UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 26, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number:
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)
115 Stevens Avenue
Valhalla, New York 10595
(914) 749-3274
(Address and telephone number of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities 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 a 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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting and non-voting equity of the
registrant held by non-affiliates of the registrant as of October 24, 1998:
There is no market for the common stock of the registrant.
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 October 20, 1998: Class A: 5,625,838 Shares
Class B: 564,586 Shares
Class C: 399,000 Shares
PART I
ITEM 1. BUSINESS
General
SF Holdings Group, Inc. ("SF Holdings" and with its subsidiaries, the
"Company") believes it is one of the three largest converters and marketers of
disposable food service and packaging products in North America. The Company
sells a broad line of disposable paper, plastic and foam food service and food
packaging products under both branded and private labels to the consumer and
institutional markets, including large national accounts, and participates at
all major price points. 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
Lily(R), Sweetheart(R) Trophy(R), Sensations and Hoffmaster(R) brands.
The Company's product offerings are among the broadest in the industry,
enabling it to offer its customers "one-stop" shopping for their disposable food
service and food packaging product needs. The Company's principal products
include (i) paperboard, plastic and foam food service products, primarily cups,
lids, plates, bowls, plastic cutlery and food containers; (ii) tissue and
specialty food service products, primarily napkins and placemats; and (iii) food
packaging products, primarily containers for the dairy and food processing
industries.
The Company sells its products to more than 5,000 customers and serves
the institutional and consumer markets, including large national accounts,
located throughout the United States and Canada. In addition, the Company has
developed and maintained long-term relationships with many of its customers. The
Company's institutional customers, which are served by Sweetheart and Fonda,
include (i) major food service distributors, (ii) national accounts, including
fast-food chains and catering services, and (iii) schools, hospitals and other
major institutions. The Company's consumer customers, which are served by Fonda,
include supermarkets, mass merchandisers, warehouse clubs and other retailers.
The Company's food packaging customers, which are served 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.
Products
General. The Company's principal products include: (i) paperboard,
plastic and foam food service products, such as white, colored and printed
paper, plastic and foam plates and bowls, paper, plastic and foam cups for both
hot and cold drinks and lids, straws, plastic cutlery, paper and plastic handled
food pails, food containers and trays for take-out of fast food; (ii) tissue and
specialty food service products, such as printed and solid napkins, printed and
solid tablecovers, crepe paper, placemats, doilies, tray covers, fluted products
and paper and plastic portion cups; and (iii) food packaging products, such as
paper and plastic containers for the dairy and food processing industries. The
Company believes it holds one of the top three market positions in white paper
plates, decorated plates, bowls and cups in the private label consumer market,
as well as in plastic, paper and foam cups, plates, bowls, plastic cutlery,
lids, food containers, food pails, trays and premium napkins in the
institutional market. The Company also believes it is the second largest
supplier, in terms of sales, of containers to the frozen dessert and cultured
dairy products segments of the food packaging industry in North America. These
products are sold nationwide to supermarkets, restaurant franchises, discount
store chains, food processors and major food distributors.
Fonda is a party to a license agreement, dated March 12, 1998 (the
"License Agreement") with Creative Expression Group, Inc. ("CEG"), an affiliate
of Fonda, whereby CEG was granted the exclusive right to use the trademarks and
trade names Splash(R) and Party Creations(R) in connection with the manufacture,
distribution and sale of disposable party goods products for a period of five
years, subject to extension. Pursuant to the License Agreement, Fonda receives
an annual royalty equal to 5% of CEG's cash flow as determined in accordance
with a formula specified in such agreement. In addition, in accordance with the
License Agreement, the Company, at CEG's request, manufactures and sells to CEG
certain party goods products, principally napkins and paper plates, including
products bearing the trademarks or trade names Splash(R) or Party Creations(R).
2
Paperboard, Plastic and Foam Food Service Products
Beverage Service Products. Paper, plastic and foam cups, which
represent the largest portion of Sweetheart's sales, are sold to both the
consumer and institutional markets, including national accounts. Both Sweetheart
and Fonda offer a number of attractive cup and lid combinations for both hot and
cold beverages. Cups for the consumption of cold beverages are generally plastic
or wax coated for superior rigidity or made of DSP, which permits the printing
of better quality graphics, while cups for the consumption of hot beverages are
made from paper which is poly-coated on one side or foam to provide a barrier to
heat transfer. Printed paper and plastic cups are often used as promotional
items by Sweetheart's customers. Sweetheart sells plastic straws exclusively to
the institutional market. Sweetheart's beverage service products are sold under
the Sweetheart(R), Lily(R), Trophy(R), Preference(R), Jazz(R), Gallery(R),
Clarity(R) and Lumina(R) brand names. Fonda's hot and cold beverage cups are
sold principally to the consumer market.
Sweetheart operates in Canada through its subsidiary Lily Cups, Inc.
("Lily Cups"), which has been manufacturing and marketing food service
disposables since 1947. Lily Cups is one of the largest providers of food
service disposable products in the Canadian market, primarily as a consequence
of its large portfolio of national account customers. Sales by Lily Cups during
Sweetheart's fiscal year ended September 30, 1997 and the nine months ended June
30, 1998 constituted approximately 6% and 7%, respectively, of Sweetheart's
gross sales.
Tabletop Service Products. Paper plates and bowls, which represent the
largest portion of Fonda's sales, are sold primarily to the consumer market.
These products include coated and uncoated white paper plates, decorated plates
and bowls. Sweetheart's plastic and foam plates and bowls and plastic cutlery
are sold to the institutional market. White uncoated and coated paper plates are
considered commodity items and are generally purchased by cost-conscious
consumers for everyday use. Printed and decorated plates and bowls are
value-added products and are sold for everyday use as well as for parties and
seasonal celebrations, such as Halloween and Christmas. Sweetheart's foam
dinnerware, a value-added product, and plastic cutlery are sold to the
institutional market under the Silent Service(R), Centerpiece(R), Basix (R),
Guildware(R) and Simple Elegance(R) brand names.
Take-Out Containers. Sweetheart sells paper and plastic food containers
and lids primarily for the take-out of fast foods, and Fonda sells paper trays
and food pails, which are sold to the institutional market.
Tissue and Specialty Food Service Products
Tissue Converted Products. Napkins represent the second largest portion
of Fonda's sales and are sold under Fonda's Hoffmaster(R), Fonda, Sensations,
Splash(R) and Party Creations(R) brand names, as well as under national
distributor private label names. Napkin products range from decorated-colored,
multi-ply napkins and simple custom printed napkins featuring an end-user's name
or logo to fully printed, graphic-intensive napkins for the premium paper goods
sector. Tablecovers, ranging from economy to premium product lines, are sold
under the Hoffmaster(R), Linen-Like(R), Windsor(R), Sensations, Splash(R) and
Party Creations(R) brand names. The Company has a broad selection of tablecovers
in one-, two-, and three-ply configurations and produces tablecovers in white,
solid color and one-to four-colored printed products. Fonda also sells or
licenses crepe products under the Hoffmaster(R), Splash(R) and Party
Creations(R) brand names.
Specialty Products. The Company sells placemats, traycovers, paper
doilies, plastic and paper portion cups and fluted products in a variety of
shapes and sizes. Fonda produces unique decorated placemats in a variety of
shapes. In addition, Fonda uses a proprietary technology to produce non-skid
traycovers that serve the particular needs of the airline and healthcare
industries.
Food Packaging Products
Sweetheart's food packaging operations sell paper and plastic
containers and lids for ice cream, frozen novelty products and cultured foods
(including sour cream, yogurt, cottage cheese and snack dip), and plastic
containers for single-serving chilled juice products. Other products include
Sweetheart's Flex-E-Form straight-wall paper manufacturing technology and
Flex-Guard, a spiral wound tamper-evident lid.
To enhance product sales, Sweetheart designs, manufactures and leases
container filling and lidding equipment to dairies and other food processors to
package food items in Sweetheart containers at their plants. Sweetheart's
filling and lidding equipment is leased to customers under the Auto-Pak,
Flex-E-Fill and Flex-E-Form trade names. This equipment is manufactured in
Sweetheart's machine shop and assembly plant located in Owings Mills, Maryland.
Types of products packaged in Sweetheart's machines include ice cream,
factory-filled jacketed ice cream cones, cottage cheese, yogurt and squeeze-up
desserts.
3
Marketing and Sales
The following is a discussion of Sweetheart and Fonda's existing
marketing and sales operations. Sweetheart and Fonda intend to enter into joint
marketing and sales agreements which will be designed to eliminate duplicative
marketing and sales expenses.
Sweetheart focuses its marketing efforts on both the distributor and
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 market segments.
Sweetheart sells these programs through a direct sales organization. Sweetheart
supports this process through the development of innovative new products,
materials and processes, while leveraging its strong brand recognition and
nationwide network of manufacturing and distribution centers.
Fonda's marketing efforts are principally focused on (i) providing
value-added services; (ii) category expansion by cross marketing products
between the consumer and institutional markets; (iii) developing new graphic
designs which Fonda believes will offer consumers recognized value; and (iv)
increasing brand awareness through enhanced packaging and promotion. Fonda sells
its products through an internal sales organization and independent brokers.
Fonda believes its experienced sales team and its ability to provide high levels
of customer service enhance its long-term relationships with its customers.
Fonda sells to more than 2,500 institutional and consumer customers located
throughout the United States.
In Fiscal 1998, Fonda's five largest customers represented
approximately 17%, of net sales. In Sweetheart's fiscal year ended September 30,
1997 and the nine months ended June 30, 1998, Sweetheart's five largest
customers represented approximately 39% and 36%, respectively, of its net sales.
One customer of Sweetheart, McDonald's, accounted for 13.7% and 12% of its net
sales in fiscal 1997 and the nine months ended June 30, 1998, respectively; no
one single customer of Fonda accounted for more than 10% of its net sales. The
loss of one or more large national customers could adversely affect the
Company's operating results.
In the fourth quarter of fiscal 1997, Sweetheart completed negotiations
of a three-year contract renewal with McDonald's. Pursuant to such agreement,
Sweetheart committed to convert McDonald's cold cup volume to a new raw material
substrate (from wax to DSP) over the life of the contract which will cause
Sweetheart to incur incremental capital expenditures.
Sweetheart Sales
Food Service Institutional Market. Sweetheart's food service products
are sold directly to large national accounts, such as fast-food chains and food
service management companies. Food service products are also sold through
distributors to other end-users, such as independent restaurants, school systems
and hospitals. Sweetheart sells to more than 4,000 institutional customers and
national accounts throughout the United States and Canada. Sweetheart's national
accounts include ARAMARK Corporation, McDonald's and Wendy's International,
Inc., and its major distributor accounts include Comsource Independent Food
Services Companies Inc., Independent Distributors of America, Network, Inc. and
SYSCO Corporation. This market represented approximately 89% and 88% of
Sweetheart's net sales in fiscal 1997 and the nine months ended June 30, 1998,
respectively.
Food Packaging Institutional Market. Food packaging containers and
filling machines are marketed directly to national and regional dairies and food
companies. Major customers of Sweetheart's food packaging products include Ben &
Jerry's Homemade, Inc., Blue Bell Creameries, L.P., The Kroger Co. and Prairie
Farms Dairy, Inc. This market represented approximately 11% and 12% of
Sweetheart's net sales in fiscal 1997 and the nine months ended June 30, 1998,
respectively.
