-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M5g3mzL6kM1w+BKRSLQptAoSgvvhRUUPf2a+lOeeUIGJP6F4ycV34C8xNs7mLCrw bQ0DofDhUyw7WDgtk0EaxA== 0000930661-98-002701.txt : 19981231 0000930661-98-002701.hdr.sgml : 19981231 ACCESSION NUMBER: 0000930661-98-002701 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 19981230 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GORGES QUIK TO FIX FOODS INC CENTRAL INDEX KEY: 0001030999 STANDARD INDUSTRIAL CLASSIFICATION: SAUSAGE, OTHER PREPARED MEAT PRODUCTS [2013] IRS NUMBER: 582263508 STATE OF INCORPORATION: DE FISCAL YEAR END: 0927 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-20155 FILM NUMBER: 98777871 BUSINESS ADDRESS: STREET 1: 9441 LBJ FREEWAY STREET 2: STE 214 CITY: DALLAS STATE: TX ZIP: 75243 BUSINESS PHONE: 9726907675 MAIL ADDRESS: STREET 1: 9441 LBJ FREEWAY STREET 2: STE 214 CITY: DALLAS STATE: TX ZIP: 75243 10-K405 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K ----------------------- (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 3, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER 333-20155 GORGES/QUIK-TO-FIX FOODS, INC. (Exact name of registrant as specified in its charter) Delaware 58-2263508 (State or other (I.R.S. Employer jurisdiction of incorporation) Identification No.) 9441 LBJ FREEWAY SUITE 214 DALLAS, TEXAS 75243 (Address of principal executive offices) (972) 690-7675 (Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE (Title of class) 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The number of shares of the registrant's Common Stock outstanding at December 21, 1998 was 1,000. There is no public trading market for shares of the registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Certain exhibits to this Form 10-K are incorporated by reference in Part IV. ================================================================================
GORGES/QUIK-TO-FIX FOODS, INC. TABLE OF CONTENTS Page ---- PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . 10 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters . . . . 11 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 PART III Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . 23 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . 25 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . 25 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . 28 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
GORGES/QUIK-TO-FIX-FOODS, INC. 1998 ANNUAL REPORT ON FORM 10-K PART I ITEM 1. BUSINESS GENERAL Gorges/Quik-to-Fix Foods, Inc., (the "Company"), or its representatives, may make forward looking statements, oral or written, including statements in this report's Management's Discussion and Analysis of Financial Condition and Results of Operations, press releases and filings with the Securities and Exchange Commission (the "Commission"), regarding estimated future operating results, planned capital expenditures (including the amount and nature thereof) and the Company's financing plans, if any, related thereto, changes in the Company's financial position and other plans and objectives for future operations. Certain of the matters discussed may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause the actual results, performance or achievements of the Company to differ materially from the Company's expectations are set forth among the factors set forth in the "Factors Affecting Future Performance" section in Item 7 of this report or in the description of the Company's business in Item 1 of this report, as well as factors contained in the Company's other filings with the Commission. All subsequent oral and written forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. The Company assumes no obligation to update any of these statements. The Company's fiscal year ends on the Saturday closest to September 30. References in this report to "fiscal 1999," "fiscal 1998," "fiscal 1997," "fiscal 1996," and "fiscal 1995" refer to the twelve month periods ended October 2, 1999, October 3, 1998, September 27, 1997, September 28, 1996, and September 30, 1995, respectively. The Company is a leading producer of value added processed beef products for the foodservice industry and is one of the few companies in this segment of the industry that markets and distributes nationally. The Company's products are marketed under the nationally recognized Quik-to-Fix and Gorges brand names, as well as the private labels of leading national foodservice distributors. The Company believes that its products are well positioned to take advantage of what it believes is a trend within the foodservice industry toward greater outsourcing of the food preparation process. Outsourcing provides many benefits to foodservice operators including consistent product quality, reduced preparation costs and increased food safety. The Company purchases fresh and frozen beef and, to a lesser extent, pork and poultry, which it processes into a broad range of fully cooked and ready to cook products. The Company's two product categories are value added products and ground beef. Value added product offerings include: (i) breaded beef items, such as country fried steak and beef fingers; (ii) charbroiled beef, such as fully cooked hamburger patties, fajita strips, meatballs, meatloaf and taco meat; and (iii) other specialty products, such as fully cooked and ready to cook pork sausage, breaded pork and turkey, cubed steaks and Philly steak slices. Ground beef product offerings consist primarily of ready to cook individually quick frozen ("IQF") hamburger patties. The Company operates four manufacturing facilities, three of which are dedicated to value added products and one of which produces primarily ground beef products. The Company's products are sold primarily to the foodservice industry, which encompasses all aspects of away- from-home food preparation, including commercial establishments such as fast food restaurants and family dining restaurants and non-commercial establishments such as healthcare providers, schools and corporations. The Company sells its products principally through broadline and specialty foodservice distributors. The Company was formed in 1996 in connection with the acquisition of the processed beef operations (the "Business") of Tyson Foods, Inc. ("Tyson" and the "Acquisition," respectively). Prior to the Acquisition, the Business operated as part of Tyson, the world's largest vertically integrated poultry processor. Tyson acquired a portion of the Business in 1989 through its acquisition of Holly Farms. In doing so, Tyson acquired two separate beef processing companies, Harker's, Inc. ("Harker's") and Quik-to-Fix Foods, Inc. ("Quik-to-Fix, Inc."), each of which had been acquired by Holly Farms in 1986. In 1990, Tyson sold the Harker's brand name and route sales division to Harker's Distribution, Inc., a company formed by former members of Harker's management. In January 1994, Tyson expanded its beef processing operations further by acquiring Gorges Foodservice, Inc., ("Gorges, Inc."), a leading producer of charbroiled beef products. In April 1996, Tyson announced its intention to sell the Business in order to concentrate on its core poultry business. The Acquisition was consummated on November 25, 1996. The Company is incorporated under the laws of the state of Delaware. The Company's principal executive offices are located at 9441 LBJ Freeway, Suite 214, Dallas, Texas, 75243, and its telephone number is 972/690-7675. The Company is a wholly owned subsidiary of Gorges Holding Corporation ("GHC"), which, in turn, is substantially owned by CGW Southeast Partners III, L.P. ("CGW"). GHC has no business other than holding the stock of the Company, which is the sole source of GHC's financial resources. GHC is controlled by CGW, which beneficially owns shares representing 54.8% of the voting interest in GHC, (46.3% on a fully diluted basis) and has the right to designate all of the directors of GHC. Accordingly, CGW, through its control of GHC, controls the Company and has the power to elect all of its directors, appoint new management, and approve any action requiring the approval of the holders of the Company's common stock. RECENT DEVELOPMENTS Operational Restructuring Plan. Historically, the Company has produced two principal product lines, value added products and ground beef products. Since January 1998, the Company's results have been adversely affected by a number of factors including: (i) a significant decrease in sales volume resulting from the loss of certain national account customers; and (ii) the adverse effects on profitability of lower margin products, especially ground beef. The Company recently completed, with the assistance of outside consultants, a detailed review of its operations and has begun to implement an operational restructuring plan. The Company has implemented or intends to implement the following restructuring measures designed to improve operating efficiencies and better position it to focus its efforts on its core value added products business (the "Restructuring"): . Termination of the Low Margin Ground Beef Business. On October 7, 1998, the Company announced its intent to exit the ground beef business to concentrate on its core value added products. The Company's decision to exit the ground beef business was based on the ground beef business being a low margin, commodity business. Additionally, as a middle tier producer of ground beef products, the Company's operating costs have been higher than many of its larger competitors and have been adversely affected by increased regulation of ground beef production and continued consolidation of the ground beef industry. During fiscal 1998, ground beef represented approximately 26.1% of the Company's total net sales. . Disposition of Ground Beef Manufacturing Facility. The Company has offered to sell its Orange City, Iowa manufacturing facility (the "Ground Beef Facility"). Historically, the Ground Beef Facility has produced almost exclusively ground beef product offerings, representing 100% of the Company's total ground beef production based on weight. In December 1998, the Company entered into a non-binding letter of intent to sell the Ground Beef Facility by not later than February 1, 1999. This letter of intent is subject to a number of contingencies, many of which are not within the Company's control, including but not limited to the completion of due diligence by the buyer, the negotiation and execution of a definitive sale agreement and the approval of the buyer's board of directors. There can be no assurance that these contingencies will be satisfied on or before February 1, 1999, if at all. In the event the Company is unable to consummate the proposed sale of the Ground Beef Facility, it intends to close this facility as soon as practicable to facilitate its exit from the ground beef business and to reduce costs. Should the Company close the Ground Beef Facility, it will continue to explore opportunities to sell this facility. Any proceeds from the sale of the Ground Beef Facility are required to be used to reduce the Company's borrowings under the Credit Facility (as defined herein). The Company incurred significant charges relating to the writedown in value or loss on sale of the Ground Beef Facility in the fiscal year ended October 3, 1998 and expects to incur additional charges in the first quarter of fiscal year 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." . Elimination of Lower Margin Value Added Product Offerings. The Company has identified a number of value added product offerings whose contribution margins are not sufficient to justify their continued production. The Company intends to eliminate these product offerings in order to focus on its higher margin value added product offerings. The Company believes that elimination of less profitable product lines will allow it to produce more efficiently its remaining value added product offerings. . Reduction of Working Capital Requirements and Corporate Overhead. The Company intends to reduce inventory levels in connection with its exit from the ground beef business and the elimination of lower margin value added product offerings. The Company also has identified various other areas in which it believes it can reduce its overhead expenses. Additionally, the Restructuring contemplates a reduction in selling, general and administrative costs, as well as other corporate overhead costs. . Strengthening of Management Team. In connection with the Restructuring, the Company has strengthened its management team by eliminating the position of President, hiring a new Vice President of Operations and creating the new position of Senior Vice President of Sales and Marketing. The Company believes this will allow it to more efficiently implement the Restructuring and operate its business following the Restructuring. See "Directors and Executive Officers of the Registrant." Financial Restructuring. As of October 3, 1998, the Company was not in compliance with certain technical or financial and limit ratio covenants under its credit agreement (the "Credit Agreement") with NationsBank, N.A. (the "Bank") as agent for a syndicate of banks and financial institutions which provides the Company with a $30 million revolving credit facility (the "Revolver") and a $40 million term loan facility (the "Term Loan" and, together with the Revolver, the "Credit Facility"). As a result of its noncompliance under the Credit Facility, the Company was prohibited by the Bank from borrowing additional amounts under the Revolver or making the December 1, 1998 interest payment (the "Interest Payment") on its Senior Subordinated Notes Due 2006, Series B (the "Notes"). In order to address the company's non-compliance under the Credit Facility and to facilitate the Interest Payment, the Company has implemented or intends to implement the following measures designed to address the Company's short-term and long-term financing needs (the "Financial Restructuring"): . Amendment to Credit Facility. On October 29, 1998, the Company entered into an amendment to the Credit Facility (the "Amendment") that replaces the existing covenants with a new set of covenants under which the Company can borrow funds based on the levels of its accounts receivable and inventory. The implementation of new covenants under the Credit Facility may have the effect of reducing the amount available under the Revolver depending on the levels of accounts receivable and inventory at any given time. The Amendment also shortens the maturity of the Credit Facility from November 2001 to November 2000. The change in maturity of the Credit Facility does not affect the repayment schedule under the Credit Facility, except that all payments that previously were due between November 2000 and November 2001 (an aggregate of $11.4 million) will be due on November 30, 2000. Additionally, the Amendment provides that on March 31, 1999, the Company must pay a fee under the Credit Facility equal to 0.25% of the amounts outstanding under the Credit Facility and, thereafter, every three months, the Company must pay a fee under the Credit Facility in cash equal to 0.50% of the amounts outstanding under the Credit Facility until such time as the Company has secured a replacement facility (the "Replacement Credit Facility") from another lender. The Amendment became effective on December 21, 1998, at which time the Company was in compliance with all terms and conditions of the Credit Facility. . Repurchase and Retirement of Notes. On October 29, 1998, the Company announced a tender offer pursuant to which it offered to purchase not less than $36,000,000 (the "Minimum Tender Condition") and up to $46,000,000 aggregate principal amount of its Notes (the "Offer"). On December 2, 1998, the Company elected to waive all conditions to the consummation of the Offer, including the Minimum Tender Condition, and consummated the Offer with respect to $29,970,000 aggregate principal amount of Notes (the "Tendered Notes"). Additionally, on December 21, 1998, the Company's controlling stockholder, CGW, contributed to the Company $18,030,000 aggregate principal amount of Notes (the "CGW Notes") acquired by CGW through open market purchases. The Tendered Notes and the CGW Notes were retired on December 21, 1998. The repurchase and retirement of the Tendered Notes and the CGW Notes were financed through an equity investment by CGW in GHC totaling $16,900,000. . Bridge Loan. On December 21, 1998 the Company obtained from CGW a $4,000,000 subordinated bridge loan (the "Bridge Loan"), the proceeds of which were used to fund the Interest Payment. The terms of the Bridge Loan provide for a one year loan to the Company at an interest rate of 9%. On December 15, 1999, if the Company has not obtained a Replacement Credit Facility, the Bridge Loan will automatically convert to equity in GHC. . The Replacement Senior Facility. As a result of the increased fees payable under the Credit Facility pursuant to the Amendment, the Company is seeking a commitment from several alternative lenders with respect to the Replacement Credit Facility. There can be no assurance that the Company will successfully implement the Replacement Credit Facility, or that if obtained, such facility will have terms and conditions satisfactory to the Company or that are more favorable than the Credit Facility. As a result of the effectiveness of the Amendment, the retirement of the Tendered Notes and the CGW Notes and the obtaining of the Bridge Loan, as of December 21, 1998, the Company was in compliance with all terms and conditions under the Credit Agreement and the indenture pursuant to which the Notes were issued. The Company believes that the Financial Restructuring will address its short and long-term financing needs and will allow management to concentrate on the completion of the Restructuring. There can be no assurance, however, that the Restructuring or the Financial Restructuring will be successful in improving the Company's financial condition and results of operations. Factors that may affect the success of the Restructuring or the Financial Restructuring include, among other things, the sale or closure of the Ground Beef Facility, the implementation of the Replacement Credit Facility and the matters set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Future Performance." INDUSTRY OVERVIEW The Foodservice Industry. Purchases of food prepared away from home have grown consistently for over forty years and currently represent approximately 50% of total food purchases. Demand has risen due to various demographic changes, including increases in personal disposable income, the increasing number of single-parent households and the rising number of dual income families. The Company believes it has strengthened its relationships with broadline and specialty foodservice distributors over the last decade, a period of industry consolidation. Furthermore, management believes that the Company is well positioned to continue to identify and capitalize on certain segments of the foodservice industry that are growing at a faster rate than the foodservice industry overall. The Company believes restaurants and other foodservice providers are seeking to outsource more of the ''back-of-the-house'' food preparation process in order to reduce preparation costs and to ensure product safety, quality and consistency. Management believes the growth in the foodservice industry, combined with the trend of outsourcing food preparation, will enhance the growth of value added food processors. The Beef Industry. Beef is the most consumed protein in the United States on the basis of boneless, per capita consumption. Although per capita beef consumption in the United States declined through the late 1980s as consumers became more concerned about the level of fat in their diet, the beef industry has taken steps to maintain beef as the nation's number one protein. Beef is now leaner than ever, with the average cut of beef 27% leaner than in 1985, due to closer trimming of fat, new leaner cuts of beef and the use of leaner cattle. According to the Beef Industry Council, within the foodservice industry, beef consumption increased from 6.22 billion beef servings in commercial restaurants in 1991 to 6.68 billion servings in 1994, a 7.4% increase. Furthermore, according to NPD/CREST, ground beef represents 79% of all beef served away from home. Fueled by high value ''combo'' meals in the fast food segment, ground beef volume sales in the restaurant industry grew by 2.5% in 1996. A number of national associations conduct research on consumer preferences for beef, run programs to promote the consumption of beef and conduct research on improvement of the beef product. These associations, which provide valuable category promotion, include The National Cattlemen's Association, The Beef Industry Council and the National Livestock and Meat Board. Value Added Beef Processors. Value added beef processors such as the Company purchase fresh and frozen beef and process it into a broad range of fully cooked and ready to cook products sold primarily to the foodservice industry, including fast food and family dining restaurants, wholesale clubs, healthcare providers, schools and corporations. The Company believes that foodservice operators' priorities are quality, product consistency, food safety, ease of preparation and price and that its products satisfy these priorities. PRODUCT CATEGORIES The Company manufactures and markets an extensive variety of IQF, fully cooked and ready to cook beef, pork and poultry products. The Company's products are marketed under the nationally recognized Quik-to-Fix and Gorges brand names as well as the private labels of leading national foodservice distributors. Value Added Products. The Company's breaded beef products are sold primarily under the Quik-to-Fix brand. The flagship product of the Quik-to-Fix brand is country fried steak. The primary customers for breaded beef products are commercial foodservice operators, including Shoney's, Cracker Barrel, Chili's, Steak and Ale and Marriott Corporation. Charbroiled beef products are the flagship items of the Gorges brand. Under the Gorges brand, the Company offers an extensive variety of fully cooked charbroiled beef products, including charbroiled steak burgers, meatballs, meatloaf, taco meat and chili. Customers for charbroiled beef products include a wide variety of commercial users such as Ryan's, Golden Corral and Marriott Corporation, along with non-commercial users such as hospitals, schools and corporations. Growth in charbroiled beef products has been driven by customers' desire to minimize preparation time and concerns about the food safety issues surrounding the handling of raw beef products. The USDA Commodity Reprocessing Program for schools has also played an important role in the growth of these products, as it allows the Company to couple the processing of federally donated commodity products with the sale of other value added products, thereby increasing penetration in the important school foodservice program segment. Other value added products include a wide variety of fully cooked and ready to cook items such as charbroiled beef strips, pork sausage, beef luncheon steaks, cubed steaks, pre-cooked rib patties, meatloaf, stew beef and breaded turkey products. In March 1996, Quik-to-Fix Beef Steak Slices were introduced for use in Philly steak sandwiches, stir-fry and other sliced steak dishes. Customers for these specialty items include Tyson, Stouffer's, Steak and Ale, McLane, and Subway. Value added products accounted for $149.0 million (73.9%), $147.3 million (71.9%) and $149.6 million (64.3%) of sales (excluding frozen portion steak sales) in fiscal 1998, fiscal 1997, and fiscal 1996, respectively. Ground Beef. The Company currently serves the ground beef market principally through the sale of IQF patties. The ground beef market is very competitive and is served by a large number of national and regional suppliers. Ground beef customers include Sonic, Harker's, and Sysco. Ground beef accounted for $56.3 million (26.7%), $57.4 million (28.1%) and $74.7 million (32.1%) of sales (excluding frozen portion steak sales) in fiscal 1998, fiscal 1997, and fiscal 1996 respectively. As part of the Restructuring, the Company intends to exit the ground beef business. Accordingly, the Company expects that sales of ground beef products will decline significantly in fiscal 1999 and will not continue after the second quarter of fiscal 1999. GROWTH STRATEGY The Company's business was acquired from Tyson on November 25, 1996. Prior to the Acquisition, Tyson's management modified its strategy of providing a full range of center of the plate meat proteins in addition to chicken. Accordingly Tyson returned its focus to its core poultry business, as evidenced by its adoption of the ''We're Chicken'' campaign in early 1996. The Company's principal business objective is to build its higher margin value added business. Value added products address many of the concerns within the foodservice industry, including cost reduction, food safety and product quality and consistency. Management believes that by focusing on its core value added product offerings, the Company will be better able to capitalize on its strengths and industry trends, including the following. . Favorable Trends in the Foodservice Industry. Purchases of food prepared away from home have grown consistently for over forty years and currently represent approximately 50% of total food purchases. Demand has risen due to various demographic changes, including increases in personal disposable income, the increasing number of single-parent households and the rising number of dual income families. The Company believes that there is also an increasing trend within the foodservice industry toward outsourcing more of the food preparation process to reduce preparation costs and to ensure product safety, quality and consistency. The Company addresses these outsourcing needs by producing products that are precooked or ready to cook (e.g. breaded, portioned and seasoned) and require little "back-of-the-house" preparation. . Strong Brand Names. The Gorges and Quik-to-Fix brands have been established for over 50 and 30 years, respectively. The Company believes its charbroiled beef and country fried steak customers associate the Gorges and Quik-to-Fix brand names with products that are high quality, safe and reasonably priced. The Company intends to capitalize on this brand recognition to increase the market penetration of its breaded beef and charbroiled beef products and to promote additional products under the Gorges and Quik-to-Fix brand names. . Focused Sales and Marketing Team. The Company's sales and marketing team consists of 14 experienced professionals, most of whom worked with Gorges, Inc., Harker's or Quik-to-Fix, Inc. prior to their acquisition by Tyson. Until May 1996, these sales professionals marketed substantially all of the Tyson product line. With volume based incentives, sales were dominated by high volume chicken products. The Company's sales force, now selling only the Company's product line, continues to be compensated based on sales volume and growth based incentive programs, all of which are tied to sales of the Company's predominantly beef based product lines. . Extensive Foodservice Broker Network. Management believes that the Company's extensive independent foodservice broker network, consisting of 64 brokers covering 49 states, is one of its most valuable assets. The brokers act as extensions of the Company's in-house sales force, providing sales and marketing support and an intensive sales effort focused on the major foodservice distributors in each of their respective regions. . Strong and Diverse Customer Base. The Company has a strong and diverse customer base, anchored by 48 of the 50 largest broadline foodservice distributors. The Company's products are purchased by several the 50 largest multi-unit restaurant chains in the United States, including Shoney's, Metromedia (Steak and Ale, Bennigan's and Ponderosa) and Advantica (Denny's, Coco's and Carrow's) as well as by institutional customers such as Marriott Corporation and Aramark. The Company also services school districts through the USDA Commodity Reprocessing Program. . Modern Facilities with Excess Capacity. As part of the Restructuring, the Company intends to sell or close the Ground Beef Facility to aid its exit from the ground beef business. The Company's three remaining modern facilities use state-of-the-art equipment with capacity that will allow significant volume increases without major additional capital expenditures. . Experienced and Focused Management Team. Prior to the Acquisition, the Company's four plants operated primarily as independent facilities rather than as an integrated unit. Furthermore, strategic decisions were made by corporate level managers whose principal focus was on Tyson's core poultry business. As part of the Restructuring, the Company has strengthened its management team by eliminating the position of President, hiring a new Vice President of Operations and creating the new position of Senior Vice President of Sales and Marketing. The Company believes this will allow it to more efficiently implement the Restructuring