<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q/A
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1997
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 0-23024
BROTHERS GOURMET COFFEES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1681708
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2255 GLADES ROAD
SUITE 100E
BOCA RATON, FL 33431
(Address of principal executive offices)
(Zip code)
(561) 995-2600
(Registrant's telephone number, including area code)
Indicate by check mark 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 [ ]
As of May 9, 1997 the Registrant had (1) 10,362,605 shares of Common Stock, par
value $.0001 per share, and (2) 839,332 shares of Class B Common Stock, par
value $.0001 per share.
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INTRODUCTION
The purposes of this filing are (1) to correct certain information
regarding the change in the status of certain indebtedness of Brothers Gourmet
Coffees, Inc. (the "Company") from long-term debt to current maturities of long-
term debt as shown on the Company's Condensed Consolidated Balance Sheets for
the fiscal quarter ended March 28, 1997 (Unaudited), as presented in "Item 1.
Financial Statements" and "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and (2) update the disclosure in
the Form 10-Q for the fiscal quarter ended March 28, 1997, regarding the
financial covenant defaults under the Company's Debt Facilities.
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BROTHERS GOURMET COFFEES, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets--March 28, 1997 and
December 27, 1996 . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations--Three
months ended March 28, 1997 and March 29, 1996. . . . . . . . 2
Condensed Consolidated Statements of Cash Flows--Three
months ended March 28, 1997 and March 29, 1996. . . . . . . . 3
Notes to Condensed Consolidated Financial Statements--
March 28, 1997. . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations. . . . . . . 10
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
i
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BROTHERS GOURMET COFFEES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 28, December 27,
1997 1996
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash $ -- $ --
Trade receivables, net 10,811 15,717
Receivable from the sale of
discontinued retail operations 3,695 3,795
Inventories 13,646 13,924
Prepaid promotional expenses 986 776
Prepaid expenses and other current assets 1,454 1,225
--------- ------------
Total current assets 30,592 35,437
Plant and equipment, net 15,403 14,814
Other assets:
Excess of cost over net assets acquired, net 52,100 52,470
Noncompete agreements, net 898 1,197
Noncurrent promotional expenses 4,134 2,918
Debt acquisition costs 1,617 1,689
Other assets 796 778
--------- ------------
$ 105,540 $ 109,303
--------- ------------
--------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 14,594 $ 1,648
Accounts payable 3,295 8,247
Accrued expenses 6,014 6,498
Accrued litigation settlement 5,500 5,500
Accrued losses and other costs of
discontinued retail operations 4,075 1,781
Accrued restructuring costs 182 373
--------- ------------
Total current liabilities 33,660 24,047
Long-term debt, less current liabilities 11,929 20,137
Minority interest 81 89
Stockholders' equity:
Preferred Stock--10,000,000 shares authorized:
$1.00 par value; -0- shares issued and
outstanding at March 28, 1997
and December 27, 1996 -- --
Common Stock -- 15,000,000 shares authorized:
$.0001 par value; 11,400,105 shares issued and
outstanding at March 28, 1997 and December 27,
1996 1 1
Common Stock Class B -- 2,000,000 shares
authorized: $.0001 par value; 839,332 shares
issued and outstanding at March 28, 1997 and
December 27, 1996 -- --
Additional paid-in capital 145,992 145,992
Accumulated deficit in earnings (85,873) (80,713)
Treasury stock (37,500 shares, at cost) (250) (250)
--------- ------------
Total stockholders' equity 59,870 65,030
--------- ------------
$105,540 $109,303
--------- ------------
--------- ------------
See accompanying notes to condensed consolidated financial statements.
1
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BROTHERS GOURMET COFFEES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three-months Three-months
Ended March 28, Ended March 29,
1997 1996
--------------- -------------
Net sales $16,808 $19,109
Cost of goods sold 9,247 10,007
--------------- -------------
Gross profit 7,561 9,102
Operating expenses:
Distribution, selling and marketing 7,069 6,514
Administrative 1,325 1,558
Amortization of intangibles 669 775
Restructuring -- 97
--------------- -------------
Income (loss) from operations (1,502) 158
Other expenses (income):
Interest expense, net 943 579
Other income 15 (9)
--------------- -------------
Loss before discontinued retail operations (2,460) (412)
Loss on disposal of discontinued retail
operations (2,700) --
--------------- -------------
Net loss $ (5,160) $ (412)
--------------- -------------
--------------- -------------
Loss per common share:
Loss per common share from continuing
operations $ (0.22) $ (0.04)
Loss per common share from discontinued
retail operations $ (0.24) $ --
--------------- -------------
Net loss per common share $ (0.46) $ (0.04)
--------------- -------------
--------------- -------------
Weighted average common
shares outstanding 11,202 11,202
--------------- -------------
--------------- -------------
See accompanying notes to condensed consolidated financial statements.
2
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BROTHERS GOURMET COFFEES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
Three-months Three-months
Ended March 29, Ended March 29,
1996 1996
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,160) $ (412)
Adjustments to reconcile net income to cash
provided by operating activities:
Discontinued retail operations 2,700 --
Depreciation and amortization 3,157 3,501
Current and noncurrent promotional expenses (2,499) (2,294)
Changes in operating assets and liabilities:
Current assets 4,955 4,255
Current liabilities (5,627) 1,729
Other noncurrent assets (26) (106)
-------- --------
Net cash (used in) provided by operating activities:
Continuing operations (2,500) 6,673
Discontinued retail operations (406) (1,760)
-------- --------
(2,906) 4,913
Cash flows from investing activities:
Purchases of property, plant and equipment, net (1,769) (420)
Proceeds from sale of discontinued retail operations 100 3,183
-------- --------
Net cash (used in) provided by investing activities (1,669) 2,763
Cash flows from financing activities:
Net borrowings and repayments under
revolving line of credit 5,010 (7,676)
Payment of term loan (375) --
Payments under capital lease (37) --
Debt issuance costs (23) --
-------- --------
Net cash provided by (used in) financing activities 4,575 (7,676)
-------- --------
Change in cash -- --
Cash at the beginning of the period -- --
-------- --------
Cash at the end of the period $ -- $ --
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997
(IN THOUSANDS)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q pursuant to the
Securities Exchange Act of 1934, as amended, and Article 10 of Regulation S-X,
as amended. Accordingly, they do not include all the financial statements and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 28, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 26, 1997. For further information, refer
to the Brothers Gourmet Coffees, Inc.'s (the "Company") consolidated financial
statements and footnotes (collectively the "1996 Financial Statements") included
in its Annual Report on Form 10-K for the fiscal year ended December 27, 1996
(the "1996 Form 10-K").
NOTE 2--SALES
The Company is an integrated sourcer, roaster and wholesaler of high quality
gourmet coffee products. The Company participates in the wholesale distribution
channel through sales of gourmet coffee to supermarkets, grocery and drug
stores, military commissaries, warehouse stores, mass merchandisers and
specialty stores. The Company's business is seasonal, with increased sales
during the colder months. As a result, in a typical year, a substantial portion
of the Company's sales and its reported results from operations occur during the
fourth quarter of each year. The Company's results of operations for any
particular quarter may not necessarily be indicative of its results of
operations for any other particular quarter or for the whole year.
NOTE 3--EARNINGS PER SHARE
Shares underlying options and warrants are not included in the computation for
the three-months ended March 28, 1997, and March 29, 1996, because their effect
is antidilutive to the net loss per share.
