owner of our business.

 

  Ÿ   Pay related fees and expenses.

 

  Ÿ   Distribute the remainder of the borrowed amounts to our equityholders.

 

In addition, we distributed to our equityholders any cash on hand on April 4, 2002 plus cash generated from our operations from April 4, 2002 to April 18, 2002. As a result, the aggregate amount of cash distributed to American Seafoods Consolidated LLC, for distribution to the equity holders of its parent, was approximately $203.8 million, including $5.7 million of fees paid out of the distribution.

 

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On July 2, 2002, ASG loaned $6.0 million to Bernt O. Bodal to finance his purchase of equity interests in ASLP. The interest rate on this loan resets each January 1, April 1, July 1 and October 1 to the prime rate plus  1/2 percent. The current rate is 5.25% per annum. This loan will mature in 2012. Mr. Bodal is obligated to apply the amount of any distributions he receives on his ASLP units, after payment of applicable income taxes, to repay this loan. In connection with the transactions contemplated by this offering, (i) all of ASG’s rights with respect to this loan will be distributed to Holdings and (ii) Mr. Bodal will repay this loan in full.

 

On October 4, 2002, three investment funds managed by Wasserstein & Co., which we refer to as the U.S. Equity Partners Funds purchased from Holdings a combination of preferred equity securities and notes, and purchased from ASLP warrants to purchase ASLP units, for a total purchase price of $27.3 million. Proceeds from the sale were used by ASLP to redeem 44,828 ASLP units and a warrant to purchase 106,875 ASLP units, which were held by affiliates of Norway Seafoods. In the transactions contemplated by this offering, Holdings will use approximately $33.8 million of the proceeds received to redeem the preferred equity interests and notes held by the U.S. Equity Partners Funds. A portion of the U.S. Equity Partners Funds warrants will be exercised in connection with the offering and a portion will be amended to become exercisable for Holdings equity and then transferred to the Issuer in exchange for IDSs and cash. An aggregate of $5.3 million will be paid to the U.S. Equity Partners Funds in connection with the transfer or exercise of such warrants.

 

On October 28, 2002, Holdings loaned approximately $0.7 million to certain members of management of ASG to purchase ownership interests in ASLP from a selling partner. The loans bear an initial interest rate of 5.25% with a requirement to reset the rate to the prime rate plus one-half percent per annum on January 1, April 1, July 1 and October 1 of each year that the loans are outstanding. Payments on the loans are required to be made from the net proceeds of any and all dividends and distributions with respect to the purchasers’ interests in ASLP and with 25% to 33% of the gross amount of any annual bonus paid or payable to such purchasers, and any outstanding balance is due in 2012. The underlying loans are full recourse to the assets of the purchasers, except that the recourse to assets other than ownership interests is eliminated if the value of the underlying security in ASLP becomes greater than four times the loan balance. All of the purchasers’ ownership interest in ASLP is pledged as collateral for the loans. In connection with the transactions contemplated by this offering, (i) immediately prior to the consummation of this offering, Holdings’ rights with respect to these loans will be distributed to ASLP and (ii) such members of management shall apply any distributions received by them on their ASLP units as a result of the transactions consummated in connection with this offering, after payment of applicable income taxes, to repay such loans. We expect these loans to be repaid in full as a result of the transactions consummated in connection with this offering.

 

On November 18, 2002, we forgave the exercise price on certain Series C options that had been repriced to $0.01 in connection with the recapitalization of Holdings and its affiliates in April 2002 and forced the conversion of these options into ASLP ownership units.

 

On December 16, 2002, ASG entered into the Second Amended and Restated Credit Agreement with Bank of America, N.A., as Administrative Agent, and various other lenders, which amended the existing credit facility, dated as of April 18, 2002. The amendment provided, among other things, for an increase in the principal amount of term B loans by $50 million, and consents to our acquisition of Southern Pride as other than a permitted acquisition. We used the borrowing of $50 million in additional term B loans to pay the purchase price for the acquisition, make certain payments related to the acquisition, pay related fees and expenses and fund our general corporate purposes. The assets we acquired from Southern Pride secure ASG’s indebtedness under the existing credit facility. As of December 31, 2002, after giving effect to the amendment, there was $360.5 million of outstanding indebtedness under the existing credit facility and approximately $73.0 million of unused borrowing capacity under the revolving credit facility.

 

Following the completion of the transactions contemplated by this offering, ASG will use the proceeds it receives from Holdings, together with borrowings under the new credit facility, to repay all outstanding borrowings under the existing credit facility and to repurchase all of the existing senior subordinated notes that are validly tendered and not withdrawn pursuant to the consent solicitation and tender offer.

 

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Liquidity and Capital Resources

 

Our principal liquidity requirements are for working capital, consisting primarily of receivables, inventories, pre-paid expenses, payables and accrued expenses; capital expenditures; and debt service. We will fund our liquidity needs primarily with cash generated from operations and, to the extent necessary, through borrowings under the new revolver that we will enter into as part of this offering. As of June 30, 2003, the balance under our revolving credit facility was $18.0 million.

 

Cash flows from operating activities was $75.2 million and $40.0 million for the six months ended June 30, 2002 and 2003, respectively, a decrease of $35.2 million. This decrease was primarily due to the additional inventory on hand related to the close of the A season combined with additional prepaid activity in preparation for the B season and an increase in annual insurance premiums.

 

Cash used in investing activities was $4.8 million and $7.9 million for the six months ended June 30, 2002 and 2003, respectively, an increase of $3.1 million. Investing activities during the six months ended June 30, 2002 and 2003 consisted principally of capital expenditures.

 

Cash used in financing activities was $53.8 million and $32.8 million for the six months ended June 30, 2002 and 2003, respectively, a decrease of $21.0 million. This decrease was primarily due to distributions related to the April 2002 recapitalization partially offset by a higher level of repayments on long term debt in the current year.

 

Cash flow from operating activities was $44.2 million, $84.6 million and $96.7 million for the period from January 28, 2000 to December 31, 2000 and the years ended December 31, 2001 and 2002, respectively. The increase in cash flow provided by operating activities from 2001 to 2002 was due principally to an increase in operating income, and a net decrease in working capital excluding the current portion of long-term debt. The increase in cash flow provided by operating activities from 2000 to 2001 was due principally to an increase in operating income, and a more favorable Japanese yen exchange rate, partially offset by a net increase in working capital.

 

Cash flow used by investing activities was $369.8 million, $13.7 million and $58.6 million for the period from January 28, 2000 to December 31, 2000 and the years ended December 31, 2001 and 2002, respectively. The increase in cash used by investing activities from 2001 to 2002 related principally to the acquisition of Southern Pride. The cash used by investing activities in 2000 was due principally to the January 2000 purchase of predecessor assets and vessels plus $24.1 million in a deferred purchase payment to the seller.

 

Cash flows from financing activities were net cash inflows of $330.0 million in the period from January 28, 2000 to December 31, 2000, net cash outflows of $73.0 million in 2001 and net cash outflows of $35.0 million for 2002.

 

During the period from January 1, 2000 to January 27, 2000, our cash flows from financing activities were comprised of net repayments of revolving debt of $5.0 million.

 

During the period from January 28, 2000 to December 31, 2000, our cash flows from financing activities included borrowings of $250.0 million of long-term debt, net revolving debt borrowings of $28.0 million and capital contributions of $72.1 million. These amounts represent cash flows relating primarily to funding the acquisition. The acquisition, which had a total purchase price of $477.9 million, involved the issuance of seller notes, bank borrowings and the issuance of equity instruments. All debt obligations that we have assumed, that we repaid with proceeds from the offering of the notes, or that we have guaranteed or for which our assets are pledged as collateral, have been pushed down to ASG’s and Holdings’ financial statements. In addition to our acquisition funding, our cash flows from financing activities during the period January 28, 2000 to December 31, 2000 included $9.3 million of financing fees and costs, and principal payments on our long-term debt of $9.4 million.

 

During 2001, our cash flows from financing activities were primarily comprised of borrowings of long-term debt of $3.5 million, principal payments of long-term debt of $47.8 million, net repayments on our revolving debt of $16.0 million and distributions to a member of $11.2 million. We repaid our debt as required by our loan

 

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agreements and we paid down our revolving debt to reduce our interest cost and improve our leverage ratio as cash was available from our operating activities. The distributions to members were made based on estimated tax allocations.

 

During 2002, our cash flows from financing activities were primarily comprised of net borrowings and net payments of long-term and revolving debt. On April 18, 2002, we repaid all of our existing senior debt and seller notes in the amount of $305.6 million in connection with the April 2002 recapitalization. ASG entered into the existing credit facility in the amount of $445.0 million, which includes two term loans for $370.0 million and a revolving credit line of $75.0 million, and subordinated notes of $175.0 million. The total amount borrowed on the term loans and subordinated notes was $545.0 million, of which $9.5 million had been paid down at December 31, 2002. There was a $2.0 million outstanding balance on the revolver at December 31, 2002. Following the completion of the transactions contemplated by this offering, we will repay all outstanding borrowings under the existing credit facility.

 

We had $5.6 million of cash and cash equivalents at December 31, 2002 compared to $2.3 million at December 31, 2001 and $4.4 million at December 31, 2000. After giving effect to this offering, we believe that this cash, the cash flows we expect to generate from operations, and borrowing capabilities under our new credit facility, will be sufficient to meet our liquidity requirements in the foreseeable future, including our payment obligations under the notes and our anticipated dividend payments on our common stock.

 

Covenant Restrictions.    The new credit facility will impose restrictions on our ability to make capital expenditures. Additionally, the new credit facility and the indenture governing the notes will limit our ability to incur additional indebtedness. Such restrictions could limit our ability to respond to certain market conditions, meet our capital spending program, provide for unanticipated capital investments or take advantage of business opportunities. The covenants in the new credit facility also, among other things, will restrict our ability and the ability of our subsidiaries to dispose of assets, incur indebtedness, incur guarantee obligations, prepay other indebtedness or amend other debt instruments, make restricted payments, create liens, make investments, make acquisitions, change the nature of our business, engage in mergers and consolidations, enter into sale and leaseback transactions, make capital expenditures or engage in certain transactions with affiliates. The indenture governing the notes also will impose similar restrictions on the operation of our business.

 

Capital Expenditures.    We use the term “maintenance capital expenditures” to refer to costs we incur that meet capitalization requirements under accounting principles generally accepted in the United States of America that we consider recurring in nature. The majority of our maintenance capital expenditures relate to our catcher-processor fleet and include items such as fishing gear, improvements to vessel factory processing equipment and major scheduled vessel maintenance. Major scheduled vessel maintenance costs relate principally to our periodic overhauls and replacements performed generally on a three- to five-year cycle. Capital expenditures reflected below were funded from cash flows from operations and borrowings under our existing credit facility.

