<PAGE>
================================================================================
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 MARCH 28, 1998
--------------
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 (I.R.S. Employer Identification No.)
Jurisdiction of Incorporation)
9441 LBJ FREEWAY
SUITE 214
DALLAS, TEXAS 75243
(Address of Principal Executive Offices)
(972) 690-7675
(Registrant's Telephone Number, Including Area Code)
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 X No
--- ---
The number of shares of the registrant's Common Stock outstanding at May
11, 1998 was 1,000. There is no public trading market for shares of the
registrant's Common Stock.
================================================================================
<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>
SEPTEMBER 27, MARCH 28,
1997 1998
--------------------- -------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net 21,960 19,006
Inventory 28,645 26,496
Prepaid expenses and other 78 236
--------------------- -------------------
Total current assets 50,683 45,738
Property, plant and equipment:
Land 1,499 1,499
Buildings and leasehold improvements 44,531 44,625
Machinery and equipment 44,517 48,062
Land improvements and other 3,144 1,045
93,691 95,231
Accumulated depreciation (7,358) (11,896)
--------------------- -------------------
Net property, plant and equipment 86,333 83,335
Other assets:
Intangible assets 65,389 64,214
Organizational and deferred debt issuance costs 8,767 8,092
Other 89 64
--------------------- -------------------
Total assets $211,261 $201,443
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 18,658 $ 12,226
Current portion of long-term debt 8,450 7,750
--------------------- -------------------
Total current liabilities 27,108 19,976
Long-term debt, less current portion 141,050 142,250
Stockholders' equity:
Common stock, $.01 par value; 2,000 shares authorized,
1,000 shares issued and outstanding - -
Additional paid-in capital 45,585 45,585
Accumulated deficit (2,482) (6,368)
--------------------- -------------------
Total stockholders' equity 43,103 39,217
--------------------- -------------------
Total liabilities and stockholders' equity $211,261 $201,443
===================== ===================
</TABLE>
See accompanying notes to financial statements
2
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Company | Predecessor | Company
-------------------------------------|---------------|---------------------------------------------------
Three months Three months | Proforma | Eighteen Proforma six Six
ended ended | Eight weeks | weeks months months
| ended | ended ended ended
March 29, March 28, | November 25, | March 29, March 29, March 28,
1997 1998 | 1996 | 1997 1997 1998
(Unaudited) (Unaudited) | (Unaudited) | (Unaudited) (Unaudited) (Unaudited)
-------------------------------------|---------------|---------------------------------------------------
<S> <C> <C> |<C> | <C> <C> <C>
| |
Sales $48,559 $49,573 | $31,966 | $65,677 $97,643 $100,560
Costs of goods sold 39,546 40,649 | 25,917 | 53,990 80,538 81,891
-------------------------------------|---------------|---------------------------------------------------
Gross profit 9,013 8,924 | 6,049 | 11,687 17,105 18,669
| |
Operating expenses: | |
Selling, general | |
and Administrative 5,675 6,364 | 4,153 | 7,333 11,542 12,424
Amortization 761 808 | 250 | 1,049 1,399 1,668
-------------------------------------|---------------|---------------------------------------------------
Total operating | |
expenses 6,436 7,172 | 4,403 | 8,382 12,941 14,092
-------------------------------------|---------------|---------------------------------------------------
Operating income 2,577 1,752 | 1,646 | 3,305 4,164 4,577
| |
Interest expense 4,066 4,277 | - | 5,604 8,293 8,476
Other (income) expense - (5) | - | - - (13)
-------------------------------------|---------------|---------------------------------------------------
Earnings before taxes | |
on income (1,489) (2,520) | 1,646) | (2,299) (4,129) (3,886)
Income tax expense - - | 731 | - - -
-------------------------------------|---------------|---------------------------------------------------
Net income (loss) $(1,489) $(2,520) | $ 915 | $(2,299) $(4,129) $ (3,886)
=====================================|===============|===================================================
</TABLE>
See accompanying notes to financial statements
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
PREDECESSOR | COMPANY
------------------------- | ---------------------------------------
EIGHT WEEKS | EIGHTEEN WEEKS SIX
ENDED | ENDED MONTHS
NOVEMBER 25, | MARCH 29, ENDED
1996 | 1997 MARCH 28,
| 1998
-------------------- | ---------------------------------------
(Unaudited) | (Unaudited)
<S> <C> | <C> <C>
|
Cash flows from operating activities: |
Net income (loss) $ 915 | $ (2,299) $(3,886)
Adjustments to reconcile net income (loss) to net |
Cash provided by (used in) operating activities: |
Depreciation 342 | 2,897 4,538
Amortization 250 | 1,330 2,100
Allowance for bad debt - | - (88)
Deferred income taxes 26 | - -
Loss on disposition of equipment - | - -
Changes in assets and liabilities: |
Increase in accounts receivable - | (14,337) 3,041
(Increase) decrease in inventory (571) | 5,685 2,150
Increase in prepaid expenses and other - | (595) (133)
Increase in accounts payable and |
Accrued expenses - | 13,762 (6,432)
-------------------- | ---------------------------------------
Net cash provided by (used in) operating |
activities 962 | 6,443 1,290
|
Cash flows from investing activities: |
Purchases of plant and equipment (141) | (864) (1,540)
Acquisition, net of cash received - | (184,349) -
Proceeds from sale of equipment - | 15 -
Other - | - (84)
-------------------- | ---------------------------------------
Net cash provided by (used in) investing |
activities (141) | (185,198) (1,624)
|
Cash flows from financing activities: |
Proceeds from note offering - | 100,000 -
Capital contributions - | 45,000 -
Proceeds from revolving line of credit - | 10,000 9,000
Payments on revolving line of credit - | (5,000) (6,000)
Proceeds from term loan - | 40,000 -
Payments on term loan - | (1,250) (2,500)
Debt issuance and organizational costs - | (9,995) -
Expenses for deal - | - (33)
Expenses for debt - | - (133)
Decrease in Investment and advances by |
Tyson (821) | - -
-------------------- | ---------------------------------------
Net cash (used in) provided by financing |
activities (821) | 178,755 334
-------------------- | ---------------------------------------
Net increase in cash and cash equivalents - | - -
Cash and cash equivalents at beginning of period 9 | - -
-------------------- | ---------------------------------------
Cash and cash equivalents at end of period $ 9 | $ - $ -
==================== | =======================================
</TABLE>
See accompanying notes to financial statements
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
March 28, 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
On November 25, 1996 the Company acquired certain assets and liabilities of
the beef processing division (the "Predecessor"), of Tyson Foods, Inc., in
exchange for a cash payment of approximately $184 million (the "Acquisition").