NOTE 4--INVENTORIES
The components of inventories consist of the following:
March 28, December 27,
1997 1996
--------- ------------
Green coffee $ 4,601 $ 4,844
Finished goods 7,254 7,500
Packaging and other supplies 2,493 2,082
-------- --------
14,348 14,426
Less: LIFO reserve (702) (502)
-------- --------
$ 13,646 $ 13,924
-------- --------
-------- --------
4
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BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997
(IN THOUSANDS)
(UNAUDITED)
An actual valuation of inventory under the last-in, first-out ("LIFO") method
can only be determined at the end of each year based on the inventory levels and
costs at that time. Accordingly, interim LIFO calculations must necessarily be
based on management's estimates of expected year-end inventory levels and costs.
Because inventory levels and costs are subject to many factors beyond
management's control, interim results are subject to the final year-end LIFO
inventory valuation.
NOTE 5--DEBT FACILITIES
A summary of indebtedness outstanding under various credit arrangements at
March 28, 1997 and December 27, 1996 is as follows:
1997 1996
---- ----
Revolving Credit Facility(a) $ 8,176 $ 3,166
Term Loan Facility(b) 6,375 6,750
Senior Subordinated Note Facility(c) 15,000 15,000
Capital lease obligations 191 228
-------- -------
29,742 25,144
Less value ascribed to warrants (3,219) (3,359)
Less current maturities (11,594) (1,648)
-------- -------
$ 11,929 $20,137
-------- -------
-------- -------
(a) The Company's revolving credit facility (the "Revolving Credit Facility"),
in the aggregate principal amount of $15,000 (the "Revolving Credit Facility"),
bears interest (at the Company's election) at (1) the prime rate plus 1.0%
(9.50% at March 28, 1997) or (2) the LIBOR rate plus 2.5% (8.0% at March 28,
1997). Interest is payable monthly in arrears. The Revolving Credit Facility
is scheduled to mature (absent earlier acceleration under the applicable loan
documents) on May 28, 1999. At March 28, 1997, (X) the outstanding principal
balance drawn under the Revolving Credit Facility was $8,600 and (Y) the
remaining availability under the Revolving Credit Facility was $6,400. In
connection with the closing of the Revolving Credit Facility in May 1996,
certain stockholders of the Company provided credit support to the Company in
the form of letters of credit (the "Credit Support Facility"). The Credit
Support Facility terminated in December 1996. In exchange for such credit
support, in May 1996, the Company issued warrants (the "Credit Support
Warrants") to the stockholders providing the Credit Support Facility entitling
them to purchase up to 103,626 shares of Company common stock at an exercise
price of $3.00 per share (the then quoted market price of the Company's common
stock). The Credit Support Warrants were fully vested as of March 28, 1997.
(b) The Company's term loan facility (the "Term Loan Facility"), in the
aggregate principal amount of $7,500 (which has been fully drawn), bears
interest (at the Company's election) at (1) the prime rate plus 1.5% (10.0%
at March 28, 1997) or (2) the LIBOR rate plus 3.0% (8.5% at March 28, 1997).
The Term Loan Facility is payable in monthly installments of $125 of
principal, plus interest, through May 2001. The Term Loan Facility is due
and payable in full at the maturity of the Revolving Credit Facility, i.e.,
May 28, 1999.
5
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(c) The Company's unsecured subordinated senior note facility (the "Senior
Subordinated Note"), in an aggregate principal amount of $15,000 (which has been
fully drawn), bears interest at the rate of 11.25% per annum. Interest is
payable quarterly. The entire principal balance of the Senior Subordinated Note
(plus accrued and unpaid interest) is due and payable on December 26, 2002. In
connection with the closing of the Senior Subordinated Note in December 1996,
the Company issued (1) warrants (the "Senior Subordinated Note Warrants") to an
affiliate of the lender providing the Senior Subordinated Note Facility
entitling such affiliate to purchase up to 1,245,000 shares of Company common
stock at an exercise price of $0.25 per share and (2) warrants (the "Placement
Warrants") to an affiliate of the Company's investment banker that placed the
Senior Subordinated Note Facility entitling such affiliate to purchase 400,000
shares of Company common stock at an exercise price of $3.44 per share. The
Senior Subordinated Note Warrants vest in various amounts over the six year
period immediately following the closing of the Senior Subordinated Note
Facility so long as any portion of the principal amount of the Senior
Subordinated Note remains outstanding on each vesting date. As of March 28,
1997, 265,600 of the Senior Subordinated Notes had vested and all of the
Placement Warrants were vested.
The Revolving Credit Facility and Term Loan Facility (collectively, the
"Operating Facility") and the Senior Subordinated Note Facility (the "Senior
Subordinated Note," which, together with the Operating Facility, are
collectively referred to herein as the "Debt Facilities") contain several
financial covenants, including cash flow-to-debt service covenants. As of March
28, 1997, the Company was not in compliance with either cash flow-to-debt
service covenant. Such non-compliance constituted an event of default
("Covenant Default") under the agreements governing the Debt Facilities (the
"Debt Documents"). The Company requested a waiver from both lenders with
respect to the Covenant Default.
Sanwa Business Credit Corporation, the Operating Facility lender ("SBCC"),
informed the Company in April that it was not willing to waive the Covenant
Default; however, it indicated that it was willing to enter into a forbearance
agreement with respect to the Covenant Default. On or about May 15, 1997, SBCC
and the Company executed a Forbearance Agreement (the "Forbearance Agreement"),
effective as of March 28, 1997. Pursuant to the Forbearance Agreement, SBCC has
agreed (1) to continue to permit the Company to borrow under the Operating
Facility and (2) to forbear from exercising any of its remedies with respect to
the Covenant Default through the earliest to occur of (a) August 15, 1997, (b)
repayment in full of the obligations under the Operating Facility or (c) the
date of a default under the Forbearance Agreement. The Company has agreed to
retain a consultant to review its business plan and to provide certain
additional financial reporting to SBCC during the forbearance period. Absent a
default under the Forbearance Agreement, SBCC has agreed to extend the
forbearance period through November 15, 1997, on such terms as SBCC may
reasonably require, including, without limitation, an increase in the applicable
interest rate(s). Based on the foregoing, the Company has reflected all
borrowings outstanding under the Operating Facility as current liabilities on
its Condensed Consolidated Balance Sheet for the fiscal quarter ended March 28,
1997.
The Company is currently negotiating with Dilmun, the Senior Subordinated Note
lender ("Dilmun"), the terms of a waiver agreement with respect to the Covenant
Default under the Senior Subordinated Note. Although Dilmun has indicated that
it is willing to waive such Covenant Default provided certain conditions are met
(including the possible vesting of all or a portion of the Senior Subordinated
Note Warrants), the parties have not yet executed a definitive agreement. The
Company believes that such agreement will be executed and delivered before the
end of the second quarter fiscal 1997.
On June 3, 1997, the Company received (and countersigned) a letter of interest
from an institutional lender for a new, long-term, operating debt facility which
would replace the Operating Facility. The Company anticipates that it will (1)
receive a binding commitment letter for the new facility before the end of the
second quarter fiscal 1997 and (2) execute definitive loan documents and close
the new replacement facility before the expiration of the forbearance period
under the Forbearance Agreement. However, there can be no assurance (a) that
the Company will receive a commitment letter on terms acceptable to it or (b) if
it does receive such commitment letter, that the parties will sign and deliver
definitive loan documents before the end of the forbearance period. If the
Company is unable, for any reason, to obtain a new, operating debt facility in a
principal amount sufficient to permit it to refinance the entire outstanding
principal balance of the Operating Facility prior to the expiration of the
Forbearance Agreement, the Company will be in default under its Operating
Facility.
