<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 JUNE 27, 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
August 11, 1998 was 1,000. There is no public trading market for shares of the
registrant's Common Stock.
================================================================================
1
<PAGE>
Part I - Financial Information Item
Item 1. - Financial Statements
--------------------
GORGES/QUIK-TO-FIX FOODS, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 27, JUNE 27,
1997 1998
--------------------- -------------------
UNAUDITED
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net 21,960 13,352
Inventory 28,645 22,332
Prepaid expenses and other 78 705
--------------------- -------------------
Total current assets 50,683 36,389
Property, plant and equipment:
Land 1,499 1,499
Buildings and leasehold improvements 44,531 44,632
Machinery and equipment 44,517 48,703
Land improvements and other 3,144 1,599
--------------------- -------------------
93,691 96,433
Accumulated depreciation (7,358) (14,298)
--------------------- -------------------
Net property, plant and equipment 86,333 82,135
Other assets:
Intangible assets 65,389 63,648
Organizational and deferred debt issuance costs 8,767 7,704
Other 89 87
--------------------- -------------------
Total assets $ 211,261 $ 189,963
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 18,658 $ 9,354
Current portion of long-term debt 8,450 48,350
--------------------- -------------------
Total current liabilities 27,108 57,704
Long-term debt, less current portion 141,050 100,000
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) (13,326)
--------------------- -------------------
Total stockholders' equity 43,103 32,259
--------------------- -------------------
Total liabilities and stockholders' equity $ 211,261 $ 189,963
===================== ===================
</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 Thirty-one Proforma Nine months
ended ended eight weeks weeks ended nine months ended
ended ended
June 28, 1997 June 27, 1998 November June 28, June 28, June 27,
25, 1996 1997 1997 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $50,163 $44,034 $31,966 $115,840 $147,806 $144,593
Costs of goods sold 40,050 39,247 25,917 94,041 120,588 121,240
-----------------------------------------------------------------------------------------------------
Gross profit 10,113 4,787 6,049 21,799 27,218 23,353
Operating expenses:
Selling, general
and Administrative 5,412 6,781 4,153 12,745 16,954 19,101
Amortization 869 812 250 1,917 2,268 2,480
-----------------------------------------------------------------------------------------------------
Total operating
expenses 6,281 7,593 4,403 14,662 19,222 21,581
-----------------------------------------------------------------------------------------------------
Operating income (loss) 3,832 (2,806) 1,646 7,137 7,996 1,772
Interest expense 4,062 4,151 - 9,666 12,356 12,627
Other (income) expense (205) - - (205) (206) (12)
-----------------------------------------------------------------------------------------------------
Earnings before taxes
on income (25) (6,957) (1,646) (2,324) (4,154) (10,843)
Income tax expense - - 731 - - -
-----------------------------------------------------------------------------------------------------
Net income (loss) $ (25) $(6,957) $ 915 $ (2,324) $ (4,154) $(10,843)
=====================================================================================================
</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
------------------------- -----------------------------------
EIGHT WEEKS THIRTY-ONE NINE MONTHS
ENDED WEEKS ENDED ENDED
NOVEMBER 25, JUNE 28, 1997 JUNE 27,
1996 1998
-------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 915 $ (2,324) $(10,843)
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Depreciation 342 5,114 6,944
Amortization 250 1,917 2,480
Amortization of debt issuance costs - 395 664
Allowance for bad debt - 175 265
Deferred income taxes 26 - -
Loss on disposition of equipment - - -
Changes in assets and liabilities:
(In)Decrease in accounts receivable - (17,533) 8,343
(In)Decrease in inventory (571) 3,293 6,313
(In)Decrease in prepaid expenses and other - (57) (625)
In(De)crease in accounts payable - - (5,443)
In(De)crease in accrued expenses - 15,861 (3,862)
-------------------- -----------------------------------
Net cash provided by (used in) operating 962 6,841 4,236
activities
Cash flows from investing activities:
Purchases of plant and equipment (141) (2,652) (2,742)
Acquisition, net of cash received - (184,349) -
Proceeds from sale of equipment - 16 -
Other - 61 (87)
-------------------- -----------------------------------
Net cash provided by (used in) investing (141) (186,924) (2,829)
activities
Cash flows from financing activities:
Proceeds from note offering - 100,000 -
Capital contributions - 45,585 -
Proceeds from revolving line of credit - 13,000 15,000
Payments on revolving line of credit - (7,000) (11,000)
Proceeds from term loan - 40,000 -
Payments on term loan - (1,250) (5,150)
Debt issuance and organizational costs - (10,252) (257)
Decrease in Investment and advances by
Tyson (821) - -
-------------------- -----------------------------------
Net cash (used in) provided by financing (821) 180,083 1,407
activities
-------------------- -----------------------------------
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
4
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
June 27, 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.