The cash used to consummate the Acquisition was obtained through the issuance of
$45 million in common stock, and the proceeds from the borrowings described in
the notes. 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. As a result of the acquisition, financial information for periods
through November 25, 1996 are presented on a different cost basis and,
therefore, such information may not be comparable.
Gorges/Quik-to-Fix Foods, Inc., (the "Company"), a wholly owned subsidiary
of Gorges Holding Company ("GHC"), 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 throughout
the U.S.
The accompanying audited and unaudited financial statements include
financial information of the Company, and its Predecessor, which represents the
Company prior to its acquisition from Tyson Foods, Inc. ("Tyson"). The
Predecessor represents the beef processing assets and operations of Tyson, which
was 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
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.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
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.
Accounts Receivable
The Company periodically evaluates the credit worthiness of its customers
as accounts receivable balances are not collateralized. The Company has not
experienced significant credit losses.
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):
September 27, March 28,
1997 1998
------------------- -------------------
Finished products $17,655 $16,334
Supplies 10,990 10,162
------------------- -------------------
Total $28,645 $26,496
=================== ===================
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 20 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 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 over the life of the debt
instrument to which it relates.
At September 27, 1997 and March 28, 1998, the accumulated amortization was
$3.3 million and $5.3 million, respectively.
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.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Selling Expenses
Selling expenses include product line expenses such as shipping and
storage, external handling, 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 from Tyson certain indirect administrative and
selling expenses incurred by Tyson, 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.
Advertising, Promotion and Research and Development Expenses
Advertising, promotion and research and development expenses are charged to
operations in the period incurred. Advertising and promotion expenses were $2.9
million and $5.9 million for the three month and six month periods ending March
29, 1997, compared to $3.0 million and $6.2 million for the same periods ending
March 28, 1998. Research and Development expenses were $ 0.2 million and $.4
million for the three month and the six month periods ending March 28, 1998.
Prior years were nominal, with expenses allocated by Tyson.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles 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.
Collective Bargaining Agreements
The Company employs approximately 1,000 people. Currently, approximately
200 employees of a total of 253 union-eligible employees at the Garland, Texas
facility are represented by the United Food & Commercial Workers International
Union, AFL-CIO, CLC, Local 540 (the "Union"). The Garland, Texas facility is
being operated pursuant to the terms and conditions specified by the Company and
the Union in an interim agreement. The Company was not obligated to operate the
Garland, Texas facility pursuant to the terms of such agreement. Management is
currently negotiating a collective bargaining agreement with the Union, although
there can be no assurance that it will be successful in doing so.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
3. LONG TERM DEBT
Senior Debt
The Company has entered into a credit agreement (the "Credit Agreement")
with NationsBank of Texas, NA (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 30, 2001. As of
March 28, 1998, the Company's available credit under the Revolver was $15.0
million. The Term Loan also has a five year term and is subject to quarterly
principal payments in an aggregate amount of $6 million in the remainder of
fiscal 1998, $8.5 million in fiscal 1999, $9.0 million in fiscal 2000, $9.75
million in fiscal 2001, and $1.7 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 1.75%,
or (ii) the Eurodollar rate, LIBOR, plus 2.75%, 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. The interest rate for
the Company based on this formula was 8.24% and 8.26% for the three and six
month periods ending March 28, 1998. 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 March 28, 1998, the Company's outstanding borrowings
under these facilities were $50.25 million, $15 million on the Revolver, $35
million on the Term Loan, and one outstanding letter of credit in the amount of
$.250 million.
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.
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 11.5% per annum. The issuance of the Notes resulted in net proceeds to
the Company of approximately $95 million after underwriting discounts and other
debt issuance costs aggregating approximately $5 million. On April 30, 1997,
the Company consummated an exchange offer whereby 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 December 27,
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 March 28, 1998.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
3. LONG TERM DEBT - CONTINUED
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. The Company paid
interest of $4.2 million and $8.5 million respectively for the three month and
six month periods ending March 28, 1998.
