<PAGE>
UNITED STATES
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 September 26, 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 September 26, 1997 the Registrant had outstanding (1)10,824,634 shares of
Common Stock, par value $.0001 per share, and (2) 839,332 shares of Class B
Common Stock, par value $.0001 per share.
<PAGE>
BROTHERS GOURMET COFFEES, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets--September 26, 1997 and
December 27, 1996............................................. 1
Condensed Consolidated Statements of Operations--Three months
and nine months ended September 26, 1997 and
September 27, 1996............................................ 2
Condensed Consolidated Statements of Cash Flows--Three months
and nine months ended September 26, 1997 and
September 27, 1996............................................ 3
Notes to Condensed Consolidated Financial Statements--
September 26, 1997............................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings............................................. 11
Item 2. Changes in Securities......................................... 11
Item 3. Defaults Upon Senior Securities............................... 11
Item 4. Submission of Matters to a Vote of Security Holders........... 11
Item 5. Other Information............................................. 11
Item 6. Exhibits and Reports on Form 8-K.............................. 12
SIGNATURES.................................................................. 13
<PAGE>
BROTHERS GOURMET COFFEES, INC.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS FORM
10-Q (AND ANY DOCUMENTS INCORPORATED HEREIN BY REFERENCE) CONTAIN
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 (THE "1933 ACT") AND SECTION 21E OF THE SECURITIES AND
EXCHANGE ACT OF 1934 (THE "1934 ACT"). THESE STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO
BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE TYPICALLY IDENTIFIED BY THEIR INCLUSION OF
PHRASES SUCH AS "THE COMPANY ANTICIPATES,""MANAGEMENT BELIEVES" AND OTHER
PHRASES OF SIMILAR MEANING. SUCH FACTORS INCLUDE, AMONG OTHERS, THE EFFECT
OF ECONOMIC AND MARKET CONDITIONS; INDUSTRY AND INDUSTRY SEGMENT CONDITIONS
AND DIRECTIONS; WEATHER; COFFEE CROP AND GREEN COFFEE PRICE FLUCTUATIONS;
FOREIGN LABOR PROBLEMS; FOREIGN COFFEE DELIVERY DIFFICULTIES; PRODUCTION
COSTS; COMPETITIVE PRESSURES; THE COMPANY'S OWN FINANCING CONTINGENCIES AND
RESTRICTIONS; MANAGEMENT LIMITATIONS; THE ABILITY AND WILLINGNESS OF
PURCHASERS TO COMPLETE ACQUISITIONS OF THE COMPANY'S RETAIL COFFEE BARS AND
THE GLORIA JEAN'S STORES; THE COMPANY'S ABILITY TO RESOLVE POST-CLOSING
DIFFERENCES WITH THE PURCHASERS OF CERTAIN COMPONENTS OF THE COMPANY'S
DISCONTINUED RETAIL OPERATIONS; LEGISLATION AND REGULATIONS; RESOLUTION OF
PENDING LITIGATION IN WHICH THE COMPANY IS A DEFENDANT; THE ABILITY OF THE
COMPANY TO CLOSE CONTRACTS WITH NEW ACCOUNTS AND TO RENEW EXISTING ACCOUNTS
AS SUCH ACCOUNTS COME UP FOR RENEWAL; CHANGES IN CONSUMER TASTES AND
PREFERENCES; THE SUCCESS OR LACK THEREOF OF THE COMPANY'S NEW PRODUCTS,
DISPLAY MODELS AND CAN LINES; AND OTHER FACTORS REFERENCED IN THIS FORM 10-Q.
AS A RESULT OF THE FOREGOING AND OTHER FACTORS, NO ASSURANCE CAN BE GIVEN AS
TO FUTURE RESULTS, LEVELS OF ACTIVITY AND/OR ACHIEVEMENTS, AND NEITHER THE
COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY OR
COMPLETENESS OF THESE STATEMENTS.
<PAGE>
BROTHERS GOURMET COFFEES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
September 26, December 27,
1997 1996
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash $ -- $ --
Trade receivables, net 9,945 15,717
Receivable from the sale of discontinued
retail operations 2,348 3,795
Inventories 13,431 13,826
Prepaid promotional expenses 1,122 776
Prepaid expenses and other current assets 1,706 1,225
--------- ---------
Total current assets 28,552 35,339
Plant and equipment, net 15,950 14,814
Other assets:
Excess of cost over net assets acquired, net 51,361 52,470
Noncompete agreements, net 299 1,197
Noncurrent promotional expenses 4,271 2,918
Debt acquisition costs 1,497 1,689
Other assets 860 778
--------- ---------
$ 102,790 $ 109,205
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 15,741 $ 1,648
Accounts payable 3,875 8,247
Accrued expenses 7,283 6,498
Accrued litigation settlement 4,125 5,500
Accrued losses and other costs of
discontinued retail operations 1,315 1,781
Accrued restructuring costs 62 373
--------- ---------
Total current liabilities 32,401 24,047
Long-term debt, less current liabilities 12,038 20,137
Minority interest 116 89
Stockholders' equity:
Preferred Stock--10,000,000 shares
authorized: $1.00 par value;
-0- shares issued and outstanding at
September 26, 1997 and December 27, 1996 -- --
Common Stock-- 25,000,000 shares authorized at
September 26, 1997 and 15,000,000 shares
authorized at December 27, 1996 $.0001 par
value; 10,824,634 and 10,362,605 issued
and outstanding at September 26, 1997 and
December 27, 1996, respectively 1 1
Common Stock Class B--2,000,000 shares authorized:
$.0001 par value; 839,332 shares issued and
outstanding at September 26, 1997 and
December 27, 1996 -- --
Additional paid-in capital 147,367 145,992
Accumulated deficit in earnings (88,883) (80,811)
Treasury stock (37,500 shares, at cost) (250) (250)
--------- ---------
Total stockholders' equity 58,235 64,932
--------- ---------
$ 102,790 $ 109,205
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
BROTHERS GOURMET COFFEES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
