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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X|Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended September 24, 2000
|_|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 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 No.)
373 Park Avenue South, New York, New York 10016
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 212/779-7448
Securities of the Registrant registered pursuant to Section 12(b)of the Act:None
Securities of the Registrant registered pursuant to Section 12(g)of the Act:None
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant as of December 21, 2000. Not Applicable. There
is no market for the Common Stock of the Registrant.
The number of shares outstanding of the Registrant's common stock
as of December 21, 2000:
SF Holdings Group, Inc. Class A Common Stock, $0.001 par value - 562,583 shares
SF Holdings Group, Inc. Class B Common Stock, $0.001 par value - 56,459 shares
SF Holdings Group, Inc. Class C Common Stock, $0.001 par value - 39,900 shares
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<PAGE>
PART I
Item 1. BUSINESS
General
SF Holdings Group, Inc. ("SF Holdings" and with its subsidiaries, the
"Company") believes it is one of the largest producers and marketers of
disposable foodservice and food packaging products in North America with net
sales of approximately $1.3 billion in Fiscal 2000. The Company sells a broad
line of disposable paper, plastic and foam foodservice and food packaging
products at all major price points under both branded and private labels to
institutional foodservice and consumer foodservice customers, including large
national accounts. The Company conducts its business through two principal
operating subsidiaries, Sweetheart Holdings Inc. ("Sweetheart") and The Fonda
Group, Inc. ("Fonda"), and markets its products under its well recognized
Sweetheart(R), Trophy(R), Sensations(R), Hoffmaster(R) and Lily(R) brands.
The Company's product offerings cover a broad range within the
industry, including (i) paper, plastic and foam foodservice products, primarily
cups, lids, plates, bowls, plastic cutlery and food containers; (ii) tissue and
specialty foodservice products, primarily napkins, table covers and placemats;
and (iii) food packaging products, primarily containers for the dairy and food
processing industries. In addition, the Company designs, manufactures and leases
container filling equipment for use by dairies and other food processors. This
equipment is specifically designed by Sweetheart to fill and seal its containers
in customers' plants. During the third quarter of Fiscal 2000, Sweetheart
acquired Sherwood Industries, Inc. ("Sherwood") which designs and produces cup
making equipment, paper cups and other disposable food service products.
The Company sells its products to institutional foodservice and
consumer foodservice customers, including large national accounts, located
throughout the United States and Canada. The Company has developed and
maintained long-term relationships with many of its customers. The Company's
institutional foodservice customers, serviced by Sweetheart and Fonda, include
(i) major foodservice distributors, (ii) national accounts, including quick
service restaurants and catering services, and (iii) schools, hospitals and
other major institutions. The Company's consumer foodservice customers, serviced
primarily by Fonda, include supermarkets, mass merchandisers, warehouse clubs,
party good stores and other retailers. The Company's food packaging customers,
serviced by Sweetheart, include national and regional dairy and food companies.
SF Holdings was formed in December 1997 as a holding company to
facilitate the acquisition by SF Holdings of 90% of the total outstanding common
stock of Sweetheart, including 48% of the voting stock of Sweetheart (the
"Sweetheart Investment"). On March 12, 1998, the Company consummated the
Sweetheart Investment and acquired all of the outstanding capital stock of Fonda
pursuant to a merger (the "Merger") whereby the stockholders of Fonda became the
stockholders of the Company and Fonda became a wholly owned subsidiary of the
Company.
On December 3, 1999, Creative Expressions Group, Inc. ("CEG"), an
affiliate of the Company in the disposable party goods products business, became
an 87% owned subsidiary of SF Holdings pursuant to a merger. The transaction has
been accounted for in a manner similar to a pooling-of-interests. The
accompanying consolidated financial statements have been restated for all
periods presented to include the balance sheet and results of operations of CEG.
2
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Products
The Company has historically sold its products to three principal
customer groups, institutional foodservice, consumer foodservice and food
packaging. Institutional foodservice customers primarily purchase disposable hot
and cold drink cups, lids, food containers, plates, bowls, cutlery, napkins,
tablecovers, placemats, straws and other specialty products. Products are sold
directly and through distributors to quick service restaurant chains, full
service restaurants, convenience stores, hospitals, airlines, theaters, school
systems and other institutional customers. The Company sells disposable hot and
cold drink cups, lids, plates, bowls, cutlery, napkins, tablecovers, placemats
and other specialty disposable products, including specialty party goods, to
consumer foodservice customers primarily through supermarkets, mass merchants,
warehouse clubs, discount chains, party goods stores and other retail outlets.
Food packaging customers primarily purchase paper and plastic containers for the
dairy and food processing industries. Food packaging customers also lease
filling and packaging machines from Sweetheart designed and manufactured by
Sweetheart that fill and seal the containers in customers' plants. Sweetheart
also manufactures and markets its products in Canada to national accounts and
distributors.
Marketing and Sales
Sweetheart's institutional and consumer foodservice products are
primarily sold to national accounts and through distributors to other end-users.
Food packaging customers include national and regional dairies and food
companies. Consumer products are sold to grocery, convenience and club stores.
Sweetheart focuses its marketing efforts on both the distributor and the
end-user customer. Sweetheart tailors programs, consisting of products, price,
promotional and merchandising materials, training and sales/marketing coverage
to effectively meet the specific needs of target customers and markets.
Sweetheart sells these programs through both a direct sales organization and
brokers. Sweetheart supports this process through the development of innovative
new products, materials and processes, while leveraging its strong brand
recognition and national network of manufacturing and distribution centers.
Fonda's marketing efforts are focused on (i) providing value-added
products and services, (ii) cross-marketing products, designs or services
between both institutional foodservice and consumer foodservice customers, (iii)
developing new products that enhance the value of the bundle for the customer,
(iv) developing new designs which capitalize on future trends, color palettes,
and imagery and (v) increasing brand awareness through enhanced packaging and
promotion. Fonda sells its products through an internal sales force and
independent brokers. Fonda sells to both institutional foodservice customers
which include restaurants, hotels, airlines, hospitals, and other non-retail
foodservice institutions and consumer foodservice customers which include
supermarkets, mass merchants, drug stores, warehouse clubs, specialty party, and
other retail stores.
Production
The Company's plants operate on a variety of manufacturing schedules.
Paper operations generally run five days per week at 24 hours per day, with
Saturday scheduled as an overtime day when needed to meet customer demand.
Plastic operations generally run seven days per week at 24 hours per day. Due to
customer demand, the Company's overall plant utilization historically is
substantially higher during late spring and summer than during fall and winter
with the tissue plants at their highest utilization during the fall season. See
"Item 2. Properties".
Raw Materials and Suppliers
Raw materials are critical components of the Company's cost structure.
Principal raw materials for the Company's paper and tissue operations include
solid bleached sulfate paperboard, bond paper, wax bond paper and napkin tissue
obtained directly from major North American manufacturers. Other material
components include wax, adhesives, coatings, corrugated boxes, poly bags, and
inks. Paperboard, napkin tissue, bond paper and waxed bond paper are purchased
in "jumbo" rolls and then printed and converted into smaller rolls or blanks
3
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for processing into final products. The principal raw material for the Company's
plastic operations is plastic resin (polystyrene, polypropylene and high and low
density polyethylene) purchased directly from major petrochemical companies and
other resin suppliers. Resin is processed and formed into cups, cutlery, meal
service products, straws, lids and containers. The Company manufactures foam
products by extruding sheets of plastic foam material that are converted into
cups and plates.
The Company has a number of suppliers for substantially all of its raw
materials and believes that current sources of supply for its raw materials are
adequate to meet its requirements.
Competition
All of the markets in which the Company sells its products are
extremely competitive. Because of the low barriers to entry for new competitors,
the level of competition has been and may continue to be intense as new entrants
attempt to gain market share. The Company's competitors include large
multinational companies as well as regional manufacturers, some of whom have
greater financial and other resources than the Company. The marketplace for the
Company's products is fragmented and includes competitors who compete across the
full line of the Company's products, as well as those who compete against a
limited number of the Company's products. A few of the Company's competitors are
also vertically integrated into the production of paper or plastic raw materials
and have greater access to financial and other resources.
Sweetheart's primary competitors in its institutional and consumer
foodservice customer base include Dart Container Corporation, Dixie Foodservice
(a division of Georgia Pacific Corp.), Solo Cup Co., International Paper Food
Service Group and Pactiv. Major competitors in its food packaging customer base
include Berry Plastics, Inc., Landis Plastics, Inc., Interbake Foods Inc.,
Polytainer, Ltd. and Sealright Co., Inc.
Fonda's primary competitors include Imperial Bondware (a division of
International Paper Co.), Dixie Foodservice (a division of Georgia Pacific
Corp.), AJM Packaging Corp., Temple-Inland Inc., Fold-Pak Corp., Solo Cup Co.,
Duni Corp., Erving Paper Products Inc., Fort James Corp. and Wisconsin Tissue
Mills Inc. (a subsidiary of Georgia-Pacific Corp.).
Customers
The Company markets its products primarily to customers in the United
States. During Fiscal 2000, sales to Sweetheart's customers in Canada
constituted approximately 7.1% of its net sales. During Fiscal 2000, sales to
Sweetheart's five largest customers represented approximately 35.2% of its net
sales. One national customer of Sweetheart accounted for 11.1% of its net sales
in Fiscal 2000. During Fiscal 2000, sales to the Fonda's five largest customers
represented approximately 21.7% of its net sales. The loss of one or more large
national customers could adversely affect the Company's operating results. The
Company believes it has strong relationships with its major national accounts,
which have been developed over many years.
Environmental Matters
The Company and its operations are subject to comprehensive and
frequently changing federal, state, foreign and local environmental and
occupational health and safety laws and regulations, including laws and
regulations governing emissions of air pollutants, discharge of waste and storm
water and the disposal of hazardous wastes. The Company is subject to liability
for the investigation and remediation of environmental contamination (including
contamination caused by other parties) at properties that it owns or operates
and at other properties where the Company or its predecessors have arranged for
the disposal of hazardous substances. As a result, the Company is involved from
time to time in administrative and judicial proceedings and inquiries relating
to environmental matters. The Company believes that, except as noted below,
there are currently no material pending investigations at the Company's plants
and sites relating to environmental matters. However, there can be no assurance
that the Company will not be involved in any such proceeding in the future and
that any amount of future clean up costs and other environmental liabilities
will not be material.
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The Company cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions
may be found to exist. Enactment of more stringent laws or regulations or a more
strict interpretation of existing laws and regulations may require additional
expenditures by the Company, some of which could be material.
The Clean Air Act mandates the phase out of certain refrigerant
compounds, which will require the Company to upgrade or retrofit air
conditioning and chilling systems during the next few years. Sweetheart has
decided to replace units as they become inefficient or unserviceable.
Some of the Company's facilities contain asbestos. Although there is no
current legal requirement to remove such asbestos, the Company has an ongoing
monitoring and maintenance program to maintain and/or remove such asbestos as
appropriate to prevent the release of friable asbestos. The Company does not
believe the costs associated with such program will be material to its business
or financial condition.
On July 13, 1999, the Sweetheart received a letter from the
Environmental Protection Agency ("EPA") identifying Sweetheart, among numerous
others, as a "potential responsible party" under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), at a
site in Baltimore, Maryland. The EPA letter states that it does not constitute a
final determination by the EPA concerning the liability of Sweetheart or any
other entity. On December 20, 1999, Sweetheart received an information request
letter from the EPA, pursuant to CERCLA, regarding a Container Recycling
Superfund Site in Kansas City, Kansas. Sweetheart denies liability and has no
reason to believe the final outcomes will have a material effect on the
Company's financial condition or results of operations. However, no assurance
can be given about the ultimate effect on the Company, if any, given the early
stage of the investigations.
Technology and Research
Sweetheart maintains a facility for the development of new products and
product line extensions in Owings Mills, Maryland and a facility for machinery
design in Kensington, Connecticut. Sweetheart maintains a staff of engineers and
technicians who are responsible for product quality, process control,
improvement of existing products, development of new products, equipment, and
processes and technical assistance in adhering to environmental rules and
regulations. Sweetheart strives to expand its proprietary manufacturing
technology, further automate its manufacturing operations and develop improved
manufacturing processes, equipment, and products.
Fonda tests new product concepts at its facilities located in Oshkosh,
Wisconsin; Appleton, Wisconsin and St. Albans, Vermont. Fonda's management,
supervisors and experienced operators are responsible for plant safety, product
quality, process control, improvement of existing products, development of new
products and processes and technical assistance in adhering to environmental
rules and regulations. Fonda focuses on improving upon safety and performance,
further automating its manufacturing operations and developing improved
manufacturing processes and product designs.
Employees
At September 24, 2000, Sweetheart employed approximately 6,384 persons,
of whom approximately 5,385 persons were hourly employees. Approximately 93.3%
of the employees are located at facilities in the United States. Sweetheart
currently has collective bargaining agreements in effect at its facilities in
Springfield, Missouri; Augusta, Georgia; Kensington, Connecticut; and Toronto,
Canada (collectively, the "Sweetheart CBAs"). The Sweetheart CBAs cover all
production, maintenance and distribution hourly-paid employees at each
respective facility and contain standard provisions relating to, among other
things, management rights, grievance, procedures, strikes and lockouts,
seniority and union rights. As of September 24, 2000, approximately 24.7% of the
hourly employees were covered by the Sweetheart CBAs. The current expiration
dates of the Springfield, Augusta, Kensington and Toronto CBAs are March 4,
2001, October 31, 2002, September 30, 2001 and
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November 30, 2003, respectively.
At September 24, 2000, Fonda employed approximately 1,805 persons, of
whom approximately 1,320 were hourly employees. Fonda has collective bargaining
agreements in effect at its facilities in Appleton, Wisconsin; Oshkosh,
Wisconsin; St. Albans, Vermont; Indianapolis, Indiana; Williamsburg,
Pennsylvania; and Maspeth, New York which cover all production, maintenance and
distribution hourly-paid employees at each respective facility and contain
standard provisions relating to, among other things, management rights,
grievance procedures, strikes and lockouts, seniority, and union rights
(collectively, the "Fonda CBAs"). The current expiration dates of the Fonda CBAs
at the Appleton, Oshkosh, St. Albans, Indianapolis, Williamsburg and Maspeth
facilities are May 1, 2002, May 31, 2002, January 31, 2001, December 1, 2001,
June 11, 2004 and October 31, 2001, respectively.
The Company considers its relationship with its employees to be good.
Item 2. PROPERTIES
The Company has manufacturing and distribution facilities located
throughout the United States and Canada. All of the Company's facilities are
well maintained, in good operating condition and suitable for the Company's
operations. The table below provides summary information regarding the
properties owned or leased by the Company.
<TABLE>
<CAPTION>
Size
Type of Owned/ (Approximate
Location Facility (1) Leased square feet)
-------- ------------ ------ ------------
<S> <C> <C> <C>
Sweetheart Facilities:
Augusta, Georgia.............................. M/W O 339,000
Conyers, Georgia (2 facilities)............. M/W O 350,000
W O 555,000
Chicago, Illinois (2 facilities)............ M/W O 902,000
W L 741,000
Dallas, Texas .............................. M/W O 1,316,000
Hampstead, Maryland.......................... W L 1,034,000
Kensington, Connecticut (4 facilities)........ M/W L 96,000
M/W L 112,000
W L 40,000
W L 30,000
Lafayette, Georgia.............................. M/W L 147,000
Manchester, New Hampshire................... M/W O 160,000
North Las Vegas, Nevada (2 facilities)...... M/W L 195,100
W L 58,450
Ontario, California......................... W L 396,000
Owings Mills, Maryland (2 facilities)....... M/W O 1,533,000
M/W O 267,000
Somerville, Massachusetts................... M/W O 193,000
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Size
Type of Owned/ (Approximate
Location Facility (1) Leased square feet)
-------- ------------ ------ ------------
<S> <C> <C> <C>
Springfield, Missouri (2 facilities)........ M/W O 925,000
W L 415,000
Wilmington, Massachusetts................... W L 119,000
Scarborough, Ontario, Canada ............... M/W O 400,000
Fonda Facilities:
Appleton, Wisconsin ........................ M/W O 267,700
Glens Falls, New York....................... M/W O 59,100
Goshen, Indiana............................. M/W O 63,000
Indianapolis, Indiana....................... W L 725,000
Lakeland, Florida........................... M/W L 45,000
Maspeth, New York........................... M/W L(2) 130,000
Oshkosh, Wisconsin.......................... M/W O 484,000
St. Albans, Vermont (2 facilities).......... M O 124,900
W L 182,000
Williamsburg, Pennsylvania.................. M/W O(3) 146,000
</TABLE>
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(1) M-Manufacturing; W-Warehouse; M/W-Manufacturing and Warehouse in same
facility.
(2) Lease expired November 30, 2000 and was not renewed. Equipment was moved
to other facilities.
(3) Subject to capital lease. (See Note 17 of the Notes to Consolidated
Financial Statements)
Fonda also occupies several retail and storage facilities located
throughout Indiana and Pennsylvania in connection with its party goods consumer
business. These facilities are comprised of outlet stores and local storage
facilities maintained for marketing purposes.
Item 3. LEGAL PROCEEDINGS
Aldridge. A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary
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Retirement Plan Benefits Committee and Fort Howard Cup Corporation, Civil Action
No. CV 187-084, was initially filed in state court in Georgia in April 1987 and
is currently pending in federal court. The remaining plaintiffs claimed, among
other things, that Sweetheart wrongfully terminated the Lily-Tulip, Inc. Salary
Retirement Plan (the "Plan") in violation of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). The relief sought by plaintiffs was
to have the plan termination declared ineffective. In December 1994, the United
States Court of Appeals for the Eleventh Circuit (the "Circuit Court") ruled
that the Plan was lawfully terminated on December 31, 1986. Following that
decision, the plaintiffs sought a rehearing which was denied, and subsequently
filed a petition for a writ of certiorari with the United States Supreme Court,
which was also denied. Following remand, in March 1996, the United States
District Court for the Southern District of Georgia (the "District Court")
entered a judgment in favor of Sweetheart. Following denial of a motion for
reconsideration, the plaintiffs, in April 1997, filed an appeal with the Circuit
Court. On May 21, 1998, the Circuit Court affirmed the judgment entered in favor
of Sweetheart. On June 10, 1998, the plaintiffs petitioned the Circuit Court for
a
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rehearing of their appeal which petition was denied on July 29, 1998. In October
1998, plaintiffs filed a petition for writ of certiorari with the United States
Supreme Court, which was denied in January 1999. Sweetheart has been in the
process of paying out the termination liability and associated expenses and as
of December 21, 2000, has disbursed $12.3 million in termination payments. The
estimate of the total termination liability and associated expenses, less
payments to date, exceeds assets set aside in the Plan by approximately $8.0
million, which amount has been fully reserved by the Company.
On April 27, 1999, the plaintiffs filed a motion in the 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 to such fees. On June 17, 1999, the District Court deferred these
motions and ordered discovery in connection therewith. Discovery has been
completed and Sweetheart is awaiting further action by the plaintiffs. Due to
the complexity involved in connection with the claims asserted in this case, the
Company cannot determine at present with any certainty the amount of damages it
would be required to pay should the plaintiffs prevail; accordingly, there can
be no assurance that such amounts would not have a material adverse effect on
the Company's financial position or results of operations.
Fort James Corporation. 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., Civil
Action No. 97-C-1221, was filed in the United States District Court for the
Eastern District of Wisconsin on November 21, 1997. During the fourth quarter of
Fiscal 1999, mediation resulted in a settlement of this action whereby
Sweetheart agreed to pay damages of $2.6 million. As of June 29, 2000, all
payments in conjunction with this settlement had been paid.
Other. On July 13, 1999, Sweetheart received a letter from the EPA
-----
identifying Sweetheart, among numerous others, as a "potential responsible
party" under CERCLA, at a site in Baltimore, Maryland. The EPA letter states
that it does not constitute a final determination by EPA concerning the
liability of Sweetheart or any other entity. On December 20, 1999, Sweetheart
received an information request letter from the EPA, pursuant to CERCLA,
regarding a Container Recycling Superfund Site in Kansas City, Kansas.
Sweetheart denies liability and has no reason to believe the final outcomes will
have a material effect on the Company's financial condition or results of
operations. However, no assurance can be given about the ultimate effect on the
Company, if any, given the early stage of these investigations.