4. COMMITMENTS
Tyson (for the Predecessor), and the Company leased certain properties and
equipment for which the total rentals thereon approximated $43,000 and $54,000
for the three and six month periods ended March 29, 1997 and approximately
$32,000 and $64,000 for the three and six month periods ended March 28, 1998.
5. BENEFIT PLANS
The Company has defined contribution retirement and incentive benefit
programs for all employees 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 Predecessor or
the Company. Contributions to the defined contribution plans totaled $146,068
and $279,170 for the three and six month period ending March 28, 1998.
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 an income tax benefit related to the net deferred tax asset for the
period ended March 28, 1998 because in the opinion of management it is uncertain
when the Company will be able to realize such deferred tax asset.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
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 Company's top two customers accounted for approximately 18% and 16% of sales
for the three and six month periods ended March 28, 1998.
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, 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, NA, 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 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 fees and commissions in connection with that transaction.
9. PRO FORMA INFORMATION
The pro forma income statement included herein for the three and six month
periods ending March 29, 1997 combines the final eight week period September
28, 1996 through November 25, 1996 when the company was owned by the
Predecessor, with the eighteen week period November 26, 1996 through March 29,
1997, providing a full three month and six month period to compare with future
periods. On a proforma basis, the Company would have sales of $48,559 and
$49,573 and a net loss of $1,489 and $2,520 for the three month periods ended
March 29, 1997 and March 28, 1998, respectively.
10. STOCK OPTIONS
In 1997, GHC adopted a stock option plan (the Stock Option Plan) which
provides for the granting of up to 112,250 incentive stock options to employees
to purchase shares of GHC's common stock. All options granted under the Stock
Option Plan have a five year vesting period and a term of up to ten years. GHC
has no assets or liabilities, other than their direct investment in the Company.
Stock option activity is as follows:
Number of Shares Option Price per Share
-----------------------------------------
Options granted 91,468 $100.00
Options exercised - -
Options cancelled - -
-----------------------------------------
Options outstanding March 28, 1998 91,468 $100.00
11. SUBSEQUENT EVENTS
During the quarter, the Company entered into a non-binding letter of intent
to purchase another Company also in the beef, pork and poultry processing
business. Although no assurances can be given, the transaction, terms of which
have not been finalized, is anticipated to close prior to the end of the
Company's fiscal year.
<PAGE>
Part 1 - Financial Information
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gorges/Quik-to-Fix Foods, Inc., (the "Company"), or its representatives,
may make forward looking statements, oral or written, including statements in
this report's Management's Discussion and Analysis of Financial Condition and
Results of Operations, press releases and filings with the Securities and
Exchange Commission (the "Commission"), regarding estimated future operating
results, planned capital expenditures (including the amount and nature thereof)
and the Company's financing plans, if any, related thereto, increases in
customers and the Company's financial position and other plans and objectives
for future operations. Certain of the matters discussed may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause the actual
results, performance or achievements of the Company to differ materially from
the Company's expectations are set forth among the factors set forth in the
"Factors Affecting Future Performance" section in Item 7 of this report or in
the description of the Company's business in Item 1 of this report, as well as
factors contained in the Company's other securities filings.
All subsequent oral and written forward looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by these factors. The Company assumes no obligation to update any of
these statements. The Company's fiscal year ends on the Saturday closest to
September 30. References in this report to "fiscal 1998" and "fiscal 1997"
refer to the 53 and 52 week periods ended October 3, 1998 and September 27,
1997, respectively.
The Company is a leading producer of value added processed beef products
for the foodservice industry and is one of the few companies in this segment of
the industry that markets and distributes nationally. The Company's products are
marketed under the nationally recognized Quik-to-Fix and Gorges brand names, as
well as the private labels of leading national foodservice distributors. The
Company believes that its products are well positioned to take advantage of what
it believes is a trend within the foodservice industry toward greater
outsourcing of the food preparation process. Outsourcing provides many benefits
to foodservice operators including consistent product quality, reduced
preparation costs and increased food safety.
The Company purchases fresh and frozen beef and, to a lesser extent, pork
and poultry, which it processes into a broad range of fully-cooked and ready to
cook products. The Company's two product categories are value added products and
ground beef. Value added product offerings include (i) breaded beef items, such
as country fried steak and beef fingers, (ii) charbroiled beef, such as fully
cooked hamburger patties, fajita strips, meatballs, meatloaf and taco meat 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 primarily of ready to cook individually quick
frozen ("IQF") hamburger patties. The Company operates four manufacturing
facilities, three of which are dedicated to value added products and one of
which produces primarily ground beef products. The Company's products are sold
primarily to the foodservice industry, which encompasses all aspects of away-
from-home food preparation, including commercial establishments such as fast
food restaurants and family dining restaurants and non-commercial establishments
such as healthcare providers, schools and corporations. The Company sells its
products principally through broadline and specialty foodservice distributors.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company was formed in 1996 in connection with the acquisition of the
processed beef operations (the "Business") of Tyson Foods, Inc. ("Tyson" and the
"Acquisition" respectively). Prior to the Acquisition, the Business operated as
part of Tyson, the world's largest vertically integrated poultry processor.
