<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 JANUARY 2, 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 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 January
2, 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, JANUARY 2,
1998 1999
--------------------- --------------------
ASSETS (Audited) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,671 $ -
Accounts receivable, net 16,970 15,333
Inventory 15,880 17,622
Prepaid expenses and other 448 623
--------------------- --------------------
Total current assets 34,969 33,578
Property, plant and equipment:
Land 1,499 1,499
Buildings and leasehold improvements 38,174 38,344
Machinery and equipment 38,826 39,235
Land improvements and other 1,002 732
-------------------- -------------------
79,501 79,810
Accumulated depreciation (13,067) (15,528)
--------------------- --------------------
Net property, plant and equipment 66,434 64,282
Other assets:
Intangible assets 63,090 62,534
Organizational and deferred debt issuance costs 7,282 4,680
Other 28 28
--------------------- --------------------
Total assets $171,803 $165,102
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 13,381 $ 13,999
Current portion of long-term debt 8,500 13,052
--------------------- --------------------
Total current liabilities 21,881 27,051
Long-term debt, less current portion 139,350 86,100
Deferred income taxes - -
Investment and advances by Tyson - -
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) (10,541)
-------------------- -------------------
Total stockholders' equity 10,572 51,951
--------------------- --------------------
Total liabilities and stockholders' equity $171,803 $165,102
===================== ====================
</TABLE>
See accompanying notes to financial statements
2
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Three months Three months
ended ended
December 27, January 2,
1997 1999
(Unaudited) (Unaudited)
------------------- ------------------
<S> <C> <C>
Sales $50,986 $46,829
Costs of goods sold 40,923 38,729
--------------- ---------------
Gross profit 10,063 8,100
Operating expenses:
Selling, general and
administrative 6,378 6,735
Amortization 860 812
--------------- ---------------
Total operating expenses 7,238 7,547
--------------- ---------------
Operating income 2,825 553
Interest expense 4,199 3,820
Other (income) expense (8) 198
--------------- ---------------
Loss before taxes on income (1,366) (3,465)
Income tax expense - -
--------------- ---------------
Net (loss) before extraordinary item $(1,366) (3,465)
--------------- ---------------
Extraordinary item net of tax - 27,937
--------------- ---------------
Net income loss $(1,366) $24,472
=============== ===============
</TABLE>
See accompanying notes to financial statements
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED DECEMBER 27, ENDED
1997 JANUARY 2, 1999
(unaudited) (unaudited)
------------------------ -----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,366) $ 24,472
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Depreciation 2,209 2,459
Amortization 860 812
Amortization of deferred debt - 154
Allowance for bad debt 75 105
Extraordinary gain on early retirement of debt - (28,506)
Changes in assets and liabilities:
Decrease in accounts receivable 3,113 1,532
Increase in inventory (650) (1,742)
Increase in prepaid expenses and other (8) (174)
(Decrease) increase in accounts payable and
accrued expenses (7,947) 617
------------------- -------------------
Net cash used in operating
activities (3,714) (271)
Cash flows from investing activities:
Purchases of plant and equipment (1,083) (309)
Proceeds from sale of equipment - -
Other 124 -
------------------- -------------------
Net cash used in investing activities (959) (309)
Cash flows from financing activities:
Proceeds from revolving line of credit 6,000 -
Payments on revolving line of credit - (3,000)
Proceeds from long term debt (1,250) 4,052
Payments on long term debt - (18,656)
Capital contributions - 16,907
Debt issuance and organizational costs (77) (394)
Provided by
------------------- -------------------
Net cash provided by (used in) provided by financing
activities 4,673 (1,091)
------------------- -------------------
Net increase in cash and cash equivalents - (1,671)
Cash and cash equivalents at beginning of period - 1,671
------------------- -------------------
Cash and cash equivalents at end of period $ - $ -
=================== ===================
</TABLE>
See accompanying notes to financial statements
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
January 2, 1999
1. ORGANIZATION AND BASIS OF PRESENTATION
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.