Three months Three months Nine months Nine months
September 26, September 27, September 26, September 27,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $17,126 $16,721 $49,797 $51,244
Cost of goods sold 8,780 9,463 25,129 28,182
------- ------- ------- -------
Gross profit 8,346 7,258 24,668 23,062
Operating expenses:
Distribution, selling and marketing 7,117 6,255 20,901 18,707
Administrative 1,398 1,397 4,139 4,334
Amortization of intangibles 669 669 2,007 2,115
Restructuring -- 42 -- 263
------- ------- ------- -------
Loss from operations (838) (1,105) (2,379) (2,357)
Other expenses (income):
Litigation settlement expense -- 5,500 -- 5,500
Interest expense, net 1,028 402 2,932 1,521
Other (income) expense 50 15 61 (8)
------- ------- ------- -------
Loss from continuing operations (1,916) (7,022) (5,372) (9,370)
Loss on disposal of discontinued
retail operations -- -- (2,700) --
------- ------- ------- -------
Net loss $(1,916) $(7,022) $(8,072) $(9,370)
------- ------- ------- -------
------- ------- ------- -------
Loss per common share:
Loss per common share
from continuing operations $ (0.16) $ (0.63) $ (0.47) $ (0.84)
Loss per common share
from discontinued retail -- -- (0.24) --
------- ------- ------- -------
Net loss per common share $ (0.16) $ (0.63) $ (0.71) $ (0.84)
------- ------- ------- -------
------- ------- ------- -------
Weighted average common shares
outstanding 11,634 11,202 11,346 11,202
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
BROTHERS GOURMET COFFEES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
Three months Three months Nine months Nine months
September 26, September 27, September 26, September 27,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,916) $(7,022) $(8,072) $ (9,370)
Adjustments to reconcile net income to cash
provided by operating activities:
Loss from litigation settlement expense -- 5,500 -- 5,500
Discontinued retail operations -- -- 2,700 --
Depreciation and amortization 3,286 2,960 9,628 9,459
Current and noncurrent promotional expenses (1,371) (1,360) (5,155) (2,229)
Changes in operating assets and liabilities:
Current assets (1,838) (5,668) 5,686 (1,137)
Current liabilities 2,741 666 (3,999) (708)
Other noncurrent assets (32) 18 (55) (195)
------- ------- ------- --------
Net cash provided by (used in) operating
activities:
Continuing operations 870 (4,906) 733 1,320
Discontinued retail operations (63) (601) (2,131) (3,529)
------- ------- ------- --------
807 (5,507) (1,398) (2,209)
Cash flows from investing activities:
Purchases of plant and equipment, net (1,685) (805) (4,697) (1,979)
Proceeds from sale of discontinued
retail operations 312 540 412 4,477
------- ------- ------- --------
Net cash (used in) provided by
investing activities (1,373) (265) (4,285) 2,498
Cash flows from financing activities:
Net borrowings and repayments under
revolving line of credit 902 3,147 6,866 (10,414)
(Repayment of) proceeds from term loan (375) (375) (1,125) 7,125
Net borrowings and repayments under
capital lease 39 -- (35) --
Proceeds from short term note payable -- 3,000 -- 3,000
Debt issuance costs -- -- (23) --
------- ------- ------- --------
Net cash provided by (used in)
financing activities 566 5,772 5,683 (289)
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
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 26, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(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 and nine-month periods
ended September 26, 1997 are not necessarily indicative of the results that may
be expected for the year ending 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").
This Quarterly Report on Form 10-Q contains certain restated financial
information regarding the Company's financial position for certain prior
reporting periods. For more details concerning such restated financial
information, see the Company's Quarterly Reports on Form 10-Q/A for the fiscal
quarter ended March 28, 1997 (the "First Quarter 1997 Form 10-Q") and the fiscal
quarter ended June 27, 1997 (the "Second Quarter 1997 Form 10-Q") , and Note 2
below.
NOTE 2-- ACCOUNTING CHANGE
During the fiscal quarter ended June 27, 1997, the Company changed its method of
accounting for inventories from the last-in, first-out (LIFO) method to the
first-in, first out (FIFO) method. The Company believes the change is
preferable because (1) due to recent operating losses and demands on liquidity,
users of the Company's financial statements are principally interested in
understanding the Company's current financial position, and the FIFO method
better illustrates that position, (2) the FIFO method provides a better matching
of current costs with revenues and (3) the FIFO method is the predominant method
used by the Company's competitors and peer group.
The change in method of inventory costing has been applied retroactively by
restating the prior years' financial statements. The effect on the balance
sheet as of December 27, 1996, was to decrease (1) inventory and retained
earnings by $98 and (2) net loss for the three-month period ended March 28, 1997
by $200. Net loss for the nine- months ended September 27, 1996 increased by
$400.
NOTE 3--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 4--EARNINGS PER SHARE
Shares underlying options and warrants are not included in the computation
for the three-months ended and nine- months ended September 26, 1997, and
September 27, 1996, because their effect is antidilutive to the net loss per
share.
