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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

For the quarterly period ending June 29, 2003

OR

For the transition period from          to          

Commission file number 001-13956

VENTURI PARTNERS, INC.

(Exact name of Registrant as specified in its charter)

Five LakePointe Plaza
2709 Water Ridge Parkway, 2^nd Floor
Charlotte, North Carolina 28217
(Address, including zip code, of
Registrant’s principal executive offices)

(704) 442-5100

     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 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [  ] No [ X ]

     As of August 4, 2003, 47,821,637 shares (before reverse stock split) of the registrant’s Common Stock, $.01 par value, were outstanding.

VENTURI PARTNERS, INC.
TABLE OF CONTENTS

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Venturi Partners, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
For the Periods Ended June 29, 2003 and June 30, 2002
(in thousands, except per share data)

The accompanying notes are an integral part of these statements.

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Venturi Partners, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
June 29, 2003 and December 29, 2002
(in thousands, except per share data)

The accompanying notes are an integral part of these balance sheets.

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Venturi Partners, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity (Deficit)
For the Period Ended June 29, 2003
(in thousands)

The accompanying notes are an integral part of these statements.

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Venturi Partners, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
For the Periods Ended June 29, 2003 and June 30, 2002
(in thousands)

The accompanying notes are an integral part of these statements.

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VENTURI PARTNERS, INC.
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)

(1)

General

     The unaudited consolidated financial statements included herein have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnotes required by generally accepted accounting principles; however, they do include all adjustments of a normal recurring nature that, in the opinion of management, are necessary to present fairly the results of operations of the Company for the interim periods presented. These interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2002. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year.

     Certain amounts in prior periods have been reclassified to conform to the 2003 presentation, including reclassifying professional fees paid in connection with the financial restructuring from restructuring and rationalization charges to gain (loss) on financial restructuring, net.

(2)

Name Change and Reverse Stock Split

     On August 5, 2003, the Company amended and restated its charter as contemplated in its recently completed financial restructuring. See Note 3, “Comprehensive Financial Restructuring.” Among other provisions, the charter amendment changed the Company’s corporate name to Venturi Partners, Inc., and effected a 1-for-25 reverse split of the Company’s common stock. The par value remained at $0.01 per share. Shareholder’s equity has been restated by reclassifying the reduction in par value arising from the reverse stock split from common stock to additional paid-in capital. All references in the accompanying consolidated financial statements to the number of common shares, except for authorized, and per share amounts have been restated to reflect the reverse stock split.

(3)

Comprehensive Financial Restructuring

     On April 14, 2003, the Company completed a comprehensive financial restructuring with its senior lenders and the holders of approximately $109,661 of its outstanding 5.75% Convertible Subordinated Notes due 2004 (the “5.75% Notes”) in which it issued shares of the Company’s Common Stock and Series B Preferred Stock to the participating noteholders in exchange for their 5.75% Notes (the “Exchange Transaction”). In the Exchange Transaction, which was privately negotiated, the Company exchanged newly issued equity with the participating noteholders and issued the following consideration for each $1 in principal amount of notes exchanged:

	•		$28.75 in cash (not in thousands);
	•		7.6382 shares (190.9560 shares before reverse split) of newly issued shares of the Company’s Common Stock; and
	•		9.5242 shares of Series B Preferred Stock of the Company, each share of which is convertible into 4 shares (100 shares before reverse split) of Common Stock upon any amendment to the Company’s charter increasing the authorized number of shares of Common Stock or effecting a reverse split of outstanding shares of Common Stock that increases the number of authorized but unissued shares. The holders of Series B Preferred Stock vote on all matters with the Common Stock as if converted, have a liquidation preference of $.01 per share, and otherwise have no greater rights or privileges than the Common Stock. With the reverse stock split

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complete, the Company intends to convert all of the Series B Preferred Stock into Common Stock in accordance with its terms.

     In connection with the Exchange Transaction, the Company entered into an agreement with each of the former noteholders participating in the exchange to provide them with registration rights with respect to the shares of Common Stock issued in the exchange or acquired upon conversion of the Series B Preferred Stock.

     As a result of the Exchange Transaction, the participating noteholders in the aggregate were issued 837,617 shares of Common Stock (20,940,425 shares before reverse split) and 1,044,433 shares of Series B Preferred Stock, which together represent approximately 82% of the Company’s outstanding Common Stock (assuming for this purpose that all shares of the Series B Preferred Stock issued to the participating noteholders have been converted). The existing shareholders retained ownership of their outstanding 1,075,248 shares of Common Stock (26,881,212 shares before reverse split), which represent approximately 18% of the outstanding Common Stock (on the same, as-converted, basis). In connection with this ownership change, the Company also reconstituted its Board of Directors to provide for a seven-person Board and the designation of two representatives of the new major shareholders to serve as new Board members, together with the Company’s Chief Executive Officer, one incumbent independent Board member who was designated by the Company with the consent of the participating noteholders and three other independent Board members, two of whom are incumbents who were designated by the participating noteholders.

     In order to permit the closing of the Exchange Transaction contemplated in the financial restructuring and to provide for the terms on which the existing senior lenders would continue to finance the Company’s working capital needs, the Company and its existing senior lenders also executed definitive loan agreements for the Credit Facility, which provided for certain amendments and maturity date extensions to the revolving credit facility and eliminated the Equity Appreciation Right (the “EAR”) held by the senior lenders (the “Senior Debt Restructuring”). The Senior Debt Restructuring provided for the forgiveness of indebtedness in the amount of $10,300. As a result of the Exchange Transaction and the Senior Debt Restructuring, the Company used substantially all of its cash on hand, after payment of transaction expenses, to repay approximately $37,985 of its outstanding credit facility and eliminated an additional $119,961 of its outstanding indebtedness, which will result in substantial reductions in the Company’s interest expense in future periods. No provision or benefit for income taxes was recorded in the second quarter of 2003 since the gain from financial restructuring will not be subject to income tax and the Company has incurred operating losses which can be carried forward to offset future taxable income.