6
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BROTHERS GOURMENT COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997
(IN THOUSANDS)
(UNAUDITED)
NOTE 6--DISCONTINUED RETAIL OPERATIONS
In June 1995, the Company's Board of Directors (the "Board") adopted a plan (the
"Disposition Plan") to dispose of all of its retail operations, consisting of
the Gloria Jean's specialty retail business ("Gloria Jean's") and the Brothers
Gourmet Coffee Bars (the "Coffee Bars"). Accordingly, the operating results of
discontinued retail operations, including provisions for estimated losses during
the phase-out period, have been segregated from continuing operations and
reported as a separate line item on the statement of operations. Interest
expense has been allocated to discontinued retail operations based on the ratio
of discontinued operations net assets to consolidated net assets. Due to the
subjective nature of estimating future operating losses and incremental costs of
disposal, it is reasonably possible that these estimates may change in the
future. Future changes in estimates will be included in the statement of
operations in the fiscal year determined. See Note 7 -- Contingencies.
As of March 28, 1997, the Company's obligations under the non-cancelable
operating leases for its Coffee Bars were as follows: fiscal year 1997 - $421;
fiscal year 1998 - $570; fiscal year 1999 - $583; fiscal year 2000 - $601;
fiscal year 2001 - $610 ; and thereafter -$2,471. The Company is negotiating to
terminate its obligations under all of the remaining leases and estimates that
the total costs relating to the assignment and termination of these leases will
be approximately $250. This incremental cost has been included in the estimated
loss on disposal. The Company remains as a guarantor on twenty (20) leases sold
and assigned to third parties.
NOTE 7--CONTINGENCIES AND CONTINGENT LIABILITIES
In November 1995, the Company sold Gloria Jean's to The Second Cup, Ltd.
("Second Cup") for an aggregate purchase price of $30,000. To date, the Company
has received $28,500 of the purchase price (including $1,300 applied to the
Lindgren settlement (See Note 9 below)) and the remaining $1,500 of the purchase
price is subject to holdback and escrow arrangements (the "Escrow") to secure
the Company's post-closing obligations under the purchase agreement with Second
Cup. In connection with the settlement of the Lindgren litigation, the Company
requested Second Cup's consent to release the full amount of the cash settlement
from the post-closing escrow. Second Cup refused to consent to the distribution
of more than $1.3 million from the post-closing escrow and advised the Company
that it intended to assert claims against the remainder of the funds held in the
escrow. These claims consist of costs, expenses and other amounts incurred with
respect to (1) missing landlord consents and waivers, (2) franchisee disputes,
(3) inventory, packaging and fixed asset claims, (4) lease termination and
buyout costs and (5) other miscellaneous costs and expenses. The total amount
of these claims is approximately $1,000. After completing a detailed review of
these claims, the Company has set up a reserve of $600 to cover these claims.
While the Company believes that this reserve is reasonable under all of the
facts and circumstances known to it at this time, there can be no assurance that
the aggregate amount of such claims will not exceed the reserve. At this time
the amount of claims is less than the remaining balance in the post-closing
escrow. As of March 28, 1997, the receivable from the sale of Gloria Jean's was
$2,800.
During fiscal year 1996, the Company sold or closed its remaining Coffee Bars
located in Colorado, Texas, Washington, D.C., New York and Illinois (including
the assignment of leases on 5 Coffee Bar sites which were never built out) for
$2,660 (subject to certain holdbacks to secure the performance by the Company of
certain of its post-closing obligations). The Company has set up a reserve of
$400 to cover the termination/buyout of its remaining Coffee Bar leases. See
Note 6 above. While the Company believes that this reserve is reasonable under
all of the facts and circumstances known to the Company at this time, there can
be no assurance that the aggregate termination/buyout costs for the remaining
Coffee Bar leases will not exceed the reserve. As of March 28, 1997, the
receivable from the sale of the Coffee Bars was $900.
7
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BROTHERS GOURMENT COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997
(IN THOUSANDS)
(UNAUDITED)
See Note 9--Litigation below for a discussion of pending litigation.
NOTE 8--INCOME TAXES
The Company historically has experienced net operating losses and has
established valuation allowances to offset net deferred tax assets.
Accordingly, the Company has had no provision for income taxes for the three-
month periods ended March 28, 1997 and March 29, 1996, and expects this trend to
continue for the remainder of fiscal year 1997.
NOTE 9--LITIGATION
See the discussion of the Lindgren litigation, the Shareholder Class Action, the
Shareholder Derivative Action, the Kona Coffee Class Action in Note 9 to the
1996 Financial Statements. Developments concerning these matters in the first
quarter of fiscal year 1997 are discussed below.
1. GLORIA JEAN'S FRANCHISE LITIGATION. In April 1997, the parties entered
into a Mutual Settlement Agreement and Release, pursuant to which (a) the
defendants agreed to pay $2,200 in cash, and to deliver 76,667 shares of Company
common stock, to the plaintiffs in settlement of all of the plaintiffs' claims
and (b) the parties mutually released each other and dismissed all claims
against each other. The $2,200 was funded as follows: (i) $2,015 from the
Company (of which approximately $900 was funded out of the escrowed purchase
price from the sale of Gloria Jean's), and (ii) $225 for the other defendants
and their counsel. The shares of Company common stock came entirely from the
Company.
2. SHAREHOLDER CLASS ACTION. In January 1997, the parties executed a
definitive Stipulation of Settlement (the "Stipulation of Settlement") with
respect to this litigation. In late January 1997, the court issued an order
preliminarily approving the proposed settlement. In April 1997, the court
entered the final judgment in the case. The principle terms of the settlement
are as follows: (a) the plaintiff class will receive $3,000 in cash and the
Company will transfer to the plaintiff class 1,848,118 shares of its own freely
tradeable common stock, (b) the parties will enter into mutual general releases
and (c) the Shareholder Class Action (and the Derivative Action, see 3.
SHAREHOLDER DERIVATIVE ACTION below) will be dismissed.
The case is currently in the share allocation phase. There is one remaining
issue as to whether the holders of Class C Preferred Stock of the Company who
converted their shares of Class C Preferred Stock into Company Common Stock in
connection with the Company's IPO in December 1993 are part of the plaintiff
class and entitled to share in the settlement. This issue is not yet resolved.
The Company expects the share allocation phase of the case to be completed by
the end of the second quarter of fiscal year 1997.
The cash portion of the settlement is fully funded. The Company's insurance
carrier and other defendants have transferred $3.0 million to the settlement
fund to fund this amount. The Company has fully funded the stock component of
the settlement.
3. SHAREHOLDER DERIVATIVE ACTION. The plaintiff in the Shareholder
Derivative Action has agreed to settle his claims and is a party to the
Stipulation of Settlement. The principle terms of the proposed settlement are
as follows: (a) the Company has agreed to use its reasonable best efforts (i)
to appoint a new non-employee member to its Board of Directors on or before
April 30, 1997 (which it has done), (ii) to continuously maintain thereafter at
least a majority of non-employee members on its Board of Directors and on its
Audit and Finance and
8
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BROTHERS GOURMENT COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997
(IN THOUSANDS)
(UNAUDITED)
Compensation Committees (which it has done), and (iii) unless approved by
unanimous action of the Board of Directors, to neither enter into any new
employment agreement or consulting agreement with any person who prior to
October 22, 1996 was a former employee Board member nor renew or extend the
term of any existing consulting arrangement with any such former employee
Board member beyond its stated termination date and (b) the Shareholder
Derivative Action will be dismissed and all of the claims asserted by the
plaintiff will be released. The arrangements described in (a) of the
preceding sentence will remain in place until the earlier of the date upon
which the Company no longer has any class of securities registered under the
Securities and Exchange Act of 1934 or 5 years from the date of the
Stipulation of Settlement.
