UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------ to ------
Commission file number 33-38051
SF SERVICES, INC.
(Exact name of registrant as specified in its charter)
ARKANSAS 71-0220282
(State or other (IRS Employer
jurisdiction of incorporation Identification Number)
or organization)
120 MAIN STREET
NORTH LITTLE ROCK, ARKANSAS 72114
(Address of principal executive offices) (Zip Code)
(501) 945-2371
(Registrant's telephone number, including area code)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of September 10, 1997:
Common Stock 125 shares
Part I. Financial Information
Item 1. Financial Statements
SF SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
July 31, 1997 October 31, 1996
CURRENT ASSETS (Unaudited)
Cash $ 1,443,059 $ 3,214,419
Accounts and notes
receivable, net 82,199,909 48,740,388
Inventory 73,496,165 84,215,934
Prepaid expenses
and other current assets 3,441,533 2,256,148
----------- -----------
Total Current Assets 160,580,666 138,426,889
----------- -----------
INVESTMENTS AND LONG-TERM RECEIVABLES
Investments in
other cooperatives 14,181,135 12,974,801
Notes receivable 2,845,878 3,154,281
Deferred income taxes 1,145,844 1,145,844
---------- ----------
Total Investments and
Long-Term Receivables 18,172,857 17,274,926
---------- ----------
PROPERTY AND EQUIPMENT, at cost 70,543,840 57,653,388
Less accumulated depreciation 24,376,391 21,996,709
---------- ----------
Net Property and Equipment 46,167,449 35,656,679
---------- ----------
OTHER ASSETS 808,018 763,565
TOTAL ASSETS $225,728,990 $192,122,059
=========== ============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 73,513,688 $ 65,582,931
Current maturities of
Long-term debt 3,190,226 3,013,819
Accounts payable 37,444,532 29,094,690
Patrons deposits 10,536,872 14,175,462
Accrued expenses and
other current liabilities 19,979,013 6,591,520
----------- -----------
Total Current Liabilities 144,664,331 118,458,422
----------- -----------
LONG-TERM DEBT,
LESS CURRENT MATURITIES 33,374,879 22,309,220
OTHER LIABILITIES 175,196 168,200
MEMBERS' EQUITY 47,514,584 51,186,217
----------- -----------
TOTAL LIABILITIES AND
MEMBERS' EQUITY $225,728,990 $192,122,059
=========== ===========
See notes to Condensed Consolidated Financial Statements.
SF SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
July 31, 1997 July 31, 1996
NET SALES $ 225,439,526 $ 208,493,287
COST OF GOODS SOLD 212,764,666 197,575,141
----------- -----------
GROSS PROFIT 12,674,860 10,918,146
OPERATING EXPENSES 12,666,656 10,424,978
---------- ----------
INCOME (LOSS) FROM OPERATIONS 8,204 493,168
---------- ----------
OTHER INCOME (EXPENSES)
Interest, net (1,350,096) (1,311,875)
Gain on sale of MCC stock 0 2,936,831
Miscellaneous 276,017 362,589
---------- ----------
(1,074,079) 1,987,545
---------- ----------
SAVINGS BEFORE INCOME TAXES (1,065,875) 2,480,713
INCOME TAX EXPENSE (BENEFIT) 66,057 943,292
---------- ----------
NET SAVINGS (LOSS) $ (1,131,932) $ 1,537,421
========== ==========
NET SAVINGS (LOSS) APPLIED TO:
ALLOCATED EQUITIES
Cash
Capital Equity Credits
(Deficit)- (363,621) (324,709)
RETAINED EARNINGS (DEFICIT) (768,311) 1,862,130
---------- ----------
(1,131,932) 1,537,421
========== ==========
See notes to Condensed Consolidated Financial Statements.