     The Credit Facility provides for a $70,700 revolving line of credit due May 1, 2004 and is subject to certain maturity date extensions, assuming the Company is in compliance with its covenants, in six-month increments up through May 1, 2005. Availability of borrowings under the Credit Facility is subject to a borrowing base calculated as specified percentages of the Company’s eligible accounts receivable (as defined) in the aggregate. The Credit Facility contains covenants, including financial covenants that require monthly maintenance of cumulative EBITDA levels (as defined in the amended agreement) and an interest and subordinated indebtedness coverage ratio. The Credit Facility also contains restrictions on the payment of cash dividends on the Company’s capital stock and places additional limitations on share repurchases, acquisitions and capital expenditures. Finally, in lieu of the EAR included as part of the revolving credit facility that was in effect in 2002, the Company has issued common stock purchase warrants to the lenders under the Credit Facility entitling them to purchase a total of 768,997 shares of Common Stock (19,224,916 shares before reverse split), or 10% of the outstanding Common Stock on a fully diluted basis. These warrants are exercisable in whole or part over a 10-year period and the exercise price thereunder is $7.8025 per share ($0.3121 per share before reverse split), which was based on a stated equity valuation for the Company of $60,000. The exercise price for these warrants exceeded the estimated fair value of the underlying equity at the issuance date. Interest rates payable under the Credit Facility were set at prime plus 325 basis points through June 2003, with increases during each six-month period through May 1, 2005. The Company’s interest rate is currently set at prime plus 375 basis points through December 2003.

     In connection with the financial restructuring the Company agreed to seek shareholder approval at the

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2003 Annual Meeting of Shareholders to amend and restate its certificate of incorporation, and on July 24, 2003, the shareholders approved each of the proposed amendments. In addition to the name change and reverse stock split described in Note 2 above, the amendments to the certificate of incorporation included the following:

	•		elimination of provisions that separate the Board of Directors into three classes and that prohibit action by consent of shareholders without a meeting;
	•		an election by the Company not to be governed by Section 203 of the Delaware General Corporation Law, which restricts the ability of the Company to engage, directly or indirectly, in a business combination transaction with a holder of 15% or more of its voting stock;
	•		addition of provisions requiring a supermajority vote of the Board of Directors or shareholders to adopt changes to the certificate of incorporation or bylaws; and
	•		addition of a provision to protect minority shareholders in connection with certain transactions with a shareholder (a “Significant Holder”) that beneficially owns 20% or more of the shares of the Company’s capital stock that are entitled to vote on matters submitted to a vote of the shareholders.

     In connection with the financial restructuring, the Company amended and restated the shareholder rights agreement that governs the terms of preferred share purchase rights that currently accompany the Common Stock. The amendments included, among other things, exemptions preventing the following from triggering separation of the rights from the Common Stock: (i) beneficial ownership of capital stock by the participating noteholders acquired in the financial restructuring; (ii) beneficial ownership by any Significant Holder of capital stock of the Issuer acquired in accordance with the amended and restated certificate of incorporation; and (iii) beneficial ownership by any third party of capital stock of the Company acquired in a transfer from a Significant Holder pursuant to a transaction that complies with the amended and restated certificates of incorporation. In addition, the shareholder rights plan was amended to include a tag-along right for the benefit of any holder (including certain holders of more than 2% acting together as a group) of 5% or more of the voting stock of the Company pursuant to which such holder (or group) will be entitled to participate pro rata, for the same amount and form of consideration and otherwise on substantially the same terms and conditions, in any transfer by any Significant Holders of capital stock of the Company of 20% or more of the voting stock of the Company.

     In connection with the Company’s financial restructuring, the Company terminated its 1995 Stock Option Plan. Additionally, a number of the Company’s employees, including each of the Company’s executive officers at the end of 2002 and all but one of the Company’s Board of Directors, irrevocably cancelled any and all rights that they had to exercise any and all stock options that were previously granted and agreed that all such options would be forfeited to the Company. These directors and employees held in the aggregate 87,601 of the stock options (2,190,030 stock options before reverse split) that were outstanding under the 1995 Stock Option Plan as of December 29, 2002. As a result of these voluntary forfeitures, only 16,683 stock options (417,080 options before reverse split) remained outstanding under the 1995 Stock Option Plan, and these options have a weighted average exercise price of $232.33 per share ($9.29 per share before reverse split). Although the 1995 Stock Option Plan has been terminated and no future issuances thereunder will be made, these remaining outstanding stock options will continue to be exercisable in accordance with their terms.

     The Company’s Board of Directors adopted the 2003 Equity Incentive Plan (the “2003 Equity Plan”) simultaneously with the completion of the Company’s financial restructuring. The 2003 Equity Plan authorizes grants of stock options, stock appreciation rights (or “SARs”), restricted stock, deferred stock awards and performance awards (and dividend equivalent rights relating to options, SARs, deferred stock and performance awards), in the case of stock or option awards, for up to 794,835 shares (19,870,873 shares before reverse split), or 10.3%, of the Company’s fully diluted Common Stock. Awards under the 2003 Equity Plan are to be made to key employees, directors and consultants as selected by the Board of Directors or the

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Compensation Committee. The duration of any option or SAR granted under the 2003 Equity Plan will not exceed ten years. Awards will generally vest monthly on a pro r