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):
<TABLE>
<CAPTION>
October 3, December 27,
1998 1997
------------------- -------------------
<S> <C> <C>
Finished products $10,306 $11,232
Supplies 5,574 6,390
------------------- -------------------
Total $15,880 $17,622
=================== ===================
</TABLE>
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is
calculated primarily by the straight-line method over the estimated useful lives
of the assets, which range from 3 to 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.
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 October 3, 1998 and January 2, 1999, the
accumulated amortization was $7.3 million and $7.1 million, respectively.
During the quarter, the Company amended its credit agreement (the "Credit
Agreement") with NationsBank, N.A. (the "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.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Income Taxes
The Company follows the liability method of accounting for deferred income
taxes. The liability method provides that deferred tax liabilities are recorded
at currently enacted tax rates based on the difference between the tax basis of
assets and liabilities and their carrying amounts for financial reporting
purposes, referred to as temporary differences.
Selling Expenses
Selling expenses 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 $5.3
million for the period ending December 27, 1997 compared to $3.2 million for the
period ending January 2, 1999. Research and development expenses were $ 0.2
million for the period ended December 27, 1997 compared to $0.2 million for the
period ending January 2, 1998.
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. The Company incurred additional costs related to the exit from the
ground beef business and restructuring of the value added business in the first
quarter of fiscal 1999 totaling $0.2 million.
Extraordinary Item
Included in the extraordinary item of $27.9 million is $ 31.1 million in
income from the repurchase of the Notes, $1.7 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 Senior Credit Facility). See Notes 3 and 10.
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 an agreement
between the Union and Tyson Foods, Inc., which operated the Garland, Texas
facility prior to its acquisition by the Company in November 1996. The Company
was not obligated to operate the Garland, Texas facility pursuant to the terms
of such agreement. Management is currently negotiating a replacement collective
bargaining agreement with the Union, although there can be no assurance that it
will be successful in doing so.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
3. LONG TERM DEBT
Senior Debt
The Company's Credit Agreement provides the Company with a $19.8 million
revolving credit facility (the "Revolver") and a $40.0 million term loan
facility (the "Term Loan"). The Revolver includes a sub-facility of $7.0 million
for commercial and standby letters of credit. The Revolver has a term of four
years, and all amounts outstanding will become due and payable on November 30,
2000. The Term Loan also has a four year term and is subject to quarterly
principal payments in an aggregate amount of $8.5 million in fiscal 1999, $9.0
million in fiscal 2000, and $11.4 million in fiscal 2001.
As a result of its noncompliance with certain covenants under the Credit
Agreement, the Company was prohibited by the Bank from borrowing additional
amounts under the Revolver or making the December 1, 1998 interest payment (the
"Interest Payment") on the Notes. On October 29, 1998, the Company entered into
an amendment to the Credit Facility (the "Amendment") that replaces 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
implementation of new covenants under the Credit Facility may have the effect of
reducing the amount available under the Revolver depending on the levels of
accounts receivable and inventory at any given time. The Amendment became
effective on December 21, 1998, and at January 2, 1999, the Company was in
compliance with all covenants, terms and conditions of the Credit Facility. See
Note 10.
Outstanding borrowings under the Credit Agreement bear interest at floating
rates per annum equal to a base rate plus 1.50%. At January 2, 1999, the
interest rate for the Company based on this formula was 9.50%. The Company may
be required to make mandatory prepayments against both the Term Loan and the
Revolver, 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
January 2, 1999, the Company's outstanding borrowings under the Credit Agreement
were $43.1 million, comprised of $16.0 million under the Revolver and $27.1
million under the Term Loan. Also, at January 2, 1999, the Company had $0.8
million in outstanding letters of credit.