and operate its business following the Restructuring. SALES AND MARKETING Sales and Marketing Team The Company's sales and marketing team consists of 16 experienced professionals, most of whom worked with Gorges, Inc., Harker's or Quik-to-Fix, Inc. prior to their respective acquisitions by Tyson. Until May 1996, these sales professionals marketed substantially all of the Tyson product line. With volume based incentives, sales were dominated by high volume chicken products. The Company's sales force, now selling only the Company's product lines, continues to be compensated based on sales volume and growth based incentive programs, all of which are tied to sales of the Company's predominantly beef based product lines. Foodservice Broker Network Management believes that the Company's extensive independent foodservice broker network consisting of 64 brokers covering 49 states, is one of its most valuable assets. The brokers act as extensions of the Company's in-house sales force, providing sales and marketing support and an intensive sales effort focused on the major foodservice distributors in each of their respective regions. Most brokers sell a wide variety of products produced by other manufacturers. However, the brokers generally do not carry products that compete directly with those produced by the Company. The brokers are compensated on a commission basis and do not take title to the Company's products. The brokers perform the following functions: (i) sell the Company's products to foodservice distributors; (ii) provide administrative support for the Company and its foodservice distributors; and (iii) sell the Company's products to foodservice operators through product presentations, participation in broadline foodservice distributor food shows, training seminars for key foodservice operators, training seminars for distributor sales representatives and introduction and execution of new product rollout and promotional activities. CUSTOMERS AND END USERS Overview Commercial and non-commercial foodservice operators are the primary end users of the Company's products. Commercial foodservice operators include fast food and family dining restaurants, multi-unit national chain accounts, regional chain accounts and wholesale clubs. Non-commercial foodservice operators include hospitals, corporations and schools (including through the USDA Commodity Reprocessing Program). The Company's sales force, in conjunction with the Company's independent foodservice brokers, markets the Company's products to broadline and specialty distributors, multi-unit chains and wholesale clubs. The majority of sales to foodservice distributors are effected through the Company's independent broker network. Foodservice distributors are the principal suppliers of the Company's products to the end users. During fiscal 1998, Sysco and Harker's accounted for 16.6% and 10.7% of gross sales, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Factors Affecting Future Performance." Foodservice Distributors Broadline foodservice distributors distribute a full line of dry, refrigerated and frozen food products to commercial and non-commercial foodservice operators. A majority of the Company's sales are made to broadline and specialty foodservice distributors which resell the Company's products to end users under the Gorges and Quik-to-Fix brand names or under the distributor's private label using items produced and packaged for the distributor. The Company has established strong relationships with 48, if necessary] of the top 50 broadline foodservice distributors in the United States, including Sysco, US Food Service (formerly JP Foodservice, US Foodservice and Rykoff-Sexton), Alliant Foodservice, Inc. and PYA/Monarch, Inc. End Users. The four primary end users of the Company's products are: (i) independent commercial foodservice operators, including fast food, family dining and fine dining restaurants, snack bars and caterers, most of which purchase their products through broadline foodservice distributors; (ii) national accounts, concentrated in the rapidly growing fast food and family dining category, which generally have centralized buying organizations served by either broadline or specialty foodservice distributors; (iii) wholesale clubs such as Price/Cost Co.; and (iv) non-commercial foodservice operators, including corporate cafeterias and health care and educational institutions, most of which purchase their products primarily through broadline foodservice distributors. USDA Commodity Reprocessing. The Company participates in the USDA Commodity Reprocessing Program. Under this federal program, the Company takes USDA-donated commodity beef and further processes it for schools. The Company charges a fee for processing the beef into value-added further processed products such as charbroiled beef patties and fully cooked breaded beef patties. The program has complex administrative requirements with which the Company has significant experience. These complex administrative requirements make it difficult for competitors to enter the business on a casual basis. The majority of demand for a product under the program arises each springs and fall; however, the frozen nature of the product allows production to be scheduled throughout the year to keep plant utilization high. Despite this segments continued growth as a percent of the Company's sales, the Company has historically derived less than 10% of its revenues from the USDA Commodity Reprocessing Program. DISTRIBUTION The Company is one of the few value added beef processors that distributes its products nationally. Prior to the Acquisition, all of the Company's products were shipped frozen to customers, to public warehouses for distribution or to a Tyson warehouse for distribution with other Tyson products. Historically, two thirds of the Company's shipping requirements have been met by independent shippers and trucking lines with the remainder being shipped in Tyson-owned trucks with charges to the Company at market rates. Between 1994 and the consummation of the Acquisition, Tyson required the Business to stock inventory at four separate warehouses to accommodate Tyson's poultry shipping needs, thereby resulting in higher inventory levels. Beginning June 1, 1997, the Company established a distribution network using its own warehouses and two primary public warehouses. Substantially all of the Company's products are shipped by common and contract carriers. Management believes that this network will allow the Company to maintain its national distribution capability. SUPPLIERS The three major components of the Company's products are: (i) meat proteins; (ii) batter, breading, spices and other ingredients; and (iii) packaging material. The Company has long standing relationships with numerous major beef suppliers and operates a centralized procurement group that is responsible for sourcing beef for all of its facilities. Approximately 50% of the Company's beef needs are obtained from two major suppliers: IBP and Montfort (ConAgra). The Company's pork and poultry needs also are sourced primarily from these major suppliers, as well as Tyson Foods, and John Morrell. Although the supply of meat proteins is concentrated, it is a commodity market and supplies at USDA standards are readily available from a variety of sources. The Company typically purchases raw materials from its suppliers using short-term purchase orders. The Company does not speculate in the markets for its raw materials and generally does not enter into long-term contractual arrangements with its suppliers. As a matter of policy, the Company performs its own quality assurance testing of its raw materials; however, the Company does require pre-testing by its suppliers of raw materials to be used in its IQF raw ground beef products. Batters, breading, spices and other ingredients, once specified, are purchased at the plant level, typically from regional suppliers. Virtually all packaging material requirements for the Company's products, which consist of corrugated boxes, plastic bags and labels, are acquired on a local basis for each of the plants. RESEARCH AND DEVELOPMENT Over the past three years, the Company has introduced a variety of new products or product extensions, including the Super and Ultra Crispy Country Fried Steaks, Pub Burger, Beef TastyRib, charbroiled meatballs, cooked taco meat, philly beef steak slices, breaded turkey and cooked babyback ribs. The Company currently employs nine research and development professionals dedicated to product development, headed by a team leader with a BS in Biochemistry and Food Science and Masters degrees in Biochemistry and Business Administration. The Company's research and development team works closely with the sales force to respond to changing customer needs. ENVIRONMENTAL MATTERS The operations of the Company and the ownership of real property by the Company are subject to extensive and changing federal, state and local environmental laws and regulations. The Company believes it is currently in material compliance with all known material and applicable environmental regulations and currently does not expect to make material capital expenditures with respect to environmental control facilities during fiscal 1999. However, in the future the Company may be involved from time to time in administrative and judicial proceedings and inquiries relating to environmental matters and may be required to make capital expenditures to comply with environmental laws. Prior to the Acquisition, Tyson incurred monthly surcharges of approximately $40,000 to the city of Garland, Texas as a result of effluent wastewater discharges from the Garland, Texas facility. Tyson elected to pay the monthly surcharges and not modify the facility to allow for reduction or elimination of the surcharges. Since the Acquisition, the Company has continued to incur the monthly surcharges although slightly reduced in amount due to certain modifications of the facility. The Company currently does not intend to further modify the facility to allow its operation without incurring any surcharge due to the prohibitive nature of the amount of needed investment; however, this will not preclude other minor modifications as needed or deemed necessary over time to help further reduce these charges. The amount of the surcharge is calculated based on the amount of effluent discharge and the total amount of water used by the Garland, Texas plant. Management does not believe that the incurrence of the aforementioned surcharges will have a material adverse effect on the Company's business, results of operations and debt service capabilities. There can be no assurance, however, that such surcharges will not be increased or that the Company will not be required to modify its operations, which may result in significant expenses or material capital expenditures. GOVERNMENTAL REGULATION The Company is subject to federal, state and local health laws and regulations that establish standards for the manufacture, storage, labeling and transport of foodstuffs. The USDA is the regulatory body, which is primarily responsible for oversight of the Company's operations. Beef, pork and poultry inspection is mandatory, under the jurisdiction of the Food Safety and Inspection Service (a division of the USDA), for meat that is transported across state lines or is otherwise placed in interstate commerce. Tyson has made, and the Company may be required to make, capital expenditures in response to changing compliance standards and production, storage, and transportation technology. Recently, several of the Company's competitors allegedly have been responsible for the distribution and sale of beef products contaminated with the e-coli virus. Although the Company has taken measures to ensure that its products are not contaminated with such virus, there can be no assurance that such contamination will not occur or that, in the absence of such contamination, the Company's results of operations, financial condition and debt service capabilities will not be adversely affected by negative publicity about the Company's industry. In addition, such publicity or other factors may result in increased government regulation of the Company's business and there can be no assurance that such regulation will not adversely affect the Company's results of operations, financial condition, and debt service capabilities. The Company operates an USDA-approved Total Quality Control program at each facility. The Company's programs assure that the Company's products are manufactured under conditions that meet or exceed all applicable government standards. Such programs are monitored by federal inspectors and include: (i) inspection of meat at various stages of processing; (ii) temperature monitoring for both fresh and cooked meat; (iii) review of packaging and labels used for fresh and processed meat; and (iv) controlling and monitoring the use of additives. As a participant in the USDA Commodity Reprocessing Program for schools, the Company must adhere to certain rules, regulations and guidelines. Such rules, regulations and guidelines include financial surety bonding in the state of operation, product inspection and grading and certain reporting requirements. Should the Company fail to remain in compliance with such rules, regulations and guidelines, it could be excluded from the USDA Commodity Reprocessing Program, which could have a material adverse effect on the Company's business, results of operations and debt service capabilities. The operations and the products of the Company are also subject to state and local regulation through such measures as licensing of plants, enforcement of health standards and inspection of the facilities. Enforcement actions for violations of federal, state and local regulations may include seizure and condemnation of products, cease and desist orders, injunctions and/or monetary penalties. Management believes that the Company's facilities and practices are sufficient to maintain compliance with applicable government regulations, although there can be no assurances in this regard. PATENTS AND TRADEMARKS The Company utilizes a number of U.S. trademarks, the most important of which are Gorges/(R)/ and Quik-to-Fix/(R)/. Certain of the Company's products are marketed under additional trademarks, such as Crispntender/(R)/, Tenderbroil/(R)/ and TastyRib/(R)/. Although the Company's management considers all such intellectual property to be valuable assets, management believes that the loss or expiration of any patents or trademarks, other than the Gorges or Quik-to-Fix trademarks, would not have a material adverse effect on the Company's business, results of operations and debt service capabilities. The above referenced trademarks, service marks and trade names used by the Company are the property of the Company. In addition, the Company uses other trademarks under co-pack arrangements for various customers. Various trademarks, service marks and trade names used under such co-pack arrangements or to which reference is made in this report are the property of owners other than the Company. Such owners have all applicable rights with respect to their respective trademarks, service marks and trade names. COMPETITION The value-added beef processing industry is highly competitive, with a large number of competitors offering similar products. The Company's most significant competitors in its primary markets are Advance Meats, King's Command, Penthouse Meats, Pierre/Fresh Foods, Travis Meats and Zartic. In addition, certain of the Company's suppliers, such as Cargill, IBP and ConAgra, produce ground beef products that compete directly with certain of the Company's products. The Company seeks to successfully compete with these suppliers by providing a diversity of product offerings and custom order packaging to meet its customers' needs. However, there can be no assurance that such suppliers will not expand their presence in the value-added beef processing industry in the future. These suppliers and Hudson Specialty Foods are larger and have greater resources than the Company. The Company also faces significant price competition from its competitors and may encounter competition from new market entrants. EMPLOYEES The Company employs approximately 1,000 people. However, in connection with the Restructuring and the sale or closure of the Ground Beef Facility, the Company expects to reduce its total number of employees by approximately 250. Currently, approximately 200 employees of a total of 253 union-eligible employees at the Garland, Texas facility are represented by the United Food & Commercial Workers International Union, AFL-CIO, CLC, Local 540 (the "Union"). The Garland, Texas facility is being operated pursuant to the terms and conditions specified by the Company at the time of the consummation of the Acquisition. The Company was not obligated to enter into the collective bargaining agreement agreed upon by Tyson and the Union or to continue to operate the Garland, Texas facility pursuant to the terms of such agreement. Management is currently negotiating a replacement collective bargaining agreement with the Union, although there can be no assurance that it will be successful in doing so. [Has the Union contract been finalized?] ITEM 2. PROPERTIES. The Company's properties consist of the following manufacturing facilities:
---------------------------------------------------------------------- LOCATION PRODUCT CATEGORY SQUARE FOOTAGE --------------------------- ----------------------- ---------------- ---------------------------------------------------------------------- Garland, Texas Value added products 122,166 ---------------------------------------------------------------------- Harlingen, Texas Value added products 111,412 ---------------------------------------------------------------------- Orange City, Iowa Ground beef and value 135,600 added products ---------------------------------------------------------------------- Sioux Center, Iowa Value added products 72,211 ----------------------------------------------------------------------
The Company owns all of the manufacturing facilities. The Company has offered to sell its Orange City, Iowa manufacturing facility and has entered into a non-binding letter of intent to sell this facility by February 1, 1999. In the event the Company is unable to consummate the proposed sale of the Ground Beef Facility, it intends to close this facility as soon as practicable to facilitate its exit from the ground beef business and to reduce costs. Should the Company close the Ground Beef Facility, it will continue to explore opportunities to sell this facility. The Company's principal executive offices are located at 9441 LBJ Freeway, Suite 214, Dallas, Texas 75243. ITEM 3. LEGAL PROCEEDINGS. At the present, the Company is not a party to nor are any of its properties subject to any lawsuit or proceeding which, in the opinion of management of the Company, is likely, individually or in the aggregate, to have a material adverse effect on the Company. However, the Company is likely to be subject to claims arising from time to time in the ordinary course of its business. In certain of such actions, plaintiffs may request punitive or other damages that may not be covered by insurance and, accordingly, no assurance can be given with respect to the ultimate outcome of any such possible future claims or litigation or their effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matters to a vote of security holders during the year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's common stock is not publicly traded. The Company is a wholly owned subsidiary of GHC, which, in turn, is substantially owned by CGW. GHC has no business other than holding the stock of the Company, which is the sole source of GHC's financial resources. GHC is controlled by CGW, which beneficially owns shares representing 54.8% of the voting interest in GHC, (46.3% on a fully diluted basis) and has the right to designate all of the directors of GHC. Accordingly, CGW, through its control of GHC, controls the Company and has the power to elect all of its directors, appoint new management and approve any action requiring the approval of the holders of the Company's common stock. On November 25, 1996, CGW, NationsBanc Investment Corp. ("NBIC"), Mellon Bank, N.A., as trustee of First Plaza Group Trust, a General Motors pension plan ("FPGT") and Messrs. Culwell, Mitchell, Powers, Collins and Aviles (each a "Senior Manager" and, collectively, the "Senior Managers" and, together with NBIC and FPGT, the "Stockholders") entered into a Securities Purchase and Stockholders Agreement (the "Securities Purchase and Stockholders Agreement") with regard to GHC. Subsequent to the Acquisition Closing, Mr. Letier became a party to the Securities Purchase and Stockholders' Agreement (Mr. Letier shall hereinafter be included in the definitions of Stockholder and Senior Manager). All future purchasers of GHC common stock will be required to enter into the Securities Purchase and Stockholders Agreement. The Securities Purchase and Stockholders Agreement contains provisions concerning the governance of GHC and the Company, restrictions on the transferability of the securities of GHC and the Company and registration rights for the securities of GHC held by the Stockholders. The governance provisions of the Securities Purchase and Stockholders Agreement provide that the Board of Directors of GHC will consist of up to five members all of whom shall be designated by CGW, and that the Board of Directors of the Company shall be comprised of the directors of GHC. The Securities Purchase and Stockholders Agreement requires holders of voting securities of GHC to vote their shares in favor of such designees of CGW for election as directors of GHC. The Securities Purchase and Stockholders Agreement also grants to each of NBIC and FPGT the right, except in certain circumstances, to have a representative in attendance at all meetings of the Board of Directors of GHC or the Company. The Securities Purchase and Stockholders Agreement grants to the stockholder parties thereto pre-emptive rights, exercisable pro rata in accordance with their respective ownership of common stock of GHC, to purchase shares of common stock or other equity securities of GHC (other than shares of common stock issued upon exercise of options, rights, awards or grants pursuant to the Plan and common stock issued in exchange for common stock of another class), and further provides for certain co-sale rights and obligations in the event CGW elects to sell all or a portion of its shares of GHC's common stock. Additionally, GHC has a right of first refusal in connection with any proposed sale by NBIC, FPGT or any Senior Manager of its or his investment in GHC. In connection with the Financial Restructuring, in December 1998 CGW acquired additional equity securities of GHC. In order to provide NBIC, FPGT and the Senior Managers with the benefit of the pre-emptive rights under the Securities Purchase and Stockholders Agreement, CGW has agreed to offer to each of NBIC, FPGT and the Senior Managers the opportunity to acquire its pro rata share of such equity securities at the same price as such equity securities were acquired by CGW. Assuming each of NBIC, FPGT and the Senior Managers accept this offer, CGW will continue to beneficially own shares representing 54.8% of the voting interest in GHC. Should any or all of NBIC, FPGT or the Senior Managers decline this offer, CGW's beneficial ownership of GHC will increase proportionately. The Securities Purchase and Stockholders Agreement provides that if a Senior Manager's employment is terminated for any reason other than for cause, GHC will have the right to repurchase any shares owned by such Senior Manager at the greater of cost or fair value. If a Senior Manager's employment is terminated for cause, GHC will have the right to repurchase any shares owned by such Senior Manager at the lesser of fair value or cost. Such right is exercisable within 180 days following such termination of employment of the Senior Manager. Fair value of the repurchased shares shall be determined by agreement between GHC and the Senior Manager whose shares are being repurchased or, failing such agreement, by an independent investment banking firm. If GHC is unable to exercise either its right of first refusal or right to repurchase shares of common stock from a Senior Manager whose employment is terminated, it may assign such right to the other Stockholders who are parties to the Securities Purchase and Stockholders Agreement (other than the Stockholder whose shares are subject to such rights), who may exercise such rights in accordance with their respective ownership of common stock. ITEM 6. SELECTED FINANCIAL DATA. The following table presents (i) selected historical financial information of the Company and the Business, as of the dates and for the periods indicated, and (ii) summary pro forma financial information of the Company, as of the date and for the period indicated, adjusted for the completion of the Acquisition. The historical financial information for the year ended October 3, 1998 and the three hundred six days ended September 27, 1997 have been derived from the Company's financial statements, which have been audited by Ernst & Young LLP. The historical information for the three years in the period ended September 28, 1996 and the fifty-eight days ended November 25, 1996 has been derived from the Business' financial statements, which have been audited by Ernst & Young LLP. The summary pro forma information does not purport to represent what the Company's results of operations would have been if such events had occurred at the dates indicated, nor does such information purport to project the results of the Company for any future period. The summary financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and the Notes thereto included elsewhere in this annual report.
Business Company --------------------------------------------------------------------------------------------- Year Ended Year Ended Year Ended September November September Year Ended October 1, September September 29, 1996 26, 1996 29, 1996 October 3, 1994 30, 1995 28, 1996 to to to 1998 November September September 25, 1996 27, 1997 27, 1997 (58 days) (306 days) (Pro (In thousands) forma)(2) Statement of operations data: Revenues $331,969 $304,474 $232,761 $31,966 $172,738 $204,704 $201,581 Costs and expenses, excluding amortization 312,480 283,337 215,973 30,070 158,794 189,649 199,627 and restructuring Amortization 1,528 1,624 1,624 250 2,706 3,057 3,294 Restructuring expense - - - - - - 13,900 Operating income (loss) 17,961 19,513 15,164 1,646 11,238 12,098 (15,240) Interest expense - - - - 13,709 16,398 17,243 Other expenses (income) 4 678 796 - 11 11 (10) Income tax 7,508 7,931 6,205 731 - - 58 Net income (loss) $10,449 $10,904 $8,163 $915 ($2,482) ($4,311) ($32,531) Balance sheet data (at period end): Total assets $211,261 $211,261 $171,803 Total debt 149,500 149,500 147,850 Total equity 43,103 43,103 10,572 Other data: EBITDA (1) 28,579 29,877 24,080 2,238 21,291 24,768 11,487 Cash provided by (used for) operating activities 16,724 21,107 15,895 962 3,117 N/A 6,785 Cash provided by (used for) investing activities (39,773 2,510 (609) (141) (187,944) N/A (3,208) Cash provided by (used for) financing activities 23,075 (23,637) (15,286) (821) 184,827 N/A (1,906) Capital expenditures 6,580 2,792 735 141 3,691 3,832 3,112
(1) Excludes one time charge of $13,900 for the year ended October 3, 1998 relating to the Restructuring. (2) The pro forma results reflect the information assuming the Acquisition occurred at September 29, 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL In the Acquisition, the Company acquired the Business from Tyson. Prior to the Acquisition, (i) Gorges/Quik-to-Fix Foods, Inc. had no significant assets or liabilities and had not conducted any business, other than in connection with the Acquisition and the related financings (the "Transactions"), and (ii) the Business was not operated by Tyson as a distinct legal entity. The following discussion should be read in conjunction with the Audited Financial Statements and the Notes thereto, and the Unaudited Pro Forma Financial Statements and the Notes thereto of the Company included elsewhere in this report. RESULTS OF OPERATIONS The Company's fiscal year ends on the Saturday closest to September 30. References in this report to "fiscal 1998," "fiscal 1997" and "fiscal 1996" refer to the twelve month periods ended October 3, 1998, September 27, 1997, and September 28, 1996, respectively. Discussion of the results of operations for the Company as they relate to fiscal 1997 are made in reference to the pro forma Statement of Income, which represents an adjusted combination of the two stub periods, one of the Business prior to the consummation of the Acquisition, and one of the Company following the consummation of the Acquisition, which together completes coverage of the time of the 52 week period ended September 27, 1997. The following tables set forth, for the fiscal periods indicated: (i) sales and categories of expenses in dollars and as a percentage of sales; and (ii) production volumes.