The Company is also involved in a number of legal proceedings arising
in the ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for SF Holdings' common
stock. SF Holding has never paid cash dividends on its common stock and does not
anticipate paying any cash dividends in the foreseeable future. SF Holdings'
indenture governing the $144.0 million aggregate principal amount at maturity of
12 3/4% Senior Secured Discount Notes due 2008 (the "Discount Notes") and the
instruments governing the indebtedness of Sweetheart and Fonda limit the payment
of dividends or other distributions to SF Holdings. SF Holdings currently
intends to retain future earnings to fund the development and growth of its
business.
As of December 21, 2000, there were four, one and two holders of SF
Holdings' Class A, Class B and Class C Common Stock, respectively.
Item 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
On December 3, 1999, Creative Expressions Group, Inc. ("CEG"), an
affiliate of the Company in the disposable party goods products business, became
an 87% owned subsidiary of SF Holdings pursuant to a merger. The transaction has
been accounted for in a manner similar to a pooling-of-interests. The
accompanying consolidated financial statements have been restated for all
periods presented to include the balance sheet and results of operations of CEG.
Set forth below are selected historical consolidated financial data of
the Company at the dates and for the fiscal years shown. The selected historical
consolidated financial data at September 24, 2000, September 26, 1999, September
27, 1998 and July 26, 1998 and for Fiscal 2000, 1999, 1998 and TP 1998 is
derived from historical consolidated financial statements of the Company and
subsidiaries for such periods that have been audited by Deloitte & Touche, LLP,
independent auditors and are included elsewhere herein. The selected historical
financial data at July 27, 1997 and July 28, 1996 and for Fiscal 1997 and 1996
is derived from the historical financial statements of Fonda, the predecessor to
the Company for such periods.
During Fiscal 2000, Sweetheart accelerated $0.5 million of amortization
for unamortized debt issuance costs related to the early retirement of debt.
These charges are shown as an extraordinary loss (net of $0.2 million of income
taxes) on the Consolidated Statements of Operations and Other Comprehensive
Income (Loss). In conjunction with the CEG Asset Purchase Agreement (the "Asset
Purchase Agreement"), CEG also retired its long-term debt. As a result, CEG
charged $0.9 million, or $0.5 million net of income tax benefit, to consolidated
results of operation as an extraordinary item. This amount represented the
unamortized deferred financing fees and other expenses pertaining to the CEG
debt. During the quarter ended December 31, 1997, Sweetheart recorded a $1.5
million expense as a cumulative effect of change in accounting principle (net of
$1.0 million of income taxes) relating to the implementation of EITF 97-13,
which requires companies to expense any previously capitalized reengineering
costs in connection with software installation.
9
<PAGE>
<TABLE>
<CAPTION>
Fiscal
------------------------------------------------------------------------------------
(In thousands) 2000 1999 TP 1998 (1) 1998 (2) 1997 (3) 1996
------------ ------------ -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales $ 1,276,888 $ 1,182,004 $ 275,652 $ 622,917 $ 317,018 $ 221,404
Cost of sales 1,090,799 1,023,135 246,587 528,148 238,287 172,635
------------ ------------ -------------- ------------- ------------ ------------
Gross profit 186,089 158,869 29,065 94,769 78,731 48,769
Selling, general and administrative 113,320 118,654 23,853 73,188 56,053 34,132
Restructuring charge (credit) 1,153 (512) - 3,895 - -
Other (income) expense, net (448) (307) (597) (14,734) (1,608) -
------------ ------------ -------------- ------------- ------------ ------------
Operating income 72,064 41,034 5,809 32,420 24,286 14,637
Interest expense, net 65,312 70,173 15,135 32,999 11,140 8,452
------------ ------------ -------------- ------------- ------------ ------------
Income (loss) before taxes, minority
interest and extraordinary loss 6,752 (29,139) (9,326) (579) 13,146 6,185
Income tax (benefit) expense 4,114 ( 9,561) (4,370) 1,245 5,491 2,609
Minority interest 1,649 (897) (497) (2,085) - -
Extraordinary loss, net of tax 843 - - - 3,495 -
------------ ------------ -------------- ------------ ------------ ------------
Net income (loss) $ 146 $ (18,681) $ (4,459) $ 261 $ 4,160 $ 3,576
============ ============ ============== ============= ============ ============
Balance Sheet Data (at end of period):
Property, plant and equipment, net $ 263,368 $ 387,309 $ 423,117 $ 434,815 $ 59,261 $ 46,350
Total assets 881,129 937,210 972,581 988,566 212,546 172,904
Long-term debt (4) 434,967 380,706 673,984 663,611 122,368 81,740
Exchangeable preferred stock 41,794 36,291 31,444 30,680 - -
Preferred Stock B, Series 2 15,000 - - - - -
Minority interest in subsidiary 3,169 1,520 2,417 2,914 - -
Redeemable common stock 2,286 2,217 2,150 2,139 - -
Shareholders' equity (deficit) (41,964) (21,367) (299) 7,673 18,166 14,208
</TABLE>
(1) The 1998 Transition Period ("TP 1998") is the nine weeks ending
September 27, 1998.
(2) Fiscal 1998 includes a $15.9 million gain on the sale of substantially all
of the fixed assets and certain related working capital (the "Mill
Disposition") of its tissue mill in Gouverneur, New York (the "Mill") and
settlement in connection with the termination by the owner of the
co-generation facility formerly hosted by Fonda at the Mill of its
obligation, among other things, to supply steam to the Mill (the "Steam
Contract").
(3) Fonda incurred a $3.5 million extraordinary loss (net of a $2.5 million
income tax benefit) in connection with the early retirement of debt
consisting of the write-off of unamortized debt issuance costs,
elimination of unamortized debt discount and prepayment penalties.
(4) See Note 10 of the Notes to Consolidated Financial Statements
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Forward-looking statements in this filing, including those in the Notes
to Consolidated Financial Statements, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties and actual
results could differ materially. Such risks and uncertainties include, but are
not limited to, general economic and business conditions, competitive market
pricing, increases in raw material costs, energy costs and other manufacturing
costs, fluctuations in demand for the Company's products, potential equipment
malfunctions and pending litigation.
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General
SF Holdings was formed in December 1997 as a holding company to
facilitate the Sweetheart Investment. The Company conducts all of its operations
through its principal operating subsidiaries, Sweetheart and Fonda, and
therefore has no significant cash flows or operations independent of such
subsidiaries. The following discussion of results of operations for the fiscal
years ended July 26, 1998 and July 27, 1997 is based on the historical results
of operations of Fonda for those periods and the results of operations of
Sweetheart from March 12, 1998, the date of the consummation of the Sweetheart
Investment, to June 30, 1998. Since the Sweetheart Investment, which was
accounted for as a purchase, was consummated during the Company's third quarter
of Fiscal 1998, the financial information contained herein with respect to the
periods prior to the Sweetheart Investment does not reflect Sweetheart's results
of operations; thus, this financial information is not necessarily indicative of
the results of operations that would have been achieved had the Sweetheart
Investment been consummated by the Company at the beginning of the periods
presented herein or which may be achieved in the future.
On December 3, 1999, CEG, an affiliate of the Company in the disposable
party goods products business, became an 87% owned subsidiary of SF Holdings
pursuant to a merger. The transaction has been accounted for in a manner similar
to a pooling-of-interests. The accompanying consolidated financial statements
have been restated for all periods presented to include the balance sheet and
results of operations of CEG.
Sweetheart and Fonda are converters and marketers of disposable paper,
plastic and foam foodservice and food packaging products. The prices for each
subsidiary's raw materials fluctuate. When raw material prices decrease, selling
prices have historically decreased. The actual impact on each company from raw
materials price changes is affected by a number of factors including the level
of inventories at the time of a price change, the specific timing and frequency
of price changes, and the lead and lag time that generally accompanies the
implementation of both raw materials and subsequent selling price changes. In
the event that raw materials prices decrease over a period of several months,
each company may suffer margin erosion on the sale of such inventory.
Each of Fonda and Sweetheart's business is seasonal with a majority of
its net cash flow from operations realized during the last six months of the
fiscal year. Sales for such periods reflect the high seasonal demands of the
summer months when outdoor and away-from-home consumption increases. In the
event that Fonda's and/or Sweetheart's cash flow from operations is insufficient
to provide working capital necessary to fund their respective requirements,
Fonda and/or Sweetheart will need to borrow under their respective credit
facilities or seek other sources of capital. The Company believes that funds
available under such credit facilities together with cash generated from
operations, will be adequate to provide for each company's respective cash
requirements for the next twelve months.
Recent Developments
On September 25, 2000, pursuant to an asset purchase agreement dated
August 9, 2000 (the "Springprint Agreement"), Fonda purchased substantially all
of the property, plant and equipment, intangibles and net working capital of
Springprint Medallion, a division of Marcal Paper Mills, Inc. ("Springprint").
In addition, pursuant to the Springprint Agreement, Fonda agreed to assume the
liabilities and obligations of Springprint arising under contracts or leases
that are either assets purchased by the Company or a part of the accounts
payable. The aggregate purchase price for the assets and working capital was
$6.7 million, subject to post-closing adjustments.
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Change of Fiscal Year-end
In October 1998, the Company changed its fiscal year end to the last
Sunday in September. The following discussion compares the fiscal year ended
September 24, 2000 to the Fiscal year ended September 26, 1999 and the fiscal
year ended September 26, 1999 to the fiscal year ended July 26, 1998.
Fiscal 2000 Compared to Fiscal 1999
Net sales increased $94.9 million, or 8.0%, to $1.3 billion in Fiscal
2000 compared to $1.2 billion in Fiscal 1999. The following analysis includes
sales from Sweetheart to Fonda and sales from Fonda to Sweetheart which were
eliminated in consolidation.
Sweetheart results - Net sales increased $88.9 million, or 10.3%,
(including intercompany sales to Fonda of $16.7 million and $6.8 million for
Fiscal 2000 and Fiscal 1999, respectively) to $952.7 million in Fiscal 2000
compared to $863.8 million in Fiscal 1999 reflecting a 7.1% increase in sales
volume and a 2.9% increase in average sales prices to domestic customers. During
Fiscal 2000, Sweetheart experienced an increase in sales volume of those
products with higher average selling prices. The increase in average realized
sales price reflects a successful effort by Sweetheart to raise prices to
institutional foodservice customers and to sell a mix of units with higher
average selling prices. Sales volumes to institutional foodservice customers
increased 6.4% primarily as a result of Sweetheart's focus on revenue growth
with key customers. Sales volumes to food packaging customers increased 0.5%
while average realized sales price increased 1.3%, primarily as a result of
increased pricing resulting from raw material cost increases. Net sales to
Canadian customers increased $8.4 million, or 14.1%, primarily due to increased
sales volume of existing products to national accounts and the introduction of
several new products.
Fonda results - Net sales increased $22.7 million, or 6.9%, (including
intercompany to Sweetheart of $11.8 million and $4.3 million for Fiscal 2000 and
Fiscal 1999, respectively) to $352.0 million in Fiscal 2000, compared to $329.3
million in Fiscal 1999, reflecting an 11.6% increase in average realized sales
price partially offset by a 4.8% decrease in sales volume. Net sales to consumer
foodservice customers increased 5.6%, resulting from a 14.0% increase in average
realized sales price, partially offset by a decrease in sales volume of 8.4%.
Selling prices were positively affected by increases in raw material costs that
were passed through to customers as well as more competitive market conditions.
Net sales to institutional foodservice customers increased 8.8%, resulting from
a 3.6% increase in average realized sales price and a 5.2% increase in sales
volume. The increased sales volume to institutional foodservice customers was
primarily due to an increase in sales of value-added converted tissue products
and certain commodity paperboard products. The increase in average selling
prices primarily resulted from a more favorable sales mix.
Gross profit increased $27.2 million, or 17.1%, to $186.1 million in
Fiscal 2000 compared to $158.9 million in Fiscal 1999. As a percentage of net
sales, gross profit increased to 14.6% in Fiscal 2000 from 13.4% in Fiscal 1999.
Sweetheart results - Gross profit increased $18.8 million, or 18.8%, to
$118.8 million in Fiscal 2000 compared to $100.0 million in Fiscal 1999. As a
percentage of net sales, gross profit increased to 12.5% in Fiscal 2000 from
11.6% in Fiscal 1999. This improvement is attributable to a shift in sales
towards a more profitable product mix in combination with increased sales
volume, improved manufacturing efficiencies and higher average selling prices,
partially offset by increased raw material costs.
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Fonda results - Gross profit increased $8.3 million, or 14.0%, to $67.7
million in Fiscal 2000, compared to $59.4 million in Fiscal 1999. As a
percentage of net sales, gross profit increased from 18.0% in Fiscal 1999 to
19.2% in Fiscal 2000. Gross profit in Fiscal 2000 was positively affected by
margin enhancement in value-added tissue products as well as cost reductions
through manufacturing efficiencies.
Selling, general and administrative expenses decreased $5.4 million,
or 4.5%, to $113.3 million in Fiscal 2000 compared to $118.7 million in Fiscal
1999. As a percentage of net sales, selling, general and administrative expenses
decreased to 8.9% in Fiscal 2000 from 10.0% in Fiscal 1999. This decrease is due
primarily to lower spending in the areas of legal and outside consulting
services for Sweetheart. In Fiscal 1999 results of operations reflected an
increased bad debt write-off associated with bankruptcy filings by two of the
Fonda's top 25 customers. This decrease was supplemented by savings in Fiscal
2000 resulting from the consolidation of the CEG business.
Restructuring charge (credit) increased to a charge of $1.2 million
in Fiscal 2000 compared to a credit of $0.5 million in Fiscal 1999. During
Fiscal 2000, Sweetheart established a $0.5 million restructuring reserve in
conjunction with the planned elimination of Sweetheart's centralized machine
shop, primarily for severance and related costs in connection with workforce
reductions. Fonda incurred a restructuring expense of $0.7 million in Fiscal
2000 in connection with the November 2000 closing of the Maspeth, New York
facility which will result in the elimination of 130 positions by 2001. See Note
19 of the Notes to Consolidated Financial Statements.
Other (income) expense, net was $0.4 million of income in Fiscal 2000
compared to $0.3 million of income in Fiscal 1999. In Fiscal 2000, a $2.8
million gain was realized due to the amortization of the deferred gain in
conjunction with the sale-leaseback transaction, coupled with a $0.7 million
gain on the sale of a warehouse facility in Owings Mills, Maryland. These gains
were partially offset by a $0.7 million management fee to American Industrial
Partners Capital Fund, L.P. ("AIP"), an owner of Sweetheart, a $1.4 million
expense accrual in connection with the Aldridge liability, a one-time write-off
of a $1.0 million unsecured note receivable issued in connection with the Fiscal
1998 sale of the bakery business due to the bankruptcy of the borrower, and a
$0.2 million loss was incurred as a result of the sale of a building in St.
Albans, Vermont and various pieces of machinery and equipment.
Operating income increased $31.1 million to $72.1 million in Fiscal
2000 compared to $41.0 million in Fiscal 1999 due to the reasons described
above.
Interest expense, net decreased $4.9 million, or 7.0%, to $65.3 million
in Fiscal 2000 compared to $70.2 million in Fiscal 1999. This decrease is
attributable to lower interest rates on lower outstanding balances under the
Company's revolving credit facilities and the June 2000 redemption of the
Sweetheart Senior Secured Notes.
Income tax expense (benefit) increased $13.7 million to an expense of
$4.1 million in Fiscal 2000 compared to a benefit of $9.6 million in Fiscal
1999. The effective rate for Fiscal 2000 was 61% compared to 33% in 1999. Both
the 2000 and the 1999 effective tax rates reflect certain non-deductible costs
relating to the investment in Sweetheart, the related financing and the
proportionate results of both Fonda and Sweetheart.
Minority interest increased $2.5 million to an expense of $1.6 million
in Fiscal 2000 compared to a credit of $0.9 million in Fiscal 1999.
Extraordinary loss on the early extinguishment of debt was $0.8 million
net of the income tax benefit in Fiscal 2000 resulting from the redemption of
Sweetheart's Senior Secured Notes and CEG's long term debt ( See Note 10 in the
"Notes to Consolidated Financial Statements").
Net income (loss) increased $18.8 million, or 100.5%, to $0.1 million
income in Fiscal 2000 compared to $18.7 million loss in Fiscal 1999 due to the
reasons described above.
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Fiscal 1999 Compared to Fiscal 1998
Net sales increased $559.1 million, or 89.8%, to $1,182.0 million in
Fiscal 1999 compared to $622.9 million in Fiscal 1998 primarily as a result of
the Sweetheart Investment. The following analysis includes sales from Sweetheart
to Fonda and sales from Fonda to Sweetheart which were eliminated in
consolidation.
Sweetheart results - Net sales increased $581.4 million, (including
intercompany sales to Fonda of $6.8 million and $0.0 million for Fiscal 1999 and
Fiscal 1998, respectively) primarily due to the effect of the consolidation of
Sweetheart's results for a full year. In addition, for the third quarter of
Fiscal 1999 compared to the period from March 12, 1998 to June 30, 1998,
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 $11.4 million, or 3.3%, (including
intercompany to Sweetheart of $4.3 million and $0.2 million for Fiscal 1999 and
Fiscal 1998, respectively) to $329.3 million in Fiscal 1999, compared to $340.7
million in Fiscal 1998. Fiscal 1998 included $13.3 million of net sales of
tissue mill products prior to the March 1998 Mill Disposition. Excluding such
tissue product sales, net sales increased $1.1 million in the converting
operations. Net sales to consumer foodservice customers decreased 10.3%,
resulting from a decrease in sales volume of 9.9% and a 0.4% decrease in average
selling prices. Selling prices were adversely affected by reductions in raw
material costs that were passed through to customers as well as more competitive
market conditions. Net sales to institutional foodservice customers increased
10.5%, resulting from a 3.7% increase in volume and a 6.8% increase in sales
price. The increased sales volume to institutional customers was primarily due
to an increase in sales of value added converted tissue products and certain
commodity paperboard products. The increase in average selling prices primarily
resulted from the more favorable sales mix.
Gross profit increased $64.1 million, or 67.6%, to $158.9 million in
Fiscal 1999 compared to $94.8 million in Fiscal 1998.
Sweetheart results - Gross profit increase $76.2 million to 11.5% of
net sales in Fiscal 1999 from 8.3% in Fiscal 1998. The increase in gross profit
was primarily due to the consolidation of Sweetheart's results for a full year,
and partially due 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 $11.9 million or 16.7%, to $59.4
million in Fiscal 1999, compared to $71.3 million in Fiscal 1998. Fiscal 1998
included $1.7 million of gross profit from tissue mill products prior to the
Mill Disposition. Excluding the gross profit from such tissue product sales,
gross profit decreased $10.2 million in the converting operations. As a
percentage of net sales, gross profit decreased from 20.9% in Fiscal 1998 to
18.0% in Fiscal 1999. Gross profit in Fiscal 1999 was adversely affected by
margin erosion in commodity paperboard products as well as excess costs incurred
in implementing efficiency initiatives.
Selling, general and administrative expenses increased $45.5 million,
or 62.2%, to $118.7 million in Fiscal 1999 compared to $73.2 million in Fiscal
1998. As a percentage of net sales, selling, general and administrative expenses
decreased to 10.0% in Fiscal 1999 from 11.8% in Fiscal 1998. This percentage
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decrease is due primarily to cost savings associated with headcount reductions
which is partially offset by increased legal expenses of $2.0 million related to
the Fort James settlement. See "Item 3. Legal Proceedings".
Restructuring charge (credit) was adjusted resulting in income of $0.5
million in Fiscal 1999 compared to an expense of $4.0 million in Fiscal 1998. In
March 1998, Sweetheart established restructuring reserves primarily for
severance and related costs in connection with workforce reductions. This plan
has been completed, resulting in a reversal of $0.5 million. In Fiscal 1998,
Fonda incurred $0.5 million related to a decision to close Fonda's Jacksonville,
Florida facility and the St. Albans, Vermont administrative offices. Also in
Fiscal 1998, a $1.3 million charge related to CEG's closure of its Indianapolis,
Indiana manufacturing facility was incurred.
Other (income) expense, net was $0.3 million of income in Fiscal 1999
compared to $14.7 million of income in Fiscal 1998. In Fiscal 1999, the
Sweetheart recognized $1.2 million gain on the sale of property, plant and
equipment. In Fiscal 1998, Fonda incurred a $15.9 million gain on the Mill
Disposition and the Steam Contract and a gain on the sale of other non-core
assets.
Operating income increased $8.6 million to $41.0 million in Fiscal 1999
compared to an operating income of $32.4 million in Fiscal 1998 due to the
reasons described above.
Interest expense, net increased $37.2 million, or 112.7%, to $70.2
million in Fiscal 1999 compared to $33.0 million in Fiscal 1998. This increase
is a result of the Sweetheart Investment.
