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, 1998 Commission File Number 33-68956
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Specialty Foods Corporation
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(Exact name of registrant as specified in its charter)
State of Delaware 75-2488181
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
520 Lake Cook Road, Suite 550, Deerfield, IL 60015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 405-5300
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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 October 13, 1998 was 100 shares of common stock.
<PAGE> 1
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
INDEX
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PART I - FINANCIAL INFORMATION Page No.
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ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations for
the three- and nine-month periods
ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for
the nine-month periods ended September 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 8-11
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>
September 30, December 31,
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 104,352 $ 235,033
Accounts receivable, net 20,914 19,163
Inventories 45,109 35,577
Other current assets 9,319 7,400
----------- ----------
Total current assets 179,694 297,173
Property, plant, and equipment, net 239,486 187,874
Intangible assets, net 20,983 19,434
Other noncurrent assets 29,117 23,491
----------- ----------
Total assets $ 469,280 $ 527,972
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 3,831 $ 2,847
Accounts payable 45,521 51,983
Accrued expenses 70,712 85,344
----------- -----------
Total current liabilities 120,064 140,174
Long-term debt 749,827 753,581
Due to Specialty Foods Acquisition
Corporation 7,753 7,376
Other noncurrent liabilities 29,303 30,645
----------- -----------
Total liabilities 906,947 931,776
Stockholders' equity (437,667) (403,804)
----------- -----------
Total liabilities and
stockholders' equity $ 469,280 $ 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)
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-----------------------------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 229,670 $ 237,982 $ 675,671 $ 679,131
Cost of sales 120,554 130,448 359,071 375,626
---------- ---------- ---------- ----------
Gross profit 109,116 107,534 316,600 303,505
---------- ---------- ---------- ----------
Operating expenses:
Selling, distribution,
general and administrative 92,076 94,567 284,615 275,413
Amortization of intangibles 356 346 1,070 1,036
---------- ---------- ----------- ----------
Total operating expenses 92,432 94,913 285,685 276,449
---------- ---------- ----------- ----------
Operating profit 16,684 12,621 30,915 27,056
Other expenses:
Interest expense, net 21,436 23,068 61,533 68,695
Other expense, net 857 893 2,475 3,966
---------- ---------- ----------- ----------
Loss before income taxes (5,609) (11,340) (33,093) (45,605)
Provision (benefit) for
income taxes (264) 339 (234) 638
---------- ---------- ----------- ----------
Loss from continuing
operations (5,345) (11,679) (32,859) (46,243)
Discontinued operations:
Net income - 4,297 - 12,585
Gain (loss) on disposal,net - 31 - (5,337)
----------- --------- ----------- ----------
- 4,328 - 7,248
----------- --------- ----------- ----------
Net loss $ (5,345) $ (7,351) $ (32,859) $ (38,995)
=========== ========= =========== ==========
</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>
Nine months ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (32,859) $ (46,243)
Adjustments to reconcile to net cash from
from continuing operating activities
Depreciation and amortization 21,344 17,851
Debt issuance cost amortization 6,753 4,133
Changes in operating assets and
liabilities,net of effects from
businesses acquired or sold (34,979) (56,356)
----------- -----------
Net cash used by continuing
operating activities (39,741) (80,615)
Net cash provided by
discontinued operations - 11,568
----------- -----------
Net cash used by operations (39,741) (69,047)
Cash flows from investing activities:
Proceeds from divestitures of
businesses - 55,785
Capital expenditures (72,465) (28,868)
Other (3,963) (21)
------------ ------------
Net cash provided (used) by
investing activities (76,428) 26,896
Cash flows from financing activities:
Decrease in revolving credit - (22,900)
Issuance of preferred stock and
warrants - 19,500
Refinancing costs (11,862) -
Payments on long-term debt (2,026) (2,604)
Other (624) 188
------------ ------------
Net cash used by
financing activities (14,512) (5,816)
Decrease in cash and cash equivalents (130,681) (47,967)
Cash - beginning of period 235,033 49,146
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Cash - end of period $ 104,352 $ 1,179
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
<PAGE> 5
SPECIALTY FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
($ 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:
September 30, December 31,
1998 1997
---- ----
Raw materials and packaging $ 16,747 $ 14,026
Work in progress 1,919 1,857
Finished goods 24,232 17,340
Other 2,211 2,354
--------- ----------
$ 45,109 $ 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 $170 million and $578 million for the
quarter ended and the nine month period ended September
30, 1997, respectively, have been classified as
discontinued operations in the Consolidated Statement of
Operations. No interest expense has been allocated to
discontinued operations.
NOTE 4 - Subsequent Events
In a press release dated October 14, 1998, the Company
announced that it had signed definitive agreements to
acquire two bakery companies, which would represent, in
the aggregate, an investment of over $100 million.
Consummation of certain of these transactions is subject
to customary closing conditions, including the obtaining
of all required approvals from governmental regulatory
agencies and, in the case of one acquisition,
review by SFC of completed disclosure schedules.
Also on that date, the Company and its parent Specialty
Foods Acquisition Corporation (SFAC) announced exchange
offers for their publicly held debt. The offers are to
exchange existing debt of SFC and SFAC for new debt
securities of two new intermediate holding companies.