Fonda Sales
Institutional Market. Restaurants, schools, hospitals and other major
institutions comprise Fonda's institutional market. This market represented
approximately 47% of Fonda's net sales in Fiscal 1998. Fonda's predominant
institutional customers of private label products include SYSCO Corporation,
Rykoff-Sexton, Inc./U.S. Foodservice Inc. and Alliant Foodservice Inc.
Institutional customers of Fonda's branded products include Sweet Paper Sales
Corp., Smart Food Distributors Incorporated, Bunzl USA, Inc. and Lisanti Food
Incorporated. The institutional market is serviced by dedicated field service
representatives located throughout the United States. The field sales force
works directly with these national and regional distributors to service the
needs of the various segments of the food service industry.
4
Consumer Market. Supermarkets, mass merchants, warehouse clubs,
discount chains and other retail stores comprise the Fonda consumer market. This
market represented approximately 53% of Fonda's net sales in Fiscal 1998.
Fonda's consumer market is classified into four distribution channels: (i) the
grocery channel, which is serviced through a national and regional network of
brokers, (ii) the retail mass merchant channel, which is serviced directly by
field service representatives, (iii) the specialty (party) channel, which is
serviced principally through CEG (see "--Affiliated Company Sales") and (iv) the
warehouse club channel, which is serviced both through national and regional
networks of brokers and directly by field service representatives. Customers of
Fonda's branded consumer products include Target Stores (a division of Dayton
Hudson Corp.), Wal-Mart Stores, Inc., Kmart Corporation and The Great Atlantic &
Pacific Tea Company, Inc. Fonda's primary private label customers in the
consumer market include The Kroger Co., The Great Atlantic & Pacific Tea
Company, Inc. and The Stop & Shop Companies, Inc.
Affiliated Company Sales. In connection with the License Agreement,
Fonda, at CEG's request, manufactures and sells to CEG certain party goods
products, principally napkins and paper plates including products bearing the
trademarks and trade names Splash(R) or Party Creations(R). Fonda sells such
products to CEG on terms no less favorable to Fonda than those it could
otherwise have obtained from unrelated third parties. In Fiscal 1998, Fonda's
net sales of such party goods products were approximately $36 million. Fonda has
been a long-term supplier to CEG and during Fiscal 1998 net sales to CEG were
$17 million. Fonda expects sales to CEG to continue to grow pursuant to the
License Agreement.
Distribution
Each of the Company's manufacturing facilities and distribution
facilities includes sufficient warehouse space to store such respective
facility's raw materials and finished goods as well as products from the
Company's other facilities. Shipments of finished goods are made from each
facility via common carrier. Sweetheart is in the process of consolidating its
warehouse and distribution facilities in order to reduce costs and improve its
customer service levels which the Company expects to be completed by the end of
Fiscal 1999. As part of this consolidation, Sweetheart closed its Clackamas,
Oregon and Sparks, Nevada distribution centers. As of October 1998, Sweetheart's
Ontario and Riverside distribution centers have been consolidated in a new west
coast distribution center.
Competition
The disposable food service products industry is highly competitive.
The Company believes that competition is principally based on product quality,
customer service, price and graphics capability. Competitors include large
multinational companies as well as regional and local manufacturers. The
marketplace for these products is fragmented and includes participants that
compete across the full line of products, as well as those that compete with a
limited number of products. Some of the Company's major competitors are
significantly larger than the Company, are vertically integrated and have
greater access to financial and other resources.
Fonda's primary competitors in the paperboard, plastic and foam food
service converted product categories include International Paper Food Service
Group (formerly Imperial Bondware) (a division of International Paper Co.), Fort
James Corp. (successor by merger of James River and Fort Howard Corp.), AJM
Packaging Corp., Dopaco Inc., Fold-Pak Corp. and Solo Cup Co. Major competitors
in the tissue and specialty food service converted product categories include
Duni Corp., Erving Paper Products Inc., Fort James Corp. and Wisconsin Tissue
Mills Inc. (a subsidiary of Chesapeake Corporation). Fonda's competitors also
include manufacturers of products made from plastics and foam. Sweetheart's
primary competitors in the food service categories include Dart Container
Corporation, Fort James Corp., Solo Cup Co., International Paper Food Service
Group and Tenneco Inc. Major competitors in the food packaging categories
include Cardinal Plastics, Inc., Landis Plastics, Inc., Norse Dairy Systems,
Inc., Polytainer, Ltd. and Sealright Co., Inc.
Raw Materials and Suppliers
Raw materials are a significant component of the Company's cost
structure. Principal raw materials for the Company's paperboard and tissue
operations include SBS paperboard and napkin tissue, obtained from major
domestic manufacturers. Other material components include bond paper, waxed
bond, corrugated boxes, poly bags, wax adhesives, coating and inks. Paperboard,
napkin tissue, bond paper and waxed bond paper are purchased in "jumbo" rolls
which may either be slit for in-line printing and processing, printed and
processed or printed and blanked for processing into final products. Fonda's
primary suppliers of paperboard stock are Georgia-Pacific Corp., Temple-Inland
Inc. and Gilman Paper Co. for which Fonda has total commitments of 49,200 tons
through April 2001. Sweetheart's primary suppliers of paperboard stock are
Temple-Inland Inc., Georgia-Pacific Corp. and WWF International, Ltd. Lincoln is
the primary supplier of tissue to Fonda. Pursuant to a contract, as amended,
with
5
Lincoln, Fonda is required to purchase color and white tissue at the lower
of a formula-based price or market price through December 31, 1999. The
principal raw material for the Company's plastic operations is plastic resin
(polystyrene, polypropylene and high density polyethylene) purchased directly
from major petrochemical companies and other resin suppliers. Resin is processed
and formed into cups, lids, cutlery, meal service products, straws and
containers through thermo forming and injection molding processes. 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 current sources of supply
for its raw materials are adequate to meet its requirements. Fonda purchases the
bulk of its SBS paperboard and napkin tissue under long-term contracts.
Sweetheart does not maintain any written contracts with its suppliers of raw
materials.
Environmental Matters
The Company and its operations are subject to comprehensive and
frequently changing Federal, state, local and foreign environmental and
occupational health and safety laws and regulations, including laws and
regulations governing emissions of air pollutants, discharges 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 there are currently no
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.
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 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 Sweetheart 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. The Company
anticipates the costs of upgrading such systems to be approximately $1.5
million.
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.
Technology and Research
Sweetheart maintains facilities for the development of new products and
product line extensions in Owings Mills, Maryland. Sweetheart maintains a staff
of engineers and technicians who are responsible for product quality, process
control, improvement of existing products, development of new products and
processes and technical assistance in adhering to environmental rules and
regulations. Sweetheart is continually striving to expand its proprietary
manufacturing technology, further automate its manufacturing operations, and
develop improved manufacturing processes and product designs.
Employees
At July 26, 1998, Sweetheart employed approximately 6,700 persons, of
whom approximately 5,700 persons were hourly employees with approximately 93% of
those employees located at facilities in the United States. Sweetheart currently
has collective bargaining agreements in effect at its facilities in Springfield,
Missouri, Augusta, Georgia and Toronto, Canada 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.
As of July 26, 1998, approximately 24% of such Sweetheart hourly employees were
covered by the Sweetheart collective bargaining agreements. The current
expiration dates of the Sweetheart collective bargaining agreements at the
Springfield, Augusta and Toronto
6
facilities are March 4, 2001, October 31, 1998 and November 30, 2000,
respectively. The Company anticipates that renewal negotiations regarding the
Augusta collective bargaining agreement will result in another three-year
contract term. Sweetheart considers its relationship with its employees to be
good.
At July 26, 1998, Fonda employed approximately 1,435 persons, of whom
approximately 1,110 were hourly employees. Fonda has collective bargaining
agreements in effect at its facilities in Appleton, Wisconsin; Oshkosh,
Wisconsin; St. Albans, Vermont; 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. The current expiration dates of the Fonda
Collective bargaining agreements at the Appleton, Oshkosh, St. Albans,
Williamsburg and Maspeth facilities are are May 1, 2002, May 31, 2002, January
31, 2001, June 11, 2000 and October 31, 1999, respectively. Fonda considers its
relationship with its employees to be good.
7
ITEM 2. PROPERTIES
The Company has converting 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 principal
properties owned or leased by Fonda and Sweetheart.
SIZE
(APPROXIMATE
MANUFACTURING/ AGGREGATE OWNED/
LOCATION WAREHOUSE SQUARE FEET) LEASED
-------- --------- ------------ ------
Fonda Converting Facilities
Appleton, Wisconsin M/W 267,700 O
Glens Falls, New York M/W 59,100 O
Goshen, Indiana M/W 63,000 O
Lakeland, Florida M/W 45,000 L
Maspeth, New York M/W 130,000 L
Oshkosh, Wisconsin M/W 484,000 O
St. Albans, Vermont (2 facilities) M 124,900 O
W 182,000 L
Williamsburg, Pennsylvania M/W 146,000 O(1)
Sweetheart Converting Facilities
Augusta, Georgia M/W 339,000 O
Conyers, Georgia (2 facilities) M/W 350,000 O
W 555,000 O
Chicago, Illinois (2 facilities) M/W 902,000 O
W 587,000 L
Dallas, Texas M/W 1,316,000 O
Manchester, New Hampshire M/W 160,000 O
North Las Vegas, Nevada (2 facilities) M/W 128,000 L
W 12,000 L
Ontario, California W 400,000 L(2)
Owings Mills, Maryland (3 facilities) M/W 1,533,000 O
W 267,000 O
W 406,000 O
Scarborough, Ontario (2 facilities) M/W 185,000 O
M/W 207,000 O
Somerville, Massachusetts M/W 193,000 O
Springfield, Missouri (2 facilities) M/W 925,000 O
W 415,000 L
Wilmington, Massachusetts W 407,000 L
- --------------------
(1) Subject to capital lease.
(2) Leased as of September 1998, replacing a 249,000 square foot warehouse
also located in Ontario, California.
During Fiscal 1997, Fonda decided to close its Three Rivers, Michigan
and Long Beach, California facilities and during Fiscal 1998, it decided to
close its Jacksonville, Florida facility, which facility was leased from Dennis
Mehiel (see "Certain Relationships and Related Transactions"). Such closures
were a result of the rationalization of Fonda's operations. The operations at
Three Rivers and Jacksonville were moved to facilities in Goshen, Indiana,
acquired in Fiscal 1997, and Lakeland, Florida, acquired in Fiscal 1998. The
operations at Long Beach were moved to the Oshkosh, Wisconsin facility and such
facility has been subleased through the term of the lease.
Sweetheart also leases a warehouse in Augusta, Georgia which was closed
in the latter part of fiscal 1997. Sweetheart is currently subleasing such
property to a third party through March 31, 2001 and will continue to
8
actively seek to sublet the property through the lease termination date, March
31, 2008. Sweetheart's Riverside, California facility was closed in the latter
part of fiscal 1997 and was sold in August 1998.
On March 24, 1998, Fonda consummated an agreement to sell substantially
all of the fixed assets and certain related working capital (the "Mill
Disposition") of its tissue mill in Gouverneur, New York (the "Mill"). On May
27, 1998, Fonda announced its decision to close its administrative offices in
St. Albans, Vermont and to relocate such offices, including its principal
executive offices, to Oshkosh, Wisconsin.
ITEM 3. Legal Proceedings
From time to time, the Company is subject to legal proceedings and
other claims arising in the ordinary course of its business. The Company
maintains insurance coverage of types and in amounts which it believes to be
adequate. The Company believes that it is not presently a party to any
litigation, the outcome of which could reasonably be expected to have a material
adverse effect on its financial condition or results of operations.