SF SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Nine Months Ended
July 31, 1997 July 31, 1996
NET SALES $ 496,054,906 $ 458,938,232
COST OF GOODS SOLD 464,297,455 433,185,434
----------- -----------
GROSS PROFIT 31,757,451 25,752,798
OPERATING EXPENSES 32,849,535 31,965,366
---------- ----------
INCOME (LOSS) FROM OPERATIONS (1,092,084) (6,212,568)
---------- ----------
OTHER INCOME (EXPENSES)
Interest, net (3,974,397) (3,057,868)
Gain on sale of MCC stock 0 16,617,192
Dividend Income-MCC stock 0 94,010
Miscellaneous 630,981 482,688
---------- ----------
(3,343,416) 14,136,022
---------- ----------
SAVINGS BEFORE INCOME TAXES (4,435,500) 7,923,454
INCOME TAX EXPENSE (BENEFIT) (822,297) 3,575,750
---------- ----------
NET SAVINGS (LOSS) $ (3,613,203) $ 4,347,704
========== ==========
NET SAVINGS (LOSS) APPLIED TO:
ALLOCATED EQUITIES
Cash
Capital Equity Credits
(Deficit)- (1,713,639) (1,098,492)
RETAINED EARNINGS (DEFICIT) (1,899,564) 5,446,196
---------- ----------
(3,613,203) 4,347,704
========== ==========
See notes to Condensed Consolidated Financial Statements.
SF SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Nine Months
Ended Ended
July 31, 1997 July 31, 1996
Cash flows from
operating activities:
Net Margin for the period $ (3,613,203) $ 4,347,704
Items not requiring
(providing) cash:
Depreciation and amortization 2,431,162 1,909,264
Non-cash portion of patronage
dividends from other co-ops (1,206,334) (1,479,787)
Gain on sale of property
and equipment (314,413) (30,175)
Gain on sale of MCC stock 0 (16,617,192)
Asset valuation adjustment 0 4,781,398
Changes in operating assets and
liabilities:
Accounts and notes receivable (32,982,971) (24,192,352)
Inventory 10,719,769 7,134,560
Prepaid expenses and
other assets (1,397,985) (2,240,667)
Accounts payable 8,349,842 10,522,633
Accrued expenses and
other liabilities 13,394,489 6,820,339
---------- ----------
Net cash (used in)
operating activities (4,619,644) (9,044,275)
---------- ----------
Cash flows from investing
activities:
Purchase of property
and equipment (13,342,604) (8,209,614)
Proceeds from sale of property
and equipment 715,085 234,390
Redemption of investments 0 75,985
Proceeds from sale of MCC stock 0 31,644,375
---------- ----------
Net cash provided by (used in)
investing activities (12,627,519) 23,745,136
---------- ----------
Cash flows from financing
activities:
Patronage distributions 0 (3,993,404)
Proceeds from borrowings 155,373,462 141,113,347
Repayment of borrowings (136,200,639) (153,914,012)
Redemption of common stock 0 (2,000)
Retirement of preferred stock (58,430) (58,400)
Net change in patron deposits (3,638,590) 3,563,737
---------- ----------
Net cash provided by (used in)
financing activities 15,475,803 (13,290,732)
---------- ----------
Net increase (decrease) in cash (1,771,360) 1,410,129
Cash, beginning of period 3,214,419 645,379
---------- ----------
Cash, end of period $ 1,443,059 $ 2,055,508
========== ==========
See notes to Condensed Consolidated Financial Statements.
SF SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: FINANCIAL STATEMENTS
The condensed consolidated balance sheet as
of July 31, 1997, the condensed consolidated statements of
cash flows for the nine months ended July 31, 1997 and
1996, and the condensed consolidated statements of operations
for the three months and nine months ended July 31, 1997 and
1996 have been prepared by the Company, without audit. In
the opinion of management, all adjustments (consisting only
of normal recurring items) necessary to present fairly the
financial position, results of operations, and cash flows at
July 31, 1997 and for all periods presented have been made.
