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, 1998 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.)
520 Lake Cook Road, Suite 550, Deerfield, IL 60015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 405-5300
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, 1998 was 100 shares of common stock.
<PAGE> 1
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
INDEX
-----
PART I - FINANCIAL INFORMATION Page No.
---------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the three- and six-month periods
ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 1998 and 1997 5
Notes to Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-10
PART II - OTHER INFORMATION 11
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.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
<TABLE>
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
($ In thousands)
<CAPTION>
June 30, December 31,
1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 148,636 $ 235,033
Accounts receivable, net 21,130 19,163
Inventories 41,654 35,577
Other current assets 10,222 7,400
---------- ----------
Total current assets 221,642 297,173
Property, plant, and equipment, net 216,207 187,874
Intangible assets, net 19,696 19,434
Other noncurrent assets 31,039 23,491
---------- ----------
Total assets $ 488,584 $ 527,972
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 2,662 $ 2,847
Accounts payable 45,558 51,983
Accrued expenses 83,284 85,344
---------- ----------
Total current liabilities 131,504 140,174
Long-term debt 751,997 753,581
Due to Specialty Foods Acquisition
Corporation 7,995 7,376
Other noncurrent liabilities 29,528 30,645
---------- ----------
Total liabilities 921,024 931,776
Stockholders' equity (432,440) (403,804)
---------- ----------
Total liabilities and
stockholders' equity $ 488,584 $ 527,972
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
<PAGE> 3
<TABLE>
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
($ In thousands, except share data)
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 229,314 $ 227,199 $ 446,001 $ 441,149
Cost of sales 120,671 123,941 238,517 245,178
--------- --------- --------- ---------
Gross profit 108,643 103,258 207,484 195,971
--------- --------- --------- ---------
Operating expenses:
Selling, distribution,
general and administrative 96,653 90,693 192,539 180,846
Amortization of intangibles 372 345 714 690
--------- --------- --------- ---------
Total operating expenses 97,025 91,038 193,253 181,536
--------- --------- --------- ---------
Operating profit 11,618 12,220 14,231 14,435
Other expenses:
Interest expense, net 20,453 22,849 40,097 45,627
Other expense, net 628 1,778 1,618 3,073
--------- --------- --------- ---------
Loss before income taxes (9,463) (12,407) (27,484) (34,265)
Provision (Benefit) for
income taxes (17) 124 30 299
--------- --------- --------- ---------
Loss from continuing
operations (9,446) (12,531) (27,514) (34,564)
Discontinued operations:
Net income - 5,604 - 8,288
Loss on Disposal, net - (5,699) - (5,368)
--------- --------- --------- ---------
- (95) - 2,920
Net loss $ (9,446) $ (12,626) $ (27,514) $ (31,644)
========== ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
<PAGE> 4
<TABLE>
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
($ In thousands)
<CAPTION>
Six months ended June 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (27,514) $ (34,564)
Adjustments to reconcile to net cash from
continuing operating activities
Depreciation and amortization 13,728 11,774
Debt issuance cost amortization 3,989 2,755
Changes in operating assets and
liabilities, net of effects from
businesses acquired or sold (18,422) (39,770)
---------- ---------
Net cash used by continuing
operating activities (28,219) (59,805)
Net cash used by discontinued operations - (2,456)
---------- ---------
Net cash used by operations (28,219) (62,261)
Cash flows from investing activities:
Proceeds from divestitures of businesses - 51,567
Capital expenditures (44,250) (16,955)
Other (790) (297)
---------- ----------
Net cash provided (used) by
investing activities (45,040) 34,315
Cash flows from financing activities:
Increase (decrease) in revolving credit - (35,500)
Advance to Parent - 19,500
Refinancing costs (11,469) -
Payments on long-term debt (1,168) (2,066)
Other (501) (574)
---------- ----------
Net cash used by
financing activities (13,138) (18,640)
Decrease in cash and cash equivalents (86,397) (46,586)
Cash - beginning of period 235,033 49,146
---------- ----------
Cash - end of period $ 148,636 $ 2,560
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
<PAGE> 5
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed consolidated Financial Statments
($ In thousands, except per share data)
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, 1997 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 1997 financial statements have
been reclassified to conform to the manner in which the
1998 financial statements have been presented.
