<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 December 28, 1996
------------------
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
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.
Incorporation or Organization) Employer 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 February 26, 1997
----- -----------------------
Common Stock, $.01 par value 1,000
<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, DECEMBER 28,
1996 1996
-------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9 $ 15
Accounts receivable, net - 11,882
Inventory 31,325 29,197
--------- --------
Prepaid expenses and other - 715
Total current assets 31,334 41,809
Property, plant and equipment:
Land 1,088 1,499
Buildings and leasehold improvements 35,768 43,162
Machinery and equipment 52,853 42,589
Land improvements and other 1,186 3,145
--------- --------
90,895 90,395
Accumulated depreciation (44,439) (682)
--------- --------
Net property, plant and equipment 46,456 89,713
Other assets:
Intangible assets 59,508 63,774
Organizational and deferred debt issuance costs - 8,731
--------- --------
Other - 50
--------- --------
Total assets $137,298 $204,077
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ - $ 10,888
Current portion of long-term debt - 5,000
--------- --------
Total current liabilities 15,888
Long-term debt, less current portion - 144,000
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 - 45,000
Accumulated deficit - (811)
--------- --------
Total stockholders' equity - 44,189
--------- --------
Total liabilities and stockholder's equity $137,298 $204,077
========= ========
</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
------------------------------------- ---------------------------------------------
Pro-forma three
Three months ended Eight weeks ended Five weeks ended months ended
December 30, 1995 November 25, 1996 December 28, 1996 December 28, 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------------------------------- ------------------ -------------------------
<S> <C> <C> <C> <C>
Sales $59,068 $31,966 $17,118 $49,084
Costs of goods sold 48,308 25,917 14,445 39,799
------- ------- ------- -------
Gross profit 10,760 6,049 2,673 9,285
Operating expenses:
Selling, general and
administrative 6,790 4,153 1,659 5,268
Amortization 406 250 287 746
------- ------- ------- -------
Total operating expenses 7,196 4,403 1,946 6,014
------- ------- ------- -------
Operating income 3,564 1,646 727 3,272
Interest expense - - 1,538 4,227
Other (income) expense (23) - - -
------- ------- ------- -------
Earnings before taxes on income 3,587 1,646 (811) (1,528)
Income tax expense 1,578 731 - -
------- ------- ------- -------
Net income (loss) $ 2,009 $ 915 $ (811) $ (955)
======= ======= ======= =======
</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
---------------------------------------- -----------------
THREE MONTHS ENDED EIGHT WEEKS ENDED FIVE WEEKS ENDED
DECEMBER 30, 1995 NOVEMBER 25, 1996 DECEMBER 28, 1996
--------------------- ----------------- ------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,009 $ 915 $ (811)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation 2,069 342 682
Amortization 406 250 356
Deferred income taxes (746) 26 -
Changes in assets and liabilities:
Increase in accounts receivable - - (11,882)
(Increase) decrease in inventory (1,648) (571) 1,730
Increase in prepaid expenses and other - - (765)
Increase in accounts payable and
accrued expenses - - 10,310
---------- ---------- ----------
Net cash provided by (used in) operating
activities 2,090 962 (380)
Cash flows from investing activities:
Purchases of plant and equipment (811) (141) (395)
Acquisition, net of cash received - - (184,349)
Other 1,080 - -
---------- ---------- ----------
Net cash provided by (used in) investing
activities 269 (141) (184,744)
Cash flows from financing activities:
Proceeds from note offering - - 100,000
Capital contributions - - 45,000
Proceeds from revolving line of credit - - 9,000
Proceeds from term loan - - 40,000
Debt issuance and organizational costs - - (8,861)
Decrease in Investment and advances by
Tyson (2,359) (821) -
---------- ---------- ----------
Net cash (used in) provided by financing
activities (2,359) (821) 185,139
---------- ---------- ----------
Net increase in cash and cash equivalents 0 0 15
Cash and cash equivalents at beginning of
period 9 9 -
---------- ---------- ----------
Cash and cash equivalents at end of period $ 9 $ 9 $ 15
========== ========== ==========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
December 28, 1996
(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 December 28, 1996, and the results of operations and cash flows for
the three months ended December 28, 1996 and December 30, 1995. 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 Business 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, December 28,
1996 1996
------------- ------------
<S> <C> <C>
Finished products $27,569 $26,623
Work in process 688 141
Supplies 3,068 2,433
------------- ------------
Total $31,325 $29,197
============= ============
</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 December 28, 1996, the accumulated amortization was
$10.6 million and $0.4 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 three months ended December 30, 1995 were $1.8
million.
