UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the thirty-nine weeks ended June 27, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-50683
SF HOLDINGS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3990796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
373 Park Ave. South
New York, NY 10016
(212) 779-7448
(Address and telephone number of registrant's principal executive offices)
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 registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $.001 par value, as
of August 1, 1999: Class A: 5,625,838 Shares
Class B: 564,586 Shares
Class C: 399,000 Shares
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SF HOLDINGS GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements (unaudited): Page
Consolidated Condensed Balance Sheets as of June 27, 1999
and July 26, 1998 (audited) 3
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the thirteen and thirty-nine weeks
ended June 27, 1999 and July 26, 1998 4
Consolidated Statements of Cash Flows for the thirty-nine
weeks ended June 27, 1999 and July 26, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SF HOLDINGS GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 27, July 26,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,859 $ 20,703
Cash in escrow 1,622 6,819
Accounts receivable, less allowance for doubtful
accounts of $2,537 and $3,569, respectively 126,874 120,112
Due from affiliates 8,001 1,313
Inventories 172,117 168,493
Deferred income taxes 15,881 17,322
Other current assets 21,886 20,026
--------- ---------
Total current assets 349,240 354,788
Property, plant and equipment, net 405,044 430,150
Goodwill, net 98,982 94,865
Deferred income taxes 40,825 32,572
Other assets, net 27,559 31,436
--------- ---------
TOTAL ASSETS $ 921,650 $ 943,811
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 80,334 $ 78,013
Accrued expenses 107,269 117,426
Current maturities of long-term debt 1,525 3,825
--------- ---------
Total current liabilities 189,128 199,264
Long-term debt 625,964 619,143
Other liabilities 64,642 61,865
Deferred income taxes 5,621 4,771
--------- ---------
Total liabilities 885,355 885,043
Exchangeable preferred stock 35,030 30,680
Minority interest in subsidiary 1,658 3,020
Redeemable common stock 2,198 2,139
Stockholders' equity (deficit) (2,591) 22,929
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 921,650 $ 943,811
========= =========
</TABLE>
3
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SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
June 27, July 26, June 27, July 26,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 298,073 $ 301,679 $ 824,326 $ 483,220
Cost of goods sold 255,519 268,524 728,256 423,886
--------- --------- --------- ---------
Gross profit 42,554 33,155 96,070 59,334
Selling, general and
administrative expenses 23,250 23,728 72,179 44,968
Other (income) expense, net (413) (4,802) 97 (12,008)
--------- --------- --------- ---------
Income from operations 19,717 14,229 23,794 26,374
Interest expense, net 16,525 16,378 49,174 26,368
--------- --------- --------- ---------
Income (loss) before income taxes 3,192 (2,149) (25,380) 6
Income taxes provision (benefit) 1,591 371 (9,227) 1,447
Minority interest in subsidiary's income (loss) 434 (475) (814) (1,900)
--------- --------- --------- ---------
Net income (loss) 1,167 (2,045) (15,339) 459
Payment-in-kind dividends on
exchangeable preferred stock 1,221 1,043 3,586 1,616
--------- --------- --------- ---------
Net loss applicable to
common stock $ (54) $ (3,088) $ (18,925) $ (1,157)
========= ========= ========= =========
Statements of comprehensive income (loss):
Net income (loss) $ 1,167 $ (2,045) $ (15,339) $ 459
Other comprehensive income, net of income tax:
Minimum pension liability adjustment 627 -- 1,516 --
Foreign translation adjustment 323 383 312 476
--------- --------- --------- ---------
950 383 1,828 476
--------- --------- --------- ---------
Total comprehensive income (loss) $ 2,117 $ (1,662) $ (13,511) $ 935
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
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SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
----------------------
June 27, July 26,
1999 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) $ (15,339) $ 459
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 42,716 19,155
Interest capitalized on debt 8,188 3,707
Provision for doubtful accounts 305 405
Deferred income taxes (7,381) (5,779)
Net gain on business and equipment dispositions
and settlement of long-term contracts (305) (16,175)
Minority interest in subsidiary's loss (814) (1,900)
Changes in assets and liabilities:
Accounts receivable (12,029) (14,101)
Due from affiliates (8,141) 3,416
Inventories (1,833) 14,379
Other current assets (156) (441)
Accounts payable and accrued expenses 16,619 3,387
Other 6,270 2,736
--------- ---------
Net cash provided by operating activities 28,100 9,248
--------- ---------
Investing activities:
Capital expenditures (35,158) (11,706)
Proceeds from business and equipment dispositions 6,171 34,533
Payments for business acquisitions -- (101,901)
Other -- 1,931
--------- ---------
Net cash used in investing activities (28,987) (77,143)
--------- ---------
Financing activities:
Net decrease in revolving credit borrowings (6,297) (7,284)
Proceeds from long-term debt -- 84,351
Repayments of long-term debt (3,429) (5,851)
Proceeds from issuance of exchangeable preferred stock -- 15,000
Redemption of Fonda's common stock -- (1,436)
Debt issuance costs -- (3,762)
Decrease in escrow cash 3,842 4,870
Other -- 371
--------- ---------
Net cash provided by (used in) financing activities (5,884) 86,259
--------- ---------
Net increase (decrease) in cash (6,771) 18,364
Cash and cash equivalents, beginning of period 9,630 2,339
--------- ---------
Cash and cash equivalents, end of period $ 2,859 $ 20,703
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 28,918 $ 28,386
Income taxes, net of refunds $ 1,715 $ 5,062
</TABLE>
See notes to consolidated financial statements.