4
<PAGE>
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 26, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTE 5--INVENTORIES
The components of inventories consist of the following:
September 26, December 27,
1997 1996
---- ----
Green coffee $ 5,147 $ 4,844
Finished goods 6,510 6,900
Packaging and other supplies 1,774 2,082
------- -------
$13,431 $13,826
------- -------
------- -------
NOTE 6--DEBT FACILITIES
A summary of indebtedness outstanding under the Company's Debt Facilities (as
defined below) is as follows:
September 26, December 27,
1997 1996
---- ----
Revolving Credit Facility(a) $ 10,032 $ 3,166
Term Loan Facility(b) 5,625 6,750
Senior Subordinated Note Facility(c) 15,000 15,000
Capital lease obligations 199 228
-------- -------
30,856 25,144
Less value ascribed to warrants (3,077) (3,359)
Less current maturities (15,741) (1,648)
-------- -------
$ 12,038 $20,137
-------- -------
-------- -------
(a) The Company's revolving credit facility (the "Revolving Credit
Facility"), in the maximum principal amount of $15,000, currently bears
interest at the default rate, i.e., the prime rate plus 3.0% (11.5% at
September 26, 1997), payable monthly in arrears. The Revolving Credit
Facility is scheduled to mature on May 28, 1999. At September 26, 1997, the
outstanding principal balance drawn under the Revolving Credit Facility was
$10,032, and the remaining availability was $1,200.
(b) The Company's term loan facility (the "Term Loan Facility"), in the
principal amount of $7,500, bears interest at the default rate, i.e., the
prime rate plus 3.5% (12.0% at September 26, 1997), 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.
(c) The Company's unsecured subordinated senior note facility (the "Senior
Subordinated Note Facility"), in the principal amount of $15,000, bears
interest at the rate of 11.25% per annum, payable quarterly. The entire
principal balance of the Senior Subordinated Note Facility (plus accrued and
unpaid interest) is due and payable on December 26, 2002.
(a), (b) and (c) The Revolving Credit Facility and Term Loan Facility
(collectively, the "Operating Facility) and the Senior Subordinated Note
Facility (which, together with the Operating Facility, is collectively referred
to herein as the "Debt Facilities") contain various restrictive covenants. At
September 26, 1997, the Company was not in compliance with the cash flow-to-debt
service covenants in its Debt Facilities. Such non-compliance constitutes
continuing events of default (the "Covenant Defaults") under the Debt Facilities
documents. As discussed below, SBCC (as defined below) has agreed to forebear
from acting on the Covenant Defaults through November 28, 1997. Pursuant to the
terms of the Subordination Agreement (as defined below), management believes
that Dilmun does not have the right to accelerate repayment of the Senior
Subordinated Note Facility (as defined below) solely because of the Covenant
Defaults and, accordingly, the Company has continued to classify the outstanding
borrowings as long-term.
5
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 26, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Sanwa Business Credit Corporation, the Operating Facility lender ("SBCC"), and
the Company are parties to a Forbearance Agreement. Pursuant to the Forbearance
Agreement (as amended), SBCC has agreed (1) to continue to permit the Company to
borrow under the Revolving Credit Facility and (2) to forbear from exercising
any of its remedies with respect to the Covenant Default through the earliest to
occur of (a) November 28, 1997, (b) repayment in full of the obligations under
the Operating Facility or (c) the date of a default under the Forbearance
Agreement (the "Extension Period"). Based on the foregoing, the Company has
reflected all borrowings outstanding under the Operating Facility as a current
liability on its Condensed Consolidated Balance Sheet at September 26, 1997.
The Company has asked Dilmun Financial Services, the Senior Subordinated Note
Facility lender ("Dilmun"), to waive the Covenant Default under the Senior
Subordinated Note Facility, for certain amendments to the Senior Subordinated
Note Facility documents to conform such documents to the New Senior Facility (as
defined below) documents and for certain amendments to the subordination
agreement between Dilmun and SBCC to reflect the terms of the New Senior
Facility (as defined below). Dilmun has indicated that it is willing to provide
such waivers and amendments, as requested, provided certain conditions are met.
The parties are in negotiations to finalize the terms of of such waivers and
amendments. While the Company anticipates that it will obtain the necessary
waivers and amendments from Dilmun, there can be no assurance that this will
occur. If the Company cannot obtain such waivers and amendments, the Company
may not be able to close the New Senior Facility (or another financing
alternative) prior to the expiration of the Extension Period on November 28,
1997.
In September 1997, the Company received a commitment letter for a new $26
million revolving credit and term loan facility from an institutional lender
(the "New Senior Facility"). The commitment letter terminates on November 28,
1997. The Company is working diligently to close the New Senior Facility and
refinance the Operating Facility in full before the termination of the
commitment letter and the Extension Period. At the same time, the Company is
exploring other financing alternatives. While the Company believes that it will
close the New Senior Facility or another financing alternative on or before
November 28, 1997, there can be no assurance that this will in fact occur. If
the Company is unable, for any reason, to obtain a new senior debt facility in a
principal amount sufficient to permit it to refinance the entire outstanding
principal balance of the Operating Facility on or before November 28, 1997, the
Company will be in default under the Operating Facility, and SBCC's agreement to
forbear from acting on such default will expire.
NOTE 7--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. 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 8 -- Contingencies and
Contingent Liabilities.
As of September 26, 1997, the Company's obligations under the non-cancelable
operating leases for its Coffee Bars were as follows: fiscal year 1997- $140;
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/or assigned to third parties. The remaining rents on these 20 leases are
approximately $6,600.
NOTE 8--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 $28,407 of the purchase price. The remaining $1,593 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. The period for Second Cup to assert claims against the Company's
expired on September 30, 1997. Prior to that date, Second Cup has asserted
warranty claims against the Company totaling approximately $1,000. These claims
principally consist of costs and expenses and other amounts
6
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 26, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
incurred with respect to (a) franchisee disputes, threatened disputes and
related legal fees , (b) inventory packaging and fixed asset claims, (c)
lease termination and buyout costs, (e) consultant costs, (f) advertising
fund deficiencies, (g) income tax deficiencies and (h) other miscellaneous
costs and expenses. The Company has accepted a total of $130,000 (net) of
these claims. The Company is in negotiations with Second Cup regarding the
remaining claims. Claims that cannot be settled will be submitted to
arbitration or litigation. The Company intends to vigorously defend the
claims that it has rejected and to negotiate in good faith the claims that
are subject to dispute. Based on its own detailed review of the 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.
