<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1997
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 333-20155
---------
GORGES\QUIK-TO-FIX FOODS, INC.
------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 58-2263508
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9441 LBJ Freeway, Suite 214, Dallas, Texas 75243
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (972) 690-7675
--------------
N/A
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check X whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Shares Outstanding
Class as of August 12, 1997
----- ---------------------
Common Stock, $.01 par value 1,000
1
<PAGE>
Part I - Financial Information Item
Item 1. - Financial Statements
--------------------
GORGES/QUIK-TO-FIX FOODS, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------ -----------
SEPTEMBER 28, JUNE 28,
1996 1997
------------ -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9 $ -
Accounts receivable, net - 17,358
Inventory 31,325 27,634
Prepaid expenses and other - 57
-------- --------
Total current assets 31,334 45,049
Property, plant and equipment:
Land 1,088 1,499
Buildings and leasehold improvements 35,768 43,162
Machinery and equipment 52,853 44,519
Land improvements and other 1,186 3,086
-------- --------
90,895 92,266
Accumulated depreciation (44,439) (5,113)
--------- --------
Net property, plant and equipment 46,456 87,153
Other assets:
Intangible assets
Organizational and deferred debt 59,508 63,005
issuance costs - 9,212
Other - -
-------- --------
Total assets $137,298 $204,419
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ - $ 16,438
Current portion of long-term debt - 5,250
-------- --------
Total current liabilities 21,688
Long-term debt, less current portion - 139,500
Deferred income taxes 6,375 -
Investment and advances by Tyson 130,923 -
Stockholders= equity:
Common stock, $.01 par value; 2,000
shares authorized,
1,000 shares issued and
outstanding - -
Additional paid-in capital - 45,585
Accumulated deficit - (2,354)
-------- --------
Total stockholders' equity - 43,231
-------- --------
Total liabilities and
stockholders' equity $137,298 $204,419
======== ========
</TABLE>
Note: The balance sheet at September 28, 1996 has been derived from
the audited financial statements at that date.
See accompanying notes to financial statements
2
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Predecessor Company Predecessor Company
------------- ------------ --------------------------- -----------------------------
Three months Three months Nine months Eight Thirty-one Pro-forma nine
ended ended ended weeks ended weeks ended months ended
June 29, June 28, June 29, November 25, June 28, June 28,
1996 1997 1996 1996 1997 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales $55,476 $50,163 $168,752 $31,966 $115,840 $147,806
Costs of goods sold 45,855 40,050 139,400 25,917 94,041 120,588
------------- ----------- ---------- ---------- ---------- -----------
Gross profit 9,621 10,113 29,352 6,049 21,799 27,218
Operating expenses:
Selling, general and
Administrative 5,802 5,412 18,809 4,153 12,745 16,954
Amortization 406 869 1,219 250 1,917 2,268
------------- ----------- ---------- ----------- ----------- -----------
Total operating
expenses 6,208 6,281 20,028 4,403 14,662 19,222
------------- ----------- ---------- ---------- ---------- -----------
Operating income 3,413 3,832 9,324 1,646 7,137 7,996
Interest expense - 4,062 - - 9,666 12,356
Other (income) expense 530 (205) 258 - (205) (206)
------------- ----------- ---------- ---------- ---------- -----------
Earnings before taxes on
income 2,883 (25) 9,066 1,646 (2,324) (4,154)
------------- ----------- ---------- ---------- ---------- -----------
Income tax expense 1,269 - 3,750 731 - -
------------- ----------- ---------- ---------- ---------- -----------
Net income (loss) $ 1,614 $ (25) $ 5,316 $ 915 $ (2,324) $ (4,154)
============= =========== ========== ========== ========== ===========
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------- ----------------------
NINE MONTHS ENDED EIGHT WEEKS ENDED THIRTY-ONE WEEKS ENDED
JUNE 29, NOVEMBER 25, 1996 JUNE 28,
1996 1997
(Unaudited) (Unaudited) (Unaudited)
----------------- ----------------- ----------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 3,158 $ 915 $ (2,324)
Adjustments to reconcile net income
(loss) to net
cash provided by (used in)
operating activities:
Depreciation 4,085 342 5,114
Amortization 813 250 2,312
Deferred income taxes (1,252) 26 -
Loss on disposition of equipment 295 - -
Changes in assets and liabilities:
Increase in accounts receivable - - (17,358)
(Increase) decrease in inventory 3,275 (571) 3,293
Increase in prepaid expenses
and other - - (57)
Increase in accounts payable
and Accrued expenses - - 15,861
-------- -------- ----------
Net cash provided by (used in)
operating activities 10,374 962 6,841
-------- -------- ----------
Cash flows from investing activities:
Purchases of plant and equipment (811) (141) (2,652)
Acquisition, net of cash received - - (184,349)
Proceeds from sale of equipment 1,080 - 16
Other - - 61
-------- -------- ----------
Net cash provided by (used in)
investing activities 269 (141) (186,924)
-------- -------- ----------