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SF HOLDINGS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
SF Holdings Group, Inc. ("SF Holdings"), is a holding company that
conducts its operations through its principal operating subsidiaries, Sweetheart
Holdings Inc. ("Sweetheart") and The Fonda Group, Inc. ("Fonda") (collectively,
the "Company"), and therefore has no significant cash flows independent of such
subsidiaries. The instruments governing the indebtedness of Sweetheart and Fonda
contain numerous restrictive covenants that restrict Sweetheart and Fonda's
ability to pay dividends or make other distributions to SF Holdings or to each
other. The Company believes that the combined operations of its subsidiaries
makes the Company one of the three largest converters and marketers of
disposable food service and food packaging products in North America.
The information included in the foregoing interim consolidated financial
statements of the Company are unaudited but, in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments and
accruals) which the Company considers necessary for a fair presentation of the
operating results for these periods. Results for interim periods are not
necessarily indicative of results for the entire year. These condensed financial
statements should be read in conjunction with the Company's financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
fiscal year ended July 26, 1998 and its transition report on Form 10-Q for the
nine week period ended September 27, 1998.
On October 22, 1998, the Board of Directors of SF Holdings and Fonda
approved a change in their respective fiscal year ends from a fifty-two or
fifty-three week period which ends on the last Sunday in July to the same number
of weekly periods which end on the last Sunday in September. The nine-week
transition period ending September 27, 1998 was not part of the fiscal year
ended July 26, 1998 and will not be part of Fiscal 1999, which will end on
September 26, 1999.
2. CASH IN ESCROW
Cash received by Sweetheart as proceeds from the sale of assets is
restricted to qualified capital expenditures in accordance with the covenants
set forth in Sweetheart's debt instruments, and is held in escrow with the
trustee until utilized.
3. INVENTORIES
Inventories consist of the following (in thousands):
June 27, July 26,
1999 1998
---------- ---------
Raw materials and supplies $ 50,644 $ 43,998
Work-in-process 8,489 9,456
Finished goods 112,984 115,039
======== ========
$172,117 $168,493
======== ========
4. RELATED PARTY TRANSACTIONS
In December 1998, Fonda entered into an Exclusive Manufacture and
Supply Agreement (the "Manufacture and Supply Agreement") with Creative
Expressions Group ("CEG"), an affiliate. Pursuant to such agreement, Fonda
manufactures and supplies all of CEG's requirements for, among other items,
disposable paper plates, cups, napkins and tablecovers. Fonda sells such
manufactured products to CEG in accordance with a formula based on cost. Net
sales to CEG during the thirty-nine weeks ended June 27, 1999 were $25.7
million. Also in December 1998, Fonda purchased certain manufacturing assets
from CEG for $4.9 million and entered into operating leases, whereby Fonda
leases to CEG certain non-manufacturing assets for annual lease income of $.1
million. Independent appraisals were obtained to determine the fairness of both
the purchase price and lease terms. The Company believes the terms on which
Fonda (i) manufactures and supplies product for CEG, (ii) purchased
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manufacturing assets from CEG, and (iii) leased non-manufacturing assets to CEG
are at least as favorable as those Fonda could have obtained from unrelated
third parties and were negotiated on an arm's length basis.
In December 1998, Fonda purchased certain paper plate manufacturing assets
from Sweetheart for $2.4 million. In February 1999, Fonda entered into a five
year operating lease with Sweetheart, whereby Fonda leases certain paper cup
manufacturing assets to Sweetheart with a net book value of $1.3 million for
annual lease income of $.2 million. Independent appraisals were obtained to
determine the fairness of both the purchase price and lease terms. The Company
believes the terms on which Fonda purchased manufacturing assets from Sweetheart
and leases manufacturing assets to Sweetheart are at least as favorable as those
it could have obtained from unrelated third parties and were negotiated on an
arm's length basis. The purchase of assets by Fonda from Sweetheart was
eliminated in consolidation.
5. CONTINGENCIES
On January 11, 1999, the United States Supreme Court denied Plaintiff's
petition for Writ of Certiorari in the matter of Aldridge v. Lily-Tulip, Inc.
Salary Retirement Benefits Committee and Fort Howard Cup Corporation. The court
decided that Lily-Tulip Salary Retirement Plan (the "Plan") was lawfully
terminated. Sweetheart is in the process of determining the amount of total
payouts for which the Plan is liable. The estimate of the total termination
liability exceeds assets set aside in the Plan by approximately $17 million,
which amount has been fully reserved by the Company. Sweetheart expects to fund
such payments within the next three months. On April 27, 1999, the Plaintiffs
filed a motion in the United States District Court for reconsideration of the
court's dismissal without appropriate relief, and a motion for attorneys' fees
with a request for delay in determination of entitlement of such fees. On June
17, 1999, the court deferred these motions, and ordered discovery in connection
therewith. Discovery is expected to be completed by the end of October 1999. See
Item 2 - Management Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources.