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 against Sweetheart in federal court. The remaining issue involved in the
case is a claim 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 is 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 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 in favor of
Sweetheart. On June 10, 1998, the plaintiffs petitioned the Circuit Court for a
hearing of their appeal which petition was denied on July 29, 1998. Plaintiffs
have filed a motion in the District Court for attorney's fees. No amount has
been specified in such motion.
The Company believes that Sweetheart will ultimately prevail on the
remaining material issues in the Aldridge litigation. 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 the
Company's financial position or results of operations. See Note 20 of the Notes
to the Financial Statements.
A patent infringement action entitled Fort James Corp. 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.
Sweetheart has filed an answer to the complaint denying liability and asserting
various affirmative defenses and counterclaims. The Company believes the
ultimate liability, if any, will not materially affect Sweetheart's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 Holdings has never paid any 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
9
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 October 20, 1998, there were four, one, and two holders of SF
Holdings' Class A, Class B and Class C Common Stock, respectively.
ITEM 6. SELECTED FINANCIAL DATA
Years Ended July (1)
-------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------ ------------- ------------ ------------
(In thousands)
Statement of Operations Data: (2)
Net sales $ 553,735 $ 252,513 $ 204,903 $ 97,074 $ 61,839
Cost of goods sold 481,263 201,974 164,836 76,252 51,643
-------------- ------------ ------------- ------------ ------------
Gross profit 72,472 50,539 40,067 20,822 10,196
Selling, general and administrative expenses 53,538 31,527 26,203 14,112 8,438
Other income, net (3) (12,166) (1,608) - - -
-------------- ------------ ------------- ------------ ------------
Income from operations 31,100 20,620 13,864 6,710 1,758
Interest expense, net 29,304 9,017 7,934 2,943 1,268
-------------- ------------ ------------- ------------ ------------
Income before taxes and extraordinary loss 1,796 11,603 5,930 3,767 490
Income taxes 2,198 4,872 2,500 1,585 239
Minority interest in subsidiariries' loss (1,900) - - - -
-------------- ------------ ------------- ------------ ------------
Income before extraordinary loss 1,498 6,731 3,430 2,182 251
Extraordinary loss, net (4) - 3,495 - - -
-------------- ------------ ------------- ------------ ------------
Net income $ 1,498 $ 3,236 $ 3,430 $ 2,182 $ 251
============== ============ ============= ============ ============
Balance Sheet Data as of July:
Cash $ 20,703 $ 5,908 $ 1,467 $ 120 $ 225
Working capital 155,524 58,003 38,931 28,079 2,731
Property, plant and equipment, net 430,150 59,261 46,350 26,933 7,454
Total assets 943,811 179,604 136,168 79,725 24,668
Total indebtedness (5) 622,968 122,987 87,763 48,165 12,581
Exchangeable preferred stock 30,680 - - - -
Minority interest in subsidiary 3,020 - - - -
Redeemable common stock 2,139 2,076 2,179 2,115 -
Stockholders' equity 22,929 15,010 11,873 7,205 5,977
(1) All fiscal years are 52 weeks, except for Fiscal 1994 which is 53 weeks.
Certain prior year amounts have been restated to conform to current year
presentation.
(2) Includes the results of operations of the Company and the following
acquisitions since their respective dates of acquisition: (i) the net
assets of the Scott Foodservice Division from Scott Paper Company as of
March 31, 1995; (ii) the net assets of Alfred Bleyer & Co., Inc. as of
November 30, 1995; (iii) all of the outstanding capital stock of the
Chesapeake Consumer Products Company from Chesapeake Corporation as of
December 29, 1995; (iv) the net assets of two divisions of the Specialties
Operations Division of James River Paper Corporation as of May 5, 1996;
(v) all of the outstanding capital stock of Heartland Mfg. Corp. as of
June 2, 1997; (vi) the net assets of the former printed products division
of Astro Valcour, Inc. from Tenneco Inc. as of June 10, 1997; (vii) the
net assets of Leisureway as of January 5, 1998 (the "Leisureway
Acquisition"); and (viii) the Sweetheart Investment. The acquisitions
referred to in (v) and (vi) above are hereinafter referred to as the "1997
Fonda Acquisitions". See "Business", "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and of the Notes to the
Financial Statements.
(3) Fiscal 1998 includes a $15.9 million gain on the Mill Disposition 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").
(4) The Company 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.
10
(5) Includes short-term and long-term borrowings and current maturities of
long-term debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion 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, and developments with respect to contingencies.
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 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, 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, nor does it reflect the operations of Sweetheart under
current management for a significant period of time.
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 highly seasonal with a
majority of its net cash flows from operations realized in the second and third
quarters of the calendar 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 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.
Year 2000
Many of Sweetheart's and Fonda's computer systems may be unable to
process dates beyond December 31, 1999. This could result in system failures or
miscalculations which could have a material adverse effect on the Company's
business, financial condition or results of operations. Each of Sweetheart and
Fonda has implemented a Year 2000 compliance program intended to identify the
programs and infrastructures that could be effected by Year 2000 issues and
resolve the problems that were identified on a timely basis.
Fonda has completed the assessment phase, in which it has identified
potential Year 2000 issues, including those with respect to information
technology systems, technology embedded within equipment Fonda uses as well as
equipment that interfaces with vendors and other third parties. Fonda is in the
process of upgrading its hardware and software systems which run most of Fonda's
data processing and financial reporting software applications and consolidating
certain of its in-house developed computer systems into the upgraded systems.
The upgraded systems are expected to be operational and Year 2000 compliant by
December 1998. All other information technology systems, that are not currently
Year 2000 compliant, are also expected to be compliant by December 1998. In
addition, Fonda is working with vendors to ensure that its telephone systems and
other embedded technologies are Year 2000 compliant. EDI trading partners have
been contacted, and other key business partners are in the process of being
contacted, to ensure that key business transactions will be Year 2000 compliant.
Furthermore, in the event
11
Fonda is unable to meet certain key operational dates, the Company believes its
systems that are already Year 2000 compliant, as well as temporary solutions to
systems that are currently in place, and manual procedures would allow Fonda to
ship product to customers and engage in other critical business functions.
Sweetheart has completed the assessment phase, in which it has
identified potential Year 2000 issues with respect to information technology
systems, as well as equipment that interfaces with vendors and third parties,
and developed a compliance project for its hardware, operating systems and
application systems. Sweetheart is scheduled to complete the hardware and
operating systems conversion plans by January 1999. With respect to the
application phase, Sweetheart is compliant in its order management and
warehousing systems. Manufacturing and planning systems are in final testing and
are expected to be compliant by January 1999. Financial, corporate and in-house
developed systems are scheduled for compliance by July 1999. Sweetheart expects
to complete the assessment phase for technology embedded within equipment by
November 1998. Sweetheart believes a significant portion of its manufacturing
equipment is not affected by Year 2000 issues due to its operations use, or was
compliant when purchased. Sweetheart has or is in the process of contacting key
vendors and business partners, to ensure that key business transactions will by
Year 2000 compliant. Furthermore, in the event Sweetheart is unable to meet
certain key operational dates, Sweetheart believes its already compliant Year
2000 systems for planning, order management and warehouse management which, in
use with manual systems, would allow Sweetheart to ship products to customers
and engage in other critical business functions.
Sweetheart and Fonda estimate the total cost of their respective Year
2000 program at $2.7 million and $2.6 million, respectively, of which $1.2
million and $1.0 million has been spent by Sweetheart and Fonda, respectively,
as of the end of Fiscal 1998. Future expenditures will be funded from cash flow
from the respective company's operations or borrowings under each company's
respective credit facility. However, there can be no assurance that Sweetheart
or Fonda will identify all Year 2000 issues in its computer systems in advance
of their occurrence or that they will be able to successfully remedy all
problems that are discovered. Failure by Sweetheart or Fonda and/or their
significant vendors and customers to complete Year 2000 compliance programs in a
timely manner could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the revenue stream
and financial stability of existing customers may be adversely impacted by Year
2000 problems which could cause fluctuations in the Company's revenues and
operating profitability.
Results of Operations
Results of Operations
Years Ended July
1998 1997 1996
----------------------------- --------------------------- ----------------
Amount % of Amount % of Amount % of
Net Net Net
Sales Sales Sales
(Dollars in millions)
Net Sales $ 553.7 100.0% $ 252.5 100.0 % $ 204.9 100.0%
Cost of goods sold 481.3 86.9 202.0 80.0 164.8 80.4
--------- ---------- --------- --------- ----------- ---------
Gross profit 72.5 13.1 50.5 20.0 40.1 19.6
Selling, general and
administrative expense 53.5 9.7 31.5 12.5 26.2 12.8
Other income, net (12.2) (2.2) (1.6) (0.6) - -
---------- ---------- ---------- ---------- --------- ---------
Income from operations 31.1 5.6 20.6 8.2 13.9 6.8
Interest expense, net 29.3 5.3 9.0 3.6 8.0 3.9
--------- --------- ---------- --------- -------- --------
Income before taxes and
extraordinary loss 1.8 0.3 11.6 4.6 5.9 2.9
Income tax expense 2.2 0.4 4.9 1.9 2.5 1.2
Minority interest in
subsidiaries' loss (1.9) (0.3) - - - -
---------- ---------- --------- ---------- --------- ---------
Income before
extraordinary loss 1.5 0.3 6.7 2.7 3.4 1.7
Extraordinary loss, net - - 3.5 1.4 - -
--------- ---------- -------- -------- ---------- --------
Net income $ 1.5 0.3 % $ 3.2 1.3% $ 3.4 1.7%
========= ======== ======== ========= ======== ========
12
Fiscal 1998 Compared to Fiscal 1997
Net sales increased $301.2 million, or 119%, to $553.7 million
primarily as a result of the Sweetheart Investment. The Sweetheart Investment
resulted in a $282.3 million increase in net sales. The increase in net sales is
also due in part to increased sales volume in Fonda's converting operations
resulting from the 1997 Fonda Acquisitions and Leisureway Acquisition, and to a
lesser extent increased sales volume in Fonda's converted tissue products. Sales
volume in such converting operations increased 12% in the consumer markets and
7% in the institutional markets.
Average selling prices increased 5% in the institutional markets and 1%
in the consumer markets. Net sales of tissue mill products declined $6.1 million
resulting from the Mill Disposition on March 24, 1998 and a shift in mix due to
competitive market conditions Increased sales of commodity white paper from the
new paper machine were offset by reduced sales of deep tone paper due to
competitive market conditions.
Gross profit increased $21.9 million, or 43.4%, to $72.5 million. The
Sweetheart Investment resulted in a $23.5 million increase in gross profit. The
offsetting decrease in gross profit is the result of Fonda's operations,
primarily a $4.5 million decrease in gross profit in tissue mill products,
partially offset by an increase in gross profit in the converting operations.
The decrease in gross profit of tissue mill products was due to the Mill
Disposition, as well as the increased sales of lower margin white paper, reduced
sales of higher margin deep tone paper, and increased manufacturing costs
resulting from the start-up of the second paper machine. In the converting
operations, the increase in gross profit attributable to the 1997 Fonda
Acquisitions and the Leisureway Acquisition and higher margins in converted
tissue products were partially offset by increased costs of paperboard, which
were not recovered through price adjustments. As a percentage of net sales,
gross profit decreased from 20.0% in Fiscal 1997 to 13.1% in Fiscal 1998 for the
reasons set forth above.