Tyson acquired a portion of the Business in 1989 through its acquisition of
Holly Farms. In doing so, Tyson acquired two separate beef processing companies,
Harker's, Inc. ("Harker's") and Quik-to-Fix Foods, Inc. ("Quik-to-Fix, Inc."),
each of which had been acquired by Holly Farms in 1986. In 1990, Tyson sold the
Harker's brand name and route sales division to Harker's Distribution, Inc., a
company formed by former members of Harker's management. In January 1994, Tyson
expanded its beef processing operations further by acquiring Gorges Foodservice,
Inc., ("Gorges, Inc."), a leading producer of charbroiled beef products. In
April 1996, Tyson announced its intention to sell the Business in order to
concentrate on its core poultry business. The Acquisition was consummated on
November 25, 1996.
The Company is incorporated under the laws of the state of Delaware. The
Company's principal executive offices are located at 9441 LBJ Freeway, Suite
214, Dallas, Texas, 75243, and its telephone number is 972/690-7675. The
Company is a wholly owned subsidiary of Gorges Holding Corporation ("GHC"),
which, in turn, is substantially owned by CGW Southeast Partners III, L.P.
("CGW"). GHC has no business other than holding the stock of the Company, which
is the sole source of GHC's financial resources. GHC is controlled by CGW,
which beneficially owns shares representing 54.8% of the voting interest in GHC,
(46.3% on a fully diluted basis) and has the right to designate all of the
directors of GHC. Accordingly, CGW, through its control of GHC, controls the
Company and has the power to elect all of its directors, appoint new management,
and approve any action requiring the approval of the holders of the Company's
common stock.
The following discussion should be read in conjunction with the unaudited
Financial Statements and the Notes thereto, included elsewhere in this Document.
RESULTS OF OPERATIONS
Overview
Discussion of the results of operations for the Company as they relate to
the fiscal three and six month periods ending March 29, 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 three and six month
periods ended March 29, 1997. As a result of the Acquisition on November 25,
1996, the Pro-forma statement will not be comparable to prior periods.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 29, 1997 March 28, 1998 March 29, 1997 March 28, 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales Dollars:
Value Added $37,205 $36,750 $74,442 $ 75,583
Ground Beef 11,354 12,823 23,201 24,977
------- ------- ------- --------
Total $48,559 $49,573 $97,643 $100,560
Pounds:
Value Added 24,249 23,128 47,798 48,554
Ground Beef 12,377 15,079 25,161 29,333
------- ------- ------- --------
Total 36,626 38,207 72,959 77,887
Dollars/Pound
Value Added $ 1.53 $ 1.59 $ 1.56 $ 1.56
Ground Beef 0.92 0.85 0.92 0.85
------- ------- ------- --------
Total $ 1.33 $ 1.30 $ 1.34 $ 1.29
</TABLE>
Sales increased $3.0 million, or 3.1%, from $97.6 million in the six months
ended March 29, 1997 to $100.6 million in the six months ended March 28, 1998.
This increase is primarily a result of increased sales of ground beef products
and, to a lesser extent, increased sales of value added products. Ground beef
sales increased 4.1 million pounds, or 16.3%, from 25.2 million pounds in the
six months ended March 29, 1997 to 29.3 million pounds in the six months ended
March 28, 1998. Value added product sales increased 0.8 million pounds, or 1.4%,
from 47.8 million pounds in the six months ended March 29, 1997 to 48.6 million
pounds in the six months ended March 28, 1998. Sales increased $1.0 million, or
2.1%, from $48.6 million in the three months ended March 29, 1997 to $49.6
million in the three months ended March 28, 1998. This increase is primarily a
result of increased sales of ground beef products, partially offset by decreased
sales of value added products. Ground beef sales increased 2.7 million pounds,
or 21.2%, from 12.4 million in the three months ended March 29, 1997 to 15.1
million pounds in the three months ended March 28, 1998. Value added products
sales decreased 1.1 million pounds, or 5.0%, from 24.2 million pounds in the
three months ended March 29, 1997 to 23.1 million pounds in the three months
ended March 28, 1998.
Gross profit increased $1.6 million, or 9.4%, from $17.1 million in the
six months ended March 29, 1997 to $18.7 million in the six months ended March
28, 1998. This increase is primarily a result of increased sales of ground beef
products and, to a lesser extent, increased sales of value added products. As a
percentage of sales, gross profit increased from 17.5% in the six months ended
March 29, 1997 to 18.6% in the six months ended March 28, 1998. Gross profit
decreased $0.1 million, or 1.1%, from $9.0 million in the three months ended
March 29, 1997 to $8.9 million in the three months ended March 28, 1998. This
decrease is primarily a result of changes in product mix resulting from
increased sales of lower margin ground beef products. As a percentage of sales,
gross profit decreased from 18.6% in the three months ended March 29, 1997 to
18.0% in the three months ended March 28, 1998.
Operating expenses increased $1.2 million, or 9.3%, from $12.9 million in
the six months ended March 29, 1997 to $14.1 million in the six months ended
March 28, 1998. This increase is primarily a result of organization and staffing
of the Company's corporate headquarters following the Acquisition and, to a
lesser extent, increased amortization. Operating expenses increased $0.8
million, or 12.5%, from $6.4 million in the three months ended March 29, 1997 to
$7.2 million in the three months ended March 28, 1998. This increase is
primarily a result of organization and staffing of the Company's corporate
headquarters following the Acquisition and, to a lesser extent, increased
amortization.