5
<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, June 27,
1997 1998
------------------- -------------------
Finished products $17,655 $13,711
Supplies 10,990 8,621
------------------- -------------------
Total $28,645 $22,332
=================== ===================
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 June 27, 1998, the accumulated amortization was
$3.3 million and $6.4 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.
6
<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 $3.3
million and $9.5 million for the three month and nine month periods ending June
27, 1998, compared to $1.6 million and $4.5 million for the same periods ending
June 28, 1997. Research and Development expenses were $ 0.4 million and $0.8
million for the three month and the nine month periods ending June 27, 1998.
Expenses in the prior year periods, including some allocation from Tyson, was
nominal.
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.
7
<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. The Term
Loan also has a five year term and is subject to quarterly principal payments in
an aggregate amount of $3.5 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 8.37% and 8.30% for the three and nine
month periods ending June 27, 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 June 27, 1998, the Company's total outstanding
borrowings under the Credit Agreement were $48.4 million, $16 million under the
Revolver, $32.4 million under the Term Loan, and one outstanding letter of
credit in the amount of $0.66 million.
Under the Credit Agreement, the Company is subject to customary financial
and other covenants including certain technical or 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 is
currently not in compliance with certain technical or financial and limit ratio
covenants under the Credit Agreement. As a result of this noncompliance, amounts
outstanding under the Credit Agreement have been classified as current
liabilities. This classification is reflective of the fact that the lenders can,
without notice, demand payment of all amounts outstanding under the Credit
Agreement. The Company is in discussions with its senior lenders concerning an
amendment to its credit facility that it expects will address the Company's non-
compliance issues as well as its long term financing needs; however, there can
be no assurance that the Company will be successful in securing such an
amendment.
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 June 27, 1998.
8
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
The Notes were issued pursuant to an indenture, which contains certain
restrictive covenants and limitations. Among other things, the Indenture limits
the incurrence of additional indebtedness, limits the making of restricted
payments (as defined) including the declaration and/or payment of dividends,
places limitations on dividends and other payments by the Company, and places
limitations on liens, certain asset dispositions and merger/sale of assets
activity. The Company was in compliance with these covenants at June 27, 1998;
however, inability to amend the Credit Agreement could lead to an event of
default under the Indenture should the Bank exercise its right to accelerate
payments under the Credit Agreement or should the Company otherwise default in
payment of principal or interest under the Credit Agreement.
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 $12.6 million respectively for the three month and
nine month periods ending June 27, 1998.
4. COMMITMENTS
Tyson (for the Predecessor), and the Company leased certain properties and
equipment for which the total rentals thereon approximated $62,000 and $122,000
for the three and nine month periods ended June 28, 1997 and approximately
$32,000 and $96,000 for the three and nine month periods ended June 27, 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 $138,439
and $403,298 for the three and nine month period ending June 27, 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 June 27, 1998 because in the opinion of management it is uncertain
when the Company will be able to realize such deferred tax asset.
9
<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 27% and 26% of sales
for the three and nine-month periods ended June 27, 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 it's 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 nine month
periods ending June 28, 1997 combines the eight week period September 28, 1996
through November 25, 1996, when the Company was owned by the Predecessor, with
the thirty-one week period November 26, 1996 through June 28, 1997, providing a
full three month and nine month historical period to compare with current
periods.
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:
<TABLE>
<CAPTION>
Number of Shares Option Price per Share
-------------------------------------------------
<S> <C> <C>
Options granted 93,268 $100.00
Options exercised - -
Options cancelled 500 $100.00
-------------------------------------------------
Options outstanding June 27, 1998 92,768 $100.00
</TABLE>
10
<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.