Advertising and Promotion Expenses
Advertising and promotion expenses are charged to operations in the period
incurred. Advertising and promotion expenses for the three month periods ended
December 30, 1995 and December 28, 1996 were $1.9 million and $1.5 million,
respectively.
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
December 28, 1996, the Company's available credit under the Revolver was $21.0
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 December 28, 1996
the interest rate for the Company based on this formula was 8.15%. 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.
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 December 28, 1996.
(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.
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 December 28,
1996.
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 $11,000
for the three month period ended December 30, 1995 and December 28, 1996,
respectively.
Future minimum lease payments for all noncancelable operating leases for the
Business at December 28, 1996 total $1,041,000, composed of $152,000, $205,000,
$207,000, $210,000, 199,000, and $68,000 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. Discretionary contributions
totaled $218,000 and $145,000 for the three month period ended December 30, 1995
and December 28, 1996, 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 December 28, 1996 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 month period ended December 30, 1995 and 36% for the three month
period ended December 28, 1996. Sales to one of these customers are likely to
be 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 three month period ended
December 28, 1996 gives effect to the completion of the Acquisition, the
application of the net proceeds of the of the financing and the 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
$1,125,000 reduction in selling and general administrative expenses incurred by
Tyson, allocated and included in the historical financial statements of the
Predecessor, but not actually incurred by the Predecessor; (iii) a $525,000
increase in selling, general and administrative expenses representing the
addition of estimated costs expected to be incurred by the Company as a stand-
alone entity, which are based on estimates of personnel head counts, and
estimated expenses necessary to maintain administration, sales and marketing;
(iv) 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; (v) a $209,000 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; (vi) 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
(vii) 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>
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 which were maintained only on
a consolidated basis at the corporate level, which 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 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 three month period are made in reference to the Pro-forma Statement of
Income, which represents an adjusted combination of the two stub periods, one of
the Predecessor, and one of the Company, which together completes coverage of
the time of the three month period ended December 28, 1996, because the
acquisition amounts 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 period ended December 28, 1996
(the first quarter of fiscal 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 prices for two
key raw materials, 90% lean beef trimmings and rib lifter meat, which the
Company has passed on, in part, to customers. Overall, the lower sales volumes
in the current periods are related to the uncertainties which 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 fiscal school year, and also as a direct result of
uncertainties related to the sale prior to its consummation, some national
customers did not place larger contracts with the Company which it had garnered
in prior years, primarily a large account which in the past has purchased a
significant amount of ground beef from the Company. Also responsible for sales
declines are the reduced sales of ground beef, primarily related to the
completion of a temporary contract with a national fast food chain, and lower
volumes for frozen portion steaks, a business which the Company discontinued in
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 declined in the three month period ended December 28, 1996, as
compared to the three month period ended December 30, 1995, continuing a trend
from fiscal 1996. The decline in gross profit in fiscal 1996 is attributable
primarily to the lower sales volumes described above. However, as a percentage
of sales, gross profits improved from 18.2% in the first quarter of 1996 to
18.9% in the first quarter of 1997 (pro-forma). The improvement in gross profit
as a percentage of sales is attributable to the declines in the raw materials
costs, changes in product mix as the Company's sales of lower margin ground beef
and portion steaks decreased, and a reduction of variable overhead. The
increase in gross profit as a percentage of sales was partially offset by
several factors, including inefficiencies and costs related to the Company's
efforts to hold down production in an effort to increase cycle times and reduce
inventory levels.
