<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 July 3, 1999
------------
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
Jurisdiction of Incorporation Identification No.)
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
16, 1999 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>
October 3, July 3,
1998 1999
--------------------- --------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,671 $ 463
Accounts receivable, net 16,970 10,541
Inventory 15,880 18,009
Prepaid expenses and other 448 827
--------------------- --------------------
Total current assets 34,969 29,840
Property, plant and equipment:
Land 1,499 1,371
Buildings and leasehold improvements 38,174 35,146
Machinery and equipment 38,826 38,830
Land improvements and other 1,002 1,626
--------------------- --------------------
79,501 76,973
Accumulated depreciation (13,067) (18,636)
--------------------- --------------------
Net property, plant and equipment 66,434 58,337
Other assets:
Intangible assets 63,090 61,414
Organizational and deferred debt issuance costs 7,282 4,935
Other 28 28
--------------------- --------------------
Total assets $171,803 $154,554
===================== ====================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 13,381 $ 8,771
Current portion of long-term debt 8,500 7,260
--------------------- --------------------
Total current liabilities 21,881 16,031
Long-term debt, less current portion 139,350 92,194
Stockholders' equity:
Common stock, $.01 par value; 2,000 shares authorized,
1,000 shares issued and outstanding - -
Additional paid-in capital 45,585 62,492
Accumulated deficit (35,013) (16,163)
--------------------- --------------------
Total stockholders' equity 10,572 46,329
--------------------- --------------------
Total liabilities and stockholders' equity $171,803 $154,554
===================== ====================
</TABLE>
See accompanying notes to financial statements
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
June 27, July 3, June 27, July 3,
1998 1999 1998 1999
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $44,034 $31,367 $144,593 $115,187
Costs of goods sold 39,247 25,241 121,240 93,683
-----------------------------------------------------------
Gross profit 4,787 6,126 23,353 21,504
Operating expenses:
Selling, general and
administrative 6,781 5,525 19,101 18,622
Amortization 812 815 2,480 2,442
-----------------------------------------------------------
Total operating
expenses 7,593 6,340 21,581 21,064
-----------------------------------------------------------
Operating income (2,806) (214) 1,772 440
Interest expense 4,151 2,740 12,627 9,297
Other (income) expense (-) 52 (12) 0
-----------------------------------------------------------
Income (Loss) before taxes (6,957) (3,006) (10,843) (8,857)
Income tax expense - 27 - 36
-----------------------------------------------------------
Net (loss) before
extraordinary
item (6,957) (3,033) (10,843) (8,893)
-----------------------------------------------------------
Extraordinary item net of
tax - - - 27,743
-----------------------------------------------------------
Net income (loss) $(6,957) $(3,033) $(10,843) $ 18,850
===========================================================
</TABLE>
See accompanying notes to financial statements
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
June 27, July 3,
1998 1999
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (10,843) $ 18,850
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Depreciation 6,944 6,449
Amortization 2,480 2,442
Amortization of deferred debt 664 415
Allowance for bad debt 266 216
Gain on asset sale/restructuring - (352)
Write off of deferred debt - 2,759
Extraordinary gain on early retirement of debt - (31,093)
Changes in assets and liabilities:
Decrease in accounts receivable 8,343 6,211
(In)Decrease in inventory 6,312 (2,129)
Increase in prepaid expenses and other (625) (379)
Decrease in accounts payable and
accrued expenses (9,305) (4,609)
---------------- -----------------
Net cash provided (used) by operating activities 4,236 (1,220)
Cash flows from investing activities:
Purchases of plant and equipment (2,742) (1,997)
Proceeds from sale of facility - 4,000
Other (87) (13)
---------------- -----------------
Net cash provided by (used in) investing (2,829) 1,990
activities
Cash flows from financing activities:
Proceeds from revolving line of credit 15,000 58,807
Payments on revolving line of credit (11,000) (60,996)
Proceeds from long term debt - 33,052
Payments on long term debt (5,150) (48,229)
Capital contributions - 16,907
Debt issuance and organizational costs (257) (1,519)
---------------- -----------------
Net cash provided by (used in) financing
