UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the thirteen weeks ended December 26, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-50683
SF Holdings Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3990796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
373 Park Avenue South
New York City, New York 10016
(212) 779-7448
(Address and telephone number of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $.001 par value, as of February 1, 2000:
Class A: 562,583 Shares
Class B: 56,459 Shares
Class C: 39,900 Shares
1
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SF HOLDINGS GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements (unaudited): Page
Consolidated Condensed Balance Sheets as of
December 26, 1999 and September 26, 1999 (audited) 3
Consolidated Statements of Operations and
Comprehensive Income (Loss) for the thirteen weeks
ended December 26, 1999 and December 27, 1998 4
Consolidated Statements of Cash Flows for the thirteen
weeks ended December 26, 1999 and December 27, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 15
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SF HOLDINGS GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
December 26, September 26,
1999 1999 (1)
--------------- --------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,126 $ 4,180
Accounts receivable, less allowance for doubtful
accounts of $7,303 and $6,979, respectively 128,631 136,629
Due from affiliates 754 538
Inventories 200,997 191,848
Deferred income taxes 20,757 20,547
Other current assets 21,727 26,473
-------------- --------------
Total current assets 375,992 380,215
Property, plant and equipment, net 379,586 385,166
Goodwill, net 97,369 98,176
Deferred income taxes 40,512 38,424
Other assets, net 35,009 35,229
-------------- --------------
$ 928,468 $ 937,210
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 81,440 $ 80,786
Accrued expenses and other current liabilities 110,018 112,700
Current maturities of long-term debt 275,089 276,845
-------------- --------------
Total current liabilities 466,547 470,331
Long-term debt 380,187 381,554
Other liabilities 61,822 62,494
Deferred income taxes 4,105 4,026
-------------- --------------
Total liabilities 912,661 918,405
Exchangeable preferred stock 37,608 36,291
Minority interest in subsidiary 2,088 1,971
Redeemable common stock 2,234 2,217
Stockholders' deficit (26,123) (21,674)
--------------- --------------
$ 928,468 $ 937,210
============== ==============
</TABLE>
(1) Restated, see Note 2 to consolidated financial statements
See notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
Thirteen Weeks Ended
--------------------------------------
December 26, December 27,
1999 1998 (1)
--------------------------------------
<S> <C> <C>
Net sales $305,820 $289,731
Cost of goods sold 260,279 258,259
------------- --------------
Gross profit 45,541 31,472
Selling, general and administrative expenses 30,809 29,048
Other (income) expense, net 1,448 220
------------- --------------
Income from operations 13,284 2,204
Interest expense (net of interest income
of $87 and $239) 17,563 17,910
------------- --------------
Loss before income taxes and minority interest (4,279) (15,706)
Income taxes benefit (1,384) (5,966)
Minority interest in subsidiary's income (loss) 117 (803)
------------- --------------
Net loss (3,012) (8,937)
Payment-in-kind dividends on exchangeable preferred stock 1,317 1,157
------------- --------------
Net loss applicable to common stock $ (4,329) $(10,094)
============= ==============
Statements of comprehensive income (loss):
Net loss $ (3,012) $ (8,937)
Other comprehensive income, net of income tax:
Minimum pension liability adjustment (114) 1,343
Foreign translation adjustment 11 (263)
------------- --------------
Total comprehensive loss $ (3,115) $ (7,857)
============= ==============
</TABLE>
(1) Restated, see Note 2 to consolidated financial statements
See notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Thirteen Weeks Ended
-------------------------------------
December 26, December 27,
1999 1998 (1)
-------------------------------------
Operating activities:
<S> <C> <C>
Net income (loss) $ (3,012) $ (8,937)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 13,963 13,890
Interest capitalized on debt 3,020 2,664
Provision for doubtful accounts 1,885 144
Deferred income taxes (2,225) (6,534)
(Gain) loss on equipment dispositions 53 (112)
Minority interest in subsidiary's loss 117 (803)
Changes in assets and liabilities:
Accounts receivable 4,815 5,952
Due from affiliates (224) 233
Inventories (8,495) 15,142
Other current assets 1,380 (257)
Accounts payable and accrued expenses (1,322) (10,454)
Other (411) 3,431
------------- -------------
Net cash provided by operating activities 9,544 14,359
------------- -------------
Investing activities:
Capital expenditures (4,479) (10,772)
Proceeds from equipment dispositions 93 3,131
------------- -------------
Net cash used in investing activities (4,386) (7,641)
------------- -------------
Financing activities:
Net decrease in revolving credit borrowings (5,836) (5,130)
Repayments of long-term debt (376) (5,581)
Decrease in escrow cash - (1,885)
------------- -------------
Net cash used in financing activities (6,212) (12,596)
------------- -------------
Net decrease in cash (1,054) (5,878)
Cash and cash equivalents, beginning of period 4,180 9,898
------------- -------------
Cash and cash equivalents, end of period $ 3,126 $ 4,020
============= =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 3,197 $ 4,428
Income taxes, net of refunds $ (74) $ 2,502
</TABLE>
(1) Restated, see Note 2 to consolidated financial statements
See notes to consolidated financial statements.