A patent infringement action seeking injunctive relief and damages
relating to Sweetheart's production and sale of certain paper plates entitled
Fort James Corporation v. Sweetheart Cup Company Inc., was filed in the United
States District Court for the Eastern District of Wisconsin on November 21,
1997. On May 17, 1999, Sweetheart filed a motion for summary judgment on all
claims. In the opinion of management, the ultimate liability, if any, will not
have a material adverse affect on the Company's financial position or results of
operations.
On July 13, 1999, Sweetheart received a letter from the Environmental
Protection Agency (the "EPA") identifying Sweetheart, among numerous others, as
a "potential responsible party" under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, at a site in Baltimore,
Maryland. The Company has no reason to believe that the final outcome of this
matter will have a material adverse effect on the Company's financial condition
or results of operations. However, no assurance can be given about its ultimate
effect on the Company, if any, given the early stage of this investigation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion for the Company contains forward-looking
statements as defined by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on management's current expectations
and involve a number of known and unknown risks and uncertainties that could
cause the actual results, performance or achievements of the Company to be
materially different from those anticipated in these forward-looking statements.
Such risks and uncertainties include, but are not limited to, the highly
competitive nature of the industry, raw material costs and fluctuations in
demand for the Company's products due in part to general economic and business
conditions.
7
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General
SF Holdings Group, Inc. ("SF Holdings") conducts all of its operations
through its principal operating subsidiaries, Sweetheart Holdings Inc.
("Sweetheart") and The Fonda Group, Inc. ("Fonda") (collectively, the "Company")
and therefore has no significant cash flows independent of such subsidiaries.
Debt instruments of Fonda and Sweetheart restrict each subsidiary's ability to
pay dividends or make other distributions to SF Holdings or each other.
As a result of the change in Fonda's fiscal year from the fifty-two or
fifty-three week period which ends on the last Sunday in July to the same number
of weekly periods which end on the last Sunday in September, the quarterly
comparisons for Fonda are between the thirteen and thirty-nine week periods
ended June 27, 1999 (the "1999 Fonda Thirteen Week Period" and the "1999 Fonda
Thirty-nine Week Period") and the same number of weekly periods ended April 26,
1998 (the "1998 Fonda Thirteen Week Period" and the "1998 Fonda Thirty-nine Week
Period").
In Fonda's thirty-nine week comparison, sales in the four week period in
October (which is included in the 1999 Fonda Thirty-nine Week Period) would
expect to be higher, primarily in seasonal and party goods products, than such
sales in the four week period in July (which is included in the 1998 Fonda
Thirty-nine Week Period). In the thirteen week comparison, the seasonality
effect is reduced as sales in the four week period in April (which is included
in the 1999 Fonda Thirteen Week Period) historically have not been materially
different than those in the four week period in July (which is included in the
1998 Fonda Thirteen Week Period).
The investment in Sweetheart was consummated on March 12, 1998 and was
accounted for as a purchase. As a result, the financial information with respect
to the 1998 thirteen week and thirty-nine week periods contained herein reflects
Sweetheart's results of operations for period April 1, 1998 to June 30, 1998 and
March12, 1998 to June 30, 1998, respectively.
Sweetheart and Fonda are converters and marketers of disposable paper,
plastic and foam food service and food packaging products. The price of the
Company's primary raw materials, including SBS paperboard and plastic resin,
historically fluctuates. These fluctuations are generally passed on to customers
through price increases or reductions. However, in the short term, the Company
is at risk of margin erosion. The severity of such margin erosion depends on
various factors including inventory levels at the time of a price change, the
timing and frequency of such price changes, and the lead and lag time that
generally accompanies the implementation of both raw materials and subsequent
selling price changes.
Each of Fonda and Sweetheart's business is seasonal as away from home
consumption of disposable products increases in the late spring and summer. This
results in disproportionately higher net income in the last six months of the
fiscal year as cost absorption improves from a more profitable sales and
production mix.
In connection with the License Agreement, as described below, Fonda and
Creative Expressions Group ("CEG"), an affiliate, entered into an Exclusive
Manufacture and Supply Agreement in December 1998 (the "Manufacture and Supply
Agreement" and together with the License Agreement the "CEG Agreements").
Pursuant to the Manufacture and Supply Agreement, Fonda manufactures and
supplies all of CEG's requirements for, among other items, disposable paper
plates, cups, napkins and tablecovers. Fonda sells such manufactured products to
CEG in accordance with a formula based on cost, as defined in such agreement.
The Company believes that such agreement will enable Fonda to increase the
utilization of its manufacturing capacity. Pursuant to the License Agreement,
CEG has the right, among other things, to distribute certain products previously
distributed by Fonda and in exchange therefor, Fonda receives a royalty of 5% of
CEG's cash flow as determined in accordance with a formula specified in such
agreement.
