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 April 30, 1998.
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 June 9, 1998:
Common Stock 119 shares
Part I. Financial Information
Item 1. Financial Statements
SF SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
April 30, 1998 October 31, 1997
CURRENT ASSETS (Unaudited)
Cash $ 1,281,204 $ 4,809,079
Accounts and notes
receivable, net 90,748,390 55,591,458
Inventory 48,752,912 62,903,882
Prepaid expenses
and other current assets 2,204,597 1,526,754
----------- -----------
Total Current Assets 142,987,103 124,831,173
----------- -----------
INVESTMENTS AND LONG-TERM RECEIVABLES
Investments in
other cooperatives 14,170,201 13,549,277
Notes receivable 5,698,024 2,921,728
---------- ----------
Total Investments and
Long-Term Receivables 19,868,225 16,471,005
---------- ----------
PROPERTY AND EQUIPMENT, at cost 67,101,461 71,671,064
Less accumulated depreciation 26,249,531 24,909,488
---------- ----------
Net Property and Equipment 40,851,930 46,761,576
---------- ----------
OTHER ASSETS 703,583 731,662
TOTAL ASSETS $204,410,841 $188,795,416
=========== ============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 78,019,799 $ 76,518,530
Current maturities of
Long-term debt 4,644,223 4,801,464
Accounts payable 48,567,738 28,130,453
Patrons deposits 4,843,233 4,010,610
Accrued expenses and
other current liabilities 12,375,776 8,775,023
----------- -----------
Total Current Liabilities 148,450,769 122,236,080
----------- -----------
LONG-TERM DEBT,
LESS CURRENT MATURITIES 26,790,807 33,031,344
OTHER LIABILITIES 168,934 168,934
MEMBERS' EQUITY 29,000,331 33,359,058
----------- -----------
TOTAL LIABILITIES AND
MEMBERS' EQUITY $204,410,841 $188,795,416
=========== ===========
See notes to Condensed Consolidated Financial Statements.
SF SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
April 30, 1998 April 30, 1997
NET SALES $ 141,332,183 $ 181,244,529
COST OF GOODS SOLD 130,256,831 167,571,032
----------- -----------
GROSS PROFIT 11,075,352 13,673,497
OPERATING EXPENSES 9,962,234 10,222,364
---------- ----------
INCOME (LOSS) FROM OPERATIONS 1,113,118 3,451,133
---------- ----------
OTHER INCOME (EXPENSES)
Interest, net (1,364,160) (1,181,253)
Miscellaneous 1,243,729 172,784
---------- ----------
(120,431) (1,008,469)
---------- ----------
SAVINGS BEFORE INCOME TAXES 992,687 2,442,664
INCOME TAX EXPENSE (BENEFIT) 0 82,801
---------- ----------
NET SAVINGS (LOSS) $ 992,687 $ 2,359,863
========== ==========
NET SAVINGS (LOSS) APPLIED TO:
ALLOCATED EQUITIES
Cash
Capital Equity Credits
(Deficit)- 817,008 1,537,334
RETAINED EARNINGS (DEFICIT) 175,679 822,529
---------- ----------
992,687 2,359,863
========== ==========
See notes to Condensed Consolidated Financial Statements.
SF SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Six Months Ended
April 30, 1998 April 30, 1997
NET SALES $ 216,913,035 $ 270,615,380
COST OF GOODS SOLD 199,003,295 251,532,789
----------- -----------
GROSS PROFIT 17,909,740 19,082,591
OPERATING EXPENSES 20,753,073 20,182,879
---------- ----------
INCOME (LOSS) FROM OPERATIONS (2,843,333) (1,100,288)
---------- ----------
OTHER INCOME (EXPENSES)
Interest, net (3,024,045) (2,624,301)
Miscellaneous 1,570,652 354,964
---------- ----------
(1,453,393) (2,269,337)
---------- ----------
SAVINGS BEFORE INCOME TAXES (4,296,726) (3,369,625)
INCOME TAX EXPENSE (BENEFIT) 0 (888,354)
---------- ----------
NET SAVINGS (LOSS) $ (4,296,726) $ (2,481,271)
========== ==========
NET SAVINGS (LOSS) APPLIED TO:
ALLOCATED EQUITIES
Cash
Capital Equity Credits
(Deficit)- (1,862,427) (1,350,018)
RETAINED EARNINGS (DEFICIT) (2,434,299) (1,131,253)
---------- ----------
(4,296,726) (2,481,271)
========== ==========
See notes to Condensed Consolidated Financial Statements.