activities (1,407) (1,978)
---------------- -----------------
Net increase in cash and cash equivalents - (1,208)
Cash and cash equivalents at beginning of period - 1,671
---------------- -----------------
Cash and cash equivalents at end of period $ - $ 463
================ =================
</TABLE>
See accompanying notes to financial statements
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
July 3, 1999
(Unaudited)
1. Organization and Basis of Presentation
Gorges/Quik-to-Fix Foods, Inc., (the "Company"), is a Delaware corporation
and a wholly owned subsidiary of Gorges Holding Company ("GHC"). The Company is
a leading producer, marketer and distributor of value added processed fresh and
frozen beef, and to a lesser extent pork and poultry. The Company purchases
fresh and frozen beef, pork and poultry, which it processes into a broad range
of fully cooked and ready to cook products generally falling into one of two
categories, value added products and ground beef. Value added products include
but are not limited to: (i) breaded beef items such as country fried steak and
beef fingers; (ii) charbroiled beef items such as fully cooked hamburger
patties, fajita strips, meatballs, and meatloaf; and (iii) other specialty
products such as fully cooked and ready to cook pork sausage, breaded pork and
turkey, cubed steaks, and Philly steak slices. Ground beef product offerings
primarily consist of individually quick frozen hamburger patties. The Company's
products are primarily sold to the foodservice industry, which encompasses all
aspects of away-from-home food preparation, including restaurants, schools,
healthcare providers, corporations, and other commercial feeding operations.
The Company sells its products primarily through broadline and specialty
foodservice distributors throughout the U.S.
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. Quarterly financial information reflects all
necessary adjustments normal and recurring in nature, in the opinion of
management, to present such information in accordance with GAAP.
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):
October 3, July 3,
1998 1999
------------------- -------------------
Finished products $10,306 $12,514
Raw Materials and 5,574 5,495
Supplies
------------------- -------------------
Total $15,880 $18,009
=================== ===================
Property, Plant and Equipment
Property, plant and equipment are 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. 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.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
2. Summary of Significant Accounting Policies - Continued
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. Accumulated amortization was $9.1 million at
July 3, 1999. During the first quarter of 1999, the Company amended its credit
facility (the "Old Credit Facility") with NationsBank, N.A. (the "Old Bank") as
agent for a syndicate of banks and financial institutions, and as a result
wrote-off approximately $1.4 million of deferred debt issuance costs. See Notes
3 and 10.
Income Taxes
The Company follows the liability method of accounting for deferred income
taxes. The liability method provides that deferred tax liabilities are recorded
at currently enacted tax rates based on the difference between the tax basis of
assets and liabilities and their carrying amounts for financial reporting
purposes, referred to as temporary differences.
Selling Expenses
Selling expenses 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.
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 $2.5 million and $6.4 million for the same periods ending
July 3, 1999. Research and Development expenses were $0.4 million and $0.8
million for the three month and nine month periods ended June 27, 1998, compared
to $0.2 million and $0.6 million for the same periods ending July 3, 1999.
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.
Other (Income) Expense/Restructuring Expenses
On October 7, 1998, the Company announced its intent to exit the ground
beef business to concentrate on its core value added products. Certain expenses
were recorded in the fourth quarter of fiscal 1998 in conjunction with this
decision. The $13.9 million charge recorded in fiscal 1998 is comprised of: (i)
a $13.5 million charge to write down the value of certain assets used in the
ground beef business to the estimated net realizable value of these asset, and
(ii) a $0.4 million charge for severance and other expenses related to the exit
from the ground beef business and restructuring of the Company's value added
business. On February 1, 1999, the Company sold its Orange City, Iowa
manufacturing facility for $4 million in cash.
