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 September 30, 1997 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
25 Tri-State International Office Center, Suite 250, Lincolnshire, IL 60069
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 267-1001
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
November 4, 1997 was 100 shares of common stock.
<PAGE>
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page No.
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations for
the three- and nine-month periods
ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 1997 and 1996 5
Notes to Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-11
PART II - OTHER INFORMATION 12
SIGNATURE 13
This Report on Form 10-Q contains forward-looking statements within the
meaning of the federal securities laws which reflect the Company's
expectations and are based on currently available information. Actual
results, performance, achievements or other information may vary materially
from such statements and are subject to future known and unknown risks,
uncertainties and events, including, among other factors, weather, economic
and market conditions, cost and availability of raw materials, competitive
activities and other business conditions.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ In thousands)
September 30, December 31,
1997 1996
------ ------
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,179 $ 37,508
Accounts receivable, net 36,651 32,368
Inventories 125,698 123,391
Net assets of discontinued operations - 66,434
Other current assets 11,750 27,406
-------- --------
Total current assets 175,278 287,107
Property, plant, and equipment, net 280,076 256,529
Intangible assets, net 23,574 24,109
Due from Specialty Foods Acquisition
Corporation - 10,999
Other noncurrent assets 32,237 32,589
-------- --------
Total assets $ 511,165 $ 611,333
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 3,377 $ 4,049
Accounts payable 107,912 118,692
Accrued expenses 75,776 106,631
-------- --------
Total current liabilities 187,065 229,372
Long-term debt 812,874 838,059
Due to Specialty Foods Acquisition
Corporation 7,688 -
Other noncurrent liabilities 37,248 37,945
-------- --------
Total liabilities 1,044,875 1,105,376
Stockholders' equity (533,710) (494,043)
-------- --------
Total liabilities and
stockholders' equity $ 511,165 $ 611,333
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
($ In thousands, except share data)
Three months ended September 30, Nine months ended September 30,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $ 403,475 $ 429,737 $ 1,168,910 $ 1,210,263
Cost of sales 284,621 319,792 829,359 888,216
-------- ------- ---------- ----------
Gross profit 118,854 109,945 339,551 322,047
-------- ------- ---------- ----------
Operating expenses:
Selling, distribution, general
and administrative 97,819 92,847 290,068 283,575
Amortization of intangibles 585 3,276 1,765 9,527
-------- -------- ---------- ----------
Total operating expenses 98,404 96,123 291,833 293,102
Operating profit 20,450 13,822 47,718 28,945
Other expenses:
Interest expense 23,228 23,827 69,300 71,990
Other (income) expense, net 3,643 3,275 8,308 (1,982)
-------- -------- ---------- ----------
Loss before income taxes (6,421) (13,280) (29,890) (41,063)
Provision for income taxes 373 834 707 3,330
-------- -------- ---------- ----------
Loss from continuing
operations (6,794) (14,114) (30,597) (44,393)
Discontinued operations:
Net income (loss) - 3,250 (1,896) 5,428
Loss on disposal, net (556) - (6,501) -
-------- -------- ---------- ----------
(556) 3,250 (8,397) 5,428
Net loss $ (7,350) $ (10,864) $ (38,994) (38,965)
========= ========== ========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ In thousands)
Nine months ended September 30,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (30,597) $ (44,393)
Adjustments to reconcile to net cash
from continuing operating activities
Depreciation and amortization 26,436 36,739
Debt issuance cost amortization 4,133 4,094
Changes in operating assets and liabilities,
net of affects from businesses
acquired or sold (33,426) (14,582)
-------- --------
Net cash used by
continuing operations (33,454) (18,142)
Cash flows from investing activities:
Proceeds from divestitures of businees 55,784 5,343
Capital expenditures (50,861) (38,616)
Property related insurance proceeds - 15,000
Proceeds from sale-leaseback of equient - 17,941
-------- --------
Net cash provided (used) by
investing activities 4,923 (332)
Cash flows from financing activities:
Increase (decrease) in revolving credit (22,900) 2,400
Payments on long-term debt (2,424) (1,747)
Advance to Parent 19,500 -
Other (1,974) (7,324)
-------- --------
Net cash used by
financing activities (7,798) (6,671)
Decrease in cash and cash equivalents (36,329) (25,145)
Cash - beginning of period 37,508 17,331
-------- --------
Cash - end of period $ 1,179 $ (7,814)
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
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 31, 1996
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.