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 is currently negotiating
to sell its two remaining Coffee Bars located in New York City.
NOTE 9--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-months and nine -months ended September 26, 1997 and September 27,
1996, and expects this trend to continue for the remainder of fiscal year
1997.
NOTE 10--LITIGATION
For background information concerning the litigation matters discussed below,
please see the Company's 1996 Form 10-K, First Quarter 1997 Form 10-Q and Second
Quarter 1997 Form 10-Q (collectively, the "Company's Prior SEC Filings"):
(1) SHAREHOLDER CLASS ACTION AND SHAREHOLDER DERIVATIVE ACTION (COLLECTIVELY,
THE "SHAREHOLDER ACTIONS") . As discussed in the Company's Prior SEC Filings,
the Company has agreed to distribute, 1,848,118 shares of its Common Stock to
the plaintiff class. The case is still in the share allocation phase. The
Company expects to complete this phase, to distribute the settlement shares to
the plaintiff class and for the Shareholder Actions to be resolved during the
fourth quarter of fiscal year 1997.
(2) KONA COFFEE CLASS ACTION. The hearing on class certification and the
defendants' motion to dismiss the plaintiffs' amended complaint was held on
October 15 and 16, 1997. The court had not ruled on the defendants' motions as
of the date hereof. The Company has submitted a claim to its insurors seeking
coverage for, among other things, advertising injury, in connection with this
lawsuit.. The insurors initially denied coverage. The Company is continuing to
negotiate this matter with its insurors.
(3) SECOND CUP WARRANTY CLAIMS/LITIGATION:
PARKER/FRANKLIN MILLS FRANCHISE ARBITRATION. This matter went before an
arbitration panel in May 1997 and the panel held for the defendants and
against the plaintiff.
PATEL HILLTOP FRANCHISE ARBITRATION. The plaintiffs have filed an
arbitration claim against the Company and Gloria Jean's, seeking to rescind
a franchise agreement for the Hilltop franchise, located in Richmond,
California. The claims are similar to the claims asserted against the
defendants in the Parker/Franklin Mills matter. The defendants are
vigorously defending this matter.
(4) JERRY HOLLAND LITIGATION. Mr. Holland, a former employee of, and
consultant to, the Company has filed suit against the Company seeking to
recover certain consulting fees and severance pay that he alleges the
Company agreed to pay him. The Company denies liability for these amounts
and is vigorously defending this lawsuit.
7
<PAGE>
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.
THREE MONTHS ENDED SEPTEMBER 26, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 27, 1996
NET SALES. Net sales increased by $.4 million, or 2.4%, in the third
quarter of fiscal year 1997 as compared to the third quarter of fiscal year
1996. The increase was due principally to a 15.8%, or $.80 per pound,
improvement in sales price realization during the third quarter of fiscal year
1997 as compared to the same period in fiscal year 1996. Sales price
realization improved in the third quarter of fiscal year 1997 due to two
wholesale price increases, one in April 1997 and another in July 1997. The
increases were offset, in part, by a 13.1%, or .5 million, decrease in pound
volume. The decrease in pound volume was attributable principally to a loss of
certain customers and lower consumer demand for gourmet coffee due, in all
likelihood, to the increasing retail price of coffee, especially in the gourmet
coffee segment. Green coffee prices have started declining. In response to these
declines, the Company announced a price decrease, effective October 1997.
GROSS PROFIT AND GROSS PROFIT MARGIN. Gross profit increased by $1.1
million during the third quarter of fiscal year 1997 as compared to the third
quarter of fiscal year 1996. Gross profit margin increased, as a percentage of
sales, from 43.4% in the third quarter of fiscal year 1996 to 48.7% in the third
quarter of fiscal year 1997. The increases were due principally to the effects
of wholesale coffee prices increasing in advance of increases in green coffee
costs coupled with the Company selling selected amounts of green coffee which
generated $.7 million of incremental gross profit.
DISTRIBUTION, SELLING AND MARKETING EXPENSES. Distribution, selling and
marketing expenses increased $.9 million, or 13.8%, in the third quarter of
fiscal year 1997 as compared to the third quarter of fiscal year 1996. This was
due principally to $.2 million of increased advertising costs and a $.5
million increase in customer expenses associated with incremental rebate,
slotting and advertising allowances. Distribution, selling and marketing
expenses, as a percentage of sales, increased from 37.4% in the third quarter of
fiscal year 1996 to 41.6% in the third quarter of fiscal year 1997, principally
due to these same factors.
ADMINISTRATIVE EXPENSES. Administrative expenses remained unchanged during
the third quarter of fiscal year 1997 as compared to the third quarter of fiscal
year 1996. Administrative expenses, as a percentage of sales, decreased to 8.1%
in the third quarter of fiscal year 1997 from 8.4% in the comparable period in
fiscal year 1996, principally due to increased sales.
INTEREST EXPENSE. Interest expense increased by $.6 million, or 155.7%, in
the third quarter of fiscal year 1997 as compared to the third quarter of fiscal
year 1996. The increase was due principally to higher borrowing amounts and
higher effective interest rates due to the Covenant Defaults under the Operating
Facility.
LITIGATION SETTLEMENT. During the third quarter of fiscal year 1996, the
Company accrued $5.5 million for the Shareholder Litigation Settlement. No
litigation accrual was recorded in the third quarter of fiscal year 1997.
LOSS FROM CONTINUING OPERATIONS AND NET LOSS. Loss from continuing
operations and net loss was $1.9 million in the third quarter of fiscal year
1997 as compared to $7.0 million in the third quarter of fiscal year 1996. See
Litigation Settlement above.