Cash flows from financing activities:
Proceeds from note offering - - 100,000
Capital contributions - - 45,585
Proceeds from revolving line of
credit - - 13,000
Payments on revolving line of credit - - (7,000)
Proceeds from term loan - - 40,000
Payments on term loan - - (1,250)
Debt issuance and organizational
costs - - (10,252)
Decrease in Investment and advances
by Tyson (10,643) (821) -
-------- -------- ----------
Net cash (used in) provided by
financing activities (10,643) (821) 180,083
-------- -------- ----------
Net increase in cash and cash
equivalents 0 0 0
Cash and cash equivalents at beginning
of period 9 9 -
-------- -------- ----------
Cash and cash equivalents at end of
period $ 9 $ 9 $ -
======== ======== ==========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
June 28, 1997
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
(a) Description of Business
Gorges/Quik-to-Fix Foods, Inc., (the "Company") is a leading producer,
marketer and distributor of value added processed fresh and frozen beef, and to
a lesser extent pork and poultry. The Company purchases fresh and frozen beef,
pork and poultry, which it processes into a broad range of fully cooked and
ready to cook products generally falling into one of two categories, value added
products and ground beef. Value added products include but are not limited to:
(i) breaded beef items such as country fried steak and beef fingers; (ii)
charbroiled beef items such as fully cooked hamburger patties, fajita strips,
meatballs, and meatloaf; and (iii) other specialty products such as fully cooked
and ready to cook pork sausage, breaded pork and turkey, cubed steaks, and
Philly steak slices. Ground beef product offerings primarily consist of
individually quick frozen hamburger patties. The Company's products are
primarily sold to the foodservice industry, which encompasses all aspects of
away-from-home food preparation, including restaurants, schools, healthcare
providers, corporations, and other commercial feeding operations. The Company
sells its products primarily through broadline and specialty foodservice
distributors.
(b) Basis of Presentation
The accompanying unaudited financial statements include financial
information of the Company, and its "Predecessor," which is the Company prior to
its acquisition from Tyson Foods, Inc. ("Tyson"). The Predecessor represents the
beef processing assets and operations of Tyson, and had been operated and
accounted for as a consolidated operating division of Tyson. Prior to the
Acquisition, Tyson's accounting system produced separate income statements for
the Predecessor while certain balance sheet accounts, including the majority of
cash, receivables, prepaids, payables and accruals were maintained only on a
consolidated basis at the corporate level, and are in effect reflected in
Investment and Advances by Tyson. The Predecessor also participated in Tyson's
overall corporate cash management program whereby operating funds were provided
by Tyson with the corresponding charge or credit reflected in the Investment and
Advances by Tyson account. As a result, the Predecessor maintained only nominal
cash accounts. A portion of Tyson's accounting and administrative costs related
to these functions were allocated to the Predecessor as discussed in Note 2.
Additionally, the allocable portion of the expenses associated with certain
other assets and other liabilities recorded at Tyson's corporate level for which
the Predecessor received benefit was reported in the Predecessor's operations.
On November 25, 1996, the assets of the Predecessor were sold to the
Company, an entity formed by CGW Southeast Partners III, L.P. ("CGW"), to
acquire the assets of the Predecessor. As a result of the acquisition, financial
information for periods through September 28, 1996 and periods subsequent to
September 29, 1996 is presented on a different cost basis and, therefore, such
information is not comparable.
In the opinion of management, the accompanying unaudited financial
information of the Company contains all adjustments, consisting only of those of
a normal recurring nature, necessary to present fairly the Company's financial
position as of June 28, 1997, the results of operations for the three and nine
month periods ended June 28, 1997 and June 29, 1996, and cash flows for the nine
months ended June 28, 1997 and June 29, 1996. These results are not necessarily
indicative of the results to be expected for the full fiscal year.
5
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company utilizes a 52 or 53 week accounting period, ending on the
Saturday closest to September 30.
Inventories
Inventories, valued at the lower of cost (first-in, first-out) or market
(replacement or net realizable value), consist of the following (in thousands):
<TABLE>
<CAPTION>
Predecessor Company
------------- -------
September 28, June 28,
1996 1997
------------- --------
<S> <C> <C>
Finished products $27,569 $18,935
Work in process 688 -
Supplies 3,068 8,699
------------- --------
Total $31,325 $27,634
============= ========
</TABLE>
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is
calculated primarily by the straight-line method over the estimated useful lives
of the assets, which range from 3 to 30 years.