Certain amounts in the 1996 financial statements have been
reclassified to conform to the manner in which the 1997 financial
statements have been presented.
NOTE 2 - Inventories
The components of inventories are as follows:
September 30, December 31,
1997 1996
-------- --------
Raw materials and packaging $ 20,999 $ 20,942
Work in progress 52,640 54,676
Finished goods 49,701 46,782
Other 2,358 991
-------- --------
$ 125,698 $ 123,391
======== ========
Inventories are stated at the lower of cost or market. Cost is
determined principally by the first-in first-out ("FIFO") method.
<PAGE>
NOTE 3 - Discontinued Operations
Discontinued operations consist of the following businesses:
Bloch and Guggenheimer, Inc. (B&G)/Burns & Ricker, Inc.
(B&R) - Pickle, pepper, and specialty snack food businesses
operated under common management. The sale of the combined
business of B&R/B&G was completed on December 27, 1996.
Gai's Seattle French Baking Company (Gai's) - A restaurant
and institutional bakery operation serving the northwestern
United States. The sale of Gai's was completed on February 24,
1997.
San Francisco French Bread (SFFB) - A sourdough hearth bread
operation located in California. The sale of SFFB was completed
on March 31, 1997.
A restaurant and institutional bakery operated by Metz
located in Illinois. The sale of this bakery was completed on
August 23, 1997.
These divestitures have been reported as discontinued operations
in the accompanying financial statements in accordance with
Accounting Principles Board Opinion No. 30. Operating results
for these businesses, including revenues of $64,741 and $289,039
for the nine months ended September 30, 1997 and 1996,
respectively, have been classified as discontinued operations in
the Consolidated Statement of Operations. No interest expense
has been allocated to discontinued operations.
The net loss on disposal of discontinued operations for the nine
months ended September 30, 1997 consisted of the gain realized on
the sale of Gai's, the loss realized on the disposal of SFFB, the
loss on disposal of the Illinois restaurant and institutional
bakery, and 1997 operating losses for the three entities.
Remaining retained liabilities from discontinued operations are
$3,096 and are included with accrued liabilities at September 30, 1997.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
POTENTIAL SALE OF BUSINESS
In a press release issued July 29, 1997, the Company announced
that it had retained an investment banking firm to advise it in
connection with the potential sale of its Stella Foods
subsidiary. The Company expects to reach a final decision
regarding the potential divestiture by year-end. Stella sales
account for approximately 45 percent of the Company's 1997
revenues. If the divestiture is carried out, the Company intends
to use a portion of the net proceeds from a sale of Stella to
reduce outstanding indebtedness with the balance to be used for
acquisitions in the Company's Bakery Operations. The net
proceeds from a sale of Stella will equal the gross sales price
less approximately $75 million of funds required to (x)
repurchase Stella's trade receivables from the Company's Accounts
Receivable Facility, (y) repurchase certain machinery and
equipment leased by Stella and (z) pay transaction costs. The
sale of Stella would require amendments to the Company's Term
Loan Facility and the Revolving Credit Facility as well as its
Accounts Receivable Facility. Given the preliminary nature of
this divestiture effort, there can be no assurance that the
Company will elect to complete this divestiture.
SEASONALITY
The Company's businesses are moderately seasonal with lower
sales, operating profit, and cash flows generally occurring in
the first quarter 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 holiday season.