Certain information and footnote disclosures
normally included in financial statements prepared in
accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto
included in the Company's October 31, 1996 audited financial
statements. The results of operations for the nine months
ended July 31, 1997 and 1996 are not necessarily indicative
of the operating results for the full year.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
SF Services, Inc. is a basic manufacturer of agricultural
and pet feeds, a production contractor and distributor of
seeds in the rice, cotton, soybean and wheat production
areas of the midsouth and a basic wholesaler of a wide
variety of farm and ranch supplies, tires, batteries and
automotive accessories ("TBA"), chemical, petroleum,
fertilizer products, and engages in catfish processing and
marketing. These products are sold primarily to 125 local
cooperative retail stores serving the individual farmer
producer and to other non-cooperative accounts. Weather,
federal farm programs, and commodity prices impact the unit
demand for the products sold by SF Services, Inc. Primarily
the Seed, Fertilizer, Chemical and Feed divisions may be
impacted by seasonal changes. Additionally, variations
in ingredient prices precipitate changes in the Feed
Division sales volume. The Company's business cycle is
highly seasonal and can be advanced or delayed by weather
conditions. Results of operations for the nine months ended
July 31, 1997 and 1996 reflect the seasonality of the
Company's business and are not indicative of results expected
for a full fiscal year.
Sales increased approximately $37.1 million (8%) for the
nine months ended July 31, 1997 compared to the prior
year period. Sales increases were realized in Animal Health,
Seed, and Petroleum, while decreases in sales were realized
in Feed, Farm and Ranch, Fertilizer, Chemicals, TBA, and
Catfish Processing. Further analysis of sales is included
under the comparative analysis presented below.
Gross profit increased approximately $6.0 million (23%) for
the nine months ended July 31, 1997 compared to the prior
year period. Further analysis of gross profit is included
under the comparative analysis presented below.
Operating expenses increased approximately $884,000 (2.8%)
for the nine months ended July 31, 1997 compared to
the prior year period. Further analysis of operating expenses
is included under the comparative analysis presented below.
Net interest expense increased approximately $917,000 (30%)
for the nine months ended July 31, 1997 compared to the
prior year period. This increase was due primarily to higher
investments in fixed assets and higher average borrowing on the
Company's seasonal loan caused by the delayed spring planting
season due to wet weather conditions throughout the Company's
trade area.
On December 31, 1996, the Company purchased the assets of
Matthews of Monette, Inc., a wholesale and retail fuel
business located in Arkansas, for approximately $9.4 million.
This acquisition is expected to add approximately $45 million
in annual sales to the Company. The new operation is being
operated under the name "Northeast Arkansas Oil Company, LLC"
("NEA Oil"), a newly formed, wholly-owned subsidiary. During
the nine months ended July 31, 1997, NEA Oil had sales of
approximately $23.5 million.
Comparative Analysis of the Nine Months Ended July 31, 1997
to the Nine Months Ended July 31, 1996
Wholesale/Retail Operations:
Feed sales decreased approximately 8.5% as a result of
lower demand for beef and dairy feed caused by a reduction
of livestock numbers in the trade area and a mild winter
season. Tonnage sold for the nine months ended July 31,
1997 was 297,000 tons compared to 344,000 tons sold during
the prior year period. Gross profit decreased $1.8 million
as a result of higher per ton manufacturing costs due
to the lower manufacturing level.
Animal Health sales increased approximately 14% due to
improving cattle market and the producers' focus toward herd
health. Gross profit as a percent of sales decreased from
10.7% to 8.2% due to competitive pressure in the market.
Farm and Ranch sales decreased approximately 8.6%. This
decrease was the result of a very wet spring season. Cotton
acres were replaced with more corn and soybean acres. These
crops require less tillage supplies and equipment than cotton.
Gross profit as a percent of sales decreased from 9.5% to 9.2%
as a result of a higher percentage of direct shipment sales,
which carry a lower gross profit.
Fertilizer sales decreased approximately $3.2 million (3%).
This decrease in sales dollars was due to a lower per unit
sales price compared to the prior year period. Total tons
sold during the nine months ended July 31, 1997 increased
59,000 tons (8%) to 782,000 tons. Gross profit as a percent
of sales increased from 4.64% to 5.62%. This increase was
due to the Company's ability to take advantage of quantity
discounts and stable markets in ammonium nitrate and potash
products.