FISCAL YEAR ENDED --------------------------------------------------------------------------- SEPTEMBER 28, SEPTEMBER 27, OCTOBER 3, 1996 1997 1998 HISTORICAL PRO FORMA COMPANY --------------------------------------------------------------------------- (DOLLARS AND POUNDS IN THOUSANDS) SALES $232,761 100.0% $204,704 100.0% $201,581 100.0% COST OF GOODS SOLD 189,559 81.4 166,696 81.4 171,746 85.2 --------------------------------------------------------------------------- GROSS PROFIT 43,202 18.6 38,008 18.6 29,835 14.8 OPERATING EXPENSES 28,038 12.1 25,910 12.7 45,075 22.4 --------------------------------------------------------------------------- OPERATING INCOME (LOSS) 15,164 6.5 12,098 5.9 (15,240) -7.6 OTHER EXPENSES 796 0.3 16,409 8.0 17,233 8.5 --------------------------------------------------------------------------- EARNINGS BEFORE TAXES ON INCOME (LOSS) 14,368 6.2 (4,311) -2.1 (32,473) -16.1 PROVISION FOR INCOME TAXES 6,205 2.7 - 0.0 58 0.0 --------------------------------------------------------------------------- NET INCOME (LOSS) $ 8,163 3.5% $ (4,311) -2.1% $(32,531) -16.1 =========================================================================== VOLUME (IN POUNDS) 173,821 154,628 156,192
FISCAL YEAR ENDED ----------------------------------------- SEPTEMBER 28, 1996 SEPTEMBER 27, 1997 OCTOBER 3, 1998 ------------------ ------------------ --------------- HISTORICAL PRO FORMA COMPANY ---------- --------- ------- (DOLLARS AND POUNDS IN THOUSANDS, EXCEPT PER POUND AMOUNTS) DOLLARS Value added products............ $149,564 $147,260 $149,051 Ground beef..................... 74,670 57,444 52,530 Frozen portion steaks........... 8,527 - - -------- -------- -------- $232,761 $204,704 $201,581 ======== ======== ======== VOLUMES (IN POUNDS) Value added products............ 93,631 92,065 92,494 Ground beef..................... 77,604 62,563 63,698
Frozen portion steaks........... 2,586 - - -------- -------- -------- 173,821 154,628 156,192 ======== ======== ======== SALES PER POUND Value added products............ $ 1.60 $ 1.60 $ 1.61 Ground beef..................... 0.96 .92 0.82 Frozen portion steaks........... 3.30 - - -------- -------- -------- Overall average................. $ 1.34 $ 1.32 $ 1.29 ======== ======== ========
FISCAL YEAR ENDED OCTOBER 3, 1998 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 27, 1997 Sales. Total sales decreased $3.1 million, or 1.5%, from $204.7 million in fiscal 1997 to $201.6 million in fiscal 1998. This decrease was primarily due to decreased sales of ground beef, partially offset by increased sales of value added products. Sales of value added products increased $1.8 million, or 1.2%, from $147.3 million in fiscal 1997 to $149.0 million in fiscal 1998. This increase reflects increased sales in the first quarter of fiscal 1998, partially offset by decreases in sales to national accounts in the second and third quarters of fiscal 1998. This increase is also partially attributable to the inclusion of an additional week in fiscal 1998 compared to fiscal 1997 and increases in average selling prices, partially offset by the discontinuation of sales of certain less profitable value added products. Value added product sales increased 0.4 million pounds, or 0.5%, from 92.1 million pounds in fiscal 1997 to 92.5 million pounds in fiscal 1998. Sales of ground beef products decreased $4.9 million, or 8.6%, from $57.4 million in fiscal 1997 to $52.5 million in fiscal 1998. This decrease was primarily due to decreased sales volumes resulting from the completion of a contract with a national club store and, to a lesser extent, decreases in average selling prices. The decrease in average selling prices is primarily due to lower prices for raw materials, which the Company passed on, in part, to its customers. The Company's ground beef contracts with its customers are generally formula based, changing periodically (weekly, monthly or quarterly) as the market price of the raw materials change; therefore, changes in the costs of raw materials are quickly passed along to customers. Ground beef product sales increased 1.1 million pounds, or 1.8%, from 62.6 million pounds in fiscal 1997 to 63.7 million pounds in fiscal 1998. Gross Profit. Gross profit decreased $8.2 million, or 21.5%, from $38.0 million in fiscal 1997 to $29.8 million in fiscal 1998. As a percentage of sales, gross profit decreased from 18.6% in fiscal 1997 to 14.8% in fiscal 1998. This decrease reflects operating ineffeciencies resulting from lower production levels, discounted sales of older or overstocked products in connection with the Company's inventory reduction initiative and increased sales of lower margin ground beef products. This decrease also reflects reduced sales of higher margin value added products and increased expenses relating to sales and promotional activities. Operating Expenses. Operating expenses increased $19.2 million, or 74.0%, from $25.9 million in fiscal 1997 to $45.1 million in fiscal 1998. Operating expenses for fiscal 1998 include a one time charge of $13.9 million relating to the Restructuring. Excluding this one time charge, operating expenses increased $5.3 million, or 20.3%, from $25.9 million in fiscal 1997 to $31.2 million in fiscal 1998. This increase is primarily the result of the complete organization and staffing of the Company's corporate headquarters following the Acquisition, increased sales and promotional activity in fiscal 1998, full staffing of the Company's research and development group, a significantly higher level of product development activity and, to a lesser extent, increased amortization of goodwill relating to the Acquisition. Operating Income (loss). Operating income (loss) decreased $27.4 million, or 226%, from $12.1 million in fiscal 1997 to ($15.3) million in fiscal 1998. Operating income (loss) for fiscal 1998 includes a one time charge of $13.9 million relating to the Restructuring. Excluding this one time charge, operating income (loss) decreased $13.4 million, or 112%, from $12.1 million in fiscal 1997 to ($1.3) million in fiscal 1998. This decrease is primarily the result of decreases in gross profit due to increased sales of ground beef and decreased sales of higher margin value added products, discounted sales of older or overstocked products in connection with the Company's inventory reduction initiative and increased operating expenses. Interest Expense. Interest expense increased $0.8 million, or 5.2%, from $16.4 million in fiscal 1997 to $17.2 million in fiscal 1998. This increase reflects increased borrowings under the Revolver and, to a lesser extent, increased interest rates. Income Tax. Income tax increased from $0 in fiscal 1997 to $0.06 million in fiscal 1998. The Company's effective income tax rate was approximately 0% and 0% for fiscal 1997 and fiscal 1998, respectively. Net Income (loss). Net income (loss) decreased $28.2 million, or 656%, from ($4.3) million in fiscal 1997 to ($32.5) million in fiscal 1998. Net income (loss) for fiscal 1998 includes a one time charge of $13.9 million relating to the Restructuring. Excluding this one time charge, net income (loss) decreased $14.3 million, or 333%, from ($4.3) million in fiscal 1997 to ($18.6) million in fiscal 1998. FISCAL YEAR ENDED SEPTEMBER 27, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 28, 1996 Sales. Total sales decreased $28.1 million, or 12.1%, from $232.8 million in fiscal 1996 to $204.7 million in fiscal 1997. This decrease was primarily due reduced sales volumes and, to a lesser extent, decreases in average selling prices, partially offset by increased sales through the USDA Commodity Reprocessing Program. The decrease in average selling prices is primarily due to lower prices for two key raw materials, 90% lean beef trimmings and rib lifter meat, which the Company passed on, in part, to its customers. This decrease also reflects the conclusion of a temporary contract with a national fast food chain and the discontinuation of sales of frozen portion steaks during fiscal 1996. Sales of value added products decreased $2.3 million, or 1.5%, from $149.6 million in fiscal 1996 to $147.3 million in fiscal 1997. This decrease reflects slight decreases in sales volumes and selling prices. Sales volumes decreased due to the loss of some business with national account customers and the elimination of certain less profitable products, partially offset by the introduction of new products. Value added product sales decreased 1.5 million pounds, or 1.6%, from 93.6 million pounds in fiscal 1996 to 92.1 million pounds in fiscal 1997. Sales of ground beef products decreased $17.2 million, or 23.1%, from $74.6 million in fiscal 1996 to $57.4 million in fiscal 1997. A major reason for this decrease was the completion of a contract with a national club store and, to a lesser extent, decreases in average selling prices. Ground beef product sales decreased 15.0 million pounds, or 19.4%, from 77.6 million pounds in fiscal 1996 to 62.6 million pounds in fiscal 1997. Sales of frozen portion steaks decreased $8.5 million, or 100%, from $8.5 million in fiscal 1996 to $0 in fiscal 1997, reflecting the Company's decision to discontinue sales of frozen portion steaks. Frozen portion steak sales decreased 2.6 million pounds, or 100%, from 2.6 million pounds in fiscal 1996 to 0 pounds in fiscal 1997. Gross Profit. Gross profit decreased $5.2 million, or 12.1%, from $43.2 million in fiscal 1996 to $38.0 million in fiscal 1997. As a percentage of sales, gross profit remained unchanged at 18.6% in fiscal 1996 and fiscal 1997. The decline in gross profit is primarily attributable to reduced sales volumes. As a percentage of sales, gross profit remained unchanged due to declines in raw material costs and changes in product mix due to declining sales of lower margin ground beef and frozen portion steaks, partially offset by inefficiencies and costs related to the reconfiguration of the Company's Garland, Texas manufacturing facility (the "Reconfiguration") and losses incurred in disposing of frozen portion steak inventory. Operating Expenses. Operating expenses decreased $2.1 million, or 7.6%, from $28.0 million in fiscal 1996 to $25.9 million in fiscal 1997. This decrease is primarily the result of decreased sales of ground beef products, partially offset by the incurrence of costs related to the Reconfiguration in fiscal 1996. Additionally, in fiscal 1996, the Company incurred additional freight and freezer expenses due to increased usage of third party outside freezer space during the Reconfiguration, higher inventory levels resulting from lower sales volumes and opportunistic purchases of raw materials and the added costs of servicing a national account customer. Operating Income. Operating income decreased $3.1 million, or 20.2%, from $15.2 million in fiscal 1996 to $12.1 million in fiscal 1997. This decrease is primarily the result of decreases in sales of ground beef and value added products, partially offset by decreases in operating expenses. Interest Expense. Interest expense increased $16.4 million, or 100%, from $0 million in fiscal 1996 to $16.4 million in fiscal 1997. This increase reflects increased borrowings incurred under the Revolver, the Term Loan and the Notes in connection with the Acquisition. Income Tax. Income tax decreased $0.7 million, or 100%, from $0.7 in fiscal 1996 to $0 in fiscal 1997, reflecting the incurrence of net losses in fiscal 1997. Prior to the Acquisition, the Company's results of operations had been included in Tyson's consolidated federal income tax return. However, the provision for income taxes for fiscal year 1996 has been computed as though the Company had operated on a stand-alone basis. The Company's effective income tax rate was approximately 43% and 0% for fiscal 1996 and fiscal 1997, respectively. Net Income (loss). Net income (loss) decreased $12.5 million, or 152%, from $8.2 million in fiscal 1996 to ($4.3) million in fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES As a result of the Transactions, the Company has significant annual principal and interest obligations. Borrowings under the Credit Facility, which totaled $47.8 million at October 3, 1998 ($28.8 million under the Term Loan and $19.0 million under the Revolver), accrued interest at an average rate of 8.55% in the year ended October 3, 1998. Borrowings under the Notes totaled $100.0 million at October 3, 1998, and accrued interest at 11.5%. As of October 3, 1998, the Company was not in compliance with certain technical or financial and limit ratio covenants under its credit agreement with the Bank which provides the Company with the Revolver and the Term Loan. As a result of its noncompliance under the Credit Facility, the Company was prohibited by the Bank from borrowing additional amounts under the Revolver or making the December 1, 1998 interest payment on its Senior Subordinated Notes Due 2006, Series B. In order to address the company's non-compliance under the Credit Facility and to facilitate the Interest Payment, the Company has implemented or intends to implement the following measures designed to address the Company's short-term and long-term financing needs: . Amendment to Credit Facility. On October 29, 1998, the Company entered into an amendment to the Credit Facility that replaces the existing covenants with a new set of covenants under which the Company can borrow funds based on the levels of its accounts receivable and inventory. The implementation of new covenants under the Credit Facility may have the effect of reducing the amount available under the Revolver depending on the levels of accounts receivable and inventory at any given time. The Amendment also shortens the maturity of the Credit Facility from November 2001 to November 2000. The change in maturity of the Credit Facility does not affect the repayment schedule under the Credit Facility, except that all payments that previously were due between November 2000 and November 2001 (an aggregate of $11.4 million) will be due on November 30, 2000. Additionally, the Amendment provides that on March 31, 1999, the Company must pay a fee under the Credit Facility equal to 0.25% of the amounts outstanding under the Credit Facility and, thereafter, every three months, the Company must pay a fee under the Credit Facility in cash equal to 0.50% of the amounts outstanding under the Credit Facility until such time as the Company has secured a replacement facility from another lender. The Amendment became effective on December 21, 1998, at which time the Company was in compliance with all terms and conditions of the Credit Facility. . Repurchase and Retirement of Notes. On October 29, 1998, the Company announced a tender offer pursuant to which it offered to purchase not less than $36,000,000 and up to $46,000,000 aggregate principal amount of its Notes. On December 2, 1998, the Company elected to waive all conditions to the consummation of the Offer, including the Minimum Tender Condition, and consummated the Offer with respect to $29,970,000 aggregate principal amount of Notes. Additionally, on December 21, 1998, the Company's controlling stockholder, CGW, contributed to the Company $18,030,000 aggregate principal amount of Notes acquired by CGW through open market purchases. The Tendered Notes and the CGW Notes were retired on December 21, 1998. The repurchase and retirement of the Tendered Notes and the CGW Notes were financed through an equity investment by CGW in GHC totaling $16,900,000. . Bridge Loan. On December 21, 1998 the Company obtained from CGW a $4,000,000 subordinated bridge loan, the proceeds of which were used to fund the Interest Payment. The terms of the Bridge Loan provide for a one year loan to the Company at an interest rate of 9%. On December 15, 1999, if the Company has not obtained a Replacement Credit Facility, the Bridge Loan will automatically convert to equity in GHC. . The Replacement Senior Facility. As a result of the increased fees payable under the Credit Facility pursuant to the Amendment, the Company is seeking a commitment from several alternative lenders with respect to the Replacement Credit Facility. There can be no assurance that the Company will successfully implement the Replacement Credit Facility, or that if obtained, such facility will have terms and conditions satisfactory to the Company or that are more favorable than the Credit Facility. As a result of the effectiveness of the Amendment, the retirement of the Tendered Notes and the CGW Notes and the obtaining of the Bridge Loan, as of December 21, 1998, the Company was in compliance with all terms and conditions under the Credit Agreement and the indenture pursuant to which the Notes were issued. The Company believes that the Financial Restructuring will address its short and long-term financing needs and will allow management to concentrate on the completion of the Restructuring. There can be no assurance, however, that the Restructuring or the Financial Restructuring will be successful in improving the Company's financial condition and results of operations. Factors that may affect the success of the Restructuring or the Financial Restructuring include, among other things, the sale or closure of the Ground Beef Facility, the implementation of the Replacement Credit Facility and the matters set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Future Performance." In addition to its debt service obligations, the Company will need liquidity for working capital and capital expenditures. For the fiscal year ended September 28, 1996 the Company spent $0.7 million on capital projects. For the year ended October 3, 1998 and the three hundred six days ended September 27, 1997, the Company spent $3.1 million and $3.7 million, respectively, on capital projects, primarily for the establishment of a corporate administrative function, principally for computer software and hardware, as well as office furniture, fixtures and equipment. The remaining capital expenditures are primarily for the capital maintenance of the Company's facilities as well as the establishment of a research and development facility. In connection with the effort to establish an administrative structure the Company has hired additional personnel into its Dallas corporate office. The Company's primary sources of liquidity are cash flows from operations. In the year ended October 3, 1998, net cash provided by operations of $6.8 million, was used by financing activities of $1.9 million, primarily in connection with reduced term loan balances. In addition, net cash provided by operations was used by investing activities for capital asset purchases. In the three hundred six-day period ended September 27, 1997, net cash provided by financing activities of $184.8 million was used by investing activities of $187.9 million in connection with the Acquisition and normal capital expenditures. Also, the Company had cash provided by operating activities of $3.1 million, primarily in connection with the increase of working capital assets. In the fifty-eight day period ending November 25, 1996, net cash provided by operating activities of $1.0 million was used by investing activities of $0.1 million and financing activities of $0.8 million. At October 3, 1998, the Company had $1.7 million in cash and cash equivalents. The Company anticipates that its working capital requirements, capital expenditures, and scheduled repayments for fiscal 1999 will be satisfied through a combination of cash flows generated from operations together with funds available under the Revolving Credit Facility. EFFECTS OF INFLATION Inflation has not had a significant effect on the Company's operations. However, in the event of increases in inflation or commodity prices from recent levels, the Company could experience sudden and significant increases in beef costs. Over periods of 90 days or less, the Company may be unable to completely pass these price increases on to its customers. Management currently believes that over longer periods of time, it generally will be able to pass on price increases to its customers. EFFECTS OF YEAR 2000 PROBLEMS While the Company is not aware of any material expenses or losses of revenue that it will incur as a result of so-called "Year 2000 problems" it is impossible to anticipate all of the ways in which such problems could arise and affect the Company's financial condition and results of operations. In addition to hardware and software problems that could arise within the Company's own computer systems, computer systems with which the Company's systems interface or other machinery, the Company could be affected by the Year 2000 problems of its suppliers, partners or customers, or of other parties upon whom the Company depends, as well. At this time the Company is unable to quantify the possible effect of Year 2000 problems on its financial condition or results of operations. The majority of the Company's hardware and software was purchased and implemented in the past two years and has been represented to the Company as Year 2000 compliant by the respective vendors. Major risks to the Company from Year 2000 issues would primarily be in the areas of performance by either vendors or customers. The Company could be significantly impacted if the Company's vendors are unable to deliver goods and services needed, or the Company's customers were unable to carry out their respective businesses, or were unable to place an order with the Company due to system failures. The Company's remaining plans related to Year 2000 issues involve a continued effort to poll and monitor vendors and customers through questionnaires and profiles to be gathered in the purchasing and sales processes. RECENT ACCOUNTING PRONOUNCEMENTS In addition, the financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 Reporting Comprehensive Income and Statement of Financial Accounting Standards No. 131 Disclosures About Segments of an Enterprise and Related Information which are effective for financial statement periods beginning after December 15, 1997. As these statements require only additional disclosures, they will have no effect on the Company's financial position, results of operations or cash flows. Statement of Position 98-1, Accounting for the Costs of Computer Software Developed for Internal Use and SOP 98-5, Reporting on the Costs of Start Up Activities are effective for years beginning after December 15, 1998. The Company does not anticipate that SOP 98-1 will have a significant effect on the Company's financial position, results of operations or cash flows. With the adoption of SOP 98-5 the Company will have to write off existing organizational costs. As of October 3, 1998, organizational costs are approximately $3.0 million. FACTORS AFFECTING FUTURE PERFORMANCE Significant Leverage and Debt Service. Upon consummation of the Transactions, the Company became highly leveraged. At October 3, 1998, the Company had total outstanding debt of $147.8 million. In addition, subject to the restrictions in the Indenture, the Company may incur additional indebtedness (including additional Senior Indebtedness) from time to time to finance acquisitions or capital expenditures or for other purposes. At October 3, 1998, the Company had outstanding borrowings of approximately $19.0 million and no unused capacity under the Revolver to finance working capital needs. The level of the Company's indebtedness could have important consequences to holders of the Notes, including: (i) a substantial portion of the Company's cash flow from operations must be dedicated to debt service and will not be available for other purposes; (ii) the Company's ability to obtain additional debt financing in the future for working capital, capital expenditures, research and development, acquisitions or other corporate purposes may be limited; (iii) the borrowings of the Company under the Credit Facility accrue interest at variable rates, which could cause the Company to be vulnerable to increased interest expense in the event of higher interest rates; and (iv) the Company's level of indebtedness could limit its flexibility in reacting to changes in its industry or economic conditions generally. The Company's ability to pay interest on the Notes and to satisfy its other debt obligations will depend upon its future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond its control, as well as the availability of borrowings under the Revolver or successor facilities. The Company anticipates that its operating cash flow and borrowings under the Revolver or successor facilities will be sufficient to meet its operating expenses and to service its debt requirements as they become due. However, if the Company is unable to service its indebtedness, it will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing its indebtedness or seeking additional equity capital. There can be no assurance that any of these remedies can be effected on satisfactory terms, if at all. In addition, the Company's ability to repay the principal amount of the Notes at maturity may depend on its ability to refinance the Notes. There can be no assurance that the Company will be able to refinance the Notes at maturity, if necessary, on satisfactory terms, if at all. Subordination of Notes. The Notes are general unsecured obligations of the Company subordinated in right of payment to all existing and future Senior Indebtedness of the Company, including borrowings under the Credit Facility. In the event of bankruptcy, liquidation or reorganization of the Company, the assets of the Company will be available to pay obligations on the Notes only after all Senior Indebtedness has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Notes then outstanding. In addition, under certain circumstances the Company will not be able to make payment of its obligations under the Notes in the event of a default under certain Senior Indebtedness. At October 3, 1998, the aggregate principle amount of Senior Indebtedness was $47.8 million, including outstanding borrowings of approximately $19.0 million under the Revolver. Decreases in Net Sales. The Company has experienced an overall decrease in net sales during fiscal 1996, fiscal 1997 and fiscal 1998. The decreases are due to decreases in average selling prices, and to a lesser extent a change in sales mix. The decreases in average selling prices are primarily due to lower prices for two key raw materials, 90% lean beef trimmings and rib lifter meat, which the Company has passed on, in part, to customers. Also responsible for sales declines are the reduced sales of ground beef, primarily related to the completion of a temporary contract with a national fast food chain, and lower volumes for frozen portion steaks, a line of the business which the Company discontinued in fiscal 1996. Sales volumes for the Company's value added products have generally increased during the past three years due to overall market growth for these products and the introduction of new products. These increases in sales volumes for value added products were partially offset by the loss of some