NOTE 2 - Inventories
The components of inventories are as follows:
June 30, December 31,
1998 1997
------ ------
Raw materials and packaging $ 14,583 $ 14,026
Work in progress 1,610 1,857
Finished goods 23,089 17,340
Other 2,372 2,354
--------- ---------
$ 41,654 $ 35,577
========= =========
Inventories are stated at the lower of cost or market.
Cost is determined principally by the first-in first-out
("FIFO") method.
<PAGE> 6
NOTE 3 - Discontinued Operations
Discontinued operations relate to the divestiture of
certain operating companies during 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 $176 million and $408 million for the quarter
ended and the six month period ended June 30, 1997,
respectively, have been classified as discontinued
operations in the Consolidated Statement of Operations.
No interest expense has been allocated to discontinued
operations.
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 and cookie sales in the summer months, as well as
the winter holiday season.
Results of Operations
COMPARISON OF SECOND QUARTER 1998 TO SECOND QUARTER 1997
Consolidated net sales from continuing operations increased 1% to
$229.3 million in 1998 compared to $227.2 million in 1997. Net
sales of the Bakery Operations increased $8.4 million (5%) to
$186.3 million in 1998. The increase was primarily due to volume
increases at Metz and Mother's. Net sales of the Meat Operations
decreased $6.3 million (13%) to $43.0 million due to lower sales
volume and market driven price decreases on its formula priced
products reflecting a decrease in beef and pork commodity prices.
The Company's gross profit margin percentage increased to 47.4%
in 1998 from 45.4% in 1997 primarily due to increased volume,
production efficiencies, a favorable sales mix shift at Mother's
and lower flour costs.
Selling, distribution, and general and administrative expenses
increased $6.0 million (7%) in 1998 to $96.7 million. This
increase is principally related to costs associated with
contractual wage and fringe benefit increases, higher advertising
and promotion costs, and distribution expense at Metz due to new
business volume.
Interest expense, net in 1998 decreased $2.3 million to $20.5
million from $22.8 million in 1997. The decrease is primarily
due to the paydown of the Revolver and interest earned on cash
equivalents.
Other expense, net decreased to $0.6 million in 1998 compared to
$1.8 million in 1997 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 $9.4 million in 1998 compared to $12.5
million in 1997.
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, 1998 COMPARED TO SIX MONTHS ENDED JUNE
30, 1997
Consolidated net sales from continuing operations increased 1% to
$446.0 million in 1998 compared to $441.1 million in 1997. Net
sales of the Bakery Operations increased $15.1 million (4%) to
$357.2 million in 1998. The increase was primarily due to volume
increases at Metz and Mother's. Net sales of the Meat Operations
decreased $10.3 million (10%) to $88.8 million due to lower sales
volume and market driven price decreases on its formula priced
products reflecting a decrease in beef and pork commodity prices.
<PAGE> 8
The Company's gross profit margin percentage increased to 46.5%
in 1998 from 44.4% in 1997 primarily due to increased volume,
production efficiencies, a favorable sales mix shift at Mother's
and lower flour costs.
Selling, distribution, and general and administrative expenses
increased $11.7 million (6%) in 1998 to $192.5 million. This
increase is principally related to costs associated with
contractual wage and fringe benefit increases, higher advertising
and promotion costs, and higher distribution expense at Metz due
to new business volume.
Interest expense, net in 1998 decreased $5.5 million to $40.1
million from $45.6 million in 1997. The decrease is primarily
due to the paydown of the Revolver and interest earned on cash
equivalents.
Other expense, net decreased to $1.6 million in 1998 compared to
$3.1 million in 1997 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 $27.5 million in 1998 compared to $34.6
million in 1997.
The Company reports minimal state income tax and no federal
income tax due to its net operating loss position for tax
purposes.