Extraordinary Item
Included in the extraordinary item of $27.8 million is $31.1 million in
income from the repurchase of the Notes, $1.6 million in income from interest
forgiven on the repurchase of Notes, $2.3 million of expenses related to the
repurchase of the Notes, $2.6 million of expenses related to the write off of
deferred debt fees (partially related to the repurchased Notes and partially
related to the restructuring of the Old Credit Facility). See Notes 3 and 10.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
2. Summary of Significant Accounting Policies - Continued
Collective Bargaining Agreements
The Company employs approximately 750 people. Currently, approximately 200
employees of a total of 250 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 Collective
Bargaining Agreement between the Company and the Union, which is effective
through September, 2000.
3. Long Term Debt
Senior Debt
On March 5, 1999, the Company repaid all amounts outstanding under the Old
Credit Facility and entered into a new credit facility with The CIT
Group/Business Credit, Inc. ("CIT") as agent for a syndicate of banks and
financial institutions (the "Replacement Credit Facility") which provides the
Company with a revolving credit facility (the "Revolver") and a $29.0 million
term loan facility (the "Term Loan"). The Revolver includes covenants under
which the Company can borrow funds based on the levels of its accounts
receivable and inventory in an aggregate amount of not more than $25.0 million.
The Revolver includes a sub-facility of $3.0 million for commercial and standby
letters of credit. The Revolver has a term of five years and all amounts
outstanding under the Revolver will become due and payable on April 1, 2004.
The Term Loan has a five year term and is subject to principal payments in an
annual amount of $1.0 million in the remainder of fiscal 1999, $3.9 in fiscal
2000, $4.3 million in each of fiscal 2001, 2002 and 2003 and $9.8 million in
fiscal 2004.
Outstanding borrowings under the Replacement Credit Facility bear interest
at floating rates per annum equal to the prime rate plus 1.625% for borrowings
under the Revolver and the prime rate plus 2.125% for borrowings under the Term
Loan. At July 3, 1999, the interest rate for the Company based on this formula
was 9.375% for borrowings under the Revolver and 9.875% for borrowings under the
Term Loan. The interest rates under the Replacement Credit Facility may vary
based on changes in the prime rate or the London Interbank Office Rate.
Additionally, the interest rates under the Replacement Credit Facility may vary
based on the Company's future financial performance. 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 Surplus Cash (as defined in the Replacement Credit Facility). 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 July 3, 1999, the
Company's outstanding borrowings under the Replacement Credit Facility were
$44.5 million, $16.9 million under the Revolver and $27.6 million under the Term
Loan. Also, at July 3, 1999, the Company had $0.2 million in outstanding
letters of credit.
Under the Replacement Credit Facility, 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. The Replacement Credit Facility
also provides that 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 secure indebtedness outstanding. As of July 3, 1999,
the Company was not in compliance with the covenants in the Replacement Credit
Facility relating to minimum net worth and fixed charge coverage ratio. On
August 12, 1999, CIT delivered to the Company a written waiver of this non-
compliance. As a result of such waiver, as of August 12, 1999, the Company was
in compliance with all technical, financial and limit ratio covenants under the
Replacement Credit Facility.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
3. Long Term Debt Continued
Subordinated Debt
On November 25, 1996, the Company consummated a private placement of $100.0
million aggregate principal amount 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 is 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 $95.0 million after underwriting
discounts and other debt issuance costs aggregating approximately $5.0 million.
On April 30, 1997, the Company consummated an exchange offer where by the
private placement Notes were replaced with similar Notes that are publicly
traded. In December 1998, the Company retired $48.0 million aggregate principal
amount of Notes, through a combination of open market purchases and a cash
tender offer. The Company's outstanding indebtedness under these Notes was
$52.0 million at July 3, 1999. (See Note 10).
The Notes were issued pursuant to an indenture that contains certain
restrictive covenants and limitations. Among other things, the Indenture limits
(but does not prohibit) the incurrence of additional indebtedness, limits the
making of restricted payments 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 July 3,
1999.