 

     January 28
through
December 31,
2000


   2001

   2002

     (dollars in millions)

Fishing gear

   $ 1.0    $ 2.3    $ 0.8

Machinery and equipment

     1.5      4.1      5.2

Major scheduled vessel maintenance

     2.1      0.9      2.7

Other

     2.8      1.9      0.7
    

  

  

Total capital expenditures

   $ 7.4    $ 9.2    $ 9.4
    

  

  

 

We estimate that we will have capital expenditure requirements in the range of approximately $9.0 million to $12.0 million per year for the next five years (of which in each year approximately $9.5 million is anticipated to represent maintenance capital expenditures and the remainder for expansion of facilities and production). This

 

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moderate level of anticipated capital expenditures is primarily due to the fact that we made significant investments on our vessels immediately following their acquisition. In addition to our capital expenditures, we spend approximately $7.0 million per year on routine vessel maintenance, which is expensed in the year it is incurred. We also anticipate maintenance capital expenditures for our facilities in Alabama and Massachusetts to maintain these facilities at their current conditions.

 

Our Indebtedness

 

Old Credit Facility.    In connection with our acquisition by Centre Partners and others through ASLP on January 28, 2000, we entered into a revolving credit and term loan agreement with a syndicate of lenders, the administrative agent of which was Bank of America, N.A. This agreement provided for $250.0 million in term loans ($175.0 million Term A and $75.0 million Term B) and $60.0 million in revolving credit. In connection with the recapitalization of Holdings and its affiliates in April 2002, we repaid all indebtedness under our old senior credit facility.

 

Existing Credit Facility.    In connection with the April 2002 recapitalization, ASG entered into a senior credit agreement with a syndicate of banks, the administrative agent of which is Bank of America, N.A. ASG’s credit agreement consists of a $75.0 million revolving credit facility with an initial $5.9 million drawn at closing, and $370.0 million in term loans ($90.0 million Term A and $280.0 million Term B). ASG’s obligations under the credit facility are secured by substantially all its assets. The agreement subjects ASG to various restrictive covenants, including limitations on its ability to prepay indebtedness (including its subordinated notes), incur additional indebtedness, and requirements that it maintains specified financial ratios, such as maximum total leverage, minimum interest coverage and minimum fixed charge coverage. Following the completion of the transactions contemplated by this offering, ASG will use net proceeds received from this offering, together with $220.0 million of borrowings under the new credit facility, to repay all outstanding borrowings under the existing credit facility.

 

U.S. Equity Partners Funds Equity Interests and Notes.    On October 4, 2002, the U.S. Equity Partners Funds purchased from Holdings a combination of preferred equity securities and notes, and purchased from ASLP warrants to purchase ASLP units, for a total purchase price of $27.3 million. Proceeds from the sale were used by ASLP to redeem 44,828 ASLP units and a warrant to purchase 106,875 ASLP units, which were held by affiliates of Norway Seafoods. In the transactions contemplated by this offering, Holdings will use approximately $33.8 million of the proceeds received to redeem the preferred equity interests and notes held by the U.S. Equity Partners Funds. A portion of the U.S. Equity Partners Funds warrants will be exercised in connection with the offering and a portion will be amended to become exercisable for Holdings equity and then transferred to the Issuer in exchange for IDSs and cash. An aggregate of $5.3 million will be paid to the U.S. Equity Partners Funds in connection with the transfer or exercise of such warrants.

 

PLC Credit Facility.    In December 2001, PLC entered into an $8.0 million revolving term note agreement with a bank. PLC obligations under this credit facility are secured by substantially all of PLC’s assets. The agreement subjects PLC to various restrictive covenants, including limitations on PLC’s ability to prepay indebtedness, incur additional indebtedness and requires that PLC maintains specified financial ratios. PLC will be distributed by Holdings to its equity owners (including the Corporate Partners and ASLP) prior to the completion of this offering.

 

New Credit Facility.    Upon completion of this offering, our subsidiary ASG will enter into $300.0 million of senior secured debt facilities with a syndicate of financial institutions, which we refer to as the “new credit facility.” We expect that the new credit facility will include an $80.0 million senior secured revolving credit facility, which we refer to as the “new revolver,” a term loan in a total principal amount of $80.0 million, which we refer to as the “new term loan,” and $140.0 million of senior secured notes, which we refer to as the “new senior notes.” The Issuer will not be a party to the new credit facility. The new credit facility will contain restrictions on ASG’s ability to make distributions to Holdings. Such distributions are the projected sources of cash to allow the Issuer to make interest and dividend payments to IDS holders. We expect that the new credit

 

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facility will have a 5-year maturity. See “Use of Proceeds” and “Description of Certain Indebtedness—New Credit Facility.”

 

Our ability to comply in future periods with the financial covenants in the new credit facility will depend on our ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, business and other factors, many of which are beyond our control, and will be substantially dependent on the selling prices for our products and our ability to successfully implement our overall business strategies.

 

Subordinated Seller Notes.    In connection with the acquisition of our business by Centre Partners and others through ASLP on January 28, 2000, ASC, Inc. and Holdings each issued a note to the seller, Norway Seafoods. These notes were in the principal amounts of $50.0 million and $45.0 million, respectively, and bore interest at the rate of 10% per annum, increasing to 12% to the extent interest was not paid in cash. Any interest not paid in cash was added to the principal amounts of the notes. No cash interest was paid on these notes in 2000 or 2001. The notes were scheduled to mature on January 28, 2010. In connection with the recapitalization of Holdings and its affiliates in April 2002, we repaid these notes plus related accrued interest.

 

Existing Senior Subordinated Notes.    On April 18, 2002, ASG completed a private offering of $175.0 million principal amount of 10.125% senior subordinated notes due 2010 (the existing senior subordinated notes). A registration statement under the Securities Act registering these notes became effective on October 15, 2002. On November 20, 2002, ASG completed its exchange offer of the privately-placed notes for SEC registered notes. All of the privately-placed notes were exchanged for registered notes. Following the completion of the transactions contemplated by this offering, we will repurchase all of the existing senior subordinated notes that are validly tendered and not withdrawn pursuant to the consent solicitation and tender offer.

 

Contractual Obligations and Commercial Commitments

 

The following table provides aggregated information about our contractual obligations as of December 31, 2002.

 

    

Payments Due by Period

(in thousands)


Contractual Obligations


   Total

   Less than
1 year


   1-3 years

   4-5 years

   After 5
years


Long-Term Debt

   $ 544,751    $ 16,023    $ 39,726    $ 51,977    $ 437,025

Operating Leases

     3,147      831      1,256      1,060     

Unconditional Purchase Obligations(1)

     31,220      17,160      14,060          

Other Long-Term Obligations

     17,646      552      13,116      1,961      2,017
    

  

  

  

  

Total Contractual Cash Obligations

   $ 596,764    $ 34,566    $ 68,158    $ 54,998    $ 439,042
    

  

  

  

  


(1) Unconditional purchase obligations assume total allowable catch and allocated quotas at 2003 levels.

 

In addition to the above, we are obligated to purchase up to 5 million pounds of catfish per year (which is less than 5% of the total amount of catfish purchased by Southern Pride in 2002) from Southern Pride’s previous owner at a price that is based on a market index. The term of this obligation is ten years. We had no significant commercial commitments as of December 31, 2002.

 

After the completion of the transactions contemplated by this offering, we expect our total long-term debt to be approximately $618.0 million, $255.0 million of which will mature after 5 years and $363.0 million of which will mature after 10 years.

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of our financial condition and results of operations is based on Holdings’ consolidated financial statements, which have been prepared in accordance with accounting principles generally

 

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accepted in the United States of America. The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates and base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements:

 

Foreign exchange contracts.    We record gains and losses on foreign currency transactions in other income and expense following Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Foreign exchange contracts are used to hedge the variability of future cash flows associated with Japanese yen denominated sales due to changes in foreign currency exchange rates. The effectiveness of the hedged transactions is measured by changes in spot rates and the gain or loss resulting from the change in time value is recognized currently in earnings. The unrealized gains and losses resulting from the change in spot rates, or the effective portion, are recorded in other comprehensive income. These gains and losses are recognized in revenues when the forecasted sales have occurred. Gains and losses resulting from the ineffective portion of the hedge, which generally relate to the time value component of the contract, are recognized currently in earnings. See “Risk Factors—Our business is subject to Japanese currency fluctuations which could materially adversely affect our financial condition.”

 

Our profitability depends in part on revenues received in Japanese yen as a result of sales in Japan. During 2002, our Japanese sales represented 39.6% of our total revenues. A decline in the value of the yen against the U.S. dollar would adversely affect our earnings from sales in Japan. Fluctuations in currency are beyond our control and are unpredictable. From January 1 through December 31, 2002, the value of the dollar decreased by 9.6% against the JPY, from 131.26 JPY per USD to 118.64 JPY per USD. While we conduct hedging activities to mitigate the risk of currency fluctuations, these hedging activities may not be sufficient to provide complete protection against loss, and accordingly any such fluctuations could adversely affect our revenues.

 

Acquisition and pushdown accounting.    On January 28, 2000, Centre Partners and others through ASLP acquired our business in a transaction accounted for as a purchase. Accordingly, all of our assets and liabilities were recorded at their estimated fair market values as of the date of the acquisition.

 

The goodwill resulting from the purchase has also been recorded in our financial statements. In addition, expenses incurred by our parent have been recorded in our financial statements to the extent that such expenses related to or benefited our operations.

 

In December 2002, we acquired Southern Pride. A portion of the net book value of our property and equipment represents amounts allocated to those assets as part of the allocation of the purchase price in the acquisition. The allocation of the purchase price in a business combination under the purchase method of accounting is subjective. Management is required to estimate the fair values of assets and liabilities as of the acquisition date. For property and equipment, an estimate of fair market value was determined based on replacement cost and age of the assets. Inventories were valued at fair value less costs to sell and a normal profit margin. Intangible assets acquired, including the trade name and customer relationships, were valued by discounting estimated future cash flows. Other assets and liabilities were allocated purchase price based on the carrying value as management determined that carrying value approximated fair value. The excess purchase price over the fair value of the net assets acquired was recorded as goodwill. We review the carrying value of goodwill annually and when events and changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations.

 

Cooperative rights.    An identifiable intangible asset, cooperative rights, was recorded at its estimated fair value of $138.2 million in connection with the acquisition on January 28, 2000. This estimated fair value was

 

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determined using a discounted cash flow analysis by comparing the expected discounted cash flows under the cooperative system to the cash flows under the former Olympic style system, which means that any vessel licensed to operate in the fishery may harvest as much fish as possible until the fishery’s aggregate seasonal quota allocation has been reached.

 

From January 2000 to October 2001, the cooperative rights intangible asset was amortized on a straight-line basis over 59 months, which was the remaining life of the sunset provision in the American Fisheries Act. Beginning in November 2001, as a result of changes to the American Fisheries Act, we changed the life of our cooperative rights to 23.2 years, which matched the average remaining lives of the vessels, as the American Fisheries Act specifies vessels to which the cooperative rights apply.

 

Vessel maintenance.    A significant portion of our operations is related to our vessels. On January 28, 2000, the purchase of our vessels was part of the total acquisition. Our vessels were recorded at their estimated fair market values, with approximately 60% categorized as vessel equipment and machinery with an estimated useful life of seven years and approximately 40% as vessel hull with an estimated useful life of twenty-five years. We depreciate these assets on a straight-line basis over their estimated useful lives.

 

We incur expenses to repair and maintain our vessels. Repairs and ordinary maintenance are expensed as incurred. Significant additions and improvements are capitalized. As a condition to maintaining our Det Norske Veritas class certification, the highest vessel certification in the industry, the vessels must undergo scheduled major shipyard maintenance at intervals of three to five years. As a part of this scheduled maintenance, we may also have major vessel components overhauled. The costs for this major shipyard maintenance are capitalized and charged to operations on a pro-rata basis during the period through the next scheduled major shipyard maintenance.