4. KONA COFFEE CLASS ACTION. The defendants have filed a motion to
dismiss the litigation. Oral arguments on the motion are scheduled for the end
of June 1997. The defendants also have proposed to stay all discovery on the
merits pending the court's determination as to whether this lawsuit can proceed
as a class action.
5. PARKER/FRANKLIN MILLS FRANCHISE ARBITRATION. In August 1996, a
franchisee filed a claim for arbitration against Gloria Jean's, the Company,
Brothers Retail Corp. and certain officers and a director of the Company seeking
to rescind a franchise agreement to develop and operate a Gloria Jean's
franchise at the Franklin Mills mall, alleging fraud in the inducement,
misrepresentation, violations of the Illinois Franchise and breach of contract,
occurring prior to the Company's sale of Gloria Jean's to the Second Cup in
November 1995. The parties are in negotiation to settle this matter. However,
there can be no assurance that a settlement will be reached. The matter is
scheduled to go to arbitration in late May 1997. The plaintiffs have asserted
damages of approximately $350,000, $50,000 of which has already been paid by the
defendants to the Franklin Mills landlord to buyout the remainder of the
Franklin Mills lease.
9
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ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is an integrated sourcer, roaster, and wholesaler of high
quality gourmet coffee products. The Company is one of the leading wholesale
suppliers of gourmet coffees in the United States. The Company participates in
the wholesale distribution channel through sales of gourmet coffee to
supermarkets, grocery and drug stores, military commissaries, warehouse stores,
mass merchandisers and specialty stores.
FIRST QUARTER 1997 COMPARED WITH FIRST QUARTER 1996
NET SALES. Net sales decreased $2.3 million, or 12.0%, in the first quarter
of fiscal year 1997 as compared to the first quarter of fiscal year 1996. The
decline was principally due to (a) a $1.2 million decline in pound volume and
(b) a $1.1 million (a $0.31 per pound) decline in sales price realization. The
$1.2 million decline in pound volume was attributable principally to a loss of
certain customers. The Company's decision not to enter into unprofitable
promotional contracts, requiring the payment by the Company of substantial
product placement costs, was the primary reason for the loss of such customers.
The Company also lowered its sales prices during the second quarter of fiscal
year 1996 in response to lower green coffee costs and competitive market
conditions. Beginning late last year, green coffee costs started rising. In
response to this increase, the Company announced a sales price increase,
effective April 15, 1997.
GROSS PROFIT AND GROSS PROFIT MARGIN. Gross profit decreased $1.5 million,
or 16.9%, in the first quarter of fiscal year 1997 as compared to the first
quarter of fiscal year 1996. The decrease resulted principally from a (a)
decrease in sales volume and price realization ($2.3 million) and (b) a $.2
million increase in LIFO cost of goods sold. These negative changes were
partially offset by favorable savings of (x) $.6 million in packaging and
flavoring costs and (y) $.5 million in lower labor and overhead costs. The
gross profit margin decreased as a percentage of sales from 47.6% in the first
quarter of fiscal year 1996 to 45.0% in the first quarter of fiscal year 1997
principally due to the (i) lower sales price realization and (ii) the $.2
million increase in LIFO cost of goods sold.
DISTRIBUTION, SELLING AND MARKETING EXPENSES. Distribution, selling and
marketing expenses increased $.6 million, or 8.5%, in the first quarter of
fiscal year 1997 as compared to the first quarter of fiscal year 1996
principally due to higher advertising and distribution costs. Distribution
costs increased $.5 million as a result of the increase in the Company's direct
store distribution ("DSD") routes. The number of route increased by 18, or 30%,
during the fourth quarter of fiscal year 1996 and the first quarter of fiscal
year 1997. The Company expects to improve same store growth and sales price
realization as a result of the discontinuation of certain distributor
arrangements and the increase in DSD. Distribution, selling and marketing
expenses as a percentage of sales increased from 34.1% of sales in the first
quarter of fiscal year 1996 to 42.1% of sales in the first quarter of fiscal
year 1997 principally due to these same factors.
ADMINISTRATIVE EXPENSES. Administrative expenses decreased $.2 million, or
14.9%, in the first quarter of fiscal year 1997 as compared to the first
quarter of fiscal year 1996 principally due to lower professional fees and
reduced bad debt expense. Administrative expenses decreased from 8.1% of sales
in the first quarter of fiscal year 1996 to 7.8% of sales in the first quarter
of fiscal year 1997 due to these same factors.
INTEREST EXPENSE. Interest expense increased $.4 million, or 62.9%, in the
first quarter of fiscal year 1997 as compared to the first quarter of fiscal
year 1996. The increase was principally due to higher borrowing amounts and
higher effective interest rates.
LOSS FROM CONTINUING OPERATIONS. Loss from continuing operations was $2.5
million in the first quarter of fiscal year 1997 compared to a loss from
ontinuing operations of $0.5 million in the first quarter of fiscal year 1996.
The $2.0 million increase in loss from continuing operations during the first
quarter of fiscal year 1997 was principally due to a $1.5 million decrease in
gross profit and an increase of $.4 million in interest expense.
10
<PAGE>
LOSS FROM DISCONTINUED RETAIL OPERATIONS. Loss from discontinued retail
operations was $2.7 million in the first quarter of fiscal year 1997 compared to
a loss from discontinued operations of $0 in the first quarter of fiscal year.
The first quarter fiscal year 1997 loss was principally due to (a) the
additional cost of settling the Lindgren litigation ($1.3 million) and (b)
increased anticipated costs associated with post-closing claims with respect to
the sale of Gloria Jean's, the closing of the Coffee Bars and the
termination/buyout of certain remaining Coffee Bars leases ($1.4 million).
NET LOSS. Net loss increased $4.7 million in the first quarter of fiscal
year 1997 from the first quarter of fiscal 1996 principally due to (a) an
increased loss from continuing operations of $2.0 million and (b) an increased
loss from discontinued retail operations of $2.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities for the first quarter of
fiscal year 1997 was ($2.9) million. The liquidation of $5.0 million of current
assets, principally accounts receivable, partially offset the $5.6 million
reduction in current liabilities and $2.5 of promotional expense payments. In
addition, the Company made $1.8 million of capital expenditures, consisting of
$1.2 million for customer display equipment and $.6 million for plant and
computer equipment. The Company funded net cash used in operating activities
and capital expenditures through $5.0 million of borrowings under its Revolving
Credit Facility.
Net cash provided by (used in) financing activities for the first quarter of
fiscal year 1997 was $4.6 million compared to ($7.7) million for the first
quarter of fiscal year 1996. Net cash provided by (used in) investing
activities for the first quarter of fiscal year 1997 was ($1.7) million compared
to $2.8 million for the first quarter of fiscal year 1996. The Company funded
net cash used in investing activities with borrowings under its revolving Credit
Facility.
Management expects capital expenditures in fiscal year 1997 (primarily
associated with the acquisition of customer display and plant equipment) not to
exceed $5.5 million. Management expects to fund these expenditures from
operations and borrowings under its Revolving Credit Facility to the extent
required. At March 28, 1997, the Company had approximately $6.4 million of
borrowing availability under its Revolving Credit Facility.