5
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SF HOLDINGS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
SF Holdings Group, Inc. ("SF Holdings"), is a holding company that
conducts its operations through its subsidiaries, Sweetheart Holdings Inc.
("Sweetheart") and The Fonda Group, Inc. ("Fonda") (collectively, the
"Company"), and therefore has no significant cash flows independent of such
subsidiaries. The instruments governing the indebtedness of Sweetheart and Fonda
contain numerous restrictive covenants that restrict Sweetheart and Fonda's
ability to pay dividends or make other distributions to SF Holdings or to each
other. The Company believes that the combined operations of its subsidiaries
makes the Company one of the three largest converters and marketers of
disposable food service and food packaging products in North America.
The information included in the foregoing interim consolidated
financial statements of the Company are unaudited but, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments and accruals) which the Company considers necessary for a fair
presentation of the operating results for these periods. Results for interim
periods are not necessarily indicative of results for the entire year. These
condensed financial statements should be read in conjunction with the Company's
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the fiscal year ended September 26, 1999.
2. BUSINESS ACQUISITION
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 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. As a result of this transaction, Fonda
markets, manufactures and distributes disposable party goods products directly
to the specialty (party) channel of its consumer market. The transaction has
been accounted for in a manner similar to pooling-of-interests. The accompanying
financial statements have been restated for all periods presented to include
CEG's balance sheet and results of operations.
3. INVENTORIES
Inventories consist of the following (in thousands):
December 26, September 26,
1999 1999
-------------- ------------
Raw materials and supplies $ 54,574 $ 53,627
Work-in-process 8,252 8,036
Finished goods 138,171 130,185
---------- ----------
$ 200,997 $ 191,848
========== ==========
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4. SEGMENTS
Thirteen weeks ended
December 26, December 27,
1999 1998
------------- ------------
Net sales:
Sweetheart $ 214,216 $ 203,909
Fonda 97,572 85,920
Intersegment elimination (5,968) (98)
-------------- -------------
$ 305,820 $ 289,731
============== =============
Income from operations, excluding other income:
Sweetheart $ 8,837 $ (1,568)
Fonda 5,900 4,036
Corporate and eliminations (5) (44)
-------------- -------------
$ 14,732 $ 2,424
============== =============
5. CONTINGENCIES
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 to the United
States Supreme Court, which was denied in January 1999. Sweetheart has begun the
process of paying out the termination liability and as of December 26, 1999,
Sweetheart had disbursed $8.6 million in termination payments. The initial
estimate of the total termination liability, less these payments, exceeds assets
set aside in the Plan by approximately $11.6 million, which amount has been
fully reserved by Sweetheart.
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. The discovery period has
been extended to March 15, 2000. 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.
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. This amount has been fully reserved by
Sweetheart, with the first of two payments, $1.6 million, made on September 30,
1999. The second payment of $1.0 million is due July 1, 2000.
7
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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 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 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.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion for the Company contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
or future events could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, raw material costs, labor market conditions, the highly competitive
nature of the industry, general economic and business conditions, and
developments with respect to contingencies.
