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 June 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 July 31, 1997 was 100 shares of common stock.
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page No.
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations for
the three- and six-month periods
ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for
the six-month periods
ended June 30, 1997 and 1996 5
Notes to Financial Statements 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-11
PART II - OTHER INFORMATION 12
SIGNATURE 12
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.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
($ In thousands)
June 30, December 31,
1997 1996
---- ----
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 2,560 $ 37,508
Accounts receivable, net 41,943 32,368
Inventories 123,395 123,391
Net assets of discontinued operations 3,101 66,434
Other current assets 24,149 27,406
------- -------
Total current assets 195,148 287,107
Property, plant, and equipment, net 269,015 256,529
Intangible assets, net 23,719 24,109
Due from Specialty Foods Acquisition
Corporation - 10,999
Other noncurrent assets 33,387 32,589
------- -------
Total assets $ 521,269 $ 611,333
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 3,308 $ 4,049
Accounts payable 103,280 118,692
Accrued expenses 95,176 106,631
------- -------
Total current liabilities 201,764 229,372
Long-term debt 801,204 838,059
Due to Specialty Foods Acquisition
Corporation 8,468 -
Other noncurrent liabilities 36,643 37,945
------- -------
Total liabilities 1,048,079 1,105,376
Stockholders' equity (526,810) (494,043)
------- -------
Total liabilities and
stockholders' equity $ 521,269 $ 611,333
======= =======
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
($ In thousands, except share data)
Three months ended June 30, Six months ended June 30,
---------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 380,309 $ 399,957 $ 765,435 $ 780,526
Cost of sales 264,538 289,086 544,738 568,424
------- ------- ------- -------
Gross profit 115,771 110,871 220,697 212,102
Operating expenses:
Selling, distribution, general
and administrative 94,691 96,021 192,249 190,728
Amortization of intangibles 746 3,096 1,180 6,251
------- ------- ------- -------
Total operating expenses 95,437 99,117 193,429 196,979
Operating profit 20,334 11,754 27,268 15,123
Other expenses:
Interest expense 23,044 24,372 46,072 48,163
Other (income) expense, net 2,380 2,748 4,665 (5,257)
------- ------- ------- -------
Loss before income taxes (5,090) (15,366) (23,469) (27,783)
Provision for income taxes 146 2,045 334 2,496
------- ------- ------- -------
Loss from continuing operations (5,236) (17,411) (23,803) (30,279)
Discontinued operations:
Net income (loss) (905) 3,715 (3,811) 2,178
Loss on disposal, net (6,485) - (4,030) -
------- ------- ------- -------
(7,390) 3,715 (7,841) 2,178
Net loss $ (12,626) $ (13,696) $ (31,644) $ (28,101)
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed financial statements.
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
($ In thousands)
Six months ended June 30,
1997 1996
---- ----
Cash flows from operating activities:
Loss from continuing operations $ (23,803) $ (30,279)
Adjustments to reconcile to net cash
from continuing operating activities
Depreciation and amortization 17,406 24,063
Debt issuance cost amortization 2,755 3,346
Changes in operating assets and
liabilities, net of affects from
businesses acquired or sold (32,025) (25,376)
------ ------
Net cash used by
continuing operations (35,667) (28,246)
Cash flows from investing activities:
Proceeds from divestitures of businesses 50,595 -
Capital expenditures (30,348) (27,564)
Property related insurance proceeds - 15,000
Proceeds from sale-leaseback of equipment - 17,941
Other (298) 2,762
------ ------
Net cash provided by
investing activities 19,949 8,139
Cash flows from financing activities:
Increase (decrease) in revolving credit (35,500) 6,600
Payments on long-term debt (2,074) (1,491)
Advance to Parent 19,500 -
Other (1,156) (6,529)
------ ------
Net cash used by
financing activities (19,230) (1,420)
Decrease in cash and cash equivalents (34,948) (21,527)
Cash - beginning of period 37,508 17,331
------ ------
Cash - end of period $ 2,560 $ (4,196)
====== ======
See accompanying notes to condensed financial statements.
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:
June 30, December 31,
1997 1996
---- ----
Raw materials and packaging $ 18,772 $ 20,942
Work in progress 57,185 54,676
Finished goods 45,215 46,782
Other 2,223 991
------- -------
$123,395 $123,391
======= =======
Inventories are stated at the lower of cost or market. Cost is
determined principally by the first-in first-out ("FIFO") method.
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 is expected to
close in the third quarter of 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 $58,861 and $193,878
for the six months ended June 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 six
months ended June 30, 1997 consisted of the gain realized on the
sale of Gai's, an adjustment to the previously estimated loss on
the disposal of SFFB, and the estimated loss on disposal of the
Illinois bakery. Remaining retained liabilities from
discontinued operations are $1,258 and are included with accrued
liabilities at June 30, 1997.