The Revolving Credit Facility and Term Loan Facility (collectively, the
"Operating Facility") and the Senior Subordinated Note Facility (the "Senior
Subordinated Note," which, together with the Operating Facility, are
collectively referred to herein as the "Debt Facilities") contain several
financial covenants, including separate cash flow-to-debt service covenants. As
of March 28, 1997, the Company was not in compliance with either cash flow-to-
debt service covenant. Such non-compliance constituted an event of default
("Covenant Default") under the agreements governing the Debt Facilities (the
"Debt Documents"). The Company requested a waiver from both lenders with
respect to the Covenant Default.
Sanwa Business Credit Corporation, the Operating Facility lender ("SBCC"),
informed the Company in April that it was not willing to waive the Covenant
Default; however, it indicated that it was willing to enter into a forbearance
agreement with respect to the Covenant Default. On or about May 15, 1997, SBCC
and the Company executed a Forbearance Agreement (the "Forbearance Agreement"),
effective as of March 28, 1997. Pursuant to the Forbearance Agreement, SBCC has
agreed (1) to continue to permit the Company to borrow under the Operating
Facility and (2) to forbear from exercising any of its remedies with respect to
the Covenant Default through the earliest to occur of (a) August 15, 1997, (b)
repayment in full of the obligations under the Operating Facility or (c) the
date of a default under the Forbearance Agreement. The Company has agreed to
retain a consultant to review its business plan and to provide certain
additional financial reporting to SBCC during the forbearance period. Absent a
default under the Forbearance Agreement, SBCC has agreed to extend the
forbearance period through November 15, 1997, on such terms as SBCC may
reasonably require, including, without limitation, an increase in the applicable
interest rate(s). Based on the foregoing, the Company has reflected all
borrowings outstanding under the Operating Facility as current liabilities on
its Condensed Consolidated Balance Sheet for the fiscal quarter ended March 28,
1997.
The Company is currently negotiating with Dilmun, the Senior Subordinated
Note lender ("Dilmun"), the terms of a waiver agreement with respect to the
Covenant Default under the Senior Subordinated Note. Although Dilmun
11
<PAGE>
has indicated that it is willing to waive such Covenant Default provided
certain conditions are met (including the possible vesting of all or a
portion of the Senior Subordinated Note Warrants), the parties have not yet
executed a definitive agreement. The Company believes that such agreement
will be executed and delivered before the end of the second quarter fiscal
1997.
On June 3, 1997, the Company received (and countersigned) a letter of
interest from an institutional lender for a new, long-term, operating debt
facility which would replace the Operating Facility. The Company anticipates
that it will (1) receive a binding commitment letter for the new facility before
the end of the second quarter fiscal 1997 and (2) execute definitive loan
documents and close the new replacement facility before the expiration of the
forbearance period under the Forbearance Agreement. However, there can be no
assurance (a) that the Company will receive a commitment letter on terms
acceptable to it or (b) if it does receive such commitment letter, that the
parties will sign and deliver definitive loan documents before the end of the
forbearance period. If the Company is unable, for any reason, to obtain a new,
operating debt facility in a principal amount sufficient to permit it to
refinance the entire outstanding principal balance of the Operating Facility
prior to the expiration of the Forbearance Agreement, the Company will be in
default under its Operating Facility.
SUPPLY OF COFFEE AND GENERAL RISK CONDITIONS
Coffee is the world's second largest traded commodity. Supply and price can
be and have been volatile. While most coffee trades in the commodities market,
coffee of the quality level sought by the Company has a tendency to trade on a
negotiated basis at a substantial premium above commodity coffee pricing,
depending upon the supply and demand at the time of purchase. The supply and
price can be affected by multiple factors, such as weather, politics and
economics in the coffee producing countries, many of which are lesser developed
nations.
The International Coffee Organization, through the imposition of export
quotas agreed upon by consumer and producer member nations, has in the past
attempted to maintain the commodity prices of green coffees. In August 1993, 21
coffee-producing countries formed a new cartel, the Association of Coffee
Producing Countries ("ACPC"), and announced plans to cut the supply of coffee
by 20% beginning October 1, 1993 in an attempt to raise world coffee prices. In
January 1996, the ACPC agreed to extend its current limitations on the supply of
green coffee upon their expiration in June 1996 through the 1996/1997 green
coffee year. The Company is unable to predict whether the ACPC will be
successful in achieving its goals; however, the supplies of green coffees held
by consumers (roasters and buyers) are currently at historical low levels.
The low levels of supplies, labor unrest in Colombia and reported poor
coffee crops in key Arabica growing countries has led to an increase in green
coffee prices from $1.14 per pound in December 1996 to in excess of $2.50 per
pound in April 1997. In response to the green coffee price increases, the
Company announced sales price increases on all its products of approximately
$0.50 per pound, effective April 15, 1997. The Company will attempt to maintain
its per pound gross profit by increasing sales prices commensurate with the
increase in green coffee prices. There is no assurance that the Company will be
able to pass such price increases through to the customer. In the past,
substantial price increases have met with varying degrees of customer
resistance. The increase in sales prices may result in a decrease in sales
volume.
A significant portion of the Company's green coffee supply is contracted for
future delivery, generally between three and twelve months forward (with
declining percentages of the supply being subject to future contracts in the
latter portions of each year), to ensure both an adequate supply and reduced
risk of short-term price fluctuations. Green coffee is a large market with
well-established brokers, importers and warehousemen through which the Company
manages its requirements. In addition to forward purchases, the Company keeps
physical inventory in each of its production facility and third-party warehouses
representing anywhere from four to ten weeks of supply requirements. All coffee
purchase transactions are in U.S. dollars, the industry's standard currency.
The Company believes that it is not dependent upon any one importer or broker
for its supply of green coffee beans from any particular country.
SEASONALITY AND FLUCTUATIONS IN QUARTERLY RESULTS
12
<PAGE>
The Company's business is seasonal, with increased sales during the colder
months. As a result, in a typical year, a substantial portion of the Company's
sales and its reported income from operations occur during the fourth quarter of
each fiscal year, while the Company's working capital requirements fluctuate
during the year with its greatest needs during the third and fourth quarter of
each year. The Company's income from operations thus fluctuates somewhat from
quarter to quarter. The timing of slotting fee payments, other similar payments
and product introduction costs in connection with wholesale accounts and the
amount of revenue contributed by such new wholesale accounts may cause the
Company's quarterly results of operations to fluctuate in the future. The
Company may experience quarterly losses and its results of operations for any
particular quarter may not necessarily be indicative of net income or loss that
may be expected for any other particular quarter or for the whole year.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the discussion of the Lindgren Litigation, the Shareholder Class Action,
the Shareholder Derivative Action, the Kona Coffee Class Action and the
Parker/Franklin Mills Franchise Arbitration in (a) Note 9 to the 1996 Financial
Statements and (b) Note 9 to the Notes to Condensed Consolidated Financial
Statements of the Company for the fiscal quarter ended March 28, 1997, which are
included elsewhere in this Quarterly Report on Form 10-Q.
The Company is also involved in routine legal proceedings incidental to the
conduct of its business. Management believes that none of these routine legal
proceedings will have a material adverse effect on the financial condition or
operations of the Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Part I, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources and Note
5 to Notes to Condensed Consolidated Financial Statements March 28, 1997 for a
detailed description of the pending violation of the cash flow-to-debt service
covenant in the Bank Debt Facility and the status of the Company's request for a
waiver from the lender with respect to this violation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27 -- Financial Data Schedule
99-1 -- Forbearance Agreement
(b) REPORTS ON FORM 8-K.
Form 8-K filed on January 10, 1997.
13
<PAGE>
SIGNATURES
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.
BROTHERS GOURMET COFFEES, INC.