Recent Developments
Fonda is engaged in an extensive program to improve manufacturing
efficiencies and upgrade production capabilities, which includes, among other
things, the full implementation of the Manufacture and Supply Agreement and
further consolidation of its manufacturing operations (the "Fonda Efficiency
Initiatives"). This program has and will continue to result in incremental
expenses arising from start-up, training and other related expenses and is
expected to be substantially complete by the end of the fiscal year. In
connection with the Fonda Efficiency Initiatives, (i) in December 1998, Fonda
purchased certain paper plate manufacturing assets from Sweetheart for $2.4
million and (ii) in February
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1999, Fonda entered into a five year operating lease whereby it leases certain
paper cup manufacturing assets to Sweetheart.
Results of Operations
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------------- ------------------------------------
June 27, 1999 July 26, 1998 June 27, 1999 July 26, 1998
--------------- -------------- ----------------- ----------------
% of % of % of % of
Net Net Net Net
Amount Sales Amount Sales Amount Sales Amount Sales
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $298.1 100.0 % $301.7 100.0 % $824.3 100.0 % $483.2 100.0 %
Cost of goods sold 255.5 85.7 268.5 89.0 728.3 88.3 423.9 87.7
------ ------ ------ ------ ------ ------ ------ ------
Gross profit 42.6 14.3 33.2 11.0 96.1 11.7 59.3 12.3
Selling, general and
administrative expenses 23.3 7.8 23.7 7.9 72.2 8.8 45.0 9.3
Other income, net (0.4) (0.1) (4.8) (1.6) 0.1 0.0 (12.0) (2.5)
------ ------ ------ ------ ------ ------ ------ ------
Income from operations 19.7 6.6 14.2 4.7 23.8 2.9 26.4 5.5
Interest expense, net 16.5 5.5 16.4 5.4 49.2 6.0 26.4 5.5
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before taxes 3.2 1.1 (2.1) (0.7) (25.4) (3.1) 0.0 0.0
Income tax provision (benefit) 1.6 0.5 0.4 0.1 (9.2) (1.1) 1.4 0.3
Minority interest 0.4 0.1 (0.5) (0.2) (0.8) (0.1) (1.9) (0.4)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) $ 1.2 0.4 % $ (2.0) (0.7)% $(15.3) (1.9)% $ 0.5 0.1 %
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Thirteen Weeks Ended June 27, 1999 Compared to Thirteen Weeks Ended July 26,
1998
Net sales decreased $3.6 million, or 1.2%, to $298.1 million in the 1999
thirteen week period. The following analysis includes $2.8 million of sales from
Sweetheart to Fonda and $1.7 million of sales from Fonda to Sweetheart which
were eliminated in consolidation.
Sweetheart results- Net sales increased $.5 million (including
intercompany sales to Fonda). Domestic net sales decreased by $1.1 million, or
0.5%, reflecting a 0.7% decrease in domestic sales volume which is partially
offset by a 0.2% increase in realized domestic sales price. The increase in
average realized sales price reflects price increases in selected product lines
which was partially offset by a shift in sales mix to lower priced products.
Foodservice sales volume increased 1.2% primarily as a result of Sweetheart's
focus on revenue growth with key customers. Food packaging sales volume
decreased 12.7%, primarily resulting from decreases in demand by large accounts
in the food packaging customer base due to market conditions. Canadian sales
increased 9.9% from the prior comparable period due primarily to increased sales
volume from the introduction of new products.
Fonda results- Net sales increased $.4 million (including intercompany
sales to Sweetheart). Net sales of party goods products decreased 3.0%,
primarily due to the CEG Agreements. Such agreements resulted in a significant
increase in volume which was more than offset by a significant reduction in
selling prices. The lower selling prices reflect cost savings from the License
Agreement as well as savings that Fonda is beginning to realize and expects to
realize more fully in future periods upon full implementation of the Manufacture
and Supply Agreement. Excluding such party goods products, net sales in the
consumer market decreased 3.1%, resulting from an increase in sales volume of
5.2%, which was more than offset by a 7.9% decrease in average selling prices.
Selling prices in this market were adversely affected by reductions in raw
material costs that were passed through to customers as well as more competitive
market conditions. In the institutional market, net sales increased 3.2%,
resulting from an increase in sales volume of 8.1%, which was partially offset
by a 4.5% decrease in average selling prices. The increased sales volume in the
institutional market was primarily due to an increase in sales of value added
converted tissue products and certain commodity paperboard products. The
reduction in selling prices was due to the same conditions experienced in the
consumer market.
Gross profit increased $9.4 million, or 28.3%, to $42.6 million in the
1999 thirteen week period. As a percentage of net sales, gross profit increased
from 11% in the 1998 thirteen week period to 14.3% in the 1999 period primarily
due to improved Sweetheart earnings.
Sweetheart results- Gross profit increased $13.3 million to 14.3% of net
sales for the thirteen weeks ended June 27, 1999 from 8.7% for the three months
ended June 30, 1998. This improvement is attributable to a shift in
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sales to a more profitable product mix and the cost reduction initiatives
implemented by Sweetheart in the latter part of the 1998 fiscal year which has
resulted in improved manufacturing efficiencies.