Income tax expense (benefit) decreased $10.8 million to a $9.6 million
benefit in Fiscal 1999 compared to a $1.2 million expense in the Fiscal 1998.
The effective rate for Fiscal 1999 was 33% compared to negative 215% in 1998.
Both the 2000 and the 1999 effective tax rates reflect certain non-deductible
costs relating to the investment in Sweetheart, the related financing and the
proportionate results of both Fonda and Sweetheart.
Minority interest decreased $1.2 million to a credit of $0.9 million in
Fiscal 1999 compared to a credit of $2.1 million in Fiscal 1998.
Net income (loss) decreased $19.0 million, or 6,333.3%, to a loss of
$18.7 million in Fiscal 1999 compared to income of $0.3 million in Fiscal 1998
due to the reasons described above.
Liquidity And Capital Resources
Historically, the Company and its subsidiaries have relied on cash flow
from operations, sales of non-core assets and revolving credit borrowings to
finance its working capital requirements and capital expenditures. In Fiscal
2000, the Company funded its capital expenditures from the sale of assets and
cash generated from operations. The Company expects to continue this method of
funding for its Fiscal 2001 capital expenditures.
Net cash provided by operating activities in Fiscal 2000 was $9.4
million compared to net cash provided by operating activities of $51.5 million
in Fiscal 1999. This decrease is due primarily to an increase in receivables
resulting from increased sales and management's decision to build inventory in
support of anticipated market expansion. These increases were partially offset
by more favorable income from operating activities.
Working capital increased $268.2 million to $175.5 million at September
24, 2000 from a deficit of $92.7 million at September 26, 1999. This increase
resulted primarily from the redemption of Sweetheart's Senior Secured Notes and
the refinancing of Sweetheart's U.S. Credit Facility.
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Capital expenditures for Fiscal 2000 were $25.3 million compared to
$37.8 million in Fiscal 1999. Capital expenditures in Fiscal 2000 included $15.1
million for new production equipment, $3.5 million for facility improvements and
$1.0 million for management information systems, with the remaining consisting
primarily of routine capital improvements. Funding for the Fiscal 2000 capital
expenditures was provided by cash generated from operations, $7.9 million from
the sale of a distribution facility and $2.5 million from the sale of machinery.
During Fiscal 2001, the Company intends to continue to rely on a combination of
cash generated by operations and the sale of non-core assets to fund capital
expenditures.
In connection with the Sweetheart Investment, the Company issued $144.0
million aggregate principal amount at maturity of 12 3/4% Senior Secured
Discount Notes due 2008 (the "Discount Notes") and 28,800 shares of Class C
Common Stock. Until March 15, 2003, accrued interest on the Discount Notes will
not be paid but will accrete semi-annually, thereby increasing the value of the
Discount Notes.
Also on March 12, 1998, the Company issued units consisting of $30.0
million of 13 3/4% Exchangeable Preferred Stock due 2009 (the "Exchangeable
Preferred") and 11,100 shares of Class C Common Stock. Until March 15, 2003
cumulative dividends are paid quarterly, either in cash or by the issuance of
additional shares of Exchangeable Preferred, at the Company's option.
Thereafter, dividends will be payable in cash. The Exchangeable Preferred is
exchangeable at the Company's option into 13 3/4% subordinated notes due March
15, 2009. As of December 21, 2000, all cumulative dividends on the Exchangeable
Preferred have been paid by the issuance of additional shares of Exchangeable
Preferred.
On May 15, 2000, Sweetheart Cup acquired all of the issued and
outstanding capital stock of Sherwood and its subsidiaries pursuant to a Stock
Purchase Agreement among Sweetheart Cup and the stockholders of Sherwood (the
"Sherwood Agreement") for an aggregate purchase price of $17.4 million of which
$12.4 million was paid in cash, subject to post-closing adjustments. As part of
the purchase price, Sweetheart Cup issued to the stockholders of Sherwood
non-interest bearing promissory notes due May 2005 in an aggregate principal
amount of $5.0 million and a present value of $2.9 million. Sweetheart Cup also
assumed $9.3 million of Sherwood's debt, which was paid in full on June 15,
2000.
In connection with a sale-leaseback transaction, on June 15, 2000,
Sweetheart Cup and Sweetheart Holdings sold certain production equipment located
in Owings Mills, Maryland; Chicago, Illinois and Dallas, Texas to several owner
participants for a fair market value of $212.3 million. The proceeds from this
sale were used in part to redeem Sweetheart's Senior Secured Notes, repay debt
in connection with the acquisition of Sherwood and repay a portion of the
outstanding balance under the U.S. Credit Facility.
Pursuant to a lease dated as of June 1, 2000 ("the Lease") between
Sweetheart Cup and State Street Bank and Trust Company of Connecticut, National
Association ("State Street"), as trustee, Sweetheart Cup leases the production
equipment sold in connection with the sales lease-back transaction from State
Street as owner trustee for several owner participants, through November 9,
2010. Sweetheart Cup has the option to renew the Lease for up to four
consecutive renewal terms of two years each. Sweetheart Cup also has the option
to purchase such equipment for fair market value either at the conclusion of the
Lease term or November 21, 2006. Sweetheart's obligations under the Lease are
collateralized by substantially all of Sweetheart's property, plant and
equipment owned as of June 15, 2000. The Lease contains various covenants, which
prohibit, or limit, among other things, dividend payments, equity repurchases or
redemption, the incurrence of additional indebtedness and certain other business
activities.
Sweetheart is accounting for the sale-leaseback transaction as an
operating lease, expensing the $32.0 million annualized rental payments and
removing the property, plant and equipment sold from its balance sheet. A
deferred gain of $107.0 million was realized from this sale and will be
amortized over 125 months, which is the term of the Lease. The taxable gain in
the amount of $147.8 million has allowed Sweetheart to utilize a substantial
portion of its net operating loss carry-forward. See "--Net Operating Loss
Carry-forwards".
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On June 15, 2000, Sweetheart refinanced its revolving credit facility
(the "U.S. Credit Facility") to extend the maturity of the $135 million
revolving credit facility, subject to borrowing base limitations, through June
15, 2005 and to add a term loan of $25 million that requires equal monthly
principal payments of $0.4 million through June 2005. Both the term loan and the
revolving credit facility have an accelerated maturity date of July 1, 2003 if
Sweetheart's Senior Subordinated Notes due September 1, 2003 are not refinanced
before June 1, 2003. Borrowings under the revolving credit facility bear
interest, at Sweetheart's election, at a rate equal to (i) LIBOR plus 2.00% or
(ii) a bank's base rate plus 0.25%, plus certain other fees. Borrowings under
the term loan bear interest, at Sweetheart's election, at a rate equal to (i)
LIBOR plus 2.50% or (ii) a bank's base rate plus 0.50%, plus certain other fees.
The credit facility is collateralized by inventories and receivables with the
term loan portion of the credit facility further collateralized by certain
production equipment. As of September 24, 2000, $56.1 million was available
under such facility. The fee for outstanding letters of credit is 2.00% per
annum and there is a commitment fee of 0.375% per annum on the daily average
unused amount of the commitments.
Sweetheart's Canadian subsidiary has a Credit Agreement (the "Canadian
Credit Facility") which provides for a term loan facility of up to Cdn $10
million and a revolving credit facility of up to Cdn $10 million. Term loan
borrowings under the Canadian Credit Facility are payable quarterly through May
2001 and revolving credit and term loan borrowings have a final maturity date of
June 15, 2001. The Canadian Credit Facility is secured by all existing and
thereafter acquired real and personal tangible assets of Lily Cups, a subsidiary
of Sweetheart Cup, and net proceeds on the sale of any of the foregoing.
Borrowings under the 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. As of September 24, 2000,
Cdn $1.8 million (approximately $1.2 million) was available under the Canadian
Credit Facility. Sweetheart intends to refinance this debt prior to its
maturity however, there can be no assurances that it will be able to obtain such
refinancing on terms and conditions acceptable to Sweetheart.
On January 12, 2000, Fonda's revolving credit facility was amended to
increase the revolving facility to $55 million, subject to borrowing base
limitations. The facility is collateralized by eligible accounts receivable and
inventories, certain general intangibles and the proceeds on the sale of
accounts receivable and inventory. On February 28, 2000, Fonda's revolving
credit facility was amended to extend the maturity through September 30, 2001.
Borrowings are available at the bank's prime rate plus 0.25% or at LIBOR plus
2.25% at Fonda's election. At September 24, 2000, $40.7 million was outstanding
and $14.3 million was the maximum remaining advance available based upon
eligible collateral. Although Fonda intends to refinance this debt, there can be
no assurances that Fonda will be able to obtain such refinancing on terms and
conditions acceptable to Fonda.
On September 25, 2000, Fonda's revolving credit facility was amended to
include a term loan of $5 million. This amount is payable in equal monthly
installments through the maturity date of September 30, 2001, at an annual rate
of LIBOR plus 2.5%. The proceeds from this term loan were used to partially
finance the purchase of Springprint.
Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor
with respect to $110 million of Senior Subordinated Notes. The Senior
Subordinated Notes bear interest at 10.50% per annum, payable semi-annually in
arrears on March 1 and September 1 and mature on September 1, 2003. The Senior
Subordinated Notes are subject to redemption at the option of Sweetheart, in
whole or in part, at the redemption price (expressed as percentages of the
principal amount), plus accrued interest to the redemption date, at a call
premium of 101.313% until September 1, 2001 and 100% thereafter. The Senior
Subordinated Notes are subordinate in right of payment to the prior payment in
full of all borrowings under the U.S. Credit Facility, all obligations under the
Lease, and all other indebtedness not otherwise prohibited.
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On June 15, 2000, Sweetheart issued a redemption notice to the holders
of its Senior Secured Notes due September 1, 2000. In connection therewith,
Sweetheart paid $190.0 million plus accrued interest to the U.S. Trust Company
of New York in settlement of the Senior Secured Notes.
In 1997, Fonda issued $120 million of 9-1/2% Series A Senior
Subordinated Notes due 2007 (the "Notes") with interest payable semiannually.
Payment of the principal of, and interest on, the Notes is subordinate in right
of payment to Senior Debt (as defined therein) which includes the revolving
credit facility. The principal amount of the Notes is payable on February 28,
2007. Fonda may, at its election, redeem the Notes at any time after March 1,
2002 at a redemption price equal to a percentage (104.75% after March 1, 2002
and declining in annual steps to 100% after March 1, 2005) of the principal
amount thereof plus accrued interest. The Notes provide that upon the occurrence
of a change of control (as defined therein), the holders thereof will have the
option to require the redemption of the Notes at a redemption price equal to
101% of the principal amount thereof plus accrued interest.
During Fiscal 1998, Fonda redeemed shares of Class A common stock
(pre-Merger shares) for $9.8 million pursuant to an offer to repurchase a
certain number of shares of its common stock (pre-Merger shares) from its
stockholders on a pro rata basis.
The instruments governing the indebtedness of the Company and its
subsidiaries contain customary covenants and events of default, including
without limitation, restrictions on, subject to defined exceptions, the payment
of dividends, the incurrence of additional indebtedness, investment activities
and transactions with affiliates.
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084,
was initially filed in state court in Georgia in April 1987 and is currently
pending in federal court. The remaining plaintiffs claimed, among other things,
that Sweetheart wrongfully terminated the Lily-Tulip, Inc. Salary Retirement
Plan (the "Plan") in violation of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). The relief sought by plaintiffs was to have the plan
termination declared ineffective. In December 1994, the United States Court of
Appeals for the Eleventh Circuit (the "Circuit Court") ruled that the Plan was
lawfully terminated on December 31, 1986. Following that decision, the
plaintiffs sought a rehearing, which was denied, and subsequently filed a
petition for a writ of certiorari with the United States Supreme Court, which
was also denied. Following remand, in March 1996, the United States District
Court for the Southern District of Georgia (the "District Court") entered a
judgment in favor of Sweetheart. Following denial of a motion for
reconsideration, the plaintiffs, in April 1997, filed an appeal with the Circuit
Court. On May 21, 1998, the Circuit Court affirmed the judgment entered in favor
of Sweetheart. On June 10, 1998, the plaintiffs petitioned the Circuit Court for
a rehearing of their appeal which petition was denied on July 29, 1998. In
October 1998, plaintiffs filed a petition for writ of certiorari with the United
States Supreme Court, which was denied in January 1999. Sweetheart has been in
the process of paying out the termination liability and associated expenses and
as of December 21, 2000, has disbursed $12.3 million in termination payments.
The estimate of the total termination liability and associated expenses, less
payments, exceeds assets set aside in the Plan by approximately $8.0 million,
which amount has been fully reserved.
On April 27, 1999, the plaintiffs filed a motion in the 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 to such fees. On June 17, 1999, the District Court deferred these
motions and ordered discovery in connection therewith. Discovery has been
completed and Sweetheart is awaiting further action by the plaintiffs. Due to
the complexity involved in connection with the claims asserted in this case,
Sweetheart cannot determine at present with any certainty the amount of damages
it would be required to pay should the plaintiffs prevail; accordingly, there
can be no assurance that such amounts would not have a material adverse effect
on Sweetheart's financial position or results of operations.
18
<PAGE>
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., Civil Action No.
97-C-1221, was filed in the United States District Court for the Eastern
District of Wisconsin on November 21, 1997. During the fourth quarter of Fiscal
1999, mediation resulted in a settlement of this action whereby Sweetheart
agreed to pay damages of $2.6 million. As of June 29, 2000, all payments in
conjunction with this settlement had been paid.
On July 13, 1999, Sweetheart received a letter from the EPA identifying
Sweetheart, among numerous others, as a "potential responsible party" under
CERCLA, at a site in Baltimore, Maryland. The EPA letter states that it does not
constitute a final determination by EPA concerning the liability of Sweetheart
or any other entity. On December 20, 1999, Sweetheart received an information
request letter from the EPA, pursuant to CERCLA, regarding a Container Recycling
Superfund Site in Kansas City, Kansas. Sweetheart denies liability and has no
reason to believe the final outcomes will have a material effect on its
financial condition or results of operations. However, no assurance can be given
about the ultimate effect on Sweetheart, if any, given the early stage of these
investigations.
The Company believes that cash generated by each of Fonda's and
Sweetheart's operations, combined with amounts available under its respective
credit facilities in addition to funds generated by asset sales should be
sufficient to fund each of Fonda's and Sweetheart's respective capital
expenditures needs, debt service requirements, payments in conjunction with
lease commitments and working capital needs, including Sweetheart's termination
liabilities under the Plan in the next twelve months.
Net Operating Loss Carry-forwards
As of September 24, 2000, Sweetheart had approximately $32 million of
net operating loss ("NOL") carry-forwards for federal income tax purposes, which
expire in 2018. Although sufficient taxable income is expected in the future to
realize these NOLs, there can be no assurance that future taxable income will be
generated to utilize such NOLs.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and requires that an entity
recognize all derivatives at fair value in the statement of financial position.
The Company and its' subsidiaries have evaluated this standard which is
effective for Fiscal 2001 and has concluded that SFAS No.133 will not have a
significant impact on the financial statement presentation.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 establishes accounting and reporting standards for
revenue recognition and requires that an entity not recognize revenue until it
is realized or realizable and earned. The Company and its' subsidiaries have
evaluated this bulletin which is effective for Fiscal 2001 and has concluded
that SAB No.101 will not have a significant impact on the financial statement
presentation.
Item7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
NONE
19
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
report, beginning on page 30.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the directors,
executive officers and key employees of SF Holdings as of December 21, 2000. All
directors hold office until the next annual meeting of shareholders and until
their successors are duly elected and qualified. Officers serve at the
discretion of the Board of Directors.
Name Age Position
---- --- --------
Dennis Mehiel 58 Chairman and Chief Executive Officer
Thomas Uleau 56 President, Chief Operating Officer
and Director
Hans H. Heinsen 47 Senior Vice President, Chief Financial
Officer and Treasurer
Harvey L. Friedman 65 Secretary and General Counsel
Alfred B. DelBello 64 Vice Chairman
James Armenakis 57 Director
W. Richard Bingham 64 Director
Gail Blanke 52 Director
John A. Catsimatidis 52 Director
Chris Mehiel 61 Director
Jerome T. Muldowney 55 Director
Alan D. Scheinkman 50 Director
G. William Seawright 59 Director
Lowell P. Weicker 69 Director
Mr. Mehiel has been Chairman of the Board and Chief Executive Officer
of SF Holdings since December 1998. He has served as Chairman and Chief
Executive Officer of Sweetheart Holdings and Sweetheart Cup since March 1998.
Mr. Mehiel is also Chairman and Chief Executive Officer of Fonda and Creative
Expressions Group ("CEG"). Since August 2000, he has been a director of Four M
Corporation ("Four M"), a converter and seller of interior packaging, corrugated
sheets and corrugated containers, which he co-founded. From 1966 until August
2000, he was Chairman of Four M, and since 1977 (except during a leave of
absence from April 1994 through July 1995) he was the Chief Executive Officer of
Four M. Mr. Mehiel is also currently a director of Box USA Holdings, Inc
("BoxUSA").
20
<PAGE>
Mr. Uleau has been President, Chief Operating Officer and a Director of
SF Holdings since February 1998 and Sweetheart Holdings and Sweetheart Cup since
March 1998. Mr. Uleau is also Executive Vice President of Fonda. He has been a
director of Fonda since 1988. He has also served in a variety of executive
officer positions at Fonda since 1988. He served as Executive Vice President and
Chief Financial Officer of Four M from 1989 through 1993 and its Chief Operating
Officer in 1994.
Mr. Heinsen has served as Senior Vice President, Chief Financial
Officer and Treasurer of SF Holdings since February 1998 and Senior Vice
President - Finance and Chief Financial Officer of Sweetheart Holdings and
Sweetheart Cup since March 1998. Mr. Heinsen also serves as Senior Vice
President and Treasurer of Fonda since February 1997, Chief Financial Officer of
Fonda since June 1996 and Chief Financial Officer of CEG since November 1998.
Prior to joining Fonda, Mr. Heinsen spent 21 years in a variety of corporate
finance positions with The Chase Manhattan Bank, N.A.
Mr. Friedman has been Secretary and General Counsel of the Company
since February 1998 and Secretary and General Counsel of Fonda from May 1996. He
was also a Director of Fonda from 1985 to January 1997. Mr. Friedman is also
Secretary and General Counsel of CEG, Four M and Box USA of New Jersey and is a
director of CEG. He was formerly a partner of Kramer, Levin, Naftalis & Frankel,
a New York City law firm.
Mr. DelBello has served as Vice Chairman of the Company since February
1998 and Vice Chairman of Fonda since January 1997 and a Director of Fonda since
1990. Since July 1995, Mr. DelBello has been a partner in the law firm of
DelBello, Donnellan & Weingarten & Tartaglia, LLP. From September 1992 to July
1995 he was a partner in the law firm of Worby DelBello Donnellan & Weingarten.
Prior thereto, he had been President of DelBello Associates, a consulting firm,
since 1985. Mr. DelBello served as Lieutenant Governor of New York State from
1983 to 1985.
Mr. Armenakis has served as a Director of the Company since February
1998 and Director of Fonda since June 1997. He is a senior partner in the law
firm of Armenakis & Armenakis.
Mr. Bingham has been a Director of SF Holdings since March 1998 and has
been a Director of Sweetheart Holdings and Sweetheart Cup since August 1993. He
co-founded American Industrial Partners Management Company, Inc. ("AIPM") and
has been a director and officer of the firm since 1989. He is also a general
partner of AIP. Prior to joining AIPM, Mr. Bingham was director of the Corporate
Finance Department, a member of the Board and director of Mergers & Acquisitions
at Lehman Brothers Kuhn Loeb Inc. Mr. Bingham is also currently a director of
Bucyrus International, Great Lakes Carbon Corporation, RBX Group, Inc.,
Standadyne Automotive Corporation and Deerfield Associates.
Ms. Blanke has served as a Director of the Company since February 1998
and as a Director of Fonda since January 1997. She has been President and Chief
Executive Officer of Gail Blanke's Lifedesigns, LLC since March 1995.
Lifedesigns was founded in March 1995 as a division of Avon Products, Inc.
("Avon") and was spun off from Avon in March 1997. Prior thereto, she held the
position of Corporate Senior Vice President of Avon since August 1991. She also
held a number of management positions at CBS, Inc., including the position of
Manager of Player Promotion for the New York Yankees. Ms. Blanke will be serving
her second consecutive term as President of the New York Women's Forum.