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.
The Company paid interest of $4.2 million and $12.6 million for the three
month and nine month periods ended June 27, 1998 compared to $2.7 million and
$9.3 million for the same periods ended July 3, 1999.
4. Commitments
The Company leases certain properties and equipment for which the total
rentals thereon approximated $32,000 and $96,000 for the three month and nine
month periods ended June 27, 1998, compared to approximately $46,000 and
$137,000 for the same periods ended July 3, 1999.
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 have been made by the
Company. Contributions to the defined contribution plans totaled $138,439 and
$403,298 for the three month and nine month periods ended June 27, 1998,
compared to $102,105 and $377,492 for the same periods ended July 3, 1999.
6. Income Taxes
The Company has not recorded an income tax benefit related to the net
deferred tax asset for the period ended July 3, 1999 because in the opinion of
management it is uncertain when the Company will be able to realize this
deferred tax asset.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
7. Significant Customers
Certain of the Company's products are sold to major foodservice
distributors for distribution to foodservice outlets. As a result, the
Company's top three customers accounted for approximately 31.4% of sales for the
three month period ended July 3, 1999.
8. Transactions with Affiliates
The Company has entered into a consulting agreement with an affiliate of
GHC's majority shareholder, CGW Southeast Partners III, L.P. ("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 the purchase of the Company from Tyson Foods, Inc.
9. 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 Weighted Average and
Option Price per Share
----------------------------------------------------------------
<S> <C> <C>
Options granted 84,968 $100.00
Options exercised - -
Options cancelled - -
----------------------------------------------------------------
Options outstanding September 27, 1997 84,968 $100.00
Options granted 8,543 $100.00
Options exercised - -
Options cancelled 15,843 $100.00
----------------------------------------------------------------
Options Outstanding July 3, 1999 77,668 $100.00
================================================================
</TABLE>
10. Restructuring
Prior to the end of fiscal 1998, the Company began a restructuring process
that encompassed two main actions: (i) exiting the raw ground beef business, and
the related closing or sale of the Orange City, Iowa, plant principally
responsible for this business line's production; and (ii) restructuring of its
balance sheet primarily through a debt restructuring plan and equity offering.
On October 7, 1998, the Company announced its intent to exit the ground
beef business to concentrate on its core value added products. Certain expenses
were recorded in fiscal 1998 in conjunction with this decision. The $13.9
million charge recorded in fiscal 1998 is comprised of: (i) a $13.5 million
charge to write down the value of certain assets used in the ground beef
business to the estimated net realizable value of these asset, and (ii) a $0.4
million charge for severance and other expenses related to the exit from the
ground beef business and restructuring of the Company's value added business.
The Company incurred additional charges in the fiscal first and second quarters
of 1999 related to the exit from the ground beef business and restructuring of
the value added business.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
10. Restructuring - Continued
On October 29, 1998, the Company entered into the Amendment to the Old
Credit Facility that replaced the existing covenants with a new set of covenants
under which the Company can borrow funds based on the levels of its accounts
receivable and inventory. The Amendment became effective on December 21, 1998,
at which time the Company was in compliance with all terms and conditions of the
Old Credit Facility.
On October 29, 1998, the Company announced a tender offer pursuant to
which it offered to purchase not less than $36.0 million (the "Minimum Tender
Condition") and up to $46.0 million aggregate principal amount of its Notes (the
"Offer"). On December 2, 1998, the Company elected to waive all conditions to
the consummation of the Offer, including the Minimum Tender Condition, and
consummated the Offer with respect to $30.0 million aggregate principal amount
of Notes (the "Tendered Notes"). Additionally, on December 21, 1998, CGW
contributed to the Company $18.0 million aggregate principal amount of Notes
(the "CGW Notes") acquired by CGW through open market purchases. The Tendered
Notes and the CGW Notes were retired on December 21, 1998. As a result of the
retirement of the $48 million of Tendered Notes, the Company recorded $28.6
million in income net of related transaction expenses and the write off of
deferred debt fees. The repurchase and retirement of the Tendered Notes and the
CGW Notes was financed through an equity investment by the shareholders in GHC
totaling $16.9 million.