Selling, general and administrative expenses increased $22.0 million,
or 69.8%, to $53.5 million. The Sweetheart Investment resulted in $19.1 million
of such increase. The remaining $2.9 million increase was primarily due to
increased selling expenses resulting from the increase in Fonda's net sales. As
a percentage of net sales, selling, general and administrative expenses
decreased from 12.5% in Fiscal 1997 to 9.7% in Fiscal 1998.
Other income, net primarily includes a 15.9 million gain on the Mill
Disposition and the Steam Contract.
Income from operations increased $10.5 million, or 50.8%, to $31.1
million due to the reasons discussed above. Excluding other income, net, as a
percentage of net sales, income from operations decreased from 8.8% in Fiscal
1997 to 7.8% in Fiscal 1998.
Interest expense, net of interest income, increased $20.3 million to
$29.3 million. The increase includes $4.0 million from the issuance of the
Discount Notes and $14.0 million from Sweetheart indebtedness since the date of
the Sweetheart Investment. The remainder of the increase was due to higher
borrowing levels at Fonda resulting from the issuance in the third quarter of
Fiscal 1997 of the Fonda Notes, which was partially offset by lower interest
rate debt.
The effective tax rate was 122% in Fiscal 1998 compared to a 42%
effective rate in Fiscal 1997 which reflects certain non-deductible costs in
Fiscal 1998 relating to the Sweetheart Investment and the financing in
connection therewith.
As a result of the above and the addback of minority interest
representing 10% of Sweetheart's historical loss, income before extraordinary
loss was $1.5 million in Fiscal 1998 compared to $6.7 million in Fiscal 1997.
In Fiscal 1997, the Company incurred a $3.5 million extraordinary loss
(net of a $2.5 million income tax benefit) in connection with Fonda's early
retirement of debt consisting of the write-off of unamortized debt issuance
costs, elimination of unamortized debt discount, and prepayment penalties. As a
result of the above, net income was $1.5 million in Fiscal 1998 compared to $3.2
million in Fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996
Net sales in Fiscal 1997 increased $47.6 million, or 23%, to $252.5
million. This increase was a result of a full year's results of operations for
the acquisitions consummated by Fonda in Fiscal 1996 and two month's results of
operations for the 1997 Fonda Acquisitions, which was partially offset by a $5.8
million decline in net sales due to lower average selling prices. The lower
selling prices arose from competitive market conditions and lower raw material
costs. During Fiscal 1997, prices declined about 16% in the institutional market
and 10% in the consumer market. These lower selling prices were partially offset
by higher sales volumes of 17% and 3% in the institutional and consumer markets
respectively.
13
Gross profit in Fiscal 1997 increased $10.5 million, or 26.1%, to $50.5
million due primarily to the acquisitions consummated by Fonda in Fiscal 1996.
As a percentage of net sales, gross profit improved slightly from 19.6% in
Fiscal 1996 to 20% in Fiscal 1997. Gross profits increased in the consumer
market, primarily due to a 14% decline in SBS paperboard costs, which were
offset by lower gross profits in the institutional market. Margins for the
institutional market were reduced primarily as a result of competitive market
conditions which lowered selling prices.
Selling, general and administrative expenses in Fiscal 1997 increased
$5.3 million, or 20%, to $31.5 million. This increase was due primarily to the
incurrence of additional expenses and corporate overhead assumed in connection
with the acquisitions consummated by Fonda in Fiscal 1996. As a percentage of
net sales, selling, general and administrative expenses increased slightly from
12.7% in Fiscal 1996 to 12.5% in Fiscal 1997.
Other income, net includes a gain of a net $2.9 million from the
settlement of a lawsuit. Partially offsetting this gain was a $1.3 million
charge for anticipated costs of the closure of the Company's Three Rivers,
Michigan facility. The charge covers the costs for the termination of employees
as well as ongoing costs to maintain the facility until its disposition.
Income from operations increased $6.8 million, or 49% due to the
reasons discussed above. Excluding the $1.6 million net gain included in other
income, income from operations increased, as a percentage of net sales, from
6.8% in Fiscal 1996 to 7.5% in Fiscal 1997.
Interest expense, net of interest income, increased $1 million, or 14%,
due to higher borrowing levels primarily resulting from the acquisitions
consummated by Fonda in Fiscal 1996 and the issuance of the Fonda Notes. See "
- --Liquidity and Capital Resources". Partially offsetting the higher borrowing
levels were the lower interest rates on such notes.
Income before income taxes and extraordinary loss increased to $11.6
million in 1997 from $5.9 million in 1996. The Company's effective income tax
rate was 42% in both years.
The Company 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. As a result of the above,
net income was $3.2 million in Fiscal 1997 compared to $3.4 million in Fiscal
1996.
Liquidity and Capital Resources
Historically, the Company's subsidiaries have relied on cash flow from
operations and borrowings to finance their respective working capital
requirements, capital expenditures and acquisitions.
Net cash provided by operating activities in Fiscal 1998 was $7.9
million compared to $8.3 million in Fiscal 1997. The decrease is primarily due
to a $8.4 million reduction in net income, excluding the net gain on the Mill
Disposition and Steam Contract in Fiscal 1998 and the extraordinary loss in
Fiscal 1997. This decrease was partially offset by a $5.2 million reduction in
inventory, the effects of the Sweetheart Investment and proceeds from the
settlement of a lawsuit by Fonda in Fiscal 1998.
Historically, the Company's subsidiaries' investing activities have
been primarily capital expenditures and, in the case of Fonda, business
acquisitions. Capital expenditures in Fiscal 1998 were $13.7 million, including
(i) $2.2 million at Sweetheart for new cup making equipment and $1.0 million for
management information systems and (ii) $1.8 million at Fonda related to the
installation of a second paper machine at the Mill and $1.2 million for plate
converting equipment. The remaining $7.5 million in Fiscal 1998 were for routine
capital improvements. Capital expenditures in Fiscal 1997 were $10.4 million,
including $8.2 million related to the installation of a second paper machine at
the Mill. The remaining $2.2 million in Fiscal 1997 were for routine capital
improvements. In addition, during Fiscal 1998 Fonda (i) received proceeds of
$34.8 million, net of transaction costs and fees, from (a) the Mill Disposition,
(b) the Steam Contract, and (c) the sale of unutilized equipment; and (ii)
acquired certain net assets of a manufacturer of white paper plates for $6.9
million. (See Note 3 of Notes to Financial Statements).
14
None of SF Holdings, Fonda or Sweetheart anticipates any material
capital expenditures in the next twelve months other than those funded through
asset sales and available cash from the respective subsidiaries. SF Holdings is
a holding company and does not anticipate any material cash needs until 2003
when interest on the Discount Notes and dividends on the Exchangeable Preferred
become payable in cash.
Funding for the cash portion of the Sweetheart Investment, including
transaction fees, was provided by (i) $77.5 million in net proceeds from the
sale of units consisting of $144.0 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, and (ii) a $15 million
investment in Class B preferred stock by CEG. 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 111,000 shares of Class C Common Stock. Until March 15, 2003
cumulative dividends may be 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 October 1, 1998, dividends on the Exchangeable Preferred have
been paid by the issuance of additional shares of Exchangeable Preferred.
The principal amount of the Fonda Notes is payable on February 28, 2007
and interest is payable semi-annually in arrears. Fonda may, at its election,
redeem the Fonda 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 Fonda 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 Fonda Notes at a redemption price equal to 101% of
the principal amount thereof plus accrued interest.
Fonda's revolving credit facility, which matures on March 31, 2000,
provides up to $50 million borrowing capacity, collateralized by eligible
accounts receivable and inventories, certain general intangibles and the
proceeds on the sale of accounts receivable and inventory. At July 26, 1998,
there was no outstanding balance and $36.7 million was the maximum advance
available based upon eligible collateral. At July 26, 1998, borrowings were
available at the bank's prime rate (8.50%) plus .25% and at LIBOR (approximately
5.66%) plus 2.25%.
Sweetheart's revolving credit facility, as amended, provides for
borrowings in an amount of up to $135.0 million, subject to borrowing base
limitations (the "Sweetheart U.S. Credit Facility"). Borrowings under the
Sweetheart U.S. Credit Facility mature on September 30, 2000 and as of June 30,
1998, $12.5 million is available. Borrowings under the Sweetheart U.S. Credit
Facility bear interest, at Sweetheart's election, at a rate equal to (i) LIBOR
plus 2.25%, or (ii) a bank's base rate plus 1.00%. The Sweetheart U.S. Credit
Facility is secured by accounts receivable, inventory, equipment, intellectual
property, general intangibles and the proceeds on the sale of any of the
foregoing. On June 15, 1998, a Canadian subsidiary of Sweetheart refinanced its
then existing term loan and revolving credit facility and entered into a new
term loan and revolving credit facility agreement which provides for a term loan
facility of up to Cdn $10.0 million and a revolving credit facility of up to Cdn
$10.0 million (the "Sweetheart Canadian Credit Facility and with the Sweetheart
U.S. Credit Facility, the "Sweetheart Credit Facilities"). Term loan borrowings
under the Sweetheart Canadian Credit Facility are payable quarterly through May
2001 and revolving credit borrowings and term loan borrowings have a final
maturity date of June 15, 2001. As of June 30, 1998, Cdn $6.4 million
(approximately $4.4 million) was available under such facility. The Sweetheart
Canadian Credit Facility is secured by all of the existing and after acquired
real and personal, tangible assets of such Canadian subsidiary and the net
proceeds on the sale of any of the foregoing. Borrowings under the Sweetheart
Canadian Credit Facility bear interest at an index rate plus 2.25% with respect
to the revolving credit borrowings, and an index rate plus 2.50% with respect to
the term loan borrowings.
The Sweetheart Notes include: (i) $190.0 million of 9 5/8% Senior
Secured Notes due September 1, 2000 (the "Sweetheart Secured Notes") and (ii)
$110.0 million of 10 1/2% Senior Subordinated Notes due September 1, 2003 (the
"Sweetheart Subordinated Notes"). Sweetheart may, at its election, redeem the
Sweetheart Secured Notes at any time at a redemption price equal to a percentage
(currently 103.208% and declining in annual increments to 100% after August 31,
1999) of the principal amount, plus accrued interest. The Sweetheart Secured
Notes are secured by
15
mortgages on the real property owned by Sweetheart. Payment of principal and
interest on the Sweetheart Subordinated Notes is subordinate to Senior
Indebtedness (as defined therein), which includes the Sweetheart U.S. Credit
Facility and the Sweetheart Secured Notes. Sweetheart may, at its election,
redeem the Sweetheart Subordinated Notes at any time after August 31, 1998 at a
redemption price equal to a percentage (103.938% after August 31, 1998 and
declining in annual increments to 100% after August 31, 2001) of the principal
amount, plus accrued interest. The Sweetheart Notes provide that upon the
occurrence of a Change of Control (as defined therein) the holders will have the
option to require the redemption of the Sweetheart Notes at a redemption price
equal to 101% of the principal amount, plus accrued interest.
Pursuant to the terms of the instruments governing the indebtedness of
SF Holdings, 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, consolidations, asset sales or changes in
capital structure, (ii) creation or acquisition of subsidiaries, (iii) purchase
or redemption of capital stock or declaration or payment of dividends or
distributions on such capital stock, (iv) incurrence of additional indebtedness,
(v) investment activities, (vi) granting or incurrence of liens to secure other
indebtedness, (vii) prepayment or modification of the terms of subordinated
indebtedness and (viii) engaging in transactions with affiliates. In addition,
such debt instruments restrict each subsidiary's ability to pay dividends or
make other distributions to SF Holdings or each other. The credit facilities
also require that each subsidiary satisfy certain financial covenants.