business with several national accounts. As set forth under "Business--Recent Developments," the Company intends to discontinue the production of ground beef products, which will result in further decreases in net sales. Management intends to pursue the strategies set forth under "Business--Recent Developments" and "--Growth Strategy." However, there can be no assurance that these strategies will be successful. Continued decreases in net sales could have a material adverse effect on the Company's business, results of operations and debt service capabilities. See "Business--Growth Strategy." Restrictions Imposed by Terms of the Company's Indebtedness. The Indenture restricts, among other things, the ability of the Company to incur additional indebtedness, pay dividends or make certain other restricted payments, incur liens to secure pari passu or subordinated indebtedness, engage in any sale and leaseback transactions, sell stock of subsidiaries, apply net proceeds from certain asset sales, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company, enter into certain transactions with affiliates, or incur indebtedness that is subordinate in right of payment to any Senior Indebtedness and senior in right of payment to the Notes. In addition, the Credit Facility contains other and more restrictive covenants and prohibits the Company from prepaying other indebtedness (including the Notes). As a result of these covenants, the ability of the Company to respond to changing business and economic conditions and to secure additional financing, if needed, may be significantly restricted, and the Company may be prevented from engaging in transactions that might otherwise be considered beneficial to the Company. The Credit Facility also requires the Company to maintain specified financial ratios and satisfy certain financial condition tests. The Company's ability to meet those financial ratios and tests can be affected by events beyond its control, and there can be no assurance that the Company will meet those tests. A breach of any of these covenants could result in a default under the Credit Facility. Upon the occurrence of an event of default under the Credit Facility, the lenders could elect to declare all amounts outstanding under the Credit Facility, together with any accrued interest, to be immediately due and payable. If the Company were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. If the Credit Facility was to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay in full that indebtedness and the other indebtedness of the Company, including the Notes. Substantially all the assets of the Company are pledged as security under the Credit Facility. Such assets may also be pledged in the future to secure other Indebtedness. Raw Materials. The Company uses large quantities of meat proteins, including beef, pork and poultry. Approximately 70% of the Company's beef needs are sourced from three major suppliers: IBP; Monfort (ConAgra); and Excel (Cargill). The Company's pork and poultry needs also are sourced from these major suppliers. Historically, market prices for meat proteins have fluctuated in response to a number of factors, including changes in United States government farm support programs, changes in international agricultural and trading policies, weather and other conditions during the growing and harvesting seasons. While the Company historically has been able to pass through changes in the price of meat proteins to end users, there can be no assurance that the Company will be able to pass the effects of future changes to end users. Furthermore, large, abrupt changes in the price of meat proteins could adversely affect the Company's operating margins, although such adverse effects historically have been only temporary. There is no assurance that significant changes in meat protein prices would not have a material adverse effect on the Company's business, results of operations and debt service capabilities. Dependence on Key Personnel. The Company's operations are dependent, to a significant extent, on the continued efforts of J. David Culwell and Randall H. Collins with whom it has entered into employment agreements containing non- compete provisions. If any of these people become unable to continue in his present role, or if the Company is unable to attract and retain other skilled employees, the Company's business could be adversely affected. Competition. The value-added beef processing industry is highly competitive with a large number of competitors offering similar products. Certain of the Company's suppliers, such as Cargill, IBP and ConAgra, produce products that compete directly with certain of the Company's products. The Company seeks to successfully compete with these suppliers by providing a diversity of product offerings and custom order packaging to meet its customers needs. However, there can be no assurance that such suppliers will not further expand their presence in the value added beef processing industry in the future or that any such expansion will not have a material adverse effect on the Company's business, results of operations and debt service capabilities. These suppliers and one of the Company's significant competitors are larger and have greater resources than the Company. The Company also faces significant price competition from its competitors and may encounter competition from new market entrants. Governmental Regulation. The Company's production facilities and products are subject to numerous federal, state and local laws and regulations concerning, among other things, health and safety matters, food manufacture, product labeling, advertising and the environment. Compliance with existing federal, state and local laws and regulations is not expected to have a material adverse effect on the Company's business, results of operations or debt service capabilities. However, the Company cannot predict the effect, if any, of laws and regulations that may be enacted in the future, or of changes in the enforcement of existing laws and regulations that are subject to extensive regulatory discretion. There can be no assurance that the Company will not incur expenses or liabilities for compliance with such laws and regulations in the future, including those resulting from changes in health laws and regulations, that may have a material adverse effect on the Company's business, results of operations and debt service capabilities. As a participant in the USDA Commodity Reprocessing Program for schools, the Company must adhere to certain rules, regulations and guidelines. Such rules, regulations and guidelines include financial surety bonding in the state of operation, product inspection and grading and certain reporting requirements. Should the Company fail to remain in compliance with such rules, regulations and guidelines, it could be excluded from the USDA Commodity Reprocessing Program, which could have a material adverse effect on the Company's business, results of operations and debt service capabilities. Recently, several of the Company's competitors allegedly have been responsible for the distribution and sale of beef products contaminated with the e-coli virus. Although the Company has taken measures to ensure that its products are not contaminated with such virus, there can be no assurance that such contamination will not occur or that, in the absence of such contamination, the Company's results of operations, financial condition, and debt service capabilities will not be adversely affected by negative publicity about the Company's industry. In addition, such publicity or other factors may result in increased government regulation of the Company's business and there can be no assurance that such regulation will not adversely affect the Company's results of operations, financial condition, and debt service capabilities. Compliance with Environmental Regulations. The Company's operations and the ownership and operation of real property by the Company are subject to extensive and changing federal, state and local environmental laws and regulations. As a result, the Company may be involved from time to time in administrative and judicial proceedings and inquiries relating to environmental matters. The Company cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. Compliance with more stringent laws or regulations, stricter interpretation of existing laws or discovery of unknown conditions may require additional expenditures by the Company, some of which may be material. The Company believes it is currently in material compliance with all known material and applicable environmental regulations. The Company incurs monthly surcharges of approximately $40,000 to the city of Garland, Texas as a result of effluent wastewater discharges from the Garland, Texas facility. The Company has elected to incur the monthly surcharges and currently does not intend to modify the facility to allow its operation without incurring such surcharges. Management does not believe that the incurrence of the aforementioned surcharges will have a material adverse effect on the Company's business, results of operation and debt service capabilities. There can be no assurance, however, that such surcharges will not be increased or that the Company will not be required to modify its operations, which may result in significant expenses or material capital expenditures. Seasonality. Certain of the end uses for some of the Company's products are seasonal. Demand in many markets is generally higher in the period from July to September due to higher demand for beef products during the summer months and increased purchasing by schools in anticipation of the commencement of the school year. As a result, Company sales and profits are generally higher in the Company's fourth quarter than in any other quarter during its fiscal year. In addition, demand in many markets is generally lowest in the period from January to March, resulting in lower sales and profits in the Company's second quarter. Importance of Key Customers. Historically, one of the Company's largest customers has been Sam's Club ("Sam's'"), a subsidiary of Wal-Mart Stores, Inc. The Company supplied Sam's with ground beef patties pursuant to two contracts (the "Sam's Contracts") which became effective in November 1995. Pursuant to the Sam's Contracts, the Company agreed to sell and Sam's agreed to purchase an aggregate of 28.0 million pounds of ground beef. As of September 27, 1997, the Company had delivered substantially all of the ground beef under the Sam's Contracts. During fiscal 1996, fiscal 1997, and fiscal 1998 the Sam's Contracts accounted for 13.2%, 5.9%, and 1.5% of the Company's sales. The Company's largest customer is a group of affiliates of Sysco Corp. ("Sysco"). Each local Sysco affiliate is responsible for its own purchasing decisions. Management believes that the loss of an individual Sysco affiliate as a customer would not have a material adverse effect on the Company's business, results of operations or debt service capabilities. However, there can be no assurance that Sysco will not elect to employ a system whereby purchasing decisions are centralized. Should Sysco elect to employ a centralized system, there can be no assurance that Sysco will continue to purchase the Company's products at historical volumes, if at all. The loss of all or a significant portion of the Company's sales to Sysco, regardless of the cause of such loss, would have a material adverse effect on the Company's business, results of operations and debt service capabilities. During fiscal 1996, fiscal 1997, and fiscal 1998 total sales to Sysco affiliates accounted for 17.8%, 16.6%, and 16.6% of sales, respectively. The Company's second largest customer is Harker's. The Company supplies Harker's with ground beef pursuant to a supply agreement that will remain in effect until 1999 (the "Harker's Agreement"). The Harker's Agreement requires Harker's to purchase minimum amounts of the Company's products. The Harker's Agreement provides that amounts charged by the Company thereunder may be adjusted in response to fluctuations in the Company's costs. During fiscal 1996, fiscal 1997, and fiscal 1998 the Harker's Agreement accounted for 12.6%, 12.8% and 10.7% of sales, respectively. At the consummation of the Acquisition, Tyson assigned to the Company its rights and obligations related to the supply of ground beef and value added products pursuant to the Harker's Agreement. Tyson will continue to supply poultry products to Harker's pursuant to the Harker's Agreement. Sam's, Harker's and affiliates of Sysco collectively accounted for approximately 43.6%, 35.3%, and 27.3% of sales during fiscal 1996, fiscal 1997, and fiscal 1998, respectively. The loss of the Harker's Agreement or reduced sales to affiliates of Sysco without offsetting sales to other customers could have a material adverse effect on the Company's business, results of operations and debt service capabilities. Risks Related to Unionized Employees. The Company's business is labor intensive. The Company's ability to operate profitably is dependent on its ability to recruit and retain employees while controlling labor costs. Currently, certain of the Company's employees at the Garland, Texas facility are represented by the United Food & Commercial Workers International Union, AFL- CIO, CLC, Local 540 (the ''Union''). The Garland, Texas facility is being operated pursuant to the terms and conditions specified by the Company at the time of the consummation of the Acquisition. The Company was not obligated to enter into the collective bargaining agreement agreed upon by Tyson and the Union or to continue to operate the Garland, Texas facility pursuant to the terms of such agreement. Management is currently negotiating a replacement collective bargaining agreement with the Union, although there can be no assurance that it will be successful in doing so. Except for employees at the Garland, Texas facility, none of the Company's employees are represented by a union. If unionized employees were to engage in a strike or other work stoppage or if additional employees were to become unionized, the Company could experience a significant disruption of operations and higher labor costs, either of which could have a material adverse effect on the Company's business, results of operations and debt service capabilities. General Risks of Food Industry. The industry in which the Company competes is subject to various risks, including: adverse changes in general economic conditions; adverse changes in local markets; evolving consumer preferences; nutritional and health-related concerns; federal, state and local food processing controls; consumer product liability claims; risks of product tampering; limited shelf life of food products; and the availability and expense of liability insurance. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and financial statement schedule in Part IV, Item 14(a) 1 and 2 of this report are incorporated by reference into this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Set forth below are the names and positions of the directors, officers and significant employees of the Company. Name Age Position ---- --- -------- J. David Culwell....... 47 Chief Executive Officer and Director John C. Douthett....... 49 Executive Vice President of Sales and Marketing A. Scott Letier........ 37 Chief Financial Officer Randall H. Collins..... 50 Vice President--Sales and Marketing Hernando Aviles........ 42 Vice President--Human Resources Richard L. Cravey...... 53 Director William A. Davies...... 52 Director James A. O'Donnell..... 45 Director J. DAVID CULWELL became Chief Executive Officer and a Director of the Company at the time of the Acquisition Closing. Mr. Culwell has been an independent food industry consultant since January 1991. Prior to being a consultant, Mr. Culwell held positions with Tyson and Holly Farms, wherein he was responsible for the operations of one of the Company's predecessors, Quik-to-Fix, Foods. JOHN C. DOUTHETT has been Executive Vice President of Sales and Marketing since joining the Company on November 10, 1998. Prior to joining the Company, Mr. Douthett was employed by Tyson Foods, Inc., for one year as Vice President of Distribution Sales, where he was responsible for a sales and marketing staff that was responsible for over $1 billion in sales. Prior to this position, Mr. Douthett worked for 25 years, and held a number of positions at Campbell Soup Company, including Vice President of Sales, Vice President of Sales for Campbell's Foodservice division, and other divisional, regional and district sales positions at Campbell's. A. SCOTT LETIER has been Vice President and Chief Financial Officer since joining the Company on December 10, 1996. Prior to joining the Company Mr. Letier served as the Senior Vice President and Chief Financial Officer of CS Wireless Systems, Inc. from July 1996 until December 1996. Mr. Letier also served as the Vice President of Finance and Chief Financial Officer of AmeriServ Food Company from July 1993 until June 1996. Mr. Letier served as the Vice President and Corporate Controller of AmeriServ Food Company from February 1992 until July 1993. Mr. Letier is a certified public accountant. RANDALL H. COLLINS was employed by Tyson as Vice President of Sales and Marketing for the Business since April 1996, where he was responsible for a 16 member sales and marketing staff. Prior to holding this position, Mr. Collins held a number of positions at Tyson, including Division Manager for Tyson Foodservice, Division Sales Manager for Tyson Beef and Pork, and Division Manager for Beef Sales. Prior to joining Tyson in 1989 as a result of Tyson's acquisition of Holly Farms, he held a number of general management and sales positions at Harker's/Holly Farms and Kraft/General Foods. Mr. Collins became Vice President--Sales and Marketing at the time of the Acquisition Closing. HERNANDO AVILES was employed by Tyson as Vice President--Human Resources, Beef and Pork Division since February 1994, where he was responsible for overseeing six personnel location directors, with responsibility over all human resources practices and policies. Mr. Aviles joined Tyson in 1989 as the Complex Personnel Manager for the New Holland, Pennsylvania complex of Tyson. Prior to 1989, Mr. Aviles held various positions at Holly Farms. Mr. Aviles became Vice President--Human Resources at the time of the Acquisition Closing. RICHARD L. CRAVEY has been a director of the Company since October 1996. Mr. Cravey is a member of CGW Southeast III L.L.C., the general partner of CGW, (the "General Partner"), and is jointly responsible for all major decisions of the General Partner. Mr. Cravey is also a member of CGW Southwest Management III, L.L.C. (the "Management Company"), an affiliate of CGW. In addition, Mr. Cravey is a member of Le Select III, L.L.C. (the "Limited Partner"), a limited partner of CGW. Mr. Cravey has been a member of the General Partner, the Management Company or affiliated entities for more than five years. He is a director of AMRESCO, Inc. and Cameron Ashley Building Products, Inc. WILLIAM A. DAVIES has been a director of the Company since October 1996. Mr. Davies is a member of each of the General Partner and the Limited Partner, and is responsible for sourcing, structuring and negotiating transactions, participating in strategic planning with portfolio company management to maximize value and managing exit strategies. In addition, Mr. Davies is involved in managing the administrative functions of the General Partner. Mr. Davies has been a member of the General Partner or an employee of affiliates of the General Partner for more than five years. JAMES A. O'DONNELL has been a director of the Company since October 1996. Mr. O'Donnell has been a member of the General Partner since 1995, and is responsible for sourcing, structuring and negotiating transactions, participating in strategic planning with portfolio company management to maximize value and managing exit strategies. Mr. O'Donnell is also a member of the Limited Partner. Mr. O'Donnell has been a general partner of Sherry Lane Partners, a private equity investment firm based in Dallas, Texas, since 1992. Also, Mr. O'Donnell has been a general partner of O'Donnell & Masur, a private equity investment firm based in Dallas, Texas, since 1989. He is a director of Bestway Rental, Inc. ITEM 11. EXECUTIVE COMPENSATION. The following table sets forth certain summary information concerning the compensation paid or awarded to the Company's Chief Executive Officer and the other executive officers receiving compensation in excess of $100,000 for the period September 28, 1997 through October 3, 1998 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
Name and Principal Salary Bonus Other Annual Securities All Other Position Compensation (1) Underlying Compensation Options/ SARs(#) - --------------------------------------------------------------------------------------------------------------- J. David Culwell 175,000 0 6,000 0 0 Richard E. Mitchell (2) 159,000 0 6,000 0 0 Randall H. Collins 142,500 0 4,165 0 0 A. Scott Letier 130,000 0 3,800 0 0 Robert M. Powers (2) 115,000 0 4,500 0 0 - ---------------------------------------------------------------------------------------------------------------
(1) Consists of 401K contribution match. (2) No longer employed by the Company EMPLOYMENT AGREEMENTS The Company entered into employment agreements (the "Employment Agreements") with Messrs. Culwell, Mitchell, Collins, Powers, Letier, and Aviles for terms expiring on the fifth anniversary of the Acquisition Closing, subject to automatic one-year renewals unless either party gives 60 days notice not to renew. The Company has the right to terminate the Employment Agreements at any time prior to expiration. However, if a Senior Manager is terminated other than for cause, death or disability, such Senior Manager will receive, in addition to earned salary and bonus, a severance payment equal to 12 months base salary. If a Senior Manager is terminated for cause, death or disability, such Senior Manager will receive only earned salary and bonus due as of the date of termination. The Employment Agreements will also contain non-competition, non- solicitation and confidentiality provisions. Mr. Culwell's Employment Agreement provides for a base salary of $175,000, and Mr. Culwell is eligible to receive a bonus of up to 50% of his base salary at the discretion of the Company's Board of Directors. Mr. Mitchell's Employment Agreement provides for a base salary of $159,000, and Mr. Mitchell eligible to receive a bonus of up to 50% of his base salary at the discretion of the Company's Board of Directors. Mr. Collins' Employment Agreement provides for a base salary of $142,500, and Mr. Collins is eligible to receive a bonus of up to 50% of his base salary at the discretion of the Company's Board of Directors. Mr. Powers' Employment Agreement provides for a base salary of $115,000, and Mr. Powers will be eligible to receive a bonus of up to 40% of his base salary at the discretion of the Company's Board of Directors. Mr. Letier's Employment Agreement provides for a base salary of $130,000, and Mr. Letier is eligible to receive a bonus of up to 40% of his base salary at the discretion of the Company's Board of Directors. Subsequent to year end, the Company and Mr. Mitchell and Mr. Powers agreed to cancel their respective Employment Agreements in accordance with the terms of these agreements. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT GHC owns 100% of the issued and outstanding capital stock of the Company. As of October 3, 1998, GHC was owned 54.8% by CGW, 19.7% by NBIC, 24.1% by FPGT and 1.4%, in the aggregate, by the Senior Managers, none of whom individually owns more than 1%. As of October 3, 1998, on a fully-diluted basis, GHC was owned 46.3% by CGW, 16.7% by NBIC, 20.4% by FPGT and 16.6% in the aggregate, by the Senior Managers and other employees of the Company who hold options to purchase GHC common stock, none of whom individually owns more than 1% on a fully diluted basis. In December 1998, in connection with the repurchase and retirement of the Tendered Notes and the CGW Notes, CGW invested $16,900,000 in equity securities of GHC. Pursuant to the terms and conditions of the Securities Purchase and Stockholders Agreement, CGW has agreed to offer to each of NBIC, FPGT and the Senior Managers the opportunity to acquire its pro rata share of such equity securities at the same price as such equity securities were acquired by CGW. Assuming each of NBIC, FPGT and the Senior Managers accept this offer, CGW will continue to beneficially own shares representing 54.8% of the voting interest in GHC. Should any or all of NBIC, FPGT or the Senior Managers decline this offer, CGW's beneficial ownership of GHC will increase proportionately. Affiliated entities of each of : (i) Richard L. Cravey, William A. Davies and James A. O'Donnell; (ii) NBIC; and (iii) FPGT are limited partners of CGW. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. SECURITIES PURCHASE AND STOCKHOLDERS AGREEMENT See "Market for Registrant's Common Stock and Related Stockholder Matters." TRANSACTIONS WITH CGW AND ITS AFFILIATES On December 21, 1998 the Company obtained from CGW a $4,000,000 subordinated bridge loan, the proceeds of which were used to fund the Interest Payment. The terms of the Bridge Loan provide for a one year loan to the Company at an interest rate of 9%. On December 15, 1999, if the Company has not obtained a Replacement Credit Facility, the Bridge Loan will automatically convert to equity in GHC. On November 25, 1996, the General Partner entered into the Consulting Agreement with the Company whereby the Company will pay the General Partner a monthly retainer fee of $30,000 for financial and management consulting services. The Company paid $360,000 to the General Partner for the year ended October 3, 1998 for such services. The General Partner may also receive additional compensation (not to exceed an aggregate of $500,000 annually) if approved by the Board of Directors of the Company at the end of the Company's fiscal year, based upon the overall performance of the Company. The Consulting Agreement expires five years from November 25, 1996The General Partner has delegated its rights and obligations under the Consulting Agreement to the Management Company, an affiliate of CGW. The Company believes that the terms and conditions of the Consulting Agreement, the fees paid to the General Partner thereunder and the fees paid to the Management Company are consistent with arms-length transactions with unaffiliated parties. In addition, the terms and conditions of the Credit Agreement and the Indenture restrict the Company's ability to enter into certain transactions with Affiliates. TRANSACTIONS WITH NBIC AND ITS AFFILIATES The Company paid, in the normal course of business, interest and fees to Nationsbank of Texas, N.A. ("Nationsbank"), an affiliate of NBIC, of $5.1 million. A portion of these amounts are paid to Nationsbank as agent for the other lends participating in the Company's Senior Credit Facility. Approximately $1.0 million of these amounts was to Nationsbank for their portion of the Facility and for other services rendered. INDEMNIFICATION OF OFFICERS AND DIRECTORS The Certificates of Incorporation of the Company and GHC contain provisions eliminating the liability of directors for monetary damages for breaches of their duty of care to the Company or GHC, as applicable, except in certain prescribed circumstances. The Certificates of Incorporation and Bylaws of the Company and GHC also provide that directors and officers of the Company and GHC will be indemnified by the Company and GHC, respectively, to the fullest extent authorized by Delaware law, as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with service for or on behalf of the Company or GHC, as appropriate. The Certificate of Incorporation and Bylaws of the Company and GHC provide that the right of directors and officers to indemnification is not exclusive of any other right now possessed or hereinafter acquired under any statute, agreement or otherwise. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS ANNUAL REPORT ON FORM 10-K. 1. CONSOLIDATED FINANCIAL STATEMENTS AT ITEM 8. 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES: All other Financial Statement Schedules have been omitted because (i) the required information is not present in amounts sufficient to require submission of the schedule, (ii) the information required is included in the Consolidated Financial Statements or the Notes thereto, or (iii) the information required in the Schedules is not applicable to the Company. 3. Exhibits: The following exhibits either (i) are filed herewith; or (ii) have previously been filed with the Securities and Exchange Commission and are incorporated herein by reference to such prior filings. 10.1 Fourth Amendment and Waiver, dated October 29, 1998, by and among Gorges Holding Corporation, the Company, the lending institutions party to the Credit Agreement and NationsBank, N.A., successor by merger to NationsBank of Texas, N.A. (incorporated by reference to the Company's Current Report on Form 8-K, dated October 29, 1998 (Commission File No. 333-20155)). 10.2 Letter Agreement, dated December 21, 1998, by and among Gorges Holding Corporation, the Company, the lending institutions party to the Credit Agreement and NationsBank, N.A., successor by merger to NationsBank of Texas, N.A. 10.3 Subordinated Promissory Note, dated December 21, 1998, between the Company and Gorges Holding Corporation. 23. Consent of Ernst & Young 27. Financial Data Schedule. (b) REPORTS ON FORM 8-K The Company did not file any Current Reports on Form 8-K during the fiscal quarter ended October 3, 1998. (c) EXHIBITS See Item 14(a)3. (d) FINANCIAL STATEMENT SCHEDULES See Item 14(a)2. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on December 30, 1998. GORGES/QUIK-TO-FIX FOODS, INC. By: /s/ J. David Culwell ----------------------- J. David Culwell Chief Executive Officer Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December ___, 1998. SIGNATURE Title --------- ----- /s/ J. David Culwell Chief Executive Officer and Director - -------------------------------- J. David Culwell /s/ Richard L. Cravey Director - -------------------------------- Richard L. Cravey /s/ William A. Davies Director - -------------------------------- William A. Davies /s/ James A. O'Donnell Director - -------------------------------- James A. O'Donnell /s/ A. Scott Letier Chief Financial Officer - -------------------------------- A. Scott Letier GORGES/QUIK-TO-FIX FOODS, INC. Index to Consolidated Financial Statements Report of Independent Auditors F-2 Balance Sheets F-3 Statements of Operations F-4 Statements of Cash Flows F-5 Statement of Changes in Stockholder's Equity F-6 Notes to Financial Statements F-7