 

Equity-Based Compensation.    Certain employees of Holdings have equity-based compensation arrangements under which they received options to acquire units of ASLP. We follow the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, for equity-based employee compensation. The related compensation cost has been pushed down to Holdings’ financial statements, and the deferred compensation has been recorded as a related party payable.

 

Segment information.    We operate in two principal business segments, ocean harvested whitefish and other seafood products. The ocean harvested whitefish segment includes the harvesting and processing of pollock, cod and hake. Processing of ocean harvested whitefish occurs on our vessels while at sea and at our facilities in Massachusetts. The other seafood products segment includes the processing of catfish and scallops at our facilities in Alabama and Massachusetts. Other seafood products sales were not significant prior to our acquisition of Southern Pride.

 

New Accounting Pronouncements

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded into other contracts, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The provisions of this statement are not expected to have a material impact on our financial position or results of operations.

 

In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” The statement requires an issuer to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, the statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period after June 15, 2003. The provisions of this statement are not expected to have a material impact on our financial position or results of operations.

 

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In May 2003, the EITF issued a final consensus on Issue 01-8, “Determining Whether an Arrangement Contains a Lease.” Issue 01-8 provides guidance on determining whether an arrangement is or includes a lease within the scope of SFAS No. 13 “Accounting for Leases.” If it is determined that a lease exists, the lease and non-lease components of a combined sales arrangement must be accounted for separately. Issue 01-8 is effective prospectively for arrangements entered into, modified, or acquired in fiscal periods beginning after May 28, 2003. The provisions of this statement are not expected to have a material impact on our financial position or results of operations.

 

Inflation

 

We do not expect inflation to have a significant impact on our business, financial condition or results of operations. Historically, we generally have been able to offset the impact of inflation through a combination of productivity improvements and price increases.

 

Quantitative and Qualitative Disclosures About Market Risk

 

Market Pricing.    The sale of pollock roe is our highest margin business. The price of pollock roe is heavily influenced by the size and condition of roe skeins, color and freshness and the maturity of the fish caught. In addition, pollock roe prices are influenced by anticipated Russian and U.S. production and Japanese inventory carryover, as pollock roe is consumed almost exclusively in Japan. A decline in the quality of the pollock roe that we harvest or fluctuations in supply could cause a decline in the market price of pollock roe, which would reduce our margins and revenues. Average roe prices per kilogram were ¥2,856, ¥2,247 and ¥1,906 per kilogram for the years ended December 31, 2000, 2001 and 2002, respectively.

 

Foreign Currency, Interest Rate and Commodity Hedging.    We are exposed to cash flow and earnings market risk from certain changes in the yen foreign currency exchange rate, interest rates and diesel fuel prices. To mitigate the risk related to these factors, we utilize forward currency contracts and other derivative commodity instruments, principally futures contracts. As of June 30, 2003, we had open foreign exchange contracts maturing through December 29, 2006 with total notional amounts of $746 million.

 

Prior to the acquisition of our business by Centre Partners and others through ASLP on January 28, 2000, Aker RGI ASA, or Aker, the parent of Norway Seafoods, had entered into a currency forward transaction with Sparebanken NOR and a forward transaction with Den norske Bank ASA. On January 28, 2000, in connection with the acquisition of our business, Aker entered into an agreement with us whereby Aker is obligated to pay us all amounts less a nominal fee that Aker receives from Sparebanken NOR or Den norske Bank ASA, and we are obligated to pay Aker all amounts that Aker must pay to Sparebanken NOR or Den norske Bank ASA. Aker also had, as of June 30, 2003, exercisable foreign currency options with Sparebanken NOR with total notional amounts of $55.0 million relating to the period October 31, 2003 through July 28, 2005. Pursuant to the January 28, 2000 agreement, Aker is obligated to pay us all amounts less a nominal fee that Aker receives from Sparebanken NOR and we are obligated to pay Aker all amounts that Aker must pay to Sparebanken NOR. These options will become forward foreign currency exchange contracts at our election or in the event that the dollar-yen spot exchange rate is at or below 94.0 JPY per one U.S. dollar at any time before July 29, 2003. As of July 29, 2003, these options had not been triggered.

 

In connection with our foreign exchange contracts, we also have extension agreements to enter into foreign exchange agreements. Two of the extension agreements expire between March 2004 and December 2005, and March 2006 and December 2007. These extension agreements would become binding and effective only if the spot rate falls to a rate below a pre-specified level (the trigger) on or before December 2003 or December 2005, respectively. If the spot rate does not reach the trigger on or before December 2003 or December 2005, neither we nor the counterparty shall have any right or obligation with respect to any of these extension agreements. The trigger for each of these two extension agreements is 99.0 JPY per USD and the notional amounts of these extension agreements are $100.0 million. We also have another extension agreement that has similar terms to the

 

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ones described above and expires between October 2003 and August 2005. The trigger is 94.0 JPY per USD and notional amounts are $70.0 million with a trigger date of July 28, 2003. During the first quarter of 2003, we entered into two additional extension agreements that have similar terms to the ones described above. These extension agreements expire between September 2006 and March 2008, and February 2007 and March 2007, respectively. The trigger is 99.0 JPY per USD and 110.0 JPY per USD, respectively, and the notional amounts are $100.0 million and $39.0 million, respectively. The trigger dates are March 30, 2006 and March 29, 2004, respectively.

 

At December 31, 2002, we prepared an analysis to determine the sensitivity of our forward foreign exchange contracts, which were staggered over a rolling 36-month timeframe, to changes in exchange rates. A hypothetical adverse yen exchange rate movement of 1% against our forward foreign exchange contracts would have resulted in a potential loss in fair value of these contracts of approximately $2.7 million. All such losses on these forward foreign exchange contracts would have been substantially offset by gains on the related underlying Japanese yen sales transactions that we have hedged. Since December 31, 2002, we have entered into foreign exchange contracts which have increased the notional amounts of these contracts from $435.0 million at December 31, 2002 to $746.0 million at June 30, 2003, and the potential loss in fair value of these contracts increased to approximately $4.3 million, corresponding to the 1% hypothetical change. All such losses on these foreign exchange contracts would be substantially offset by gains on the underlying Japanese yen sales transactions that we have hedged.

 

Fuel hedges are entered into whereby we pay a fixed price per gallon and receive a floating price per gallon with the payments being calculated on a notional gallon amount of approximately 75% of our next 12 month estimated fuel usage and approximately 55% of months 13 through 24 estimated fuel usage over the term of the contracts through November 30, 2004. The objective of the swap agreements is to hedge the variability of future fuel prices. These instruments are considered to be substantially fully effective and, therefore, substantially all unrealized gains and losses at year-end are recognized as a component of other comprehensive income. An adverse change in fuel prices, such as what has occurred in recent months, will not have a material impact on the average fuel price paid by us during the term of the open fuel hedge contracts. The average hedged prices per gallon related to contracts maturing from January 2003 through November 2004 are lower than the 2002 average fuel price per gallon.

 

Interest Rates.    The existing credit facility requires us to hedge the variable interest rate on a portion of the outstanding senior debt to convert such debt to fixed-rate debt. We are required to enter into hedging transactions such that no less than 50% of the aggregate principal amount of the term loans and the existing senior subordinated notes is effectively fixed rate debt until June 25, 2005.

 

We use various derivative financial instruments to manage our exposure to fluctuations in interest rates. We have interest rate swaps, as well as interest rate caps with notional amounts of $93.5 million at June 30, 2003. The cap rate is 5.0% and the variable rate is the U.S. dollar three month LIBOR. The fair value of these instruments was, in the aggregate, not material at June 30, 2003. The objective of the agreements is to hedge the variability of future cash flows associated with changes in variable interest rates.

 

In addition to the interest hedges applicable to our senior debt, interest on the existing senior subordinated notes has a fixed rate. Approximately 52% of our total debt effectively has a fixed interest rate or is hedged by interest rate caps as of June 30, 2003. Interest rate changes generally do not affect the market value of floating rate debt but do impact the amount of our interest payments and, therefore, our future earnings and cash flows, assuming other factors are held constant.

 

Following the completion of the transactions contemplated by this offering, ASG will use the proceeds it receives from Holdings, together with borrowings under the new credit facility, to repay all outstanding borrowings under the existing credit facility and to repurchase all of the existing senior subordinated notes that are validly tendered and not withdrawn pursuant to the consent solicitation and tender offer.

 

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Industry and Regulatory Overview

 

Overview

 

According to the Food and Agriculture Organization of the United Nations, or FAO, the worldwide production of seafood, excluding aquatic plants, has increased steadily at a compounded annual growth rate of approximately 4% from approximately 19 million metric tons in 1950 to approximately 130 million metric tons in 2001 and is projected to increase slightly from 2003 to 2010, resulting in large part from increasing world population and continued economic growth in developing countries. In 2001, the supply provided by marine and inland fisheries, or capture fisheries, accounted for approximately 92.4 million metric tons, or approximately 71% of that amount. Worldwide seafood production of capture fish has remained stable in recent years. The growth in worldwide seafood production is primarily related to increased fish farming, or aquaculture. From 1990 to 2001, the amount of seafood produced in aquaculture worldwide grew at a compounded annual growth rate of approximately 10% from approximately 13.1 million metric tons to approximately 37.9 million metric tons.

 

Due to its higher cost per ton of fish produced, aquaculture is used primarily to produce higher value fish species such as catfish and salmon. Aquaculture is not a cost effective alternative for lower value fish species such as pollock or hake.

 

Capture Fisheries

 

The following chart provides a brief overview of the different types of fish categories caught in the wild for human consumption and use in 2001, including the different species of groundfish which we harvest. The table indicates the percentage each species represents of the volume of each category harvested from capture fisheries.

 

LOGO


1 Represents species each accounting for less than 5% of the volume of finished products produced from capture fisheries.

Source: FAO Fishstat Plus Database, 2003.

 

In 2001, approximately 16.9 million metric tons of whitefish was produced worldwide. The whitefish category includes groundfish (such as pollock, hake and cod), flatfish (such as sole), and the redfish, bass and conger species groups. From 1990 to 2001, the worldwide production of groundfish has fluctuated between 8.7 million

 

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and 11.6 million metric tons. We are the largest harvester and at-sea processor of groundfish in the U.S. Pollock, the species representing a substantial majority of our harvest, is the most abundant whitefish and groundfish species in the world.

 

Aquaculture

 

The following chart provides a brief overview of the different types of fish categories produced by aquaculture in the U.S. in 2001. In 2001, approximately 28% of the seafood produced worldwide was produced in aquaculture. In 2001, according to the FAO, catfish accounted for approximately 59% of the volume of all aquaculture in the U.S., the primary market in which we sell catfish. We are the largest catfish processor in the U.S.

 

The following table outlines the percentage each segment represents of total U.S. aquaculture production.