Pursuant to the asset sale covenant under the indenture governing the
Fonda Notes, resulting from the receipt of proceeds from the Mill Disposition,
Fonda is required to (i) reinvest approximately $10 million of the net proceeds
from the Mill Disposition in fixed assets within 270 days of such disposition or
(ii) offer to repurchase the Fonda Notes to the extent that such amount has not
been reinvested. As of September 30, 1998, the Company has reinvested or has
committed to reinvest amounts in excess of $10 million, primarily in napkin and
plate-making equipment, and intends to reinvest the remainder of such net
proceeds within the required time frame.
During Fiscal 1998, Fonda redeemed 72,500 shares of Class A common
stock (pre-Merger shares) for $9.8 million pursuant to an offer by Fonda to
repurchase up to 74,000 shares of its common stock (pre-Merger shares) at $135
per share from its stockholders on a pro rata basis. Fonda has completed such
stock repurchase and canceled such shares.
During Fiscal 1998, the Company did not incur material costs for
compliance with environmental law and regulations.
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 will
be sufficient to fund each of Fonda's and Sweetheart's respective capital
expenditures needs, debt service requirements and working capital needs for the
foreseeable future.
Net Operating Loss Carryforwards
As of July 26, 1998, the Company had approximately $200 million of net
operating loss carryforwards ("NOLs") which expire at various dates through
2018. Although the Company expects that sufficient taxable income will be
generated in the future to realize these NOLs, there can be no assurance future
taxable income will be generated to use such NOLs.
Impact of Recently Issued Accounting Standards
The impact of recently issued accounting standards is discussed in Note
2 of Notes to the Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements and Schedule attached hereto and listed in
Item 14 (a)(1) and (a)(2) hereof.
16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On April 29, 1998, Deloitte & Touche LLP was appointed as independent
accountant for Sweetheart, replacing Arthur Anderson LLP. The decision to change
accountants was approved by Sweetheart's board of directors. Sweetheart had no
disagreements with Arthur Andersen LLP in the six months ended March 31, 1998 or
its fiscal years ended September 30, 1997 and 1996.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of SF Holdings:
NAME AGE POSITION
---- --- --------
Dennis Mehiel 56 Chairman and Chief Executive Officer
Thomas Uleau 53 President, Chief Operating Officer and Director
Hans Heinsen 45 Senior Vice President, Chief Financial Officer
and Treasurer
Harvey L. Friedman 56 Secretary and General Counsel
Alfred B. DelBello 63 Vice Chairman
James Armenakis 55 Director
W. Richard Bingham 62 Director
John A. Catsimatidis 50 Director
Chris Mehiel 59 Director
Jerome T. Muldowney 53 Director
G. William Seawright 57 Director
Lowell P. Weicker, Jr. 67 Director
Dennis Mehiel has been Chairman and Chief Executive Officer of SF
Holdings since December 1997. He has been Chairman and Chief Executive Officer
of Fonda since it was purchased in 1988. In addition, Mr. Mehiel is Chief
Executive Officer of Sweetheart. Since 1966 he has been Chairman of Four M
Corporation ("Four M"), a converter and seller of interior packaging, corrugated
sheets and corrugated containers which he co-founded, and since 1977 (except
during a leave of absence from April 1994 through July 1995) he has been the
Chief Executive Officer of Four M. Mr. Mehiel is also the Chairman of Box USA of
New Jersey, Inc. ("Box of New Jersey"), a manufacturer of corrugated containers,
and Chairman and Chief Executive Officer of CEG.
Thomas Uleau has been President, Chief Operating Officer and a Director
of SF Holdings since February 1998. Prior to that, he had been President of
Fonda from January 1997 and Chief Operating Officer of Fonda since 1994. He has
been a director of Fonda since 1988. In addition, Mr. Uleau is President and
Chief Operating Officer of Sweetheart since February 1998. Mr. Uleau was
Executive Vice President of Fonda from 1994 to 1996 and from 1988 to 1989. He
has been Executive Vice President of CEG since 1996. He served as Executive Vice
President and Chief Financial Officer of Four M from 1989 through 1993 and its
Chief Operating Officer in 1994. He is also currently a director of Four M, CEG,
and Box of New Jersey.
Hans Heinsen has been Senior Vice President, Chief Financial Officer
and Treasurer of SF Holdings since February 1998. He has been Senior Vice
President and Treasurer of Fonda since January 1997 and Chief Financial Officer
of Fonda since June 1996. Mr. Heinsen is also Chief Financial Officer and Vice
President Finance of Sweetheart. Prior to joining Fonda, Mr. Heinsen spent 21
years in a variety of corporate finance positions with The Chase Manhattan Bank,
N.A.
Harvey L. Friedman has been Secretary and General Counsel of SF
Holdings since February 1998. He is also Secretary and General Counsel of Fonda.
He was a director of Fonda from 1985 to January 1997. Mr. Friedman
17
is also the Secretary and General Counsel of CEG, Four M and Box 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.
Alfred B. DelBello has served as Vice Chairman of SF Holdings since
February 1998. He has served as 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.
James Armenakis has served as a Director of SF Holdings since February
1998 and a director of Fonda since June 1997. He is a senior partner in the law
firm of Armenakis & Armenakis.
W. Richard Bingham became a Director of SF Holdings upon the
consummation of the Sweetheart Investment. Mr. Bingham co-founded AIPM and has
been a director and officer of the firm since 1989. He is also a general partner
of AIP. Prior to co-founding AIPM, Mr. Bingham was a Managing Director of
Shearson Lehman Brothers from 1984 until 1987. Prior to joining Shearson Lehman
Brothers, Mr. Bingham was Director of the Corporate Finance Department, a member
of the board, and head of Mergers & Acquisitions at Lehman Brothers Kuhn Loeb
Inc. Prior thereto, he directed investment banking operations at Kuhn Loeb &
Company where he was a partner and member of the board and executive committee.
He formerly served on the board of directors of Avis Inc., ITT Life Insurance
Corporation and Valero Energy Corporation.
John A. Catsimatidis has served as a Director of SF Holdings 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 New's 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 Merchant's Association.
Chris Mehiel, the brother of Dennis Mehiel, has been a Director of SF
Holdings 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 since August 1997. He is an executive officer of the managing
member of Fibre Marketing Group, LLC, the successor to Fibre Marketing Group,
Inc., 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 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.
Jerome T. Muldowney has served as a Director of SF Holdings 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.
G. William Seawright has served as a Director of SF Holdings 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.
Lowell P. Weicker, Jr. has served as a Director of SF Holdings 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 1962 to 1989, Mr. Weicker served in the U.S. Congress. Mr. Weicker
presently teaches at the University of Virginia. In 1992, Mr. Weicker earned the
Profiles in Courage Award from the John F. Kennedy Library Foundation.
18
ITEM 11. Executive Compensation
No executive officer of SF Holdings was paid any compensation by SF
Holdings during Fiscal 1998. SF Holdings' executive officers also serve as
executive officers of Sweetheart and/or Fonda and such persons are not
separately compensated by SF Holdings. In addition, except as set forth below
under "Stock Options," SF Holdings does not at this time contemplate that any of
its executive officers will be provided with stock options, restricted stock,
stock appreciation rights ("SARs"), phantom stock or similar equity benefits.
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 years 1998, 1997, and 1996 for services rendered in all capacities to
Fonda during such fiscal years and Sweetheart from March 12, 1998 to the end of
Fiscal 1998.
In addition to their positions at Fonda, immediately prior to the
consummation of the Sweetheart Investment, Dennis Mehiel, Thomas Uleau and Hans
Heinsen were appointed executive officers of Sweetheart. In addition, Michael
Hastings, an officer of Fonda, became an officer of Sweetheart. In Fiscal 1998,
such persons received compensation from both Sweetheart and Fonda.
SECURITIES ALL OTHER
NAME AND PRINCIPAL UNDERLYING COMPEN-
POSITION YEAR SALARY BONUS OTHER(1) SARS (2) SATION (3)
- -------- ---- ------ ----- -------- ------------ ----------
Dennis Mehiel 1998 $304,150 $150,000 $-- -- $--
Chairman and Chief 1997 168,750 75,000 -- -- --
Executive Officer 1996 150,000 60,000 -- -- --
Thomas Uleau 1998 230,631 80,000 -- 1,950 42,313
President and Chief 1997 196,250 75,000 -- 1,950 9,504
Operating Officer 1996 185,000 60,000 -- 1,950 9,186
Hans Heinsen 1998 206,392 90,000 -- 1,950 10,705
Senior Vice President, 1997 170,000 56,000 -- 1,950 10,371
Chief Financial Officer 1996 26,153(4) -- -- 1,950 625
And Treasurer
Michael Hastings 1998 184,704 60,000 -- 1,950 9,246
Senior Vice President 1997 164,423 60,000 -- 1,950 8,203
1996 150,000 38,250 -- 1,950 9,219
Robert Korzenski 1998 188,390 100,000 -- 1,950 10,419
Senior Vice President 1997 164,423 50,000 -- 1,950 10,216
1996 150,000 47,250 -- 1,950 9,531
- -----------------------------
(1) The Company has concluded that the aggregate amount of perquisites and
other personal benefits paid to each of the Named Officers did not exceed
the lesser of (i) 10% of such officer's total annual salary and bonus and
(ii) $50,000. Thus, such amounts are not reflected in the table.
(2) Reflects Fonda SARs.
(3) Reflects matching contributions by Fonda under Fonda's 401(k) Plans,
long-term disability, and life insurance premiums paid by Fonda and
relocation for Mr. Uleau in 1998 paid by Sweetheart.
(4) Consists of salary for employment commencing June 1996.
Director Compensation
Directors 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, (iii) $1,000 for each committee meeting
19
attended which is not held on the date of a Board meeting and (iv) 100 SARs of
SF Holdings. Directors who are employees of SF Holdings or directors of Fonda or
Sweetheart do not receive any compensation or fees for service on the Board of
Directors or any committee thereof.
Stock Options
Pursuant to the Sweetheart Investment, Dennis Mehiel currently holds
609,307 options to purchase Class A Common Stock of SF Holdings at an option
price of $2.83 per share and 105,842 options to purchase Class A Common Stock of
SF Holdings at an option price of $3.11 per share. Of such options, options to
purchase 238,383 shares are currently exercisable and options to purchase
238,383 shares vest on October 1, 1998 and October 1, 1999 or upon an initial
public offering of SF Holdings' Common Stock, whichever occurs first; provided,
however, that Mr. Mehiel is then employed by SF Holdings and its subsidiaries.
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.
The following table provides information on grants of Fonda SARs made
during Fiscal 1998 to the Named Officers as well as the vested status of those
SARs at July 26, 1998.
Number of
1998 SAR Grant Unexercised
------------------------------------------------------------------
% of Total SARs at
# of Granted to Exercise July 26, 1998
--------------------
Securities Employees or Base Expira-
Underlying In Fiscal Price Per tion Exercisable/
Name Grant Year Share Date Unexercisable
- ---- -------------- ---------------- ------------ ----------- --------------------
Thomas Uleau 1,950 12.5% $30.06 -- 2,340/5460
Hans Heinsen 1,950 12.5% 45.33 -- 1,170/4,680
Michael Hastings 1,950 12.5% 30.06 -- 2,340/5460
Robert Korzenski 1,950 12.5% 30.06 -- 2,340/5460
(1) Unless otherwise determined by the Administering Committee of Fonda's SAR
Plan, awards of SARs will vest on each anniversary of their grant at the
rate of 20% per year commencing on the first anniversary date. However,
unless otherwise determined by the Administering Committee, in the event
that at the time of any grant of SARs the grantee has not been continuously
employed by Fonda for at least five years, such vesting will be subject to
the completion of such five-year period. Upon voluntary termination of
employment, involuntary termination without cause or termination due to
death, disability or retirement at age 60 or above, all unvested SARs will
be forfeited and vested SARs not previously redeemed will be redeemed
automatically by Fonda as of the date of termination.