NOTE 4 - Insurance Claim
In January 1996, a Stella cheese processing plant in Lena,
Wisconsin was substantially destroyed by fire. The Company
rebuilt the plant and resumed production during the fourth
quarter of 1996. A final proof of loss detailing the claim was
filed with the Company's insurance carriers during the quarter
ended March 31, 1997. The claim was finally settled with the
Company's insurance carriers in July 1997. Included in other
current assets as of June 30, 1997 is $13.3 million which
represents the remaining claim balance collected following the
July 1997 settlement.
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 proceeds from a sale of Stella to reduce
outstanding indebtedness with the balance to be used for
acquisitions in the Company's Bakery Operations. Given the
preliminary nature of this divestiture effort, there can be no
assurance that the Company will elect to complete this
divestiture and the Company cannot yet estimate the time frame in
which any such sale would be completed.
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 SECOND QUARTER 1997 TO SECOND QUARTER 1996
Consolidated net sales from continuing operations decreased 5% to
$380 million in 1997 compared to $400 million in 1996. Excluding
the impact of a divested plant and business line, net sales
decreased by $14 million (3%) during the same period. Net sales
of the Bakery Operations decreased $5 million (3%) to $166
million in 1997. The decrease was primarily due to the loss of
sales from operations that were divested in August 1996, and
volume shortfalls. These decreases were 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 Food Systems Company, decreased $15 million (6%) to $214
million. Net sales at H&M increased $7 million (17%) due to
improved sales volume and favorable commodity prices. Net sales
at Stella decreased $22 million (12%) 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 30.4% in 1997 from
27.7% in 1996 primarily due to 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
decreased $1 million in 1997 to $95 million. This decrease
principally related to lower costs at the Company's headquarters
unit, partially offset by contractual wage and fringe benefit
increases in the Cheese and Baking Operations.
Other (income) expense, net was $2 million of expense 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 $5 million in 1997 compared to $17
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.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE
30, 1996
Consolidated net sales from continuing operations decreased 2% to
$765 million in 1997 compared to $780 million in 1996. Excluding
the impact of a divested plant and business line, net sales
increased by $1 million during the same period. Net sales of the
Bakery Operations decreased $8 million (2%) to $319 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 $7 million (2%) to $446
million. Net sales at H&M increased $16 million (20%) due to
improved sales volume and favorable commodity prices. Net sales
at Stella decreased $23 million (6%) 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 28.8% in 1997 from
27.1% in 1996 primarily due to 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 $1 million (1%) in 1997 to $192 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 $5 million of expense in 1997
compared to $5 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 $24 million in 1997 compared to $30
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.
Liquidity and Capital Resources
Net cash used in operating activities totaled $36 million. The
decrease 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 $28 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 $20 million in
1997. The activity in 1997 was primarily attributable to the net
proceeds from the sale of SFFB and Gai's, offset by increased
capital expenditures. In 1996 net cash provided by investing
activities of $8 million resulted from the proceeds from the sale-
leaseback of equipment and property related proceeds from
Stella's insurance claim, offset by capital expenditures.
Net cash used in financing activities amounted to $19 million in
1997 principally due to a decrease in revolving credit
borrowings, partially offset by the issuance of preferred stock
at Specialty Foods Acquisition Corporation. In 1996, cash used
by financing activities of $1 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 $35 million and $22 million, respectively.
As of June 30, 1997, the Company had a cash balance of $3
million. Additionally, the Company had borrowed $43 million
under its $125 million Revolving Credit Facility on such date.
Outstanding letters of credit also reduce available funds under
the facility by $19 million at that time. Management believes
that these funds along with operating cash flows, asset sales,
and the receipt of the remaining $13 million of insurance
proceeds in July 1997 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 the potential sale of Stall 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.
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 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
second quarter of 1997.
Item 8: Submission of Matters to a Vote of Security Holders
None.
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: August 14, 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.
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,560
<SECURITIES> 0
<RECEIVABLES> 44,023
<ALLOWANCES> 2,080
<INVENTORY> 123,395
<CURRENT-ASSETS> 195,148
<PP&E> 407,425
<DEPRECIATION> 138,410
<TOTAL-ASSETS> 521,269
<CURRENT-LIABILITIES> 201,764
<BONDS> 575,000
0
0
<COMMON> 0
<OTHER-SE> (526,810)
<TOTAL-LIABILITY-AND-EQUITY> 521,269
<SALES> 380,309
<TOTAL-REVENUES> 380,309
<CGS> 264,538
<TOTAL-COSTS> 95,437
<OTHER-EXPENSES> 2,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,044
<INCOME-PRETAX> (5,090)
<INCOME-TAX> 146
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