On December 21, 1998 the Company, through GHC, obtained from certain
shareholders a $4.0 million subordinated bridge loan (the "Bridge Loan"), the
proceeds of which were used to fund the December 1, 1998 interest payment on the
Notes. The terms of the Bridge Loan provide for a one year loan to the Company
at an interest rate of 9%. Unless earlier repaid, on December 15, 1999, the
remaining principal and interest outstanding under Bridge Loan will
automatically convert to equity in GHC.
On February 1, 1999, the Company sold its Orange City, Iowa manufacturing
facility (the "Ground Beef Facility") for $4.0 million in cash. Historically,
the Ground Beef Facility has produced almost exclusively ground beef product
offerings, representing 100% of the Company's total ground beef production. The
proceeds from the sale of this facility were used to reduce the outstanding
indebtedness under the Old Credit Facility.
On March 5, 1999, the Company entered into the Replacement Credit Facility
and, using the proceeds from the Replacement Credit Facility, repaid all amounts
outstanding under the Old Credit Facility. Additionally, on March 5, 1999, the
Company repaid approximately $1.0 million of the principal and interest
outstanding under the Bridge Loan using proceeds from the Replacement Credit
Facility.
<PAGE>
Part 1 Financial Information
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements subject to the
safe harbor created by the Private Securities Litigation Reform Act of 1995. The
words "may," "would," "could," "will," "expect," "estimate," "anticipate,"
"believe," "intends," "plans" and similar expressions and variations thereof are
intended to identify forward-looking statements. We caution that these
statements represent projections and estimates of future performance and involve
certain risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors including, without limitation, the factors set forth in the "Future
Operating Results; Forward Looking Statements" in this section and other risk
factors that are contained in documents that we file with the U.S. Securities
and Exchange Commission.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 filings with the Commission.
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 1999" and "fiscal 1998"
refer to the twelve month periods ended October 2, 1999 and October 3, 1998,
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. The
Company operates three manufacturing facilities which are dedicated to value
added 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. (the
"Acquisition" and "Tyson", 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
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 27, 1998 July 3, 1999 June 27, 1998 July 3, 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales Dollars:
Value Added $30,292 $30,270 $105,874 $103,442
Ground Beef 13,742 1,097 38,719 11,745
------------------------------------------------------------------------------------
Total $44,034 $31,367 $144,593 $115,187
Pounds:
Total Value Added 18,489 17,300 66,953 63,747
Ground Beef 16,318 1,037 45,582 14,242
------------------------------------------------------------------------------------
Total 34,807 18,337 112,535 77,989
Dollars/Pound
Value Added $ 1.64 $ 1.75 $ 1.58 $ 1.62
Ground Beef 0.84 1.06 0.85 0.82
------------------------------------------------------------------------------------
Total $ 1.27 $ 1.71 $ 1.28 $ 1.48
</TABLE>
Sales. Total sales decreased $12.7 million, or 28.8%, from $44.0 million
in the three month period ended June 27, 1998 to $31.4 million in the three
month period ended July 3, 1999. This decrease was primarily due to decreases in
the sales of ground beef as a result of exiting the ground beef business.
Total sales decreased $29.4 million, or 20.3%, from $144.6 in the nine
month period ended June 27, 1998 to $115.2 million in the nine month period
ended July 3, 1999. This decrease was primarily due to decreases in the sales
of ground beef and the sales to national account customers of value added
products.