 

LOGO

 

Groundfish

 

Pollock Fisheries

 

Pollock accounted for 34% of groundfish produced worldwide in 2001, representing 3.1 million metric tons, which is more than any other groundfish species. The two primary global pollock sources are the U.S. Bering Sea pollock fishery, the primary fishery in which we operate, and the Russian fishery in the Sea of Okhotsk. The pollock biomasses in these U.S. and Russian pollock fisheries are independent of one another, with virtually no co-mingling between these stocks. Pollock stocks in the U.S. Bering Sea pollock fishery have increased steadily since 1999, while pollock stocks in Russia have experienced a steep decline in recent years. According to TINRO, Wespestad & Ianelli, the Russian fisheries are expected to continue their decline over the next several years, which we believe is attributable to overfishing. As a result, approximately 44% of the pollock produced worldwide in 2001 came from the U.S. Bering Sea pollock fishery, up from 30% in 1999.

 

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The map below represents the U.S. Bering Sea pollock fishery and the Russian pollock fishery in the Sea of Okhotsk, our primary competing fishery.

 

LOGO

 

U.S. Pollock Fishery.    According to the Marine Conservation Alliance, the U.S. Bering Sea pollock fishery is one of the healthiest and most responsibly managed fisheries in the world. In contrast to the general world trend of declining groundfish stocks, the U.S. Bering Sea pollock fishery is generally characterized by abundant fish stocks and conservative management. This fishery is highly regulated and only 19 specifically identified catcher-processor vessels, of which we own seven, can participate in the catcher-processor sector of the fishery. Pollock matures relatively quickly, with fish aged three to seven years contributing most significantly to the commercial fisheries. Rapid growth allows a relatively high portion of the pollock biomass to be harvested each year without impacting overall population. According to the National Marine Fisheries Service, the body that conducts pollock stock assessments and recommends sustainable harvest limits in this fishery, approximately 36% of this fishery’s 2002 pollock biomass could be harvested without causing overfishing to occur. The federal government typically sets harvest limits in the 10% to 20% range, substantially below the levels the National Marine Fisheries Service views as sustainable.

 

The National Marine Fisheries Service considers the current U.S. Bering Sea pollock population healthy and stable. The National Marine Fisheries Service’s population models for pollock in the U.S. Bering Sea pollock fishery show that between 1993 and 2002, the biomass has averaged 11.7 million metric tons. The following graphic indicates the historical pollock total allowable catch and biomass in the U.S. Bering Sea pollock fishery:

 

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U.S. Bering Sea Pollock Fishery Total Allowable Catch/Biomass

 

LOGO


 

1 Source for 1993 to 1998: National Marine Fisheries Service; source for 1999 to 2001: North Pacific Fishery Management Council; source for 2002: National Marine Fisheries Service. Amounts for 1999 and thereafter refer to the total allowable catch for the Eastern Bering Sea only.

 

2 Source for 1993 to 2002: Eastern Bering Sea Walleye Pollock Stock Assessment from Alaska Fisheries Science Center and National Marine Fisheries Service, November 2002.

 

The pollock fishery in the U.S. Bering Sea is seasonal. The winter or “A” season takes place from January to April and the summer/fall or “B” season runs from July through October. Since 1998, the year the American Fisheries Act was passed, the National Marine Fisheries Services has permitted participants in the U.S. Bering Sea pollock fishery to harvest 40% of the annual quota during the “A” season and the remaining 60% during the “B” season. During the “A” season, spawning pollock produce large quantities of high-value roe, making this season the more profitable one.

 

Other Groundfish Fisheries

 

In addition to harvesting and processing pollock, we participate in the catcher-processor sector of U.S. fisheries for hake and cod. In 2001, the U.S. hake and cod fisheries represented 14% and 16% of the worldwide production of hake and cod, respectively. According to the FAO, from 1990 to 2001, the worldwide production of hake has varied from a low of approximately 1.1 million metric tons in 1992 to a high of approximately 1.7 million metric tons in 1996. Worldwide production of cod has dropped considerably over the last two decades (particularly the Atlantic cod) from approximately 2.6 million metric tons in 1981 to approximately 1.4 million metric tons in 2001. We believe this decrease in cod led to the spike in cod pricing in the early 1990s and the conversion of most fillet customers to lower-priced, relatively more abundant pollock as a primary source of groundfish.

 

Participants in these fisheries require a federal government permit. Harvesting by catcher-processors in U.S. hake fisheries is conducted on a cooperative basis similar to the system in place for pollock fishing; the mothership sector for hake is conducted on an “Olympic-style” or “open access” basis, meaning that any vessel licensed to operate in the fishery may harvest as much fish as possible until the fishery’s aggregate seasonal quota allocation has been reached. Harvesting in U.S. cod fisheries is Olympic-style.

 

Groundfish Consumption

 

Pollock and cod are the first and third, respectively, largest whitefish species in terms of human consumption. There are three primary markets for groundfish products produced for human consumption: Asia, Europe and

 

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North America, representing 30%, 39% and 17%, respectively, of the market in 2001. The Japanese use groundfish primarily to produce surimi (a fish protein paste used in products such as imitation lobster and crabmeat), roe and a variety of fresh-fish products. Consumers in Western Europe and the United States generally purchase groundfish in the form of fresh and frozen fillets, products produced from blocks of fillets (steaks and fish sticks) and headed and gutted fish.

 

According to the National Fisheries Institute, per capita consumption of pollock has experienced stable growth since 1987 at a compounded annual growth rate of approximately 2.3% per annum.

 

Groundfish Pricing

 

Each of the products produced from pollock has different pricing characteristics. The price of pollock roe is heavily influenced by the size and condition of roe skeins, color and freshness of the roe and the maturity of the fish caught. Catcher-processors are more likely to produce higher quality roe because they process the fish within hours of being caught, rather than several days later as is the case with inshore processors. In addition, roe prices are influenced by anticipated Russian and U.S. production and Japanese inventory carryover, because roe is consumed almost exclusively in Japan. The U.S. Bering Sea pollock fishery commonly produces the highest quality roe.

 

The prices of surimi and fillets are influenced primarily by expected production in the U.S. and Russian pollock fisheries, and other factors such as carryover inventories and changes in demand. Because surimi and fillet blocks often are composed of the same raw material, the demand for one product can influence the price of the other. Surimi and fillet blocks are also produced utilizing species of fish other than pollock, such as hake or itoyori species. However, due to differences in flesh attributes between pollock and other species, the surimi and block produced from other species are generally not used as substitutes for pollock products and thus have minimal influence on pollock pricing. Surimi and fillet blocks are often supplied by both the U.S. Bering Sea pollock fishery and the Russian fisheries.

 

Pollock Allocation

 

We operate within a favorable statutory and regulatory environment. The stable nature of the U.S. Bering Sea pollock fishery is partly a function of the regulatory and cooperative structure that governs its activities. The American Fisheries Act specifically identifies the catcher-processor vessels that are eligible to participate in the fishery, prohibits the entry of additional vessels and prohibits any single entity from harvesting more than 17.5% of the annual directed pollock catch.

 

The Act allocates the total allowable catch of pollock in the U.S. Bering Sea pollock fishery among the following sectors:

 

  Ÿ   10% of the total allowable catch is allocated to six Alaska Community Development Groups (mostly native Alaskan villages and their residents) that sell or lease their community development quota to other participants, including us;

 

  Ÿ   approximately 3.5% of the total allowable catch is set aside for pollock by-catch in other fisheries;

 

  Ÿ   the remaining 86.5% of the total allowable catch (the “directed pollock catch”) is allocated as follows:

 

  Ÿ 50% of the directed pollock catch is allocated to catcher-vessels delivering to inshore factories;

 

  Ÿ 40% of the directed pollock catch is allocated to catcher-processors, and catcher-vessels that deliver to catcher-processors; and

 

  Ÿ 10% of the directed pollock catch is allocated to the catcher-vessels that deliver to at-sea processor vessels called motherships, which do not harvest.

 

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Catcher-processors, such as the vessels we own, harvest and process fish into products, such as roe, fillets and surimi, within hours of catching them, and operate offshore. Catcher-vessels harvest and deliver fish to catcher-processors, motherships and inshore processors for processing. Motherships are at-sea processors which rely on catcher-vessels to harvest and deliver fish to them. Inshore processors operate onshore at fixed-location processing facilities, relying on catcher-vessels to harvest and deliver fish to them.

 

We own and operate seven of the 19 catcher-processor vessels permitted to participate in the catcher-processor sector of the U.S. Bering Sea pollock fishery. Under the American Fisheries Act, this sector is allocated 40% of the annual directed pollock catch and, by the terms of the Pollock Conservation Cooperative agreement, a contractual arrangement among the seven companies that own the catcher-processors named in the statute, this percentage is further divided and allocated among the Cooperative members (with 3.4% being allocated to catcher-vessels). Within the catcher-processor sector, our allocation for pollock under the Cooperative agreement is nearly 2.5 times larger than that of the second largest Cooperative member.

 

In 2001 and 2002, we harvested an aggregate of 17.9% of the total allowable catch in the U.S. Bering Sea pollock fishery. We are allocated 16.8% of the directed pollock catch under our Cooperative agreements, and we lease the right to harvest another 0.7% of the directed pollock catch from other vessels in our fishery, bringing us to 17.5% of the directed pollock catch (which is the maximum permitted harvesting allocation of the directed pollock catch by any single entity). Our share of the directed pollock catch represented 15.1% of the total allowable catch. We supplemented our share of the directed pollock catch in 2001, 2002 and 2003 by purchasing 28.0%, 28.0% and 36.0% of the community development quota (or 2.8%, 2.8% and 3.6%, respectively, of the total allowable catch) from Alaska Community Development Groups, two of which are equity investors in our company.

 

Catfish

 

Catfish production has grown steadily since the earliest commercial production began. According to the FAO, worldwide production of catfish was approximately 792,000 tons in 2001, up from 472,000 tons in 1990, representing an increase of approximately 68% over the last 11 years. Of this amount, approximately 55% came from aquaculture and approximately 45% came from capture fisheries.

 

A large amount of catfish produced in the U.S. comes from independently owned and operated local family farms. The catfish raised in these farms are typically sold to processors, such as ourselves. We do not own any of the farms from which we source catfish and we are not controlled by or affiliated with catfish farmers or their co-operatives, reducing our exposure to catfish price volatility. The catfish is processed into various ready to consume products such as fillets, nuggets and marinated and breaded products.

 

Prior to 1999, the total amount of catfish imports in the U.S. was insignificant, representing less than 5% of the volume of catfish sold. Beginning in 1999, there was an increase in catfish-like imports from Vietnam. In November 2002, the Department of Commerce, or DOC, made a preliminary ruling that the Vietnamese were selling catfish-like products into the U.S. at unfairly low market prices. The DOC issued its final ruling in July 2003, imposing import duties on Vietnamese catfish and other aquaculture exports.

 

Worldwide catfish consumption is concentrated in the U.S., Asia, and Africa, and to a lesser degree in Central Europe. There is very little catfish consumption in Western Europe or Japan. According to the National Fisheries Institute, in the U.S., per capita catfish consumption has surpassed cod and now is the second largest selling whitefish, behind pollock. According to the National Fisheries Institute, U.S. per capita catfish consumption, like pollock consumption, has experienced stable growth since 1990 at a compounded annual growth rate of approximately 5% per annum since 1990. The majority of this growth has occurred in aquaculture, the sector in which we operate.