SF SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Six Months
Ended Ended
April 30, 1998 April 30, 1997
Cash flows from
operating activities:
Net Margin for the period $ (4,296,727) $ (2,481,271)
Items not requiring
(providing) cash:
Depreciation and amortization 2,266,636 1,329,209
Non-cash portion of patronage
dividends from other co-ops (620,924) (102,106)
Gain on sale of property
and equipment (1,390,862) (275,296)
Changes in operating assets and
liabilities:
Accounts and notes receivable (37,933,228) (44,708,634)
Inventory 14,150,970 (6,047,006)
Prepaid expenses and
other assets (649,764) (1,401,193)
Accounts payable 20,437,285 33,534,019
Accrued expenses and
other liabilities 3,600,753 6,922,035
---------- ----------
Net cash (used in)
operating activities (4,435,861) (13,230,243)
---------- ----------
Cash flows from investing
activities:
Purchase of property
and equipment (1,568,869) (12,185,325)
Proceeds from sale of property
and equipment 6,602,741 383,662
---------- ----------
Net cash provided by (used in)
investing activities 5,033,872 (11,801,663)
---------- ----------
Cash flows from financing
activities:
Proceeds from borrowings 53,664,557 109,565,745
Repayment of borrowings (58,561,066) (86,423,262)
Redemption of common stock (2,000) 0
Retirement of preferred stock (60,000) (58,605)
Net change in patron deposits 832,623 362,183
---------- ----------
Net cash provided by (used in)
financing activities (4,125,886) 23,446,061
---------- ----------
Net increase (decrease) in cash (3,527,875) (1,585,845)
Cash, beginning of period 4,809,079 3,214,419
---------- ----------
Cash, end of period $ 1,281,204 $ 1,628,574
========== ==========
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 April 30, 1998, the condensed consolidated statements of
cash flows for the six months ended April 30, 1998 and
1997, and the condensed consolidated statements of operations
for the three months and six months ended April 30, 1998 and
1997 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
April 30, 1998 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, 1997 audited financial
statements. The results of operations for the six months
ended April 30, 1998 and 1997 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
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 ("PSLRA")
Certain forward-looking information contained in this report
is being provided in reliance upon the "safe harbor" provisions
of the PSLRA as set forth in Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such information includes, without
limitation, discussions as to estimates, expectations, beliefs,
plans, strategies and objectives concerning the Company's future
financial and operating performance. Such forward-looking
information is subject to assumptions and beliefs based on
current information known to the Company and factors that could
yield actual results differing materially from those
anticipated. Such factors include, without limitation, costs of
feed ingredients and other products sold by the Company, prices
received for products sold by the Company, extreme weather
conditions in the Company's trade area, significant economic
changes within the agriculture industry, and effects of the
Company's restructuring efforts.
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 mid-south 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 119 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 sales may be
impacted by seasonal changes. Additionally, variations
in ingredient prices precipitate changes in the feed
sales volume. The Company's business cycle is highly
seasonal and can be advanced or delayed by weather
conditions. Results of operations for the six months ended
April 30, 1998 and 1997 reflect the seasonality of the
Company's business and are not indicative of results expected
for a full fiscal year.
Sales decreased approximately $53.7 million for the
six months ended April 30, 1998 compared to the prior
year period. Gross profit decreased approximately $1.2 million
for the six months ended April 30, 1998 compared to the prior
year period.
Comparative Analysis of the Six Months Ended April 30, 1998
to the Six Months Ended April 30, 1997
Wholesale/Retail Operations:
During the six month reporting period the Company reorganized
its wholesale operations into three major areas - livestock
production, crop production and petroleum. The livestock
production area includes feed, animal health, and farm & ranch.
The crop production area includes fertilizer, chemicals, and
seed. The petroleum area includes fuel and TBA.
Sales of livestock production products declined $13.6 million
due to lower commodity prices, exiting certain farm & ranch
product lines and lower demand because of mild winter weather.
Unit gross margins were unchanged from the prior year.
Sales of crop production products declined $34.5 million due
to lost market share in chemicals and lower nitrogen prices,
partially offset by higher seed sales. Unit gross margins for
crop production increased from the prior year.
Sales of petroleum products decreased $34.7 million due to
exiting fuel brokerage sales programs, lower energy prices and
exiting certain TBA product lines. Unit gross margins declined
due to a shift from warehouse to direct ship TBA products.
Catfish Processing Operations:
Unit sales in the fish processing and marketing operation
increased approximately 277,000 pounds. The unit average
selling price remained at approximately the same level as
experienced during the prior year period. Gross profit
decreased slightly due to higher prices paid for live fish.
Retail and Wholesale Fuel Subsidiary Operations:
The retail and wholesale fuel subsidiary was not in
operation during much of the prior year period, therefore no
analysis of changes in operations can be made. For the six
months ended April 30, 1998, sales for this operation were
approximately $28.7 million, and gross profit was approximately
$3.14 million.
Operating Expenses
Operating expenses, excluding new operations, declined $1.0
million for the six month periods ended April 30, 1998 and 1997.
This decline was due to restructuring the wholesale product lines
and company owned stores.
Operating expenses, including new operations, increased $570,000
for the six month period ended April 30, 1998. This increase was
due to the addition of the retail and wholesale fuel subsidiary,
which operated during only part of the prior year period, and was
expanded with new locations during the current year period.
Comparative Analysis of the Three Months Ended April 30, 1998
to the Three Months Ended April 30, 1997
Sales of livestock production products declined $6.5 million
due to lower commodity prices, exiting certain farm & ranch
product lines and lower demand for beef and dairy feeds resulting
from the mild winter weather. Unit gross margins were unchanged
from the prior year.