Mr. Catsimatidis has served as a Director of the Company since February
1998 and as a Director of Fonda since January 1997. He has been Chairman and
Chief Executive Officer of the Red Apple Group, Inc., a company with diversified
holdings that include oil refining, supermarkets, real estate, aviation and
newspapers, since 1969. Mr. Catsimatidis serves as a director of Sloan's
Supermarket, Inc. and News Communications, Inc. He also serves on the board of
trustees of New York Hospital, St. Vincent Home for Children, New York
University Business School, Athens College, Independent Refiners Coalition and
New York State Food Merchants Association.
21
<PAGE>
Mr. Chris Mehiel, has been a Director of the Company since February
1998 and a Director of Fonda since January 1997. Mr. Mehiel is a co-founder of
Four M and has been Executive Vice President, Chief Operating Officer and a
director of Four M since September 1995 and Chief Financial Officer from August
1997 until July 2000. He is an executive officer of the managing member of Fibre
Marketing Group, LLC, the successor to Fibre Marketing Group, Inc., ("Fibre
Marketing") a waste paper recovery business which he co-founded, and was
President from 1994 to January 1996. From 1993 to 1994, Mr. Mehiel served as
President and Chief Operating Officer of Box USA of New Jersey. From 1982 to
1992, Mr. Mehiel served as the President and Chief Operating Officer of
Specialty Industries, Inc., a waste paper processing and container manufacturing
company.
Mr. Muldowney has served as a Director of the Company since February
1998 and as a Director of Fonda since 1990. Since January 1996, Mr. Muldowney
has been a Managing Director of AIG Global Investment Corp. and since March 1995
he has been a Senior Vice President of AIG Domestic Life Companies ("AIG Life").
Prior thereto, he had been a Vice President of AIG Life since 1982. In addition,
from 1986 to 1996, he served as President of AIG Investment Advisors, Inc. He is
currently a director of AIG Life and AIG Equity Sales Corp.
Mr. Scheinkman has been a Director of the Company since April 2000.
Since January 1998 Mr. Scheinkman has been County Attorney of Westchester
County, New York, Counsel to the County Executive and Board of Legislators.
Prior thereto, Mr. Scheinkman was in private practice with Scheinkman, Fredman &
Kosan LLP. Mr. Scheinkman is also an adjunct professor of law at Pace
University, School of Law and St. John's University, School of Law.
Mr. Seawright has served as a Director of the Company since February
1998 and as a Director of Fonda since January 1997. He has been President and
Chief Executive Officer of Stanhome Inc., a manufacturer and distributor of
giftware and collectibles, since 1993. Prior thereto, he was President and Chief
Executive Officer of Paddington, Inc., an importer of distilled spirits, since
1990. From 1986 to 1990, he was President of Heublein International, Inc.
Mr. Weicker, Jr. has served as a Director of the Company since February
1998 and as a Director of Fonda since January 1997. Mr. Weicker served as
Governor of the State of Connecticut from January 1991 through January 1995.
From 1968 to 1989, Mr. Weicker served in the U.S. Congress. He currently serves
as a Director of Compuware Corporation, World Wrestling Federation
Entertainment, Inc., HPSC, Inc. and United States Tobacco, Inc.
Compensation of Directors
Directors of the Company who are not employees of SF Holdings or
directors of Fonda or Sweetheart receive annual compensation of (i) $12,000,
(ii) $1,000 for each Board meeting attended, and (iii) $1,000 for each committee
meeting attended which is not held on the date of a board meeting. Directors who
are employees of the Company or directors of Fonda or Sweetheart do not receive
any compensation or fees for service on the Board of Directors or any committee
thereof.
22
<PAGE>
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned, whether paid
or deferred, to the Company's Chief Executive Officer and its other four most
highly compensated executive officers (collectively, the "Named Officers") for
Fiscal 2000, Fiscal 1999, the 1998 Nine Week Transition Period ("1998 TP") and
Fiscal 1998 for services rendered in all capacities to the Company during such
periods. The Company has concluded that the aggregate amount of perquisites and
other personal benefits paid to each of the named executive officers did not
exceed the lesser of (i) 10% of such officer's total annual salary and bonus or
(ii) $50,000. Thus, such amounts are not reflected in the following table.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
---------------------------------------- -------------------------------------------- -------------------------------
All Other
Name and Principal Salary Bonus SARs Compensation
Position Fiscal ($) ($) (#)(1) ($)(2)
---------------------------------------- -------------- -------------- ------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Dennis Mehiel
Chairman and Chief Executive Officer 2000 946,280 600,000 - 1,507
1999 524,650 415,000 - -
1998 TP 88,793 - - -
1998 304,150 150,000 - -
Thomas Uleau
President and Chief Operating Officer 2000 420,235 500,000 126,516 18,201
1999 348,654 445,000 - 78,037
1998 TP 59,456 - - 4,004
1998 230,631 80,000 1,950 42,313
Robert Korzenski
Senior Vice President 2000 239,578 235,000 126,516 20,998
1999 204,616 75,000 - 31,332
1998TP 30,769 - - 1,548
1998 188,590 100,000 1,950 10,419
Hans H. Heinsen
Senior Vice President, Chief 2000 251,102 235,000 40,178 8,065
Financial Officer and Treasurer 1999 235,140 217,000 - 13,547
1998 TP 36,175 - - 1,548
1998 206,392 90,000 1,950 10,705
Michael Hastings
Senior Vice President 2000 245,512 235,000 126,516 23,182
1999 199,231 255,000 - 49,722
1998 TP 33,162 - - 52,957
1998 184,704 60,000 1,950 9,246
</TABLE>
(1) The Fonda SAR Plan was terminated on September 14, 2000, effective as of
October 1, 1999. No SARs were issued during Fiscal 2000 or Fiscal 1999.
All vested SARs were redeemed on September 20, 2000. See "--Stock
Appreciation Rights".
23
<PAGE>
(2) Reflects matching contributions under 401(k) Plans, long-term disability
and life insurance premiums paid (See "Employee Benefit Plans").
Stock Option Plan
Pursuant to the Sweetheart Investment, Dennis Mehiel currently holds
71,515 currently exercisable options to purchase Class A Common Stock of SF
Holdings.
On March 12, 1998, all outstanding options to purchase stock of
Sweetheart were cashed out in full pursuant to the agreement governing the
Sweetheart Investment.
Stock Appreciation Rights
No Fonda SARs were issued to Named Officers during Fiscal 2000. On
September 14, Fonda terminated the SAR plan effective as of October 1, 1999. In
total, 15,600 Fonda SARs were redeemed at their October 1, 1999 value from Named
Officers at a total cost of $506,064. All unvested SARs held by Named Officers
not redeemed by Fonda were forfeited.
<TABLE>
<CAPTION>
SARs
Outstanding at Value of
Name SARs Redeemed (#) Value Realized ($) FY end Outstanding SARs
------------------------- ------------------------ -------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Thomas Uleau 3,900 126,516 - -
Robert Korzenski 3,900 126,516 - -
Hans H. Heinsen 2,340 40,178 - -
Michael Hastings 3,900 126,516 - -
</TABLE>
Employee Benefit Plans
A majority of Sweetheart's employees ("Participants") are covered under
a 401(k) defined contribution plan. Effective January 1, 2000, Sweetheart
provides a matching contribution of 100% on the first 2% of a participant's
salary and 50% on the next 4% of a participant's salary. Sweetheart's match is
currently limited to participant contributions up to 6% of participant salaries.
In addition, Sweetheart is allowed to make discretionary contributions. Certain
employees are covered under defined benefit plans. Benefits under these plans
are generally based on fixed amounts for each year of service.
Sweetheart sponsors various defined benefit post-retirement health care
plans that cover substantially all full-time employees. The plans, in most
cases, pay stated percentages of most medical expenses incurred by retirees
after subtracting payments by Medicare or other providers and after a stated
deductible has been met. Participants generally become eligible after reaching
age 60 with ten years of service. The majority of Sweetheart's plans are
contributory, with retiree contributions adjusted annually.
Fonda provides certain union and non-union employees with retirement
and disability income benefits under defined benefit pension plans. Fonda's
policy has been to fund annually the minimum contributions required by
applicable regulations.
24
<PAGE>
On January 1, 1997, Fonda adopted a defined contribution benefit plan.
All non-union employees and certain union employees are covered under the 401(k)
savings and investment plans. Employee contributions are matched to varying
amounts according to the plan as it relates to a particular facility and in
addition, at the discretion of Fonda. Fonda also participates in multi-employer
pension plans for certain of its union employees. See Note 21 of the Notes to
Consolidated Financial Statements.
The executive officers of SF Holdings are not covered under any of the
Sweetheart or Fonda defined benefit plans. Rather, such persons are covered
under defined contribution plans only.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 21,
2000, with respect to the shares of common stock of SF Holdings beneficially
owned by each person or group that is known by the Company to be a beneficial
owner of more than 5% of the outstanding common stock of SF Holdings, the
directors and officers of the Company, and all directors and officers of the
Company, as a group.
Number of Percent
Name of Beneficial Owner Shares Ownership
------------------------ ----------------- --------------
Dennis Mehiel
373 Park Avenue South
New York City, NY 10016 715,850 (1) 73.25%
Thomas Uleau
10100 Reisterstown Road
Owings Mills, Maryland 21117 13,487 1.38%
Directors and executive officers as a
Group (3 persons) 738,872 75.60%
(1) Includes 15,165 shares of Class A common stock of SF Holdings that would
be issuable upon conversion of Class B Series 1 Preferred Stock held by
CEG, 116,647 shares of Class A common stock of SF Holdings that would be
issuable upon conversion of Class B Series 2 Preferred Stock, 71,515
shares underlying options to purchase Class A common stock of SF
Holdings, which are presently exercisable, and 134,138 shares which Mr.
Mehiel has the power to vote pursuant to a voting trust agreement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All of the affiliates referenced below are directly or indirectly under
the common ownership of the Company's Chief Executive Officer.
Fonda leases a building in Jacksonville, Florida from Dennis Mehiel on
terms Fonda believes are no less favorable than could be obtained from
independent third parties and were negotiated on an arm's length basis. Annual
payments under the lease are $0.2 million plus annual increases based on changes
in the Consumer Price Index ("CPI") through December 31, 2014. In addition, Mr.
Mehiel can require Fonda to purchase the facility for $1.5 million, subject to a
CPI-based escalation, until July 31, 2006. In Fiscal 1998, Fonda terminated its
operations at this facility and is currently subleasing the entire facility.
Four M subleased
25
<PAGE>
a portion of this facility through May 1998 and again from October 1999 through
February 2000. Rent expense, net of sublease income on the portion of the
premises subleased to Four M during Fiscal 2000 was less than $0.2, and through
May 1998 was $0.1 million in Fiscal 1999, less than $0.1 million in the 1998 TP,
and $0.1 million in Fiscal 1998.
On December 3, 1999, CEG became an 87% owned subsidiary of the Company
pursuant to a merger. In connection with the merger, 87% of CEG's common stock
was exchanged for 15,000 shares of Class B Series 2 Preferred Stock of the
Company. On December 6, 1999, pursuant to the CEG Asset Purchase Agreement,
Fonda purchased the intangible assets of CEG, including domestic and foreign
trademarks, patents, copyrights, and customer lists. In addition, pursuant to
the CEG Asset Purchase Agreement, Fonda purchased certain inventory of CEG. The
aggregate purchase price for the intangible assets and the inventory is $41
million ($16 million for the intangible assets and $25 million for the
inventory), payable in cash, the cancellation of certain notes and warrants, and
the assumption of certain liabilities. Pursuant to the agreement, Fonda also
acquired other CEG assets in exchange for outstanding trade payables owed to
Fonda by CEG. In connection with this agreement, Fonda canceled all other
agreements with CEG. As a result of the CEG Asset Purchase Agreement, Fonda
markets, manufactures and distributes disposable party goods products directly
to the specialty (party) channel of the consumer foodservice market. Independent
appraisals were obtained to determine the fairness of the purchase price for
such assets. Fonda believes the terms on which it purchased such assets are at
least as favorable as it could have obtained from unrelated third parties and
were negotiated on an arm's length basis.
Pursuant to a certain agreement with the stockholders of Sweetheart as
of December 29, 1997 (the "Sweetheart Stockholders"), following the fifth
anniversary of the consummation of the Sweetheart Investment, the Sweetheart
Stockholders have the right to exchange their shares of Class A common stock of
Sweetheart for warrants (the "Exchange Warrants") to purchase, for nominal
consideration, shares of Class C Common Stock of SF Holdings representing 10% of
the total outstanding shares of common stock of SF Holdings at the consummation
of the Sweetheart Investment on a fully diluted basis. SF Holdings has the right
to cause such exchange and has the right to thereafter repurchase the Exchange
Warrants, in whole or in part, for an aggregate call price of $50.0 million,
subject to increase at 12.5% per annum until the fifth anniversary of the
consummation of the Sweetheart Investment. Upon the occurrence of a merger (as
defined in such agreement), the Sweetheart Stockholders will be required to
exchange their shares of Class A common stock of Sweetheart for the Exchange
Warrants. In addition, in the event SF Holdings proposes to sell shares of Class
A common stock or Class B common stock of Sweetheart in an amount greater than
30% of the outstanding shares of Sweetheart common stock, the Sweetheart
Stockholders will have the right to participate in such sale. In the event SF
Holdings proposes to sell shares of Sweetheart common stock in an amount greater
than 30% of the outstanding shares of Sweetheart common stock, then SF Holdings
will have the right to require the Sweetheart Stockholders to sell all, but not
less than all, of their shares of Sweetheart common stock.
During Fiscal 1998, Fonda purchased a 38.2% ownership interest in Fibre
Marketing from a director of Fonda for $0.2 million. Four M is also a member of
Fibre Marketing. Fonda granted Sweetheart the right to acquire 50% of it's
interest in Fibre Marketing for $0.1 million. During Fiscal 2000, Fonda sold a
13.2% interest in Fibre Marketing to Mehiel Enterprises, Inc. for $0.1 million,
retaining a 25% ownership interest in Fibre Marketing. Fonda believes that the
terms on which it purchased and sold such interest are at least as favorable as
those it could otherwise have obtained from an unrelated third party and were
negotiated on an arm's length basis.
During the fourth quarter of Fiscal 2000, Sweetheart entered into a
lease agreement with D&L Development, LLC, an entity in which the Company's CEO
has an interest, to lease a warehouse facility in Hampstead, Maryland. In Fiscal
2000, rental payments under this lease were $0.7 million. Annual rental payments
under the 20-year lease are $3.7 million for the first 10 years of the lease and
$3.8 million annually,
26
<PAGE>
thereafter.
In November 2000, Sweetheart began leasing a facility from D&L Andover
Property, LLC, an entity in which the Company's CEO has an interest. Annual
rental payments under the 20-year lease are $1.5 million in the first year,
which escalates at a rate of 2% each year thereafter.
During Fiscal 2000, Sweetheart and Fonda combined, sold $7.4 million of
scrap paper to Fibre Marketing. Included in accounts receivable as of September
24, 2000 is $1.3 million due from Fibre Marketing. Other sales to affiliates
during Fiscal 2000 were not significant.
During Fiscal 2000, Sweetheart and Fonda combined, purchased $9.7
million of corrugated containers from Box USA Holdings, Inc. ("Box USA"), $0.2
million of other services from Four M Corporation ("Four M") and $0.9 million of
travel services from Emerald Lady, Inc.. Included in accounts payable, as of
September 24, 2000, is $0.1 million due to Box USA. Other purchases from
affiliates during Fiscal 2000 were not significant.
During Fiscal 1999, Sweetheart and Fonda combined, sold $4.1 million of
scrap paper to Fibre Marketing. Included in accounts receivable as of September
26, 1999 is $1.1 million due from Fibre Marketing. Other sales to affiliates
during Fiscal 1999 were not significant.
During Fiscal 1999, Sweetheart and Fonda combined, purchased $7.9
million of corrugated containers from Box USA and $0.9 million of travel
services from Emerald Lady, Inc.. Included in accounts payable, as of September
26, 1999, is $0.5 million due to Box USA. Other purchases from affiliates during
Fiscal 1999 were not significant.
At September 24, 2000, Fonda had loans receivable from its Chief
Executive Officer totaling $275,000 plus accrued interest at 10%. This loan is
payable upon demand. During Fiscal 1999, the Company also had a $150,000 loan
receivable with another executive officer plus accrued interest at 5.39% which
was paid in full in June 1999.
SF Holdings and Fonda intend to file consolidated Federal income tax
returns, and pursuant to a tax sharing agreement, Fonda will pay SF Holdings its
allocable share of the consolidated group's consolidated Federal income tax
liability, which, in general, will equal the tax liability Fonda would have paid
if it had filed separate tax returns.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. The financial statements listed in the "Index to Consolidated
Financial Statements."
2. The financial statement schedule listed in the "Index to
Consolidated Financial Statement Schedules."
Exhibits 2.1 through 10.8 are incorporated herein by reference to the
exhibit with the corresponding number filed as part of the Company's
Registration Statement on Form S-4, as amended (File No. 333-50683). Exhibits
10.9 through 10.18 are incorporated herein by reference to the exhibit with the
corresponding
27
<PAGE>
number filed as part of the Company's Registration Statement on Form S-4, as
amended (File No. 333-51563).
2.1 Investment Agreement, dated as of December 29, 1997, among the
Stockholders of Sweetheart Holdings Inc. ("Sweetheart Holdings"),
Creative Expressions Group, Inc.("CEG") and SF Holdings Group, Inc.
("SF Holdings").
3.1 Restated Certificate of Incorporation of the Company.
3.2 By-laws of the Company.
3.3* Amended and Restated Certificate of Incorporation of SF Holdings
Group, Inc.
3.4* Certificate of Designation of Class B Series 2 Preferred Stock of SF
Holdings Group, Inc.
4.1 Indenture, dated as of March 12, 1998, between SF Holdings and The
Bank of New York.
4.2 Form of 12 3/4% Series A and Series B Senior Secured Discount Notes,
dated as of March 12, 1998 (incorporated by reference to Exhibit
4.1).
4.3 Registration Rights Agreement, dated as of March 12, 1998, among SF
Holdings, Bear, Stearns & Co. Inc. and SBC Warburg Dillon Read Inc.
(the "Initial Purchasers").
4.4 Registration Rights Agreement, dated as of March 20, 1998, between
the Company, American Industrial Partners Management Company, Inc.
("AIPM") and Bear, Stearns & Co., Inc.
4.5 Form of Certificate of Exchangeable Preferred Stock.
4.6 Form of Indenture between the Company and The Bank of New York
governing the 13 3/4% Subordinated Notes due March 15, 2009.
4.7 Paragraph A of Article Fourth of the Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.1).
10.1 Stockholders' Rights Agreement, dated as of March 12, 1998, among SF
Holdings and the persons listed on Schedule I thereto.
10.2 Stockholders' Agreement, dated as of March 12,1998, among Sweetheart
Holdings, SF Holdings and the Original Stockholders.
10.3 Stockholders Agreement, dated as of March 12, 1998, among SF
Holdings and the Initial Purchasers.
10.4 Pledge Agreement, dated as of March 12, 1998, between SF Holdings
and the Bank of New York.
10.5 Tax Sharing Agreement, dated as of March 12, 1998, among SF Holdings
and The Fonda Group, Inc ("Fonda").
10.6 Second Restated Management Services Agreement, dated as of March 12,
1998, among Sweetheart Holdings, Sweetheart Cup Company Inc.
("Sweetheart Cup"), American Industrial Partners Management Company,
Inc. ("AIPM") and SF Holdings.
10.7 Amendment No. 1 to Second Restated Management Services Agreement,
dated as of March 12, 1998, among Sweetheart Holdings, Sweetheart
Cup, AIPM and SF Holdings.
10.8 Assignment and Assumption Agreement, dated as of March 12, 1998,
between SF Holdings and Fonda.
10.9 Stockholders Agreement, dated as of March 20, 1998, between the
Company and Bear, Stearns & Co., Inc.
10.19 Asset Purchase Agreement, dated as of December 6, 1999 between
Creative Expressions Group, Inc and Fonda.
10.20* Agreement and plan of merger, dated as of December 3, 1999, amongst
SF Holdings, Inc., SF Holdings Acquisition Holdings Corp. and
Creative Expressions Group, Inc..
27.1* Financial Data Schedule.
----------------
* filed herein.
(b) No reports were filed on Form 8-K during the fiscal year ended September 24,
2000.
