SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 30, 1996 Commission File Number 33-68956
Specialty Foods Corporation
(Exact name of registrant as specified in its charter)
State of Delaware 75-2488181
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
520 Lake Cook Road, Suite 520, Deerfield, IL 60015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 267-3000
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
The number of shares outstanding of the Registrant's common stock as of
May 8, 1996 was 100 shares of common stock.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
CONDENSED BALANCE SHEETS
(In thousands)
March 30, December 30,
1996 1995
---------- -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 3,314 $ 18,229
Accounts receivable, net 59,891 54,987
Inventories 147,411 149,072
Insurance claim receivable 17,400 -
Prepaid expenses and
other current assets 14,137 10,151
----------- -----------
Total current assets 242,153 232,439
Property, plant, and equipment, net 356,153 369,430
Intangible assets, net 469,557 471,874
Deferred debt issuance costs, net 32,857 34,222
Due from Specialty Foods Acquisition
Corporation 10,113 11,036
Other noncurrent assets 4,467 4,675
----------- -----------
Total assets $ 1,115,300 $ 1,123,676
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,118 $ 4,177
Accounts payable 173,838 148,550
Accrued expenses 103,829 120,586
----------- -----------
Total current liabilities 281,785 273,313
Long-term debt 838,001 837,191
Other noncurrent liabilities 58,205 57,828
Stockholder's equity:
Common stock - -
Additional paid-in capital 275,000 275,000
Accumulated deficit (336,896) (318,819)
Cumulative translation adjustment (795) (837)
----------- -----------
Total stockholder's equity (62,691) (44,656)
----------- -----------
Total liabilities and stockholder's equity $ 1,115,300 $ 1,123,676
=========== ===========
See accompanying notes to condensed financial statements.
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Three months ended
March 30, March 31,
1996 1995
----------- -----------
Net sales $ 474,917 $ 470,112
Cost of sales 336,907 330,231
--------- ---------
Gross profit 138,010 139,881
Operating expenses
Selling, general and administrative expenses 132,712 120,636
Amortization of intangibles 3,622 5,104
--------- ---------
Total operating expenses 136,334 125,740
--------- ---------
Operating profit 1,676 14,141
Other
Interest, net (23,878) (24,559)
Other income (expense), net 8,546 (1,829)
--------- ---------
Loss before income taxes and
extraordinary item (13,656) (12,247)
Provision for income taxes 749 549
--------- ---------
Loss before extraordinary item (14,405) (12,796)
Extraordinary item - (2,323)
--------- ---------
Net loss $ (14,405) $ (15,119)
========= =========
See accompanying notes to condensed financial statements.
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three months ended
March 30, March 31,
1996 1995
---------- ----------
Cash flows from operating activities:
Net loss $ (14,405) $ (15,119)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 15,723 16,510
Debt issuance cost amortization 1,365 2,115
Write-off of deferred costs - 2,323
Excess of insurance proceeds over
carrying value of assets (8,300) -
Changes in operating assets and liabilities
and other (12,666) (24,403)
------ ------
Net cash used in operating activities (18,283) (18,574)
------ ------
Cash flows from investing activities:
Capital expenditures (6,248) (5,243)
Proceeds from insurance claim 15,000 -
Other 84 205
------ ------
Net cash provided by (used in)
investing activities 8,836 (5,038)
------ ------
Cash flows from financing activities:
Payments on long-term debt (682) (46,084)
Proceeds from long-term debt - 45,199
Payments of debt issuance costs (3,438) (1,176)
Dividends paid (2,748) (1,699)
Increase in revolving credit 1,400 26,200
------ ------
Net cash provided by (used in) financing activities (5,468) 22,440
------ ------
Decrease in cash and cash equivalents (14,915) (1,172)
Cash and cash equivalents at beginning of period 18,229 1,761
------ ------
Cash and cash equivalents at end of period $3,314 $ 589
====== ======
See accompanying notes to condensed financial statements.
SPECIALTY FOODS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In Thousands)
NOTE 1 - Interim Financial Information
In the opinion of management, the accompanying unaudited interim condensed
financial information of Specialty Foods Corporation ("SFC") and its
subsidiaries (collectively, the "Company") contains all adjustments,
consisting only of those of a recurring nature, necessary to present fairly
the Company's financial position and results of operations. All significant
intercompany accounts, transactions and profits have been eliminated.