RESULTS OF OPERATIONS
COMPARISON OF THIRD QUARTER 1997 TO THIRD QUARTER 1996
Consolidated net sales from continuing operations decreased 6% to
$403 million in 1997 compared to $430 million in 1996. Net sales
of the Bakery Operations increased $1 million to $174 million in
1997 primarily due to higher cafe sales at Boudin Bakeries. Net
sales of the Cheese and Meat Operations, consisting of Stella and
H&M Food Systems Company, decreased $28 million (11%) to $229
million. This sales decline was attributed to Stella and related
to market driven price decreases on formula priced products
reflecting a decrease in the cost of milk in 1997.
The Company's gross profit margin increased to 29.5% in 1997 from
25.6% in 1996 primarily due to productivity improvements
attributed to capital projects and higher margins on fixed price
products in both Cheese and Bakery Operations as a result of
lower commodity costs offset by tighter margins on market priced
products in the Company's Cheese Operations.
Selling, distribution, and general and administrative expenses
increased $5 million in 1997 to $98 million primarily due to
contractual wage and fringe benefit increases in the Bakery
Operations and higher rental expense related to additional cafe
sites at Boudin Bakeries.
Other expense, net was $4 million in 1997 compared to $3 million
in 1996 and consists principally of discount expense on the
Company's accounts receivable facility.
As a result of the above factors, net loss from continuing
operations decreased to $7 million in 1997 compared to $14
million in 1996.
<PAGE>
The Company reports minimal state income tax and no federal
income tax due to its net operating loss position for tax purposes.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1996
Consolidated net sales from continuing operations decreased 3% to
$1.169 billion in 1997 compared to $1.211 billion in 1996.
Excluding the impact of a divested plant and business line, net
sales decreased by $25 million during this period. Net sales of
the Bakery Operations decreased $7 million (1%) to $493 million
in 1997. The decrease was primarily due to the loss of sales
from an operation that was divested in August, 1996, partially
offset by price increases taken to partially recover increased
ingredient and operating costs and higher cafe sales at Boudin
Bakeries. Net sales of the Cheese and Meat Operations,
consisting of Stella and H&M, decreased $35 million (5%) to $676
million. Net sales at H&M increased $15 million (11%) due to
improved sales volume and favorable commodity prices. Net sales
at Stella decreased $50 million (9%) primarily due to market
driven price decreases on its formula priced products reflecting
a decrease in the cost of milk in 1997.
The Company's gross profit margin increased to 29.0% in 1997 from
26.6% in 1996 primarily due to productivity improvements and
favorable commodity price impacts, partially offset by increased
rental expense incurred as a result of sale leaseback
transactions involving equipment at several of the Company's
facilities.
Selling, distribution, and general and administrative expenses
increased $6 million (2%) in 1997 to $290 million primarily due
to contractual wage and fringe benefit increases offset by a
reduction in general and administrative expense principally
related to lower costs at the Company's headquarters unit.
Other (income) expense, net was $8 million of expense in 1997
compared to $2 million of income in 1996. The net other income
in 1996 results primarily from the excess of replacement cost
over book value and lost operating profit included in the
insurance claim related to the Stella fire.
As a result of the above factors, net loss from continuing
operations decreased to $31 million in 1997 compared to $44
million in 1996.
The Company reports minimal state income tax and no federal
income tax due to its net operating loss position for tax purposes.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities in the third quarter of
1997 totaled $33 million. The increase in net cash used in
operating activities in 1997 was primarily attributable to the
net increase in the Company's working capital accounts. Working
capital requirements have increased in 1997 primarily as a result
of the lower accounts payable levels resulting from the Company's
effort to normalize relations with suppliers, increased accounts
receivable resulting from reduced levels of financings through
the Company's accounts receivable facility, and a reduction of
accrued liabilities. In 1996, cash used by operating activities
of $18 million was principally driven by the Company's aggressive
working capital management, and substantially offset by lower
operating profit and cash expenditures resulting from the Stella
fire that had not yet been recovered from the Company's insurance
carriers.