28
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 30
Consolidated Balance Sheets as of September 24, 2000
and September 26, 1999 31
Consolidated Statements of Operations and Other Comprehensive
Income (Loss) for Fiscal Years 2000, 1999, the nine
weeks ended September 27, 1998 and the fifty two weeks
ended July 26, 1998 32
Consolidated Statements of Cash Flows
for Fiscal Years 2000, 1999, the nine weeks ended
September 27, 1998 and the fifty two weeks ended
July 26, 1998 33
Consolidated Statements of Shareholders' Equity
for Fiscal Years 2000, 1999, the nine weeks ended
September 27, 1998 and the fifty two weeks ended
July 26, 1998 34
Notes to Consolidated Financial Statements 35
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
The SF Holdings Group, Inc.
We have audited the accompanying consolidated balance sheets of The SF
Holdings Group, Inc. (the "Company") as of September 24, 2000 and September 26,
1999, and the related consolidated statements of operations and other
comprehensive income (loss), cash flows and shareholders' equity for the years
ended September 24, 2000 and September 26,1999, the nine week transition period
ended September 27, 1998 and the year ended July 26, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of September
24, 2000 and September 26, 1999, and the results of its operations and its cash
flows for the years ended September 24, 2000 and September 26,1999, the nine
week transition period ended September 27, 1998 and the year ended July 26, 1998
in conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 1 to the consolidated financial statements, in
Fiscal 2000 the Company acquired an affiliate. The transaction has been
accounted for in a manner similar to a pooling-of-interests and accordingly, the
consolidated financial statements have been restated for all periods presented.
/s/ DELOITTE & TOUCHE LLP
Baltimore, Maryland
December 12, 2000
30
<PAGE>
SF HOLDINGS GROUP, INC.
-----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except share data)
---------------------------------
<TABLE>
<CAPTION>
September 24, September 26,
2000 19991
----------------- ----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,352 $ 4,180
Cash in escrow 300 -
Receivables, less allowances of $3,534 and $6,979, respectively 155,684 136,629
Due from affiliates 1,286 538
Inventories 226,657 189,367
Deferred income taxes 24,347 20,947
Refundable income taxes 622 1,940
Spare parts 24,066 18,759
Other current assets 6,428 6,112
------------ ------------
Total current assets 445,742 378,472
------------ ------------
Property, plant and equipment, net 263,368 387,309
Deferred income taxes 37,694 38,424
Spare parts 8,313 10,852
Goodwill, net 106,108 98,176
Other assets 19,904 23,977
------------ ------------
Total assets $ 881,129 $ 937,210
============ ============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 91,068 $ 81,447
Accrued payroll and related costs 55,486 53,770
Other current liabilities 56,114 58,269
Current portion of deferred gain on sale of assets 10,275 -
Current portion of long-term debt 57,266 277,693
------------ ------------
Total current liabilities 270,209 471,179
------------ ------------
Commitments and contingencies (See Note 24 ) - -
Deferred income taxes 4,209 4,026
Long-term debt 434,967 380,706
Deferred gain on sale of assets 93,948 -
Other liabilities 57,511 62,638
------------ ------------
Total liabilities 860,844 918,549
------------ ------------
Exchangeable preferred stock 41,794 36,291
Preferred Stock B, Series 2 15,000 -
Minority interest in subsidiary 3,169 1,520
Redeemable common stock 2,286 2,217
Shareholders' deficit (41,964) (21,367)
------------ ------------
Total liabilities and shareholders' equity $ 881,129 $ 937,210
============ ============
</TABLE>
1 - Restated, See Note 1 to Consolidated Financial Statements
See accompanying Notes to Consolidated Financial Statements.
31
<PAGE>
SF HOLDINGS GROUP, INC.
-----------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
AND OTHER COMPREHENSIVE INCOME (LOSS)
-------------------------------------
(In thousands)
--------------
<TABLE>
<CAPTION>
Nine Weeks
Ended Fifty Two
Fiscal Fiscal September 27, Weeks Ended
2000 1999 1998 July 26, 1998
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 1,276,888 $ 1,182,004 $ 275,652 $ 622,917
Cost of sales 1,090,799 1,023,135 246,587 528,148
------------ ------------ ----------- ----------
Gross profit 186,089 158,869 29,065 94,769
Selling, general and administrative expenses 113,320 118,654 23,853 73,188
Restructuring charge (credit) 1,153 (512) - 3,895
Other (income) expense, net (448) (307) (597) (14,734)
------------ ------------ ----------- ----------
Operating income 72,064 41,034 5,809 32,420
Interest expense, net of interest income of $1,346,
$620, $386 and $1,540, respectively 65,312 70,173 15,135 32,999
------------ ------------- ----------- ----------
Income (loss) before income tax expense
(benefit), minority interest and extraordinary
loss 6,752 (29,139) (9,326) (579)
Income tax expense (benefit) 4,114 (9,561) (4,370) 1,245
Minority interest in subsidiary's income (loss) 1,649 (897) (497) (2,085)
------------ ------------ ---------- ----------
Income (loss) before extraordinary loss 989 (18,681) (4,459) 261
------------ ------------ ----------- ----------
Extraordinary (loss) on debt extinguishment net
of income tax benefit of $562 (843) - - -
------------ ------------ ----------- ----------
Net income (loss) 146 (18,681) (4,459) 261
------------ ------------ ----------- ----------
Payment-in-kind dividends on exchangeable
Preferred stock 5,503 4,847 764 1,616
------------ ------------ ----------- ----------
Net loss applicable to common stockholders $ (5,357) $ (23,528) $ (5,223) $ (1,355)
============ ============ =========== ==========
Other comprehensive income (loss), net of tax:
Net income (loss) $ 146 $ (18,681) $ (4,459) $ 261
Foreign currency translation adjustment (122) 272 (345) (476)
Minimum pension liability adjustment (net of
$(33), $1,503 and $(1,595) income tax
respectively) (49) 2,255 (2,393) -
------------ ------------ ----------- ----------
Other comprehensive income (loss) (171) 2,527 (2,738) (476)
------------ ------------ ----------- ----------
Comprehensive income (loss) $ (25) $ (16,154) $ (7,197) $ (215)
============ ============ =========== ==========
</TABLE>
1 - Restated, See Note 1 to Consolidated Financial Statements
See accompanying Notes to Consolidated Financial Statements.
32
<PAGE>
SF HOLDINGS GROUP, INC.
-----------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
--------------
<TABLE>
<CAPTION>
Nine Weeks
Ended Fifty Two
Fiscal Fiscal September 27, Weeks Ended
2000 1999 1998 July 26, 1998
---------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 146 $ (18,681) $ (4,459) $ 261
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 50,025 56,862 14,103 20,921
Amortization of deferred gain (2,813) - - -
Interest accreted on debt 11,984 11,046 1,779 3,707
Deferred income tax expense (benefit) (1,100) (9,118) (4,099) (5,721)
(Gain) / Loss on sale of assets (878) (1,150) (201) (16,333)
Minority interest in subsidiary 1,649 (897) (497) (1,900)
Changes in operating assets and liabilities:
Receivables (17,508) (794) (2,842) (15,743)
Due from affiliates (748) 305 337 -
Inventories (30,204) (65) 1,121 8,566
Other current assets (4,051) 173 (3,683) 819
Accounts payable and accrued expenses (3,045) 4,297 (17,207) 6,297
Other, net 5,901 9,531 (1,363) 1,383
---------- ----------- ------------ -----------
Net cash provided by (used in) operating activities 9,358 51,509 (17,011) 2,257
---------- ----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (25,269) (37,776) (12,139) (14,895)
Sweetheart investment - - - (95,000)
Acquisition of businesses (12,411) - - (6,901)
Proceeds from sale of property, plant and equipment 221,448 7,435 7,133 36,724
---------- ----------- ------------ -----------
Net cash provided by (used in) investing activities 183,768 (30,341) (5,006) (80,072)
---------- ----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under credit facilities 38,273 (47,008) 4,424 22,145
Net borrowings (repayments) of other debt (228,927) 14,658 4,589 79,098
Payment of finance fees - - - (3,762)
Change in escrow account (300) 5,464 1,355 4,870
Redemption of common stock - - - (9,788)
---------- ----------- ------------ -----------
Net cash provided by (used in)financing activities (190,954) (26,886) 10,368 92,563
---------- ----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,172 (5,718) (11,649) 14,748
CASH AND CASH EQUIVALENTS, beginning of period 4,180 9,898 21,547 6,799
---------- ----------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 6,352 $ 4,180 $ 9,898 $ 21,547
========== =========== ============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 53,733 $ 56,103 $ 24,299 $ 15,220
========== =========== ============ ===========
Income taxes paid $ 3,673 $ 2,608 $ 305 $ 6,303
========== =========== ============ ===========
SUPPLEMENTAL NON-CASH INVESTING ACTIVITY:
Note Payable associated with business acquisition $ 2,914 $ - $ - $ -
========== =========== ============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
33
<PAGE>
SF HOLDINGS GROUP, INC.
-----------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
(In thousands)
--------------
<TABLE>
<CAPTION>
Additional Minimum Total
Common Paid In Retained Pension Translation Shareholders'
Stock Capital Earnings Liability Adjustment Equity
----------- ------------ ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 26, 1998 $ 7 $ 3,357 $ 4,785 $ - $ (476) $ 7,673
Net (loss) - - (4,459) - - (4,459)
Preferred dividend - - (764) - - (764)
Accretion of redeemable common stock - - (11) - - (11)
Minimum pension liability adjustment - - - (2,393) - (2,393)
Translation adjustment - - - - (345) (345)
------ ---------- --------- -------- ------- ---------
Balance, September 27, 1998 7 3,357 (449) (2,393) (821) (299)
Net (loss) - - (18,681) - - (18,681)
Preferred dividend - - (4,847) - - (4,847)
Accretion of redeemable common stock - - (67) - - (67)
Minimum pension liability adjustment - - - 2,255 - 2,255
Translation adjustment - - - - 272 272
------ ---------- --------- -------- ------- ---------
Balance, September 26, 1999 7 3,357 (24,044) (138) (549) (21,367)
Issuance Preferred B, Series 2 - (3,357) (11,643) - - (15,000)
Net income - - 146 - - 146
Preferred dividend - - (5,503) - - (5,503)
Accretion of redeemable common stock - - (69) - - (69)
Minimum pension liability adjustment - - - (49) - (49)
Translation adjustment - - - - (122) (122)
------ ---------- --------- -------- ------ ---------
Balance, September 24, 2000 $ 7 $ - $(41,113) $ (187) $ (671) $(41,964)
====== ========== ========= ======== ====== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE>
SF HOLDINGS GROUP, INC.
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
As used in these notes, unless the context otherwise requires, the
"Company" shall refer to SF Holdings Inc. ("SF Holdings") and its subsidiaries,
including Sweetheart Holdings Inc. ("Sweetheart") and The Fonda Group, Inc.
("Fonda").
The Company is one of the largest producers of plastic and paper
disposable foodservice and food packaging products in North America. In Fiscal
2000, the Company had net sales of approximately $1.3 billion. The Company sells
a broad line of disposable paper, plastic and foam foodservice and food
packaging products under both branded and private labels to institutional
foodservice and consumer foodservice customers, including large national
accounts, and participates at all major price points. The Company conducts its
business through two principal operating subsidiaries, Sweetheart and Fonda and
markets its products under its well recognized Sweetheart(R), Trophy(R),
Sensations(R), Hoffmaster(R) and Lily(R) brands. In addition, Sweetheart
designs, manufactures and leases container filling equipment for use by dairies
and other food processors. This equipment is specifically designed by Sweetheart
to fill and seal containers in customers' plants. One national customer of
Sweetheart accounted for 11.1% of its net sales in Fiscal 2000.
1. PRIOR YEARS RESTATEMENT
On December 3, 1999, Creative Expressions Group, Inc. ("CEG"), an
affiliate of the Company in the disposable party goods products business, became
an 87% owned subsidiary of SF Holdings pursuant to a merger (the "CEG Merger").
The companies are under common control, and therefore, the transaction has been
accounted for in a manner similar to a pooling-of-interests method. The
financial statements have been restated for all periods presented to include the
balance sheet and results of operations of CEG (See Note 16).
The following information presents certain income statement data of the
separate companies for the periods preceding the CEG Merger:
<TABLE>
<CAPTION>
Nine Weeks
Ended Fifty Two
Fiscal Fiscal September Weeks Ended
2000 1999 27, 1998 July 26, 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net Sales
SF Holdings $ 1,181,969 $ 1,075,465 $ 252,066 $ 536,764
CEG 94,919 106,539 23,586 86,153
------------ ------------ ---------- ----------
Consolidated net sales $ 1,276,888 $ 1,182,004 $ 275,652 $ 622,917
============ ============ ========== ==========
Net income (loss)
SF Holdings $ (2,418) $ (15,174) $ (4,853) $ 1,684
CEG 2,564 (3,507) 394 (1,423)
------------ ------------ ---------- ----------
Consolidated net income (loss) $ 146 $ (18,681) $ (4,459) $ 261
============ ============ ========== ==========
</TABLE>
Sales from SF Holdings to CEG were eliminated and have been excluded
from net sales as presented. Intercompany sales to CEG were $30.0 million in
Fiscal 2000, $40.1 million in Fiscal 1999, $6.9 million in the 1998 Transition
Period and $17.0 million in Fiscal 1998.
35
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal year end - In Fiscal 1998, the Company's Board of Directors
approved a change in the Company's fiscal year from the year ended September 30
to the 52 or 53 week period ending on the last Sunday in September. Fiscal 2000
is the 52 week period ended September 24, 2000. Fiscal 1999 is the 52 week
period ended September 26, 1999. The nine-week period from July 27, 1998 to
September 27, 1998 (the "1998 Transition Period") has been treated as a
transition period that was not part of Fiscal 1998 or Fiscal 1999. Fiscal 1998
is the 52 week period ended July 26, 1998.
Principles of Consolidation and Translation - The financial statements
include the accounts of the Company and its subsidiaries on a consolidated basis
as of September 24, 2000, September 26, 1999, September 27, 1998 and July 26,
1998 for Fiscal Years 2000, 1999, the 1998 Transition Period and Fiscal 1998.
Assets and liabilities denominated in Canadian dollars are translated at the
rates of exchange in effect at the balance sheet date. Income amounts are
translated at the average of the monthly exchange rates. The cumulative effect
of translation adjustments is deferred and classified as a cumulative
translation adjustment. All inter-company accounts and transactions have been
eliminated.
The Company incorporates the results of Fibre Marketing Group, LLC
("Fibre Marketing") based upon the equity method of accounting for its relative
share of the profit and or loss of Fibre Marketing for the corresponding period
(See Note 16).
Cash, including Cash Equivalents, Restricted Cash and Cash in Escrow -
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash overdrafts are reclassified to
accounts payable and accrued payroll and related costs. Cash received as
proceeds from the sale of assets is restricted to qualified capital expenditures
under the terms of a lease agreement and is held in escrow with the trustee
until utilized.
Inventories - The Company accounts for inventories using the first-in
first-out (FIFO) method.
Property, Plant and Equipment - Property, plant and equipment is
recorded at cost, less accumulated depreciation, and is depreciated on the
straight-line method over the estimated useful lives of the assets, with the
exception of property, plant and equipment acquired prior to January 1, 1991,
which is depreciated on the declining balance method.
The asset lives of buildings and fixtures range between 12 and 50
years. The asset lives of equipment range between 3 and 18 years. The asset
lives of leasehold improvements range between 5 and 10 years.
Deferred Catalog Cost and Advertising Expense - Fonda expenses the
costs of advertising as incurred, except for catalog costs, which are
capitalized and amortized over the expected period of future benefits. Direct
response advertising consists primarily of catalogs that include order forms for
Fonda's products. The everyday products catalog costs are expensed over a period
of twelve months, while the spring, fall and holiday season catalog costs are
amortized over periods ranging from four to six months coinciding with shipments
of products.
At September 24, 2000 and September 26, 1999, $215,000 and $290,000,
respectively, of unamortized catalog costs were included in other current
assets. Advertising expense was $193,000 in Fiscal 2000, $101,000 in Fiscal
1999, $27,000 in the 1998 Transition Period and $451,000 in Fiscal 1998. Catalog
expense was $559,000 in Fiscal 2000, $746,000 in Fiscal 1999, $165,000 in the
1998 Transition Period, and $748,000 in Fiscal 1998.
Advanced Royalties and Minimum License Guarantees - The Company enters
into licensing agreements with third parties for the right to use their designs
and trademarks. Certain agreements require minimum guarantees of royalties, as
well as advance payments. Advance royalty payments are recorded as other current
assets and are charged to expense as royalties are earned. Minimum license
guarantees are recorded as an other asset, with a corresponding payable, when
the agreement is executed and are charged to expense based on actual
36
<PAGE>
sales. The Company charges to expense remaining advance royalties and minimum
license guarantees when management determines that actual related product sales
are significantly less than original estimates.
As of September 24, 2000 and September 26,1999, the Company had
$450,000 and $536,000 in minimum license guarantees and advance royalties, net
of reserves, respectively. Future minimum royalty payments are $60,000 in 2001
and $187,000 thereafter.
Revenue Recognition - Revenue is recognized upon shipment of product.
Also, Sweetheart rents filling equipment to certain of its customers and
recognizes this income over the life of the lease.
Goodwill - Goodwill represents the excess of the purchase price over
the fair value of tangible and identifiable intangible net assets acquired and
is amortized on a straight-line basis over twenty years. The carrying value of
goodwill is reviewed when facts and circumstances suggest that it may be
impaired. The Company assesses its recoverability by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted projected future cash flows. Should the review indicate
that goodwill is not recoverable, the Company's carrying value of the goodwill
would be reduced by the estimated shortfall of the cash flows.
Income Taxes - Deferred income taxes are provided to recognize
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities.
Reclassifications - Certain prior period balances have been
reclassified to conform with current presentation.
Impact of Recently Issued Accounting Standards - In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and requires that an entity recognize all derivatives at
fair value in the statement of financial position. The Company has evaluated
this process which is effective for Fiscal 2001 and has concluded that SFAS No.
133 will not have a significant impact on the financial statement presentation.
In December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 establishes accounting and reporting standards for
revenue recognition and requires that an entity not recognize revenue until it
is realized or realizable and earned. The Company has evaluated this bulletin
which is effective for Fiscal 2001 and has concluded that SAB No.101 will not
have a significant impact on the financial statement presentation.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting fiscal years. Actual results could differ from those
estimates.
3. INVENTORIES
The components of inventories are as follows (in thousands):
September 24, September 26,
2000 1999
--------------- ---------------
Raw materials and supplies $ 66,941 $ 51,002
Finished products 148,231 130,329
Work in progress 11,485 8,036
---------- --------
Total inventories $ 226,657 $189,367
========= ========
37
<PAGE>
4. INCOME TAXES
The income tax provision includes the following components (in
thousands):
----------- --------- ----------------- ---------------
Nine Weeks Ended Fifty Two Weeks
Fiscal Fiscal September 27, Ended July 26,
2000 1999 1998 1998
----------- --------- ----------------- ---------------
Current-
Federal $ 3,749 $ (866) $ (187) $ 5,254
State 1,195 423 (84) 1,712
Foreign 270 - - -
-------- --------- --------- ---------
Total current 5,214 (443) (271) 6,966
-------- --------- ---------- ---------
Deferred -
Federal (157) (7,515) (3,272) (5,095)
State (943) (1,575) (482) (626)
Foreign - (28) (345) -
-------- --------- --------- ---------
Total deferred (1,100) (9,118) (4,099) (5,721)
-------- --------- --------- ---------
$ 4,114 $ (9,561) $ (4,370) $ 1,245
======== ========= ========= =========
The effective tax rate varied from the U.S. Federal tax rate of 35% for
Fiscal 2000, 1999 and 1998 as a result of the following:
Nine Weeks
Ended
Fiscal Fiscal September Year Ended
2000 1999 27, 1998 July 26, 1998
-------- ------ ------------- -------------
U.S. Federal tax rate 35% 35% 35% 35%
State income taxes, net of
U.S. Federal tax impact 5 3 4 (121)
Interest on discount notes 6 (1) (1) (22)
Non-deductible amortization 12 (3) (2) (30)
Other 3 (1) 11 (77)
--- --- --- ------
Effective tax rate 61% 33% 47% (215)%
=== === === ======
38
<PAGE>
Deferred income taxes reflect the net tax effects of net operating loss
carry-forwards, tax credit carry-forwards, and temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The significant components of the
Company's net deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
September 24, September 26,
2000 1999
--------------- ----------------
<S> <C> <C>
Assets
Purchase price allocation for property, plant and equipmen $ 397 $ 400
Capitalized inventory costs 2,167 1,631
Allowance for doubtful accounts receivable 2,747 2,150
Employee benefits 4,053 7,259
Inventory and sales related reserves 7,527 9,908
Post-retirement health and pension benefits 25,451 26,990
Deferred gain on sale-leaseback transaction 41,689 -
Accreted Interest 10,382 6,295
Benefit of tax carry-forwards 16,455 84,470
Other 613 536
--------- ---------
111,481 139,639
Liabilities
Depreciation (51,157) (73,096)
Inventory adjustments (2,708) (11,198)
--------- ---------
(53,865) (84,294)
--------- ---------
Net deferred tax assets $ 57,616 $ 55,345
========= =========
</TABLE>
Sweetheart has net operating loss carry-forwards for income tax
purposes of approximately $32 million, which will expire in 2018. Although
future earnings cannot be predicted with certainty, management currently
believes that realization of the net deferred tax asset is more likely than not.