These financial statements are for interim periods and do not include
all information normally provided in annual financial statements and should
be read in conjunction with the financial statements of the Company for the
year ended December 30, 1995 included in the annual report filed on Form
10-K. The results of operations for interim periods are not necessarily
indicative of the results that may be expected for the full year.
NOTE 2 - Inventories
The components of inventories are as follows:
March 30, December 30,
1996 1995
---------- -----------
Raw materials and packaging $ 28,308 $ 26,126
Work in progress 55,072 56,213
Finished goods 63,519 66,476
Other 2,741 2,769
--------- ----------
$149,640 $151,584
Less LIFO and other reserves (2,229) (2,512)
--------- ----------
$147,411 $149,072
========= ==========
Inventories are stated at the lower of cost or market. Cost is determined
principally by the last-in first-out ("LIFO") method, although the first-in
first-out ("FIFO") method is used by certain subsidiaries.
NOTE 3 - Product Grouping Information
All of the Company's operations fall within the food industry segment. Net
sales, gross profit and operating profit (loss) for the Company's major
product groupings are summarized below:
Three months ended March 30, 1996
----------------------------------------------------------------
Cheese and Other
Bakery Meat Specialty Food Corporate Total
Operations Operations Operations and Other Operations
---------- ---------- ---------- --------- ----------
Net sales 213,115 227,042 34,760 - 474,917
======= ======= ======= ======= =======
Gross profit 99,807 27,187 11,016 - 138,010
======= ======= ======= ======= =======
Operating profit 1,907 3,536 626 (4,393) 1,676
======= ======= ======= ======= =======
Three months ended March 31, 1995
----------------------------------------------------------------
Cheese and Other
Bakery Meat Specialty Food Corporate Total
Operations Operations Operations and Other Operations
---------- ---------- ---------- --------- ----------
Net sales 206,225 232,291 31,596 - 470,112
======= ======= ======= ======= =======
Gross profit 99,058 30,708 10,115 - 139,881
======= ======= ======= ======= =======
Operating profit 6,885 9,332 616 (2,692) 14,141
======= ======= ======= ======= =======
The Bakery Operation's products primarily consist of breads, buns, rolls,
sweet goods, cookies and sourdough French bread. These products are
distributed primarily through a company-owned DSD system throughout the
Midwestern United States, California and the Pacific Northwest.
The Cheese and Meat Operation's products primarily consist of specialty
Italian cheeses, other European-style specialty cheeses, basic Italian
cheeses and pre-cooked meat products. The cheese products are sold
throughout the United States, through retail grocers, to foodservice accounts
and to industrial food processors. The meat products are sold primarily to
national and regional restaurant chains and to prepared-food producers.
Products in the Other Specialty Food Operations grouping include pickles,
peppers, and spices sold through retail grocers in the greater New York
metropolitan area and bagel chips distributed nationally through brokers
and distributors to grocery stores, gourmet shops and club stores. The
Company also operates 29 cafe shops located in the San Francisco Bay area,
San Diego and the greater Chicago area.
NOTE 4 - Stella Fire
On January 5, 1996, a Stella Foods, Inc. (Stella) cheese manufacturing plant
located in Lena, Wisconsin was substantially destroyed by fire. The plant,
which was responsible for approximately 20% of Stella's production, produced
mozzarella and ricotta cheeses sold primarily under the Frigo trademark. The
Company is rebuilding the plant and expects it to be substantially operational
by August, 1996. Although Stella has shifted some of the production to other
plants and to co-packers, it has not been able to replace all of its
customers' product requirements. As a result, the Company's 1996 first quarter
operating profit was adversely impacted by approximately $2.1 million.
The Company has comprehensive insurance which provides replacement cost
coverage for all property damage, as well as reimbursement for lost operating
profit for the period until the plant is fully operational.