Chemical sales decreased approximately 5.25% due to increased
sales of generic products, which sell for 20% to 40% lower than
proprietary products. Also, producers are growing more
transgenic crops, which displace a portion of agricultural
chemical sales. Gross profit as a percent of sales increased
from 4.9% to 6.25% due to a higher percentage of small package
and specialty chemical sales, which carry a higher gross profit.
Seed sales increased approximately 22%. This increase was due
to increased sales of Roundup Ready soybeans. Growers of
Roundup Ready soybeans are not allowed to save a portion of
their crop to replant. This provides the opportunity for
increased soybean seed sales. Gross profit as a percent of
sales increased from 7.1% to 11.2% due to the increased
profitability of transgenic seed products such as Roundup
Ready soybeans.
TBA sales decreased approximately 5.5%. This decrease was
primarily due to wet weather conditions, which compressed
the spring planting season. Gross profit as a percent of
sales increased from 15.4% to 16.2%. This increase was due
to a higher percentage of sales of passenger and light truck
tire sales, which carry a higher gross profit. Also, there
were some product lines in short supply in the market, which
allowed for higher gross profit.
Petroleum sales increased approximately 70%. This increase
was the result of a gain in market share from fuel distributors
exiting the business due to the need for expensive upgrades in
equipment. Also, there was a very large increase in brokered
sales which carry a lower gross profit. Gross profit as a
percent of sales decreased from 2.2% to 1.3% as a result of
a change in volume pricing discounts from a major supplier and
the increase in brokered sales.
Catfish Processing Operations:
Unit sales in the fish processing and marketing operation
decreased 2.1 million pounds (16%). This decrease was due
primarily to fewer sales of processed fish purchased from
other processors for resale ("outside fish"). The unit
average selling price and total pounds processed remained at
approximately the same levels as experienced during the prior
year period. Gross profit increased $1.75 million due to
lower processing costs, fewer sales of outside fish, and lower
prices paid for live fish due to improved supplies.
Operating Expenses
Company operating expenses increased approximately $884,000
(2.8%) over the prior year period. The prior year period
included an asset valuation adjustment of $4.78 million.
The primary areas which experienced operating expense
increases are listed below.
* $1.16 million in increased costs associated with the
new computer system, including $247,000 in increased
labor and related costs, $217,000 of additional lease
expense, and $637,000 of additional software costs.
* $1.93 million in increased costs associated with the
addition of NEA Oil, including $846,000 of additional
labor and related costs, $108,000 of additional
maintenance and repairs, $101,000 of additional utilities
and telephone, and $171,000 of additional depreciation.
* $1.06 million in increased costs associated with
additional fertilizer terminal operations, including
$297,000 of additional labor and related costs,
$235,000 of additional maintenance and repair, $301,000
of additional depreciation, and $143,000 of additional
rent and lease costs.
Comparative Analysis of the Three Months Ended July 31, 1997
to the Three Months ended July 31, 1996.
Feed sales decreased approximately 7.7%. This decrease was
due to decreased demand for beef and dairy feeds due to an
adequate supply of hay available for feeding. Also, the
number of dairy operations in the trade area has declined.
Tonnage sold for the three months ended July 31, 1997 was
118,000 tons compared to 128,000 tons sold during the prior
year period. Gross profit decreased approximately $1.2
million as a result of higher per ton manufacturing costs
due to the lower manufacturing levels.
Animal Health sales increased approximately 13% due to
producers concentrating on herd health as the beef market
returns to profitability. Gross profit as a percent of sales
decreased from 11% to 9% as a result of competitive pressure
in the market.
Farm and Ranch sales decreased approximately 10.8%. This
decrease was the result of a very wet spring season. Cotton
acres were replaced with more corn and soybean acres. These
crops require less tillage supplies and equipment than cotton.
Gross profit as a percent of sales decreased from 10.6% to
9.9%. This decrease was the result of a higher percentage
of direct shipment sales, which carry a lower gross profit.