Capital expenditures for equipment and capital improvements are
generally capitalized while maintenance is expensed.
Intangible assets and Organizational and Deferred Debt Issuance Costs
Intangible assets, consisting of goodwill and trademarks, are stated at
cost and are amortized on a straight-line basis over 10 to 30 years (40 years
by the Predecessor). Recoverability of the carrying value of intangible assets
is evaluated on a recurring basis with consideration toward recovery through
future operating results on an undiscounted basis.
Organizational costs are amortized on a straight line basis over five
years, and deferred debt issuance costs are amortized on a straight line basis
over the life of the debt instrument to which it relates.
At September 28, 1996 and June 28, 1997, the accumulated amortization
was $10.6 million and $2.3 million, respectively.
Long - Lived Assets
At each balance sheet date, the Company reviews the carrying value of long -
lived assets to determine if facts and circumstances suggest that it may be
impaired. If this review indicates that the carrying value of an asset may not
be fully recoverable, an estimate of the discounted cash flows is prepared and
the carrying value of the asset will be reduced by the estimated shortfall of
discounted cash flows, if any.
6
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
Income Taxes
The Company follows the liability method of accounting for deferred
income taxes. The liability method provides that deferred tax liabilities are
recorded at currently enacted tax rates based on the difference between the tax
basis of assets and liabilities and their carrying amounts for financial
reporting purposes, referred to as temporary differences.
Selling Expenses
Selling expenses consist of direct selling expenses incurred by the
Company, and include direct product line expenses such as shipping and storage,
external handling, consignment freight, external freezer charges, product and
package design, brokerage expense, and other direct selling expenses such as
certain salaries, travel and research and development. Selling expenses for the
Predecessor also include an allocable share of other common Tyson selling
expenses as discussed below.
Allocation of Corporate Expenses
Prior to the Acquisition certain indirect administrative and selling
expenses incurred at the corporate level which were not actually incurred for
programs specific to the Predecessor have been allocated to the Predecessor
based on net sales. Allocated administrative expenses include costs incurred for
all corporate support functions. Allocated selling expenses consisted of costs
incurred by Tyson's corporate sales and marketing department. Because these
charges were incurred by Tyson, actual charges, if the Predecessor had been a
separate entity at the time, might have differed. Certain expenses incurred at
Tyson corporate directly related to the Predecessor such as production
scheduling, research and development and the corporate aviation department were
allocated based on usage.
Selling, administrative and corporate expenses allocated to the
Predecessor and charged to operations for the nine months ended June 29, 1996
were $5.3 million.
Advertising and Promotion Expenses
Advertising and promotion expenses are charged to operations in the
period incurred. Advertising and promotion expenses were $1.6 million and $4.5
million for the third quarter and the nine-month period ending June 28, 1997
compared to $1.3 million and $4.5 million for the same fiscal periods of 1996.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
7
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
Investment and Advances by Tyson
Investment and Advances by Tyson represent its' ownership interest in
the recorded net assets of the Predecessor. As discussed in Note 1, all cash and
inter-company transactions flow through this account. The Predecessor was not
charged interest on advances from Tyson.
3. LONG TERM DEBT
(a) Senior Debt
The Company has entered into a credit agreement (the "Credit Agreement")
with NationsBank of Texas, N.A., (the "Bank") as agent for a syndicate of banks
and financial institutions which provides the Company with a $30 million
Revolving Credit Facility (the "Revolver"), and a $40 million Term Credit
Facility (the "Term Loan"). The Revolver includes a subfacility of $7 million
for commercial and standby letters of credit. The Revolver has a term of five
years, and all amounts outstanding will become due and payable on November 25,
2001. As of June 28, 1997, the Company's available credit under the Revolver was
$24.0 million. The Term Loan also has a five year term and is subject to
quarterly principal payments in an aggregate amount of $3.75 million remaining
in fiscal 1997, $6.5 million in fiscal 1998, $8.5 million in fiscal 1999, $9.0
million in fiscal 2000, $9.75 million in fiscal 2001, and $2.5 million in fiscal
2002.