Management's current estimate of the total insurance claim through March 30,
1996 is $32 million of which $19.5 million has been received to date ($15
million received as of March 30). The portion of the claim representing
coverage for the lost operating profit ($2.1 million) during the first
quarter and the portion representing management's estimate of the excess of
the replacement cost over book value of assets destroyed and written off
($8.3 million), have been recorded as "Other income" in the statement of
operations. The Company expects settlement procedures with its insurance
carriers to continue throughout the remainder of 1996.
NOTE 5 - Other Information
On January 12, 1996, the Company's President and Chief Executive Officer (the
"Executive") resigned. The Company entered into a termination agreement with
the Executive pursuant to which the Company will pay the Executive
approximately $2.0 million over a period of twenty-four months beginning
January, 1996. The payments have been fully accrued in the financial
statements for the quarter ended March 30, 1996.
As of March 30, 1996 the Company was in compliance with all covenants under its
Term Facility and Revolving Credit Facility (together, the "Credit
Facilities"). However, if the difficult conditions experienced by businesses
in categories in which the Company competes continue throughout the remainder
of 1996, the Company may violate certain of its financial covenants under the
Credit Facilities. If necessary, management would request amendments to its
financial covenants relating to 1996 results.
NOTE 6 - Subsequent Events
On April 12, 1996, the Company executed a non-binding letter of intent to merge
its subsidiary, Belsea Holdings, Inc (Belsea) into a newly-formed joint
venture with United States Bakery (USB) of Portland, Oregon. This
transaction, which is subject to certain conditions, including obtaining
certain regulatory approvals, is expected to close in the third quarter of
1996 and, will result in the contribution of substantially all the respective
assets and liabilities of Belsea and USB into the joint venture. The
tentative terms of the transaction provide for minority ownership of the
joint venture on the part of the Company.
On April 25, 1996, the Company entered into several agreements for the sale and
leaseback of approximately $17.9 million of production equipment at four
bakeries and two cheese plants. The leases will be classified as operating
leases and, as a result, the book value of the equipment will be removed from
the balance sheet. Losses of $2.5 million realized on the sale of equipment
at two facilities will be recognized immediately while gains of $5.0 million
realized at the other four facilities will be deferred and amortized to
income as rent expense adjustments over the 6 1/2-year lease term. Aggregate
rentals under the leases will approximate $3.5 million annually, commencing
in May, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF FIRST QUARTER 1996 TO FIRST QUARTER 1995
Consolidated net sales for the three months ended March 30, 1996 increased
1% to $475 million compared to $470 million in 1995. Excluding the impact
of acquisitions, net sales were comparable to the prior year.
Net sales of the Bakery Operations increased $7 million (3%) to $213 million.
This increase was primarily due to price increases and the acquisition in
May, 1995 of two bakeries and the related routes, partially offset by slightly
lower volumes. Net sales of the Cheese and Meat Operations, consisting of
Stella and H&M Food Systems Company, Inc. (H&M), respectively, decreased $5
million (2%) to $227 million. Net sales increased at Stella by $1 million
(1%), while declining $6 million (13%) at H&M. Stella's net increase in sales
resulted from price increases substantially offset by decreased volume
resulting from a fire at a Stella manufacturing plant in January, 1996. (See
"Stella Fire" below for further discussion regarding the fire and its
impacts). The decline at H&M was primarily due to lower commodity prices and
the loss of significant business from its largest customer subsequent to the
first quarter of 1995. Net sales of the Other Specialty Food Operations
increased $3 million (10%) primarily due to the incremental sales
contribution from The New York Style Bagel Chip Business, which was acquired
in September, 1995.
The Company's gross profit margin decreased to 29.1% from 29.8% in 1995
primarily due to a significant increase in the cost of flour and milk, the
key commodity ingredients in the Company's Bakery and Cheese Operations,
respectively, partially offset by price increases and continued manufacturing
cost reductions.
Consolidated operating profit in 1996 decreased 88.1% to $1.7 million
compared to $14.1 million in 1995. Operating profit in the Bakery Operations
decreased 72.3% to $1.9 million compared to $6.9 million in 1995. This
decrease was principally due to the significant increase in the cost of flour,
increases in promotion and selling expenses and slightly lower volumes,
partially offset by price increases and decreased amortization expense due to
the 1995 goodwill write-down.