General
SF Holdings Group, Inc. ("SF Holdings") conducts all of its operations
through its principal operating subsidiaries, Sweetheart Holdings Inc.
("Sweetheart") and The Fonda Group, Inc. ("Fonda") (collectively, the "Company")
and therefore has no significant cash flows independent of such subsidiaries.
Sweetheart and Fonda are converters and marketers of disposable paper,
plastic and foam food service 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 flows from operations realized in the third and forth quarters of
the fiscal year. Sales of paperboard products for such periods reflect the high
seasonal demands of the summer months when outdoor and away-from-home
consumption increases. This results in disproportionately higher net income in
the last six months of the fiscal year as cost absorption improves resulting
from a more profitable sales and production mix. In addition, Fonda's tissue
based and specialty party goods products experience increased volume and a high
percentage of its net income in the first and fourth fiscal quarters due to the
buildup of seasonal business between Halloween and the Super Bowl. 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 production
requirements, Fonda and/or Sweetheart will need to borrow under their respective
credit facilities or seek other sources of capital. Although 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, there can be no assurance that such capital
resources will be sufficient in the future.
Recent Developments
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 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. As a result of this transaction, Fonda
markets, manufactures and distributes disposable party goods products directly
to the specialty (party) channel of its consumer market. The transaction has
been accounted for in a manner similar to pooling-of-interests, and financial
statements have been restated for all periods presented to include CEG's balance
sheet and results of operations.
9
<PAGE>
Results of Operations
Thirteen Weeks Ended
-----------------------------------------
December 26, December 27,
1999 1998
-------------------- ---------------
% of Net % of Net
Amount Sales Amount Sales
------------------------------------------
(Dollars in millions)
Net sales $ 305.8 100.0% $ 289.7 100.0%
Cost of goods sold 260.3 85.1 258.3 89.1
---------- --------- ---------- --------
Gross profit 45.5 14.9 31.5 10.9
Selling, general and
administrative expenses 30.8 10.1 29.0 10.0
Other (income) expense, net 1.4 0.5 0.2 0.1
---------- --------- ---------- --------
Income from operations 13.3 4.3 2.2 0.8
Interest expense, net 17.6 5.7 17.9 6.2
---------- --------- ---------- --------
Income (loss) before taxes (4.3) (1.4) (15.7) (5.4)
Income tax (benefit) provision (1.4) (0.5) (6.0) (2.1)
Minority interest in subsidiary's
loss 0.1 - (0.8) (0.3)
---------- --------- ---------- --------
Net income (loss) $ (3.0) (1.0)% $ (8.9) (3.1)%
========== ========= ========== ========
Thirteen Weeks Ended December 26, 1999 (Fiscal 2000 First Quarter) Compared to
December 27, 1998 (Fiscal 1999 First Quarter)
Net sales increased $16.1 million, or 5.6%, to $305.8 million in the
Fiscal 2000 First Quarter, due to net sales increases at both Sweetheart and
Fonda. The following analysis includes $3.5 million of sales from Sweetheart to
Fonda and $2.5 million of sales from Fonda to Sweetheart, which were eliminated
in consolidation. Sweetheart results- Net sales increased $10.3 million, or
5.1%, to $214.2 million in the Fiscal 2000 First Quarter, reflecting a 3.3%
increase in sales volume and a 1.8% increase in average realized sales price.
Net sales to institutional foodservice customers increased 5.8%, reflecting a
3.8% increase in sales volume and a 2.0% increase in average realized sales
price. This increase is primarily the result of Sweetheart's focus on revenue
growth with key institutional foodservice customers. Net sales to food packaging
customers decreased 1.2%, or $0.3 million, reflecting a 1.4% decrease in sales
volume, partially offset by a 0.2% increase in average realized sales price.