Dated: June 13, 1997 By: /s/ Barry Bilmes
-----------------------------------
Barry Bilmes
Vice President Finance
and Administration
Signing on behalf of the registrant
and as principal financial officer of
the registrant
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS (UNAUDITED) FOR THE THREE-MONTHS ENDED MARCH 28, 1997
CONTAINED IN THE FORM 10-Q FILED ON MAY 12, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-28-1997
<PERIOD-END> MAR-28-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 10,811
<ALLOWANCES> 0
<INVENTORY> 13,646
<CURRENT-ASSETS> 30,592
<PP&E> 15,403
<DEPRECIATION> 0
<TOTAL-ASSETS> 105,540
<CURRENT-LIABILITIES> 33,660
<BONDS> 11,929
0
0
<COMMON> 0
<OTHER-SE> 1
<TOTAL-LIABILITY-AND-EQUITY> 59,870
<SALES> 16,808
<TOTAL-REVENUES> 16,808
<CGS> 9,247
<TOTAL-COSTS> 9,063
<OTHER-EXPENSES> 15
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 943
<INCOME-PRETAX> (5,160)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,460)
<DISCONTINUED> (2,700)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,160)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
<PAGE>
Exhibit 99-1
FORBEARANCE AGREEMENT
THIS FORBEARANCE AGREEMENT (this "Agreement"), dated as of May 15,
1997, is by and between BROTHERS GOURMET COFFEES, INC., a Delaware corporation,
as Borrower (the "Borrower"), SANWA BUSINESS CREDIT CORPORATION, a Delaware
Corporation, as Agent and Lender, and the other Lenders signatory to the Loan
and Security Agreement from time to time.
RECITALS
A. WHEREAS, Borrower, Agent and Lenders, are parties to that certain Loan
and Security Agreement, dated as of May 29, 1996 (as from time to time amended,
restated, supplemented or otherwise modified the "Loan Agreement"), pursuant to
which Lenders have made and may hereafter make loans and advances and other
extensions of credit to Borrower;
B. WHEREAS, Borrower and Dilmun Financial Services, an unlimited Irish
company ("Dilmun"), are parties to that certain Senior Subordinated Note
Agreement, dated as of December 27, 1996 (as from time to time amended,
restated, supplement and modified, the "Dilmun Agreement") pursuant to which
Dilmun has made certain loans to Borrower.
C. WHEREAS, Sanwa Business Credit Corporation, as a Senior Lender and as
Agent under the Sanwa Documents for other Senior Lenders, Dilmun, and BIB
Holdings (Bermuda) Ltd., a Bermuda corporation ("BIB"), are parties to that
certain Subordination Agreement dated as of December 27, 1996, as amended from
time to time, (the "Subordination");
D. WHEREAS, this Agreement, the Dilmun Agreement and the Subordination
shall constitute a Financing Agreement and these recitals shall be construed as
a part of this Agreement;
E. WHEREAS, an Event of Default has occurred in that Borrower has failed
to perform, keep or observe the Cash Flow Coverage Covenant contained at section
7.11 of the Loan Agreement (the "Current Default");
F. WHEREAS, Agent and Lenders have not expressly or impliedly waived the
Current Default and as a result of the occurrence of the Current Default, Agent
and Lenders have the right to accelerate the Obligations and demand immediate
payment thereof and the right to foreclose upon, and take possession of, and
liquidate all Collateral and Borrower has no setoff, defense or counterclaim
based thereon or related thereto;
G. WHEREAS, Borrower has requested that Agent and Lenders forbear in the
exercise and enforcement of their rights, powers and remedies under the
Financing Agreements or now existing at law or in equity or by statute; and
H. WHEREAS, Agent and Lenders are willing to forbear, for the time period
expressly set forth herein, in the exercise and enforcement of such rights,
powers and remedies, but only upon full and complete compliance and fulfillment
by Borrower of the terms and conditions set forth herein in the manner hereafter
stated.
NOW, THEREFORE, in consideration of the terms and conditions contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINITIONS. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement. In addition, the following terms shall have the
16
<PAGE>
following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"Commitment" shall have the meaning set forth in Section 5.5.
"Current Default" - See RECITALS.
"Forbearance Event of Default" shall have the meaning set forth in
Section 9.
"Forbearance Period" means the period commencing on and as of March
28, 1997 and ending on the earliest to occur of (i) the date of the termination
of the Forbearance Period pursuant to Sections 3(b), 9 or otherwise, (ii) the
date on which all of the Obligations have been paid in full and the Loan
Agreement has been terminated, or (iii) the Forbearance Termination Date.
"Forbearance Termination Date" means August 15, 1997, or such later
date solely as provided at Section 3(c).
"Loan Agreement" - See RECITALS.
"Payment Blockage Notice" shall have the meaning ascribed thereto in
subsection 2(b) of the Subordination.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
2. ACKNOWLEDGMENTS. The Borrower hereby acknowledges that (a) each
Recital set forth hereinabove is complete, accurate and not subject to dispute,
(b) the Current Default has occurred and is continuing, (c) Agent and Lenders
have not heretofore expressly or impliedly waived the Current Default, (d)
pursuant to and in accordance with section 8.20(d) of the Loan Agreement,
Borrower is prohibited from making any prepayment, or any other acts described
therein, with respect to the Subordinated Note and that such prohibition remains
in affect until the Obligations are paid in full, (e) all conduct of, and
requirements made by, the Agent and Lenders as set forth herein are authorized
by and undertaken pursuant to and in accordance with the terms of the Financing
Agreements, (f) Borrower has no grounds for disputing the validity or
enforceability of the Financing Agreements or any of its obligations thereunder,
or the validity, priority, enforceability or extent of Lender's security
interest in or lien against any item of Collateral in any judicial,
administrative or other proceeding, either during or following the termination
or expiration of the Forbearance Period, and (g) absent the effectiveness of
this Agreement, Agent and Lenders would have the right to accelerate and
immediately enforce payment of all Obligations and, in connection therewith, to
immediately enforce its security interest in and liens on the Collateral and
exercise all other rights, powers and remedies provided to Agent and Lenders
under the Financing Agreements or at law or in equity or by statute.
3. LIMITED FORBEARANCE.
(a) During the Forbearance Period, so long as no Forbearance Event of
Default shall have occurred and be continuing and subject to strict
compliance by Borrower with each and every term and condition of each and
every of the Financing Agreements, Agent and Lenders hereby agree that they
shall forbear in the exercise of their rights, powers and remedies afforded
under the Financing Agreements or at law or in equity or by statute, except
that Agent specifically reserves its rights under section 3.5 of the Loan
Agreement to issue and deliver Redirection Notices and under section
2(b)(ii) of the Subordination to issue a Payment Blockage Notice, during
the Forbearance Period. The foregoing forbearance shall not be construed
to impair the ability of Agent and Lenders to enforce any such rights,
powers or remedies
17
<PAGE>
after the Forbearance Period regardless of whether or not such
enforcement relates to actions taken or payments received during the
Forbearance Period.
(b) Upon the occurrence of any Forbearance Event of Default under
this Agreement, any Default or Event of Default under any of the Financing
Agreements, Agent and Lenders, at their option, may terminate the
Forbearance Period and their forbearance hereunder. As more fully set
forth at Section 9(b), upon such termination, all Obligations shall be due
and payable and Agent and Lenders shall have the undisputed and absolute
right to exercise and enforce all other rights, powers and remedies which
may exist pursuant to the Financing Agreements, or at law, in equity or by
statute, all without further demand or notice or legal process of any kind,
all of which are hereby waived by Borrower.