Operating profit in the Cheese and Meat Operations decreased 62.1% to
$3.5 million compared to $9.3 million in 1995. Operating profit at Stella
decreased $6.0 million (79%) principally due to a significant increase in
milk prices, increased promotion and distribution expenses and volume losses
resulting from the fire, partially offset by price increases. Operating
profit at H&M was essentially flat compared to the prior year as the negative
impacts of lower volume and lower commodity prices were fully offset by cost
reductions and decreased amortization expense due to the 1995 goodwill
write-down. Operating profit in the Other Specialty Food Operations was
essentially flat compared to 1995.
Corporate expenses increased to $4.4 million in 1996 compared to $2.7 million
in 1995. On January 12, 1996, the Company announced the resignation of its
President and Chief Executive Officer (the "Executive"). The Company entered
into a termination agreement with the Executive pursuant to which the Company
will pay the Executive approximately $2.0 million over a period of
twenty-four months beginning in January, 1996. All costs associated with the
termination agreement have been accrued in the first quarter and results in
the increase in corporate expenses.
Interest expense in 1996 decreased 3% to $23.9 million from $24.6 million in
1995 due to a small decline in interest rates.
The effective income tax rates in 1996 and 1995 differ from the Federal
statutory rate primarily due to the nondeductibility of the amortization of
certain intangible assets and tax benefits not currently recognizable for
financial statement purposes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities decreased to $18.3 million in 1996 from
$18.6 million in 1995. The decrease in 1996 results primarily from the
Company's continued aggressive management of its working capital accounts,
particularly accounts payable, substantially offset by lower operating profit
in 1996 and cash expenditures associated with the Stella fire that have not
yet been reimbursed by the Company's insurance carriers. In both 1996 and
1995, the Company's first quarter operating cash flows were impacted by
interest payments totaling $22.8 million on its 10 1/4% Senior Notes and the
11 1/4% Senior Subordinated Notes.
The Company's businesses are moderately seasonal with higher sales, operating
profit and operating cash flows generally occurring in the third and fourth
quarters of the year. This seasonality is due primarily to higher bread sales
in the summer months and higher cheese sales in the fall and winter months.
The cheese business tends to build inventory of its hard-style cheeses for
aging in the spring and summer when milk prices have historically been lower.
Specialty Foods Finance Corporation ("SFFC"), an accounts receivable
subsidiary, purchases substantially all of the accounts receivable from the
operating subsidiaries of the Company. SFFC sells, for cash, an undivided
interest in eligible accounts receivable, up to a maximum of $95 million, on
a revolving basis, pursuant to a securitization facility. At March 30, 1996
and March 31, 1995, the consolidated accounts receivable balance has been
reduced by $95 million due to the receivables sold by SFFC pursuant to the
securitization facility.
Net cash provided by investing activities was $8.8 million in 1996 compared
to net cash used in investing activities of $5.0 million in 1995. Investing
activities in 1996 include the $15 million proceeds from the Stella
fire insurance claim. Capital expenditures were $6.2 million in 1996 and
$5.2 million in 1995. These expenditures have been funded primarily through
internally generated funds and borrowings under the Revolving Credit
Facility. Capital expenditures are expected to approximate $40 million for
the full year and will continue to be funded from internal sources and
available borrowing capacity under the Revolving Credit Facility. The
planned level of capital expenditures is needed primarily to maintain the
Company's existing level of operations and enhance its production
efficiencies.
Net cash used in financing activities was $5.5 million in 1996 compared to
net cash provided by financing activities of $22.4 million in 1995. In 1996,
limited additional borrowings under the Revolving Credit Facility were
required principally due to the cash on hand at the end of 1995. The
Revolving Credit Facility provides for borrowings of up to $125 million. At
March 30, 1996, $74.0 million was outstanding under the Revolving Credit
Facility and the Company had $24.6 million of outstanding letters of credit.
The letters of credit reduce the availability of the facility and, as a
result, $26.4 million was available for borrowing at March 30, 1996.
In February, 1995, the Company repaid approximately $45 million in
principal amount of the Original Term Loan Facility previously due on or
prior to August, 1996 and, concurrently with the payment of such amounts,
borrowed $45 million under the Original Term Loan Facility with maturities in
1996 through 1999. As a result of this early extinguishment of debt,
deferred debt issuance costs of $2.3 million were written off and recorded as
an extraordinary item in the 1995 first quarter.