Employee Benefit Plans
Fonda
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.
Fonda provides 401(k) savings and investment plans for the benefit of
non-union employees. Employee contributions are matched at the discretion of
Fonda. On January 1, 1997, Fonda adopted a defined contribution benefit plan for
all non-union employees for which contributions and costs are based on
participant earnings. Fonda
20
also participates in multi-employer pension plans for certain of its union
employees. See Note 18 of the Notes to Financial Statements.
None of the executive officers of SF Holdings is covered under any of
Fonda's defined benefit plans. Rather, such persons are covered under defined
contribution plans.
Sweetheart
A majority of Sweetheart's employees ("participants") are covered under
a 401(k) defined contribution plan. Sweetheart's annual contributions to this
defined contribution plan represent a 50% match on participant contributions.
Sweetheart's match is limited to participant contributions up to 6% of
participant salaries. In addition, Sweetheart is allowed to make discretionary
contributions. Certain Sweetheart 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 postretirement 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. Sweetheart does not
fund the plans.
None of the executive officers of SF Holdings is covered under any of
Sweetheart's 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 October 20,
1998 with respect to the beneficial ownership of the shares of common stock of
SF Holdings.
BENEFICIAL OWNERSHIP
--------------------
NAME AND ADDRESS OF NUMBER OF PERCENTAGE OF
BENEFICIAL OWNER SHARES OWNERSHIP(1)(2)
- ---------------- ------ ---------------
Dennis Mehiel
115 Stevens Avenue
Valhalla, New York 10595 . . . . . . . . . . . . 6,431,573 78.8%
Thomas Uleau . . . . . . . . . . . . . . . . . . 95,353 1.2%
10100 Reisterstown Road
Owings Mills, Maryland 21117
All executive officers and directors
As a group (3 persons) . . . . . . . . . . . . . 6,679,458 81.8%
(1)Includes 564,586 shares of Class B Common Stock.
(2)Includes 238,383 shares underlying options to purchase Class A Common Stock,
which are presently exercisable, and 1,341,381 shares which Mr. Mehiel has
the power to vote pursuant to a voting trust agreement between his spouse,
Edith Mehiel, and himself. See "Management--Stock Options."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Fonda leases a facility in Jacksonville, Florida, from Dennis Mehiel on
terms that Fonda believes are no less favorable than could be obtained from an
independent third parties and were negotiated on an arm's length basis. Pursuant
to the lease, which has a term expiring December 31, 2014, Fonda currently pays
base rent of approximately $.2 million per year, subject to escalations indexed
to the Consumer Price Index ("CPI"). In addition, Mr. Mehiel holds an option
that expires July 31, 2006, under which he may require Fonda to purchase the
facility for $1.5 million, subject to a CPI-based escalation. In Fiscal 1998,
Fonda decided to close its Jacksonville facility and
21
is currently seeking a sublease tenant. The Company does not expect the outcome
of this action to result in a material adverse effect on its financial condition
or results of operations.
On March 12, 1998, Fonda entered into a license agreement with CEG,
whereby CEG was granted the exclusive rights to use certain trademarks and trade
names in connection with the manufacture, distribution and sale of disposable
party goods products for a period of five years, subject to extension. In
connection therewith, Fonda will receive an annual royalty equal to 5% of CEG's
cash flow, as determined in accordance with a formula specified in such
agreement. The Company believes the terms of such agreement are at least as
favorable as those it could otherwise have obtained from unrelated third parties
and were negotiated on an arm's length basis. In addition, in accordance with
such agreement, Fonda, at CEG's request, manufactures and sells to CEG certain
party goods products, principally napkins and paper plates including products
bearing the trademarks and trade names Splash(R) or Party Creations(R). Fonda
sells such products to CEG on terms no less favorable to Fonda than those it
could otherwise have obtained from unrelated third parties. In Fiscal 1998,
Fonda's net sales of such party goods products were approximately $36 million.
On March 12, 1998, Fonda amended certain terms of the $2.6 million
Promissory Note dated February 27, 1997, made by CEG in favor of Fonda (the "CEG
Note"). The 10% annual interest rate on the CEG Note was converted to
pay-in-kind, the CEG Note's 2002 maturity was extended for an additional three
years and the CEG Note was made subordinate to Senior Debt (as such term is
defined therein). In connection with such amendment, Fonda was also issued a
warrant to purchase, for a nominal amount, 2.5% of CEG's common stock. The
Company believes that the terms of such loan and the amendments thereto are no
more favorable to CEG than those that CEG could otherwise have obtained from
unrelated third parties and such terms were negotiated on an arm's length basis.
On March 12, 1998, Fonda entered into an agreement with SF Holdings
whereby Fonda acquired for $7.0 million substantially all of SF Holding's rights
under a Management Services Agreement dated August 31, 1993, as amended, and
pursuant to which the Company has the right, subject to the direction of the
board of directors of Sweetheart, to manage Sweetheart's day-to-day operations.
In consideration of Fonda's performance of services, Fonda will be entitled to
receive management fees from Sweetheart of $.7 million, $.9 million and $1.1
million in the first, second and third years, respectively, and $1.6 million per
year for the remaining seven years of the Management Services Agreement. SF
Holding's will be entitled to receive $.2 million per year in consideration for
its performance of certain administrative services. The Company believes that
the terms of such agreement are at least as favorable as those it could
otherwise have obtained from unrelated third parties and were negotiated on an
arm's length basis. In Fiscal 1998, management fee income to Fonda was $.1
million.
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.
On May 15, 1998, Fonda purchased a 38.2% ownership interest in Fibre
Marketing Group, LLC ("Fibre Marketing"), a waste paper recovery business, from
a Director of the Company for $.2 million. Fonda granted Sweetheart the right to
acquire 50% of Fonda's interest in Fibre Marketing for $.1 million. Four M is
also a member of Fibre Marketing. The Company believes the terms on which it
purchased 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.
22
Net sales to CEG were $17 million in Fiscal 1998, $7.8 million in
Fiscal 1997 and $1.9 million in Fiscal 1996 and royalty income was $.1 million
in Fiscal 1998. Net sales to Fibre Marketing were $4.2 million in Fiscal 1998,
$3.6 million in Fiscal 1997 and $4 million in Fiscal 1996. Fonda and Sweetheart
purchased corrugated containers from Four M which totaled $2.0 million in Fiscal
1998, $.9 million in Fiscal 1997 and $.2 million in Fiscal 1996. The Company
believes that the terms on which it or purchased such products are at least as
favorable as those it could otherwise have obtained from unrelated third parties
and were negotiated on an arm's length basis.
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) (1) - Financial Statements
--------------------
The following financial statements of the Company are included in this
report:
Independent Auditors' Report F-1
Balance Sheets as of July 26, 1998 and July 27, 1997 F-2
Statements of Income for the three years ended July 26, 1998 F-3
Statements of Cash Flows for the three years ended July 26, 1998 F-4
Notes to Financial Statements F-5
(a) (2) - Financial Statement Schedule
----------------------------
The following schedule to the financial statements of the Company is
included in this report:
Schedule
--------
II - Valuation and Qualifying Accounts S-1
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required or are inapplicable, and therefore have been omitted.
(a) (3) 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 # 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.
23
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.
10.10 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 Inc. and
its subsidiary, Sweetheart Cup Company Inc. and William H. Haas
dated November 18, 1996.
10.14 Special Incentive Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and Daniel M. Carson
dated November 18, 1996.
10.15 Special Incentive Agreement between Sweetheart Holdings Inc. and
its subsidiary, Sweetheart Cup Company Inc. and James R. Mullen
dated November 18, 1996.
10.16 Employee Relocation Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and James R.
Mullen dated December 19, 1997.
10.17 Employee Relocation Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and Daniel M.
Carson dated December 19, 1997.
10.18 Employee Relocation Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and William H.
Haas dated December 19, 1997.
16.1 Letter regarding change in certifying accountant.
24
27.1 * Financial Data Schedule.
----------------
o filed herein.
(b) No reports were filed on Form 8-K during the fourth quarter ended July 26,
1998.
25
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
October 23, 1998.
SF HOLDINGS GROUP, INC.
By: /s/ DENNIS MEHIEL
-------------------
Dennis Mehiel
Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in the
capacities and on the date indicated.
Signature Title(s) Date
--------- -------- ----
/s/ DENNIS MEHIEL Chairman of the Board and Chief October 23, 1998
--------------------------------------- Executive Officer (Principal Executive
Dennis Mehiel Officer)
/s/ THOMAS ULEAU President, Chief Operating Officer October 23, 1998
--------------------------------------- and Director
Thomas Uleau
/s/ HANS H. HEINSEN Senior Vice President, Chief Financial October 23, 1998
--------------------------------------- Officer and Treasurer (Principal
Hans H. Heinsen Financial and Accounting Officer)
/s/ ALFRED B. DELBELLO Vice Chairman October 23, 1998
---------------------------------------
Alfred B. DelBello
/s/ W. RICHARD BINGHAM Director October 23, 1998
---------------------------------------
W. Richard Bingham
/s/ JAMES J. ARMENAKIS Director October 23, 1998
---------------------------------------
James J. Armenakis
/s/ JOHN A. CATSIMATIDIS Director October 23, 1998
---------------------------------------
John A. Catsimatidis
/s/ CHRIS MEHIEL Director October 23, 1998
---------------------------------------
Chris Mehiel
/s/ JEROME T. MULDOWNEY Director October 23, 1998
---------------------------------------
Jerome T. Muldowney
/s/ G. WILLIAM SEAWRIGHT Director October 23, 1998
---------------------------------------
G. William Seawright
/s/ LOWELL P. WEICKER, JR. Director October 23, 1998
---------------------------------------
Lowell P. Weicker, Jr.
26
INDEPENDENT AUDITORS' REPORT
Board of Directors
SF Holdings Group, Inc.
We have audited the accompanying consolidated balance sheets of SF
Holdings Group, Inc. and subsidiaries (the "Company") as of July 26, 1998 and
July 27, 1997 and the related consolidated statements of operations and cash
flows for each of the three years in the period ended July 26, 1998. Our audits
also included the financial statement schedule listed at Item 14(a)2. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those 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 SF Holdings Group, Inc. and
subsidiaries as of July 26, 1998 and July 27, 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
July 26, 1998 in conformity with generally accepted accounting principles. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Baltimore, Maryland
October 16, 1998
F-1
SF HOLDINGS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
July 26, July 27,
1998 1997
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 20,703 $ 5,908
Cash in escrow 6,819 -
Accounts receivable, less allowance for
doubtful accounts of $3,569 and $961,
respectively 120,112 30,009
Due from affiliates 1,313 1,207
Inventories 168,493 40,834
Deferred income taxes 17,322 6,780
Other current assets 20,026 5,835
------------- -------------
Total current assets 354,788 90,573
Property, plant and equipment, net 430,150 59,261
Goodwill, net 94,865 15,405
Deferred income taxes 32,572 -
Other assets, net 31,436 14,365
------------- -------------
TOTAL ASSETS $ 943,811 $ 179,604
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 78,013 $ 7,340
Accrued expenses 117,426 24,611
Current maturities of long-term 3,825 619
debt
------------- -------------
Total current liabilities 199,264
32,570
Long-term debt 619,143 122,368
Other liabilities 61,865 1,436
Deferred income taxes 4,771 6,144
------------- -------------
Total liabilities 885,043 162,518
Exchangeable preferred stock -
30,680
Minority interest in subsidiary -
3,020
Redeemable common stock, $.01 par value,
287,762 shares issued and 2,139 2,076
outstanding
Stockholders' equity 22,929 15,010
============= =============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 943,811 $ 179,604
============= =============
See notes to consolidated financial statements.