This decrease is primarily the result of lower demand by large accounts in the
food packaging customer base due to market conditions. Fonda results- Net sales
increased $11.7 million, or 13.6%, to $97.6 million in the Fiscal 2000 First
Quarter. This increase was primarily due to significant increases in selling
prices of paperboard products; increased institutional tissue volume; and
increased net sales in Fonda's specialty party goods business. Sales volume in
converting operations increased 15.9% in the institutional market and 4.4% in
the consumer market. Average selling prices increased 12.2% in the consumer
market and decreased 2.1% in the institutional market. In the consumer market,
the increase in selling prices was primarily due to a significant increase in
raw material paperboard prices which Fonda passed onto its customers. In the
institutional market, the increased tissue volume was due to increased national
account and holiday seasonal sales. The increase in net sales in Fonda's
specialty party goods business resulted in a 24.2% volume increase due to
millennium celebrations as well as inventory restocking for two customers that
had been experiencing financial difficulties. Such volume increase was partially
offset by a 11% reduction in average selling prices. In addition, volume
increases in all markets reflected accelerated inventory purchases by customers
resulting from anticipated Year 2000 disruptions.
Gross profit increased $14.1 million, or 44.7%, to $45.5 million in the
2000 First Fiscal Quarter. As a percentage of net sales, gross profit increased
to 14.9% in the 2000 First Fiscal Quarter from 10.9% in the 1999 First Fiscal
Quarter primarily due to increased margins at Sweetheart and to a lesser extent
at Fonda. Sweetheart results- Gross profit increased $12.3 million, or 85.6%, to
$26.6 million in the Fiscal 2000 First Quarter. As a percentage of net sales,
gross profit increased to 12.4% in the Fiscal 2000 First Quarter from 7.0%. This
improvement is attributable to a shift in sales to a more profitable product
mix, improved manufacturing efficiencies and improved margins through customer
price initiatives.
10
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Fonda results- Gross profit increased $1.8 million, or 10.4%, to $18.9 million
in the Fiscal 2000 First Quarter. The increase was primarily due to the
realization of cost savings from the manufacturing consolidation of CEG, and, as
noted above, increased net sales of specialty party goods products, increased
selling prices of paperboard products, and increased volume of institutional
tissue products. As a percentage of net sales, gross profit decreased to 19.4%
in the Fiscal 2000 First Quarter from 19.9% in the Fiscal 1999 First Quarter.
The margin compression was due to a change in sales mix as well as the time lag
between increased raw material costs and the increase in pricing to customers.
Selling, general and administrative expenses increased $1.8 million to
$30.8 million in the Fiscal 2000 First Quarter. As a percentage of net sales,
selling, general and administrative expenses increased slightly to 10.1% in the
Fiscal 2000 First Quarter from 10.0% in the Fiscal 1999 First Quarter. A $1.9
million increase in such costs at Sweetheart was principally attributable to a
$1.2 million provision for doubtful accounts resulting from the bankruptcy
filing of a customer, annual wage increases and increased costs associated with
systems development. A $.1 million decrease in such costs at Fonda was due to
Fiscal 1999 overhead cost saving initiatives, which was partially offset by a
provision for doubtful accounts resulting from the filing of a bankruptcy
petition by a CEG customer.
Other expense was $1.4 million in the Fiscal 2000 First Quarter
compared to $0.2 million in the Fiscal 1999 First Quarter primarily due to the
write-off of an unsecured note receivable issued by Sweetheart in connection
with the sale of its bakery business in Fiscal 1998.
Income from operations increased $11.1 million to $13.3 million in the
Fiscal 2000 First Quarter due to the reasons discussed above.
Interest expense, net decreased $.3 million to $17.6 million in the
Fiscal 2000 First Quarter from $17.9 million in the Fiscal 1999 First Quarter.
This decrease is attributable to a decrease of $.7 million at Sweetheart due to
lower outstanding balances under its U. S. Credit Facility, which was partially
offset due to the increasing balance of the Company's 12 3/4% Senior Secured
Discount Notes.
The effective tax rate was 32.3% in the Fiscal 2000 First Quarter,
which reflects certain non-deductible costs relating to the investment in
Sweetheart and the related financing, and 38% in the Fiscal 1999 First Quarter.
As a result of the above and the addback of minority interest representing 10%
of Sweetheart's historical loss and 13% of CEG's net income, the net loss was
$3.0 million in the Fiscal 2000 First Quarter compared to $8.9 million in the
Fiscal 1999 First Quarter.