 

In the U.S., the catfish market has evolved over the last decade from being a regional commodity, locally produced and consumed predominantly in the southern U.S., to a large, commercial aquaculture industry serving

 

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major U.S. markets. In 2001, according to the FAO, catfish accounted for approximately 50% of the value and 59% of the volume of all aquaculture in the U.S. The U.S. catfish industry is concentrated in Alabama, the region in which we operate, as well as Mississippi, Arkansas and Louisiana. We are the largest catfish processor in the U.S., processing approximately 100 million pounds of catfish per year.

 

Catfish harvests are seasonal, following the warm weather-growing cycle of the fish. Farmers prefer to harvest their ponds at the end of the summer, after the period in which the fish experience their maximum weight gain and before the fish enter a period of slower growth during the winter. The harvest slows modestly during November and December due to reduced demand during the holiday season and picks up again in the beginning of the year. This leads to a seasonal abundance of fish between late summer and early winter, the time of year when catfish prices are usually at their lowest.

 

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Business

 

We are one of the largest integrated seafood companies in the U.S. in terms of revenues. We harvest and process a variety of fish, either on board our sophisticated catcher-processor vessels or at our land-based processing facilities, and market our products to a diverse group of customers in North America, Asia and Europe. We are the largest harvester and at-sea processor of pollock and the largest processor of catfish in the U.S. Pollock is the world’s highest-volume whitefish harvested for human consumption and accounts for a majority of our revenues. In the U.S., catfish is the basis for a large, commercial aquaculture industry serving major U.S. markets, and according to the FAO, catfish accounted for approximately 50% of the value of all aquaculture in the U.S. in 2001. In addition, we harvest and/or process other seafood, including scallops, hake and cod. We maintain an international marketing network through our U.S., Japanese and European offices and have developed long-term relationships with a U.S. and international customer base.

 

We own and operate a premier modern fleet of seven catcher-processor vessels, which average over 300 feet in length and carry crews of 90 to 125 persons. Our catcher-processors are capable of producing between 110 and 150 metric tons of frozen finished product daily. We produce a variety of products at sea, such as pollock roe (fish eggs), surimi (a fish protein paste used in products such as imitation lobster and crabmeat), fillet blocks, headed and gutted fish and fishmeal.

 

We operate in two principal business segments, ocean harvested whitefish and other seafood products. The ocean harvested whitefish segment includes the harvesting and processing of pollock, cod and hake. Processing of ocean harvested whitefish occurs on our vessels while at sea and at our facilities in Massachusetts. The other seafood products segment includes the processing of catfish and scallops at our facilities in Alabama and Massachusetts.

 

We harvest pollock primarily in the U.S. Bering Sea pollock fishery. According to the Marine Conservation Alliance, this fishery is among the largest and most conservatively managed in the world. We benefit from the favorable regulatory system that governs pollock fishing in these waters. Under U.S. federal law, the fishery is subject to total allowable catch limitations, quota allocations among the different sectors of participants in the fishery, and rules that give exclusive harvesting rights to specifically identified vessels, with the result that any potential new competitors face significant barriers to entry. We own and operate seven of the 19 catcher-processor vessels permitted to participate in the catcher-processor sector of the fishery. Under the American Fisheries Act, this sector is allocated 40% of the annual directed pollock catch and, by the terms of the Pollock Conservation Cooperative agreement, a contractual arrangement among the seven companies that own the catcher-processors named in the statute, this percentage is further divided and allocated among the Cooperative members (with 3.4% being allocated to catcher-vessels). Within the catcher-processor sector, our allocation for pollock under the Cooperative agreement is nearly 2.5 times larger than that of the second largest Cooperative member.

 

We own and operate two catfish processing facilities in Alabama. We do not own any of the farms from which we source catfish, reducing our exposure to catfish price volatility. We have strong relationships with catfish farmers and we distribute fresh and frozen catfish products to both retailers and foodservice customers throughout several regions in the U.S. In addition, we conduct other seafood processing operations at our facility in Massachusetts, where we manufacture products such as breaded seafood portions, fillets and scallops.

 

Competitive Strengths

 

Abundant, Stable Pollock Fishery.    Our pollock harvesting operations target the U.S. Bering Sea pollock fishery, which, according to the Marine Conservation Alliance, is one of the healthiest and most responsibly managed fisheries in the world. Under federal law, the National Marine Fisheries Service is directed to set the total allowable catch at a level which ensures a healthy, abundant resource. The total allowable catch for pollock in the U.S. Bering Sea pollock fishery has grown from 992,000 metric tons in 1999 to 1,491,760 metric tons in 2003.

 

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According to the North Pacific Fishery Management Council, the biomass for pollock stocks in the U.S. Bering Sea pollock fishery has remained relatively stable and averaged 11.7 million metric tons between 1993 and 2002. According to recent data obtained from the National Marine Fisheries Service, we expect this biomass to remain stable, and we believe that the total allowable catch in this fishery will not fluctuate significantly for the next several years. In contrast, the Russian pollock fishery, our primary competing fishery, has recently experienced significant declines in its biomass and total catch. We believe that the stability of our fishery will afford us an advantage over our competitors who harvest pollock in the declining fisheries.

 

Attractive Regulatory Environment; Barriers to Entry.    We operate within a favorable statutory and regulatory environment primarily designed to ensure the long-term stability of the pollock biomass. The U.S. Congress in October 1998 enacted the American Fisheries Act, which provides us with the following key competitive benefits:

 

  Ÿ It ensures the catcher-processor sector in which we operate 40% of the annual directed pollock catch in the U.S. Bering Sea pollock fishery (with 36.6% being allocated to 19 catcher-processor vessels and 3.4% being allocated to catcher-vessels).

 

  Ÿ It creates a significant barrier to entry because participation in the catcher-processor sector of our fishery is limited to 19 specifically named catcher-processor vessels, of which we own seven.

 

  Ÿ It has facilitated the formation of the Pollock Conservation Cooperative, which allocates a fixed portion of the annual directed pollock catch to us, enabling us to increase the predictability and efficiency of our operations.

 

Efficient Large-Scale Operator.    As one of the largest integrated seafood companies in the U.S., we believe that the scale and efficiency of our harvesting and processing operations, combined with the breadth of our marketing activities, give us substantial competitive advantages. We own and operate seven catcher-processors, the largest fleet of catcher-processors in the U.S. Bering Sea pollock fishery. In 2002, our fleet included the industry’s top five catcher-processors in terms of metric tons harvested. Each of our catcher-processors is a floating factory, averaging in excess of 300 feet in length and carrying a 90 to 125 person crew.

 

Our catcher-processors are capable of producing between 110 and 150 metric tons of frozen finished product daily and have flexible manufacturing platforms that enable them to operate both fillet and surimi production lines, giving us the ability to readily shift production based on current market demand and to mitigate pricing volatility. Each vessel is also equipped with an integrated computer system enabling constant communication among vessels, the corporate office and our sales representatives, and real-time response to shifts in market demand. We have been able to improve our average pollock flesh recovery rate from approximately 17% in 1997 to approximately 23.5% in 2002, which we believe is better than our competitors. In addition, we believe that our size enables us to negotiate more favorable transportation rates and fuel contracts.

 

Catfish Processor Leader.    We are the largest catfish processor in the U.S., processing approximately 100 million pounds of catfish per year in our two Alabama facilities, which represents a leading market share in the catfish processing sector of over 15%. Our catfish sales and marketing operations include a network of 37 brokers capable of delivering fresh and frozen catfish products to both foodservice and retail customers throughout several regions in the U.S. We have strong relationships with approximately two hundred catfish farmers, most of whom run small farms in Alabama located close to our processing facilities. We operate our own harvest and live-haul departments, the largest in the nation.

 

Strong Customer Relationships and Distribution Network.    We have established long-standing relationships with many customers worldwide. In 2002, our largest customer accounted for less than 8% of our total revenues. Our customer base includes industrial importers, foodservice distributors, food retailers, restaurant chains and reprocessing companies. We have established close relationships with major Japanese end-users. In the U.S., we have established long-term customer relationships, including multi-year or multi-season supply contracts with

 

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some of the largest U.S. pollock deepskin/block customers. As a result of our worldwide operating scale, we believe we have formed good relationships with major international transporters and distributors. Our logistics team continually evaluates shipping and storage alternatives in an effort to maintain the most cost-efficient and reliable logistical system available.

 

Experienced Management Team.    Our senior management team has extensive experience in fishing and related industries. Our Chairman and CEO has worked in the fishing industry for over 25 years and our senior management team members average more than 20 years of industry experience. In addition, we have an experienced group of operational managers and vessel managers throughout our organization.

 

Business Strategy

 

Over the past decade, we have become one of the largest integrated seafood companies in the U.S. Today we are committed to building on our existing harvesting, processing and marketing platforms.

 

The primary components of our business strategy include the following:

 

Maximize Pollock Revenues.    Our pollock harvesting and at-sea processing operations provide a majority of our revenues. Our strategy to maximize pollock revenues includes:

 

  Ÿ Maximize access to pollock resources.    Over the last two years, we have increased our share of the total allowable catch in the U.S. Bering Sea pollock fishery by approximately 15%, largely through increasing our purchases of community development quota from Alaska Community Development Groups from 5.0% of the total community development quota in 1999, to 36.0% in 2003. We will continue working to maximize our share of the total allowable catch within the applicable regulatory framework.

 

  Ÿ Optimize product mix to maximize profitability.    We will continue our efforts to maximize revenues by optimizing product mix based on global demand and pricing. Each of our vessels is staffed with production managers who coordinate continuously with our marketing department to schedule production between blocks and surimi to optimize product mix and maximize our profitability.

 

Continue to Diversify Sources of Revenues.    We generate most of our revenues from ocean harvested whitefish, primarily comprised of pollock-based products. In addition, we participate in a number of other fisheries, such as those for hake, cod and yellowfin sole. We plan to continue expanding our operations in these and other fisheries. With the recent acquisition of Southern Pride, we became the largest catfish processor in the U.S. and therefore have significant market positions in pollock, catfish and cod, the top three whitefish species in terms of U.S. human consumption. In addition, we have state of the art processing facilities to produce scallops, a market we entered in 2001. We also recently reconfigured one of our catcher-processors to more aggressively target yellowfin sole.

 

Leverage International Marketing Network.    We are currently expanding our presence in worldwide seafood markets, with a particular focus on the Asian and European markets, to increase and diversify our customer base and global seafood market share. We have expanded our Japanese office in an effort to increase direct distribution to end-users and to gain an entryway into growing markets such as South Korea and China. We expect that over time, increasing local market presence in Asia will help maintain price stability through long-term contracts, improve production planning, strengthen customer relationships and provide us with marketing and sales advantages. Additionally, we believe that a strong local market presence will provide us with an opportunity to introduce new species and product forms into the Asian market and enhance relationships with distributors in Japan. In 2001, we established a sales office in Denmark to serve the growing European market for pollock block, which in the past has been supplied primarily with Russian pollock. As Russian pollock stocks and harvests decrease, we believe that our access to pollock resources in the U.S. Bering Sea pollock fishery will provide us with a competitive advantage in implementing our strategy to increase our presence in Europe. Seafood sales to customers in Europe increased from 2.1% of total revenues in 1999 to 17.3% of total revenues in 2002.