Sales of value added products remained comparable at $30.3 million in both
the three month period ended June 27, 1998 to and the three month period ended
July 3, 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Sales of value added products decreased $2.5 million, or 2.3%, from $105.9
million in the nine month period ended June 27, 1998 to $103.4 million in the
nine month period ended July 3, 1999. This decrease reflects decreased sales to
national account customers, partially offset by increases in sales of co-packed
product sold to other manufacturers. The national account business carried a
high average sale price, and the co-pack volume replacing it is primarily on a
fee for service/toll conversion cost basis. The result of the sales mix change,
coupled with the continued fall in beef prices in fiscal 1999 resulted in lower
average selling prices in fiscal 1999.
Sales of ground beef products decreased $12.6 million, or 92.0%, from $13.7
million in the three month period ended June 27, 1998 to $1.1 million in the
three month period ended July 3, 1999. This decrease is a direct result of the
Company's strategic decision made in the fourth quarter of 1998 to exit the
ground beef business. Ground beef product sales decreased 15.3 million pounds,
or 93.7%, from 16.3 million pounds in the three month period ended June 27, 1998
compared to 1.0 million pounds in the three month period ended July 3, 1999.
Sales of ground beef products decreased $27.0 million, or 70.0%, from $38.7
million in the nine month period ended June 27, 1998 to $11.8 million in the
nine month period ended July 3, 1999. This decrease is a direct result of the
Company's strategic decision made in the fourth quarter of 1998 to exit the
ground beef business. Ground beef product sales decreased 31.3 million pounds,
or 69.0%, from 45.6 million pounds in the nine month period ended June 27, 1998
compared to 14.2 million pounds in nine month period ended July 3, 1999.
Gross Profit. Gross profit increased $1.3 million, or 28.0%, from $4.8
million in the three month period ended June 27, 1998 compared to $6.1 million
in the three month period ended July 3, 1999. As a percentage of sales, gross
profit increased from 10.9% in the three month period ended June 27, 1998 to
19.5% in the three month period ended July 3, 1999. This increase in gross
profit dollars and gross profit as a percent of sales reflect the Company's
decision to exit the ground beef business.
Gross profit decreased $1.8 million, or 7.9%, from $23.4 million in the
nine month period ended June 27, 1998 to $21.5 million in the nine month period
ended July 3, 1999. As a percentage of sales, gross profit increased from 16.2%
in the nine month period ended June 27, 1998 to 18.7% in the nine month period
ended July 3, 1999. This increase in gross profit dollars and gross profit as
a percent of sales reflect the Company's decision to exit the ground beef
business.
Operating Expenses. Operating expenses decreased $1.3 million, or 16.5%,
from $7.6 million in the three month period ended June 27, 1998 to $6.3 million
in the six month period ended July 3, 1999. This decrease is primarily the
result of the Company's decision to exit the ground beef business.
Operating expenses decreased $0.5 million, or 2.4%, from $21.6 million in
the nine month period ended June 27, 1998 to $21.1 million in the nine month
period ended July 3, 1999. This decrease is primarily the result of the
Company's decision to exit the ground beef business.
Operating Income. Operating income increased $2.6 million, or 92.3%, from
$(2.8) million in the three month period ended June 27, 1998 to $(0.2) million
in the three month period ended July 3, 1999. This increase is primarily the
result of the company's decision to exit the ground beef business.
Operating income decreased $1.3 million, or 75.2%, from $1.8 million in the
nine month period ended June 27, 1998 to $0.4 million in the nine month period
ended July 3, 1999. This decrease is primarily the result of decreases in gross
profit due to sales mix changes described above and the resulting decline in
gross margin, which includes discounted sales of older or overstocked products.
Interest Expense. Interest expense decreased $1.4 million, or 34.0%, from
$4.2 million in the three month period ended June 27, 1998 to $2.7 million in
the three month period ended July 3, 1999. This decrease reflects the overall
lower debt level due to the repurchase and retirement of $48.0 aggregate
principal amount of million of Notes.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Interest expense decreased $3.3 million, or 26.4%, from $12.6 million in
the nine month period ended June 27, 1998 to $9.3 million in the nine month
period ended July 3, 1999. This decrease reflects the overall lower debt level
due to the repurchase and retirement of $48.0 million aggregate principal amount
of Notes.