Because of the highly leveraged status of the Company, earnings
before interest, taxes, depreciation, and amortization ("EBITDA")
is an important performance measure used by the Company and its
stakeholders. The Company believes that EBITDA provides
additional information for determining its ability to meet future
debt service requirements. However, EBITDA is not indicative of
operating income or cash flow from operations as determined under
generally accepted accounting principles. The Company's EBITDA
from continuing operations for the three and six-month periods
ended June 30, 1998 and 1997 is calculated as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
Operating Profit $ 11.6 $ 12.2 $ 14.3 $ 14.5
Depreciation and amortization 7.2 5.9 13.7 11.7
------- ------- ------- -------
EBITDA $ 18.8 $ 18.1 $ 28.0 $ 26.2
======= ======= ======= =======
<PAGE> 9
Liquidity and Capital Resources
Net cash used in operating activities totaled $28.2 million in
1998. The $18.4 million use of cash for changes in operating
assets and liabilities included increased inventories of $6.1
million for seasonal inventory build and $6.4 million for
reductions in accounts payable as the Company took advantage of
certain cash discount opportunities. In 1997, cash used by
operating activities of $62.3 million was principally driven by
increased working capital requirements, including higher levels
of receivables and inventories and reductions in accounts payable
and accrued expenses.
Net cash used by investing activities totaled $45.0 million in
1998. The activity in 1998 was primarily attributable to the
Company purchasing $19.5 million of fleet and production
equipment previously leased and planned capital expenditures. In
1997, net cash provided by investing activities of $34.3 million
was primarily attributable to the net proceeds from the sale of
divested businesses, offset by capital expenditures.
Net cash used in financing activities amounted to $13.1 million
in 1998 principally due to refinancing costs and scheduled payments
on long-term debt. In 1997, net cash used by financing
activities of $18.6 million was primarily attributable to a
decrease in revolving credit borrowings, partially offset by the
issuance of preferred stock.
Based upon the above, the net decrease in cash in 1998 and 1997
was $86.4 million and $46.6 million, respectively.
As of June 30, 1998, the Company had a cash balance of $149
million and has no borrowings under its $125 million Revolving
Credit Facility. Outstanding letters of credit of $7 million as
of June 30, 1998 reduce available funds under the facility.
Management believes that these funds along with operating cash
flows should be adequate to fund the Company's short-term
obligations and its 360-day asset sale reinvestment obligations
stemming from the December 5, 1997 sale of Stella Foods, Inc.
However, there can be no assurance that available funds will be
adequate to meet such needs. By the year 2000, the Company's
ability to meet its cash debt service requirements will be
dependent upon either refinancing a significant portion of its
indebtedness or additional asset sales.
<PAGE> 10
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of the Company was held on
May 14, 1998 in Deerfield, Illinois. The stockholders of the
Company took the following actions at the annual meeting:
1. The stockholders elected the following directors of the
Company to serve for the term expiring on the date of the
next annual meeting or until their respective successors are
duly elected and qualified:
Messrs. Thomas J. Baldwin, Lawrence S. Benjamin, J. Taylor
Crandall, Charles J. Delaney, Daniel L. Doctoroff, Robert B.
Haas, Jerry M. Meyer, Andrew J. Nathanson, David G.
Offensend, Marc A. Particelli, Anthony P. Scotto and Douglas
D. Wheat. An aggregate of 48,148,300 shares were cast in
favor of the election of each of the directors: none were
cast against.
2. The stockholders ratified and approved the appointment of
KPMG Peat Marwick LLP as the Company's independent auditors
for the Company's 1998 fiscal year. An aggregate of
48,148,300 shares were cast in favor of the action: none
were cast against.
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 1998.
<PAGE> 11
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, 1998 /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.
<PAGE> 12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 148,636
<SECURITIES> 0
<RECEIVABLES> 22,383
<ALLOWANCES> 1,253
<INVENTORY> 41,654
<CURRENT-ASSETS> 221,642
<PP&E> 349,186
<DEPRECIATION> 132,979
<TOTAL-ASSETS> 488,584
<CURRENT-LIABILITIES> 131,504
<BONDS> 578,747
0
0
<COMMON> 60,888
<OTHER-SE> (493,328)
<TOTAL-LIABILITY-AND-EQUITY> 488,584
<SALES> 446,001
<TOTAL-REVENUES> 446,001
<CGS> 238,517
<TOTAL-COSTS> 193,253
<OTHER-EXPENSES> 1,618
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,097
<INCOME-PRETAX> (27,484)
<INCOME-TAX> 30
<INCOME-CONTINUING> (27,514)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,514)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