Under the Credit Agreement, the Company is subject to customary financial
and other covenants including certain financial limit and ratio covenants as
well as limitations on further indebtedness, guaranties, liens, dividends and
other restricted payments (including transactions with affiliates), prepayments
and redemption of debt, mergers, acquisitions, asset sales, consolidations, and
other investments. The Credit Agreement 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. The Company is also required under the Credit Agreement to pay the
Bank a quarterly fee equal to 0.25% of the outstanding finance commitment
beginning with the quarter ended April 2, 1999, and increasing to 0.5% of the
financing commitment in the next quarter and for each subsequent quarter.
Subordinated Debt
On November 25, 1996, the Company consummated a private placement of $100.0
million aggregate principal amount of 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. The Company's outstanding indebtedness under the Notes was
$100.0 million at October 3, 1998. On December 21, 1998, the Company retired
$48.0 million aggregate principal amount of Notes, through a combination of open
market purchases and a cash tender offer. As a result, the Company's
outstanding indebtedness under the Notes was $52.0 million at January 2, 1999.
See Note 10.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
3. LONG TERM DEBT CONTINUED
The Notes were issued pursuant to an indenture that 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 January 2,
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 as defined by the indenture.
The Company paid interest of $3.7 million for the fiscal first quarter
ended January 2, 1999 compared to $4.0 million for the fiscal first quarter
ended December 27, 1997.
4. COMMITMENTS
The Company leases certain properties and equipment for which the total
rentals thereon approximated $32,000 for the three month period ended December
27, 1997 and approximately $98,000 for the three month period ended January 2,
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 $133,102 for
the three-month period ended December 27, 1997 and $133,991 for the three-month
period ended January 2, 1999.
6. INCOME TAXES
The Company has not recorded an income tax benefit related to the net
deferred tax asset for the period ended January 2, 1999 because in the opinion
of management it is uncertain when the Company will be able to realize such
deferred tax asset.
7. SIGNIFICANT CUSTOMERS
Certain of the Predecessor's and the Company's products are sold to major
foodservice distributors for distribution to foodservice outlets. As a result,
the Company's top two customers accounted for approximately 28% of sales for the
three- month period ended January 2, 1999.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
8. TRANSACTIONS WITH AFFILIATES
The Company has entered into a consulting agreement with an affiliate of
the majority shareholder of GHC, 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.
The Bank, 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.
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 January 2, 1999 77,668 $100.00
=================================================
</TABLE>
10. RESTRUCTURING AND SUBSEQUENT EVENTS
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.
Additionally, the Company incurred additional charges in the fiscal first
quarter of 1999 related to the exit from the ground beef business and
restructuring of the value added business. Additional expenses will occur in
the second quarter as well, however; currently, the amount of these costs cannot
be accurately estimated.
<PAGE>
GORGES/QUIK-TO-FIX FOODS, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
10. RESTRUCTURING AND SUBSEQUENT EVENTS - CONTINUED
On October 29, 1998, the Company entered into the Amendment to the Credit
Agreement that replaces 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 implementation of new covenants under the Credit
Agreement may have the effect of reducing the amount available under the
Revolver depending on the levels of accounts receivable and inventory at any
given time. The Amendment also shortens the maturity of the Credit Facility
from November 2001 to November 2000. The change in maturity of the Credit
Facility does not affect the repayment schedule under the Credit Agreement,
except that all payments that previously were due between November 2000 and
November 2001 (an aggregate of $11.4 million) will be due on November 30, 2000.
Additionally, the Amendment provides that on March 31, 1999, the Company must
pay a fee under the Credit Facility equal to 0.25% of the amounts outstanding
under the Credit Facility and, thereafter, every three months, the Company must
pay a fee under the Credit Facility in cash equal to 0.50% of the amounts
outstanding under the Credit Facility until such time as the Company has secured
a replacement facility (the "Replacement Credit Facility") from another lender.
The Amendment became effective on December 21, 1998, at which time the Company
was in compliance with all terms and conditions of the 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 $48.0 million aggregate principal amount 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%. On December 15, 1999, if the Company has not
obtained the Replacement Credit Facility, the 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"). 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 Term
Loan.