5. PROPERTY, PLANT AND EQUIPMENT, NET
The Company's major classes of property, plant and equipment, net are
as follows (in thousands):
September 24, September 26,
2000 1999
---------------- --------------
Land & Buildings $ 136,548 $ 144,693
Leasehold improvements 1,282 1,194
Machinery and equipment 205,568 324,631
Construction in progress 11,006 6,957
--------- ----------
Total property, plant and equipment 354,404 477,475
--------- ----------
Accumulated depreciation (91,036) (90,166)
--------- ----------
Property, plant and equipment, net $ 263,368 $ 387,309
========= ==========
Depreciation expense was $43.2 million in Fiscal 2000, $50.3 million
in Fiscal 1999, $12.3 million in the 1998 Transition Period and $17.4 million in
Fiscal 1998. In addition, property, plant and equipment includes buildings under
capital lease at a cost of $2.2 million and a net book value of $1.4 million at
39
<PAGE>
September 24, 2000 and $1.5 million at September 26, 1999.
6. ACQUISITIONS
On May 15, 2000, Sweetheart Cup acquired Sherwood, a manufacturer of
paper cups, containers and cup making equipment. Pursuant to a certain Stock
Purchase Agreement among Sweetheart Cup and the stockholders of Sherwood,
Sweetheart Cup acquired all of the issued and outstanding capital stock (the
"Sherwood Acquisition") of Sherwood and its subsidiaries for an aggregate
purchase price of $17.4 million of which $12.4 million was paid in cash, subject
to post closing adjustments. As part of the purchase price, Sweetheart Cup
issued to the stockholders of Sherwood promissory notes due May 2005 in an
aggregate principal amount of $5.0 million and a present value of $2.9 million.
Sweetheart Cup also assumed $9.3 million of Sherwood debt, which was paid in
full on June 15, 2000. The Sherwood Acquisition has preliminarily resulted in
goodwill as of September 24, 2000 of $11.2 million, which is being amortized
over 20 years. The acquisition has been accounted for using the purchase method
of accounting. Amounts and allocations of costs recorded may require adjustment
based upon information coming to the attention of the Company that is not
currently available. The consolidated financial statements of the Company
include the activity for Sherwood from May 15, 2000 to September 24, 2000. The
inclusion of this acquisition within the financial statements presented had a
minimal impact on the Company's results.
On March 12, 1998, the Company acquired 90% of the total outstanding
common stock, including 48% of the voting stock, of Sweetheart, a manufacturer
of disposable food service and food packaging products, for $125 million (the
"Sweetheart Investment"), plus transaction fees and expenses of approximately
$4.5 million. The aggregate purchase price consisted of $88 million in cash, a
demand promissory note of $7 million (which was satisfied immediately following
the consummation of the Sweetheart Investment) and $30 million of exchangeable
preferred stock (see Note 13). The excess of the purchase price over the
Company's preliminary evaluation of the fair value of the net assets acquired
was $74 million and has been recorded as goodwill.
The following summarized, unaudited pro forma results of operations
assume the Fiscal 1998 acquisition occurred as of the beginning of the year (in
thousands),
Fifty Two
Weeks Ended
July 26, 1998
-------------
Net sales $ 1,195,709
Loss before extraordinary loss $ (38,810)
Pursuant to a certain agreement with the stockholders of Sweetheart as
of December 29, 1997 (the "Sweetheart Stockholders"), following the fifth
anniversary of the consummation of the Sweetheart Investment, the Sweetheart
Stockholders have the right to exchange their shares of Class A common stock of
Sweetheart for warrants (the "Exchange Warrants") to purchase, for nominal
consideration, shares of Class C Common Stock of SF Holdings representing 10% of
the total outstanding shares of common stock of SF Holdings at the consummation
of the Sweetheart Investment on a fully diluted basis. SF Holdings has the right
to cause such exchange and has the right to thereafter repurchase the Exchange
Warrants, in whole or in part, for an aggregate call price of $50 million,
subject to increase at 12.5% per annum until the fifth anniversary of the
consummation of the Sweetheart Investment. Upon the occurrence of a merger (as
defined in such agreement), the Sweetheart Stockholders will be required to
exchange their shares of Class A common stock of Sweetheart for the Exchange
Warrants. In addition, in the event SF Holdings proposes to sell shares of
Sweetheart common stock in an amount greater than 30% of the outstanding shares
of Sweetheart common stock, then SF Holdings will have the right to require the
Sweetheart Stockholders to sell all, but not less than
40
<PAGE>
all, of their shares of Sweetheart common stock.
In January 1998, Fonda acquired certain net assets of Leisureway, Inc.,
a manufacturer of white paper plates, for $7.2 million including deferred
payments of $0.3 million and acquisition costs. The excess of the purchase price
over the Fonda's evaluation of the fair value of the net assets acquired was
$7.1 million and has been recorded as goodwill.
The above acquisition has been accounted for under the purchase method
and the results have been included in the consolidated statements of operations
since the respective date of acquisition. Goodwill amortization was $1.0 million
in Fiscal 2000, $1.2 million in Fiscal 1999, $0.2 million in the 1998 Transition
Period and $1.0 million in Fiscal 1998. Accumulated amortization was $4.0
million and $3.0 million at September 24, 2000 and September 26, 1999,
respectively. The inclusion of this acquisition within the financial statements
presented had a minimal impact on the Company's results.
7. OTHER ASSETS
The components of other assets are as follows (in thousands):
September 24, September 26,
2000 1999
------------- -------------
Debt issuance costs, net of
accumulated amortization $ 10,786 $ 11,912
Notes receivable - 4,084
Intangible asset 1,902 1,909
Prepaid assets 3,076 989
Other 4,140 5,083
-------- --------
Total other assets $ 19,904 $ 23,977
======== ========
Amortization of debt issuance costs totaled $3.7 million in Fiscal
2000, $3.9 million in Fiscal 1999, $0.4 million in the 1998 Transition Period
and $1.6 million in Fiscal 1998.
8. OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows (in
thousands):
September 24, September 26,
2000 1999
--------------- -------------
Sales allowances $ 19,054 $ 16,967
Litigation, claims and assessments
(See Note 24) 9,288 20,004
Deferred rent payable 8,631 -
Taxes, other than income taxes 3,295 4,434
Interest payable 3,167 5,615
Medical & other insurance 1,565 1,060
Freight 1,467 1,554
Other 9,647 8,635
------- --------
Total other current liabilities $ 56,114 $ 58,269
======== ========
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9. DEFERRED GAIN ON SALE OF ASSETS
In connection with a sale-leaseback transaction, on June 15, 2000,
Sweetheart Cup and Sweetheart Holdings Inc. sold certain production equipment
located in Owings Mills, Maryland, Chicago, Illinois and Dallas, Texas for a
fair market value of $212.3 million to several owner participants. Pursuant to a
lease dated as of June 1, 2000 ("the Lease") between Sweetheart Cup and State
Street Bank and Trust Company of Connecticut, National Association ("State
Street"), Sweetheart Cup will lease such production equipment from State Street,
as owner trustee for several owner participants, through November 9, 2010. The
associated property, plant and equipment was removed from the balance sheet and
a deferred gain of $107.0 million was recorded and will be amortized over 125
months which is the term of the Lease. Annual rental payments under the Lease
will be approximately $32.0 million.
10. LONG-TERM OBLIGATIONS
Long-term debt, including amounts payable within one year, is as
follows (in thousands):
September 24, September 26,
2000 1999
------------- ------------------
U.S. Credit Facility $ 102,249 $ 84,476
Fonda Revolving Credit Agreement 40,710 11,710
Canadian Credit Facility 10,320 9,416
10.5% Senior Subordinated Notes 110,000 110,000
Sherwood Industries Notes 3,541 -
Other - Fonda 1,168 1,733
Fonda Senior Subordinated Notes 120,000 120,000
SF Holdings Discount Notes 104,245 92,018
CEG Debt - 39,046
9.625% Senior Secured Notes - 190,000
---------- ----------
Total debt 492,233 658,399
Less - Current portion of long-term debt (57,266) (277,693)
---------- ----------
Total long-term debt $ 434,967 $ 380,706
========== ==========
The aggregate annual maturities of long-term debt at September 24, 2000
are as follows (in thousands):
Fiscal 2001 $ 57,266
Fiscal 2002 5,120
Fiscal 2003 115,122
Fiscal 2004 5,128
Fiscal 2005 and thereafter 309,597
-----------
$ 492,233
===========
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U.S. Credit Facility - On June 15, 2000, Sweetheart's revolving credit
facility (the "U.S. Credit Facility") was amended and restated to extend the
maturity of the $135 million revolving credit facility, subject to borrowing
base limitations, through June 15, 2005 and to add a term loan of $25 million
that requires equal monthly principal payments of $0.4 million through June
2005. Both the term loan and the revolving credit facility have an accelerated
maturity date of July 1, 2003 if Sweetheart's Senior Subordinated Notes due
September 1, 2003 are not refinanced before June 1, 2003. Borrowings under the
revolving credit facility will now bear interest, at Sweetheart's election, at a
rate equal to (i) LIBOR plus 2.00% or (ii) a bank's base rate plus 0.25%, plus
certain other fees. Borrowings under the term loan will bear interest, at
Sweetheart's election, at a rate equal to (i) LIBOR plus 2.50% or (ii) a bank's
base rate plus 0.50%, plus certain other fees. In Fiscal 2000, the weighted
average annual interest rate for the U.S. Credit Facility was 9.57%. The credit
facility is collateralized by Sweetheart's inventories and receivable with the
term loan portion of the credit facility further collateralized by certain
production equipment. As of September 24, 2000, $56.1 million was available
under such facility. The fee for outstanding letters of credit is 2.00% per
annum and there is a commitment fee of 0.375% per annum on the daily average
unused amount of the commitments.
The indebtedness of Sweetheart Cup under the U.S. Credit Facility is
guaranteed by Sweetheart Holdings and secured by a first priority perfected
security interest in inventory, accounts receivable and all proceeds of the
foregoing of Sweetheart Cup, a first priority security interest, shared with the
sale-leaseback owner participants, in Shared Collateral (as defined in the U.S.
Credit Facility to include primarily all capital stock owned by Sweetheart
Holdings and Sweetheart Cup and of each of their respective present and future
direct subsidiaries, all inter-company indebtedness payable to Sweetheart
Holdings or Sweetheart Cup by Sweetheart Holdings, Sweetheart Cup or their
respective present and future subsidiaries, and any proceeds from business
interruption insurance) and a first priority perfected security interest in
certain equipment.
The U.S. Credit Facility contains various covenants that limit, or
restrict, among other things, indebtedness, dividends, leases, capital
expenditures and the use of proceeds from asset sales and certain other business
activities. Additionally, Sweetheart must maintain on a consolidated basis,
certain specified ratios at specified times, including, without limitation,
maintenance of minimum fixed charge coverage ratio. Sweetheart is currently in
compliance with all covenants under the U.S. Credit Facility. The U.S. Credit
Facility provides for partial mandatory prepayments upon the sale of equipment
collateral unless net proceeds are used to purchase replacement collateral and
full repayment upon any change of control (as defined in the Agreement).
Fonda Revolving Credit Agreement - On January 12, 2000, Fonda's
revolving credit facility was amended to increase the revolving facility to $55
million, subject to borrowing base limitations and collateralized by eligible
accounts receivable and inventories, certain general intangibles and the
proceeds on the sale of accounts receivable and inventory. On February 28, 2000,
Fonda's revolving credit facility was amended to extend the maturity through
September 30, 2001. Borrowings are available at the bank's prime rate plus 0.25%
or at LIBOR plus 2.25% at the election of Fonda. At September 24, 2000, $40.7
million was outstanding and $14.3 million was the maximum remaining advance
available based upon eligible collateral. Although Fonda intends to refinance
this debt, there can be no assurances that Fonda will be able to obtain such
refinancing on terms and conditions acceptable to Fonda.
Canadian Credit Facility - A Canadian subsidiary has a Credit Agreement
(the "Canadian Credit Facility"). which provides for a term loan facility of up
to Cdn $10 million and a revolving credit facility of up to Cdn $10 million.
Term loan borrowings under the Canadian Credit Facility are payable quarterly
through May 2001 and revolving credit and term loan borrowings have a final
maturity date of June 15, 2001. The Canadian Credit Facility is secured by all
existing and thereafter acquired real and personal tangible assets of Lily Cups,
a subsidiary of Sweetheart Cup, and net proceeds on the sale of any of the
foregoing. Borrowings under the 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. As of September
24, 2000, Cdn $1.8 million (approximately $1.2 million) was available under the
Canadian Credit Facility. Sweetheart intends to
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<PAGE>
refinance this debt prior to its maturity however, there can be no assurances
that it will be able to obtain such refinancing on terms and conditions
acceptable to the Sweetheart.
Senior Subordinated Notes - Sweetheart Cup is the obligor and
Sweetheart Holdings the guarantor with respect to $110 million of Senior
Subordinated Notes.
The Senior Subordinated Notes bear interest at 10.50% per annum,
payable semi-annually in arrears on March 1 and September 1 and mature on
September 1, 2003. The Senior Subordinated Notes are subject to redemption at
the option of Sweetheart, in whole or in part, at the redemption price
(expressed as percentages of the principal amount), plus accrued interest to the
redemption date, at a call premium of 101.313% until September 1, 2001 and 100%
thereafter. The Senior Subordinated Notes are subordinate in right of payment to
the prior payment in full of all borrowings under the U.S. Credit Facility, all
obligations under the Lease, and all other indebtedness not otherwise
prohibited.
The Senior Subordinated Notes contain various covenants which prohibit,
or limit, among other things, asset sales, change of control, dividend payments,
equity repurchases or redemption, the incurrence of additional indebtedness, the
issuance of disqualified stock, certain transactions with affiliates, the
creation of additional liens and certain other business activities.
Sherwood Industries Notes - As part of the Sherwood Acquisition on May
15, 2000, Sweetheart Cup issued to the stockholders of Sherwood promissory notes
due May 2005 in an aggregate principal amount of $5.0 million and a present
value of $2.9 million.
Fonda Senior Subordinated Notes - In 1997, Fonda issued $120 million of
9-1/2% Series A Senior Subordinated Notes due 2007 (the "Notes") with interest
payable semi-annually. Payment of the principal of, and interest on, the Notes
is subordinate in right of payment to Senior Debt (as defined therein), which
includes the revolving credit facility. The principal amount of the Notes is
payable on February 28, 2007. Fonda may, at its election, redeem the Notes at
any time after March 1, 2002 at a redemption price equal to a percentage
(104.750% after March 1, 2002 and declining in annual steps to 100% after March
1, 2005) of the principal amount thereof plus accrued interest. The Notes
provide that upon the occurrence of a change of control (as defined therein),
the holders thereof will have the option to require the redemption of the Notes
at a redemption price equal to 101% of the principal amount thereof plus accrued
interest.
SF Holdings Discount Notes - On March 12, 1998, the Company issued
units consisting of $144 million aggregate principal amount at maturity of 12
3/4% Senior Secured Discount Notes due 2008 (the "Discount Notes") and 288,000
shares of Class C Common Stock for net proceeds of $77.5 million. Until March
15, 2003, accrued interest on the Discount Notes will not be paid but will
accrete semi-annually, thereby increasing the carrying value of the Discount
Notes. The fair value of such Class C Common Stock ($2.4 million) at the date of
issuance was recorded as common stock and paid-in capital with a corresponding
reduction in the carrying value of the Discount Notes. The resulting discount,
as well as $4.5 million of financing fees included in other assets, is being
amortized as additional interest expense over the term of the Discount Notes.
CEG Debt - In conjunction with the CEG Asset Purchase Agreement, CEG
retired its long term debt during Fiscal 2000. At September 26, 1999 the long
term debt consisted of (i) a $22.8 million revolving line of credit, (ii) a
$10.0 million senior subordinated notes and (iii) a $5.4 million junior
subordinated note.
Senior Secured Notes - On June 15, 2000, Sweetheart issued a redemption
notice to the holders of its Senior Secured Notes due September 1, 2000. In
connection therewith, Sweetheart paid $190.0 million plus accrued interest with
the U.S. Trust Company of New York in settlement of the Senior Secured Notes.
44
<PAGE>
Pursuant to the terms of the instruments governing the indebtedness of
the Company, Fonda and Sweetheart, each company is subject to certain
affirmative and negative covenants customarily contained in agreements of this
type, including, without limitation, covenants that restrict, subject to
specified exceptions (i) mergers and acquisitions, (ii) capital expenditures,
(iii) dividends, and (iv) additional indebtedness. In addition, such debt
instruments restrict each subsidiary's ability to pay dividends or make other
distributions to SF Holdings. The credit facilities also require that each
subsidiary satisfy certain financial covenants.
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments included in current
assets and current liabilities approximate their estimated fair value because of
the relatively short maturities of these instruments. Long-term debt
instruments, other than the Company's Senior Secured Discount Notes,
Sweetheart's Senior Subordinated Notes and Fonda's Senior Subordinated Notes
have variable interest rates that fluctuate along with current market conditions
and thus the carrying value approximates their fair value.
The following are the fair values of the Company's, Sweetheart's and
Fonda's notes, based on independent third party information.
The fair value of the SF Holdings Notes are estimated to be $6.4
million lower than the carrying value at September 24, 2000 and $6.4 million
lower than the carrying value at September 26, 1999.
The fair value of Sweetheart's Senior Subordinated Notes are estimated
to be $7.7 million lower than the carrying value at September 24, 2000 and $12.1
million lower than the carrying value at September 26, 1999.
The fair value of the Fonda's Senior Subordinated Notes is estimated to
be $15.6 million lower than the carrying value at September 24, 2000 and $20.4
million lower than the carrying value at September 26, 1999.
12. OTHER LIABILITIES
The components of other liabilities are as follows (in thousands):
September 24, September 26,
2000 1999
------------- -------------
Post-retirement health care benefits
(See Note 21) $ 47,965 $ 46,792
Pensions (See Note 21) 5,648 10,508
Prepaid vendor credits 750 1,500
Other 3,148 3,838
-------- --------
Total other liabilities $ 57,511 $ 62,638
======== ========
45
<PAGE>
13. PREFERRED STOCK
Exchangeable Preferred Stock
On March 12, 1998, the Company issued units consisting of $30 million
of 13 3/4% Exchangeable Preferred Stock due 2009 (the "Exchangeable Preferred")
and 11,100 shares of Class C Common Stock. Until March 15, 2003, cumulative
dividends on the Exchangeable Preferred are paid quarterly, at the Company's
option, subject to certain restrictions, either in cash or by the issuance of
additional shares of Exchangeable Preferred. Thereafter, dividends will be
payable in cash, subject to certain exceptions. The fair value of such Class C
Common Stock($0.9 million) at the date of issuance was recorded as common stock
and paid-in capital with a corresponding reduction in the carrying value of the
Exchangeable Preferred. The resulting discount is being amortized as additional
preferred stock dividends over the term of the Exchangeable Preferred. The
Exchangeable Preferred is exchangeable at the Company's option into 13 3/4%
subordinated notes due March 15, 2009.
As of December 21, 2000, all cumulative dividends on the Exchangeable
Preferred have been paid by the issuance of additional shares of Exchangeable
Preferred. The value of the Exchangeable Preferred, was $41.8 million and $36.3
million as of September 24, 2000 and as of September 26, 1999, respectively. The
Exchangeable Preferred is not entitled to any vote, except as required in the
Company's certificate of incorporation and provided by law.
Preferred Stock Class B
On March 12, 1998, the Company authorized 100,000 shares of Preferred
Stock Class B, $.001 par value. On March 12, 1998, 15,000 shares of Class B
Series 1 preferred stock, $.001 par value, were issued to CEG in consideration
for a $15 million investment. On December 3,1999, 15,000 shares of Class B
Series 2 preferred stock were issued in connection with the merger with CEG in
consideration for 87% of shares of CEG's common stock with a liquidation value
of $15 million.