The consolidated indebtedness of the Company as of March 30, 1996 consisted
of $74 million under the Revolving Credit Facility, $174 million under the
Term Facility, $225 million in 10 1/4% Senior Notes due 2001, $200 million
in 11 1/4% Senior Subordinated Notes due 2003, $150 million in 11 1/8% Senior
Notes due 2002, and $19 million of other indebtedness, principally industrial
development bonds.
With respect to the $174 million borrowed under the Term Facility, the
Company will be required to make principal payments of $.5 million, $.5
million, $.5 million, $.5 million, $86 million and $86 million in 1996, 1997,
1998, 1999, 2000, and 2001, respectively. Borrowings under the Revolving
Credit Facility will mature in April, 2001.
Certain of the Company's debt agreements contain covenants which restrict or
prohibit (with de minimis exceptions) the Company's ability to pay dividends
or make other distributions to SFAC, its Parent company. Specifically, as a
result of the Company's goodwill write-down in 1995, SFC's ability to make
distributions to SFAC under the indentures of the Senior Notes and the Senior
Subordinated Notes has been impaired and these indentures will require
modification before any such distribution to SFAC can be made.
As of March 30, 1996 the Company was in compliance with all covenants under
its Credit Facilities. However, if the difficult conditions experienced by
businesses in categories in which the Company competes continue throughout the
remainder of 1996, the Company may violate certain of its financial covenants
under the Credit Facilties. If necessary, management would request
amendments to its financial covenants relating to 1996 results.
The Company remains highly leveraged and, as a result, a significant portion
of its operating cash flows are required for debt service and to fund
seasonal working capital requirements. Nonetheless, management believes that
cash flows from operations, available borrowing capacity under the Revolving
Credit Facility, and financing opportunities, such as the equipment sale and
leaseback transaction discussed in Note 6 to the Condensed Financial
Statements, available under the Company's debt documents, provide sufficient
liquidity to enable the Company to meet its debt service obligations through
the year 2000, although there can be no assurances that cash flow will be
adequate to meet such obligations. Based upon current levels of operations
and anticipated growth, the Company expects that it will be required to
refinance a portion of its indebtedness beginning in the year 2001, when the
10 1/4% Senior Notes are due. The Company currently has no specific plans
for the implementation of such financing.
STELLA FIRE
On January 5, 1996, a Stella cheese manufacturing plant located in Lena,
Wisconsin was substantially destroyed by fire. The plant, which was
responsible for approximately 20% of Stella's production, produced mozzarella
and ricotta cheeses sold primarily under the Frigo trademark. The Company
is rebuilding the plant and expects it to be substantially operational by the
end of August, 1996. Although Stella has shifted some of the Lena production
to other plants and to co-packers, it has not been able to replace all of its
customers' product requirements. As a result, the Company's 1996 first
quarter operating profit was adversely impacted by approximately $2.1 million.
The Company has comprehensive insurance which provides replacement cost
coverage for all property damage, as well as reimbursement for lost operating
profit for the period until the plant is fully operational.
Management's current estimate of the total insurance claim through March 30,
1996 is $32 million of which $19.5 million has been received to date ($15
million received as of March 30). The portion of the claim representing
coverage for the lost operating profit ($2.1 million) during the first
quarter and the portion representing management's estimate of the excess of
replacement cost over book value of assets destroyed and written off
($8.3 million), have been recorded as "Other income" in the statement of
operations. The Company expects settlement procedures with its insurance
carriers to continue throughout the remainder of 1996.
PART II - OTHER INFORMATION
Item 4: Submission of Matters Subject to a Vote of Security Holders
None.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule.
(b) The Company filed a Report on Form 8-K dated March 28, 1996,
disclosing a press release reporting SFC's financial results for the
fourth quarter and year-end, which included a write-down of certain
acquisition-related goodwill.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECIALTY FOODS CORPORATION
(Registrant)
By: /s/ Paul J. Liska
Paul J. Liska
President and Chief Executive Officer
Dated: May 14, 1996
<TABLE> <S> <C>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 30, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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