Operating income increased $0.4 million, or 9.5%, from $4.2 million in the
six months ended March 29, 1997 to $4.6 million in the six months ended March
28, 1998. This increase is primarily a result of increased sales and gross
profit, partially offset by increased operating expenses. Operating income
decreased $0.8 million, or 30.8%, from $2.6 million in the three months ended
March 29, 1997 to $1.8 million in the three months ended March 28, 1998. This
decrease is primarily a result of decreased gross profit and increased operating
expenses.
Interest expense increased $0.2 million, or 2.4%, from $8.3 million in the
six months ended March 29, 1997 to $8.5 million in the six months ended March
28, 1998. This increase is primarily a result of increased borrowings under the
Company's revolving credit facility related to increases in inventory and
accounts receivable. Interest expense increased $0.2 million, or 4.9%, from
$4.1 million, in the three months ended March 29, 1997 to $4.3 million in the
three months ended March 28, 1998. This increase is primarily a result of
increased borrowings under the Company's revolving credit facility related to
increases in inventory and accounts receivable.
Net loss decreased $0.2 million, or 4.9%, from $4.1 million in the six
months ended March 29, 1997 to $3.9 million in the six months ended March 28,
1998. Net loss increased $1.0 million, or 66.7%, from $1.5 million in the three
months ended March 29, 1997 to $2.5 million in the three months ended March 28,
1998.
<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 $50 million at March
28,1998 ($35 million under the Term Loan and $15 million under the Revolver)
accrued interest at an average rate of 8.24% and 8.26% in the three and six
month period ended March 28, 1998. Primarily as a result of lower than
anticipated sales growth in the six month period ended March 28, 1998, at March
28, 1998, the Company was in noncompliance with certain financial covenants
under the Credit Agreement. Subsequent to March 28, 1998, the Company and the
Bank amended the Credit Agreement to change the terms of the financial covenants
with which the Company was not in compliance. The Company was in compliance with
these covenants as of May 11, 1998. Borrowings under the Notes totaled $100
million at March 28, 1998, 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 three and six month
periods ended March 28, 1998, the Company spent $.5 million and $1.5 million on
capital projects. Primarily these expenditures are for plant improvements and
the continued development of systems. The remaining capital expenditures are
primarily for the capital maintenance of the Company's facilities as well as the
continued development of its' research and development facility. The Company is
continuing to develop and refine its administrative structure to provide
additional services, some of which were previously being provided by Tyson. The
Company substantially completed the first phase of implementation of its
administrative structure in fiscal 1997; however, some additional expenditures
and hiring are continuing to refine the corporate functions.
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 $15 million on its revolving line of credit at March 28,
1998. In the six month period ended March 28, 1998, net cash from financing
activities of $.3 million and operating activities of $ 1.3 million were used in
connection with normal investing activities of $ (1.6) million, primarily for
capital expenditures. The Company anticipates that its working capital
requirements, capital expenditures and scheduled repayments for fiscal 1998 will
be satisfied through a combination of cash flows generated from operations
together with funds available under the Revolver. During the quarter, the
Company entered into a non-binding letter of intent to purchase a Company that
is similar in its operations as a protein processor. Although no assurances can
be given as to reaching final agreement and receiving all requisite regulatory
and financial approvals, the Company intends to finance the transaction with a
combination of additional equity, to come from the current equity holders, and
additional senior bank debt.
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
EFFECTS OF YEAR 2000 PROBLEMS
While the Company is not aware of any material expenses or losses of
revenue that it will incur as a result of so-called "Year 2000 problems" it is
impossible to anticipate all of the ways in which such problems could arise and
affect the Company's financial condition and results of operations. In addition
to hardware and software problems that could arise within the Company's own
computer systems, computer systems with which the Company's systems interface or
other machinery, the Company could be affected by the Year 2000 problems of its
suppliers, partners or customers, or of other parties upon whom the Company
depends, as well. At this time the Company is unable to quantify the possible
effect of Year 2000 problems on its financial condition or results of
operations; however, the majority of the Company's hardware and software was
purchased and implemented in the past year and has been represented to the
Company as Year 2000 compliant by the respective vendors.
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.
<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
10.1 Amendment to Senior Credit Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K
None
<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: May 11, 1998 GORGES/QUIK-TO-FIX FOODS, INC.
By: /s/A. Scott Letier
--------------------------------------------------
A. Scott Letier
Vice President-Finance and Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT 10.1
AMENDMENT NO. 3
TO
CREDIT AGREEMENT
AND
WAIVER
THIS AMENDMENT NO. 3 TO CREDIT AGREEMENT AND WAIVER (this "Amendment No.
3"), dated as of May 11, 1998, is entered into by and among GORGES/QUIK-TO-FIX
FOODS, INC., a Delaware corporation (the "Borrower"), GORGES HOLDING
CORPORATION, a Delaware corporation (the "Parent;" together with the Borrower,
each a "Credit Party" and collectively the "Credit Parties"), CERTAIN LENDERS
IDENTIFIED ON THE SIGNATURE PAGES THERETO (the "Lenders") and NATIONSBANK OF
TEXAS, N.A., as agent for the Lenders (in such capacity, the "Agent").