F-1 Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholder Gorges/Quick-to-Fix Foods, Inc. We have audited the accompanying balance sheets of Gorges/Quik-to-Fix Foods, Inc. as of October 3, 1998 and September 27, 1997, and the related statements of operations, stockholder's equity, and cash flows for the year ended October 3, 1998 and the three hundred and six day period ended September 27, 1997 and the statements of operations and cash flows of Gorges/Quik-to-Fix Foods operations of Tyson Foods, Inc. for the fifty-eight day period ended November 25, 1996 and the year ended September 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gorges/Quik-to-Fix Foods, Inc. at October 3,1998 and September 27, 1997 and the results of operations and cash flows for the year ended October 3, 1998 and the three hundred six day period ended September 27, 1997 of Gorges/Quik-to-Fix Foods, Inc. and fifty-eight days ended November 25, 1996 and the year ended September 28, 1996 of Gorges/Quik-to- Fix Foods, operations of Tyson Foods, Inc., in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP ----------------------- Dallas, Texas November 19, 1998, except for Note 3 and Note 11, as to which the date is December 21, 1998 F-2 GORGES/QUIK-TO-FIX FOODS, INC. BALANCE SHEETS (In thousands, except share data)
COMPANY SEPTEMBER 27, OCTOBER 3, 1997 1998 ------------------------ --------------------- ASSETS Current assets: Cash $ - $ 1,671 Accounts receivable, net of allowance for doubtful accounts of $795 and $207 21,960 16,970 Inventory 28,645 15,880 Prepaid expenses and other 78 448 ------------------------ --------------------- Total current assets 50,683 34,969 Property, plant and equipment: Land 1,499 1,499 Buildings and leasehold improvements 44,531 38,174 Machinery and equipment 44,517 38,826 Construction in process and other 3,144 1,002 ------------------------ --------------------- 93,691 79,501 Accumulated depreciation (7,358) (13,067) ------------------------ --------------------- Net property, plant and equipment 86,333 66,434 Other assets: Intangible assets 65,389 63,090 Organizational and deferred debt issuance costs 8,767 7,282 Other 89 28 ------------------------ --------------------- Total assets $211,261 $171,803 ======================== ===================== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable and accrued expenses $ 18,658 $ 13,381 Current portion of long-term debt 8,450 8,500 ------------------------ --------------------- Total current liabilities 27,108 21,881 Long-term debt, less current portion 141,050 139,350 Stockholder's equity: Common stock, $.01 par value; 2,000 shares authorized, 1,000 shares issued and outstanding - - Additional paid-in capital 45,585 45,585 Accumulated deficit (2,482) (35,013) ------------------------ --------------------- Total stockholder's equity 43,103 10,572 ------------------------ --------------------- Total liabilities and stockholder's equity $211,261 $171,803 ======================== =====================
See accompanying notes to financial statements F-3 GORGES/QUIK-TO-FIX FOODS, INC. STATEMENTS OF OPERATIONS (In thousands)
PREDECESSOR COMPANY ------------------------------------------------------------------------------------------------------ YEAR FIFTY-EIGHT | THREE PRO FORMA YEAR ENDED DAYS | HUNDRED YEAR ENDED ENDED | SIX DAYS ENDED | ENDED SEPTEMBER NOVEMBER | SEPTEMBER 27, SEPTEMBER 27, OCTOBER 28, 1996 25, 1996 | 1997 1997 3,1998 (AUDITED) (AUDITED) | (AUDITED) (UNAUDITED) (AUDITED) ----------------------------------|-------------------------------------------------------- | Sales $ 232,761 $31,966 | $172,738 $204,704 $201,581 Costs of goods sold 189,559 25,917 | 140,149 166,696 171,746 ---------- ---------- | ------------- ---------------------------- Gross profit 43,202 6,049 | 32,589 38,008 29,835 | Operating expenses: | Selling, general and | administrative 26,414 4,153 | 18,645 22,853 27,881 Amortization 1,624 250 | 2,706 3,057 3,294 Restructuring expense - - | - - 13,900 ---------- ---------- | ------------- ---------------------------- Total operating 28,038 4,403 | 21,351 25,910 45,075 Expenses | ---------- ---------- | ------------- ---------------------------- | Operating income (loss) 15,164 1,646 | 11,238 12,098 (15,240) | Interest expense - - | 13,709 16,398 17,243 Other expense (income) 796 - | 11 11 (10) ---------- ---------- | ------------- ---------------------------- | | Income (loss) before 14,368 1,646 | (2,482) (4,311) (32,473) income taxes | Income tax expense 6,205 731 | - - 58 ---------- ---------- | ------------- ---------------------------- | Net income (loss) $ 8,163 $ 915 | $ (2,482) $ (4,311) $(32,531) ========== ========== | ============= ============================
See accompanying notes to financial statements F-4 GORGES/QUIK-TO-FIX FOODS, INC. STATEMENTS OF CASH FLOWS (In thousands)
PREDECESSOR COMPANY ----------------------------------------------------------------------- | THREE FIFTY-EIGHT | HUNDRED YEAR DAYS | SIX DAYS YEAR ENDED ENDED | ENDED ENDED SEPTEMBER NOVEMBER | SEPTEMBER OCTOBER 28, 1996 25, 1996 | 27, 1997 3, 1998 ------------------------------------|---------------------------------- | Cash flows from operating activities: | Net income (loss) $ 8,163 $ 915 | $ (2,482) $(32,531) Adjustments to reconcile net income (loss) to | net cash provided by operating | activities: | Depreciation 7,292 342 | 7,358 9,523 Amortization 1,624 250 | 2,706 3,294 Amortization of deferred debt costs - - | 595 831 Deferred income taxes (1,285) 26 | - - Non-cash restructuring expenses 792 - | - 13,500 Provision for losses on doubtful accounts - - | 795 370 Changes in assets and liabilities: | (Increase) decrease in accounts - - | (22,755) 4,620 receivable | (Increase) decrease in inventory (691) (571) | (645) 12,765 Increase (decrease) in prepaid expenses and | other - - | (167) (310) Increase (decrease) in accounts payable and - - | 17,712 (5,277) accrued expenses | ------------------------------------|---------------------------------- | Net cash provided by operating activities 15,895 962 | 3,117 6,785 | Cash flows from investing activities: | Purchases of plant and equipment (735) (141) | (3,691) (3,112) Acquisition, net of cash received - - | (184,349) - Proceeds from sale of equipment 126 - | 45 - Other - - | 51 (96) ------------------------------------|---------------------------------- | Net cash used in investing (609) (141) | (187,944) (3,208) activities | | Cash flows from financing activities: | Proceeds from note offering - - | 100,000 - Capital contributions - - | 45,585 - Proceeds from revolving line of credit - - | 19,000 24,000 Payments on revolving line of credit - - | (7,000) (17,000) Proceeds from term loan - - | 40,000 - Payments on term loan - - | (2,500) (8,650) Debt issuance and organizational costs - - | (10,258) (256) Decrease in Investment and advances by | Tyson (15,286) (821) | - - | | ------------------------------------|---------------------------------- Net cash (used in) provided by financing | activities (15,286) (821) | 184,827 (1,906) ------------------------------------|---------------------------------- | Net increase in cash - - | - 1,671 Cash at beginning of period 9 9 | - - ------------------------------------|---------------------------------- Cash at end of period $ 9 $ 9 | $ - $ 1,671 ====================================|==================================
See accompanying notes to financial statements F-5 GORGES/QUIK-TO-FIX FOODS, INC. STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (In thousands, except share data)
COMMON ADDITIONAL STOCK COMMON PAID IN ACCUMULATED SHARES STOCK CAPITAL DEFICIT TOTAL -------------------------------------------------------------------------------------- November 25, 1996 - $ - $ - $ - $ - Initial sale (issuance of common stock) 1,000 45,585 - 45,585 Net loss - - - (2,482) (2,482) -------------------------------------------------------------------------------------- September 27, 1997 1,000 - 45,585 (2,482) 43,103 -------------------------------------------------------------------------------------- Net loss (32,531) (32,531) -------------------------------------------------------------------------------------- October 3, 1998 1,000 $ - $45,585 $(35,013) $10,572 ======================================================================================
F-6 GORGES/QUIK-TO-FIX FOODS, INC. NOTES TO FINANCIAL STATEMENTS October 3, 1998 (In thousands except share data) 1. ORGANIZATION AND BASIS OF PRESENTATION On November 25, 1996 Gorges/Quik-to-Fix Foods, Inc. (the "Company") acquired certain assets and liabilities of the beef processing division (the "Predecessor") of Tyson Foods, Inc., ("Tyson"), in exchange for a cash payment of approximately $184.0 million (the "Acquisition"). The cash used to consummate the Acquisition was obtained through the issuance of $45.0 million in common stock, and the proceeds from borrowings. The Company assumed no liabilities or obligations of Tyson or the Predecessor with the exception of those defined in the purchase agreement: future obligations of normal course of business executory contracts, agreements to purchase inventory or supply products, accrued vacation pay, and certain property tax obligations. Tyson agreed to indemnify the Company from any and all liabilities and obligations relating to the Predecessor, other than the aforementioned liabilities assumed by the Company. The Company and Tyson also entered into a non-competition agreement which expires two years from the date of closing, in which the parties have agreed, subject to certain exceptions and limitations, to not compete with each other in the production or sale of beef and pork items, in the case of Tyson, and poultry items, in the case of the Company. As a result of the acquisition, financial information for periods through November 25, 1996 are presented on a different cost basis and, therefore, such information may not be comparable. The Company, a wholly owned subsidiary of Gorges Holding Company ("GHC"), is a leading producer, marketer and distributor of value added processed beef products for the foodservice industry and is one of the few companies in this segment of the industry that markets and distributes nationally. The Company purchases fresh and frozen beef and, to a lesser extent, pork and poultry, which it processes into a broad range of fully cooked and ready to cook products. The Company's two product categories are value added products and ground beef. Value added product offerings include: (i) breaded beef items such as country fried steak and beef fingers; (ii) charbroiled beef items such as fully cooked hamburger patties, fajita strips, meatballs, meatloaf and taco meat; and (iii) other specialty products, such as fully cooked and ready to cook pork sausage, breaded pork and turkey, cubed steaks, and Philly steak slices. Ground beef products consist primarily of individually quick frozen hamburger patties. The Company's products are sold primarily to the foodservice industry, which encompasses all aspects of away-from-home food preparation, including commercial establishments such as fast food restaurants and family dining restaurants and non-commercial establishments such as healthcare providers, schools and corporations. The Company sells its products primarily through broadline and specialty foodservice distributors. The accompanying audited and unaudited financial statements include financial information of the Company, and its Predecessor, which represents the Company prior to its acquisition from Tyson. The Predecessor represents the beef processing assets and operations of Tyson, which was operated and accounted for as a consolidated operating division of Tyson. Prior to the Acquisition, Tyson's accounting system produced separate income statements for the Predecessor while certain balance sheet accounts, including the majority of cash, receivables, prepaids, payables and accruals were maintained only on a consolidated basis at the corporate level, and are in effect reflected in Investment and advances by Tyson. The Predecessor participated in Tyson's overall corporate cash management program whereby operating funds F-7 GORGES/QUIK-TO-FIX FOODS, INC. NOTES TO FINANCIAL STATEMENTS-(Continued) 1. ORGANIZATION AND BASIS OF PRESENTATION - CONTINUED were provided by Tyson with the corresponding charge or credit reflected in the Investment and advances by Tyson account. As a result, the Predecessor maintained only nominal cash accounts. A portion of Tyson's accounting and administrative costs related to thesefunctions were allocated to the Predecessor as discussed in Note 2. Additionally the allocable portion of the expenses associated with certain other assets and other liabilities recorded at Tyson's corporate level for which the Predecessor received benefit was reported in the Predecessor's operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year The Company utilizes a 52 or 53 week accounting period, ending on the Saturday closest to September 30. Fiscal year 1998, which ended on October 3, 1998, is a 53 week year. Accounts Receivable The Company periodically evaluates the credit worthiness of its customers as accounts receivable balances are not collateralized. The Company has not experienced significant credit losses. Inventories Inventories, valued at the lower of cost (first-in, first-out) or market (replacement or net realizable value), consist of the following (in thousands):
September 27, | October 3, 1997 | 1998 -------------------|------------------ | Finished goods $17,655 | $10,306 Supplies and ingredients 10,990 | 5,574 -------------------|------------------ Total $28,645 | $15,880 ======================================
Property, Plant and Equipment Property, plant and equipment is stated at cost. Depreciation is calculated primarily by the straight-line method over the estimated useful lives of the assets, which range from 3 to 20 years. Capital expenditures for equipment and capital improvements are generally capitalized while maintenance is expensed. Intangible assets and Organizational and Deferred Debt Issuance Costs Intangible assets, consisting of goodwill and trademarks, are stated at cost and are amortized on a straight-line basis over 30 years (40 years by the Predecessor). Recoverability of the carrying value of intangible assets is evaluated on a recurring basis with consideration toward recovery through future operating results on an undiscounted basis. F-8 GORGES/QUIK-TO-FIX FOODS, INC. NOTES TO FINANCIAL STATEMENTS-(Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Organizational costs are amortized on a straight-line basis over five years, and deferred debt issuance costs are amortized over the life of the debt instrument to which it relates. At September 27, 1997 and October 3, 1998, the accumulated amortization was $3.3 million and $7.3 million, respectively. Subsequent to year end, the Company amended its credit agreement (the "Credit Agreement") with NationsBank, N.A. (the "Bank") as agent for a syndicate of banks and financial institutions, and as a result wrote-off approximately $1.4 million of deferred debt issuance costs, see Notes 3 and 11. Income Taxes The Company follows the liability method of accounting for deferred income taxes. The liability method provides that deferred tax liabilities are recorded at currently enacted tax rates based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Selling Expenses Selling expenses include product line expenses such as shipping and storage, external handling, external freezer charges, product and package design, brokerage expense, and other direct selling expenses such as certain salaries, travel and research and development. Selling expenses for the Predecessor also include an allocable share of other common Tyson selling expenses as discussed below. Allocation of Corporate Expenses Prior to the Acquisition from Tyson certain indirect administrative and selling expenses incurred by Tyson which were not actually incurred for programs specific to the Predecessor have been allocated to the Predecessor based on net sales. Allocated administrative expenses include costs incurred for all corporate support functions. Allocated selling expenses consisted of costs incurred by Tyson's corporate sales and marketing department. Because these charges were incurred by Tyson, actual charges, if the Predecessor had been a separate entity at the time, might have differed. Certain expenses incurred at Tyson corporate directly related to the Predecessor such as production scheduling, research and development and the corporate aviation department were allocated based on usage. Selling, administrative and corporate expenses allocated to the Predecessor and charged to operations for the year ended September 28, 1996 and the fifty- eight days ended November 25, 1996 were $13.9 million and $1.4 million, respectively. Advertising, Promotion and Research and Development Expenses Advertising, promotion and research and development expenses are charged to operations in the period incurred. Advertising and promotion expenses were $9.4 million for the period ending October 3, 1998, compared to $6.6 million for the pro-forma period ending September 27, 1997 and $5.7 million for fiscal 1996. Research and Development expenses were $0.7 million for the year ended October 3, 1998 compared to $0.4 million for the year ended September 27, 1997. F-9 GORGES/QUIK-TO-FIX FOODS, INC. NOTES TO FINANCIAL STATEMENTS-(Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Restructuring Expenses On October 7, 1998, the Company announced its intent to exit the ground beef business to concentrate on its core value added products. Certain expenses were recorded in fiscal 1998 in conjunction with this decision. The $13.9 million charge recorded in fiscal 1998 is comprised of: (i) a $13.5 million charge to write down the value of certain assets used in the ground beef business to the estimated net realizable value of these asset, and (ii) a $0.4 million charge for severance and other expenses related to the exit from the ground beef business and restructuring of the Company's value added business. The Company expects to incur additional costs related to the exit from the ground beef business and restructuring of the value added business in fiscal 1999; however, currently, the amount of these costs cannot be accurately estimated. See Note 11 Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Collective Bargaining Agreements Currently the Company has approximately 200 employees of its total workforce of approximately 1,000 employees covered under a collective bargaining agreement. The collective bargaining agreement has expired and the Company is negotiating a new agreement. 3. LONG TERM DEBT Senior Debt As of October 3, 1998, the Company was not in compliance with certain technical or financial and limit ratio covenants under the Credit Agreement, which provides the Company with a $30.0 million revolving credit facility (the "Revolver") and a $40.0 million term loan facility (the "Term Loan"). The Revolver includes a subfacility of $7.0 million for commercial and standby letters of credit. The Revolver has a term of five years, and all amounts outstanding will become due and payable on November 30, 2000. The Term Loan also has a five year term and is subject to quarterly principal payments in an aggregate amount of $8.5 million in fiscal 1999, $9.0 million in fiscal 2000, and $11.4 million in fiscal 2001. As a result of its noncompliance under the Credit Agreement, the Company was prohibited by the Bank from borrowing additional amounts under the Revolver or making the December 1, 1998 interest payment (the "Interest Payment") on its Senior Subordinated Notes Due 2006, Series B (the "Notes"). On October 29, 1998, the Company entered into an amendment to the Credit Facility (the "Amendment") that replaces the existing covenants with a new set of covenants under which the Company can borrow funds based on the levels of its accounts receivable and inventory. The implementation of new covenants under the Credit Facility may have the effect of reducing the amount available under the Revolver depending on F-10 GORGES/QUIK-TO-FIX FOODS, INC. NOTES TO FINANCIAL STATEMENTS-(Continued) 3. LONG TERM DEBT - CONTINUED the levels of accounts receivable and inventory at any given time. The Amendment became effective on December 21, 1998, at which time the Company was in compliance with all terms and conditions of the Credit Facility. See Note 11. Outstanding borrowings under the Credit Agreement bear interest at floating rates per annum equal to, the Base Rate plus 1.50%. At October 3, 1998 the interest rate for the Company based on this formula was 10.00%. The Company may be required to make mandatory prepayments against both facilities, comprised of principal payments totaling: (i) 100% of cash received in asset sales wherein the proceeds are not used to purchase replacement assets, and (ii) 50% of the Company's Excess Cash Flow as defined in the Credit Agreement. These payments are to be applied first to the Term Loan and, upon the Term Loan's retirement, to the Revolver as a permanent reduction. At October 3, 1998, the Company's outstanding borrowings under the Credit Agreement were $47.9 million, $19.0 million on the Revolver, and $28.9 million on the Term Loan. Also, at October 3, 1998, the Company had $0.8 million in outstanding letters of credit. Under the Credit Agreement, the Company is subject to customary financial and other covenants including certain financial limit and ratio covenants as well as limitations on further indebtedness, guaranties, liens, dividends and other restricted payments (including transactions with affiliates), prepayments and redemption of debt, mergers, acquisitions, asset sales, consolidations, and other investments. The Credit Agreement also provides that indebtedness outstanding is secured by a first-priority security interest in, and lien upon, substantially all of the Company's present and future tangible and intangible assets and capital stock. The Company is also required under the Credit Agreement to pay the Bank a quarterly fee equal to 0.25% of the outstanding finance commitment beginning with the quarter ended April 2, 1999, and increasing to 0.5% of the financing commitment in the next quarter and for each subsequent quarter. Subordinated Debt On November 25, 1996, the Company consummated a private placement of $100.0 million aggregate principal amount Notes. The Notes will mature on December 1, 2006, unless previously redeemed. Interest on the notes is payable semiannually in arrears, commencing June 1, 1997, and is payable on June 1 and December 1 of each year at a rate of 11.5% per annum. The issuance of the Notes resulted in net proceeds to the Company of approximately $95.0 million after underwriting discounts and other debt issuance costs aggregating approximately $5.0 million. On April 30, 1997, the Company consummated an exchange offer where by the private placement Notes were replaced with similar Notes that are publicly traded. The Company's outstanding indebtedness under these Notes was $100 million at October 3, 1998. Subsequent to year end, the Company retired $48.0 million aggregate principal amount of Notes, through a combination of open market purchases and a cash tender offer. (See Note 11). The Notes were issued pursuant to an indenture which contains certain restrictive covenants and limitations. Among other things, the Indenture limits the incurrence of additional indebtedness, limits the making of restricted payments (as defined) including the declaration and/or payment of dividends, places limitations on dividends and other payments by the Company, and places limitations on liens, certain asset dispositions and merger/sale of assets activity. The Company was in compliance with these covenants at October 3, 1998. F-11 GORGES/QUIK-TO-FIX FOODS, INC. NOTES TO FINANCIAL STATEMENTS-(Continued) 3. LONG TERM DEBT - CONTINUED The Notes are unsecured subordinated general obligations of the Company. The Notes become redeemable at the Company's option on December 1, 2001, at which time the Notes are redeemable in whole or part, subject to a redemption premium which begins at 105.75 % of the face value in 2001 and reduces at a scheduled rate annually until 2004 at which time the redemption is 100% of face value. Notwithstanding the foregoing, at any time prior to December 1, 1999, the Company, at its option, may redeem the Notes, in part, with the net proceeds of a public equity offering or of a capital contribution made to the common equity of the Company. Any such redemption is also subject to a redemption premium, which begins at 110.75% in 1997 and 110.00% in 1998 and 1999. No mandatory redemption or sinking fund payments are required with respect to the Notes; however, at each Note holder's option, the Company may be required to repurchase the Notes at a redemption premium of 101% in the event the Company incurs a change of control as defined by the indenture. The Company paid interest of $16.4 million for the year ended October 3, 1998 compared to $13.7 million for the three hundred and six day period ended September 27, 1997 and none in 1996. 4. INCOME TAXES The Predecessor was included in the consolidated income tax returns of Tyson and computed its tax provision as if it filed a separate return. Detail of the provision for income taxes consists of:
Predecessor Company ---------------------------------------- --------------------------------------- Three Fifty-eight hundred six Year ended days ended days ended Year ended September November September October 3, 28, 1996 25, 1996 27, 1997 1998 - ------------------------------------------------------------------------------------------------------------------------ Federal $ 5,270 $ 621 $ - $ - State 935 110 - 58 -------------- ----------- ----- ------- 6205 731 - 58 Current 7490 990 - 58 Deferred (1,285) (259) - - -------------- ----------- ----- ------- $ 6205 $ 731 $ - $ 58 ============== =========== ===== =======
F-12 GORGES/QUIK-TO-FIX FOODS, INC. NOTES TO FINANCIAL STATEMENTS-(Continued) 4. INCOME TAXES - CONTINUED The reasons for the difference between the effective income tax rate and the statutory U.S. federal income tax rate are as follows:
Predecessor Company -------------------------------------- ---------------------------------- Year ended Fifty-eight Three Year ended September days ended hundred six October 3, 28, 1996 November days ended 1998 25, 1996 September 27, 1997 ------------------------------------------------------------------------------ U. S. federal income tax rate 35.0% 35.0% 35.0% 35% State income taxes 4.2 4.2 4.2 4.2 Amortization of excess of 4.0 5.2 - - investments over net assets acquired Valuation allowance - - (39.2) (39.2) ----------------- ----------------- ---------------------------------- 43.2% 44.4% - % - % ================= ================= ==================================
Deferred incomes taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for incomes tax purposes. The significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
Three hundred and seven days ended Year ended September 27, October 3, 1997 1998 ------------------ ------------------ Deferred tax liabilities: Tax-over-book amortization $ (758) $ (3,032) Tax over book depreciation - (1,586) ------ -------- Total deferred tax liabilities $ (758) $ (4,618) =================================== Deferred tax assets: Accounts receivable reserves 310 81 Inventory reserves 229 328 Inventory capitalization 201 80 Book-over-tax depreciation 192 - Restructuring Reserve - 5,265 Severance - 156 Contribution carryforward - 3 Net operating loss carryforward 766 12,295 ------ -------- Total deferred tax assets $1,698 $ 18,208 =================================== Total net deferred tax assets $ 940 $ 13,590 Valuation allowance (940) (13,590) ------ -------- Total net - - ===================================
F-13 GORGES/QUIK-TO-FIX FOODS, INC. NOTES TO FINANCIAL STATEMENTS-(Continued) The Company has $2.7 million of net operating loss carryforwards that expire in fiscal 2012 and $29.4 million of net operating loss carryforwards that expire in fiscal 2018. The Company has not recorded an income tax benefit related to its net deferred tax assets because in the opinion of management it is uncertain whether the Company will be able to realize such deferred tax asset. 5. COMMITMENTS Tyson (for the Predecessor), and the Company leased certain properties and equipment for which the total rentals thereon approximated $388,000 for the year ended October 3, 1998, approximately $134,000 for the three hundred six day period ended September 27, 1997, approximately $11,000 for the fifty-eight day period ended November 25, 1996, and approximately $44,000 for the year ended September 28, 1996. Future minimum lease payments for all noncancelable operating leases for the Company at October 3, 1998 consist of $394,000, $377,000, $373,000, $151,000, and $31,000 for fiscal 1999 through 2003. 6. BENEFIT PLANS The Company has defined contribution retirement and incentive benefit programs for all employees after meeting requirements concerning time employed. Incentive benefit programs are of a profit sharing nature, and are discretionary as to amount and timing. No incentive contributions were made by Predecessor or the Company. Contributions to the defined contribution plans totaled $575,000 for the year ended October 3, 1998, compared to $453,000 for the three hundred six day period ending September 27, 1997. 7. SIGNIFICANT CUSTOMERS Certain of the Predecessor's and the Company's products are sold to major foodservice distributors for distribution to foodservice outlets. As a result, customers with purchases greater than 10% of total sales accounted for approximately 27.3% of sales for the year ended October 3, 1998, and 35.3% for the fifty-two week pro forma period ended September 27, 1997. 8. TRANSACTIONS WITH AFFILIATES The Company has entered into a consulting agreement with an affiliate of majority shareholder CGW, under which CGW will receive a monthly fee of $30,000 for financial and management consulting services. In addition to the monthly fee to CGW, the Board of Directors may approve an additional fee not to exceed $500,000 annually, based upon overall Company operations. At the closing of the acquisition, CGW received a fee of $2.65 million, included as part of the Company's organizational costs, for its services in assisting the Company with the structuring and negotiating of this transaction. The Company paid CGW $360,000 for the year ended October 3, 1998 compared to $300,000 for the three hundred and six day period ended September 27, 1997. See Note 11. F-14 GORGES/QUIK-TO-FIX FOODS, INC. NOTES TO FINANCIAL STATEMENTS-(Continued) 8. TRANSACTIONS WITH AFFILIATES - CONTINUED NationsBank of Texas, NA, an affiliate of NationsBanc Investment Corp. ("NBIC") a minority shareholder and a limited partner of CGW, is a lender to the Company and in that capacity has received fees for underwriting, structuring, syndicating and administering the Facilities under the Credit Agreement. NationsBanc Capital Markets, Inc., another affiliate of NBIC, was the initial purchaser of the Company's Senior Subordinated Notes, and in that capacity received fees and commissions in connection with that transaction. 9. PRO FORMA INFORMATION The pro forma income statement included herein for the fifty-two week period ended September 27, 1997 combines the final fifty-eight day period September 28, 1996 through November 25, 1996 when the Predecessor was owned by Tyson, with the three hundred six day period November 26, 1996 through September 27, 1997, providing a full fifty-two week period to compare with previous periods. 10. STOCK OPTIONS In 1997, GHC adopted a stock option plan (the "Stock Option Plan") which provides for the granting of up to 112,250 incentive stock options to employees to purchase shares of GHC's common stock. All options granted under the Stock Option Plan have a five year vesting period and a term of up to ten years. GHC has no assets or liabilities, other than their direct investment in the Company. Stock option activity is as follows:
Weighted Average Number of Shares and Option Price per Share --------------------------------------------- Options granted 84,968 $100.00 Options exercised - - Options cancelled - - --------------------------------------------- Options outstanding September 27, 1997 84,968 $100.00 Options granted 8543 $100.00 Options exercised - - Options cancelled 15,843 $100.00 --------------------------------------------- Options outstanding October 3, 1998 77,668 $100.00
The weighted-average remaining contractual life of options outstanding at October 3, 1998 and September 27, 1997 is 8.1 years and 9.0 years. At October 3, 1998 there are 35,396 shares issuable upon exercise or conversion of outstanding options under the Stock Option Plan. Under APB 25, because exercise price of the Company's employee stock options exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. F-15 GORGES/QUIK-TO-FIX FOODS, INC. NOTES TO FINANCIAL STATEMENTS-(Continued) 10. STOCK OPTIONS - CONTINUED Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its stock options under fair value method of that statement. The fair value for these options was estimated at the date of grant using a minimum value pricing model with the following weighted-average assumptions for 1998, risk- free interest rate of 5.57% to 6.15% in 1998 and 6.0% in 1997, dividend yield of 0%, a weighted-average expected life of the option of 8 years and near zero volatility for both 1998 and 1997. Option valuation models are used in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense on a straight-line basis over the options' vesting period. The Company's pro-forma net loss for the three hundred and six days ended September 27, 1997 is $3.0 million. The Company's net pro forma loss for the year ended October 3, 1998 is $33.1 million. 11. SUBSEQUENT EVENTS Prior to October 3, 1998, the Company began a restructuring process that encompassed two main actions: 1.) exiting of the its raw ground beef business, and the related closing or sale of the Orange City, IA, plant principally responsible for this business line's production; and 2.) restructuring of its balance sheet primarily through a debt restructuring plan and equity offering. On October 7, 1998, the Company announced its intent to exit the ground beef business to concentrate on its core value added products. Certain expenses were recorded in fiscal 1998 in conjunction with this decision. The $13.9 million charge recorded in fiscal 1998 is comprised of: (i) a $13.5 million charge to write down the value of certain assets used in the ground beef business to the estimated net realizable value of these asset, and (ii) a $0.4 million charge for severance and other expenses related to the exit from the ground beef business and restructuring of the Company's value added business. The Company expects to incur additional costs related to the exit from the ground beef business and restructuring of the value added business in fiscal 1999; however, currently, the amount of these costs cannot be accurately estimated. The Company has offered to sell its Orange City, Iowa manufacturing facility (the "Ground Beef Facility"). Historically, the Ground Beef Facility has produced almost exclusively ground beef product offerings, representing 100% of the Company's total ground beef production based on weight. In December 1998, the Company entered into a non-binding letter of intent to sell the Ground Beef Facility by not later than February 1, 1999. This letter of intent is subject to a number of contingencies, many of which are not within the Company's control, including but not limited to the completion of due diligence by the buyer, the negotiation and execution of a F-16 GORGES/QUIK-TO-FIX FOODS, INC. NOTES TO FINANCIAL STATEMENTS-(Continued) 11. SUBSEQUENT EVENTS - CONTINUED definitive sale agreement and the approval of the buyer's board of directors. There can be no assurance that these contingencies will be satisfied on or before February 1, 1999, if at all. In the event the Company is unable to consummate the proposed sale of the Ground Beef Facility, it intends to close this facility as soon as practicable to facilitate its exit from the ground beef business and to reduce costs. Should the Company close the Ground Beef Facility, it will continue to explore opportunities to sell this facility. Any proceeds from the sale of the Ground Beef Facility are required to be used to reduce the Company's borrowings under the Credit Agreement. On October 29, 1998, the Company entered into the Amendment to the Credit Agreement that replaces the existing covenants with a new set of covenants under which the Company can borrow funds based on the levels of its accounts receivable and inventory. The implementation of new covenants under the Credit Agreement may have the effect of reducing the amount available under the Revolver depending on the levels of accounts receivable and inventory at any given time. The Amendment also shortens the maturity of the Credit Facility from November 2001 to November 2000. The change in maturity of the Credit Facility does not affect the repayment schedule under the Credit Agreement, except that all payments that previously were due between November 2000 and November 2001 (an aggregate of $11.4 million) will be due on November 30, 2000. Additionally, the Amendment provides that on March 31, 1999, the Company must pay a fee under the Credit Facility equal to 0.25% of the amounts outstanding under the Credit Facility and, thereafter, every three months, the Company must pay a fee under the Credit Facility in cash equal to 0.50% of the amounts outstanding under the Credit Facility until such time as the Company has secured a replacement facility (the "Replacement Credit Facility") from another lender. The Amendment became effective on December 21, 1998, at which time the Company was in compliance with all terms and conditions of the Credit Facility. On October 29, 1998, the Company announced a tender offer pursuant to which it offered to purchase not less than $36.0 million (the "Minimum Tender Condition") and up to $46.0 million aggregate principal amount of its Notes (the "Offer"). On December 2, 1998, the Company elected to waive all conditions to the consummation of the Offer, including the Minimum Tender Condition, and consummated the Offer with respect to $30.0 million aggregate principal amount of Notes (the "Tendered Notes"). Additionally, on December 21, 1998, CGW contributed to the Company $18.0 million aggregate principal amount of Notes (the "CGW Notes") acquired by CGW through open market purchases. The Tendered Notes and the CGW Notes were retired on December 21, 1998. The repurchase and retirement of the Tendered Notes and the CGW Notes were financed through an equity investment by CGW in GHC totaling $16.9 million. On December 21, 1998 the Company, through GHC, obtained from CGW a $4.0 million subordinated bridge loan (the "Bridge Loan"), the proceeds of which were used to fund the December 1, 1998 interest payment on the Notes. The terms of the Bridge Loan provide for a one year loan to the Company at an interest rate of 9%. On December 15, 1999, if the Company has not obtained the Replacement Credit Facility, the Bridge Loan will automatically convert to equity in GHC. F-17 EX-10.1 2 FOURTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT EXHIBIT 10.1 FOURTH AMENDMENT AND WAIVER --------------------------- This Agreement, dated as of October 29, 1998, is among Gorges Holding Corporation, a Delaware corporation ("Holding"), Gorges/Quik-To-Fix Foods, Inc., a Delaware corporation (the "Borrower"), the lending institutions party to the Credit Agreement referred to below (each a "Lender" and, collectively, the "Lenders"), and NationsBank, N.A., successor by merger to NationsBank of Texas, N.A., as Agent (in such capacity, the "Agent"). WHEREAS, Holding, the Borrower, the Lenders and Agent are parties to a Credit Agreement dated as of November 25, 1996 (as amended, modified or supplemented to, but not including, the date hereof, the "Credit Agreement"); and WHEREAS, the parties hereto wish to further amend the Credit Agreement and to waive compliance with certain provisions of the Credit Agreement as set forth herein; NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. This Agreement amends the Credit Agreement. The terms defined in the Credit Agreement as amended hereby (the "Amended Credit Agreement") are used herein with the meanings so defined. 2. AMENDMENTS TO THE CREDIT AGREEMENT. The Credit Agreement hereby is amended as follows: 2.1 AMENDMENTS TO SECTION 1.1. Section 1.1 is amended by (a) deleting the phrase, "fiscal quarter of the Borrower," in the definition of "Interest Payment and replacing such phrase with the phrase, "calendar month," and (b) or entirely amending the following terms: "Borrowing Base" means, at any time, (a) the sum of (i) 85% of Eligible Accounts, plus (ii) 50% of Eligible Inventory. Agent may, in its discretion from time to time, upon not less than five (5) days' prior notice to Borrower, (i) reduce the formula in determining the Borrowing Base with respect to Eligible Accounts to the extent that Agent determines that (A) the dilution with respect to accounts for any period (based on the ratio of (1) the aggregate amount of reductions in accounts other than as a result of payments in cash to (2) the aggregate amount of total sales) has increased in any material respect or may be reasonably anticipated to increase in any material respect above historical levels, or (B) the general creditworthiness of account debtors has materially declined, and (ii) reduce the formula in determining the Borrowing Base with respect to Eligible Inventory to the extent that Agent determines that: (A) the number of days of the turnover of inventory for any period has changed in any material respect, (B) the value of the Eligible Inventory, or any category thereof, has decreased in any material respect, or (C) the nature and quality of inventory has deteriorated. When determining whether to reduce the formula(s) in determining the Borrowing Base, Agent may consider events, conditions, contingencies or risks which are also considered in determining Eligible Accounts and Eligible Inventory. "Borrowing Base Report" means a report substantially in the form of Exhibit 1.1. "Eligible Accounts" means the enforceable and outstanding accounts of each Credit Party that are subject to perfected Liens in favor of Agent and Lenders and that the Agent in its sole discretion shall have determined to be Eligible Accounts and excluding in all events the greater of (x) such Credit Party's reserves against accounts receivable, or (y) the sum of the following, without duplication: (a) the portion of any account not paid within 30 days of when due; (b) the portion of any account against the payment of which the account debtor (i) is entitled to any allowable discount, (ii) owns a corresponding account payable or past due credit, or (iii) has asserted any defense, setoff or counterclaim or (iv) is entitled to delay payment; (c) any account on which the account debtor is not domiciled in the United States of America unless: (i) such account is supported by one or more irrevocable letters of credit that are in form and substance (and are issued by one or more Persons) acceptable to Agent, and the issuer thereof has been notified of the assignment of the proceeds of such letter of credit to Agent, or (ii) such account is subject to credit insurance payable to Agent issued by an insurer and on terms and in an amount acceptable to Agent, or (iii) such account is otherwise acceptable in all respects to Agent (subject to such lending formula with respect thereto as Agent may determine); (d) any account on which the account debtor or any officer or employee of the account debtor is an Affiliate of any Credit Party or an officer, employee or agent of or affiliated with any Credit Party directly or indirectly by virtue of family membership, ownership, control, management or otherwise; -2- (e) any account not arising out of the actual and bona fide sale and delivery by that Credit Party of inventory in the ordinary course of its trade or business completed in accordance with the terms and provisions contained in any documents related thereto; (f) any account that consists of progress billings, bill and hold invoice or retainage invoices; (g) any account that arises from sales on consignment, guaranteed sale, sale and return, sale on approval, or other terms under which payment by the account debtor may be conditional or contingent; (h) any account owed by an account debtor if 15% or more of the aggregate balances then outstanding on accounts owed by such account debtor and its Affiliates to the Credit Parties, or any of them, are unpaid more than 30 days past the original due date of the original invoice; (i) any account that is not payable in Dollars; (j) unless all actions and documents deemed appropriate by Agent under applicable Requirement of Law have been respectively taken and delivered, any account owed by the United States government or by the government of any state, county, municipality, or other political subdivision as to which a Lien on it or Agent's ability to obtain direct payment of the proceeds of it is governed by the Federal Assignment of Claims Act of 1940 or any other Requirement of Law other than the applicable Uniform Commercial Code; (k) any account owed by an account debtor that is not Solvent, is subject to proceedings under the Bankruptcy Code or other similar debtor relief laws or is subject to proceedings or actions for any reason that reasonably could result in any material adverse change in such account debtor's financial condition; (l) any account which either Agent or Required Lenders elect, in their sole respective discretion and effective upon five (5) days advance notice to Borrower to exclude because of the account debtor's unsatisfactory financial condition or payment record; (m) any account with respect to which there are any facts, events or occurrences which would impair the validity, enforceability or collectability of such accounts or reduce the amount payable (other -3- than discounts given according to prudent business practice) or delay payment thereunder; (n) any account related to inventory that is returned, reclaimed or repossessed; (o) any account evidenced by an instrument or chattel paper; and (p) any account subject to a Lien that is not a Permitted Lien. "Eligible Assets" means assets acquired in the ordinary course of business to replace assets sold or otherwise transferred in connection with an Asset Disposition. "Eligible Inventory" means the finished goods and raw materials inventory of the Credit Parties that are subject to perfected Liens in favor of Agent and Lenders and excluding in all events the greater of (x) such Credit Party's reserves against inventory, or (y) the value of all items that are: (a) not usable or saleable by the applicable Credit Party in its ordinary course of business; (b) subject to any Lien that is not a Permitted Lien; (c) neither (i) in the possession of the applicable Credit Party and stored at property owned by it, (ii) in the possession of the applicable Credit Party and stored at property leased by it where the total value of such stored inventory exceeds $100,000, unless with respect to which (A) no default or other event or condition has occurred or exists beyond the applicable grace or cure period, the effect of which is to cause or to permit the landlord or lessor to cause (whether or not it elects to cause) that lease to be terminated before its stated expiration date, and (B) Borrower has delivered to Agent a landlord estoppel and subordination agreement from that landlord or lessor in respect of that lease, the terms, form, and substance of which must be satisfactory to Agent in its sole discretion, nor (iii) in the possession of and stored at a third party warehouse where the total value of such stored inventory exceeds $100,000, unless with respect to which Borrower has delivered to Agent a third party warehousemen's agreement, the terms, form, and substance of which must be satisfactory to Agent in its sole discretion; and (d) determined by Agent in its sole discretion not to be Eligible Inventory, and in any event excluding from Eligible Inventory all -4- (i) packaging and shipping materials and raw ingredients other than meat, (ii) work-in-process, (iii) bill and hold goods, (iv) goods purchased on consignment; (v) returned, damaged or defective goods, (vi) inventory that has been held for more than 180 days, and (vii) supplies and spare parts. In addition to the above, Borrower's 8.00% mark-up in connection with in-transit costs for inventory to be stored at third-party locations shall also be deducted from the value of applicable inventory for purposes of calculating Eligible Inventory. "Maturity Date" means November 30, 2000. "Permitted Investments" means (a) any Investments in any Credit Party other than the Parent, (b) any Investment in Cash Equivalents, and (c) Investments made as a result of the receipt of non-cash consideration from any Asset Disposition that was made pursuant to and in compliance with Section 8.5. "Revolving Committed Amount" means $19,850,000. 2.2 AMENDMENT TO SECTION 2.1. Section 2.1(a) is amended and restated in its entirety, as follows: (a) Revolving Loan Commitment. Subject to the terms and coniditions set forth herein, each Lender severally agrees to make revolving loans (each a "Revolving Loan" and collectively the "Revolving Loans") to the Borrower, in Dollars, at any time and from time to time, during the period from and including the Closing Date to but not including the Maturity Date (or such earlier date if the Revolving Committed Amount has been terminated as provided herein); provided, however, that (i) the sum of the aggregate amount of Revolving Loans outstanding plus the aggregate amount of LOC Obligations outstanding shall not exceed the lesser of (A) the Revolving Committed Amount minus the Excess Payables or (B) the Borrowing Base minus the Excess Payables and (ii) with respect to each individual Lender, the Lender's pro rata share of outstanding Revolving Loans plus such Lender's pro rata share of LOC Obligations shall not exceed such Lender's Revolving Loan Commitment Percentage of the lesser of (A) the Revolving Committed Amount minus the Excess Payables, or (B) the Borrowing Base minus the Excess Payables. Subject to the terms of this Credit Agreement (including Section 3.3), the Borrower may borrow, repay and reborrow Revolving Loans. 2.3 AMENDMENT TO SECTION 2.2. Section 2.2(a) is amended by amending and restating clauses (ii) and (iii) therein in their entirety, as follows: -5- (ii) the sum of the aggregate amount of LOC Obligations outstanding plus Revolving Loans outstanding shall not exceed the lesser of (A) the Revolving Committed Amount minus the Excess Payables or (B) the Borrowing Base minus the Excess Payables, and (iii) with respect to each individual LOC Participant, the LOC Participant's pro rata share of outstanding Revolving Loans plus its pro rata share of outstanding LOC Obligations shall not exceed such LOC Participant's Revolving Loan Commitment Percentage of the lesser of (A) the Revolving Committed Amount minus the Excess Payables, or (B) the Borrowing Base minus the Excess Payables. 2.4 AMENDMENT TO SECTION 2.3. Section 2.3(c) is amended and restated in its entirety, as follows: (c) Amortization. The principal amount of the Term Loans shall be repaid in quarterly payments on the dates set forth below:
Principal Amortization Payment Dates Term Loan Principal Amortization Payment ------------------------- ---------------------- March 31, 1997 $ 1,250,000 June 30, 1997 $ 1,250,000 September 30, 1997 $ 1,250,000 December 31, 1997 $ 1,250,000 March 31, 1998 $ 1,750,000 June 30, 1998 $ 1,750,000 September 30, 1998 $ 1,750,000 December 31, 1998 $ 1,750,000 March 31, 1999 $ 2,250,000 June 30, 1999 $ 2,250,000 September 30, 1999 $ 2,250,000 December 31, 1999 $ 2,250,000 March 31, 2000 $ 2,250,000 June 30, 2000 $ 2,250,000 September 30, 2000 $ 2,250,000 Maturity Date $12,250,000 ----------- Total $40,000,000
-6- 2.5 AMENDMENT TO SECTION 3.3. Section 3.3(b) is amended by amending and restating clause (i) therein in its entirety, as follows: (i) Revolving Committed Amount. If at any time the sum of the aggregate amount of Revolving Loans outstanding plus LOC Obligations outstanding exceeds the lesser of (A) the Revolving Committed Amount minus the Excess Payables or (B) the Borrowing Base minus the Excess Payables, the Borrower shall immediately make a principal payment to the Agent in the manner and in an amount necessary to be in compliance with Section 2.1. 2.6 AMENDMENTS TO SECTION 3.4. Section 3.4 is amended, as follows: (a) Section 3.4(a) is amended by amending and restating the last sentence therein in its entirety, as follows: The accrued Commitment Fees shall commence to accrue on the Closing Date and shall be due and payable in arrears (i) from the Closing Date through the fiscal quarter of the Borrower ending on September 30, 1998, on the last Business Day of each fiscal quarter of the Borrower for the immediately preceding fiscal quarter (or portion thereof), beginning with the first of such dates to occur after the Closing Date, (ii) for the period beginning October 1, 1998, and ending on November 30, 1998, on November 30, 1998, and (iii) at all times thereafter, on the last Business Day of each calendar month for the calendar month then ending (as well as on the Maturity Date and on any date that the Revolving Committed Amount is reduced). (b) Section 3.4(b) is amended by amending and restating the last sentence in clause (i) therein in its entirety, as follows: The Standby Letter of Credit Fee shall be payable (i) from the Closing Date through the fiscal quarter of the Borrower ending on September 30, 1998, on the last Business Day of each fiscal quarter of the Borrower, (ii) for the period beginning October 1, 1998, and ending on November 30, 1998, on November 30, 1998, and (iii) at all times thereafter, on the last Business Day of each calendar month and on the Maturity Date. 2.7 AMENDMENT TO SECTION 7.1. Section 7.1(b) is amended and restated in its entirety, as follows: (b) Monthly and Weekly Information. (i) As soon as available, and in any event within 20 days after the close of each of Borrower's twelve (12) -7- fiscal periods during each fiscal year, Borrower's management book for such fiscal period, containing financial information in form and detail substantially similar to that contained in Borrower's management book that was delivered to the Lenders for Borrower's fiscal period ending in August 1998, accompanied by a certificate of an Executive Officer of the Borrower to the effect that such financial information fairly presents in all material respects the financial condition of the Credit Parties, and (ii) as soon as available, and in any event no later than Tuesday of each week, a cash collections and disbursement report for the week ending the immediately preceding Saturday, and a forecast of cash collections and disbursements for the thirteen-week period beginning the immediately preceding Sunday. 2.8 AMENDMENT TO SECTION 7.12. Section 7.12 is amended and restated in its entirety, as follows: 7.12 CONSOLIDATED EBITDA. Consolidated EBITDA for the period beginning on October 4, 1998, and ending on a date set forth below shall not be less than the amount set forth opposite such date:
Amount Period In $ Thousands ------ -------------- 10/31/98 260 12/5/98 980 1/2/99 1,620 1/30/99 2,526 3/6/99 4,168 4/3/99 5,589 5/1/99 7,074 6/5/99 8,748 7/3/99 10,083 7/31/99 11,289 9/4/99 13,323 10/2/99 14,913
and Consolidated EBITDA for the twelve-month period ending on a date set forth below shall not be less than the amount set forth opposite such date: -8-
Amount Period In $ Thousands ------ -------------- 10/30/99 15,977 12/4/99 16,728 1/1/00 17,150 1/29/00 17,222 3/4/00 17,310 4/1/00 17,383 4/29/00 17,447 6/3/00 17,544 7/1/00 17,710 7/29/00 17,784 9/2/00 17,830 9/3/00 17,840 10/28/00 19,320
2.9 AMENDMENT TO SECTION 8.5. Section 8.5 is amended by deleting the text, "$1,000,000" contained therein and replacing it with the text, "$100,000" 2.10 AMENDMENT TO SECTION 8.7. Section 8.7 is amended by adding the following text to clause (vi) thereof immediately following the text, "in an aggregate amount not to exceed $1,000,000 in any fiscal year," as follows: (no more than $360,000 of which may be used to pay Management Company's management fees) 2.11 NEW SECTION 8.17. A new Section 8.17 is added immediately following Section 8.16, as follows: 8.17 CAPITAL EXPENDITURES. After October 4, 1998, no Credit Party shall make any Capital Expenditures other than (a) from October 4, 1998, through June 30, 1999, Capital Expenditures that do not exceed an aggregate amount of $2,000,000 and (b) at any time after June 30, 1999, Capital Expenditures that do not exceed, in the aggregate for any fiscal quarter of the Credit Parties, the sum of (i) $1,000,000 plus (ii) amounts for the immediately preceding fiscal quarter permitted hereunder that were not utilized for Capital Expenditures, provided that the aggregate amount of all Capital Expenditures made by the Credit Parties during any fiscal year shall never exceed $4,000,000. 2.12 AMENDMENT TO SECTION 11.5. Section 11.5 is amended by amending and restating clause (a) therein in its entirety, as follows: (a) pay all reasonable out-of-pocket costs and expenses of (i) the Agent in connection with the negotiation, preparation, execution and delivery and -9- administration of this Credit Agreement and the other Credit Documents and the documents and instruments referred to therein (including, without limitation, the reasonable fees and expenses of special counsel to the Agent and the fees and expenses of counsel for the Agent in connection with collateral issues), and (ii) the Agent and the Lenders in connection with (A) any amendment, waiver or consent relating to this Credit Agreement or the other Credit Documents including, but not limited to, any such amendments, waivers or consents resulting from or related to any work-out, renegotiation or restructure relating to the performance by the Credit Parties under this Credit Agreement, (B) enforcement of the Credit Documents and the documents and instruments referred to therein, including, without limitation, in connection with any such enforcement, the reasonable fees and disbursements of counsel for the Agent and each of the Lenders (including the allocated costs of internal counsel), and (C) any bankruptcy or insolvency proceeding of a Credit Party. 2.13 NEW EXHIBIT 1.1. A new Exhibit 1.1 is added in the form of, and all references in the Amended Credit Agreement to Exhibit 1.1 are hereby deemed to be references to, the attached Exhibit 1.1. 2.14 AMENDED EXHIBITS 2.1 AND 7.1(C). Exhibits 2.1 and 7.1(c) are amended and restated in the forms of, and all references in the Amended Credit Agreement to Exhibits 2.1 and 7.1(c) are hereby deemed to be references to, the attached Exhibits 2.1 and 7.1(c). 3. CERTAIN COVENANTS 3.1 BORROWING BASE REPORT. Holding shall deliver a Borrowing Base Report to Agent not later than 12:00 Noon (Dallas time) on the first and third Tuesday day of each calendar month, each of which shall be prepared as of the end of business on the immediately preceding Saturday. 3.2 CONTINUATION FEE. The Borrower shall pay to the Agent, if applicable, the Continuation Fee (defined below) for the account of each Lender, pro rata according to the sum of such Lender's Revolving Committed Amount and the total outstanding principal amount of the Term Loans owed to such Lender (the "Credit Exposure") as of the applicable Fee Determination Date. As used herein, "Continuation Fee" shall mean a fee due and payable only if the Credit Party Obligations have not been paid in full on or before March 31, 1999, which fee shall equal (a) 0.25% of the Credit Exposure on the Fee Determination Date that occurs on March 31, 1999, plus (b) 0.50% of the Credit Exposure on each subsequent Fee Determination Date, which Continuation Fee shall be earned and payable on each Fee Determination Date, but payment shall be deferred until the date upon which the Credit Party Obligations are paid in full, or at final maturity of the Credit Party Obligations, whichever first occurs. As used herein, "Fee -10- Determination Date" shall mean the last day of each fiscal quarter of Holding, commencing March 31, 1999. 3.3 PRICING LEVEL; EURODOLLAR LOANS. Notwithstanding anything in the Credit Agreement or any other Credit Document, (a) Pricing Level I (as shown in the table in the definition of "Applicable Percentage" in Section 1.1 of the Credit Agreement) shall remain in effect at all times, and (b) the Borrower may not request, and Agent and Lenders will not make, Eurodollar Loans, and each Eurodollar Loan outstanding on the date hereof shall be converted to a Base Rate Loan at the end of the current Interest Period for such Eurodollar Loan. 3.4 PROCEEDS FROM ORANGE CITY SALE. Notwithstanding anything in the Credit Agreement or any other Credit Document, Borrower shall make a mandatory prepayment of the Net Proceeds (other than from the sale of current assets) from the disposition, in whole or in part, of Borrower's Orange City, Iowa plant or any equipment therein, and up to $4,000,000 of such prepayment may, at the Borrower's option, be first applied to principal installments of the Term Loans in order of maturity. Any remaining amounts of such prepayment shall be applied in accordance with Section 33(b)(v)(ii) of the Credit Agreement. Furthermore, Borrower shall make a mandatory prepayment of the Net Proceeds from the sale of current assets at Borrower's Orange City, Iowa plant, which prepayment shall be applied to the outstanding principal of the Revolving Loans and shall constitute a permanent reduction to the Revolving Committed Amount. 4. WAIVERS UNDER THE CREDIT AGREEMENT. The following waivers are hereby granted: Section 4.1 WAIVER OF SECTION 3.3. Compliance by the Credit Parties with Section 3.3b(iv) of the Credit Agreement is waived to the extent necessary to satisfy the condition precedent to the effectiveness of this Agreement set forth in Section 9(b)(iii). Section 4.2 WAIVER OF SECTION 7.12. Compliance by the Credit Parties with Section 7.12 of the Credit Agreement is waived as to the periods ending on or before October 3, 1998. Section 4.3 WAIVER OF SECTION 8.10. Compliance by the Credit Parties with Section 8.10 of the Credit Agreement is waived to the extent necessary for the Parent to amend its Articles or Certificate of Incorporation, if necessary, to provide for the issuance of additional common and/or preferred stock in order to satisfy the condition precedent to the effectiveness of this Agreement set forth in Section 9(b)(iii). Section 4.4 WAIVER OF SECTION 8.11. Compliance by the Credit Parties with Section 8.11 of the Credit Agreement is waived to the extent necessary for -11- the Credit Parties to satisfy the condition precedent to the effectiveness of this Agreement set forth in Section 9(b)(iii). Section 4.5 WAIVER OF SECTION 8.12. Compliance by the Credit Parties with Section 8.12 of the Credit Agreement is waived to the extent necessary for the Credit Parties to satisfy the condition precedent to the effectiveness of this Agreement set forth in Section 9(b)(iii). 5. EFFECTIVE DATE. Sections 2 through 4 of this Agreement shall not become effective unless and until (a) Holding, the Borrower, the Agent, and each Lender shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Agent, and (b) all conditions precedent in Section 9 of this Agreement shall have been met. 6. AMENDMENT FEE. The Borrower shall pay to the Agent an amendment fee for the account of each Lender equal to 0.50% of each such Lender's Credit Exposure as of October 30, 1998, which shall be earned and payable on October 30, 1998. Borrower's failure or refusal to make such payment when such payment is due shall be an Event of Default under the Credit Agreement. 7. NO DEFAULT; YEAR 2000 COMPLIANCE. In order to induce the Lenders to enter into this Agreement, the Borrower represents and warrants to the Lenders, as follows: (a) no Default exists under the Credit Agreement other than as waived pursuant to Section 4 of this Agreement; and (b) The Borrower has (i) initiated a review and assessment of all areas within its business and operations (including those affected by suppliers and vendors) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by the Borrower (or its suppliers and vendors) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and a timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable. The Borrower reasonably believes that all of its computer applications that are material to its business and operations will on a timely basis be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 compliant"), except to the extent that a failure to do so could not reasonably be expected to have a material adverse effect on Borrower's business or operations. 8. REPRESENTATIONS AND WARRANTIES. The representations and warranties of Holding and the Borrower set forth in the Credit Agreement are true and correct in all material respects as of the date hereof, both before and after giving effect to this -12- Agreement (unless stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date). 9. CONDITIONS PRECEDENT. This Agreement shall not be effective until all corporate actions of Holding and Borrower taken in connection herewith and the transactions contemplated hereby shall be satisfactory in form and substance to Agent and Lenders, and each of the following conditions precedent shall have been satisfied on or before December 1, 1998: (a) All out-of-pocket fees and expenses of Agent or any Lender in connection with the Credit Documents, including this Agreement, including legal and other professional fees and expenses incurred on or prior to the date of this Agreement, including, without limitation, the fees and expenses of Winstead Sechrest & Minick P.C, shall have been paid. (b) Agent and each Lender shall have received each of the following, in form and substance satisfactory to Agent, Lenders and Agent's counsel: (i) a certificate of Holding and the Borrower certifying (i) as to the accuracy in all material respects, after giving effect to this Agreement, of the representations and warranties set forth in Section 6 of the Credit Agreement, the other Credit Documents and in this Agreement, and (ii) that there exists no Default or Event of Default, after giving effect to this Agreement, and the execution, delivery and performance of this Agreement will not cause a Default or Event of Default; (ii) with respect to any third party warehouse in which any Collateral is stored, a third party warehousemen's agreement, executed by Borrower, Agent, and the applicable third party warehouseman; (iii) evidence that (A) Borrower has received sufficient capital contributions to allow Borrower to (1) purchase at least $48,000,000 (face amount) of Subordinated Debt, and (2) make the scheduled interest payment due and payable under the Indenture on December 1, 1998, and (B) Borrower has used such capital contributions to (1) consummate the tender for subordinated debt contemplated in clause (A)(1) above and cancel all tendered debt instruments in accordance with the terms of the Indenture on or before December 1, 1998, and (2) pay or make provision for the payment of the interest payment described in clause (A)(2) above; (iv) certified copies of resolutions of the boards of directors of each of Holding and the Borrower authorizing the transactions contemplated by this Agreement; and -13- (v) a Borrowing Base Report prepared as of November 21, 1998. 10. RELEASES. In consideration of Lenders' agreements herein and certain other good and valuable consideration, Holding and the Borrower each hereby expressly acknowledge and agree that neither of them has any setoffs, counterclaims, adjustments, recoupments, defenses, claims or actions of any character, whether contingent, non-contingent, liquidated, unliquidated, fixed, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, known or unknown, against any Lender or the Agent or any grounds or cause for reduction, modification or subordination of the obligations of Holding or Borrower under the Credit Documents or any liens or security interests of any Lender or the Agent in each case which arose on or prior to the date hereof. To the extent Holding or Borrower may possess any such setoffs, counterclaims, adjustments, recoupments, claims, actions, grounds or causes, each of Holding and Borrower hereby waives, and hereby releases each Lender and Agent from, any and all of such setoffs, counterclaims, adjustments, recoupments, claims, actions, grounds and causes, such waiver and release being with full knowledge and understanding of the circumstances and effects of such waiver and release and after having consulted counsel with respect thereto. 11. GENERAL. Except as expressly set forth in this Amendment, the terms, provisions and conditions of the Credit Agreement and other Credit Documents are unchanged, and said agreements, as amended, shall remain in full force and effect and are hereby confirmed and ratified as being in full force and effect. This Agreement, the Credit Agreement and the other Credit Documents referred to herein or therein constitute the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior and current understandings and agreements, whether written or oral. The invalidity or enforceability of any provision hereof shall not affect the validity or enforceability of any other term or provision hereof. The headings in this agreement are for convenience of reference only and shall not alter, limit or otherwise affect the meaning hereof. Each of this Agreement and the Credit Agreement is a Credit Document and may be executed in any number of counterparts, which together shall constitute one instrument, and shall bind and inure to the benefit of the parties and their respective successors and assigns, including as such successors and assigns all holders of any Note. This Agreement shall be governed by and construed in accordance with the laws (other than the conflict of law rules) of the State of North Carolina. For all purposes of the Credit Agreement, the signature pages to this Amendment shall be deemed to be the signature pages of each Lender party to the Credit Agreement. -14- Each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as an agreement under seal as of the date first above written. GORGES HOLDING CORPORATION By: ------------------------------ Name: ---------------------------- Title: --------------------------- GORGES/QUIK-TO-FIX FOODS, INC. By: ------------------------------ Name: ---------------------------- Title: --------------------------- NATIONSBANK, N.A., Individually and as Agent By: ------------------------------ Name: ---------------------------- Title: --------------------------- BANKBOSTON, N.A., formerly The First National Bank of Boston By: ------------------------------ Name: ---------------------------- Title: --------------------------- THE CIT GROUP/BUSINESS CREDIT, INC. By: ------------------------------ Name: ---------------------------- Title: --------------------------- BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. By: ------------------------------ Name: ---------------------------- Title: --------------------------- By: ------------------------------ Name: ---------------------------- Title: --------------------------- HARRIS TRUST AND SAVINGS BANK By: ------------------------------ Name: ---------------------------- Title: --------------------------- PNC BANK, NATIONAL ASSOCIATION By: ------------------------------ Name: ---------------------------- Title: --------------------------- SUNTRUST BANK, ATLANTA By: ------------------------------ Name: ---------------------------- Title: --------------------------- By: ------------------------------ Name: ---------------------------- Title: --------------------------- EXHIBIT 1.1 BORROWING BASE REPORT AGENT: NATIONSBANK, N.A. DATE: ---------- BORROWER: GORGES/QUIK-TO-FIX FOODS, INC. This Borrowing Base Report, prepared as of , is ---------------------- executed and delivered by Borrower pursuant to that certain Credit Agreement dated as of November 26, 1996 among the Borrower, each of the banks or other lending institutions which is or may from time to time become a signatory thereto and any successors or permitted assigns thereof ("LENDERS") and Agent (as amended, supplemented or modified from time to time, the "CREDIT AGREEMENT"). All terms used herein shall have the meanings assigned to them in the Credit Agreement. Borrower represents and warrants to Agent that all information contained herein is true, correct, and complete, and that the total Eligible Accounts and total Eligible Inventory referred to below represent the Eligible Accounts and Eligible Inventory that qualify for purposes of determining the Borrowing Base under the Credit Agreement. ELIGIBLE ACCOUNTS OF THE CREDIT PARTIES: 1. Accounts (ending balance for period ended ______________, 19__).......................... $_______________ 2. Less: Ineligible Accounts (determined pursuant to the definition of Eligible Accounts in the Credit Agreement), including, without duplication: (a) Accounts not paid within 30 days of when due......................................... $_______________ (b) Accounts for which the account debtor is entitled to any allowable discount or owns a corresponding account payable or past due credit.................. $_______________ (c) Accounts subject to any defense, setoff, dispute or counterclaim or for which the account debtor is entitled to delay payment................................ $_______________ (d) Accounts on which the account debtor is not domiciled in the United States unless, (i) such account is supported by one or more irrevocable letters of credit acceptable to Agent or (ii) such account is subject to credit insurance payable to Agent or (iii) such account is otherwise acceptable to Agent................................. $_______________ (e) Accounts owed by other Affiliates or any officer or employee of any Credit Party affiliated with any Credit Party directly or indirectly by virtue of ownership, control, management or otherwise...................................... $_______________ (f) Accounts not arising out of the actual and bona fide sale and delivery of inventory in the ordinary course of business in accordance with related documents... $_______________ (g) Accounts including progress billings, bill and hold invoices or retainage invoices.. $_______________ (h) Accounts from sales on consignment, guaranteed sale, sale-and-return, sale on approval or other conditional payment terms................................. $_______________ (i) Accounts owed by each account debtor with over 15% of the balances owed by such account debtor and its Affiliates outstanding and payable to the Credit Parties for more than 30 days past the original due date.................................... $_______________ (j) Accounts not payable in Dollars..................................................... $_______________ (k) Accounts owed by the United States or any other government for which the Federal Assignment of Claims Act of 1940, as amended, or other applicable law (other than the Uniform Commercial Code) has not been complied with................. $_______________