Fonda results- Gross profit decreased $3.4 million from 19.0% of net sales
in the 1998 Fonda Thirteen Week Period to 13.5% in the 1999 Fonda Thirteen Week
Period. Gross margins in the 1999 Fonda Thirteen Week Period were adversely
affected by reduced selling prices of party goods products sold to CEG,
described above, margin erosion in commodity paperboard products, as well as
excess costs incurred in implementing the Efficiency Initiatives. Gross margins
are expected to improve in future periods upon full implementation of the
Efficiency Initiatives, and as a result of recent price increases in various
product lines, however, there can be no assurance that such improvements will
occur.
Selling, general and administrative expenses decreased $.5 million to
$23.3 million in the 1999 thirteen week period due to a $1.5 million decrease at
Fonda which was partially offset by a $1.0 million increase at Sweetheart. As a
percentage of net sales, selling, general and administrative expenses decreased
from 7.9% in the 1998 thirteen week period to 7.8% in the 1999 period. The Fonda
decrease was primarily caused by the reduction of selling, marketing and
distribution costs due to the License Agreement, as well as the closure of an
administrative office. The increase at Sweetheart was primarily due to legal
expenses associated with pending litigation, and increased costs for medical
insurance and promotions .
Other income, net in the 1998 thirteen week period includes a $6.6 million
pre-tax gain primarily due to the July 1998 settlement of a steam contract
related to Fonda's tissue mill operations. The gain was partially offset by
closure cost accruals relating to Fonda's decision to close an administrative
office.
Income from operations increased $5.5 million to $19.7 million in the 1999
thirteen week period as a result of the above.
Interest expense, net of interest income increased $.1 million to $16.5
million in the 1999 thirteen week period. A $.5 million increase in interest on
the Senior Secured Discount Notes and a $.2 million increase at Fonda due to an
increase in outstanding debt, were partially offset by a reduction at
Sweetheart. The improvement at Sweetheart was due to lower outstanding debt and
lower interest rates.
The income tax provision was $1.6 million in the 1999 thirteen week period
and $.4 million in the 1998 thirteen week period. Both the 1999 and 1998 periods
reflect certain non-deductible costs relating to the investment in Sweetheart
and the related financing. The effective tax rate is affected by such
non-deductible costs as well as the proportionate results of both Fonda and
Sweetheart.
Minority interest, representing 10% of Sweetheart's historical income or
loss, increased $.9 million to a cost of $.4 million due to Sweetheart's
improved results. As a result of the above, net income increased $3.2 million to
$1.2 million in the 1999 thirteen week period compared to a net loss in the 1998
thirteen week period.
Thirty-nine Weeks Ended June 27, 1999 Compared to Thirty-nine Weeks Ended July
26, 1998
Net sales increased $341.1 million to $824.3 million in the 1999
thirty-nine week period due to the consolidation of Sweetheart in March 1998,
which was partially offset by a $4.5 million decrease in net sales at Fonda. The
following analysis includes $4.0 million of sales from Sweetheart to Fonda and
$1.6 million of sales from Fonda to Sweetheart, which were eliminated in
consolidation.
Sweetheart results- Net sales increased $351.2 million, (including
intercompany sales to Fonda) primarily due to the effect of the consolidation of
Sweetheart. In addition, since April 1, 1999, domestic net sales decreased by
$1.1 million, or 0.5%. This reflected a 0.7% decrease in domestic sales volume
which was partially offset by a 0.2% increase in realized domestic sales price.
The increase in average realized sales price reflects price increases in
selected product lines which was partially offset by a shift in sales mix to
lower priced products. Foodservice sales volume increased 1.2% primarily as a
result of Sweetheart's focus on revenue growth with key customers. Food
packaging sales volume decreased 12.7%, primarily resulting from decreases in
demand by large accounts in the food packaging customer base due to market
conditions. Canadian sales increased 9.9% from the prior comparable period due
primarily to increased sales volume from the introduction of new products.
Fonda results- Net sales decreased $4.5 million, (including intercompany
sales to Sweetheart). The 1998 Fonda Thirty-nine Week Period included $8.4
million of net sales of tissue mill products relating to operations that were
sold in March 1998. Excluding such tissue mill sales, net sales in the
converting operations increased $4.0
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million due primarily to the effects of seasonality on the thirty-nine week
comparison. Net sales of party goods products increased 5.4% primarily due to
the CEG Agreements. Such agreements resulted in a significant increase in volume
which was offset by a significant reduction in selling prices. The lower selling
prices reflect cost savings from the License Agreement as well as savings that
Fonda is beginning to realize and expects to realize more fully in future
periods upon full implementation of the Manufacture and Supply Agreement.
Excluding such party goods products, net sales in the consumer market decreased
.8%, resulting from an increase in sales volume of 6.2%, which was more than
offset by a 6.6% decrease in average selling prices. Selling prices in this
market were adversely affected by reductions in raw material costs that were
passed through to customers as well as more competitive market conditions. In
the institutional market, net sales increased 3.4%, resulting from an increase
in sales volume of 5.7%, which was partially offset by a 2.1% decrease in
average selling prices. The increased sales volume in the institutional market
was primarily due to an increase in sales of value added converted tissue
products and certain commodity paperboard products. The reduction in selling
prices was due to the same conditions experienced in the consumer market.