 

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Continually Improve Operating Efficiencies.    We believe that there may be significant synergies created by integrating Southern Pride, our recently acquired Alabama catfish processing operations, with our secondary processing operations in Massachusetts, leading to improved profitability for both businesses. Synergies could be achieved by utilizing Southern Pride’s extensive distribution network to penetrate additional markets and increase sales of our secondary processed products to Southern Pride’s customer base. Southern Pride’s distribution network provides us with greater access to the retail, distributor and fresh seafood channels for all of our products.

 

Pursue Strategic Acquisitions.    We intend to evaluate and selectively pursue accretive opportunities that we believe are strategically important based on their potential to diversify our product and customer base, broaden our distribution network and increase cash flow.

 

Products

 

There are three steps in preparing pollock for retail sale: harvesting, primary processing and secondary processing. At sea catcher-processor vessels harvest fish and conduct primary processing to produce products such as fillets, surimi and roe. These products are further refined and packaged for retail sale by secondary processing companies in the United States, Asia (mainly Japan) and Europe, which produce products such as breaded seafood portions, imitation crabmeat and fish sticks.

 

The sale of pollock roe is our highest margin business. The fish we catch at-sea (after extraction of roe, if applicable) is either processed into surimi or fillet blocks. Each fish is first filleted and incremental flesh is removed from the carcass and sent to the surimi line. The fillets are then either inspected and frozen in block form, or minced and used to produce surimi. The manufacturing processes for surimi and fillet blocks generate different quantities of salable product from each fish.

 

We process fish into the following products:

 

  Ÿ Ocean harvested whitefish segment:

 

  Ÿ Roe.    Roe is extracted from spawning fish, which are harvested primarily during the winter and spring. Egg sacs are sorted by size and quality and frozen on the vessels. The egg sacs are then salted and dyed by processors in Asia for sale to consumers. We produce roe primarily from pollock and to a lesser extent from cod. We sell roe primarily to large Japanese importers.

 

  Ÿ Block.    We produce different types of block products such as skinless, boneless, pin bone out, pin bone in, deepskin and minced blocks. The frozen blocks are cut into different sizes, shapes and weights by our secondary processing operations for conversion into products such as breaded and battered fish sticks and fillets. We sell block produced from pollock, hake, cod and yellowfin sole. We sell most of our block products to foodservice customers, restaurant chains, retailers or large scale secondary processors in Asia, Europe and North America.

 

  Ÿ Surimi.    Surimi is a tasteless fish paste used as the primary protein in numerous Asian dishes and, to a lesser extent in Europe and the U.S. We produce surimi from pollock and hake. We sell surimi as a commodity to importers and large-scale distributors, who then sell it to processors as a raw ingredient. Outside of Japan, the most recognized surimi products are imitation crab, shrimp, scallops and other similar products. Over 1,000 different products are made from surimi.

 

  Ÿ Fishmeal.    Fishmeal is produced from fish by-products, primarily frames, guts and heads of pollock, hake and yellowfin sole. We sell fishmeal primarily in China, Taiwan and Japan, where it is used as the main ingredient in aquaculture feeds.

 

  Ÿ Other.    We produce headed and gutted fish from cod and yellowfin sole and sell those products primarily to secondary processors in China for conversion into individual skinless, boneless fillets.

 

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  Ÿ Other seafood products segment:

 

  Ÿ Fresh.    We sell fresh catfish and scallops. Catfish is sold to foodservice customers and retailers in the U.S. Fresh scallops are sold in bagged or canned form to wholesalers and high-end restaurants in the U.S.

 

  Ÿ Individually Quick Frozen.    Individually quick frozen products are skinless fillets or scallops frozen into individual portions rather than blocks. The individually quick frozen portions are of various sizes and are processed for conversion into “center of the plate” and breaded and battered products. Most of our individually quick frozen products are produced from catfish and scallops. We sell most of our individually quick frozen products to foodservice customers and retailers in the U.S.

 

Our product sales value in dollars and as a percentage of total sales, broken out by product type and geographic region for 2002 and for the first six months of 2003 in our ocean harvested whitefish segment, excluding sales of PLC, are as follows (pricing can vary from year to year):

 

     2002

    Six Months Ended
June 30, 2003


 
     Amount of
Sales


  

Percent of

Total Sales


    Amount of
Sales


   Percent of
Total Sales


 
     (dollars in millions)  

Roe

   $ 85.7    28.4 %   $ 80.7    50.1 %

Block

     110.9    36.8       50.4    31.3  

Surimi

     83.9    27.8       22.3    13.8  

Fishmeal

     10.0    3.3       4.1    2.5  

Other

     11.0    3.7       3.5    2.3  
    

  

 

  

Total

   $ 301.5    100.0 %   $ 161.0    100.0 %
    

  

 

  

     2002

    Six Months Ended
June 30, 2003


 
     Amount of
Sales


  

Percent of

Total Sales


    Amount of
Sales


   Percent of
Total Sales


 
     (dollars in millions)  

North America

   $ 89.6    29.7 %   $ 41.5    25.8 %

Japan

     131.0    43.4       81.7    50.7  

Europe

     49.1    16.3       17.3    10.7  

Asia (other than Japan)

     31.8    10.6       20.5    12.8  
    

  

 

  

Total

   $ 301.5    100.0 %   $ 161.0    100.0 %
    

  

 

  

 

Our sales of catfish and scallops for 2002, assuming the acquisition of Southern Pride had occurred on January 1, 2002, would have been $99.8 million and $16.8 million, respectively, approximately 98% of which would have been sold in North America.

 

We are continually designing and employing new factory technologies. We employ a full time technical engineer who investigates and designs processing factory improvements. We seek to increase the value of the products produced aboard our vessels and to reduce labor and associated costs wherever possible. One example of these efforts is a patented new machine that successfully takes the fish head (which previously went entirely to fishmeal) and removes a large section of meat used for higher-value surimi or minced products. We are also investigating new technology that will grade fillets automatically with the use of computers and scanners and that could potentially reduce our labor costs.

 

Sales, Marketing and Distribution

 

Overview.    We have an international marketing network with offices in the United States, Japan and Denmark. We market, sell and distribute products for two distinct types of customers: the industrial market; and the foodservice/retail market. The products we produce through primary processing on board our catcher-processor

 

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vessels or in our primary processing catfish facilities in Alabama are sold as a raw material into the industrial market and used by our customers to produce ready to consume end products. The products we produce through secondary processing at our facility in Massachusetts and at our catfish facilities in Alabama are sold in a ready to consume format to the foodservice and retail markets.

 

In 2002, industrial customers and foodservice/retail customers comprised approximately 63.5% and 36.5% of our revenues, respectively. Our industrial sales force consists of sales representatives and brokers targeting an international group of customers primarily in Asia, Europe and North America regions. Our foodservice and retail sales and marketing operations include a network of 37 brokers throughout the U.S. This network sells and distributes on average in excess of one million pounds of processed, ready to consume catfish, scallops and breaded pollock or cod per week.

 

The opening of our Copenhagen, Denmark office in 2001 reflects our strategy to build a long-term presence in the European markets that will enable us to capitalize on seafood consumption growth trends in previously underserved markets such as France, Spain, Italy and Germany. In addition, we have recently expanded our Japanese office in an effort to increase direct distribution to end-users and to gain an entryway into growing markets such as South Korea and China.

 

Industrial Market.    Our primary processing operations focus on products used as raw materials by secondary processors serving end markets throughout the world. We harvest, manufacture and market frozen at-sea products from the Bering Sea and North Pacific. The products produced onboard our catcher-processors are specifically made for industrial processors that convert the frozen fillet blocks and surimi into breaded portions and surimi-based products like imitation crab meat. Roe is salted and dyed by processors in Asia for sale to consumers. Roe is sold to consumers as fresh or frozen whole skeins, or as bags of eggs removed from the skeins. The whole skeins are considered a high-end gourmet food product and are used for gift giving in Japan. We develop annual marketing and sales plans for our products based on anticipated demand and market pricing. We review these plans continuously and, if necessary, adjust them during the season. Because most of our vessels can easily switch between producing surimi and fillet blocks, we constantly monitor and adjust the product mix to meet market demand.

 

Depending on the product and customer, we negotiate either seasonal or long-term contracts. We have traditionally entered into revolving arrangements in which several larger customers commit to purchase all surimi produced on a specific vessel. Prior to each fishing season, we typically enter into sales commitments for 70% to 90% of our expected production. Final pricing usually occurs during the season or shortly thereafter, based on general pricing in the market. Over the years, we have built good relationships with our core customer base.

 

We generally sell our pollock roe through a combination of direct sales and silent auctions to Japanese industrial customers. Prior to the commencement of the pollock “A” season, we enter into agreements to sell a specified percentage of the roe production from each vessel to a particular customer. In 2003, that percentage was 50% for each of our vessels. The parties agree that the sales price will be identical to the price at which the remaining 50% is sold at auction. Depending on the quantity of production, the roe of the pollock “B” season is sold through a similar procedure, entirely by auction or through direct negotiated sales with major customers.

 

Through our brand names “Pride of the Sea” and “Southern Pride Catfish,” we are a well recognized supplier of industrial products, and we maintain a strong market position in Japan, the United States, parts of Europe and parts of Asia.

 

Foodservice and Retail Markets.    We focus on selling, marketing and distributing seafood products produced in our three secondary processing facilities to the foodservice and retail channels utilizing a national broker network. We market products such as breaded fish sticks, fillets and single serve portions under our national brands “Frionor,” “Arctic Cape” and “Southern Pride Catfish,” as well as under private label brands. The majority of our retail sales are in the foodservice channel and about one third of our products are sold retail through either seafood specialty shops, grocery or club stores. We market sea scallops in the retail grocery channel under the Bayside

 

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Bistro and private label brands. Additionally, we intend to capitalize on an industry trend toward fresh and chilled seafood by developing strategic alliances with seafood distributors to supply fresh and chilled seafood, primarily to the seafood counters of retail grocery and club stores. Product mix is about  2/3 frozen and  1/3 fresh. Approximately 45% of our foodservice and retail products are delivered through our own fleet of trucks.

 

We are increasingly emphasizing direct selling, particularly to national restaurant chains in the growth segments of the foodservice industry. We focus our marketing efforts on a consultative selling approach featuring culinary and resource support that assists customers to develop their seafood businesses. We complement our marketing efforts by developing innovative high quality products that also solve specific customers’ challenges, such as scarce labor and food safety.

 

Customers

 

We have established long-term relationships with a number of key customers worldwide. Our customer base includes industrial importers, foodservice distributors, food retailers, restaurants and reprocessing companies.

 

For surimi and roe products, our customers have primarily been Japanese and South Korean importers and large scale distributors. Over the past few years, we have focused on broadening our customer base and have been building closer relationships directly with key Japanese food manufacturers. We have recently penetrated the growing European surimi market, particularly in France and Spain.

 

The United States is our primary market for pollock deepskin blocks and catfish products. For pollock deepskin product, we have established long-term customer relationships, including multi-year or multi-season supply contracts with three of the largest U.S. pollock deepskin customers. Our catfish products are sold to a diversified customer base made up of retail, foodservice and specialty seafood distributors.