<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 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.
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 Report.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 2, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 27,
1997
Overview
Discussion of the results of operations for the Company as they relate to
the first fiscal quarter, or the fiscal three month periods ended December 27,
1997, and January 2, 1999.
<TABLE>
<CAPTION>
Three months ended
December 27, 1997 January 2, 1999
------------------------------------------
<S> <C> <C>
Sales Dollars:
Value Added $38,832 $38,028
Ground Beef 12,154 8,801
------------------------------------------
Total $50,986 $46,829
Pounds:
Total Value Added 25,429 25,852
Ground Beef 14,254 12,187
------------------------------------------
Total 39,683 38,039
Dollars/Pound
Value Added $ 1.53 $ 1.47
Ground Beef 0.85 0.72
------------------------------------------
Total $ 1.28 $ 1.23
</TABLE>
Sales. Total sales decreased $4.2 million, or 2.1%, from $51.0 million in
the three months ended December 27, 1997 to $46.8 million in the three months
ended January 2, 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, partially offset by increased sales of co-packed, value added products
(products packed for other manufacturers under their label).
Sales of value added products decreased $0.8 million, or 2.1%, from $38.8
million in the three months ended December 27, 1997 to $38.0 million in the
three months ended January 2, 1999. This decrease reflects decreased national
account sales in the three months ended January 2, 1999, partially offset by
increases in sales of co-packed product sold to other manufacturers. The
national account business lost 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 decline
in beef prices in the three months ended January 2, 1999 resulted in lower
average selling prices in the three months ended January 2, 1999. Overall,
value added product sales volumes increased 0.4 million pounds, or 1.9%, from
25.4 million pounds in the three months ended December 27, 1997 to 25.9 million
pounds in the three months ended January 2, 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Sales of ground beef products decreased $3.4 million, or 27.9%, from $12.2
million in the three months ended December 27, 1997 to $8.8 million in the three
months ended January 2, 1999. This decrease is a direct result of the Company's
strategic decision made in the fourth quarter of fiscal 1998 to exit the ground
beef business. Sales of ground beef products decreased 2.1 million pounds, or
14.7%, from 14.3 million pounds in the three months ended December 27, 1997 to
12.2 million pounds in the three months ended January 2, 1999.
Gross Profit. Gross profit decreased $2.0 million, or 19.8%, from $10.1
million in the three months ended December 27, 1997 to $8.1 million in the three
months ended January 2, 1999. As a percentage of sales, gross profit decreased
from 19.7% in the three months ended December 27, 1997 to 17.2% in the three
months ended January 2, 1999. This decrease reflects operating inefficiencies
resulting from lower production levels, discounted sales of older or overstocked
products and the decrease in sales of national account value added product
offset with increased sales of lower margin co-packed products. This decrease
also reflects increased expenses relating to sales and promotional activities.
Operating Expenses. Operating expenses increased $0.3 million, or 4.2%,
from $7.2 million in the three months ended December 27, 1997 to $7.5 million in
the three months ended January 2, 1999. This increase is primarily the result of
the complete organization and staffing of the Company's corporate headquarters,
increased sales and promotional activity in the three months ended January 2,
1999, full staffing of the Company's research and development group, and a
higher level of product development activity.
Operating Income (loss). Operating income decreased $2.2 million, or 79%,
from $2.8 million in the three months ended December 27, 1997 to $0.6 million in
the three months ended January 2, 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 and, to a lesser extent, increased operating expenses.
Interest Expense. Interest expense decreased $0.4 million, or 7.1%, from
$4.2 million in the three months ended December 27, 1997 to $3.8 million in the
three months ended January 2, 1999. This decrease reflects the overall lower
debt level in the last two weeks of the fiscal quarter 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
fiscal 1998, increased to $0.2 million in fiscal 1999. The increase is a result
of the Restructuring.