Gross profit increased $36.7 million to $96.1 million in the 1999
thirty-nine week period. As a percentage of net sales, gross profit decreased
from 12.3% in the 1998 thirty-nine weeks to 11.7% in the 1999 period primarily
due to the effect of lower margins at Sweetheart compared to Fonda in the first
twenty-six weeks of the current fiscal year. Such results were partially offset
by improved Sweetheart results in the 1999 thirteen week period.
Sweetheart results- Gross profit increased $43.4 million to 10.6% of net
sales for the thirty-nine weeks ended June 27, 1999 from 8.3% for the nine
months ended June 30, 1998. The consolidation of Sweetheart resulted in an
increase in gross profit of $30.1 million. The additional $13.3 million
improvement is attributable to a shift in sales mix to more profitable products
and the cost reduction initiatives implemented by Sweetheart in the latter part
of the 1998 fiscal year which has resulted in improved manufacturing
efficiencies.
Fonda results- Gross profit decreased $6.7 million from 17.8% of net sales
in the 1998 Fonda Thirty-nine Week Period to 15.0% in the 1999 Fonda Thirty-nine
Week Period. The 1998 period included $1.2 million from Fonda's tissue mill
operations. Gross margins in the 1999 Thirty-nine Week Period were adversely
affected by reduced selling prices of consumer products, described above, margin
erosion in commodity paperboard products, as well as excess costs incurred in
implementing the Efficiency Initiatives. Gross margins are expected to improve
in future periods upon full implementation of the Efficiency Initiatives, and as
a result of recent price increases in various product lines, however, there can
be no assurance that such improvements will occur.
Selling, general and administrative expenses increased $27.7 million to
$48.9 million in the 1999 thirty-nine week period. An increase of $29.5 million
of such expenses resulted from the consolidation of Sweetheart. As a percentage
of net sales, selling, general and administrative expenses decreased from 9.3%
in the 1998 thirty-nine week period to 8.8% in the 1999 thirty-nine week period.
The decrease as a percentage of net sales was partially due to the effects of
consolidating Sweetheart, for which selling, general and administrative costs as
a percentage of net sales are historically lower than at Fonda due to economies
of scale. In addition, the percentage reduction was also impacted at Fonda by
the reduction in selling and marketing costs due to the License Agreement, as
well as the closure of an administrative office.
Other income in the 1998 thirty-nine week period includes a $15.9 million
pre-tax gain from the sale of Fonda's tissue mill operations and the July 1998
settlement of a steam contract related to such operations. The gain was
partially offset by $2.1 million of charges at Sweetheart resulting from the
acquisition.
Income from operations was $23.8 million in the 1999 thirty-nine week
period and $26.4 million in the 1998 thirty-nine week period as a result of the
above.
Interest expense, net of interest income was $49.2 million in the 1999
thirty-nine week period and $26.4 million in the 1998 thirty-nine week period.
The increase was primarily due to the consolidation of Sweetheart and the
related financing thereof. In addition since April 1, 1999, a $.5 million
increase in interest on the Senior Secured Discount Notes and a $.2 million
increase at Fonda due to an increase in outstanding debt, were partially offset
by a reduction at Sweetheart. The improvement at Sweetheart was due to lower
outstanding debt and lower interest rates.
The income tax benefit was $9.2 million in the 1999 thirteen week period
and a provision of $1.4 million in the 1998 thirteen week period. Both the 1999
and 1998 periods reflect certain non-deductible costs relating to the investment
in Sweetheart and the related financing. The effective tax rate is affected by
such non-deductible costs as
11
<PAGE>
well as the proportionate results of both Fonda and Sweetheart. As a result of
the above and the addback of minority interest representing 10% of Sweetheart's
historical loss, the net loss was $15.3 million in the 1999 thirty-nine week
period compared to net income of $.5 million in the 1998 thirty-nine week
period.
Liquidity and Capital Resources
Historically, the Company's subsidiaries have relied on cash flow from
operations and borrowings to finance their respective working capital
requirements, capital expenditures and acquisitions. In addition, Sweetheart has
been funding a majority of its capital expenditures from the sale of assets.
Net cash provided by operating activities in the 1999 thirty-nine week
period was $28.1 million compared to $9.2 million in the 1998 thirty-nine week
period. Sweetheart provided $32.3 million in the 1999 period compared to $1.8
million in the 1998 period primarily due to the improved operating performance,
and a reduction in cash expended on non-recurring charges realized in the 1998
nine month period. Fonda used $4.3 million of cash from operating activities in
the 1999 period compared to $8.4 million provided by such activities in the 1998
period. The reduction in cash provided by operations is primarily due to the
build-up in amounts due from affiliates resulting from the implementation of the
CEG Agreements, and to a lesser extent, lower earnings. In March 1999, CEG's
second largest customer, representing over 10% of CEG's net sales during its
1998 fiscal year, filed a Chapter 11 bankruptcy petition. Based on information
provided by CEG, Fonda has no reason to believe that the foregoing will have a
material adverse effect on its results of operations or financial condition.