RECITALS
--------
WHEREAS, the Borrower, the Parent, the Lenders and the Agent are party to
that certain Credit Agreement dated as of November 25, 1996 (as amended,
restated or modified from time to time, the "Existing Credit Agreement");
WHEREAS, the parties hereto have agreed to amend the Existing Credit
Agreement as set FORTH herein;
WHEREAS, the Agent and the Lenders have agreed to waive the covenants
contained in Section 7.1(a) as provided herein;
NOW, THEREFORE, in consideration of the agreements herein contained, the
parties hereby agree as follows:
PART I
DEFINITIONS
SUBPART 1.1. Certain Definitions. Unless otherwise defined herein or
the context otherwise requires, the following terms used in this Amendment No.
3, including its preamble and recitals, have the following meanings:
"Amended Credit Agreement" means the Existing Credit Agreement as
amended hereby.
"Amendment No. 3 Effective Date" is defined in Subpart 4.1.
SUBPART 1.2. Other Definitions. Unless otherwise defined herein or the
context otherwise requires, terms used in this Amendment No. 3, including its
preamble and recitals, have the meanings provided in the Amended Credit
Agreement.
<PAGE>
PART II
AMENDMENTS TO EXISTING CREDIT AGREEMENT
Effective on (and subject to the occurrence of) the Amendment No. 3
Effective Date, the Existing Credit Agreement is hereby amended in accordance
with this Part II. Except as so amended, the Existing Credit Agreement and all
other Credit Documents shall continue in full force and effect.
SUBPART 2.1. Amendments to Section 1.1.
(a) The pricing grid set forth in the definition of "Applicable
Percentage" in Section 1.1 of the Existing Credit Agreement is amended and
restated in its entirety to read as follows:
<TABLE>
<CAPTION>
=========================================================================================================================
APPLICABLE APPLICABLE APPLICABLE APPLICABLE
PERCENTAGE FOR PERCENTAGE FOR PERCENTAGE FOR PERCENTAGE FOR APPLICABLE
PRICING LEVERAGE EURODOLLAR BASE RATE STANDBY LETTER OF TRADE LETTER OF PERCENTAGE FOR
LEVEL RATIO LOANS LOANS CREDIT FEE CREDIT FEE COMMITMENT FEES
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
I Greater than or equal to
5.00 to 1.0 2.75% 1.75% 2.75% 1.375% 0.50%
- -------------------------------------------------------------------------------------------------------------------------
II Less than
5.00 to 1.0 but 2.50% 1.50% 2.50% 1.25% 0.50%
Greater than or equal to
4.00 to 1.0
- -------------------------------------------------------------------------------------------------------------------------
III Less than
4.00 to 1.0 but 2.25% 1.25% 2.25% 1.125% 0.50%
Greater than or equal to
3.75 to 1.0
- -------------------------------------------------------------------------------------------------------------------------
IV Less than
3.75 to 1.0 but 2.00% 1.00% 2.00% 1.00% 0.50%
Greater than or equal to
3.50 to 1.0
- -------------------------------------------------------------------------------------------------------------------------
V Less than
3.50 to 1.0 but 1.75% 0.75% 1.75% 0.875% 0.375%
Greater than or equal to
3.25 to 1.0
- -------------------------------------------------------------------------------------------------------------------------
VI Less than
3.25 to 1.0 1.50% 0.50% 1.50% 0.75% 0.375%
=========================================================================================================================
</TABLE>
(b) The definition of "Permitted Acquisition" appearing in Section 1.1 of
the Existing Credit Agreement is amended and restated in its entirety to
read as follows:
"Permitted Acquisitions" means an Acquisition by the Borrower or any
Subsidiary of the Borrower for the fair market value of the assets or
Capital Stock acquired in such transaction, provided that (i) the assets or
Capital Stock acquired in such Acquisition relate to a line of business
similar to the business of the Borrower or any of its Subsidiaries engaged
in on the Closing Date or any reasonable extensions or expansions thereof,
(ii) the liabilities (determined in accordance with GAAP and in any event
including contingent obligations) acquired by the Borrower and its
Subsidiaries on a consolidated basis in such Acquisition shall not in the
aggregate exceed 10% of the purchase price paid for the related assets or
Capital Stock, (iii) the Agent shall have received all items in respect of
the assets or Capital Stock acquired in such Acquisition (and/or the seller
thereof) required to be delivered by the terms of Section 7.9 and/or
Section 7.13, (iv) after giving effect to such Acquisition on a Pro Forma
Basis, the Credit Parties shall be in compliance with all of the
2
<PAGE>
covenants set forth in Section 7.12, (v) the representations and warranties
made by the Credit Parties in any Credit Document shall be true and correct
in all material respects at and as if made as of the date of such
Acquisition (after giving effect thereto) except to the extent such
representations and warranties expressly relate to an earlier date, (vi)
after giving effect to such Acquisition, the Revolving Committed Amount
shall be at least $10,000,000 greater than the sum of the Revolving Loans
outstanding plus LOC Obligations outstanding plus the Excess Payables,
(vii) if, at the time of such Acquisition, the Leverage Ratio exceeds 5.00
to 1.00, the approval of the Required Lenders has been obtained and (viii)
the aggregate cost (including cash and non-cash consideration) for all such
Acquisitions occurring after the Closing Date shall not exceed $20,000,000.