Liquidity and Capital Resources
Historically, the Company's subsidiaries have relied on cash flow from
operations, sale of non-core assets and borrowings to finance their respective
working capital requirements, capital expenditures and acquisitions.
Net cash provided by operating activities was $9.5 million in the 2000
First Fiscal Quarter compared to $14.4 million in the 1999 First Fiscal Quarter.
This decrease was primarily due to management's decision to build inventory at
Sweetheart and increased working capital requirements at Fonda to support its
increase in net sales. Such decrease was partially offset by more favorable
income from operating activities at both Sweetheart and Fonda.
Capital expenditures were $4.5 million, including $1.4 million for new
production equipment at Sweetheart, $1.5 million spent on growth and expansion
projects at Sweetheart, with the remaining consisting primarily of routine
capital improvements.
In January 2000, outstanding balances on CEG's revolving credit
facility, 12% senior subordinated notes and junior subordinated notes were paid
in full. Outstanding balances on such debt totaled $22.0 million and $40.2
million at December 26, 1999 and September 26, 1999, respectively.
11
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Fonda's revolving credit facility, which matures on March 31, 2001,
provides up to $55 million borrowing capacity, is collateralized by eligible
accounts receivable and inventories, certain general intangibles and the
proceeds on the sale of accounts receivable and inventory. At December 26, 1999,
there was $25.8 million outstanding and $22.1 million was the maximum advance
available based upon eligible collateral.
Sweetheart's revolving credit facility allows up to $135.0 million in
borrowings, subject to borrowing base limitations (the "U.S. Credit Facility").
Borrowings under the U.S. Credit Facility mature on August 1, 2000; as of
December 26, 1999, $41.8 million was available under such facility. Although
Sweetheart intends to refinance this debt, there can be no assurances that it
will be able to obtain such refinancing on terms and conditions acceptable to
the Company.
Sweetheart has a credit facility which provides for a term loan of up
to Cdn $10.0 million and revolving credit of up to Cdn $10.0 million that expire
on June 15, 2001. As of December 26, 1999, Cdn $4.0 million (approximately $2.7
million) was available under such facility.
Sweetheart's Senior Secured Notes mature on September 1, 2000. Although
the Company intends to refinance this debt, there can be no assurances that the
Company will be able to obtain such refinancing on terms and conditions
acceptable to the Company.
During the Fiscal 2000 First Quarter, the Company did not incur
material costs for compliance with environmental law and regulations.
In January 1999, the United States Supreme Court denied plaintiffs'
Petition for Writ of Certiorari in the matter of Aldridge v. Lily-Tulip, Inc.
Salary Retirement Plan Benefits Committee and Fort Howard Cup Corporation, Civil
Action No. CV 187-084. The court decided that the Plan was lawfully terminated.
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. The discovery process has been
extended to March 15, 2000. Sweetheart has begun the process of paying out the
termination liability and as of December 26, 1999, Sweetheart had disbursed $8.6
million in termination payments. The initial estimate of the total termination
liability, less these payments, exceeds assets set aside in the Plan by
approximately $11.6 million, which amount has been fully reserved by Sweetheart.
The remaining payments are expected to be paid during Fiscal 2000. Sweetheart's
operating plan contemplates that cash generated by operations and amounts
available under its credit facilities will be sufficient to make the required
payments under the Plan when due. However, there can be no assurance that
Sweetheart will achieve its operating plan and have the necessary cash to make
these payments. Failure by Sweetheart to make such payments could have a
material adverse effect on the Company and its financial condition.
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 the Company
agreed to pay damages of $2.6 million. This amount has been fully reserved by
the Company, with the first of two payments, $1.6 million, made on September 30,
1999. The second payment of $1.0 million is due July 1, 2000.
The Company believes that cash generated by each of Fonda's and
Sweetheart's operations, combined with amounts available under its respective
credit facilities as well as funds generated by asset sales by Sweetheart should
be sufficient to fund each of Fonda's and Sweetheart's respective capital
expenditures needs, debt service requirements and working capital needs,
including Sweetheart's termination liabilities under the Plan, for the
foreseeable future.