NINE MONTHS ENDED SEPTEMBER 26, 1997 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 27, 1996
NET SALES. Net sales decreased $1.4 million, or 2.8%, during the first
nine months of fiscal year 1997 as compared to the first nine months of fiscal
year 1996. The decrease was due principally to a $3.0 million reduction in
volume (.6 million pounds) as a result of the loss of certain customers and
lower consumer demand for gourmet coffee due to higher retail coffee prices,
offset in part by $1.6 million of improved sales price realization ($.16 per
pound) due to higher wholesale coffee prices. Green coffee prices have started
declining. In response to these declines, the Company announced a price
decrease, effective October 1997.
8
<PAGE>
BROTHERS GOURMET COFFEES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 26, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
GROSS PROFIT. Gross profit increased $1.6 million, or 7.0%, in the first
nine months of fiscal year 1997 as compared to the first nine months of fiscal
year 1996. Gross profit, as a percentage of sales, increased to 50% in the first
nine months of fiscal year 1997 as compared to 45% in the same period during
fiscal year 1996. The increases were due principally to the effects of wholesale
coffee prices increasing in advance of increases in green coffee costs coupled
with the Company selling selected amounts of green coffee which generated $2.0
million of incremental gross profit
DISTRIBUTION, SELLING AND MARKETING EXPENSES. Distribution, selling and
marketing expenses increased $2.2 million, or 11.7% in the first nine months of
fiscal year 1997 as compared to the same period in fiscal year 1996. The
increase was due principally to increased customer expenses of $.7 million in
the area of rebates and advertising, specifically for new and renewal customer
agreements. Direct store delivery costs ("DSD") increased $.7 million as a
result of the increase in the number of DSD routes. The number of routes
increased by 10, or 20.4%, since December 31, 1996. Marketing increased by $.7
million due to an increase in advertising (principally a national coupon drop),
increased point of purchase ("POP") advertising materials for customer displays
and increased expenses for the rollout of the new gourmet gift line.
Distribution, selling and marketing expenses, as a percentage of sales,
increased from 36.5% in the first nine months of fiscal year 1996 to 42% in the
first nine months of fiscal year 1997.
ADMINISTRATIVE EXPENSES. Administrative expenses decreased $.2 million, or
4.5%, during the first nine months of fiscal year 1997 as compared to the same
period in fiscal year 1996. The decrease was due principally to a decline of
$.4 million in non-recurring administrative costs. These savings were offset by
a $.2 million increase in legal expense associated with the Kona Coffee Class
Action and other pending litigation. Administrative costs, as a percentage of
sales, improved during the first nine months of fiscal year 1997 to 8.3% as
compared to 8.5% during the same period in fiscal year 1996.
INTEREST EXPENSE. Interest expense, including debt acquisition costs,
increased by $1.4 million, or 92.8%, in the first nine months of fiscal year
1997 as compared to the first nine months of fiscal year 1996. The increase was
due principally to higher borrowing amounts and higher effective interest rates
due to the Covenant Defaults under the Operating Facility.
LITIGATION SETTLEMENT. During the third quarter of fiscal year 1996, the
Company accrued $5.5 million for the Shareholder Litigation Settlement. No
litigation accrual was recorded during the first nine-months of fiscal year
1997.
LOSS FROM CONTINUING OPERATIONS. Loss from continuing operations decreased
by $4.0 million, or 42.7%, in the first nine months of fiscal year 1997 as
compared to the same period in fiscal year 1996 principally due to a decrease
of $5.5 million related to the 1996 Shareholder Litigation Settlement and an
increase of $1.6 million in gross profit partially offset by $3.1 million of
additional interest expense and distribution, selling and marketing expenses.
LOSS FROM DISCONTINUED RETAIL OPERATIONS. Loss from discontinued retail
operations increased by $2.7 million during the first nine months of fiscal year
1997 as compared to the same period in fiscal year 1996. In the second quarter
of fiscal year 1997, the Company settled the Lindgren Litigation by agreeing to
pay $2.2 million in cash and stock to the plaintiffs. During the first nine
months of fiscal year 1997, the Company accrued an additional $1.4 million for
the Lindgren Litigation plus an additional $1.3 million for remaining
obligations associated with Gloria Jeans and the closing of its Coffee Bars.
NET LOSS. Net loss decreased from $9.4 million for the first nine months of
fiscal year 1996 to $8.1 million for the first nine-months of fiscal year 1997.
See the discussion above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended
September 26, 1997 and September 27, 1996, was $1.4 million and $2.2 million,
respectively. The Company's continuing operations generated $.7 million and
$1.3 million of cash from operating activities during the comparable periods.
In addition, the Company made $4.7 million of capital expenditures,
consisting of $2.7 million for customer display equipment and $2.0 million
for plant and computer equipment. The Company funded net cash used in
operating activities and capital expenditures with $5.7 million of borrowings
under its Revolving Credit Facility.
9
<PAGE>
Management expects that capital expenditures for the remainder of fiscal
year 1997 (primarily associated with the acquisition of customer display and
plant equipment) will not exceed $.7 million. Management expects to fund these
expenditures from operations and borrowings under its Revolving Credit Facility,
to the extent required. At September 26, 1997, the Company had approximately
$1.2 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 Debt Facility (which, together
with the Operating Facility, are collectively referred to herein as the "Debt
Facilities") contain several covenants, including cash flow-to-debt service
covenants. At September 26, 1997, the Company was not in compliance with either
cash flow-to-debt service covenant. Such non-compliance constitutes continuing
events of default (the "Covenant Defaults") under the agreements governing the
Debt Facilities under the Debt Facilities documents. As discussed below, SBCC
(as defined below) has agreed to forebear from acting on the Covenant Defaults
through November 28, 1997. Pursuant to the terms of the Subordination Agreement
(as defined below), management believes that Dilmun does not currently have the
right to accelerate repayment of the Senior Subordinated Rate Facility (as
defined below) solely because of the Covenant Defaults and, accordingly, the
Company has continued to classify the outstanding borrowings as long-term.