Net cash provided by investing activities totaled $5 million in
1997. The activity in 1997 was primarily attributable to the net
proceeds from the sale of SFFB, Gai's, and the Illinois
restaurant and institutional bakery, offset by increased capital
expenditures. In 1996, cash used by investing activities was
nominal as the proceeds from the sale-leaseback of equipment and
property related proceeds from Stella's insurance claim were
offset by capital expenditures.
Net cash used in financing activities amounted to $8 million in
1997 principally due to a decrease in revolving credit
borrowings, partially offset by the issuance of redeemable
preferred stock at Specialty Foods Acquisition Corporation.
In 1996, cash used by financing activities of $7 million
reflected the impact of normal payments on long-term
debt, payments of debt issuance costs and the repurchase from
former executives of the Company of senior secured debentures and
common stock, offset by increased revolving credit borrowings.
Based upon the above, the net decrease in cash in 1997 and 1996
was $36 million and $25 million, respectively.
As of September 30, 1997, the Company had a cash balance of $1
million. Additionally, the Company had borrowed $55 million
under its $125 million Revolving Credit Facility on such date.
Outstanding letters of credit also reduced available funds under
the facility by $19 million at that time. Management believes
that these funds along with operating cash flows and net proceeds
from asset sales should be adequate to fund the Company's short
term obligations, although there can be no assurances that cash
flow will be adequate to meet such obligations. Additionally,
the Company will also consider refinancing and additional asset
sales to address future liquidity and capital structure issues.
For example, the Company recently announced that it had retained
an investment banking firm to advise it in connection with a
potential sale of its Stella Foods subsidiary. In any case, the
Company expects that by the year 2000 it will be required to
refinance a significant portion of its indebtedness. Other than
a potential reduction of indebtedness upon a sale of Stella, the
Company has no current refinancing plans.
The Company has been in compliance with the effective financial
covenants of the Term Loan Facility and Revolving Credit Facility
for all three quarters of 1997. Whether or not Stella is sold,
financial covenants for 1998 will need to be amended. Management
is currently in discussion with its agent bank regarding this
issue and anticipates a satisfactory amendment for 1998.
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" constitute
"forward-looking statements" within the meaning of the federal
securities laws which reflect the Company's expectations and are
based on currently available information. Actual results,
performance, achievements or other information may vary
materially from such statements and are subject to future known
and unknown risks, uncertainties and events, including, among
other factors, weather, economic and market conditions, cost and
availability of raw materials, competitive activities or other
business conditions.
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
None.
Item 6: Exhibits and Reports on Form 8-K
(a) See Exhibit Index filed herewith.
(b) The Company did not file a report on Form 8-K during the
third quarter of 1997.
<PAGE>
SIGNATURE
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:
Date: November 4, 1997 /s/ Robert L. Fishbune
Robert L. Fishbune
Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number
Description of Document
27* Financial Data Schedule
__________
*Filed Herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,179
<SECURITIES> 0
<RECEIVABLES> 37,833
<ALLOWANCES> 1,182
<INVENTORY> 125,698
<CURRENT-ASSETS> 175,278
<PP&E> 431,856
<DEPRECIATION> 151,780
<TOTAL-ASSETS> 511,165
<CURRENT-LIABILITIES> 188,058
<BONDS> 575,000
0
0
<COMMON> 0
<OTHER-SE> (533,710)
<TOTAL-LIABILITY-AND-EQUITY> 511,165
<SALES> 403,475
<TOTAL-REVENUES> 403,475
<CGS> 284,621
<TOTAL-COSTS> 98,404
<OTHER-EXPENSES> 3,643
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,228
<INCOME-PRETAX> (6,421)
<INCOME-TAX> 373
<INCOME-CONTINUING> (6,794)
<DISCONTINUED> (556)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,350)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