However, no assurance can be given regarding the ultimate effect, if any, on
Fonda, and it will continue to monitor the adequacy of its affiliate reserve.
Capital expenditures were $35.2 million, including $12.1million at
Sweetheart for new production equipment, $5.3 million at Sweetheart relating to
its Canadian operations and $9.7 million at Fonda for converting equipment
primarily associated with its Efficiency Initiatives. See Note 4 of Notes to
Financial Statements. The remainder of capital expenditures was primarily for
routine capital improvements.
None of SF Holdings, Fonda or Sweetheart anticipates any material capital
expenditures in the next twelve months other than those funded through asset
sales and available cash from the respective subsidiaries. SF Holdings is a
holding company and does not anticipate any material cash needs in the next
twelve months. As of June 27, 1999, dividends on the Exchangeable Preferred have
been paid by the issuance of additional shares of Exchangeable Preferred.
Fonda's revolving credit facility, as amended, provides up to $50 million
borrowing capacity, is collateralized by accounts receivable and inventories,
certain general intangibles and the proceeds on the sale of accounts receivable
and inventory. The maturity date of such facility has been extended to September
1, 2001. At June 27, 1999, there was $7.9 million outstanding and $35.0 million
was the maximum advance available based upon eligible collateral.
Sweetheart's revolving credit facility, as amended, provides for
borrowings in an amount of up to $135.0 million, subject to borrowing base
limitations (the "Sweetheart U.S. Credit Facility"). As of June 27, 1999, $27.8
million is available. Borrowings under the Sweetheart U.S. Credit Facility bear
interest, at Sweetheart's election, at a rate equal to LIBOR plus 2.25%, or a
bank's base rate plus 1.00%. A Canadian subsidiary of Sweetheart has a term loan
and revolving credit facility agreement which provides for a term loan facility
of up to Cdn $10.0 million and a revolving credit facility of up to Cdn $10.0
million (the "Sweetheart Canadian Credit Facility and with the Sweetheart U.S.
Credit Facility, the "Sweetheart Credit Facilities"). As of June 27, 1999, Cdn
$2.2 million (approximately $1.5 million) was available under such facility.
Borrowings under the Sweetheart Canadian Credit Facility bear interest at an
index rate plus 2.25% with respect to the revolving credit borrowings, and an
index rate plus 2.50% with respect to the term loan borrowings.
Sweetheart's Senior Secured Notes and its U.S. Credit Facility mature in
September 2000, and August 2000, respectively. Although the Company intends to
refinance this debt, there can be no assurance that it will be able to obtain
such refinancing on acceptable terms and conditions.
Fonda has reinvested in equipment, amounts in excess of $10 million from
the sale of the tissue mill, within the required time period, in accordance with
the asset sale covenant under the indenture governing Fonda's senior debt.
12
<PAGE>
During the 1999 thirty-nine week period, the Company did not incur
material costs for compliance with environmental law and regulations.
In January 1999, the United States Supreme Court denied Plaintiffs'
petition for Writ of Certiorari in the matter of Aldridge v. Lily-Tulip, Inc.
Salary Retirement Plan Benefits Committee and Fort Howard Cup Corporation. The
court has decided that the Lily-Tulip Salary Retirement Plan (the "Plan") was
lawfully terminated. Sweetheart is in the process of determining the amount of
total payouts for which the Plan is liable. The estimate of the total
termination liability exceeds assets set aside in the Plan by approximately $17
million, which amount has been fully reserved by Sweetheart. Sweetheart expects
to fund such payments within the next three months. On April 27, 1999, the
Plaintiffs filed a motion in the United States District Court for
reconsideration of the court's dismissal without appropriate relief, and a
motion for attorneys' fees with a request for delay in determination of
entitlement of such fees. On June 17, 1999, the Court deferred these motions,
and ordered discovery in connection therewith. Discovery is expected to be
completed by the end of October 1999. Sweetheart's operating plan contemplates
that cash generated by operations and amounts available under its credit
facilities will be sufficient to make the required payments under the Plan when
due. However, there can be no assurance that Sweetheart will achieve its
operating plan and have the necessary cash to make these payments. Failure by
Sweetheart to make such payments could have a material adverse effect on the
Company and its financial condition.
The Company believes that cash generated by each of Fonda's and
Sweetheart's operations, combined with amounts available under its respective
credit facilities as well as funds generated by asset sales by Sweetheart should
be sufficient to fund each of Fonda's and Sweetheart's respective capital
expenditures needs, debt service requirements and working capital needs,
including Sweetheart's termination liabilities under the Plan, for the
foreseeable future.
Year 2000
Many of Sweetheart's and Fonda's computer systems may be unable to process
dates beyond December 31, 1999. This could result in system failures or
miscalculations which could have a material adverse effect on the Company's
business, financial condition or results of operations. Each of Sweetheart and
Fonda has implemented a Year 2000 compliance program intended to identify the
programs and infrastructures that could be effected by Year 2000 issues and
resolve the problems that were identified on a timely basis.