11
<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 nine month periods ending June 28, 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 nine
month periods ended June 28, 1997. As a result of the Acquisition on November
25, 1996, the Pro-forma statement will not be comparable to prior periods.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 28, 1997 June 27, 1998 June 28, 1997 June 27, 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales Dollars:
Value Added $34,141 $30,292 $108,583 $105,874
Ground Beef 16,022 13,742 39,223 38,719
------- ------- -------- --------
Total $50,163 $44,034 $147,806 $144,593
Pounds:
Total
ValueAdded 20,244 18,489 68,042 66,953
Ground Beef 17,841 16,318 43,002 45,582
------- ------- -------- --------
Total 38,085 34,807 111,044 112,535
Dollars/Pound
Value Added $ 1.69 $ 1.64 $ 1.60 $ 1.58
Ground Beef 0.90 0.84 0.91 0.85
------- ------- -------- --------
Total $ 1.32 $ 1.27 $ 1.33 $ 1.28
</TABLE>
Sales decreased $3.2 million, or 2.2%, from $147.8 million in the nine
months ended June 28, 1997 to $144.6 million in the nine months ended June 27,
1998. This decrease reflects decreased sales of value-added products, partially
offset by increased sales volume of ground beef products. Ground beef sales
increased 2.6 million pounds, or 5.7%, from 43.0 million pounds in the nine
months ended June 28, 1997 to 45.6 million pounds in the nine months ended June
27, 1998. Value added product sales decreased 1.1 million pounds, or 1.6%, from
68.0 million pounds in the nine months ended June 28, 1997 to 66.9 million
pounds in the nine months ended June 27, 1998. The decrease in sales of value
added products is primarily the result of weakness in the Company's national
accounts segment. The Company added two national account representatives during
late fiscal 1997 and has initiated efforts to increase the Company's presence in
the national accounts segment
Sales decreased $6.2 million, or 12.4%, from $50.2 million in the three
months ended June 28, 1997 to $44.0 million in the three months ended June 27,
1998. Sales in pounds for the fiscal third quarter decreased 3.3 million pounds,
or 8.7%, from 38.1 million pounds in the three months ended June 28, 1997 to
34.8 million pounds in the three months ended June 27, 1998. This decrease is
primarily a result of reduced sales of ground beef products resulting from a
large wholesale club customer not renewing its contract with the Company, and to
a lesser extent, decreased sales of value added products. This customer
accounted for 3.4 million pounds and $3.6 million dollars in sales in the three
months ended June 28, 1997, and 6.5 million pounds and $6.8 million dollars in
the nine months ended June 28, 1997. Including this loss, ground beef sales
decreased 1.5 million pounds, or 8.4%, from 17.8 million pounds in the three
months ended June 28, 1997 to 16.3 million pounds in the three months ended June
27, 1998. Value added product sales decreased 1.8 million pounds, or 8.9%, from
20.2 million pounds in the three months ended June 28, 1997 to 18.5 million
pounds in the three months ended June 27, 1998.
Gross profit decreased $3.9 million, or 14.3%, from $27.2 million in the
nine months ended June 28, 1997 to $23.3 million in the nine months ended June
27, 1998. As a percentage of sales, gross profit decreased from 18.4% in the
nine months ended June 28, 1997 to 16.1% in the nine months ended June 27, 1998.
Gross profit decreased $5.3 million, or 52.5%, from $10.1 million in the three
months ended June 28, 1997 to $4.8 million in the three months ended June 27,
1998. As a percentage of sales, gross profit decreased from 20.2% in the three
months ended June 28, 1997 to 10.9% in the three months ended June 27, 1998.
These decreases are primarily a result of the impact of lower sales as
described above, on production efficiencies due to decreased production volume.
Additionally, implementation of a plan to reduce inventory, whereby the Company
has reduced levels of inventory $6.9 million, or 23.6%, since December 27, 1997,
and $4.1 million, or 15.5%, since March 28, 1998, has contributed significantly
to lowering production rates. Production volume decreased 3.1 million pounds or
2.8% in the nine months ended June 27, 1998 compared to the nine months ended
June 28, 1997. Production volume decreased 5.4 million pounds or 13.9% in the
three months ended June 27, 1998 compared to the three months ended June 28,
1997.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Operating expenses increased $2.4 million, or 12.5% from $19.2 million in
the nine months ended June 28, 1997 to $21.6 million in the nine months ended
June 27, 1998. Operating expenses increased $1.3 million, or 20.6% from $6.3
million in the three months ended June 28, 1997 to $7.6 million in the three
months ended June 27, 1998. These increases are primarily a result of the
complete organization and staffing of the Company's corporate headquarters
following the Acquisition, increased sales and promotional activity in 1998,
full staffing of the Company's research and development group, a significantly
higher level of product development activity and, to a lesser extent, increased
amortization.
Operating income decreased $6.2 million, or 77.5%, from $8.0 million in the
nine months ended June 28, 1997 to $1.8 million in the nine months ended June
27, 1998. Operating income (loss) decreased $6.6 million, or 173.7%, from $3.8
million in the three months ended June 28, 1997 to $(2.8) million in the three
months ended June 27, 1998. These decreases are primarily a result of the sales
mix changes resulting in increased volume in the lower margin ground beef
segment and decreased volume in the higher margin value added segment decreased
plant production volumes and efficiencies due to lower levels of sales, as well
as the Company's initiative to lower inventory levels.