The Class B Series 1 and Series 2 preferred stock are not entitled to
receive dividends. The holder of Class B Series 1 preferred stock is not
entitled to any vote, except as otherwise provided by law. The holders of Class
B Series 2 preferred stock are entitled to one vote for each share held in all
matters voted on by the shareholders. Each series of preferred stock is
convertible, at any time, into 133,494 shares of Class A Common Stock and is
required to be redeemed on March 13, 2010, provided funds are legally available
for such purposes.
14. MINORITY INTEREST IN SUBSIDIARIES
Minority interest represents 10% and 13% of the total common stock
interest in Sweetheart and CEG, respectively, not owned by the Company. The 10%
minority interest in Sweetheart is held by the 52% voting stockholders, based on
historical cost as of March 12, 1998, and as adjusted to September 24, 2000 to
reflect such stockholders' interest in Sweetheart's net income.
15. STOCKHOLDERS' EQUITY AND REDEEMABLE COMMON STOCK
On March 12, 1998, in conjunction with the merger, each share of Class
A and Class B common stock of Fonda, and options and warrants to purchase such
shares, were converted into 47.6766 shares of Class A or Class B Common Stock of
the Company, respectively.
In Fiscal 1998, Fonda's Board of Directors granted the Company's Chief
Executive Officer and majority stockholder options to purchase shares of Class A
Common Stock at an option price equal to the
46
<PAGE>
current market value. In conjunction with the merger, such options were
converted into options to purchase 71,515 shares of Class A Common Stock of SF
Holdings. The proforma effect of such options on compensation expense, as
required by SFAS No. 123, was less than $.1 million in each of Fiscal 2000,
Fiscal 1999, the 1998 Transition period and Fiscal 1998.
In Fiscal 1999, the Company completed a one for ten reverse stock split
on Common Stock Classes A, B, and C. Shareholders' equity, adjusted for such
conversion consists of the following (in thousands, except share data):
<TABLE>
<CAPTION>
September 24, September 26,
2000 1999
------------- -------------
<S> <C> <C>
Common Stock Class A, $.001 par value, 1,500,000 shares
authorized, 562,583 issued and outstanding in 2000 and 1999 6 6
Common Stock Class B, $.001 par value, 100,000 shares authorized,
56,459 issued and outstanding in 2000 and 1999 1 1
Common Stock Class C, $.001 par value, 200,000 shares authorized,
39,900 issued and outstanding in 2000 and 1999 - -
Paid-in Capital - 3,357
Retained earnings (deficit) (41,113) (24,044)
Minimum pension liability (187) (138)
Translation adjustment (671) (549)
---------- ----------
$ (26,964) $ (21,367)
========== ==========
</TABLE>
The rights of holders of Class A, Class B, and Class C Common Stock are
identical except as to voting and conversion rights. The Class A Common Stock is
entitled to one vote per share and has no cumulative voting rights in election
of directors. The Class B Common Stock is entitled to one-tenth of a vote per
share and shall vote together with Class A Common Stock as a single class;
provided, however, that the vote of the holders of a majority of shares of Class
B Common stock shall be required for the amendment or modification of the
Company's certificate of incorporation in any way that would adversely affect
the rights of the Class B Common Stock. The Class C Common Stock is not entitled
to any vote whatsoever, except to the extent provided by law. The Class B Common
Stock may, at any time, be converted into Class A Common Stock at the option of
the holder other than a " Non-Converting Holder" (as identified in the
certificate of incorporation), or at the option of any Non-Converting Holder
concurrently with a sale or other transfer of Class B Common Stock to any
person, other than a Non-Converting Holder. The Class C Common Stock may,
following an under written public offering of common stock, be converted into
Class A Common Stock at the option of the holder, or at the option of the
Company.
All common stockholders are entitled , among other things, (I) to share
ratably in dividends and (ii) in the event liquidation, distribution or a sale
of assets, dissolution or winding-up of the Company, to share ratably in the
distribution of assets legally available therefor.
Prior to the merger, Fonda paid $9.8 million in fiscal 1998 and $.2
million in Fiscal 1997 to repurchase shares of its then outstanding Class A
Common Stock and its Class A Common Stock subject to redemption agreement
("Redeemable Common") from its stockholders. The repurchase of the Redeemable
Common for less than the present value of the liquidation amount as of the date
of repurchase resulted in a credit to retained earnings in Fiscal 1997. In
conjunction with the merger, the treasury stock was canceled and the outstanding
Redeemable Common were converted into shares of redeemable common stock of SF
Holdings and the book value of the Redeemable Common at that date was credited
to retained earnings.
47
<PAGE>
On September 14, 2000, Fonda terminated the Stock Appreciation Unit
Plan (the "SAR Plan") effective as of October 1, 1999. In total, 24,780 SARs
were redeemed at a total cost to the Company of $0.5 million. The SAR Plan had
provided for the granting of up to 200,000 units to key executives of the
Company. A grantee was entitled to the appreciation in a unit's value from the
date of the grant to the date of its redemption. Unit value was based upon a
formula consisting of net income (loss) and book value criteria and grants
vested over a five-year period. The Company granted 15,560 units in Fiscal 1998
and 10,980 units in Fiscal 1997 at an aggregate value on the date of grant of
$0.9 million and $0.4 million, respectively. There were no units granted in
Fiscal Years 2000 or 1999. The Company recorded compensation expense of $0.5
million in Fiscal 1998 and $0.1 million in Fiscal 1997. No compensation expense
was required to be recorded in Fiscal Years 2000, 1999 or in the 1998 Transition
Period. As of September 20, 2000, all vested units have been redeemed.
16. RELATED-PARTY TRANSACTIONS
All of the affiliates referenced below are directly or indirectly under
the common ownership of the Company's Chief Executive Officer (CEO).
Fonda leases a building in Jacksonville, Florida from Dennis Mehiel,
CEO, on terms Fonda believes are no less favorable than could be obtained from
independent third parties and were negotiated on an arm's length basis. Annual
payments under the lease are $0.2 million plus annual increases based on changes
in the Consumer Price Index ("CPI") through December 31, 2014. In addition, Mr.
Mehiel can require Fonda to purchase the facility for $1.5 million, subject to a
CPI-based escalation, until July 31, 2006. In Fiscal 1998, Fonda terminated its
operations at this facility and is currently subleasing the entire facility.
Four M subleased a portion of this facility through May 1998 and again from
October 1999 through February 2000. Rent expense, net of sublease income on the
portion of the premises subleased to Four M during Fiscal 2000 was less than
$0.2, and through May 1998 was $0.1 million in Fiscal 1999, less than $0.1
million in the 1998 TP, and $0.1 million in Fiscal 1998.
On December 3, 1999, CEG became an 87% owned subsidiary of the Company
pursuant to a merger. In connection with the merger, 87% of CEG's common stock
was exchanged for 15,000 shares of Class B Series 2 Preferred Stock of the
Company. On December 6, 1999, pursuant to the CEG Asset Purchase Agreement,
Fonda purchased the intangible assets of CEG, including domestic and foreign
trademarks, patents, copyrights, and customer lists. In addition, pursuant to
the CEG Asset Purchase Agreement, Fonda purchased certain inventory of CEG. The
aggregate purchase price for the intangible assets and the inventory is $41
million ($16 million for the intangible assets and $25 million for the
inventory), payable in cash, the cancellation of certain notes and warrants, and
the assumption of certain liabilities. Pursuant to the agreement, Fonda also
acquired other CEG assets in exchange for outstanding trade payables owed to
Fonda by CEG. In connection with this agreement, Fonda canceled all other
agreements with CEG. As a result of the CEG Asset Purchase Agreement, Fonda
markets, manufactures and distributes disposable party goods products directly
to the specialty (party) channel of the consumer foodservice market. Independent
appraisals were obtained to determine the fairness of the purchase price for
such assets. Fonda believes the terms on which it purchased such assets are at
least as favorable as it could have obtained from unrelated third parties and
were negotiated on an arm's length basis.
Pursuant to a certain agreement with the stockholders of Sweetheart as
of December 29, 1997 (the "Sweetheart Stockholders"), following the fifth
anniversary of the consummation of the Sweetheart Investment, the Sweetheart
Stockholders have the right to exchange their shares of Class A common stock of
Sweetheart for warrants (the "Exchange Warrants") to purchase, for nominal
consideration, shares of Class C Common Stock of SF Holdings representing 10% of
the total outstanding shares of common stock of SF Holdings at the consummation
of the Sweetheart Investment on a fully diluted basis. SF Holdings has the right
48
<PAGE>
to cause such exchange and has the right to thereafter repurchase the Exchange
Warrants, in whole or in part, for an aggregate call price of $50.0 million,
subject to increase at 12.5% per annum until the fifth anniversary of the
consummation of the Sweetheart Investment. Upon the occurrence of a merger (as
defined in such agreement), the Sweetheart Stockholders will be required to
exchange their shares of Class A common stock of Sweetheart for the Exchange
Warrants. In addition, in the event SF Holdings proposes to sell shares of Class
A common stock or Class B common stock of Sweetheart in an amount greater than
30% of the outstanding shares of Sweetheart common stock, the Sweetheart
Stockholders will have the right to participate in such sale. In the event SF
Holdings proposes to sell shares of Sweetheart common stock in an amount greater
than 30% of the outstanding shares of Sweetheart common stock, then SF Holdings
will have the right to require the Sweetheart Stockholders to sell all, but not
less than all, of their shares of Sweetheart common stock.
During Fiscal 1998, the Fonda purchased a 38.2% ownership interest in
Fibre Marketing from a director of Fonda for $0.2 million. Four M is also a
member of Fibre Marketing. Fonda granted Sweetheart the right to acquire 50% of
it's interest in Fibre Marketing for $0.1 million. During Fiscal 2000, Fonda
sold a 13.2% interest in Fibre Marketing to Mehiel Enterprises, Inc. for $0.1
million, retaining a 25% ownership interest in Fibre Marketing. Fonda believes
that the terms on which it purchased and sold such interest are at least as
favorable as those it could otherwise have obtained from an unrelated third
party and were negotiated on an arm's length basis.
During the fourth quarter of Fiscal 2000, Sweetheart entered into a
lease agreement with D&L Development, LLC, an entity in which the Company's CEO
has an interest, to lease a warehouse facility in Hampstead, Maryland. In Fiscal
2000, rental payments under this lease were $0.7 million. Annual rental payments
under the 20-year lease are $3.7 million for the first 10 years of the lease and
$3.8 million annually, thereafter.
In November 2000, Sweetheart began leasing a facility from D&L Andover
Property, LLC, an entity in which the Company's CEO has an interest. Annual
rental payments under the 20-year lease are $1.5 million in the first year,
which escalates at a rate of 2% each year thereafter.
During Fiscal 2000, the Company sold $7.4 million of scrap paper to
Fibre Marketing. Included in accounts receivable as of September 24, 2000 is
$1.3 million due from Fibre Marketing. Other sales to affiliates during Fiscal
2000 were not significant.
During Fiscal 2000, the Company purchased $9.7 million of corrugated
containers from Box USA Holdings, Inc. ("Box USA"), $0.2 million of other
services from Four M Corporation ("Four M") and $0.9 million of travel services
from Emerald Lady, Inc.. Included in accounts payable, as of September 24, 2000,
is $0.1 million due to Box USA. Other purchases from affiliates during Fiscal
2000 were not significant.
During Fiscal 1999, the Company sold $4.1 million of scrap paper to
Fibre Marketing. Included in accounts receivable as of September 26, 1999 is
$1.1 million due from Fibre Marketing. Other sales to affiliates during Fiscal
1999 were not significant.
During Fiscal 1999, the Company purchased $7.9 million of corrugated
containers from Box USA and $0.9 million of travel services from Emerald Lady,
Inc.. Included in accounts payable, as of September 26, 1999, is $0.5 million
due to Box USA. Other purchases from affiliates during Fiscal 1999 were not
significant.
At September 24, 2000, the Company had loans receivable from its Chief
Executive Officer totaling $275,000 plus accrued interest at 10%. This loan is
payable upon demand. During Fiscal 1999, the Company also had a $150,000 loan
receivable with another executive officer plus accrued interest at 5.39% which
was paid in full in June 1999.
49
<PAGE>
SF Holdings and Fonda intend to file consolidated Federal income tax
returns, and pursuant to a tax sharing agreement, Fonda will pay SF Holdings its
allocable share of the consolidated group's consolidated Federal income tax
liability, which, in general, will equal the tax liability Fonda would have paid
if it had filed separate tax returns.
17. LEASE COMMITMENTS
The Company leases certain transportation vehicles, warehouse and
office facilities and machinery and equipment under both cancelable and
non-cancelable operating leases, most of which expire within ten years and may
be renewed by the Company. Rent expense under such arrangements totaled $34.8
million, $26.1 million, $4.8 million and $8.3 million for Fiscal Years 2000,
1999 1998 Transition Period and 1998, respectively. Future minimum rental
commitments under non-cancelable operating leases in effect at September 24,
2000 are as follows (in thousands):
Fiscal 2001 $ 53,077
Fiscal 2002 50,819
Fiscal 2003 47,707
Fiscal 2004 44,766
Fiscal 2005 42,592
Fiscal 2006 and thereafter 238,808
---------
$ 477,769
=========
Fonda leases a warehouse facility in Williamsburg, Pennsylvania which
is being accounted for as a capital lease. The term of this lease is 15 years,
expiring in Fiscal 2005. The initial cost of the lease was $2.2 million and the
net capital lease value is $1.4 million as of September 24, 2000 and was $1.5
million as of September 26, 1999. The future minimum lease payments are $0.2
million in Fiscal 2001, $0.1 million in Fiscal 2002, $0.2 million in Fiscal
2003, $0.1 million in Fiscal 2004 and $0.1 million in Fiscal 2005. The present
value of the future minimum lease payments is $0.6 million.
In connection with a sale-leaseback transaction, on June 15, 2000,
Sweetheart Cup and Sweetheart Holdings sold certain production equipment located
in Owings Mills, Maryland; Chicago, Illinois; and Dallas, Texas for a fair
market value of $212.3 million to several owner participants.
Pursuant to the Lease dated as of June 1, 2000 between Sweetheart Cup
and State Street, Sweetheart Cup will lease such production equipment from State
Street, as owner trustee for several owner participants through November 9,
2010. Sweetheart Cup may renew the Lease at its option for up to four
consecutive renewal terms of two years each. Sweetheart may also purchase such
equipment for fair market value either at the conclusion of the Lease term or
November 21, 2006, at its option. Sweetheart's obligations in connection with
the Lease are collateralized by substantially all of Sweetheart's property,
plant and equipment owned as of June 15, 2000. This lease contains various
covenants, which prohibit, or limit, among other things dividend payments,
equity repurchases or redemption, the incurrence of additional indebtedness and
certain other business activities.
Sweetheart is accounting for this transaction as an operating lease,
expensing the $32.0 million annualized rental payments and removing the
property, plant and equipment sold from its balance sheet. A deferred gain of
$107.0 million was realized from this sale and will be amortized over 125
months, which is the term of the Lease.
50
<PAGE>
18. OTHER EXPENSE (INCOME)
In Fiscal 2000, the Company paid a $0.7 million management fee to
American Industrial Partners Capital Fund, L.P. ("AIP"), an owner of Sweetheart
and accrued a $1.4 million expense in connection with the Aldridge liability.
The Company also realized a $0.7 million gain on the sale of a warehouse
facility in Owings Mills, Maryland and a $2.8 million gain due to the
amortization of the deferred gain in conjunction with the sale-leaseback
transaction. These gains were partially offset by a one-time write-off of a $1.0
million unsecured note receivable issued in connection with the Fiscal 1998 sale
of the bakery business due to the bankruptcy of the borrower. A $0.2 million
loss was incurred as a result of the sale of a building in St. Albans, Vermont
and various pieces of machinery and equipment.
In Fiscal 1999, the Company paid a $0.8 million management fee to AIP.
Sweetheart sold certain of its paper plate and paper cup equipment at a net gain
of $0.4 million and consolidated a facility in Canada resulting in a $0.8
million gain on the sale of duplicate assets.
In Fiscal 1998, the Company paid a $0.6 million management fee to AIP.
On March 24, 1998, Fonda consummated an agreement to sell substantially all of
the fixed assets and certain related working capital of its specialty and deep
tone tissue mill (the "Mill"). In addition, on July 1, 1998, Fonda consummated
an agreement with the owner of the co-generation facility at the Mill, whereby
the owner of such facility terminated its obligation to supply steam to the Mill
and to make certain land lease payments. As a result of these transactions,
Fonda realized net proceeds of $38.5 million and recorded a gain of $15.9
million, which was included in other income, net. Net proceeds included a $3.7
million note receivable (included in other assets) from the disposition of the
Mill, due in March 2008, with 5.7% interest payable in the form of additional
notes receivable. Pursuant to an asset sale covenant under the indenture
covering the Notes, Fonda reinvested approximately $10 million of such net
proceeds in fixed assets within 270 days of such disposition.
19. RESTRUCTURING CHARGE (CREDIT)
During the quarter ended March 26, 2000, Sweetheart established a
restructuring reserve of $0.7 million in conjunction with the planned
elimination of Sweetheart's centralized machine shop operation from which 53
positions would be eliminated. During the quarter ended, September 24, 2000,
Sweetheart reversed $0.2 million of this reserve as a result of 12 employees
being placed into open positions within Sweetheart. Approximately $0.1 million
of the restructuring reserve remained at September 24, 2000, which Sweetheart
expects to utilize through December 2000. A restructuring charge of $0.7 million
was incurred in Fiscal 2000 due to the initiation of a restructuring exit
activity for the November 2000 closing of the Maspeth, New York facility which
will result in the elimination of 130 positions. This amount is recorded as part
of other current liabilities on the balance sheet.
In the quarter ended March 31, 1998, Sweetheart reduced its salaried
workforce by approximately 15% and hourly workforce by less than 5%. In
connection with such plans, Sweetheart recognized $5.1 million of charges for
severance and related costs, of which $1.4 million of cash expenditures remained
unpaid as of September 27, 1998. During Fiscal 1999, Sweetheart paid $1.0
million of severance and related costs. In addition, $0.4 million of the
restructuring reserve was decreased as the restructuring plan was completed.
In May 1998, Fonda decided to close its administrative offices in St.
Albans, Vermont and relocate such offices, including its principal executive
offices, to Oshkosh, Wisconsin. Fonda accrued $0.5 million in 1998 for severance
and other costs relating to such relocation which was spent in Fiscal 1999.
Also, in Fiscal 1998, Fonda initiated a restructuring exit activity of $1.3
million for the closure of a manufacturing facility in Indianapolis, Indiana.
In Fiscal 1998, Sweetheart recognized certain non-recurring charges,
consisting primarily of $4.4
51
<PAGE>
million of financial advisory and legal fees associated with the SF Holdings
Investment, $3.7 million of severance expenses as a result of the termination of
certain officers of the Company pursuant to executive separation agreements and
retention plans for certain key executives, $3.4 million of expense based on
actuarial estimates associated with pending litigation and asset write-downs of
$1.8 million associated with the sale of the Riverside, California facility.
These expenses were offset in part by the $3.3 million gain on the sale of the
bakery business.
In the quarter ended March 31, 1998, Sweetheart decided to rationalize
certain product lines. As a result, the Company evaluated the recoverability of
the carrying value of the equipment and other assets utilized for such product
lines, which resulted in a $5.0 million charge to write-down the assets to their
fair market value.
In the quarter ended September 30, 1997, Sweetheart adopted a
restructuring plan designed to improve efficiency and enhance its
competitiveness. Restructuring charges of $9.7 million were recognized,
consisting of cash charges primarily related to severance costs, as well as
costs to close and exit the Riverside facility. Including the unspent portion of
these charges, Sweetheart had total restructuring reserves of $13.2 million
classified as "Other current liabilities" as of September 30, 1997. During
Fiscal 1998, Sweetheart paid $8.8 million of severance, plant closure and
related costs. In addition, $4.2 million of the restructuring reserve was
decreased due to a change in the restructuring plan as a result of a change in
senior management in connection with the SF Holdings Investment. During Fiscal
1999, Sweetheart paid $0.1 million of severance and related expenses. In
addition, $0.1 million of the restructuring reserve was decreased as the
restructuring plan was completed.