F-2
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Years Ended
-----------------------------------------------
July 26, 1998 July 27, July 28,
1997 1996
-------------- ------------- -------------
Net sales $ 553,735 $ 252,513 $ 204,903
Cost of goods sold 481,263 201,974 164,836
-------------- ------------- -------------
Gross profit 72,472 50,539 40,067
Selling, general and administrative expenses 53,538 31,527 26,203
Other income, net (12,166) (1,608) -
-------------- ------------- -------------
Income from operations 31,100 20,620 13,864
Interest expense (net of interest income
of $1,277 in 1998 and $490 in 1997) 29,304 9,017 7,934
-------------- ------------- -------------
Income before income taxes, minority interest and
extraordinary loss 1,796 11,603 5,930
Provision for income taxes 2,198 4,872 2,500
Minority interest in subsidiary's loss (1,900) - -
-------------- ------------- -------------
Income before extraordinary loss 1,498 6,731 3,430
Extraordinary loss from debt extinguishment, net - 3,495 -
-------------- -------------
-------------
Net income 1,498 3,236 3,430
Payment-in-kind dividends on exchangeable preferred stock 1,616 - -
============== ============= =============
Net income (loss) applicable to common $ (118) $ 3,236 $ 3,430
stock
============== ============= =============
F-3
See notes to consolidated financial statements.
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
-----------------------------------------------
July 26, July 27, 1997 July 28, 1996
1998
------------- -------------- --------------
Operating activities:
Net income $ 1,498 $ 3,236 $ 3,430
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,646 4,954 4,471
Write-off of unamortized debt discount and issuance costs - 4,234 -
Interest capitalized on debt 3,707 684 165
Provision for doubtful accounts 476 457 148
Deferred income taxes (4,990) 3,005 533
Net gain on business and equipment dispositions
and settlement of long-term contracts (16,333) - -
Minority interest in subsidiary's loss (1,900) - -
Changes in assets and liabilities (net of business
acquisitions and dispositions):
Accounts receivable (16,725) (2,007) 6,826
Due from affiliates (377) (213) (994)
Inventories 12,442 (1,178) (299)
Other current assets 2,797 (3,273) (26)
Accounts payable and accrued expenses 1,208 (1,019) 8,782
Income taxes payable (refundable) 2,732 (1,280) (3,644)
Other 2,711 673 (1,719)
------------- -------------- --------------
Net cash provided by operating activities 17,673
7,892 8,273
------------- -------------- --------------
Investing activities:
Capital expenditures (13,727) (10,363) (1,314)
Proceeds from business and equipment dispositions 34,793 - -
Payments for business acquisitions (99,970) (23,043) (45,218)
Other - (2,600) -
------------- -------------- --------------
Net cash used in investing activities (78,904) (36,006) (46,532)
------------- -------------- --------------
Financing activities:
Net increase (decrease) in revolving credit borrowings 765 (32,842) 14,745
Proceeds from long-term debt 84,351 120,000 18,803
Repayments of long-term debt (6,000) (49,879) (2,499)
Proceeds from issuance of exchangeable preferred stock 15,000 - -
Redemption of Fonda's common stock (9,788) (203) -
Debt issuance costs (3,762) (4,902) (843)
Decrease in escrow cash 4,870 - -
Other 371 - -
------------- -------------- --------------
Net cash provided by financing activities 32,174 30,206
85,807
------------- -------------- --------------
Net increase in cash 14,795 4,441 1,347
Cash and cash equivalents, beginning of year 5,908 1,467 120
============= ============== ==============
Cash and cash equivalents, end of year $ 20,703 $ 5,908 $ 1,467
============= ============== ==============
See notes to consolidated financial statements.
F-4
SF HOLDINGS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND ORGANIZATION
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 the Company 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.
SF Holdings was formed in December 1997 to facilitate the Sweetheart
Investment. See Note 3. On March 12, 1998, in connection with the Sweetheart
Investment, SF Holdings acquired all of the outstanding capital stock of Fonda
pursuant to a merger whereby the stockholders of Fonda became stockholders of SF
Holdings and Fonda became a wholly-owned subsidiary of SF Holdings (the
"Merger"). The Merger has been accounted for in a manner similar to a pooling of
interests and the accompanying consolidated financial statements include the
historical accounts of Fonda for all periods presented. The consolidated balance
sheet as of July 26, 1998 includes Sweetheart as of June 30, 1998. The
consolidated statement of operations for the year ended July 26, 1998 includes
the results of Sweetheart's operations for the period from the date of the
consummation of the Sweetheart Investment, March 12, 1998, to June 30, 1998. All
intercompany accounts and transactions have been eliminated.
2. SIGNIFICANT ACCOUNTING POLICIES
Management 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 the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from those estimates.
Fiscal Year--The Company's fiscal year is the fifty-two or fifty-three
week period which ends on the last Sunday in July. The 1998, 1997 and 1996
fiscal years were fifty-two week periods ended July 26, 1998, July 27, 1997 and
July 28, 1996, respectively. See Note 22.
Cash, including cash equivalents and cash in escrow--All highly liquid
investments with an original maturity of three months or less are considered to
be cash equivalents. Cash received by Sweetheart as proceeds from the sale of
its assets is restricted to qualified capital expenditures under Sweetheart bond
indentures and is held in escrow with the trustee until utilized.
Inventories--Inventories are valued at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment--Property, plant and equipment is stated
at cost or fair market value for business acquisitions. Depreciation is computed
by use of the straight-line method over the estimated useful lives of the
assets.
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 forty years for the Sweetheart
Investment and twenty years for all other acquisitions. 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.
Income Taxes--Deferred income taxes are provided on the differences
between the basis of assets and liabilities for financial reporting and income
tax purposes using presently enacted tax rates.
Debt Issuance Costs--Included in other assets are unamortized debt
issuance costs of $11.5 million at July 26, 1998 and $4.8 million at July 27,
1997 incurred in connection with obtaining financing which are being amortized
over the terms of the respective borrowing agreements.
F-5
Foreign Currency Translation--The Company's Canadian subsidiary's
assets and liabilities 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 as
a component of stockholders' equity.
Fair Value of Financial Instruments-- The estimated fair value of
financial instruments included in current assets and liabilities approximate
their carrying amounts because of the relatively short maturities of these
instruments. The fair value of fixed rate debt obligations, which are thinly
traded, approximate their carrying amounts based on management's best estimate
of recent trading prices.
Impact of Recently Issued Accounting Standards-- In June 1997, the
Financial Accounting Standards Board (the "FASB") issued Statement No. 130,
Reporting Comprehensive Income and No. 131, Disclosures about Segments of an
Enterprise and Related Information. In February 1998, the FASB issued Statement
No. 132, Employers' Disclosure about Pensions and Other Postretirement Benefits.
The Company is in the process of evaluating the new statements, which are
effective for Fiscal 1999. The adoption of these statements is not expected to
have a material effect on the Company's financial statements. In Fiscal 1998,
the Company adopted Statement No. 123 Accounting for Stock-Based Compensation
("SFAS No. 123"). SFAS No. 123 encourages, but does not require companies to
record at fair value compensation cost for stock-based compensation plans. The
Company has chosen to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
3. BUSINESS ACQUISITIONS
The following acquisitions have been accounted for under the purchase
method and their results of operations have been included in the consolidated
statements of operations since the respective dates of acquisition. Goodwill
amortization was $1.6 million in Fiscal 1998, $.4 million in Fiscal 1997 and $.2
million in Fiscal 1996. Accumulated amortization was $2.2 million and $.6
million at July 26, 1998 and July 27, 1997, respectively.
The following summarized, unaudited pro forma results of operations
assume the Fiscal 1998 and 1997 Acquisitions occurred as of the beginning of
each of the years (in thousands).
Years Ended
----------------------------------
July 26, 1998 July 27, 1997
--------------- ---------------
Net sales $1,126,527 $1,162,377
Income (loss) before extraordinary loss $ (37,573) $ (11,435)
Fiscal 1998 Acquisitions
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 11). Funding for the cash portion of the purchase
price and financing fees was provided by $77.5 million in net proceeds from the
sale of Senior Secured Discount Notes (see Note 10) and a $15 million investment
in Class B Preferred Stock by Creative Expressions Group, Inc. ("CEG"), an
affiliate of the Company. 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.
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
F-6
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.
In January 1998, the Company acquired certain net assets of Leisureway,
Inc., a manufacturer of white paper plates, for $7.2 million, including deferred
payments of $.3 million and acquisition costs. The excess of the purchase price
over the Company's evaluation of the fair value of the net assets acquired was
$7.1 million and has been recorded as goodwill.
Fiscal 1997 Acquisitions
In June 1997, the Company acquired all of the outstanding capital stock
of Heartland Mfg. Corp., a manufacturer of paper plates, for $12.6 million,
including acquisition costs. The excess of the purchase price over the Company's
evaluation of the fair value of the net assets acquired was $9.3 million and has
been recorded as goodwill.
Also in June 1997, the Company acquired from Tenneco, Inc. net assets
relating to the manufacture of placemats and other disposable tabletop products
for $7 million, including acquisition costs, subject to a working capital
adjustment. The excess of the purchase price over the Company's evaluation of
the fair value of the net assets acquired was $1.3 million and has been recorded
as goodwill.
Fiscal 1996 Acquisitions
In May 1996, the Company acquired certain net assets of two divisions
("James River-California" and the "Mill") of the Specialties Operations Division
of James River Paper Corporation (the "James River Division") for $13.1 million,
including acquisition costs, and including a promissory note to the seller which
was settled in 1997 for $2.2 million. In Fiscal 1997, the Company decided to
close the James River-California manufacturing facility, which produced
tissue-based products. In Fiscal 1998, the Company sold the Mill, which produced
specialty and deep-toned colored tissue paper (see Note 4). In exchange for
hosting a co-generation facility on its site, the Mill received all of its steam
energy requirements at 50% and 25% of historical cost in calendar 1997 and 1998,
respectively and had expected to receive significantly increased savings for the
next 40 years thereafter, as well as land lease payments from the operator of
the facility. The $10 million in benefits from the co-generation facility was
included in long-term assets acquired and was being amortized based upon the
Mill's annual savings over the 42-year remaining life of the contract (see Note
4). The excess of the Company's evaluation of the fair value of the net assets
acquired (including $10 million in benefits from the co-generation facility)
over the final adjusted purchase price was $6.3 million and was allocated to
long-term assets. The remaining net assets and business of the James River
Division were acquired by Creative Expressions Group, Inc.
("CEG"), an affiliate of the Company, in a separate transaction.
In December 1995, the Company acquired the Chesapeake Consumer Products
Company ("Chesapeake") from Chesapeake Corporation for $29 million, including
acquisition costs. Chesapeake produces design-intensive and solid-colored
premium napkins, tablecovers and crepe paper. The excess of the purchase price
over the Company's evaluation of the fair value of the net assets acquired was
$4.6 million and has been recorded as goodwill.