SUBPART 2.2. Amendment to Section 7.12. Sections 7.12 of the Existing
Credit Agreement is amended in its entirety to read as follows:
7.12 FINANCIAL COVENANTS.
--------------------
(a) Interest Coverage Ratio. The Interest Coverage Ratio, as of the
last day of each fiscal quarter, shall be greater than or equal to:
(i) for the period from the Closing Date to and including
December 27, 1997, 1.50 to 1.00;
(ii) for the period from December 28, 1997, to and including
March 28, 1998, 1.55 to 1.00;
(iii) for the period from March 29, 1998, to and including June
27, 1998, 1.35 to 1.00;
(iv) for the period from June 28, 1998, to and including
October 3, 1998, 1.45 to 1.00;
(v) for the period from October 4, 1998, to and including
January 2, 1999, 1.55 to 1.00;
(vi) for the period from January 3, 1999, to and including
April 3, 1999, 1.70 to 1.00;
(vii) for the period from April 4, 1999, to and including
October 2, 1999, 1.90 to 1.00;
(viii) for the period from October 3, 1999, to and including July
1, 2000, 2.00 to 1.00; and
(ix) for the period from July 2, 2000, and at all times
thereafter 2.25 to 1.00.
3
<PAGE>
(b) Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio, as
of the last day of each fiscal quarter, shall be greater than or equal to:
(i) for the period from the Closing Date to and including
March 29, 1997, 1.20 to 1.00;
(ii) for the period from March 30, 1997, to and including
September 27, 1997, 1.00 to 1.00;
(iii) for the period from September 28, 1997, to and including
December 27, 1997, 0.90 to 1.00;
(iv) for the period from December 28, 1997, to and including
March 28, 1998, 0.95 to 1.00;
(v) for the period from March 29, 1998, to and including
October 3, 1998, 0.80 to 1.00;
(vi) for the period from October 4, 1998, to and including
January 2, 1999, 0.85 to 1.00;
(vii) for the period from January 3, 1999, to and including
April 3, 1999, 0.90 to 1.00;
(viii) for the period from April 4, 1999, to and including July
2, 1999, 0.95 to 1.00;
(ix) for the period from July 3, 1999, to and including January
1, 2000, 1.00 to 1.00;
(x) for the period from January 2, 2000, to and including July
1, 2000, 1.05 to 1.00;
(xi) for the period from July 2, 2000, to and including
September 30, 2000, 1.10 to 1.00; and
(xii) for the period from October 1, 2000, and at all times
thereafter, 1.15 to 1.00.
(c) Leverage Ratio. The Leverage Ratio shall, at all times, be less
than or equal to:
(i) for the period from the Closing Date to and including June
28, 1997, 6.00 to 1.00;
4
<PAGE>
(ii) for the period from June 29, 1997, to and including
September 27, 1997, 6.50 to 1.00;
(iii) for the period from September 28, 1997, to and including
December 27, 1997, 6.25 to 1.00;
(iv) for the period from December 28, 1997, to and including
March 28, 1998, 6.10 to 1.00;
(v) for the period from March 29, 1998, to and including June
27, 1998, 6.80 to 1.00;
(vi) for the period from June 28, 1998, to and including
October 3, 1998, 6.20 to 1.00;
(vi) for the period from October 4, 1998, to and including
January 2, 1999, 5.50 to 1.00;
(vii) for the period from January 3, 1999, to and including
April 3, 1999, 5.15 to 1.00;
(viii) for the period from April 4, 1999, to and including
October 2, 1999, 4.50 to 1.00;
(ix) for the period from October 3, 1999, to and including
April 1, 2000, 4.25 to 1.00;
(x) for the period from April 2, 2000, to and including
September 30, 2000, 4.00 to 1.00; and
(xi) for the period from October 1, 2000, and at all times
thereafter 3.50 to 1.00.
(d) Consolidated Net Worth. Consolidated Net Worth, as of the last day
of each fiscal quarter, shall be greater than or equal to:
(i) for the period from December 28, 1997, to and including
March 28, 1998, $38,500,000;
(ii) for the period from March 29, 1998, to and including June
27, 1998, $36,000,000;
(iii) for the period from June 28, 1998, to and including
October 3, 1998, $37,500,000;
5
<PAGE>
(iv) for the period from October 4, 1998, to and including July
2, 1999, $38,000,000;
(v) for the period from July 3, 1999, to and including October
2, 1999, $39,000,000; and
(vi) for the period from October 3, 1999, and at all times
thereafter the sum of $39,000,000, increased on a cumulative basis as
of the end of each fiscal quarter of the Credit Parties, commencing
with the fiscal quarter ending January 2, 1999, by an amount
equal to 50% of Consolidated Net Income (to the extent positive) for
the fiscal quarter then ended.
PART III
WAIVER
The Agent and the Required Lenders agree to waive through May 31, 1998, the
requirement that the Borrower make a prepayment of the Loans in connection with
Excess Cash Flow for the fiscal year 1997 pursuant to Section 3.3(b)(ii) of the
Credit Agreement within 10 days after the date the audited financial statements
are required to be delivered pursuant to Section 7.1(a). This is a one-time
waiver and shall expire automatically and without further notice on May 31,
1998, at which time any such prepayment required to be made pursuant to Section
3.3(b)(ii) with respect to Excess Cash Flow for the fiscal year 1997 must be
made.