Sanwa Business Credit Corporation, the Operating Facility lender ("SBCC"),
and the Company are parties to a Forbearance Agreement. Pursuant to the
Forbearance Agreement (as amended), SBCC has agreed (1) to continue to permit
the Company to borrow under the Revolving Credit Facility and (2) to forbear
from exercising any of its remedies with respect to the Covenant Default through
the earliest to occur of (a) November 28, 1997, (b) repayment in full of the
obligations under the Operating Facility or (c) the date of a default under the
Forbearance Agreement (the "Extension Period"). Based on the foregoing, the
Company has reflected all borrowings outstanding under the Operating Facility
as a current liability on its Condensed Consolidated Balance Sheet at September
26, 1997.
The Company has asked Dilmun Financial Services, the Senior Subordinated
Note Facility lender ("Dilmun"), to waive the Covenant Default under the Senior
Subordinated Note Facility, for certain amendments to the Senior Subordinated
Note facility documents to conform such documents to the New Facility (as
defined below) documents and for certain amendments to the subordination
agreement between Dilmun and the New Senior Facility (as defined below) lender.
Dilmun has indicated that it is willing to provide such waivers and amendments,
as requested, provided certain conditions are met. The parties are in
negotiations to finalize the terms of such waivers and amendments. While the
Company anticipates that it will obtain the necessary waivers and amendments
from Dilmun, there can be no assurance that this will occur. If the Company
cannot obtain such waivers and amendments, the Company may not be able to close
the New Senior Facility (or another financing alternative) prior to the
expiration of the Extension Period on November 28, 1997.
In September 1997, the Company received a commitment letter for a new $26
million revolving credit and term loan facility from an institutional lender
(the "New Senior Facility"). The commitment letter terminates on November 28,
1997. The Company is working diligently to close the New Senior Facility and
refinance the Operating Facility in full before the termination of the
commitment letter. At the same time, the Company is exploring other financing
alternatives. While the Company believes that it will close the New Senior
Facility or another financing alternative on or before November 28, 1997, there
can be no assurance that this will in fact occur. If the Company is unable, for
any reason, to obtain a new senior debt facility in a principal amount
sufficient to permit it to refinance the entire outstanding principal balance of
the Operating Facility on or before November 28, 1997, the Company will be in
default under its Operating Facility, and SBCC's agreement to forbear from
acting on such default will expire.
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.
10
<PAGE>
The low levels of supplies, labor unrest in Colombia and reported poor
coffee crops in key Arabica growing countries resulted in an increase in green
coffee prices from $1.14 per pound in December 1996 to in excess of $3.00 per
pound in April 1997. In response to these increases, the Company announced
wholesale price increases on all of its products of approximately $0.50 per
pound, effective April 1997, and $.30 per pound effective July 1997. Green
coffee prices have recently dropped back below $1.50 per pound. The Company
will attempt to maintain its per pound gross profit by increasing or decreasing
sales prices when and as necessary to help keep pace with changes in green
coffee prices. The Company's response to these decreases was an announcement to
reduce wholesale prices by approximately $0.40 per pound, effective October
1997. In the past, substantial price increases have met with varying degrees of
customer resistance. Increases in sales prices may result in decreases 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
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 pending litigation in Note 10 - Litigation to the
Notes to Condensed Consolidated Financial Statements of the Company for the
fiscal quarters ended March 28, 1997 and June 27, 1997, which are included
elsewhere in this Quarterly Report on Form 10-Q.
The Company is also involved in other 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
See Part II, Item 4., below.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Part I, Item 2. above and Note 6 - Debt Facilities to the Notes to
Condensed Consolidated Financial Statements March 28, 1997 and June 27, 1997 for
a detailed description of the pending Covenant Defaults, the Forbearance
Agreement with SBCC and the ongoing waiver and amendment discussions with
Dilmun.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
See the discussion of the vote of the stockholders to increase the number
of authorized shares of Common Stock in the Company's Second Quarter 1997 Form
10-Q.
ITEM 5. OTHER INFORMATION
None
11
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT DESCRIPTION OF DOCUMENT
3.1(1) Restated Certificate of Incorporation
3.2(2) Certificate of Amendment to Restated Certificate of
Incorporation
3.3(3) Restated Bylaws
99.1(4) First Amendment to Forbearance Agreement
99.2(4) Second Amendment to Forbearance Agreement
99.3(4) Third Amendment to Forbearance Agreement
27.1(4) Financial Data Schedule
-------------------------------------------------------------------
(1) Filed with the Company's Registration Statement,
No. 33-70236, filed with the Securities and Exchange
Commission ("SEC") and incorporated herein by reference.
(2) Filed with the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 27, 1997
(3) Filed with the Company's current Report on Form 8-K, filed
with the SEC on March 2, 1995 and incorporated herein by
reference thereto.
(4) Filed herewith.
(B) REPORTS ON FORM 8-K.
None
12
<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: November __, 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
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF DOCUMENT
3.1(1) Restated Certificate of Incorporation
3.2(2) Certificate of Amendment to Restated Certificate of
Incorporation
3.3(3) Restated Bylaws
99.1(4) First Amendment to Forbearance Agreement
99.2(4) Second Amendment to Forbearance Agreement
99.3(4) Third Amendment to Forbearance Agreement
27.1(4) Financial Data Schedule
-----------------------------------------------------------------
(1) Filed with the Company's Registration Statement,
No. 33-70236, filed with the Securities and Exchange
Commission ("SEC") and incorporated herein by reference.
(2) Filed with the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 27, 1997
(3) Filed with the Company's current Report on Form 8-K, filed
with the SEC on March 2, 1995 and incorporated herein by
reference thereto.
(4) Filed herewith.
<PAGE>
June 18, 1997
VIA FACSIMILE AND U.S. MAIL
- ---------------------------
John L. Ruppert, Esq.
Brownstein, Hyatt, Farber
& Strickland, P.C.