Outstanding borrowings under the Credit Agreement bear interest at
floating rates per annum equal to, at the Company's option: (i) the Base Rate
plus 1.50%, or (ii) the Eurodollar rate, LIBOR, plus 2.50%, provided, however,
the interest rate margins are subject to reductions in the event the Company
meets certain performance targets as set forth in the Credit Agreement. At June
28, 1997 the interest rate for the Company based on this formula was 8.16%. The
Company may be required to make mandatory prepayments against both facilities,
comprised of principal payments totaling: (i) 100% of cash received in asset
sales wherein the proceeds are not used to purchase replacement assets, and (ii)
50% of the Company's Excess Cash Flow as defined in the Credit Agreement. These
payments are to be applied first to the Term Loan and, upon the Term Loan's
retirement, to the Revolver as a permanent reduction. At June 28, 1997, the
Company's outstanding borrowings under these facilities were $44.75 million, $6
million on the Revolver and $38.75 million on the Term Loan.
Under the Credit Agreement, the Company is subject to customary
financial and other covenants including certain financial limit and ratio
covenants as well as limitations on further indebtedness, guaranties, liens,
dividends and other restricted payments (including transactions with
affiliates), prepayments and redemption of debt, mergers, acquisitions, asset
sales, consolidations, and other investments. Additionally, the Credit Agreement
provides that indebtedness outstanding is secured by a first-priority security
interest in, and lien upon, substantially all of the Company's present and
future tangible and intangible assets and capital stock. The Company was in
compliance with these covenants at June 28, 1997.
(b) Subordinated Debt
On November 25, 1996, the Company consummated a private placement of
$100 million aggregate principal amount of 11.5% Senior Subordinated Notes Due
2006 (the "Notes"). The Notes will mature on December 1, 2006, unless previously
redeemed. Interest on the notes is payable semiannually in arrears, commencing
June 1, 1997, and will be payable on June 1 and December 1 of each year at a
rate of 11 1/2% per annum. The issuance of the Notes
8
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
(Unaudited)
3. LONG TERM DEBT-(CONTINUED)
resulted in net proceeds to the Company of approximately $95 million and after
underwriting discounts and other debt issuance costs aggregating approximately
$5 million. On April 30, 1997, the Company consummated an exchange offer where
by the private placement Notes were replaced with similar Notes that are
publicly traded. The Company's outstanding indebtedness under these Notes was
$100 million at June 28, 1997.
The Notes were issued pursuant to an Indenture which contains certain
restrictive covenants and limitations. Among other things, the Indenture limits
the incurrence of additional indebtedness, limits the making of restricted
payments (as defined) including the declaration and/or payment of dividends,
places limitations on dividends and other payments by the Company, and places
limitations on liens, certain asset dispositions and merger/sale of assets
activity. The Company was in compliance with these covenants at June 28, 1997.
The Notes are unsecured subordinated general obligations of the Company. The
Notes become redeemable at the Company's option on December 1, 2001, at which
time the Notes are redeemable in whole or part, subject to a redemption premium
which begins at 105.75 % of the face value in 2001 and reduces at a scheduled
rate annually until 2004 at which time the redemption is 100% of face value.
Notwithstanding the foregoing, at any time prior to December 1, 1999, the
Company, at its option, may redeem the Notes, in part, with the net proceeds of
a public equity offering or of a capital contribution made to the common equity
of the Company. Any such redemption is also subject to a redemption premium,
which begins at 110.75% in 1997 and 110.00% in 1998 and 1999. No mandatory
redemption or sinking fund payments are required with respect to the Notes;
however, at each Note holder's option, the Company may be required to repurchase
the Notes at a redemption premium of 101% in the event the Company incurs a
change of control as defined by the Indenture.
4. COMMITMENTS
Tyson (for the Predecessor), and the Company leased certain properties and
equipment for which the total rentals thereon approximated $11,000 and $33,000
for the three and nine month periods ended June 29, 1996 and approximately
$62,000 and $122,000 for the three and nine month periods ended June 28, 1997,
respectively.
Future minimum lease payments for all noncancelable operating leases for the
Company at June 28, 1997 total $1,000,000, composed of $62,000, $220,000,
$220,000, $219,000, 205,000, and $74,000 annually for the remainder of fiscal
1997 through 2002.
5. BENEFIT PLANS
Tyson had and the Company has defined contribution retirement and incentive
benefit programs for various groups of personnel, all employees of the
Predecessor and the Company are eligible after meeting requirements concerning
time employed. Incentive benefit programs are of a profit sharing nature, and
are discretionary as to amount and timing. No incentive contributions were made
by Tyson or the Company. Discretionary contributions to the defined benefit
plans totaled $218,000 and $655,000 for the three month and nine month periods
ended June 29, 1996 and $142,000 and $416,000 for the three month and nine month
periods ended June 28, 1997, respectively.