PART IV
CONDITIONS TO EFFECTIVENESS
SUBPART 4.1. Amendment No. 3 Effective Date. This Amendment No. 3 shall
be and become effective as of the date hereof (the "Amendment No. 3 Effective
Date") when all of the conditions set forth in this 4.1 shall have been
satisfied,and there after this Amendment No. 3 shall be known, and may be
referred to, as "Amendment No. 3".
SUBPART 4.1.1. Execution of Counterparts of Amendment. The Agent shall
have received executed counterparts (or other evidence of execution, including
facsimile signatures, satisfactory to the Agent) of this Amendment No. 3, which
collectively shall have been duly executed on behalf of each of the Borrower,
the Parent, the Required Lenders and the Agent.
SUBPART 4.1.2. Amendment Fee. Payment by the Borrower to the Agent, for
the pro rata benefit of each Lender (based on each Lender's Revolving Loan
Commitment Percentage of the Revolving Committed Amount), of an amendment fee
equal to $79,062.50.
SUBPART 4.1.3. Other Documents. The Agent shall have received such other
documents as the Agent, any Lender or counsel to the Agent may reasonably
request.
6
<PAGE>
PART V
MISCELLANEOUS
SUBPART 5.1. Cross-References. References in this Amendment No. 3 to any
Part or Subpart are, unless otherwise specified, to such Part or Subpart of this
Amendment No. 3.
SUBPART 5.2. Instrument Pursuant to Existing Credit Agreement. This
Amendment No. 3 is a Credit Document executed pursuant to the Existing Credit
Agreement and shall (unless otherwise expressly indicated therein) be construed,
administered and applied in accordance with the terms and provisions of the
Existing Credit Agreement.
SUBPART 5.3. References in Other Credit Documents. At such time as this
Amendment No. 3 shall become effective pursuant to the terms of Subpart 4.1, all
references in the Credit Documents to the "Credit Agreement" shall be deemed to
refer to the Amended Credit Agreement.
SUBPART 5.4. Representations and Warranties. Each Credit Party hereby
represents and warrants that (i) each Credit Party that is party to this
Amendment No. 3: (a) has the requisite corporate power and authority to execute,
deliver and perform this Amendment No. 3, as applicable and (b) is duly
authorized to, and has been authorized by all necessary corporate action, to
execute, deliver and perform this Amendment No. 3, (ii) the Borrower has no
claims, counterclaims, offsets, or defenses to the Credit Documents and the
performance of its obligations thereunder, or if the Borrower has any such
claims, counterclaims, offsets, or defenses to the Credit Documents or any
transaction related to the Credit Documents, the same are hereby waived,
relinquished and released in consideration of the Lenders' execution and
delivery of this Amendment No. 3, (iii) the representations and warranties
contained in Section 6 of the Existing Credit Agreement are, subject to the
limitations set forth therein, true and correct in all material respects on and
as of the date hereof as though made on and as of such date (except for those
which expressly relate to an earlier date) and (iv) no Default or Event of
Default exists under the Existing Credit Agreement on and as of the date hereof
or will occur as a result of the transactions contemplated hereby.
SUBPART 5.5. Liens. The Borrower and the Parent, as applicable, affirm
the liens and security interests created and granted in the Credit Documents and
agree that this Amendment No. 3 shall in no manner adversely effect or impair
such liens and security interest.
SUBPART 5.6. Acknowledgment of the Parent. The Parent acknowledges and
consents to all of the terms and conditions of this Amendment No. 3 and agrees
that this Amendment No. 3 and all documents executed in connection herewith do
not operate to reduce or discharge the Parent's obligations under the Amended
Credit Agreement or the other Credit Documents. The Parent further acknowledges
and agrees that the Parent has no claims, counterclaims, offsets, or defenses to
the Credit Documents and the performance of the Parent's obligations thereunder
or if the Parent did have any such claims, counterclaims, offsets or defenses to
the Credit Documents or any transaction related to the Credit Documents, the
same are hereby
7
<PAGE>
waived, relinquished and released in consideration of the Lenders' execution and
delivery of this Amendment No. 3.
SUBPART 5.7. No Other Changes. Except as expressly modified and amended
in this Amendment No. 3, all the terms, provisions and conditions of the Credit
Documents shall remain unchanged.
SUBPART 5.8. Counterparts. This Amendment No. 3 may be executed by the
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement.
SUBPART 5.9. Entirety. This Amendment No. 3, the Amended Credit Agreement
and the other Credit Documents embody the entire agreement between the parties
and supersede all prior agreements and understandings, if any, relating to the
subject matter hereof. These Credit Documents represent the final agreement
between the parties and may not be contradicted by evidence of prior,
contemporaneous or subsequent oral agreements of the parties.
SUBPART 5.10. Governing Law. THIS AMENDMENT NO.3 AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA.
SUBPART 5.11. Successors and Assigns. This Amendment No. 3 shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
[Remainder of page intentionally left blank.]
8
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<PAGE>
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<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-START> SEP-28-1997
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0
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