Upon consummation, the exchanges will result in the
postponement of the cash pay interest dates and the
extension of the maturity date of SFAC's 13% Senior
Secured Discount Debentures. In addition, SFC is seeking
the consent of its term loan and revolving credit lenders
to amend existing agreements to conform to the new
holding company structure. Upon consummation of the
exchange offers, the Company will write-off approximately
$16.1 million of deferred debt issuance costs. The
exchange offers are subject to certain conditions
described in the exchange offers.
<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 THIRD QUARTER 1998 TO THIRD QUARTER 1997
Consolidated net sales from continuing operations decreased 3% to
$229.7 million in 1998 compared to $238.0 million in 1997. Net
sales of the Bakery Operations decreased $1.1 million (1%) to
$185.8 million in 1998 due to pricing, product and customer mix
at Mother's. Net sales of the Meat Operations
decreased $7.2 million (14%) to $43.9 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 47.5%
in 1998 from 45.1% in 1997 primarily due to production
efficiencies, a favorable sales mix shift at Mother's and lower
flour costs.
Selling, distribution, and general and administrative expenses
decreased $2.5 million (2.6%) in 1998 to $92.1 million. This
decrease is principally related to lower promotional and
distribution costs in the Bakery Operations.
Interest expense, net in 1998 decreased $1.7 million to $21.4
million from $23.1 million in 1997. The decrease is primarily
due to the paydown of the Revolver and interest earned on cash
equivalents, offset by a higher interest rate on senior secured
debt.
Other expense, net of $0.9 million in 1998 was consistent with
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 $5.3 million in 1998 compared to $11.7
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.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1997
Consolidated net sales from continuing operations decreased 1% to
$675.7 million in 1998 compared to $679.1 million in 1997. Net
sales of the Bakery Operations increased $14.0 million (3%) to
$543.0 million in 1998. The increase was primarily due to volume
increases at Metz. Net sales of the Meat Operations decreased
$17.4 million (12%) to $132.7 million due to lower sales volume
<PAGE> 8
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 46.8%
in 1998 from 44.6% 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 $9.2 million (3%) in 1998 to $284.6 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 $7.2 million to $61.5
million from $68.7 million in 1997. The decrease is primarily
due to the paydown of the Revolver and interest earned on cash
equivalents, offset by a higher interest rate on senior secured
debt.
Other expense, net decreased to $2.5 million in 1998 compared to
$4.0 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 $32.9 million in 1998 compared to $46.2
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 nine-month periods
ended September 30, 1998 and 1997 is calculated as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------------------------------------
(In Millions)
Operating Profit $ 16.7 $ 12.6 $ 30.9 $ 27.0
Depreciation and amortization 7.6 6.1 21.4 17.9
------ ------ ------ ------
EBITDA $ 24.3 $ 18.7 $ 52.3 $ 44.9
====== ====== ====== ======
<PAGE> 9
Liquidity and Capital Resources
Net cash used in operating activities totaled $39.7 million in
1998. The $35.0 million use of cash for changes in operating
assets and liabilities included increased inventories of $9.5
million for seasonal inventory build, a reduction in accrued
expenses of $14.6 million which is impacted by the timing of
interest payments, and $6.5 million for reductions in accounts
payable as the Company took advantage of certain cash discount
opportunities. In 1997, cash used by operating activities of
$69.0 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 $76.4 million in
1998. The activity in 1998 was primarily attributable to the
Company purchasing $35.0 million of fleet and production
equipment previously leased and planned capital expenditures. In
1997, net cash provided by investing activities of $26.9 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 $14.5 million
in 1998 principally due to refinancing costs and scheduled
payments on long-term debt. In 1997, net cash used by financing
activities of $5.8 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 $130.7 million and $48.0 million, respectively.
As of September 30, 1998, the Company had a cash balance of $104
million and has no borrowings under its $125 million Revolving
Credit Facility. Outstanding letters of credit of $9 million as
of September 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.
In a press release dated October 14, 1998, the Company announced
exchange offers for their publicly held debt. The offers are to
exchange existing debt of SFC and its parent SFAC for new debt
securities of two new intermediate holding companies. Upon
consummation, the exchanges will result in the postponement of
the cash pay interest dates and the extension of the maturity
date of SFAC's 13% Senior Secured Discount Debentures. In
addition, SFC is seeking the consent of its term loan and
revolving credit lenders to amend existing agreements to conform
to the new holding company structure. The exchange offers are
subject to certain conditions described in the exchange offers.
<PAGE> 10
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 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: October 22, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 104,352
<SECURITIES> 0
<RECEIVABLES> 22,236
<ALLOWANCES> 1,322
<INVENTORY> 45,109
<CURRENT-ASSETS> 179,694
<PP&E> 379,182
<DEPRECIATION> 139,696
<TOTAL-ASSETS> 469,280
<CURRENT-LIABILITIES> 120,064
<BONDS> 578,249
0
0
<COMMON> 0
<OTHER-SE> (437,667)
<TOTAL-LIABILITY-AND-EQUITY> 469,280
<SALES> 675,671
<TOTAL-REVENUES> 675,671
<CGS> 359,071
<TOTAL-COSTS> 285,685
<OTHER-EXPENSES> 2,475
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,533
<INCOME-PRETAX> (33,093)
<INCOME-TAX> (234)
<INCOME-CONTINUING> (32,859)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,859)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