410 17th Street
22nd Floor
Denver, Colorado 80202
Re: Sanwa Business Credit Corporation ("Sanwa"): Brothers Gourmet
Coffee, Inc. (the "Company") - Forbearance Agreement, Dated
May 15, 1997 - (the "Forbearance Agreement")
Dear John:
I write on behalf of Sanwa in furtherance of my letter to you dated
May 27, 1997. All capitalized terms used in this letter but not otherwise
defined herein shall have the meanings ascribed to them in the Forbearance
Agreement. Sanwa agrees that the date of June 22, 1997 contained at Section
5.4(c) of the Forbearance Agreement is hereby deleted in its entirety and
replaced with the date July 7, 1997. Additionally, in the event that the
Company receives a written commitment to lend from BankBoston on or before July
7, 1997, then Sanwa will not require the Company to retain the Consultant under
Section 5.4 of the Forbearance Agreement until the earlier of either August 1,
1997 or such date as BankBoston advises the Company that it is no longer
obligated under its commitment letter or is no longer pursuing refinancing on
terms set forth in the commitment letter.
Very truly yours,
Terry John Malik
<PAGE>
John Ruppert
May 27, 1997
Page 2
TJM/cal
cc: Mark Holmes
Jeffrey E. Altshul, Esq.
<PAGE>
SECOND AMENDMENT TO FORBEARANCE AGREEMENT
THIS SECOND AMENDMENT TO FORBEARANCE AGREEMENT (this "Agreement"),
dated as of August 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. All capitalized
terms used herein shall have the meanings ascribed to such terms in the Loan
Agreement and the Forbearance Agreement.
RECITALS
--------
A. WHEREAS, Borrower and Lender entered into that certain Forbearance
Agreement dated as of May 15,1997 and agreed to the first amendment thereto
under the terms of correspondence dated June 18,1997 (collectively, the
"Forbearance Agreement").
B. WHEREAS, the Forbearance Agreement terminated by its own terms on
August 15, 1997;
C. WHEREAS, Agent and Lenders have not expressly or impliedly waived the
Current Default and as a result of the occurrence of the Current Default and the
termination of the Forbearance Agreement, 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;
D. WHEREAS, Borrower has requested that Agent and Lenders renew their
forbearance 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;
E. WHEREAS, the Forbearance Agreement, as amended is a Financing
Agreement; and
F. WHEREAS, Agent and Lenders are willing to renew their forbearance, 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.
<PAGE>
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. Section 1 is hereby amended to add the following defined terms:
"Commitment" means a written, detailed and enforceable commitment for
the New Financing in a form and substance reasonably acceptable to Lender.
"Commitment Failure" means the failure by the Company to obtain the
Commitment and provide a copy thereof to Lender prior to the end of business on
September 15, 1997.
"Forbearance Fee" means $105,000 payable by Company to Lender pursuant
to the terms hereof.
"New Financing" means new loan or loans and other financial
accommodations to be provided to Borrower by an entity or person other than
Sanwa Business Credit Corporation at such times and in such amounts so as to
permit Borrower to pay in full, retire and otherwise honor all Obligations.
"Supplemental Reports" means each and all of the following:
(a) that certain cash flow statement showing revenue and
expenses on a cash basis for a 13 week period as prepared for Borrower's
consultant, Nelson & Company;(b) cash flow forecasts as referred to at Section
5.3(i) in a format acceptable to Lender; and (c) forecasts of capital
expenditures containing comparisons of actual to the prior forecast.
2. Section 1 is hereby amended to delete from the definition of
"Forbearance Termination Date" the date "August 15, 1997" and replace it with
the date "October 31, 1997."
3. Section 3(a) is hereby deleted in its entirety and replaced with
the following:
(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
-2-
<PAGE>
exercise of their rights, powers and remedies afforded under the Financing
Agreements or at law or in equity or by statue, except that (i) 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, (ii) pursuant to sections 2.6(c) and 9 of the Loan Agreement, Lender
may assess and collect interest at the Default Rate, and (iii) pursuant to
section 2.6(f) of the Loan Agreement, Lender may declare, after Commitment
Failure, that no outstanding Loan may continue as, or be converted into, a
LIBOR Rate Loan. The foregoing forbearance shall not be construed to impair
the ability of Agent and Lenders to enforce any such rights, powers or
remedies after the Forbearance Period regardless of whether or not such
enforcement relates to actions taken or payments received during the
Forbearance Period.
4. Section 3(c) is hereby deleted in its entirety and replaced with
the following:
(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.
5. Section 4 is hereby amended to add a new subsection (c) as
follows:
(c) FORBEARANCE FEE. Payment by Company to Lender of 50% of the
Forbearance Fee.
6. Section 5.4 is hereby amended as follows:
(a) In the first paragraph, the date "May 22, 1997" shall be
deleted in its entirety and replaced with "September 16, 1997" and the date
"June 2, 1997" shall be deleted in its entirety and replaced with "September 23,
1997";
(b) In subsection (c) the date "June 22, 1997" shall be deleted
in its entirety and replaced with "October 10, 1997";
7. Section 5.5 is hereby deleted in its entirety and
-3-
<PAGE>
replaced with the following:
"Agent shall waive all prepayment penalties associated with
prepayment arising out of the Commitment provided that payment in
full of the Obligations takes place on or before the Forbearance
Termination Date."
-4-
<PAGE>
8. New subsections 5.8 and 5.9 are added as follows:
5.8 CONDITION TO ENGAGEMENT OF CONSULTANT. Notwithstanding the terms
of Section 5.4, in the event Lender determines, after its receipt
of the Commitment in accordance with the terms of this Agreement,
in its reasonable business judgment that Borrower and a new
lender are proceeding to close the New Financing prior to the
Forbearance Termination Date, Lender will waive temporarily the
provisions of Section 5.4.