9
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
(Unaudited)
6. INCOME TAXES
The Predecessor was included in the consolidated federal income tax return of
Tyson and computed its federal tax provision as if it filed a separate return.
The state tax provision was computed using an effective state tax rate as if the
Predecessor filed separate state tax returns. The Company has not recorded any
income tax benefit and deferred tax asset associated with the net loss for the
period ended June 28, 1997 because in the opinion of management it is uncertain
when the Company will be able to realize such deferred tax asset.
7. SIGNIFICANT CUSTOMERS
Certain of the Predecessor's and the Company's products are sold to major
foodservice distributors for distribution to foodservice outlets. As a result,
the Business's top three customers accounted for approximately 44% of sales for
the three and nine month periods ended June 29, 1996, and 35% and 39% for the
three and nine month periods ended June 28, 1997. Sales to one of these
customers is significantly lower in fiscal 1997 than in fiscal 1996 due to the
customer's decision to increase its purchases with one of the Company's
competitors.
8. TRANSACTIONS WITH AFFILIATES
The Company has entered into a consulting agreement with an affiliate of
majority shareholder CGW, under which CGW will receive a monthly fee of $30,000
for financial and management consulting services. In addition to the monthly
fee to CGW, the Board of Directors may approve an additional fee not to exceed
$500,000 annually, based upon overall Company operations. At the closing of the
acquisition (see Note 10), CGW received a fee of $2.65 million, included as part
of the Company's organizational costs, for its services in assisting the Company
with the structuring and negotiating of this transaction.
NationsBank of Texas, N.A., an affiliate of NationsBanc Investment Corp.
("NBIC") a minority shareholder and a limited partner of CGW, is a lender to the
Company and in that capacity has received usual and customary fees for
underwriting, structuring, syndicating and administering the Facilities under
the Credit Agreement. NationsBanc Capital Markets, Inc., another affiliate of
NBIC, was the initial purchaser of the Company's Senior Subordinated Notes, and
in that capacity received usual and customary fees and commissions in connection
with that transaction.
9. ACQUISITION
On November 25, 1996 the Company acquired certain assets and liabilities of
the beef processing division of Tyson, in exchange for a cash payment of
$184,349,151 (the "Acquisition"). The cash used to consummate the Acquisition
was obtained through the issuance of $45,000,000 in common stock, and the
proceeds from the borrowings described in the notes above. The details of the
assets and liabilities purchased are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fixed and intangible assets $154,000,000
Inventory 30,927,166
Liabilities assumed (578,015)
------------
$184,349,151
============
</TABLE>
10
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
(Unaudited)
9. ACQUISITION-(CONTINUED)
The Company assumed no liabilities or obligations of Tyson or the Predecessor
with the exception of those defined in the purchase agreement: future
obligations of normal course of business executory contracts, agreements to
purchase inventory or supply products, accrued vacation pay, and certain
property tax obligations. Tyson has agreed to indemnify the Company from any
and all liabilities and obligations relating to the Predecessor, other than the
aforementioned liabilities assumed by the Company. The Company and Tyson have
also entered into a non-competition agreement which expires two years from the
date of closing, in which the parties have agreed, subject to certain exceptions
and limitations, to not compete with each other in the production or sale of
beef and pork items, in the case of Tyson, and poultry items, in the case of the
Company. Pursuant to a Transition Service agreement between the parties, Tyson
will also continue to provide the Company with administrative and computer
support for a period of up to twelve months after the date of closing.
10. PRO FORMA INFORMATION
The pro forma income statement included herein for the nine month period ended
June 28, 1997 gives effect to the completion of the Acquisition, and the
application of the net proceeds of the financing and related events as described
in the notes above, as though they had occurred on September 29, 1996.
Adjustments made to the income statement include: (i) a $563,000 reduction in
cost of sales related to the elimination of redundant staffing which resulted in
the elimination of approximately 106 plant personnel; (ii) a $1,193,000
increase in cost of sales related to the depreciation expense increase as a
result of the write-up to fair market value of property, plant and equipment
acquired; (v) a $55,000 increase in selling, general and administrative
expenses representing the maximum addition of estimated costs expected to be
incurred by the Company in connection with the consulting contract with CGW
described in the Notes above; (vi) a $101,000 increase in amortization of
intangible assets representing an increase in the basis of the assets being
amortized and a reduction in the number of years they are amortized over; (vii)
a $2,689,000 increase in interest expense representing the estimated interest
expense for the first eight weeks of the period prior to the closing of the
acquisition; and (viii) the elimination of $731,000 of income tax expense to
reflect the changes above which combine to generate a loss before income taxes.