20. EXTRAORDINARY LOSS
During Fiscal 2000, in conjunction with the redemption of Sweetheart's
Senior Secured Notes and the refinancing of the U.S. Credit Facility, Sweetheart
charged $0.5 million, or $0.3 million net of income tax benefit, to results of
operations as an extraordinary item, which amount represents the unamortized
deferred financing fees, prepaid interest and redemption fees pertaining to such
debt.
In conjunction with the CEG Asset Purchase Agreement, CEG retired its
long-term debt. As a result, CEG charged $0.9 million, or $0.5 million net of
income tax benefit, to results of operations as an extraordinary item. This
amount represented the unamortized deferred financing fees and to other expenses
pertaining to such debt.
21. EMPLOYEE BENEFIT AND POST-RETIREMENT HEALTH CARE PLANS
Sweetheart sponsors various defined benefit post-retirement health care
plans that cover substantially all full-time employees. The plans, in most
cases, pay stated percentages of most medical expenses by retirees after
subtracting payments by Medicare or other providers and after a stated
deductible has been met. Participants generally become eligible after reaching
age 60 with ten years of service. The majority of such plans are contributory,
with retiree contributions adjusted annually. Sweetheart does not fund the
plans. Both Sweetheart and Fonda provide certain union and non-union employees
with retirement and disability income benefits under defined pension plans.
Pension costs are based upon the actuarially determined normal costs plus
interest on and amortization of the unfunded liabilities. The benefits for
participants in Fonda's non-union pension plans are frozen. In Fiscal 1999, the
assets and obligations of a pension plan for a significant number of the
Company's union employees were transferred to a multi-employer pension plan
resulting in a $.2 million credit to income. The Company's policy is to annually
fund the minimum contributions required by applicable regulations.
A majority of the Company's employees ("Participants") are covered
under a 401(k) defined contribution plan. In addition, the Company is allowed to
make discretionary contributions. Costs charged against operations
52
<PAGE>
for this defined contribution plan were $10.7 million, $7.1 million, $1.1
million and $2.1 million for Fiscal 2000, Fiscal 1999, the 1998 Transition
Period and Fiscal 1998 respectively. Certain employees are covered under defined
benefit plans. Certain benefits under the plans are generally based on fixed
amounts for each period of service.
Net periodic cost for the Company's pension and other benefit plans
consists of the following (in thousands):
-------------------------------------------
Nine Weeks Fifty Two
Ended Weeks Ended
Fiscal Fiscal September July
2000 1999 27, 1998 26, 1998
-------------------------------------------
Pension Benefits
Service Cost $ 971 $ 1,400 $ 295 $ 667
Interest Cost 4,481 4,527 1,047 1,675
Return on plan assets (4,819) (4,662) (798) (1,721)
Net amortizations and deferrals 64 310 (295) 104
------- -------- --------- --------
Net periodic pension cost $ 697 $ 1,575 $ 249 $ 725
------- -------- --------- --------
Other Benefits
Service Cost $ 874 $ 1,071 $ 235 $ 340
Interest Cost 3,212 3,347 886 1,052
Net amortizations and deferrals (383) - - (41)
------- -------- --------- --------
Net periodic benefit cost $ 3,703 $ 4,418 $ 1,121 $ 1,351
------- -------- --------- --------
The following table sets f the change in benefit obligation for the
Company's benefit plans (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ 60,932 $ 66,012 $ 42,682 $ 48,927
Service cost 971 1,466 874 1,071
Interest cost 4,481 4,619 3,212 3,347
Amendments - 202 - (3,520)
Actuarial (gain) or loss (3,208) (3,862) (2,641) (4,962)
Benefits paid (3,671) (3,648) (2,413) (2,181)
Transfer to multi-employer plan - (3,857) - -
--------- ---------- ------------ ----------
Benefit obligation at end of period $ 59,505 $ 60,932 $ 41,714 $ 42,682
Change in plan assets:
Fair value of plan assets at beginning of
period $ 48,357 $ 44,810 $ - $ -
Actual return on plan assets 3,860 6,268 - -
Employer contributions to plan 4,945 4,592 1,921 1,746
Participant contributions to plan - - 492 435
Benefits paid (3,671) (3,648) (2,413) (2,181)
Transfer to multi-employer plan - (3,665) - -
--------- ---------- ------------ ----------
Fair value of plan assets at end of period $ 53,491 $48,357 $ - $ -
Funded status (6,014) $(12,575) $ (41,714) $ (42,682)
Unrecognized prior service cost 372 454 (3,138) (3,520)
Unrecognized (gain) loss (4,040) (1,762) (6,704) (4,064)
--------- ---------- ------------ ----------
Net liability recognized $ (9,682) $ (13,883) $ (51,556) $ (50,266)
--------- ---------- ------------ ----------
</TABLE>
53
<PAGE>
The following sets forth the amounts recognized in the Consolidated
Balance Sheets:
Pension Benefits
----------------
September 24, September 26,
2000 1999
--------------- --------------
Funded status $ (6,014) $ (12,575)
Intangible asset 184 191
Other (gain) loss (4,164) (1,729)
Deferred income taxes 125 92
Accrued other comprehensive (income) loss 187 138
--------- ----------
Net liability recognized $ (9,682) $ (13,883)
--------- ----------
The assumptions used in computing the preceding information are as
follows:
<TABLE>
<CAPTION>
--------------- --------------- --------------- ----------------
Nine Weeks Fifty Two
Ended Weeks Ended
Fiscal Fiscal September 27, July 26,
2000 1999 1998 1998
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Pension Benefits
Discount rate 7.75% to 8.00% 7.75% 7.00% 7.00%
Rate of return on plan assets 8.00% to 10.00% 8.00% to 10.00% 8.00% to 10.00% 8.00% to 10.00%
Other Benefits
Discount rate 8.00% 7.75% to 8.00% 7.00% to 8.00% 7.00% to 8.00%
</TABLE>
For measurement purposes, a 7% annual rate of increase in health care
benefits was assumed for 2000. The rate is assumed to decrease gradually to 5%
for 2002 and will remain at that level thereafter.
A one percentage point change in the assumed health care cost trend
rate would have the following effects:
One Percentage One Percentage
Point Increase Point Decrease
---------------- -------------------
Effect on accumulated post-
retirement benefit obligation $2,994 $(2,633)
Effect on net periodic post-
retirement benefit cost $193 $(163)
22. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are as
follows (in thousands):
September 24, September 26,
2000 1999
-------------- --------------
Foreign currency translation adjustment $ (671) $ (549)
Minimum pension liability adjustment (187) (138)
------- -------
Accumulated other comprehensive income (loss) $ (858) $ (687)
======= =======
54
<PAGE>
23. BUSINESS SEGMENTS
The Company is a holding company and its reportable segments consist of
the operations of its two significant operating subsidiaries Sweetheart and
Fonda. Sweetheart primarily manufactures and sells disposable paper, plastic and
foam foodservice and food packaging products to customers in institutional
markets. Fonda primarily manufactures and sells disposable paper and tissue
based foodservice products to customers in institutional consumer markets. Data
for such segments and a reconciliations to consolidated amounts are presented in
the table below (in thousands):
<TABLE>
<CAPTION>
------------ ------------ ----------------- -------------------
Nine Weeks Fifty Two Weeks
Ended Ended
Fiscal Fiscal September 27, July 26,
2000 1999 1998 1998
------------ ------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Net sales:
Sweetheart $ 952,728 $ 863,781 $ 216,542 $ 282,394
Fonda 351,970 329,259 59,251 340,666
Corporate and elimination (27,810) (11,036) (141) (143)
------------ ------------ --------- ----------
Total $ 1,276,888 $ 1,182,004 $ 275,652 $ 622,917
============ ============ ========= ==========
Income from operations, excluding
restructuring and other income:
Sweetheart $ 53,050 $ 32,165 $ 2,797 $ 4,433
Fonda 19,806 8,373 2,442 17,172
Corporate and elimination (87) (323) (27) (24)
------------ ------------ --------- ----------
Total $ 72,769 $ 40,215 $ 5,212 $ 21,581
============ ============ ========= ==========
Depreciation and amortization:
Sweetheart $ 42,445 $ 50,508 $ 12,951 $ 14,222
Fonda 7,373 6,033 1,089 6,431
Corporate and elimination 207 321 63 268
------------ ------------ --------- ----------
Total $ 50,025 $ 56,862 $ 14,103 $ 20,921
============ ============ ========= ==========
Interest expense, net:
Sweetheart $ 36,825 $ 41,671 $ 10,516 $ 13,341
Fonda 15,783 16,742 2,717 15,701
Corporate and elimination 12,704 11,760 1,902 3,957
------------ ------------ --------- ----------
Total $ 65,312 $ 70,173 $ 15,135 $ 32,999
============ ============ ========= ==========
Total assets:
Sweetheart $ 661,749 $ 715,684 $ 750,885 $ 766,456
Fonda 229,173 234,741 237,430 238,380
Corporate and elimination (9,793) (13,215) (15,734) (16,270)
------------ ------------ --------- ----------
Total $ 881,129 $ 937,210 $ 972,581 $ 988,566
============ ============ ========= ==========
Capital expenditures
Sweetheart $ 23,474 $ 30,790 $ 11,390 $ 6,688
Fonda 2,815 9,371 749 8,207
Corporate and elimination (1,020) (2,385) - -
------------ ------------ --------- ----------
Total $ 25,269 $ 37,776 $ 12,139 $ 14,895
============ ============ ========= ==========
</TABLE>
55
<PAGE>
Sweetheart has one national customer that accounted for more that
10.0% of its sales in each period. Net sales to such customer were $100.7
million in Fiscal 2000, $98.8 million in Fiscal 1999, $26.4 million in the 1998
Transition Period, $100.9 million in Fiscal 1998. Fonda has one national
customer that accounted for more that 10% of its net sales only in Fiscal 1999.
All net sales were to customers in the United States, except for sales to
Sweetheart customers in Canada which amounted to approximately 7.1% of
Sweetheart sales in each period. All assets are located in the United States
except for $38.9 million and $37.9 million at September 24, 2000 and September
26, 1999, respectively, which were located in Canada.
24. CONTINGENCIES
Aldridge. A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary
--------
Retirement Plan Benefits Committee and Fort Howard Cup Corporation, Civil Action
No. CV 187-084, was initially filed in state court in Georgia in April 1987 and
is currently pending in federal court. The remaining plaintiffs claimed, among
other things, that Sweetheart wrongfully terminated the Lily-Tulip, Inc. Salary
Retirement Plan (the "Plan") in violation of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). The relief sought by plaintiffs was
to have the plan termination declared ineffective. In December 1994, the United
States Court of Appeals for the Eleventh Circuit (the "Circuit Court") ruled
that the Plan was lawfully terminated on December 31, 1986. Following that
decision, the plaintiffs sought a rehearing which was denied, and subsequently
filed a petition for a writ of certiorari with the United States Supreme Court,
which was also denied. Following remand, in March 1996, the United States
District Court for the Southern District of Georgia (the "District Court")
entered a judgment in favor of Sweetheart. Following denial of a motion for
reconsideration, the plaintiffs, in April 1997, filed an appeal with the Circuit
Court. On May 21, 1998, the Circuit Court affirmed the judgment entered in favor
of Sweetheart. On June 10, 1998, the plaintiffs petitioned the Circuit Court for
a rehearing of their appeal which petition was denied on July 29, 1998. In
October 1998, plaintiffs filed a petition for writ of certiorari with the United
States Supreme Court, which was denied in January 1999. Sweetheart has been in
the process of paying out the termination liability and associated expenses and
as of December 21, 2000, has disbursed $12.3 million in termination payments.
The estimate of the total termination liability and associated expenses, less
payments, exceeds assets set aside in the Plan by approximately $8.0 million,
which amount has been fully reserved by the Company.
On April 27, 1999, the plaintiffs filed a motion in the 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 to such fees. On June 17, 1999, the District Court deferred these
motions and ordered discovery in connection therewith. Discovery has been
completed and Sweetheart is awaiting further action by the plaintiffs. Due to
the complexity involved in connection with the claims asserted in this case, the
Company cannot determine at present with any certainty the amount of damages it
would be required to pay should the plaintiffs prevail; accordingly, there can
be no assurance that such amounts would not have a material adverse effect on
the Company's financial position or results of operations.
Fort James Corporation. 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., Civil
Action No. 97-C-1221, was filed in the United States District Court for the
Eastern District of Wisconsin on November 21, 1997. During the fourth quarter of
Fiscal 1999, mediation resulted in a settlement of this action whereby
Sweetheart agreed to pay damages of $2.6 million. As of June 29, 2000, all
payments in conjunction with this settlement had been paid.
Other. On July 13, 1999, Sweetheart received a letter from the
-----
Environmental Protection Agency ("EPA") identifying Sweetheart, among numerous
others, as a "potential responsible party" under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), at a
site in Baltimore, Maryland. The EPA letter states that it does not constitute a
final determination by EPA concerning the liability of Sweetheart or any other
entity. On December 20, 1999, Sweetheart received an information request letter
from the EPA, pursuant to CERCLA, regarding a Container Recycling Superfund Site
in Kansas City, Kansas. Sweetheart denies liability and has no reason to believe
the final outcomes will
56
<PAGE>
have a material effect on the Company's financial condition or results of
operations. However, no assurance can be given about the ultimate effect on the
Company, if any, given the early stage of the investigations.
The Company is also involved in a number of legal proceedings arising
in the ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position or results of operations.
25. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The condensed financial statements of the parent company only are as
follows (in thousands):
---------------- --------------
September 24, September 26,
Balance Sheet 2000 1999
---------------- --------------
Assets
Cash and cash equivalents $ 42 $ -
Refundable income tax 324 -
Other current assets 100 100
Investments in subsidiaries 107,025 98,947
Deferred finance fees 3,572 4,049
Deferred income taxes 10,601 6,320
---------- ----------
Total Assets $ 121,664 $ 109,416
========== ==========
Liabilities and Stockholders' Equity (Deficit)
Accrued expense $ 303 $ 257
Discount notes 104,245 92,018
Exchangeable preferred stock 41,794 36,291
Preferred Stock B, Series 2 15,000 -
Redeemable common stock 2,286 2,217
Stockholders' equity (deficit) (41,964) (21,367)
---------- ----------
Total Liabilities and Equity (Deficit) $ 121,664 $ 109,416
========== ==========
<TABLE>
<CAPTION>
----------- ----------- ------------- -------------
Nine Weeks
Ended Fifty Two
Fiscal Fiscal September Weeks Ended
Statement of Operations 2000 1999 27, 1998 July 26, 1998
----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
General and administrative expenses $ (199) $ (50) $ (27) $ (24)
Management fee income 197 203 92 -
Interest expense, net (12,704) (11,760) (1,902) (3,957)
--------- ---------- ---------- ---------
Loss before income taxes and equity in subsidiaries (12,706) (11,607) (1,837) (3,981)
Income tax benefit 4,603 4,082 664 1,444
Equity in income (loss) of subsidiaries 8,249 (11,156) (3,286) 2,798
--------- ---------- --------- ---------
Net income (loss) 146 (18,681) (4,459) 261
Payment-in-kind dividends on exchangeable preferred stock (5,315) (4,659) (733) (1,546)
Preferred dividends accretion (188) (188) (31) (70)
--------- ---------- --------- ---------
Net loss applicable to common stockholders $ (5,357) $ (23,528) $ (5,223) $ (1,355)
========= ========== ========= =========
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
---------- ---------- ----------- --------------
Nine Weeks Fifty Two
Ended Weeks Ended
Fiscal Fiscal September July 26,
Statement of Cash flows 2000 1999 27, 1998 1998
---------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Operating
Net income (loss) $ 146 $ (18,681) $ (4,459) $ 261
Equity in (income) loss of subsidiaries (8,249) 11,156 3,286 (2,798)
Amortization of deferred finance fees 720 714 124 268
Interest capitalized on debt 11,984 11,046 1,779 3,707
Income taxes receivable (4,603) (4,082) (664) (1,444)
Decrease in accrued expenses 44 (154) (171) (919)
------- ---------- --------- --------
Net cash used in operating activities 42 (1) (105) (925)
Investing activities:
Sweetheart investment - - - (88,000)
------- ----------- ---------- --------
Financing activities:
Proceeds from issuance of discount notes - - - 77,538
Proceeds from issuance of exchangeable preferred stock - - - 15,000
Debt issuance costs - - - (3,507)
------- ---------- --------- --------
Net cash provided by financing activities - - - 89,031
Net increase in cash 42 (1) (105) 106
Cash at beginning of period - 1 106 -
------- ---------- --------- --------
Cash at end of period $ 42 $ - $ 1 $ 106
======= ========== ========= ========
</TABLE>
26. SUBSEQUENT EVENTS
On September 25, 2000, pursuant to an asset purchase agreement dated
August 9, 2000 (the "Springprint Agreement"), Fonda purchased substantially all
of the property, plant and equipment, intangibles and working capital of
Springprint Medallion, a division of Marcal Paper Mills, Inc. The aggregate
purchase price for the assets and net working capital was $6.7 million, subject
to post closing adjustments. This acquisition is not included within the
financial statements and its impact is expected to be minimal to the Company's
results.
On October 30, 2000, Sweetheart entered into a 20 year lease obligation
for a manufacturing facility located in North Andover, Massachusetts. In the
first year, the annual rent payment is $1.5 million. Beginning with the second
year and each succeeding lease year, the rental will be an amount equal to the
sum of the base rent in effect as of the last day of the immediately preceding
lease year plus an amount equal to 2% of the amount determined pursuant to the
foregoing year's base rent.
On December 8, 2000 CEG sold a manufacturing facility in Indianapolis,
Indiana for $975 thousand. CEG does not expect to incur a loss from the sale.
58
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
Independent Auditors' Report 60
Schedule II - Valuation and Qualifying Accounts 61
59
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The SF Holdings, Inc.:
We have audited the consolidated financial statements of SF
Holdings, Inc. (the "Company") as of September 24, 2000 and September 26, 1999,
and for the years ended September 24, 2000 and September 26, 1999, the nine week
transition period ended September 27, 1998 and the year ended July 26, 1998, and
have issued our report thereon dated December 12, 2000; such consolidated
financial statements and report are included in this Form 10-K. The consolidated
schedule listed in the accompanying index is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
/s/DELOITTE & TOUCHE LLP
Baltimore, Maryland
December 12, 2000
60
<PAGE>
SCHEDULE II
SF HOLDINGS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
---------------------------
Balance At Charged To Charged Balance At
Beginning Of Costs And To Other End Of
Classifications Period Expenses Accounts (1) Deductions (2) Period
--------------- ------------- ------------ -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Fiscal 2000 $ 6,979 $ 2,038 $ (3,395) $ (2,088) $ 3,534
Fiscal 1999 3,614 7,041 20 (3,696) 6,979
TP 1998 4,507 (35) (1) (857) 3,614
Fiscal 1998 4,683 976 (543) (609) 4,507
</TABLE>
(1) Includes recoveries on accounts previously written-off, translation
adjustments and reclassifications.
(2) Accounts written-off.
61
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15 (d) 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 on December 21, 2000.
SF HOLDINGS GROUP, INC.
(Registrant)
By: /s/ DENNIS MEHIEL
----------------------
Dennis Mehiel
Chairman of the Board and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities.
Signature Title(s)
/s/ DENNIS MEHIEL Chairman of the Board and Chief
-------------------------- Executive Officer (Principal Executive Officer)
Dennis Mehiel
/s/ THOMAS ULEAU Executive Vice President and Director
--------------------------
Thomas Uleau
/s/ HANS H. HEINSEN Senior Vice President, Chief Financial
-------------------------- Officer and Treasurer (Principal
Hans H. Heinsen Financial and Accounting Officer)
/s/ ALFRED B. DELBELLO Vice Chairman
--------------------------
Alfred B. DelBello
/s/ JAMES J. ARMENAKIS Director
--------------------------
James J. Armenakis
/s/ W. RICHARD BINGHAM Director
--------------------------
W. Richard Bingham
/s/ GAIL BLANKE Director
--------------------------
Gail Blanke
/s/ JOHN A. CATSIMATIDIS Director
--------------------------
John A. Catsimatidis
/s/ CHRIS MEHIEL Director
--------------------------
Chris Mehiel
/s/ JEROME T. MULDOWNEY Director
--------------------------
Jerome T. Muldowney
/s/ ALAN D. SCHEINKMAN Director
--------------------------
Alan D. Scheinkman
62
<PAGE>
/s/ G. WILLLAM SEAWRIGHT Director
--------------------------
G. William Seawright
/s/ LOWELL P. WEICKER, JR. Director
--------------------------
Lowell P. Weicker, Jr.
63