(1) Accounts owed by account debtor that is not Solvent, or is subject to proceedings under debtor relief laws or other proceedings that reasonably could result in material adverse change in such account debtor's financial condition...... $_______________ (m) Accounts which either the Agent or Required Lenders exclude due to debtor's unsatisfactory financial condition or payment record................................ $_______________ (n) Accounts subject to events or occurrences which impair the validity, enforceability or collectibility of such accounts.................................................. $_______________ (o) Accounts related to inventory that is returned, reclaimed, or repossessed........... $_______________ (p) Accounts evidenced by instruments or chattel paper.................................. $_______________ (q) Accounts subject to a lien other than Permitted Liens............................... $_______________ 3. Total Ineligible Accounts (sum of Lines 2(a)-(q))....................................... $_______________ 4. Reserves against accounts receivables................................................... $_______________ 5. Total Eligible Accounts (Line 1 minus the greater of Line 3 or Line 4).................. $_______________ ELIGIBLE INVENTORY OF CREDIT PARTIES: 6. Total Inventory (valued at lesser of actual cost for purchase or fair market value)..... $_______________ 7. Less: Ineligible Inventory (determined pursuant to the definition of Eligible Inventory in the Credit Agreement, without duplication) (a) Inventory not usable or saleable by applicable Credit Party in its ordinary course of business......................................................................... $_______________ (b) Work-in-process inventory........................................................... $_______________ (c) Inventory shipped or delivered on consignment, sale or return, or similar terms..... $_______________ (d) Inventory considered bill and hold goods............................................ $_______________ (e) Returned, damaged or defective goods................................................ $_______________ (f) Inventory which has been held for over 180 days..................................... $_______________ (g) Inventory considered packaging, shipping materials, and raw ingredients other than meat........................................................................... $_______________ (h) Inventory that is not (I) in the possession of the applicable Credit Party and stored at property owned by it, or (II) in the possession of the applicable Credit Party and stored at leased locations or third party warehouses where there is more than $100,000 in inventory....... $_______________ (i) Inventory subject to a lien other than Permitted Liens.............................. $_______________ 8. Total Ineligible Inventory (sum of Lines 7(a)-(j)........................................ $_______________ 9. Mark-ups in connection with in-transit costs for inventory to be stored at third-party locations................................................................................ $_______________ 10. Reserves against inventory............................................................... $_______________ 11. Total Eligible Inventory (Line 6 minus the greater of [Line 8 minus Line 9] or Line 10).. $_______________ BORROWING BASE: 12. Total Eligible Accounts (Line 5)........................................................ $_______________ 13. Total Eligible Inventory (Line 11)...................................................... $_______________ 14. 85% of Line 12.......................................................................... $_______________ 15. 50% of Line 13.......................................................................... $_______________ 16. Borrowing Base: Sum of Line 14 plus Line 15............................................ $_______________ 17. Outstanding Revolving Loans............................................................. $_______________ 18. Available Credit Amount or amount to be paid if negative [(the lesser of $19,850,000 or Line 16) minus Line 17].............................................................. $_______________
Borrower further represents and warrants to Agent and Lenders that the representations and warranties contained in Section 6 of the Credit Agreement are true and correct on and as of the date of this Borrowing Base Report as if made on and as of the date hereof, and that no Material Adverse Effect, Default, or Event of Default exists. Date: GORGES/QUIK-TO-FIX FOODS, INC. ____________ By: ---------------------------------- Name: ----------------------------- Title: ---------------------------- EXHIBIT 2.1 FORM OF NOTICE OF BORROWING NationsBank, N.A., as Agent for the Lenders 901 Main Street Dallas, Texas 75202 Attention: Agency Services Ladies and Gentlemen: The undersigned, GORGES/QUIK-TO-FIX FOODS, INC. (the "Borrower"), refers to the Credit Agreement date as of November 25, 1996 (as amended, modified, extended or restated from time to time, the "Credit Agreement"), among the Borrower, the other Credit Parties party thereto, the Lenders party thereto and NationsBank, N.A., as Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. The Borrower hereby gives notice pursuant to Section 2.1(b) of the Credit Agreement that it requests a Revolving Loan advance under the Credit Agreement, and in connection therewith sets forth below the terms on which such Loan advance is requested to be made: (A) Date of Borrowing (which is a Business Day) ---------------------- (B) Principal Amount of Borrowing ---------------------- In accordance with the requirements of Section 5.2, the Borrower hereby reaffirms the representations and warrants set forth in the Credit Agreement as provided in subsection (b) of such Section, and confirms that the matters referenced in subsections (c), (d), (e) and (f) of such Section, are true and correct. Very truly yours, GORGES/QUIK-TO-FIX FOODS, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- EXHIBIT 7.1(C) FORM OF OFFICER'S COMPLIANCE CERTIFICATE For the fiscal period ended__________________________, _______. I, ______________________, [Title] of GORGES/QUIK-TO-FIX FOODS, INC. (the "Borrower") hereby certify that, to the best of my knowledge and belief, with respect to that certain Credit Agreement dated as of November 25, 1996 (as amended, modified, extended or restated from time to time, the "Credit Agreement"; all of the defined terms in the Credit Agreement are incorporated herein by reference) among the Borrower, the other Credit Parties party thereto, the Lenders party thereto and NationsBank, N.A., as Agent: a. The company-prepared financial statements which accompany this certificate are true and correct in all material respects and have been prepared in accordance with GAAP applied on a consistent basis, subject to changes resulting from normal year-end audit adjustments. b. Since ______________________ (the date of the last similar certification, or, if none, the Closing Date) no Default or Event of Default has occurred and is continuing under the Credit Agreement; and Delivered herewith are detailed calculations demonstrating compliance by the Credit Parties with the financial covenant contained in Section 7.12 of the Credit Agreement as of the end of the fiscal period referred to above. This _______ day of ________________,_____. GORGES/QUIK-TO-FIX FOODS, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ EX-10.2 3 LETTER AGREEMENT TO CREDIT AGREEMENT EXHIBIT 10.2 December 21, 1998 Each of the Lenders party to the Credit Agreement referred to below NationsBank, N.A., as Agent 901 Main Street, 66th Floor Dallas, Texas 75202 Ladies and Gentlemen: Reference is made to that certain Credit Agreement dated as of November 25, 1996, as amended prior to the date hereof (the "Credit Agreement"), by and among Gorges/Quik-To-Fix Foods, Inc., as Borrower (the "Borrower"), Gorges Holding Corporation, as Guarantor ("Holding"), the lending institutions a party thereto from time to time (the "Lenders") and NationsBank, N.A., successor by merger to NationsBank of Texas, N.A., as Agent (the "Agent"). Terms used herein and not defined herein have their respective defined meanings as set forth in the Credit Agreement. Pursuant to Section 9(b)(iii) of that certain Fourth Amendment to Credit Agreement dated as of October 29, 1998 (the "Fourth Amendment"), among the Borrower, Holding, the Lenders and the Agent the Borrower was required to deliver to the Agent and each Lender on or before December 1, 1998 evidence that (A) Borrower has received sufficient capital contributions to allow the Borrower to (i) purchase at lease $48,000,000 (face amount) of Subordinated Debt and (ii) make the scheduled interest payment due and payable under the Indenture on December 1, 1998 (the "Subordinated Debt Interest Payment"); and (B) Borrower has used such capital contributions to (i) consummate the tender for subordinated debt contemplated in the preceding clause (A)(i) and cancel all tendered debt instruments in accordance with the terms of the Indenture on or before December 1, 1998, and (ii) pay or make provision for the payment of the Subordinated Debt Interest Payment. The Borrower and Holding request that the Agent and the Lenders: (a) confirm the "capital contributions" referred to in the immediately preceding paragraph and in the Fourth Amendment shall include the $4,052,451.30 bridge loan made by Holding to the Borrower pursuant to that certain Convertible Subordinated Promissory Note dated December 21, 1998, made by the Borrower in favor of Holding (the "Holding Bridge Note") a copy of which is attached hereto as Exhibit A which amount Holding received pursuant to a bridge loan made by CGW Southeast Partners III, L.P. ("CGW") to Holding pursuant to that certain Convertible Subordinated Promissory Note dated December 21, 1998, made by Holding in favor of CGW (the "CGW Bridge Note") a copy of which is attached hereto as Exhibit B (the foregoing transaction shall be herein referred to as the "Bridge Loan"); and (b) consent to the Bridge Loan and waive the application of Sections 8.1 and 8.9 of the Credit Agreement to the incurrence of Indebtedness evidenced by the CGW Bridge Note. Holding and Borrower confirm and agree that, notwithstanding anything to the contrary set forth in the Credit Agreement, the repayment by the Borrower of any principal or interest under the Holding Bridge Note prior to the repayment of all amounts outstanding under the Credit Agreement and the termination of the Credit Agreement shall constitute an Event of Default under the Credit Agreement. In partial consideration of the Lenders's agreement to execute and deliver this letter Agreement, and as a condition precedent to the effectiveness of the Fourth Amendment, Holding and the Borrower will execute and deliver such security agreements, pledge agreements and such other documents as may be necessary or desirable to the attachment and perfection of the Lender's security interest in the Holding Bridge Note, including UCC financing statements and the delivery of the Holding Bridge Note to the Agent together with all necessary endorsements. This letter agreement shall not be construed to be a waiver relating to any Default or Event of Default that may be in existence as of the date hereof. Further, this letter agreement shall not be construed as a consent to any future actions by the Borrower or Holding which may constitute a Default or Event of Default or as a consent to any future violation of the terms and conditions of the Credit Agreement nor shall the Borrower or Holding, by receipt of this consent, expect that such a consent will be given in the future. This letter agreement shall be governed by, and construed in accordance with the laws (other than the conflict of law rules) of the State of North Carolina. This letter agreement may be executed in any number of counterparts, each of which shall be deemed and original and shall be binding upon all parties, their successors and assigns. Very truly yours, GORGES/QUIK-TO-FIX FOODS, INC. By: ----------------------------------- A. Scott Letier Chief Financial Officer GORGES HOLDING CORPORATION By: ----------------------------------- James A. O'Donnell President Agreed and Accepted: NATIONSBANK OF TEXAS, N.A., as the Agent and a Lender By: ----------------------------------- Title: ----------------------------- [Signatures Continued on Next Page] -2- [AGREEMENT AND ACCEPTANCE TO LETTER AGREEMENT REGARDING GORGES/QUIK-TO FIX FOODS, INC.] BANKBOSTON, N.A., formerly The First National Bank Of Boston By: ----------------------------------- Title: ----------------------------- THE CIT GROUP/BUSINESS CREDIT, INC. By: ----------------------------------- Title: ----------------------------- BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. By: ----------------------------------- Title: ----------------------------- HARRIS TRUST AND SAVINGS BANK By: ----------------------------------- Title: ----------------------------- PNC BANK, NATIONAL ASSOCIATION By: ----------------------------------- Title: ----------------------------- SUNTRUST BANK, ATLANTA By: ----------------------------------- Title: ----------------------------- -3- EX-10.3 4 CONVERTIBLE SUBORDINATED PROMISSORY NOTE EXHIBIT 10.3 THIS NOTE WAS ISSUED IN RELIANCE UPON EXEMPTIONS CONTAINED IN APPLICABLE STATE SECURITIES LAWS (THE "BLUE SKY LAWS") AND THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THIS NOTE HAS NOT BEEN REGISTERED UNDER THE BLUE SKY LAWS OR THE 1933 ACT, AND THIS NOTE MAY NOT BE TRANSFERRED, NOR WILL ANY ASSIGNEE OR ENDORSEE HEREOF BE RECOGNIZED AS AN OWNER HEREOF BY THE ISSUER FOR ANY PURPOSE, UNLESS A REGISTRATION UNDER THE BLUE SKY LAWS AND UNDER THE 1933 ACT WITH RESPECT TO THIS NOTE SHALL THEN BE IN EFFECT OR UNLESS THE AVAILABILITY OF AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE BLUE SKY LAWS AND THE 1933 ACT SHALL BE ESTABLISHED. CONVERTIBLE SUBORDINATED PROMISSORY NOTE $4,052,451.30 December 21, 1998 FOR VALUE RECEIVED, GORGES/QUIK-TO-FIX FOODS, INC. a Delaware corporation (hereinafter called "Maker"), promises to pay to the order of GORGES HOLDING CORPORATION (hereafter, together with any holder hereof, called "Holder") at 9441 LBJ Freeway, Suite 241, Dallas, Texas 75243, or at such other place as the Holder may designate in writing to Maker, in lawful money of the United States of America, and in immediately available funds, the principal sum of FOUR MILLION FIFTY TWO THOUSAND FOUR HUNDRED FIFTY ONE AND 30/100 DOLLARS ($4,052,451.30). Interest shall accrue on the outstanding principal balance hereof at the rate of nine percent (9%) per annum during the period from the date hereof to, but excluding the Due Date (as hereinafter defined). Interest shall be computed on the basis of a 360 day year comprised of twelve thirty (30) day months. The entire outstanding principal balance of this Note shall be due and payable in a single installment on the earlier to occur of: (i) December 15, 1999; or (ii) the date on which the Maker repays all amounts outstanding under that certain Credit Agreement, dated November 25, 1996, as amended prior to the date hereof (the "Credit Agreement"), by and among the Maker, the lending instructions party to the Credit Agreement and NationsBank, N.A., successor by merger to NationsBank of Texas, N.A., as agent (the "Due Date"). Accrued interest hereon shall be due and payable on the Due Date. Interest shall accrue on any principal amount past due hereunder at a per annum rate equal to the lesser of (a) twelve percent (12%) and (b) the maximum rate allowable by law. All such interest shall be due and payable on demand. If: (i) the Maker fails to pay any principal or interest when due under the Credit Agreement; (ii) there occurs an Event of Default (as defined herein); or (iii) the Maker fails to repay all amounts outstanding under the Credit Agreement on or prior to the Due Date (each a "Conversion Event"), this Note shall be converted into 500 fully paid and non-assessable shares of the Maker's Common Stock, $.01 par value per share (the "Common Stock"). Upon written notice from the Maker of the occurrence of a Conversion Event, the Holder shall surrender this Note to the Maker duly endorsed to the Maker and accompanied by the written notice of the Holder to convert the entire principal amount hereof and the name or names in which the certificates for shares of Common Stock are to be issued. Upon such surrender of this Note, the Holder shall be entitled to receive stock certificates evidencing the shares of Common Stock into which this Note is converted and this Note shall be canceled. In the event of conversion of this Note, all principal and interest accrued and unpaid through the date of conversion shall be paid solely through the issuance of shares of Common Stock. In case Maker shall at any time subdivide (by stock split, stock dividend or otherwise) its outstanding shares of Common Stock into a greater number of shares, the rate at which this Note is convertible into shares of Common Stock immediately prior to such conversion shall be proportionately increased and, conversely, in the case the outstanding shares of Common Stock shall be combined into a smaller number of shares, the rate of conversion in effect immediately prior to such combination shall be proportionately decreased. If any capital reorganization or reclassification of capital stock of the Maker shall be effected in such a way that the holders of the Common Stock would be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then the Holder of this Note shall have the right, upon conversion hereof, to receive such stock, securities or assets as may be issued or payable with respect to or in exchange for the shares of Common Stock to which the Holder is or would have been entitled to receive upon conversion of this Note, and appropriate provisions shall be made with respect to the rights of the Holder hereunder to the end that the provisions hereof will be applicable, as nearly as practical, to any shares of stock, securities or assets thereafter deliverable upon conversion hereof. In no event shall the amount of interest due or payable under this Note exceed the maximum rate of interest allowed by applicable law and, in the event any such payment is inadvertently paid by Maker or inadvertently received by the Holder, then such excess sum shall be credited as a payment of principal, unless Maker shall notify the Holder in writing that Maker elects to have such excess sum returned to it forthwith. It is the express intent of the parties hereto that Maker not pay and the Holder not receive, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by Maker under applicable law. Each of the following events shall constitute an "Event of Default" under this Note: (i) failure of Maker to pay any principal, interest or other amount due hereunder within ten (10) business days of the due date thereof; (ii) Maker shall (a) commence a voluntary case under the Bankruptcy Code of 1978, as amended or other federal bankruptcy law (as now or hereafter in effect); (b) file a petition seeking to take advantage of any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or composition for adjustment of debts; (c) consent to or fail to contest in a timely and appropriate manner any petition filed against Maker in an involuntary case under such bankruptcy laws or other laws; (d) apply for or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of a substantial part of Maker's property, domestic or foreign; (e) be unable to, or admit in writing Maker's inability to, pay debts as they become due; or (f) make a general assignment for the benefit of creditors; (iii) a case or other proceeding shall be commenced against Maker in any court of competent jurisdiction seeking (a) relief under the Bankruptcy Code of 1978, as amended or other federal bankruptcy law (as now or hereafter in effect) or under any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts or (b) the appointment of a trustee, receiver, custodian, liquidator or the like for Maker or all or any substantial part of the assets, domestic or foreign, of Maker, and such case or proceeding shall not have been dismissed, within 90 days of the commencement thereof. Notwithstanding anything herein to the contrary or otherwise, Maker covenants and agrees, and the Holder by its acceptance hereof likewise covenants and agrees, that any and all payments under or in respect of this Note, including, without limitation, all principal of and interest on this Note, shall be subordinated in right of payment to the prior payment in full of all Senior Debt (as hereafter defined), including, without limitation, all amounts outstanding from time to time under the Credit Agreement; provided, however, that so long as the Holder has not received a notice from the holder of any Senior Debt that (a) a "default" or an "event of default" has occurred under any document or instrument evidencing such Senior Debt; or (b) a "default" or an "event of default" would occur under any document or instrument evidencing such Senior Debt as a result of any payment by Maker to the Holder hereunder, Maker may pay, and the Holder may receive, any scheduled payments of principal of and interest on this Note, provided further, that notwithstanding the preceding proviso, so long as any amounts remain outstanding under the Credit Agreement and until such time as the Credit Agreement is terminated, the Maker shall not make any payment of principal or interest under this Note. For purposes hereof, "Senior Debt" shall mean (i) all indebtedness for borrowed money at any time and from time to time owing by the Maker to any person or entity, whether direct or indirect, absolute or contingent, secured, now existing or hereafter arising, together with all substitutions, replacements, renewals, extensions, refinancings or refundings thereof and (ii) shall include all interest accruing on Senior Debt after the filing of a petition initiating any proceeding pursuant to any bankruptcy law whether or not the claim for such interest is allowed as a claim after such filing in any proceeding under such bankruptcy law. Without limiting the generality of the foregoing, in the event of any distribution, division or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any portion of the assets of the Maker or the proceeds thereof to the creditors of the Maker or with respect to any indebtedness of the Maker, pursuant to the liquidation, dissolution or other winding up of the Maker or its assets or pursuant to any receivership, insolvency or bankruptcy proceeding, or assignment for the benefit of creditors, or any proceeding by or against the Maker for any relief under any bankruptcy or insolvency law or laws relating to the relief of debtors, readjustment of indebtedness, reorganization, compositions or extensions, or pursuant to any foreclosure proceeding or other voluntary or involuntary sale, transfer or other disposition of any assets of the Maker, then and in any such event: (i) the Holder shall assign to the lenders under the Credit Agreement all of its right, title and interest in this Note, including but not limited to the right to vote its interest in such event, provided, that at the time of the occurrence of such event, amounts remain outstanding under the Credit Agreement; and (ii) any payment or distribution of any kind or character, either in cash, securities or other property (including any adequate protection payment), which shall be payable or deliverable upon or with respect to any amounts owing under or in respect of this Note shall be paid or delivered directly to the holder(s) of Senior Debt for application to the Senior Debt (whether or not the same is then due) until all of the Senior Debt has been paid in full. Each of the Maker and the Holder acknowledges and agrees that the subordination provisions set forth in this paragraph are for the benefit of the holders of the Senior Debt. In furtherance of the foregoing, each of the Maker and the Holder covenants and agrees that it will not amend, modify or waive any of the provisions in this paragraph without the prior consent of the Required Lenders (as defined in the Credit Agreement). -3- Subject to the provisos in the first sentence of the immediately preceding paragraph, if any payment, distribution or security or the proceeds thereof is received by the Holder on account of or with respect to any amount owing under or in respect of this Note prior to the payment in full of the Senior Debt, the Holder shall hold such payment in trust and separate and apart from other funds of the Holder and the Holder shall forthwith deliver same to the holder(s) of Senior Debt in the form received (except for the addition of any endorsement or assignment necessary to effect a transfer of all rights therein to such holder(s) of Senior Debt) for application to the Senior Debt. Until so delivered any such payment, distribution or security shall be held by the Holder in trust for the holder(s) of Senior Debt and shall not be commingled with other funds or property of the Holder. Time is of the essence of this Note. No delay or failure on the part of the holder in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Holder of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. Maker, at its option, may prepay the indebtedness evidenced by this Note, either in whole or in part, at any time without penalty. All accrued interest on the amount so prepaid shall be due and payable with such prepayment. All amendments to this note, and any waiver or consent of the holder, must be in writing and signed by the holder and maker. Maker hereby waives presentment, demand, notice of dishonor, protests and all other notices whatsoever. THE MAKER, AND THE HOLDER BY ACCEPTING THIS NOTE, EACH ACKNOWLEDGES THAT ANY DISPUTE OR CONTROVERSY BETWEEN THE MAKER AND THE HOLDER WOULD BE BASED ON DIFFICULT AND COMPLEX ISSUES OF LAW AND FACT. ACCORDINGLY, THE HOLDER AND THE MAKER HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT OR TRIBUNAL IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE MAKER ARISING OUT OF THIS NOTE OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE MAKER AND THE HOLDER OF ANY KIND OR NATURE. THE MAKER, AND THE HOLDER BY ACCEPTING THIS NOTE, HEREBY AGREE THAT THE FEDERAL COURT OF THE NORTHERN DISTRICT OF GEORGIA OR ANY STATE COURT LOCATED IN FULTON COUNTY, GEORGIA SHALL HAVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE MAKER AND THE HOLDER PERTAINING DIRECTLY OR INDIRECTLY TO THIS NOTE OR ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE MAKER AND THE HOLDER OF ANY KIND OR NATURE. -4- THE FOREGOING WAIVERS HAVE BEEN MADE WITH THE ADVICE OF COUNSEL AND WITH A FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA. Any notice to be given hereunder shall be in writing, shall be sent to holder's address as specified in the first paragraph hereof or the Maker's address set forth below its signature hereto, as the case may be, and shall be deemed received (i) on the earlier of the date of receipt or the date three business days after deposit of such notice in the United States mail, if sent postage prepaid, certified mail, return receipt requested or (ii) when actually received, if personally delivered. [SIGNATURES ON FOLLOWING PAGE] -5- Given under the hand and seal of Maker as of the date first above written. GORGES/QUIK-TO-FIX FOODS, INC. By: ------------------------------------ J. David Culwell Chief Executive Officer Accepted: GORGES HOLDING CORPORATION BY: ------------------------------------ James A. O'Donnell President Address for Notices: 9441 LBJ Freeway Suite 214 Dallas, Texas 75214 -6- EX-23 5 CONSENT OF ERNST & YOUNG EXHIBIT 23 We consent to the reference to our firm under the caption "Experts" and to the use of our report dated November 19, 1998 (except for Note 3 and Note 11, as to which the date is December 21, 1998) in the Form 10-K of Gorges/Quik-to-Fix Foods, Inc. /s/ Ernst & Young LLP Dallas, Texas November 19, 1998, except for Note 3 and Note 11, as to which the date is December 21, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR OCT-03-1998 SEP-28-1997 OCT-03-1998 1,617 0 16,970 207 15,880 34,969 79,501 (13,067) 171,803 21,881 139,350 0 0 0 45,585 171,803 201,581 201,581 171,746 45,075 0 370 17,243 (32,473) 58 (32,531) 0 0 0 (32,531) 0 0
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