11
<PAGE>
Part 1-Financial Information
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading producer, marketer and distributor of value added
processed fresh and frozen beef, and to a lesser extent pork and poultry. The
Company purchases fresh and frozen beef, pork and poultry, which it processes
into a broad range of fully cooked and ready to cook products generally falling
into one of two categories, value added products and ground beef. Value added
products include but are not limited to: (i) breaded beef items such as country
fried steak and beef fingers; (ii) charbroiled beef items such as fully cooked
hamburger patties, fajita strips, meatballs, and meatloaf; and (iii) other
specialty products such as fully cooked and ready to cook pork sausage, breaded
pork and turkey, cubed steaks, and Philly steak slices. Ground beef product
offerings consist of primarily individually quick frozen hamburger patties. The
Company's products are sold primarily to the foodservice industry which
encompasses all aspects of away-from-home food preparation, including
restaurants, schools, healthcare providers, corporations, and other commercial
feeding operations. The Company sells its products primarily through broadline
and specialty foodservice distributors.
On November 25, 1996, the assets and operations of the beef processing
division of Tyson, were sold to the Company, an entity formed by CGW Southeast
Partners III, L.P., to acquire these assets. As a result of the Acquisition,
financial information for periods through September 28, 1996 and periods
subsequent to September 29, 1996 are presented on a different cost basis and,
therefore, such information is not comparable. Prior to the Acquisition, (i)
Gorges/Quik-to-Fix Foods, Inc. had no significant assets or liabilities and had
not conducted any business, other than in connection with the Acquisition, and
(ii) the Predecessor was not operated by Tyson as a distinct legal entity.
The accompanying unaudited condensed financial statements include financial
information of the Company, and its Predecessor, which is the Company prior to
its acquisition from Tyson. The Predecessor had been operated and accounted for
as a consolidated operating division of Tyson. Prior to the Acquisition,
Tyson's accounting system produced separate income statements for the
Predecessor while certain balance sheet accounts, including the majority of
cash, receivables, prepaids, payables and accruals, were maintained only on a
consolidated basis at the corporate level. These accounts were in effect
reflected in Investment and advances by Tyson. The Predecessor also participated
in Tyson's overall corporate cash management program wherein: operating funds
were provided by Tyson with the corresponding charge or credit reflected in the
Investment and advances by Tyson account. As a result, the Predecessor
maintained only nominal cash accounts. A portion of Tyson's accounting and
administrative costs related to these functions was allocated to the Predecessor
as discussed in Note 2 to the Financial Statements. Additionally, the allocable
portion of the expenses associated with certain other assets and other
liabilities recorded at Tyson's corporate level for which the Predecessor
received benefit was reported in the Predecessor's operations.
The following discussion should be read in conjunction with the unaudited
Financial Statements and the Notes thereto, included elsewhere in this Document.
12
<PAGE>
MANAGEMENTS DISCUSSION
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS
Overview
Discussion of the results of operations for the Company as they relate to the
fiscal nine month period of 1997 is made in reference to the Pro-forma Statement
of Income. This statement represents an adjusted combination of two stub
periods, one of the Predecessor and one of the Company, which together complete
coverage of the time of the nine month period ended June 28, 1997. As a result
of the Acquisition on November 25, 1996, the Pro-forma statement will not be
comparable to prior periods.
The Company has experienced an overall decrease in net sales during the past
two years and continuing into the three month and nine-month periods ended June
28, 1997. The decreases are primarily due to reduced sales volumes, and to a
lesser extent, decreases in average selling prices. The decreases in average
selling prices are primarily due to lower market prices for two key raw
materials, 90% lean beef trimmings and rib lifter meat, which the Company has
passed on, in part, to customers. The lower sales volumes in the current
periods are in part related to the uncertainties that surrounded the Company
when Tyson announced its intent to sell the Predecessor in early 1996. As a
result of the uncertainties, and the activity surrounding the acquisition, the
Company did not have the benefit of aggressively selling during the bid programs
for the 1996-1997 school year. Also, as a result of the uncertainties, some
national customers did not place larger contracts with the Company. In
particular, one large ground beef account that in the past had purchased a
significant amount of product from the Company, decided to contract with a
competitor of the Company. Also responsible for sales declines are the reduced
sales of ground beef, related to the reduction in business with the one account
as described above, and to the completion of a temporary contract with a
national fast food chain. An additional decline in sales is the result of a
decision made by the Company to discontinue its portion controlled steak
business in early fiscal 1996. Sales volumes for the Company's value added
products have generally increased during the past two years due to overall
market growth for these products and the introduction of new products. These
increases in sales volumes for value added products were partially offset by the
loss of some business with several national accounts
Gross profit increased in the third quarter ended June 28, 1997, as compared
to the same period for 1996, but for the nine-month period, was still below the
nine-month period ended June 29, 1996. The increase in gross profit in the
fiscal third quarter of 1997 is attributable primarily to sales mix changes, as
the Company has experienced lower sales volumes in the lower margin ground beef
segment as described above. As a percent of sales, gross profit percentage
increased 2.8 % and 1.0% for the third quarter and the first nine months of 1997
compared to the same periods in 1996. The increase in gross profit as a
percentage of sales is primarily attributable to the increase in sales of value
added products and commodity further processing products and a decrease in lower
margin ground beef sales. Also, cost of sales (plant conversion cost) decreases,
despite a year to date increase in facilities and equipment depreciation of $1.0
million, have improved gross margins. Cost changes for the most part are a
direct result of a change in operations since the divestiture.