 

With the decline of Russian pollock supply, we have increased production of pin bone out, pin bone in and minced pollock blocks to capture additional European market share. In addition to the United States, Europe is a primary market for these products. The growth in European block demand led to the establishment of our European office in Copenhagen, Denmark, which leverages our existing relationships with broker alliances.

 

The table below lists alphabetically our 15 largest customers in our ocean harvested whitefish segment by revenues in 2002:

 

Customer


  

Product


  

Market Segment


  

Country


Bumble Bee Seafoods

   Surimi   

Retail manufacturer

   United States

Coland Development Ltd.

   Fishmeal   

Industrial

   China

Hanwa American Corp.

   Surimi/roe   

Importer/manufacturer

   United States

Kibun Trading Inc.

   Surimi   

Importer/retail manufacturer

   Japan

Long John Silver’s

   Deepskin block   

Foodservice-quick service restaurants

   United States

Mitsubishi International Corp.

   Roe   

Importer

   Japan

Nichimo Co. Ltd.

   Surimi/roe   

Importer/retail manufacturer

   Japan

Nichiro

   Surimi/roe   

Importer/distributor

   Japan

Pickenpack Tiefkuhlgesellscha

   Hake and pollock blocks   

Retail manufacturer

   Germany

Royal Greenland Seafood

   Hake and pollock blocks   

Retail manufacturer

   Germany

Samho America Inc.

   Surimi/roe   

Importer

   South Korea

The Forman Group

   Deepskin block   

Foodservice-quick service restaurants

   United States

Tokai Denpun

   Surimi/roe, fishmeal   

Importer

   Japan

Western Alaska Fisheries

   Surimi/roe   

Importer/manufacturer

   United States

Young Ocean Inc.

   Roe   

Importer

   Japan

 

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The table below lists alphabetically our 15 largest customers in our other seafood products segment, including Southern Pride, by revenues in 2002:

 

Customer


   Product

   Market Segment

   Country

Bi-Lo LLC

   Frozen scallops    Retailer    United States

C & S Wholesaler

   Frozen scallops    Wholesaler    United States

Darden Restaurant Group

   Frozen catfish and scallops    Restaurants    United States

Dot Foods, Inc.

   Frozen catfish fillets    Foodservice    United States

Eastern Fisheries

   Fresh scallops    Processor    United States

Gordon Foodservice

   Frozen scallops    Foodservice distributor    United States

Market Fisheries

   Fresh catfish fillets    Foodservice    United States

Midway Distributors

   Fresh catfish fillets    Foodservice    United States

Moo & Oink

   Fresh catfish fillets    Retail    United States

National One

   Frozen scallops    Importer & distributor    France

Schnucks Market, Inc.

   Fresh/frozen catfish fillets    Retail    United States

Seacliff Seafood

   Fresh/frozen catfish fillets    Retail    United States

Star Fisheries Corporation

   Fresh/frozen catfish fillets    Retail    United States

State Street

   Fresh catfish fillets    Foodservice    United States

SYSCO Food Services

   Frozen catfish fillets    Foodservice    United States

 

In 2002, our largest customer accounted for less than 8% of our total revenues. We also sell a portion of our fish to our secondary processing operations.

 

Operations

 

Ocean harvested whitefish

 

Harvesting operations.    Our vessel captain and fishmaster utilize highly sophisticated fish finding technology to identify the size of the fish and the location and density of the school, allowing the vessels to optimize the catch and resource value. Once the fishmaster identifies a fishing area, a mid-water trawl net, which includes cone-shaped nets, is towed behind the vessel. The fishing captain monitors the catch sensors attached along the portion of the net that holds the fish. When the optimal catch level is reached and the net is wound in, the fish are immediately dropped into tanks to await processing.

 

Processing operations.    Within hours, harvested fish are converted into primary processed products utilizing highly automated, continuous production processes. In the first phase of processing, fish are released from the holding tanks onto a conveyer, sorted according to size and diverted into hoppers at the head of one of the several processing lines. Headed and gutted pollock are run through an additional line which extracts roe skeins intact. These skeins are weighed, graded, packaged in groups according to grade and frozen. Fish that have been headed and gutted are either frozen as-is or filleted for conversion into either surimi or frozen fillets.

 

Breaded and battered operations.    Pollock is the primary whitefish used in low cost, breaded and battered fish products for the foodservice and frozen product markets. We convert raw fish blocks, primarily pollock blocks produced by our harvesting operations, into market ready, frozen, cut or formed, breaded and battered portions. Our products include raw breaded, pre-cooked, batter fried, glazed and dusted products.

 

Shipping and cold storage logistics.    We have established relationships with shipping agents throughout Europe and Asia to take advantage of favorable distribution and cold storage rates and service, and we have secured cold storage space in the U.S., Canada, Europe and South Korea to ensure timely delivery of quality products at the most cost efficient rate. Also, through our integrated structure, our harvesting operations utilize the cold storage facility of our secondary processing operations for East Coast shipments, further reducing storage costs.

 

Other seafood products

 

Catfish.    The catfish we buy are raised in ponds by independent catfish farmers with whom we have contractual relationships. Prior to harvesting catfish, sample fish are tested. They are loaded into baskets and then placed in

 

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our aerated tank trucks for live shipment to our processing plants. Unlike a large number of our competitors that depend on farmers to deliver catfish to their plants, we operate our own in-house harvest and live-haul departments, the largest in the nation. Prior to the trucks being unloaded into our plant, sample fish are again tested. At the plant, live catfish are transferred from aerated trucks to the processing lines. The catfish are cleaned, processed, and placed on ice or frozen using an individually quick-frozen method that preserves the taste and quality of the catfish. The frozen catfish can also be breaded and battered. The processing lines and the production processes are highly automated and generally similar to those onboard our catcher-processor vessels, with the exception of some secondary processing operations.

 

Scallop processing operations.    We operate a state-of-the-art wet-fish processing facility focused primarily on grading and processing scallops. We purchase scallops from scallop harvesters. Scallops are graded by size and quality and processed into either premium or standard products. We utilize industry leading processing equipment and food technology in the production of our scallops which significantly reduce production time and manual labor.

 

Vessels and Facilities

 

We operate the largest fleet within the catcher-processor sector of the U.S. Bering Sea pollock fishery. Our catcher-processor vessels range in length from approximately 260 to 340 feet, generate between 6,500 and 10,000 horsepower each in their main engines (allowing the vessels to operate under extreme sea conditions) and each carry between 90 to 125 crew members. Each of our catcher-processors meets the rigorous seaworthiness requirements of Det Norske Veritas, the highest vessel classification standard in the world. The catcher-processors targeting pollock have the capability to produce between 110 metric tons and 150 metric tons of frozen product daily and can harvest approximately 100 metric tons of fish per haul. An appraisal conducted in 2002 estimated that our fleet has a replacement cost of approximately $545.0 million.

 

Between 1996 and 1998, we made significant investments on our vessels immediately following their acquisition. Because of this previous capital investment, our annual capital expenditures are primarily made only to maintain our vessels at their current state-of-the-art condition. Our entire fleet is currently equipped with highly sophisticated instruments and we do not believe that any significant further capital expenditure is required to maintain the level of performance of our vessels. Within the pollock fishery, we believe that ours is the only catcher-processor fleet with significant incremental capacity. Each vessel is equipped with highly sophisticated instruments and equipment such as fish finding technology to locate schools of the targeted species, cod ends (nets) with volume sensors and an integrated computer system enabling constant, real-time communication between each vessel and the corporate office. Our port engineers oversee the maintenance of each vessel to help ensure deployment of fit vessels for every fishing trip. Our trawling fleet consists of the following vessels:

 

Vessel


   Vessel type

   Built

   Length
(feet)


American Dynasty

   Catcher-Processor    1989    272

American Triumph

   Catcher-Processor    1991    285

Ocean Rover

   Catcher-Processor    1990    256

Northern Hawk

   Catcher-Processor    1991    341

Northern Eagle

   Catcher-Processor    1988    341

Northern Jaeger

   Catcher-Processor    1991    336

Katie Ann

   Catcher-Processor    1986    296

American Challenger(1)

   Catcher-Vessel    1992    106

(1) Represents a vessel that is listed as a catcher-vessel in the American Fisheries Act and therefore may not process pollock in the U.S. Bering Sea pollock fishery. We do not operate this vessel.

 

All of our vessels targeting pollock are equipped with both surimi and fillet lines and fishmeal plants. Within hours, these flexible factory platforms can shift production plans between surimi and block products, allowing us to control daily output to meet changing market demands.

 

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We own and operate two catfish processing facilities located in Greensboro and Demopolis, Alabama. Combined, these processing facilities operate a total of thirteen processing lines and are capable of processing approximately 400,000 pounds of live catfish per day. In 2001, we installed a new, state of the art trim line. The additional trim line utilizes advanced technology to increase both throughput and yield, producing an estimated additional 6 million pounds of catfish per year. We own live hauling equipment, including 15 aerated tank trucks used to harvest and transport the live catfish to our processing facilities. We own and operate a fleet of 25 trucks used for distribution of our products.

 

We also own and operate a facility in New Bedford, Massachusetts comprised of a secondary processing facility for frozen and block products, a cold storage space for over 9,100 pallets and a corporate office. This facility also includes a state-of-the-art wet-fish processing facility focused primarily on grading and processing scallops.

 

Our corporate headquarters are located in Seattle, Washington. We benefit from a preferential docking agreement with the Port of Seattle which provides for the docking of all of our vessels during the off-season. We also lease office space in Copenhagen, Denmark and Tokyo, Japan. Additionally, in Dutch Harbor, Alaska we lease office space and warehouse facilities and use several docking facilities during the fishing season.

 

We believe that our existing vessels and facilities are adequate for our current operations.

 

Capital Expenditures

 

In 2001 and 2002, our total capital expenditures were $9.2 million and $9.4 million, respectively. The majority of our capital expenditures relate to our catcher-processor fleet and include items such as fishing gear, improvements to vessel factory processing equipment and major scheduled vessel maintenance. Major scheduled vessel maintenance costs relate principally to our periodic overhauls and replacements performed generally on a three-year cycle. In addition to capital expenditures, we spend approximately $7 million per year on routine vessel maintenance, which is expensed in the year it is incurred.

 

Between 1996 and 1998, we made significant investments on our vessels immediately following their acquisition. Our entire fleet is currently equipped with highly sophisticated instruments and we do not believe that any significant further capital expenditure is required to maintain the level of performance of our vessels.

 

With the recent acquisition of Southern Pride, we estimate that we will have maintenance capital expenditure requirements of approximately $10.0 million in each of 2003 and 2004.

 

Government Regulation

 

Fisheries Regulation

 

All U.S. fisheries in which we operate are regulated and subject to total allowable catch limits. Participants in U.S. federal fisheries are required to obtain a federal government permit.

 

We operate in the groundfish fisheries within the U.S. Exclusive Economic Zone, 3 to 200 nautical miles off the coasts of Alaska, Washington and Oregon. According to the National Marine Fisheries Service, no species in the U.S. Bering Sea is deemed to be overfished. Credit for these healthy stocks and profitable fisheries can be attributed in large part to two pieces of federal legislation.