Fonda has completed the assessment phase, in which it has identified
potential Year 2000 issues, including those with respect to information
technology systems, technology embedded within equipment Fonda uses as well as
equipment that interfaces with vendors and other third parties. Fonda has also
completed the upgrade of its hardware and software systems which run most of its
data processing and financial reporting software applications and has
consolidated certain of its in-house developed computer systems into the
upgraded systems. In addition, Fonda has upgraded its telephone, data
communication and network systems to ensure that they are Year 2000 compliant.
Embedded logic in manufacturing equipment is all being tested and upgraded.
Contingency plans are bing developed for equipment that cannot be upgraded. The
embedded logic project is expected to be completed by October 1999. EDI trading
partners and other key business partners have been contacted to ensure that key
business transactions will be Year 2000 compliant. As of August 1, 1999, Fonda
has received detailed business plans and commitments from a majority of these
parties that they are or will be Year 2000 compliant. Contingency plans are
being developed to work with trading partners or to replace suppliers who cannot
meet Fonda's compliance deadlines.
Sweetheart has completed the assessment phase, in which it has identified
potential Year 2000 issues with respect to information technology systems, as
well as equipment that interfaces with vendors and third parties, and developed
a compliance project for its hardware, operating systems and application
systems. Sweetheart has completed its hardware and operating systems conversion.
With respect to the application phase, Sweetheart is compliant in its planning,
order management, manufacturing and warehousing systems. Financial, corporate
and in-house developed systems are scheduled for compliance by August 1999.
Sweetheart has completed its internal assessment phase for technology embedded
within equipment and is awaiting responses from certain vendors. Sweetheart
believes a significant portion of its manufacturing equipment is not affected by
Year 2000 issues due to its operations use, or was compliant when purchased.
Sweetheart has or is in the process of contacting key vendors and business
partners, to ensure that key business transactions will be Year 2000 compliant.
As of July 27, 1999, Sweetheart has received detailed business plans and
commitments from the majority of these vendors that they are or will be Year
2000 compliant.
13
<PAGE>
The Company expects that Fonda and Sweetheart's respective business
systems will be Year 2000 compliant, but they may experience isolated incidences
of non-compliance and potential outages with respect to their respective
information technology infrastructure. Each of Fonda and Sweetheart plan to
allocate internal resources to be ready to take action should these events
occur. Investors are cautioned, however, that the Company's assessment of their
compliance, of the costs of performing the program and the risks attendant
thereto, and of the need for any contingency plans may change materially in the
future as each company proceeds further with their compliance programs.
As of August 1, 1999, Sweetheart and Fonda estimate the total cost of
their respective Year 2000 program at $2.7 million and $3.2 million,
respectively. Sweetheart has spent $2.5 million as of June 27, 1999, including
$1.3 million in the thirty-nine weeks ended June 27, 1999. Fonda has spent
$2.7 million as of June 27, 1999, including $1.5 million in the 1999
thirty-nine weeks. Expenditures have been, and are expected to be, funded from
cash flows from the respective company's operations, available cash, borrowings
under each company's respective credit facility, or by lease. However, there can
be no assurance that Sweetheart or Fonda will identify all Year 2000 issues in
their computer systems in advance of their occurrence or that they will be able
to successfully remedy all problems that are discovered. Failure by Sweetheart
or Fonda and/or their significant vendors and customers to complete Year 2000
compliance programs in a timely manner could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the revenue stream and financial stability of existing customers may
be adversely impacted by Year 2000 problems which could cause fluctuations in
the Company's revenues and operating profitability.
Net Operating Loss Carryforwards
As of September 27, 1998, Sweetheart had approximately $202 million of net
operating loss carryforwards ("NOLs") which expire at various dates through
2018. Although the Company expects that sufficient taxable income will be
generated in the future to realize these NOLs, there can be no assurance future
taxable income will be generated to utilize such NOLs.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) No reports on Form 8-K were filed in the thirteen weeks ended June 27, 1999.
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, thereto duly authorized.
Date: August 11, 1999
SF HOLDINGS GROUP, INC.
By: /s/ HANS H. HEINSEN
---------------------
Hans H. Heinsen
Senior Vice President, Chief Financial
Officer and Treasurer (Principal Financial
And Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Form 10-Q
for the thirty-nine week Period ended June 27, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001059697
<NAME> SF HOLDINGS GROUP, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> JUN-27-1999
<CASH> 2,859
<SECURITIES> 0
<RECEIVABLES> 129,411
<ALLOWANCES> 2,537
<INVENTORY> 172,117
<CURRENT-ASSETS> 349,240
<PP&E> 481,079
<DEPRECIATION> 76,035
<TOTAL-ASSETS> 921,650
<CURRENT-LIABILITIES> 189,128
<BONDS> 625,964
35,030
15,000
<COMMON> 2,205
<OTHER-SE> (17,598)
<TOTAL-LIABILITY-AND-EQUITY> 921,650
<SALES> 824,326
<TOTAL-REVENUES> 824,326
<CGS> 728,256
<TOTAL-COSTS> 728,256
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 305
<INTEREST-EXPENSE> 49,902
<INCOME-PRETAX> (25,380)
<INCOME-TAX> (9,227)
<INCOME-CONTINUING> (15,339)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,339)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