The Company's operating income increased in the third quarter of 1997 over the
same period in 1996; however, year to date operating income still trails 1996
for the first nine months of 1997 due primarily to the overall decrease in the
level of sales due to overall sales shortfalls. These shortfalls are directly
related to product discontinuations, the negative effects of the announced sale
of the Predecessor and the subsequent eight month period of uncertainty until
the completion of the Acquisition, and the effects on overhead of the
Acquisition as amortization and depreciation expenses have increased.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS-(CONTINUED)
Third Quarter and Pro-forma Year to Date 1997 Compared to Third Quarter and Year
to Date 1996
Sales decreased by 9.6% and 12.4% for the third quarter and the first nine
months of 1997 when compared to the like periods of 1996. The sales decrease, as
discussed above, is primarily related to the discontinuance of a certain product
line, as well as the restructure and sale of the business, as sales in product
lines which require contract or annual bid processes were affected negatively
during the acquisition period. In addition, significant national account and
ground beef business was lost during the second half of 1996, including the
Company's largest ground beef customer which made a decision to shift a majority
of its business from the Company to a competitor in late 1996.
Gross profit increased in the third quarter ended June 28, 1997, as compared
to the same period for 1996, but for the nine-month period, was still below the
nine-month period ended June 29, 1996. As a percent of sales, gross profit
percentage increased 2.8 % and 1.0% for the third quarter and the first nine
months of 1997 compared to the same periods in 1996. The increase in gross
profit for the quarter and as a percentage of sales, is attributable to the
increase in sales of value added products and commodity products, a decrease in
ground beef sales and cost decreases which are a direct result of a change in
operations since the divestiture.
Operating expenses increased by 1.2% in the third quarter of 1997 as compared
to the same period in 1996. For the first nine months of 1997, operating
expenses when compared to the like period of 1996, decreased by 4.0%. The
decrease is primarily attributable the lower level of sales in 1997. The expense
increase in the current quarter however, is a direct result of the Acquisition,
amortization expense increased by $.5 million and $1.1 million for the third
quarter and the first nine months of 1997 when compared to the like periods of
1996.
Interest and Other (income) expense increased by $3.3million and $12.4 million
for the third quarter and the first nine months of 1997 when compared to the
like periods of 1996. The increases are primarily due to the interest on the
subordinated notes and the term and revolving notes incurred as a direct result
of the Acquisition, and amortization of debt issuance costs relate to the
issuance of the Notes. Total debt service for the nine months ended June 28,
1997 was $12.4 million with no comparable amount in 1996, as Tyson did not
allocate interest expense to the Predecessor.
Net loss for the third quarter and the first nine-month period ending June 28,
1997 of $0.05 million and $4.2 million respectively, compares to net income of
$1.6 million and $5.3 million for the same fiscal periods of 1996. The $1.6
million and $9.5 million increase in net loss for the third quarter and the
first nine-month period of 1997 is acquisition related, as the most significant
factor in the increased loss is the increase in both amortization and interest
expense which are both a direct result of the Acquisition. Additionally, the
noted decrease in sales partially offset by an increase in gross margin percent
has served to lower overall net results. The increase in losses is partially
offset by the effect of these increased expenses on income taxes, as income tax
expense when compared to the prior year is down $1.3 million and $3.8 million
respectively, for the third quarter and the first nine months of 1997.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Acquisition, and the related financing (the Notes and the
Facilities), the Company has a significant annual principal and interest
obligation. Borrowings under the Facilities which totaled $44.8 million at June
28, 1997 ($38.8 million under the Term Loan and $6 million under the Revolver)
accrued interest at an average rate of 8.26% in the thirty-one week period ended
June 28, 1997. Borrowings under the Notes totaled $100 million at June 28,
1997, and accrue interest at a fixed rate of 11.5%.