Extraordinary Item. The extraordinary item is comprised of $31.1 million in
income from the repurchase of the Notes, $1.7 million in income from interest
forgiven on the repurchase of the Notes, $2.3 million of expenses related to the
repurchase of the Notes, $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 Senior Credit Facility).
Net Income (loss). Net income (loss) increased $25.8 million, or 105%,
from ($1.4) million in the three months ended December 27, 1997 to $24.5 million
in the three months ended January 2, 1999 as a result of the factors set forth
above.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Acquisition, the Company has significant annual
principal and interest obligations. Borrowings under the Credit Facility, which
totaled $43.1 million at January 2, 1999 ($27.1 million under the Term Loan and
$16.0 million under the Revolver), accrued interest at an average rate of 9.69%
in the quarter ended January 2, 1999. Borrowings under the Notes totaled $52.0
million at January 2, 1999, and accrued interest at 11.5%.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
As of January 2, 1999, the Company was in compliance with all technical,
financial and limit ratio covenants under the Credit Facility. However, as a
result of its noncompliance under the Credit Facility at the end of fiscal 1998,
the Company was prohibited by the Bank from borrowing additional amounts under
the Revolver or making the December 1, 1998 interest payment on the Notes. In
order to address the company's non-compliance under the Credit Facility and to
facilitate the Interest Payment, the Company has implemented or intends to
implement the following measures designed to address the Company's short-term
and long-term financing needs (the "Financial Restructuring"):
. Amendment to Credit Facility. On October 29, 1998, the Company
entered into an amendment to the Credit Facility that replaces 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
implementation of new covenants under the Credit Facility may have the
effect of reducing the amount available under the Revolver depending on the
levels of accounts receivable and inventory at any given time. The
Amendment also shortens the maturity of the Credit Facility from November
2001 to November 2000. The change in maturity of the Credit Facility does
not affect the repayment schedule under the Credit Facility, except that
all payments that previously were due between November 2000 and November
2001 (an aggregate of $11.4 million) will be due on November 30, 2000.
Additionally, the Amendment provides that on March 31, 1999, the Company
must pay a fee under the Credit Facility equal to 0.25% of the amounts
outstanding under the Credit Facility and, thereafter, every three months,
the Company must pay a fee under the Credit Facility in cash equal to 0.50%
of the amounts outstanding under the Credit Facility until such time as the
Company has secured a replacement facility from another lender. The
Amendment became effective on December 21, 1998, at which time the Company
was in compliance with all terms and conditions of the Credit Facility.
. Repurchase and Retirement of Notes. On October 29, 1998, the Company
announced a tender offer pursuant to which it offered to purchase not less
than $36,000,000 and up to $46,000,000 aggregate principal amount of its
Notes. 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 $29,970,000 aggregate principal
amount of Notes. Additionally, on December 21, 1998, the Company's
controlling stockholder, CGW, contributed to the Company $18,030,000
aggregate principal amount of Notes acquired by CGW through open market
purchases. The Tendered Notes and the CGW Notes were retired on December
21, 1998. The repurchase and retirement of the Tendered Notes and the CGW
Notes were financed through an equity investment by the shareholders in GHC
totaling $16,900,000.
. Bridge Loan. On December 21, 1998 the Company obtained from some of
its shareholders a $4,000,000 subordinated bridge loan, the proceeds of
which were used to fund the Interest Payment. The terms of the Bridge Loan
provide for a one-year loan to the Company at an interest rate of 9%. On
December 15, 1999, if the Company has not obtained a Replacement Credit
Facility, the Bridge Loan will automatically convert to equity in GHC.
. The Replacement Senior Facility. As a result of the increased fees
payable under the Credit Facility pursuant to the Amendment, the Company is
seeking a commitment from several alternative lenders with respect to the
Replacement Credit Facility. There can be no assurance that the Company
will successfully implement the Replacement Credit Facility or that if
obtained, such facility will have terms and conditions satisfactory to the
Company or that are more favorable than the Credit Facility.