Interest expense increased $0.2 million, or 1.6%, from $12.4 million in the
nine months ended June 28, 1997 to $12.6 million in the nine months ended June
27, 1998. Interest expense increased $0.1 million, or 2.4%, from $4.1 million in
the three months ended June 28, 1997 to $4.2 million in the three months ended
June 27, 1998. These increases are a result of increased outstanding balances on
the Company's line of credit, as well as an increase in interest rates.
Net income (loss) increased $6.7 million, or 159.5%, from $(4.2) million in
the nine months ended June 28, 1997 to $(10.8) million in the nine months ended
June 27, 1998. Net income (loss) increased $6.9 million, from $(.025) million in
the three months ended June 28, 1997 to $(7.0) million in the three months ended
June 27, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Acquisition, and the related financing (the Notes and
the Facilities), the Company has significant annual principal and interest
obligations. Borrowings under the Facilities which totaled $48.4 million at June
27, 1998 ($32.4 million under the Term Loan and $16 million under the Revolver)
accrued interest at an average rate of 8.37% and 8.30% in the three and nine
months ended June 27, 1998. Primarily as a result of lower than anticipated
sales growth in the nine months ended June 27, 1998, at June 27, 1998, the
Company was in noncompliance with certain technical or financial limit and ratio
financial covenants under the Credit Agreement. As a result of this
noncompliance, all amounts outstanding under the facilities have been classified
as current liabilities to reflect the fact that the Bank can, without notice,
demand payment of all amounts outstanding under the facilities. The Company is
currently in discussion with its senior lenders concerning an amendment to its
credit facility that it expects will address the Company's non-compliance issues
as well as its long term financing needs. However, there can be no assurance
that the Company will be successful in securing such an amendment, or that any
such amendment will be sufficient to address the Company's long-term financing
needs. Borrowings under the Notes totaled $100 million at June 27, 1998, and
accrue interest at a fixed rate of 11.5%.
The Notes were issued pursuant to an indenture, which contains certain
restrictive covenants and limitations. Among other things, the Indenture limits
the incurrence of additional indebtedness, limits the making of restricted
payments (as defined) including the declaration and/or payment of dividends,
places limitations on dividends and other payments by the Company, and places
limitations on liens, certain asset dispositions and merger/sale of assets
activity. The Company was in compliance with these covenants at June 27, 1998;
however, inability to amend the Credit Agreement could lead to an event of
default under the Indenture should the Bank exercise its right to accelerate
payments under the Credit Agreement or should the Company otherwise default in
payment of principal or interest under the Credit Agreement.
In addition to its debt service obligations, the Company needs liquidity
for working capital and capital expenditures. For the three and nine month
periods ended June 27, 1998, the Company spent $1.2 million and $2.6 million on
capital projects, including plant improvements and the continued development of
systems and the Company's 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.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 $14 million on its revolving line of credit at June 27,
1998, although access to this line has been restricted pending negotiation of an
amendment to the Credit Agreement with the lenders. In the nine months ended
June 27, 1998, net cash from financing activities of $(1.4) million and
operating activities of $4.2 million were used in connection with normal
investing activities of $ (2.8) 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 to be available
under the Revolver, although no assurances can be given as to reaching an
agreement with the lenders on an amendment to the Credit Agreement.
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.
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.
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 3. DEFAULTS UPON SENIOR SECURITIES
Primarily as a result of lower than anticipated sales growth in
the nine months ended June 27, 1998, at June 27, 1998, the
Company was in noncompliance with certain technical or financial
limit and ratio covenants under its Credit Agreement. As a result
of this noncompliance, all amounts outstanding under the Credit
Agreement have been classified as current liabilities, reflecting
the fact that the Bank can, without notice, demand payment of all
amounts outstanding under the Credit Agreement. The Company is
currently in discussions with its senior lenders concerning an
amendment to the Credit Agreement that it expects will address
the Company's noncompliance issues as well as its long term
financing needs. However, there can be no assurance that the
Company will be successful in securing such an amendment or that
any such amendment will be sufficient to address the Company's
long-term financing needs.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 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)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> JUN-27-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 13,477
<ALLOWANCES> (125)
<INVENTORY> 22,332
<CURRENT-ASSETS> 36,389
<PP&E> 1,499
<DEPRECIATION> 14,298
<TOTAL-ASSETS> 189,963
<CURRENT-LIABILITIES> 57,704
<BONDS> 100,000
0
0
<COMMON> 0
<OTHER-SE> 45,585
<TOTAL-LIABILITY-AND-EQUITY> 189,963
<SALES> 144,593
<TOTAL-REVENUES> 144,593
<CGS> 121,240
<TOTAL-COSTS> 21,581
<OTHER-EXPENSES> (12)
<LOSS-PROVISION> 265
<INTEREST-EXPENSE> 12,627
<INCOME-PRETAX> (10,843)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,843)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,843)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