(c) Unless earlier terminated in accordance with the terms of this
Agreement, Agent and Lenders' forbearance, as provided herein, shall
immediately cease without notice on the Forbearance Termination Date and
Borrower at that time shall be obligated to comply with and perform all
terms, conditions and provisions of each and every Financing Agreement
without giving effect to the forbearance set forth herein; provided,
however, in the event that, prior to the Forbearance Termination Date (i)
no Forbearance Event of Default shall have occurred, and (ii) the
Consultant's report referenced in Section 5.4 unequivocally states that the
Borrower's business plan is likely to be achieved, then, upon the written
request of Borrower, Agent and Lenders shall amend this Agreement to define
Forbearance Termination Date as through and including November 14, 1997 on
such terms and conditions as Agent and Lender may reasonably require
including, without limitation, an increase in the applicable interest rate
or rates.
4. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Agreement
is subject to the following conditions precedent:
(a) DOCUMENTATION. Borrower shall have delivered to Agent all of the
following documents, each dated the date hereof, in form and substance
satisfactory to Agent:
(i) FORBEARANCE. An executed counterpart of this Agreement; and
(ii) OTHER DOCUMENTS. All other documents, certificates and
agreements as Agent may reasonably request to accomplish the purposes
of this Agreement.
(b) NO DEFAULT. As of the date hereof, (i) no Default or Event of
Default under any of the Financing Agreements shall have occurred and be
continuing other than the Current Default; and (ii) no Default or Event of
Default shall have occurred and be continuing under the Subordinated Debt
that has not been waived or is the subject of an extension of time or
forbearance.
5. AMENDMENTS, COVENANTS AND WARRANTIES.
5.1 REDUCTION OF CURRENT ASSET BASE ADVANCE RATE FOR ELIGIBLE
ACCOUNTS. Section 2.1(a)(1) of the Loan Agreement is hereby amended by deleting
from the text therein "Eighty percent (80%)" and replacing it with "Seventy
percent (70%)."
5.2 TERMINATION OF LENDER GUARANTY OBLIGATIONS. Subsection 2.1(c) of
the Loan Agreement is amended hereby by deleting it in its entirety including
all subsections thereof. Each reference to Lender Guaranty in the Financing
Agreements is hereby deleted, together with any text thereof which is solely and
expressly related to such reference, and all remaining text of each Financing
Agreement is hereby modified to the extent necessary so as to remain
grammatically correct after such amendment.
5.3 ADDITIONAL REPORTING. Pursuant to and in accordance with clause
(x) of section 7.1 of the Loan Agreement, during the Forbearance Period Borrower
shall deliver to Agent within ten (10) business days of the first day of each
calendar month (thirty (30) days for any comparative information), by facsimile
and/or
18
<PAGE>
overnight delivery service, (i) statements of projected cash flow for the
next succeeding month, and commencing with the second such statement, the
statement will contain comparisons of actual cash flows to projected; (ii)
statements reporting, for the prior calendar month, all purchases and/or leases
of equipment, and for each subsequent calendar month, all purchases and/or
leases of equipment proposed to be made or entered during such month and
commencing with the second such statement, a comparison of actual purchase
and/or leases to those previously proposed, all such reports to include whether
such purchase is subject to a purchase money security interest and setting forth
the holder thereof; (iii) statements listing all off-site locations at which
Collateral is stored including, without limitation, a listing of the DSD
Warehouse Locations, DSD Vehicle Locations, Leases Storage Locations and Retail
Locations, and those locations identified in Exhibit 8.6 of the Loan Agreement
and any other location at which Collateral is stored, all to be up-dated to show
locations thereof, names of the landlords, lessors and/or bailees thereof and
the amounts due to each with a listing of all such amounts that are past due,
(iv) a report listing (z) all Equipment currently owned by Borrower and its
location and, to the extent such listing varies from that set forth in the
Appraisal (Equipment), a notation specifying the change, deletion or addition,
(y) all items of equipment currently held and/or leased by Borrower and its
location, and (x) all items of equipment against which a Lien is asserted and
asserted to be superior or prior to that granted to Agent and Lenders, and (v) a
complete and detailed list of all contra Accounts, such list to include name and
address of each such Account Debtor, and the amount owed by the Borrower to the
Account Debtor along with a certification by an authorized officer of Borrower
that during the last 6 months, no contra Account was included in Borrower's
determination of its Eligible Accounts.
5.4 On or before May 22, 1997, Borrower shall engage a business
consultant ("Consultant"), the qualifications and experience of which shall be
reasonably satisfactory to Agent. On or before June 2, 1997, Borrower shall
provide Agent a copy of a written engagement agreement between Borrower and
Consultant. The engagement agreement between Borrower and Consultant shall
contain the following minimal provisions and shall not contain any provisions
inconsistent with such provisions:
(a) The engagement's objectives shall be to independently review,
inspect and critique Borrower's operations, financial structure (including
safeguards regarding expenses and revenues) and business plan and
Borrower's working assumptions which serve as the basis thereof and, to the
extent such critique identifies unreasonable or invalid assumptions and
deficiencies in operations, financing and business plan, Consultant will
set forth what it believes to be valid and reasonable working assumptions
and will make independent recommendations for corrective actions (the
"Engagement Objectives");
(b) To achieve the Engagement Objectives, Consultant will, to the
extent Consultant deems it reasonably necessary, (i) review Borrower's
books and records, (ii) inspect each of Borrower's facilities, (iii)
interview officers, employees and the professionals of Borrower with
respect to operations, finances and business plan, and (iv) evaluate the
working assumptions underlying, means of implementation and likelihood of
success of Borrower's business plan including, without limitation, a review
of Borrower's financial forecasts, bidding procedures and sales strategies;
(c) On or before June 22, 1997, Consultant will produce and deliver a
written report which (i) contains Consultant's independent evaluation and
critique of Borrower's operations, finances and business plan and
Borrower's working assumptions which serves as the basis thereof, (ii)
contains Consultant's independent assessment of whether the Borrower's
business plan is likely to be achieved and the basis for such assessment,
and (iii) contains independent recommendations regarding revising the
working assumptions, operational changes, financial control safeguards
regarding expenses and revenues and what changes, if any, to each such
matter may be required to assure the Borrower's business plan is reasonably
achievable;
(d) Consultant will deliver all of its written reports including,
without limitation, all drafts to Borrower and (after consultation with
Borrower and reasonable consideration of Borrower's comments on such
reports and drafts to ensure accuracy thereof, but in no event later than 2
days after delivery to Borrower) to Agent; and
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(e) Borrower shall authorize Consultant to communicate, whether in
writing or orally, directly with representatives of Agent and Lenders and
waive all right to confidentiality of such communication.
5.5 PREPAYMENT PENALTIES. Borrower agrees to use reasonable efforts
to refinance the Obligations. In the event that during the Forbearance Period
Borrower obtains a written and enforceable commitment for financing in such
amounts and at such times as to pay in full and otherwise retire all Obligations
(a "Commitment"), Agent shall waive all prepayment penalties associated with
prepayment arising out of such commitment, provided that payment of the
Obligations takes place within 60 days of the date of Borrower's receipt of such
Commitment.
5.6 NON-INTERFERENCE WITH CONSULTANT. Borrower hereby covenants and
agrees that it will take no action, and give no instruction, which will impede
or impair Consultant's engagement.
5.7 EFFECT OF ACKNOWLEDGMENTS. Any and all acknowledgments contained
in Section 2 are intended to be and may construed to be affirmative covenants,
representations and warranties of Borrower.