Year 2000
As of February 1, 2000, the Company has no knowledge of any material
issues relating to Year 2000 malfunctions that could have a material adverse
effect on either Sweetheart or Fonda's financial condition or
12
<PAGE>
results of operations. Sweetheart and Fonda are Year 2000 ready and will
continue to monitor all Year 2000 related issues.
Net Operating Loss Carryforwards
As of September 26, 1999, Sweetheart had approximately $214 million of
net operating loss carryforwards ("NOLs") which expire at various dates from
2004 through 2019. Fonda has $1.9 million of state net operating loss
carryforwards which expire at various dates from 2003 to 2020. For federal
income tax purposes, Fonda's net operating losses will be carried back to Fiscal
1998. Although the Company expects that sufficient taxable income will be
generated in the future to realize these NOLs, there can be no assurance future
taxable income will be generated to utilize such NOLs.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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 number filed as part of the Company's
Registration Statement on Form S-4, as amended (File No. 333-51563).
Exhibit 10.19 is incorporated herein by reference to the exhibit with
the corresponding number filed as part of the Company's Form 10-K for
the year ended September 26, 1999.
Exhibit # Description of Exhibit
--------- ----------------------
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.
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 133/4% 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").
13
<PAGE>
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.
10.10 Executive Retention Pay Agreement, dated as of October 1,
1997, between Sweetheart Holdings and Daniel M. Carson.
10.11 Executive Retention Pay Agreement, dated as of October 1,
1997, between Sweetheart Holdings and William H. Haas.
10.12 Executive Retention Pay Agreement, dated as of October 1,
1997, between Sweetheart Holdings and James R. Mullen.
10.13 Special Incentive Agreement between Sweetheart Holdings,
Sweetheart Cup and William H. Haas dated November 18, 1996.
10.14 Special Incentive Agreement between Sweetheart Holdings,
Sweetheart Cup and Daniel M. Carson dated November 18, 1996.
10.15 Special Incentive Agreement between Sweetheart Holdings,
Sweetheart Cup and James R. Mullen dated November 18, 1996.
10.16 Employee Relocation Agreement between Sweetheart Holdings,
Sweetheart Cup and James R. Mullen dated December 19, 1997.
10.17 Employee Relocation Agreement between Sweetheart Holdings,
Sweetheart Cup and Daniel M. Carson dated December 19, 1997.
10.18 Employee Relocation Agreement between Sweetheart Holdings,
Sweetheart Cup and William H. Haas dated December 19, 1997.
10.19 Asset Purchase Agreement dated as of December 6, 1999 between
Creative Expressions Group, Inc. and Fonda.
16.1 Letter regarding change in certifying accountant.
27.1 * Financial Data Schedule.
----------------
* filed herein.
(b) No reports were filed on Form 8-K during the quarter ended December 26,
1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Date: February 9, 2000
SF HOLDINGS GROUP, INC.
By: /s/ HANS H. HEINSEN
-----------------------------------
Hans H. Heinsen
Senior Vice President, Chief Financial
Officer and Treasurer (Principal
Financial And Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Form 10-Q
for the thirteen week Period ended December 26, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001059697
<NAME> SF HOLDINGS GROUP, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-24-2000
<PERIOD-START> SEP-27-1999
<PERIOD-END> DEC-26-1999
<CASH> 3,126
<SECURITIES> 0
<RECEIVABLES> 135,934
<ALLOWANCES> 7,303
<INVENTORY> 200,997
<CURRENT-ASSETS> 375,992
<PP&E> 470,665
<DEPRECIATION> 91,079
<TOTAL-ASSETS> 928,468
<CURRENT-LIABILITIES> 466,547
<BONDS> 380,187
37,608
0
<COMMON> 2,241
<OTHER-SE> (26,130)
<TOTAL-LIABILITY-AND-EQUITY> 928,468
<SALES> 305,820
<TOTAL-REVENUES> 305,820
<CGS> 260,279
<TOTAL-COSTS> 260,279
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,885
<INTEREST-EXPENSE> 17,563
<INCOME-PRETAX> (4,279)
<INCOME-TAX> (1,384)
<INCOME-CONTINUING> (3,012)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,012)
<EPS-BASIC> 0
<EPS-DILUTED> 0
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