Other (Income) Expense. Other income and expense, which was minimal in the
three month period ended June 27, 1998, remained minimal in the three month
period ended July 3, 1999.
Other income and expense, which was minimal in the nine month period ended
June 27, 1998, remained minimal in the nine month period ended July 3, 1999.
Extraordinary Item. The extraordinary item is comprised of $31.1 million
in income from the repurchase and early retirement of $48.0 million aggregate
principal amount of Notes, $1.6 million in income from interest forgiven on the
repurchase of the Notes, $2.3 million of expenses related to the repurchase of
the Notes, and $2.6 million of expense related to the write off of deferred debt
fees (partially related to the repurchasing of the Notes and partially related
to the restructuring of the Old Credit Facility).
Net Income (loss). Net income (loss) increased $3.9 million, or 56.4%,
from ($7.0) million in the three month period ended June 27, 1998 to $(3.0)
million in the three month period ended July 3, 1999.
Net income (loss) increased $29.7 million, or 273.8%, from ($10.8) million
in the nine month period ended June 27, 1998 to $18.9 million in the nine month
period ended July 3, 1999.
Liquidity and Capital Resources
On March 5, 1999, the Company entered into a credit agreement with The CIT
Group/Business Credit, Inc. ("CIT") as agent for a syndicate of banks and
financial institutions (the "Replacement Credit Facility") which provides the
Company with a revolving credit facility (the "Revolver") and a $29.0 million
term loan facility (the "Term Loan"). The Revolver includes covenants under
which the Company can borrow funds based on the levels of its accounts
receivable and inventory in an aggregate amount of not more than $25.0 million.
The Revolver includes a sub-facility of $3.0 million for commercial and standby
letters of credit. The Revolver has a term of five years and all amounts
outstanding under the Revolver will become due and payable on April 1, 2004.
The Term Loan has a five year term and is subject to principal payments in an
annual amount of $2.5 million in fiscal 1999, $4.0 million fiscal 2000, $4.3
million in each of fiscal 2001, 2002 and 2003 and $9.8 million in fiscal 2004.
Outstanding borrowings under the Replacement Credit Facility bear interest
at floating rates per annum equal to the prime rate plus 1.625% for borrowings
under the Revolver and the prime rate plus 2.125% for borrowings under the Term
Loan. At July 3, 1999, the interest rate for the Company based on this formula
was 9.375% for borrowings under the Revolver and 9.875% for borrowings under the
Term Loan. The interest rates under the Replacement Credit Facility may vary
based on changes in the prime rate or the London Interbank Office Rate.
Additionally, the interest rates under the Replacement Credit Facility may vary
based on the Company's future financial performance. 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 Surplus Cash (as defined in the Replacement Credit Facility). 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 July 3, 1999, the
Company's outstanding borrowings under the Replacement Credit Facility were
$44.5 million, $16.9 million on the Revolver and $27.6 million on the Term Loan.
Also, at July 3, 1999, the Company had $0.2 million in outstanding letters of
credit.
Under the Replacement Credit Facility, 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. The Replacement Credit Facility
also provides that 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 secure indebtedness outstanding.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
As of July 3, 1999, the Company was not in compliance with the covenants in
the Replacement Credit Facility relating to minimum net worth and fixed charge
coverage ratio. On August 13, 1999, CIT delivered to the Company a written
waiver of this non-compliance. As a result of such waiver, as of August 13,
1999, the Company was in compliance with all technical, financial and limit
ratio covenants under the Replacement Credit Facility.
The Company has significant annual principal and interest obligations.
Borrowings under the Replacement Credit Facility, which totaled $44.5 million at
July 3, 1999 ($27.6 million under the Term Loan and $16.9 million under the
Revolver), accrued interest at a rate of 9.875% and 9.375% respectively, in the
quarter ended July 3, 1999. Borrowings under the Notes totaled $52.0 million at
July 3, 1999, and accrued interest at 11.5%.