The Company's operating income decreased in the first quarter of 1997 due
primarily to the overall decrease in the level of sales due to the product
discontinuations and the negative effects of the announced sale of the
Predecessor and the subsequent eight month period of uncertainty until the
completion of the Acquisition, as well as 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)
Pro-forma Three Months Ended December 28, 1996 Compared to Three Months Ended
December 30, 1995
Sales for the three month period ended September 30, 1996 were $49.1 million as
compared to sales for the three months ended September 30, 1995 of $59.1
million, a decrease of 16.9%. The decrease as discussed above are primarily
related to the discontinuance of certain products, as well as the restructure
and sale of the business as some sales in product lines which require contract
or annual bid processes were limited during the acquisition period, and certain
national and ground beef customers were lost during the second half of 1996.
Operating expenses were $6.0 million and $7.2 million for the three month
periods ended December 28, 1996 and December 30, 1995, respectively. The $1.2
million decrease was attributable to the differences in the method of operations
between the Company and the Predecessor, as selling, general and administrative
costs decreased by $1.5 million (1997 - $5.3 million; 1996 - $6.8 million) as a
result of the differences in the actual costs incurred by the Company as
compared to the costs previously allocated to the Predecessor. Also, as a
direct result of the Acquisition, amortization expense increased by $0.3 million
(1997 - $0.7 million; 1996 - $0.4 million).
Interest and Other (income) expense increased from income of $0.02 million in
1996 to expense of $4.2 million in 1997, primarily due to the interest on
subordinated notes and the term and revolving notes incurred a a direct result
of the Acquisition, and amortization of debt issuance costs related to the
issuance of the Notes totaling $4.2 million, with no comparable amount in 1996.
Tyson did not allocate interest expense to the Predecessor.
The $1.0 million pro-forma net loss for the three months ended December 28,
1996 compares to net income of $2.0 million for the same period of fiscal 1996.
The $3.0 million increase in net loss resulted primarily from the decreased
sales and gross margin dollars, partially offset by a decrease in operating
expenses along with a significant increase in interest expense related to the
acquisition, and the related effects of the above on income taxes (a reduction
from $1.6 million in fiscal 1996 due to the incurrence of a net loss).
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 $49 million at
December 28, 1996 ($40 million under the Term Loan and $9 million under the
Revolver) accrued interest at an average rate of 8.15% in the five week period
ended December 28, 1996. Borrowings under the Notes totaled $100 million at
December 28, 1996, and accrued interest at 11.5%.
In addition to its debt service obligations, the Company will need liquidity
for working capital and capital expenditures. For the fiscal year ended
September 28, 1996 the Company spent $0.7 million on capital projects. In the
three month period ended December 28, 1996, the company spent $0.4 million on
capital projects, and expects to spend an additional $4.4 million in fiscal
1997, with as much as $2.0 million 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 in the process of creating an administrative structure to provide
services some of which are currently being provided by Tyson. The Company
entered into a Transition Services Agreement which provides for the Company to
continue to receive administrative support for up to one year after the
acquisition closing date from Tyson. In connection with
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES-(CONTINUED)
the effort to establish an administrative structure the Company is hiring
additional personnel into its newly leased Dallas corporate office. The Company
estimates that fiscal 1997 expenses for its stand-alone administrative functions
will be approximately $3.4 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 $21 million on its revolving line of credit at December
28, 1996. In the three month period ended December 28, 1996, net cash from
financing activities of $185.1 million ($194 million net of $8.9 million in
financing related expenditures) was partially used by investing activities of
$184.7 million in connection with the Acquisition and normal capital
expenditures. Also, the Company had cash used by operating activities of $.4
million, primarily in connection with the increases of working capital assets.
At December 28, 1996, the Company had cash and cash equivalents of approximately
$15,000. 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.
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.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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: February 26, 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
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