As a result of the effectiveness of the Amendment, the retirement of the
Tendered Notes and the CGW Notes and the obtaining of the Bridge Loan, as of
December 21, 1998, the Company was in compliance with all terms and conditions
under the Credit Facility and the indenture pursuant to which the Notes were
issued. The Company believes that the Financial Restructuring will address its
short-term and long-term financing needs and will allow management to
concentrate on the completion of the Restructuring. There can be no assurance,
however, that the Restructuring or the Financial Restructuring will be
successful in improving the Company's financial condition and results of
operations. Factors that may affect the success of the Restructuring or the
Financial Restructuring include, among other things, the sale or closure of the
Ground Beef Facility, the implementation of the Replacement Credit Facility and
the matters set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors Affecting Future Performance" in
the Company's Annual Report on Form 10-K.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In addition to its debt service obligations, the Company will need
liquidity for working capital and capital expenditures. For the fiscal first
quarter ended January 2, 1999 and December 27, 1997, the Company spent $0.3
million and $1.1 million, respectively, on capital projects, primarily for
computer software and hardware, office furniture, fixtures and for the capital
maintenance of the Company's facilities.
The Company's primary sources of liquidity are cash flows from operations.
In the quarter ended January 2, 1999 the Company generated $3.8 million of
operating cash flow, the majority of which was used to fund interest payments
and restructuring expenses. This cash flow combined with changes in working
capital assets resulted in net cash used by operations of $0.3 million. The
Company used another $0.3 million in investing activities for capital asset
purchases. In financing activities, the Company raised $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 aggregate principal amount
of debt in the quarter, as a result of the above described transactions, wherein
the Company repurchased $48.0 aggregate principal amount million of its 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 years beginning after December 15, 1998. 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 January 2, 1999, organizational costs are approximately $2.8
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 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Fourth Amendment and Waiver, dated October 29, 1998, by and
among Gorges Holding Corporation, Gorges/Quik-to-Fix Foods, Inc.,
the lending institutions party thereto and NationsBank, N.A.,
successor by merger to NationsBank of Texas, N.A. (incorporated
by reference to the Company's Current Report on Form 8-K, dated
October 29, 1998).
(b) Reports on Form 8-K
1. Current Report on Form 8-K, dated October 22, 1998 (press release
announcing exit from ground beef business).
2. Current Report on Form 8-K, dated October 29, 1998 (press release
announcing tender offer).
3. Current Report on Form 8-K, dated November 13, 1998 (press
release announcing results of operations for fiscal year ended
October 2, 1998).
4. Current Report on Form 8-K, dated December 2, 1998 (press release
announcing extension of tender offer).
5. Current Report on Form 8-K, dated December 9, 1998 (press release
announcing completion of tender offer).
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 16, 1999 GORGES/QUIK-TO-FIX FOODS, INC.
By: /s/A. Scott Letier
----------------------------
A. Scott Letier
Vice President-Finance and Chief Financial
Officer (Principal Financial Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> OCT-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 15,333
<ALLOWANCES> 312
<INVENTORY> 17,622
<CURRENT-ASSETS> 33,578
<PP&E> 79,810
<DEPRECIATION> 15,528
<TOTAL-ASSETS> 165,102
<CURRENT-LIABILITIES> 27,051
<BONDS> 52,000
0
0
<COMMON> 0
<OTHER-SE> 62,492
<TOTAL-LIABILITY-AND-EQUITY> 165,102
<SALES> 46,829
<TOTAL-REVENUES> 46,829
<CGS> 38,729
<TOTAL-COSTS> 7,547
<OTHER-EXPENSES> 198
<LOSS-PROVISION> 105
<INTEREST-EXPENSE> 3,820
<INCOME-PRETAX> (3,465)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,465)
<DISCONTINUED> 0
<EXTRAORDINARY> 27,937
<CHANGES> 0
<NET-INCOME> 24,472
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