 

Magnuson-Stevens Fishery Conservation and Management Act.    The Magnuson-Stevens Fishery Conservation and Management Act of 1976 provides the broad framework for conserving and managing marine fisheries within the U.S. Exclusive Economic Zone. The councils that oversee the fisheries in which we participate are the North Pacific Fishery Management Council in Alaska and the Pacific Fishery Management Council in Washington and Oregon. The councils’ two primary areas of responsibility are (1) the establishment of annual

 

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maximum catch levels and (2) the development of fishery management plans that regulate who can fish, when and how they can fish and how much they can catch. The fishery management plans are then implemented and given legal force through regulations promulgated by the National Marine Fisheries Service, a division of the Department of Commerce. These regulations are then strictly enforced by both the U.S. Coast Guard and the National Marine Fisheries Service.

 

Each of the fisheries in which we participate is managed on a maximum sustainable yield basis. At the end of each year, the councils’ Scientific and Statistical Committees, which are composed of scientists from federal, state and academic positions, make recommendations on total allowable catch by species or species group. The total allowable catch is typically set equal to or less than the acceptable biological catch depending upon a variety of factors. The councils also set prohibited species catch limits to limit by-catch of non-target species. These limits are set mainly to protect and preserve crab, halibut, salmon and other non-target species for other fisheries. After being reviewed by the National Marine Fisheries Service, the councils’ recommendations are implemented.

 

American Fisheries Act.    In 1998, Congress passed a second piece of legislation, the American Fisheries Act, which introduced several major changes in the management of the U.S. Bering Sea pollock fishery. In 2001, the North Pacific Fishery Management Council provided a report to Congress on the implementation and effects of the American Fisheries Act. In light of the extremely positive report, which described the positive impacts of the American Fisheries Act on almost all aspects of the U.S. Bering Sea pollock fishery, Congress passed legislation in 2001 permanently removing the original sunset provision of the American Fisheries Act. The American Fisheries Act and its implementing regulations include the following key provisions:

 

  Ÿ Limitation on participants in the U.S. Bering Sea pollock fishery:

 

  Ÿ Only a defined group of 20 named catcher-processors, of which 19 catcher-processors are currently eligible to operate in the fishery, and the catcher-vessels that historically delivered to them, are eligible to harvest pollock for processing by catcher-processors. As part of the implementation agreement, eight of our vessels were scrapped and one was permanently removed from the fishery, reducing the overall fleet from 29 to 20;

 

  Ÿ Only a defined group of catcher-vessels may harvest pollock for delivery to motherships, and only three named motherships may process pollock; and

 

  Ÿ Only inshore processors that processed more than 2,000 metric tons of pollock during each of 1996 and 1997 may receive an unlimited amount of pollock for processing; those that processed less during those years may only receive and process under 2,000 metric tons annually. Subsequently, the council imposed a processing cap limiting the amount of pollock that can be processed by any single entity to 30% of the directed pollock catch in any given year.

 

  Ÿ Prohibition on any entity harvesting more than 17.5% of the directed pollock catch in any given year. Allocations purchased from community development quota partners do not count against this percentage.

 

  Ÿ Prohibition on the entry of additional large fishing industry vessels into any U.S. fishery.

 

  Ÿ Reallocation of the pollock total allowable catch in the U.S. Bering Sea pollock fishery between the various sectors, increasing the community development quota and inshore allocations, while reducing the catcher-processor and the mothership sector allocations:

 

  Ÿ 10% of the total allowable catch is allocated to six Alaska Community Development Groups (mostly native Alaskan villages and their residents) that sell or lease their community development quota to other participants, including us;

 

  Ÿ approximately 3.5% of the total allowable catch is set aside for pollock by-catch in other fisheries;

 

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  Ÿ the remaining 86.5% of the total allowable catch (the “directed pollock catch”) is allocated as follows:

 

  Ÿ 50% of the directed pollock catch is allocated to catcher-vessels delivering to inshore factories;

 

  Ÿ 40% of the directed pollock catch is allocated to catcher-processors, and catcher-vessels that deliver to catcher-processors; and

 

  Ÿ 10% of the directed pollock catch is allocated to the catcher-vessels that deliver to at-sea processor vessels called motherships, which do not harvest.

 

The American Fisheries Act requires that vessels engaged in U.S. fisheries be owned by entities that are at least 75% U.S. citizen owned and controlled. This requirement applies at each tier of ownership and must also be examined in the aggregate. The Maritime Administration made a favorable determination with respect to the U.S. citizenship of the entities owning our vessels in January 2002. In 2002, we applied for and obtained confirmation that after completion of the proposed changes in our ownership structure in connection with the recapitalization of Holdings and its affiliates in April 2002, the Maritime Administration would issue a renewed U.S. citizenship determination. On December 17, 2002, we filed annual affidavits of U.S. citizenship and on February 21, 2003, the Maritime Administration made a favorable determination of continuing eligibility with respect to the citizenship requirements of the American Fisheries Act.

 

In order to maintain our eligibility to participate in U.S. fisheries, our existing governance documents contain restrictions on transfers of interests in ASLP or Holdings to non-U.S. citizens, as well as provisions allowing us to require evidence of U.S. citizenship from our equity owners and providing for the automatic redemption of interests held by non-U.S. citizens to the extent necessary to keep the percentage held by non-U.S. citizens below 22%, a safe harbor percentage we thought prudent to provide a margin of error beneath the 25% maximum. To maintain our eligibility following the consummation of this offering, we will put in place governance provisions  (i) requiring each owner of 5% or more of the Issuer’s capital stock (including purchasers in this offering) to certify to us that such person is a U.S. Citizen, (ii) limiting to 20% the aggregate percentage ownership of the Issuer’s capital stock by non-U.S. citizens, (iii) requiring that at least 95% of all of the Issuer’s capital stock be held by beneficial owners with U.S. addresses, and (iv) declaring any holding in violation of the foregoing null and void, or voidable, and providing the Issuer with various remedies including mandatory redemptions and sales. Related provisions will permit us at any time to require record and beneficial owners of such common stock or IDSs to provide information and affidavits concerning citizenship status.

 

In addition, ASLP will adopt provisions and procedures to ensure that non-U.S. citizen ownership of ASLP does not exceed a percentage that, assuming 24.9% non-U.S. citizen ownership of the Issuer, would cause aggregate non-U.S. citizen ownership of Holdings to exceed 22%.

 

As a condition to the consummation of this offering, we must receive confirmation from the Maritime Administration, or suitable assurances of counsel, that adoption of and adherence to the foregoing procedures will satisfy the applicable requirements of the American Fisheries Act.

 

The determinations we have received from the Maritime Administration with respect to our equity ownership, and the confirmation we expect to receive in connection with this offering and the adoption of the provisions and procedures described above, do not extend to the citizenship status of lenders or the terms of any loan covenants and financing arrangements. Moreover, such determinations contain language in which the Maritime Administration expressly reserves the right to review these terms to determine if they constitute an impermissible shifting of control to a non-U.S. citizen lender. Based on discussions with counsel and with pertinent government

 

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officials, we believe the intention of the Maritime Administration is to prevent provisions couched as loan covenants from serving as a device to shift control to non-U.S. citizens, and not to impede conventional market based loans and credit facilities.

 

For purposes of the American Fisheries Act, a U.S. citizen is:

 

(i)  Any individual who is a citizen of the United States by birth, naturalization or as otherwise authorized by law; or

 

(ii)  Any entity (A) that is organized under the laws of the United States or of a State, (B) of which not less than 75% of the interest in such entity, at each tier of ownership of such entity and in the aggregate, is owned and controlled (including beneficial ownership and control) by U.S. citizens, and (C) with respect to which no voting or other agreements confer control to non-U.S. citizens.

 

Special rules applicable to corporations, limited liability companies, partnerships, trusts and other entities limit the number of non-U.S. citizen directors to a minority of a quorum of the board of directors, and require that certain principal officers and managers (including the chief executive officer, the chairman of the board of directors, trustees and general partners, and persons authorized to act in the absence or disability of such persons) be U.S. citizens.

 

On February 4, 2003, the Maritime Administration published final regulations implementing certain statutory requirements under the American Fisheries Act for lenders holding preferred mortgages on large U.S. flag fishing industry vessels directly or through qualified mortgage trustees. We expect that our secured lending arrangements will comply with these requirements.

 

The American Fisheries Act is relatively new legislation. As a result, no reported judicial cases clearly interpret its meaning. For this reason, the full future impact of the American Fisheries Act on our ownership and debt capital structure remains uncertain.

 

The Pollock Conservation Cooperative.    By limiting participation in the U.S. Bering Sea pollock fishery, the American Fisheries Act facilitated the formation of a cooperative agreement. In December 1998, the companies owning the 20 catcher-processors named in the American Fisheries Act formed the Pollock Conservation Cooperative. The Pollock Conservation Cooperative controls 36.6% of the directed pollock catch, with the remaining 3.4% of the sector’s 40.0% controlled by seven catcher-vessels that historically delivered to the catcher-processors. The original division of share among the companies was based primarily on historical performance and was reached by the mutual agreement of the participants. In December 1999, Alaska Trawl Fisheries, one of the original Pollock Conservation Cooperative members, agreed to sell its interest to the remaining Pollock Conservation Cooperative members and its vessel, ENDURANCE, has been permanently removed from U.S. fisheries, leaving 19 eligible catcher-processors.

 

Under the terms of the Pollock Conservation Cooperative membership agreement, each participating company is allocated a percentage of the directed pollock catch by private contractual arrangement. Pollock and other groundfish allocation rights under the Pollock Conservation Cooperative are freely transferable to other participants pursuant to the membership agreement, without the prior consent or approval of the other participants. Participants can then harvest and process their quota shares at their own pace with vessels named in the American Fisheries Act, within certain seasonal restrictions. The stable nature of the U.S. Bering Sea pollock fishery is partly a function of the regulatory and cooperative structure that governs its activities. In addition, the change in fishery management introduced by the American Fisheries Act allowed the catcher-processor sector to: slow the harvesting pace in order to optimize the value per ton of harvested round fish; reduce operating costs; and minimize by-catch and discards.

 

In 2001 and 2002, we harvested an aggregate of 17.9% of the total allowable catch. We are allocated 16.8% of the directed pollock catch under our Cooperative agreements, and we lease the right to harvest another 0.7% of

 

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the directed pollock catch from other vessels in our fishery, bringing us to 17.5% of the directed pollock catch (which is the maximum permitted harvesting allocation of the directed pollock catch by any single entity). Our share of the directed pollock catch represented 15.1% of the total allowable catch. We supplemented our share of the directed pollock catch in 2001, 2002 and 2003 by purchasing 28.0%, 28.0% and 36.0% of the community development quota (or 2.8%, 2.8% and 3.6%, respectively, of the total allowable catch) from Alaska Community Development Groups, two of which are equity investors in our company. The Alaska Community Development Groups are mostly comprised of native Alaskan villages and their residents.

 

The overall allocation of the total allowable catch, as well as our allocation and quota we have purchased, is illustrated in the following chart of the 2003 total allowable catch.

 

LOGO

 

The Pollock Conservation Cooperative membership agreement will continue through the remainder of the named vessels’ lives, unless certain events occur, none of which we expect is likely to occur in the foreseeable future.

 

The following is a summary of the Pollock Conservation Cooperative current members and their allocations for 2003:

 

Company


   Vessels

   % of Directed
Pollock Catch


 

American Seafoods

   7    16.572 %

Trident Seafoods

   5