5.9 DEFERRAL OF PORTION OF FORBEARANCE FEE. The remaining 50%
balance of the Forbearance Fee shall be payable on the first
business day immediately following Commitment Failure; provided,
however, if Commitment Failure does not occur, Lender shall waive
payment of such balance.
9. Section 9 is hereby amended as follows:
(a) subsection (vi) is deleted in its entirety and replaced with
the following:
(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) new subsections (vii) through (ix) are added as follows:
(vii) Borrower fails prior to August 25, 1997 to provide
Lender a copy of a term sheet for New Financing as executed by
Borrower;
(viii) Borrower fails prior to August 25, 1997 to provide
Lender Supplemental Report (a); and
(ix) Borrower fails to provide Lender Supplemental
Reports (b) and (c) on the periodic basis set forth in Section
5.3 or at such other times as Lender may request.
-5-
<PAGE>
10. Borrower warrants and represents as follows:
(a) Other than the Current Default, no other Event of Default
exists; and
(b) No Forbearance Event of Default exists.
11. Borrower hereby ratifies and affirms each and every term and
condition of the Forbearance Agreement and reasserts each and every
acknowledgment, representation and warranty.
IN WITNESS WHEREOF, this Second Amendment to 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:
---------------------------
-6-
<PAGE>
THIRD AMENDMENT TO FORBEARANCE AGREEMENT
THIS THIRD AMENDMENT TO FORBEARANCE AGREEMENT (the "Agreement"), dated
as of October 31, 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. All capitalized
terms used herein shall have the meanings ascribed to such terms in the Loan
Agreement and the Forbearance Agreement.
RECITALS
--------
A. WHEREAS, Borrower and Lender entered into that certain Forbearance
Agreement dated as of May 15, 1997 and agreed to the first amendment thereto
under the terms of correspondence dated June 18, 1997 and agreed to the second
amendment thereto under the terms of Second Amendment to Forbearance Agreement
dated as of August 15, 1997 (collectively, the "Forbearance Agreement");
B. WHEREAS, Borrower has informed Lender that absent this amendment a
Forbearance Event of Default will occur in that Borrower will not be able to pay
all Obligations when due;
C. WHEREAS, the effectiveness of this amendment is expressly conditioned
upon receipt by Lender of a copy of a written extension of the Commitment
through November 28, 1997;
D. WHEREAS, Agent and Lenders have not expressly or impliedly waived the
Current Default and as a result of the occurrence of the Current Default and the
aforesaid Forbearance Event of 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;
E. WHEREAS, Borrower has requested that Agent and Lenders renew their
forbearance 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;
F. WHEREAS, the Forbearance Agreement, as amended is a Financing
Agreement; and
<PAGE>
G. WHEREAS, Agent and Lenders are willing to renew their forbearance, 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. Section 1 is hereby amended to delete from the definition of
"Forbearance Termination Date" the date "October 31, 1997" and replace it with
the date "November 28, 1997."
2. Section 3(a) is hereby deleted in its entirety and replaced with
the following:
(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 statue, except that (i) 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,
(ii) pursuant to sections 2.6(c) and 9 of the Loan Agreement, Lender may assess
and collect interest at the Default Rate, and (iii) pursuant to section 2.6(f)
of the Loan Agreement, Lender has declared and issued a notice to Borrower that
no outstanding Loan may continue as, or be converted into, a LIBOR Rate Loan.
The foregoing forbearance shall not be construed to impair the ability of Agent
and Lenders to enforce any such rights, powers or remedies after the Forbearance
Period regardless of whether or not such enforcement relates to actions taken or
payments received during the Forbearance Period.
3. Section 5.4 is deleted in its entirety and replaced with the
following:
5.4 Upon the written request of Agent, Borrower shall (a) engage
a business consultant ("Consultant"), the qualifications and experience of which
shall be reasonably satisfactory to Agent, and (b) provide Agent a copy of a
written engagement agreement between Borrower and Consultant; provided,
-2-
<PAGE>
however, that Agent shall not issue such request until the earlier to occur
of Novenber 14, 1997 or a Forbearance Event of Default. 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) Within thirty days of its engagement, 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
-3-
<PAGE>
delivery to Borrower) to Agent; and
(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.
4. New subsection 5.10 is added as follows:
5.10 FORBEARANCE FEE. Notwithstanding any provision herein stated to
the contrary, as part of the consideration for this Third Amendment and the
extension of time contained herein, Borrower authorizes Agent to assess its
account directly for $52,500 representing the unpaid portion of the Forbearance
Fee.
5. Borrower warrants and represents as follows:
(a) Other than the Current Default, no other Event of Default
exists; and
(b) Other than the Forbearance Event of Default described at
Recital "B," no Forbearance Event of Default exists.
6. Borrower hereby ratifies and affirms each and every term and
condition of the Forbearance Agreement and reasserts each and every
acknowledgment, representation and warranty.
IN WITNESS WHEREOF, this Third Amendment to 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:
------------------------------
-4-
<PAGE>
Title:
----------------------------
-5-
<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 NINE MONTHS ENDED SEPTEMBER 26, 1997
CONTAINED IN THE FORM 10-Q FILED ON NOVEMBER 10, 1997, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> SEP-26-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 9,945
<ALLOWANCES> 0
<INVENTORY> 13,431
<CURRENT-ASSETS> 28,552
<PP&E> 15,950
<DEPRECIATION> 0
<TOTAL-ASSETS> 102,790
<CURRENT-LIABILITIES> 32,401
<BONDS> 12,038
0
0
<COMMON> 1
<OTHER-SE> 58,234
<TOTAL-LIABILITY-AND-EQUITY> 102,790
<SALES> 49,797
<TOTAL-REVENUES> 49,797
<CGS> 25,129
<TOTAL-COSTS> 27,047
<OTHER-EXPENSES> 61
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,932
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,372)
<DISCONTINUED> (2,700)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,072)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> (.71)
</TABLE>