In addition to its debt service obligations, the Company needs liquidity for
working capital and capital expenditures. For the fiscal year ended September
28, 1996 the Predecessor spent $0.7 million on capital projects. In the nine
months ended June 28, 1997, the Company spent $2.7 million on capital projects,
and expects to spend an additional $1.8 million in fiscal 1997. As much as $2.5
million is being spent on the establishment of a corporate administrative
function, principally for computer software and hardware, as well as office
furniture, fixtures and equipment. The remaining capital expenditures are
primarily for the capital maintenance of the Company's facilities as well as the
establishment of a research and development facility. The Company is continuing
to create its administrative structure to provide services that previously were
being provided by Tyson. The Company entered into a Transition Services
Agreement that provides for the Company to continue to receive administrative
support for up to one year after the acquisition closing date from Tyson. The
Company substantially completed the first phase of implementation of its
administrative structure in the quarter ended June 28, 1997. In connection with
the effort to establish an administrative structure the Company continues to
hire additional personnel into its newly leased Dallas corporate office. The
Company estimates that expenses in fiscal 1997 for its standalone administrative
functions will be approximately $3.8 million.
The Company's primary sources of liquidity are cash flows from operations and
borrowings under its revolving line of credit. The Company had additional
credit availability of $24 million on its revolving line of credit at June 28,
1997. In the nine month period ended June 28, 1997, net cash from financing
activities of $180.1 million ($190.4 million net of $10.3 million in transaction
and financing related expenditures) was partially used by investing activities
of $186.9 million in connection with the Acquisition and normal capital
expenditures. Also, the Company generated $6.8 million from operating
activities, primarily due to the more efficient utilization of working capital
assets. The Company anticipates that its working capital requirements, capital
expenditures and scheduled repayments for fiscal 1997 will be satisfied through
a combination of cash flows generated from operations together with funds
available under the Revolver.
EFFECTS OF INFLATION
Inflation has not had a significant effect on the operations of the Company.
However, in the event of increases in inflation or commodity prices from recent
levels, the Company could experience sudden and significant increases in beef
costs. Over periods of 90 days or less, the Company may be unable to completely
pass these price increases on to its customers. The Company currently believes
that over longer periods of time, it will be able to pass on the price increases
to its customers.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not plan to adopt the fair value-based measurement
methodology for employees stock options contemplated by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" for
financial reporting purposes. Accordingly, this Standard is not expected to have
a significant effect on the Company's financial position or results of
operations.
FUTURE OPERATING RESULTS; FORWARD LOOKING STATEMENTS
The Company's future revenues and profitability are difficult to predict due
to a variety of risks and uncertainties, including (i) business conditions and
growth in the Company's existing markets, (ii) the success of new products and
development of new markets, (iii) the Company's existing indebtedness and the
uncertainty of capital needs for debt service and additional growth, (iv)
government regulation, including USDA regulations, (v) the successful
integration of future acquisitions and (vi) numerous competitive factors,
including number and size of competitors and alternative distribution, (vii)
market price and availability of raw materials.
The Company expects to pursue business growth strategies, add customers,
product lines and possibly acquire other businesses; however, the success of
these strategies and any rate of increase cannot be estimated with precision or
certainty. The Company believes that selling general and administrative,
interest, and depreciation and amortization expenses will continue to increase
to support overall growth.
Because of the foregoing uncertainties affecting the Company=s future
operating results, past performance should not be considered to be a reliable
indicator of future performance, and investors should not use historical trends
to anticipate results or trends in future periods. In addition, the Company=s
participation in a dynamic industry often results in significant volatility in
the price of the Company's bonds.
In addition to the matters noted above, certain other statements made in this
report are forward looking. Such statements are based on an assessment of a
variety of factors, contingencies and uncertainties deemed relevant by
management, including technological changes, competitive products and services,
management issues as well as those matters discussed specifically elsewhere
herein. As a result, the actual results realized by the Company could differ
materially from the statements made herein. Readers of this report are
cautioned not to place undue reliance on the forward looking statements made in
this report.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 15, 1997 GORGES/QUIK-TO-FIX FOODS, INC.
By: /s/A. Scott Letier
------------------------------------
A. Scott Letier
Vice President-Finance and Chief Financial Officer
(Principal Financial Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 3RD QUARTER
ENDED JUNE 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> NOV-25-1997
<PERIOD-END> JUN-28-1997
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<RECEIVABLES> 17,358
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<PP&E> 92,266
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<TOTAL-ASSETS> 204,419
<CURRENT-LIABILITIES> 21,689
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0
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