Fertilizer sales dollars remained at approximately the same
level as experienced during the prior year period, while
total tons sold increased 48,000 tons (14.5%) to 376,000
tons. Gross profit as a percent of sales increased from
3.1% to 5.46% due to better purchasing in the urea market
and stable markets in phosphate, potassium, and ammonium
nitrate products.
Chemical sales decreased approximately 11%. This decrease was
due to increased sales of generic products, which sell for
lower per unit prices. Also, producers are growing more
transgenic crops, which displace a portion of agricultural
chemical sales. Gross profit as a percent of sales remained
at approximately the same level as experienced in the prior
year period.
Seed sales increased approximately 123% due to increased
Roundup Ready soybean seed sales and other proprietary seed
products. Gross profit as a percent of sales increased
from 8.8% to 15.9% due to increased profitability of
transgenic seed products along with the overall profitability
of proprietary seed products.
TBA sales decreased 15.7% due to a reduced availability of
farm tire products. Also, reduced promotional efforts
contributed to lower sales. Gross profit as a percent
of sales increased from 13.3% to 17.1% due to a higher
percentage of passenger and light truck tire sales,
which carry a higher gross profit. There were some product
lines which were in short supply in the market, which
allowed for increased gross profit.
Petroleum sales increased 23% due to an increase in market
share. Also, there were large increases in brokered sales,
which carry a lower gross profit. Gross profit as a
percent of sales decreased from 2.4% to 1.5% due to a
change in volume pricing discounts from a major supplier
and the increase in brokered sales.
Catfish Processing and Marketing
Unit sales in the fish processing and marketing operation
decreased 167,000 pounds (4%). This decrease was due to
fewer sales of processed fish purchased from other processors
for resale ("outside fish"). Total pounds processed remained
at approximately the same level as experienced in the prior
year period. Gross profit increased approximately $1.3 million
due to fewer sales of outside fish, and lower prices paid for
live fish caused by improved supplies of fish available for
processing.
Operating Expenses
Company operating expenses increased approximately $2.2 million
(21.5%). The primary areas which experienced operating expense
increases are listed below.
* $285,000 in increased costs associated with the new
computer system, including $69,000 in additional labor
and related costs, and $210,000 in additional software
costs.
* $639,000 in increased costs associated with the addition
of NEA Oil, including $345,000 in additional labor and
related costs, $66,000 in additional depreciation, $42,000
in additional rent and lease, and $83,000 in additional
maintenance and repair.
* $435,000 in additional costs associated with increased
fertilizer terminal operations, including $114,000 in
additional labor and related costs, $201,000 in
additional depreciation, and $109,000 in additional
maintenance and repair.
Liquidity and Capital Resources
Cash used by operating activities decreased to $4.6 million
compared to $9.0 million during the prior year period.
This decrease in cash used was due to reduced inventory
levels and an improved operating margin. Cash used in
investing activities was $12.6 million due primarily to the
purchase of NEA Oil, as well as additional fixed asset
purchases at the Memphis and Greenville fertilizer terminals.
Cash provided by financing activities increased to $15.4
million due to increased borrowing on the Company's seasonal
loan and an increase in term debt used to finance the
purchase of NEA Oil and other fixed assets.
Historically, most of the Company's financing has been with
CoBank, ACB ("CoBank"). The Company has an $80 million
seasonal line of credit and $29.5 million in term loans
with CoBank. The Company has additional temporary lines
of credit with CoBank to provide the Company with additional
liquidity. These temporary lines of credit are for
$10 million for the period from June 1, 1997 through August
31, 1997 and $5 million for the period from September 1, 1997
through November 30, 1997. In the opinion of management,
current financing arrangements provide sufficient liquidity.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
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.
SF SERVICES, INC.
Date: September 10, 1997 /s/ Michael P. Sadler
---------------------
Michael P. Sadler
President
Date: September 10, 1997 /s/ John A. Gaston
-------------------
John A. Gaston
Senior Vice President
(Principal Financial Officer)
EXHIBIT INDEX
Exhibits to Form 10-Q
Exhibit Number Exhibit
27 Financial Data Schedule