Sales of crop production products declined $26.7 million due to
lost market share in chemicals and lower nitrogen prices,
partially offset by higher seed sales. Unit gross margin for
crop production increased from the prior year period.
Sales of petroleum products decreased $24.8 million due to
exiting fuel brokerage sales programs, lower energy prices
and exiting certain TBA product lines. Unit gross margins
declined due to a shift from warehouse to direct ship TBA
products, partially offset by higher fuel margins resulting
from favorable supply contracts.
Catfish Processing Operations:
Unit sales in the fish processing and marketing operation
increased approximately 173,000 pounds. The unit average
selling price remained at approximately the same level as
experienced during the prior year period. Gross profit
increased approximately $250,000 due to lower processing costs.
Retail and Wholesale Fuel Subsidiary Operations:
The retail and wholesale fuel subsidiary was not in
operation during much of the prior year period, therefore no
analysis of changes in operations can be made. For the three
months ended April 30, 1998, sales for this operation were
approximately $17 million, and gross profit was approximately
$1.9 million.
Operating Expenses
Operating expenses , excluding new operations, declined
$776,000 for the three month periods ended April 30, 1998 and
1997. This decline was due to restructuring the wholesale
product lines and company owned stores.
Operating expenses, including new operations, decreased $260,000
for the three months ended April 30, 1998. The increase in
subsidiary operating expenses, including the addition of new
locations during the current fiscal year, was more than offset
by the restructuring of wholesale operations.
Liquidity and Capital Resources
Cash used in operating activities decreased to $4.4
million due primarily to lower inventory levels as a result
of supply alliances with vendors. Cash provided by investing
activities increased to $5.0 million due to the sale of fixed
assets. Cash used in financing activities increased to $4.1
million due to the repayment of debt.
Historically, most of the Company's financing has been with
CoBank, ACB ("CoBank"). The Company has an $80 million
seasonal line of credit and $23.8 million in term loans with
CoBank. During the first quarter of 1998, the Company obtained
a formal waiver from CoBank with respect to covenant violations
concerning working capital. The Company is currently
implementing plans to improve operations and return to
profitability. These plans include creating joint ventures
and distribution alliances with other supply companies, and
increasing direct shipment sales, which will reduce warehouse
inventory levels. Management believes that as these plans
are realized, the current line of credit will provide
sufficient liquidity for current and future operating levels.
For further discussion see Item 5 "Other Information."
During the first quarter of 1998, the Company sold seven
convenience store locations through a sale/leaseback
transaction. No material gain or loss resulted from this
transaction. Proceeds of $2.7 million were used to pay down
term debt with CoBank.
Part II. Other Information
Item 4. Submission of Matters to a Vote
of Security Holders
An annual meeting was held on February 20, 1998, at which the
following directors were elected to terms expiring 2001.
FOR AGAINST
--- -------
Jim Gibson 53 0
Steven Henderson 53 0
John Jay, Jr. 53 0
Alex Lewis 53 0
Robert Little 53 0
Danny Naegle 53 0
George Owens, Sr. 53 0
Ronnie Raigins 53 0
Mike Strudivant, Jr. 53 0
Johnny Wilson 53 0
Other directors of the Company and their term expirations are
presented below.
Director Term Expiration
-------- ---------------
Gene Bruick 1999
Michael Pierce 1999
Charlie Starks 1999
Daniel Viator 1999
Joe Wilder 1999
Travis Burchfield 2000
Jerry Connerly 2000
John Evans 2000
Thomas Gist 2000
W.B. Madden 2000
W.S. Patrick 2000
Item 5. Other Information
During the first quarter of 1998, the Company signed a Letter
of Intent with Wilfarm, LLC ("Wilfarm") in connection with a
proposed transaction whereby Wilfarm will acquire the Company's
chemical distribution business and related assets, and
will operate that business subject to a continuing royalty
interest on the part of the Company. The purchase price shall
be an amount equal to the cost basis of the chemical inventory
in existence as of the closing date, less the amount of trade
payables related to the inventory, which will be assumed by Wilfarm,
and the amount of all related chemical prepayments in existence
as of the closing date, the obligations under which will be
assumed by Wilfarm. Details of this transaction will be reported
in a Current Report on Form 8-K if the transaction is consummated.
Subsequent Event
On June 9, 1998 the Company and Farmland Industries, Inc.
("Farmland") of Kansas City, Missouri entered into a definitive
agreement pursuant to the terms of which the Company will be
merged into a wholly-owned subsidiary of Farmland. Stockholders
will be asked to approve the transaction at a meeting scheduled
for June 30, 1998. Pending such approval by stockholders,
the parties anticipate closing this transaction on or about
July 1, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
SF SERVICES, INC. AND SUBSIDIARIES
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: June 15, 1998 /s/ Michael P. Sadler
---------------------
Michael P. Sadler
President
Date: June 15, 1998 /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