6. REFERENCE TO AND EFFECT ON FINANCING AGREEMENTS.
6.1 RATIFICATION. Except as specifically amended herein, the
Financing Agreements shall remain in full force and effect and are each hereby
ratified and confirmed. To the extent that this Agreement conflicts with the
provisions of the Loan Agreement, the provisions of this Agreement shall govern.
6.2 NO WAIVER. The execution, delivery and effectiveness of this
Agreement shall not operate as a waiver of any right, power or remedy of Lenders
or Agent under the Financing Agreements, nor shall it constitute a waiver of any
provision of the Financing Agreements or impose upon Lender any obligation,
express or implied, to consent to any amendment or further modification of the
Financing Agreements and Lender hereby expressly reserves all rights, powers and
remedies specifically given to it under the Financing Agreements or now or
hereafter existing at law or in equity or by statute.
7. REPRESENTATIONS AND WARRANTIES. All of Borrower's
representations and warranties contained in this Agreement shall survive the
execution, delivery and acceptance of this Agreement by the parties hereto.
Borrower expressly reaffirms that each of the representations and warranties set
forth in section 6 of the Loan Agreement continues to be accurate and complete
in all material respects, and hereby remakes and incorporates herein by
reference each such representation and warranty as though made on the date of
this Agreement except for any representation or warranty limited by its terms to
a specific date. In addition, Borrower warrants and represents to Agent and
Lenders as follows:
(a) The execution and delivery of this Agreement and the performance
by Borrower of its obligations hereunder are within Borrower's corporate
powers and authority, have been duly authorized by all necessary corporate
action and do not and will not contravene or conflict with the articles of
incorporation or by-laws of Borrower. This Agreement has been duly
executed and delivered by Borrower, and constitutes the legal, valid and
binding obligation of such Person, enforceable against such Person in
accordance with its terms.
(b) No consent, order, qualification, validation, license, approval
or authorization of, or filing, recording, registration or declaration
with, or other action in respect of, any governmental body, authority,
bureau or agency or other Person is required in connection with the
execution, delivery or performance of, or the legality, validity, binding
effect or enforceability of, this Agreement.
(c) The execution, delivery and performance of this Agreement by
Borrower do not and will not violate any law, governmental regulation,
judgment, order or decree applicable to and do not and will not violate the
provisions of, or constitute a default or any event of default under, or
result in the creation of any security interest or lien upon any property
of such Person pursuant to any indenture, mortgage,
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instrument, contract, agreement or other undertaking to which such Person
is a party or is subject or by which such Person or any of such Person's
real or personal property may be bound.
(d) Except for the Current Default, no Default or Event of Default
has occurred and is continuing.
8. RELEASE. Borrower, for itself and any other Person who may claim
an interest through such Person, hereby releases and discharges, with prejudice,
Lender, its directors, officers, agents, attorneys and employees from any and
every claim, right, cause, action, cause of action, damage, liability and other
matter or proceeding arising from, relating to or in connection with any acts or
omissions of Lender, its directors, officers, agents, attorneys and employees
prior to the date of execution of this Agreement. This provision shall survive
and continue in full force and effect whether or not (i) Borrower shall satisfy
all other provisions of the Financing Agreements, including payment in full by
Borrower of all Obligations, (ii) this Agreement otherwise is terminated, or
(iii) Lender's forbearance ceases or is withdrawn.
9. FORBEARANCE EVENTS OF DEFAULT.
(a) A Forbearance Event of Default shall mean the occurrence of any
one or more of the following events:
(i) Borrower shall fail to pay any of the Obligations when due
under the Financing Agreements (taking into account any extension of
time, forbearance or waiver as evidenced by a writing expressly so
stating and signed by Agent and Borrower with respect thereto);
(ii) Borrower shall fail to observe or perform any term, covenant
or agreement binding on it contained in any of the Financing
Agreements;
(iii) A material adverse change in the business, properties,
prospects, condition (financial or otherwise), assets or results of
operation of Borrower shall have occurred since the date hereof;
(iv) An Event of Default, other than the Current Default, shall
have occurred and be continuing;
(v) Borrower impedes the work of the Consultant as reasonably
determined by the Consultant and/or terminates the Consultant prior to
it achieving the Engagement Objectives;
(vi) Any instrument, document, report, schedule, agreement,
representation or warranty, oral or written, made or delivered to
Lender by Borrower in connection with this Agreement is untrue or
incorrect in any material respect when made or delivered.
(b) Upon the occurrence of any Forbearance Event of Default described
in Section 9(iv) with respect to an Event of Default under subsection (f),
(g) or (h) of the definition of "Event of Default" in the Loan Agreement,
the Forbearance Period shall automatically terminate and all Obligations
shall automatically become immediately due and payable, without notice or
demand of any kind. Borrower hereby waives all notice and cure periods
including, without limitation, under the definition of "Event of Default"
with respect to any Forbearance Event of Default and agrees Agent and
Lender shall be immediately entitled to the benefits of the Financing
Agreements. Borrower acknowledges that it shall have no claim for damages
or otherwise against Lender with respect to any such termination of this
Agreement or acceleration of the Obligations in accordance with the terms
of the Financing Agreements. Upon the termination or expiration of this
Agreement, Lender shall be entitled to exercise all of its rights and
remedies under this Agreement, the Financing Agreements and at law or in
equity or by statute including, without limitation, the right to declare
all of the Obligations to be immediately due and payable and to
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enforce its liens on, and security interests in, the Collateral. The
occurrence of any Forbearance Event of Default shall constitute an Event
of Default under the Loan Agreement.
10. MISCELLANEOUS.
10.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding on and
shall inure to the benefit of Borrower, Agent, Lenders and their respective
successors and assigns. The terms and provisions of this Agreement are for the
purpose of defining the relative rights and obligations of Borrower, Agent and
Lenders with respect to the transactions contemplated hereby and there shall be
no third party beneficiaries of any of the terms and provisions of this
Agreement.
10.2 ENTIRE AGREEMENT. This Amendment constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof and
supersedes all other understandings, oral or written, with respect to the
subject matter hereof.
10.3 FEES AND EXPENSES. Borrower agrees to pay on demand all fees,
costs and expenses incurred by Agent and Lenders in connection with the
preparation, execution and delivery of this Agreement and Borrower agrees to pay
on demand all fees, costs and expenses arising from or associated with the
Consultant, collateral audit charges and any action which Agent reasonably
believes to be required to protect and preserve the Collateral. Nothing
contained in this Section 10.3 is intended to abrogate, diminish or waive any of
Borrower's obligations under section 10.2 of the Loan Agreement, but is intended
to be in addition thereto.
10.4 HEADINGS. Section headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose and should not be considered in interpreting any
provision hereof.
10.5 COUNTERPARTS AND FACSIMILE SIGNATURES. This Agreement may be
executed in any number of separate original counterparts and by the different
parties on separate counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one agreement. A
party to this Agreement may execute and deliver its signature page hereto by
facsimile. Each party thereto agrees to be bound by its own facsimile signature
page and to accept, as if it were a fully executed manual signature page, the
facsimile signature page of any other party hereto.
10.6 INCORPORATION OF LOAN AGREEMENT. The provisions contained in
sections 10.7 and 10.8 of the Loan Agreement are incorporated herein by
reference to the same extent as if reproduced herein in their entirety.
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IN WITNESS WHEREOF, this Forbearance Agreement has been duly executed
as of the date first written above.
BROTHERS GOURMET COFFEES, INC.
By:_____________________________
Title:__________________________
SANWA BUSINESS CREDIT CORPORATION,
as Agent and Lender
By:_____________________________
Title:__________________________
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