In addition to its debt service obligations, the Company will need
liquidity for working capital and capital expenditures. Capital expenditures,
primarily for the Harlingen, Texas facility, in relation to acquisition of
functions moved after the sale of the Orange City, Iowa facility, as well as for
computer software and hardware, office furniture, fixtures, and for the capital
maintenance of the Company facilities, were $ 1.2 million and $ 2.6 million for
the three month and nine month periods ended June 27, 1998, compared to $ 0.5
million and $ 2.0 million for the three month and nine month periods ended July
3, 1999.
The Company's primary sources of liquidity are cash flows from operations.
This cash flow combined with changes in working capital assets resulted in a net
cash used by operations of $1.2 million. The Company provided $2.5 million in
investing activities produced from proceeds from the sale of the Orange City,
Iowa facility, partially offset by capital purchases. In financing activities,
the Company used $16.9 million in capital contributions and $4.0 million by
obtaining the Bridge Loan. The Company used the $20.9 million generated to
retire $49.75 million of debt in the first quarter, as a result of the above
described transactions, wherein the Company repurchased $48.0 million aggregate
principal amount of Notes at a substantial discount. The Company anticipates
that its working capital requirements, capital expenditures, and scheduled
repayments for fiscal 1999 will be satisfied through a combination of cash flows
generated from operations together with funds available under the Revolving
Credit Facility.
Effects of Inflation
Inflation has not had a significant effect on the Company's operations.
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. Management currently believes
that over longer periods of time, it generally will be able to pass on 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. The majority of the Company's hardware and software was purchased
and implemented in the past two years and has been represented to the Company as
Year 2000 compliant by the respective vendors.
Major risks to the Company from Year 2000 issues would primarily be in the
areas of performance by either vendors or customers. The Company could be
significantly impacted if the Company's vendors are unable to deliver goods and
services needed, or the Company's customers were unable to carry out their
respective businesses, or were unable to place an order with the Company due to
system failures. The Company's remaining plans related to Year 2000 issues
involve a continued effort to poll and monitor vendors and customers through
questionnaires and profiles to be gathered in the purchasing and sales
processes.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Recent Accounting Pronouncements
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed for Internal Use and SOP 98-5, Reporting on the Costs of Start Up
Activities are effective for the Company beginning in it's fiscal year 2000.
The Company does not anticipate that SOP 98-1 will have a significant effect on
the Company's financial position, results of operations or cash flows. With the
adoption of SOP 98-5 the Company will have to write off existing organizational
costs. As of July 3, 1999, organizational costs are approximately $2.3 million.
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 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Financing Agreement, dated March 5, 1999, by and among The CIT
Group/Business Credit, Inc. (as Agent and a Lender), the Lenders and
Gorges/Quik-to-Fix Foods, Inc.
(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: August 16, 1999 GORGES/QUIK-TO-FIX FOODS, INC.
By: /s/Shelley Arnette
---------------------------
Shelley Arnette
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> OCT-04-1998
<PERIOD-END> JUL-03-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 10,541
<ALLOWANCES> (424)
<INVENTORY> 18,009
<CURRENT-ASSETS> 29,840
<PP&E> 58,337
<DEPRECIATION> 18,636
<TOTAL-ASSETS> 154,554
<CURRENT-LIABILITIES> 16,031
<BONDS> 52,000
0
0
<COMMON> 0
<OTHER-SE> 62,492
<TOTAL-LIABILITY-AND-EQUITY> 154,554
<SALES> 115,187
<TOTAL-REVENUES> 115,187
<CGS> 93,683
<TOTAL-COSTS> 21,064
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,297
<INCOME-PRETAX> (8,857)
<INCOME-TAX> 36
<INCOME-CONTINUING> (8,893)
<DISCONTINUED> 0
<EXTRAORDINARY> 27,743
<CHANGES> 0
<NET-INCOME> 18,850
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