In November 1995, the Company acquired substantially all of the net
assets of Alfred Bleyer & Co., Inc. ("Maspeth"), a manufacturer of paper plates
and cups, for $10 million, including acquisition costs. The purchase price
consisted of cash and a promissory note to the seller for $2.3 million. The
excess of the Company's evaluation of the fair value of the net assets over the
purchase price was $.1 million and has been allocated to the long-term assets.
4. OTHER INCOME, NET
On March 24, 1998, the Company consummated an agreement to sell
substantially all of the fixed assets and certain related working capital of the
Mill (the "Mill Disposition"). In addition, on July 1, 1998, the Company
consummated an agreement with the owner of the co-generation facility at the
Mill (see Note 3), 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, the Company realized net proceeds of $38.5 million and
recorded a gain of $15.9 million which was included in other income, net. Such
net proceeds included a $3.7 million note receivable (included in other assets)
from the Mill Disposition, 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 governing the Notes, resulting from the receipt of proceeds from
the Mill Disposition, the Company is required to (i) reinvest approximately $10
million of such net proceeds in fixed assets within 270 days of such
disposition, or (ii) offer to repurchase the Fonda Notes to the extent that such
amount has not been reinvested. The Mill had net sales, excluding intercompany
sales and operating income of $13.5 million and $0.9 million, respectively, in
Fiscal 1998, $19.3 million and $4.1 million in Fiscal 1997, and $4.3 million and
$.8 million in Fiscal 1996.
F-7
As a result of the application of purchase accounting by the Company
for the Sweetheart Investment, charges described in this paragraph were
established in the acquisition balance sheet and had no effect on the Company's
consolidated results of operations. In connection with the Sweetheart
Investment, Sweetheart incurred $20.7 million of one-time charges, consisting
primarily of: (i) $4.4 million of financial advisory and legal fees; (ii) $3.7
million of severance expenses as a result of the termination of certain
Sweetheart officers pursuant to executive separation agreements and retention
plans for certain key executives; and (iii) $10.5 million of charges for
severance and asset disposition costs, including severance costs related to a
15% salaried workforce reduction and a less than 5% hourly workforce reduction,
and asset disposition costs related to rationalization of certain product lines,
and in connection therewith, disposal of associated property and equipment.
Sweetheart anticipates substantial completion of this restructuring within the
next twelve months.
In Fiscal 1997, other income, net includes a net $2.9 million from the
settlement of a lawsuit. Partially offsetting this gain was a $1.3 million
charge for anticipated costs of the closure of the Company's Three Rivers,
Michigan facility. The charge covers the costs for the termination of employees
as well as ongoing costs to maintain the facility until its disposition.
5. INVENTORIES
Inventories consist of the following (in thousands):
July 26, July 27,
1998 1997
------------- -------------
Raw materials and supplies $ 43,998 $ 20,098
Work-in-process 9,456 391
Finished goods 115,039 20,345
============= =============
$ 168,493 $ 40,834
============= =============
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
Lives In Years July 26, July 27,
1998 1997
-------------- -------------- -----------
Land and buildings 20-50 $ 132,655 $ 21,703
Machinery and equipment 3-13 310,690 46,108
Leasehold improvements 5-20 1,280 955
Construction in progress 34,519 8,794
------------- ------------
479,144 77,560
Less: accumulated depreciation (48,994) (18,299)
============= ============
$ 430,150 $ 59,261
============= ============
Depreciation expense was $17.1 million in Fiscal 1998, $3.9 million in
Fiscal 1997 and $3.2 million in Fiscal 1996. In addition, property, plant and
equipment includes buildings under capital lease at a cost of $2.3 million and a
net book value of $1.7 million in Fiscal 1998 and $1.7 million in Fiscal 1997.
7. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base, and
their dispersion across many different geographical regions. The Company had
sales to one customer representing approximately 11% of net sales in Fiscal
1996.
8. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
F-8
July 26, 1998 July 27, 1997
-------------- --------------
Compensation and benefits $ 39,756 $ 8,149
Interest payable 16,203 4,716
Promotion and sales allowances 9,005 2,555
Restructuring costs 8,256 1,320
10,868 1,465
Insurance
Litigation related (see Note 20) 14,570 -
Other 18,768 6,406
============== ==============
$ 117,426 $ 24,611
============== ==============
The restructuring costs at July 26, 1998, include $5.9 million in
connection with the Sweetheart Investment (see Note 4) and the remainder
primarily relates to facility closures in connection with restructuring charges
incurred by Sweetheart prior to the Sweetheart Investment.
9. OTHER LIABILITIES
Other liabilities consist of the following (in thousands):
July 26, 1998 July 27, 1997
-------------- --------------
Postretirement benefits $ 46,876 $ -
Pensions 13,040 -
Other 1,949 1,436
============== ==============
$ 61,865 $ 1,436
============== ==============
10. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
July 26, July 27,
1998 1997
------------- -------------
Discount Notes $ 78,909 $ -
Sweetheart Secured Notes 190,000 -
Sweetheart Subordinated Notes 110,000 -
Sweetheart U.S. Credit Facility 110,081 -
Sweetheart Canadian Credit Facility 9,116 -
Fonda Senior Subordinated Notes 120,000 120,000
Other 4,862 2,987
------------- -------------
622,968 122,987
Less amounts due within one year 3,825 619
============= =============
$ 619,143 $ 122,368
============= =============
Principal maturities of long-term debt, including amounts due within
one year, include: $3.8 million in Fiscal 1999, $1.5 million in Fiscal 2000,
$308.2 million in Fiscal 2001, $.2 million in Fiscal 2002, $.2 million in Fiscal
2003, and $309.0 million thereafter.
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.
The Sweetheart Notes include: (i) $190 million of 9 5/8% Senior Secured
Notes due September 1, 2000 (the "Sweetheart Secured Notes") and (ii) $110
million of 10 1/2% Senior Subordinated Notes due September 1, 2003 (the
"Sweetheart Subordinated Notes" ). Sweetheart may, at its election, redeem the
Sweetheart Secured Notes at any time at a redemption price equal to a percentage
(currently 103.208% and declining in annual increments to 100% after August 31,
1999) of the principal amount, plus accrued interest. The Sweetheart Secured
Notes are secured by mortgages on the real property owned by Sweetheart. Payment
of
F-9
principal and interest on the Sweetheart Subordinated Notes is subordinate to
Senior Indebtedness (as defined therein), which includes the Sweetheart U.S.
Credit Facility and the Sweetheart Secured Notes. Sweetheart may, at its
election, redeem the Sweetheart Subordinated Notes at any time after August 31,
1998 at a redemption price equal to a percentage (103.938% after August 31, 1998
and declining in annual increments to 100% after August 31, 2001) of the
principal amount, plus accrued interest. The Sweetheart Notes provide that upon
the occurrence of a Change of Control (as defined therein) the holders will have
the option to require the redemption of the Sweetheart Notes at a redemption
price equal to 101% of the principal amount, plus accrued interest.
Sweetheart's U.S. revolving credit facility, as amended, provides for
up to $135 million in borrowings, subject to borrowing base limitations (the
"Sweetheart U.S. Credit Facility"). Borrowings under the Sweetheart U.S. Credit
Facility mature on September 30, 2000 and as of June 30, 1998, $12.5 million is
available. Borrowings bear interest, at Sweetheart's election at a rate equal to
LIBOR plus 2.25% or a bank's base rate plus 1%. The Sweetheart U.S. Credit
Facility is secured by Sweetheart's accounts receivable, inventory, equipment,
intellectual property, general intangibles and the proceeds on the sale of any
of the foregoing. On June 15, 1998, a Canadian subsidiary of Sweetheart
refinanced its term loan and revolving credit facility and entered into a new
term loan and revolving credit facility agreement which provides for a term loan
facility of up to Cdn $10 million and a revolving credit facility of up to Cdn
$10 million (the "Sweetheart Canadian Credit Facility and with the Sweetheart
U.S. Credit Facility, the "Sweetheart Credit Facilities"). Term loan borrowings
under the Sweetheart 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. As of June 30, 1998, Cdn $6.4 million (approximately $4.4
million) was available under such Canadian facility. The Sweetheart Canadian
Credit Facility is secured by all of the existing and after acquired real and
personal, tangible assets of such Canadian subsidiary and the net proceeds on
the sale of any of the foregoing. Borrowings under the Sweetheart Credit
Facilities 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.
In Fiscal 1997, Fonda issued $120 million of 9 1/2% Series A Senior
Subordinated Notes due 2007 (the "Fonda Notes"), with interest payable
semi-annually. Proceeds from the issuance of the Notes were primarily used to
retire debt. The Company 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 discount and prepayment penalties.
Also in Fiscal 1997, Fonda entered into a $50 million revolving credit
agreement with a bank, expiring March 31, 2000 and collateralized by Fonda's
eligible accounts receivable and inventories. At July 26, 1998 and July 27,
1997, there was no outstanding balance, $8.3 million was the maximum amount
outstanding during Fiscal 1998, and at July 26, 1998, $36.7 million was the
maximum advance available based upon eligible collateral. A commitment fee of
.375% per annum is charged on the unutilized portion of the facility. At July
26, 1998, borrowings were available at the bank's prime rate (8.50%) plus .25%
and at LIBOR (approximately 5.66%) plus 2.25%.
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. EXCHANGEABLE PREFERRED STOCK
On March 12, 1998, the Company issued units consisting of $30 million
of 13 3/4% Exchangeable Preferred Stock due 2009 (the "Exchangeable Preferred")
and 111,000 shares of Class C Common Stock. Until March 15, 2003, cumulative
dividends on the Exchangeable Preferred may be paid quarterly, at the Company's
option, subject to certain restrictions, either in cash or by the issuance of
additional shares of Exchangeable Preferred. Thereafter, dividends will be
payable in cash, subject to certain exceptions. The fair value of such Class C
Common Stock ($.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 July 26, 1998, dividends on the
Exchangeable Preferred have been paid by the issuance of additional shares of
Exchangeable Preferred.
F-10
12. MINORITY INTEREST IN SUBSIDIARY
Minority interest represents the 10% total common stock interest in
Sweetheart retained by the 52% voting stockholders, based on historical cost as
of March 12, 1998, and as adjusted to June 30, 1998 to reflect such
stockholders' interest in Sweetheart's net loss.
13. 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, and options and warrants to purchase such shares, respectively.
Stockholders' equity, adjusted for such conversion consists of the following (in
thousands, except share data):
July 26, July 27,
1998 1997
------------- -------------
Preferred Stock Class B, $.01 par value, 100,000 shares authorized, none issued $ - $ -
Preferred Stock Class B Series 1, $.01 par value, 15,000 shares authorized
and issued in 1998, at liquidation value (See Note 3) 15,000 -
Common Stock Class A, $.001 par value, 15,000,000 shares authorized,
5,625,838 and 8,772,494 issued and outstanding 6 9
Common Stock Class B, $.001 par value, 1,000,000 shares authorized,
564,586 and 127,106 issued and outstanding 1 -
Common Stock Class C, $.001 par value, 2,000,000 shares authorized,
399,000 issued and outstanding in 1998 - -
Paid-in capital 3,357 3,493
Retained earnings 5,041 11,643
Treasury stock, at cost, 47,677 shares Class B Common Stock in 1997 - (135)
Translation adjustment (476) -
============= =============
$ 22,929 $ 15,010
============= =============
Fonda had 333,736 shares of Class A Common Stock which were subject to
a redemption agreement (the "Redeemable Common"), whereby the holder had the
right to require Fonda to repurchase all of the Redeemable Common at the earlier
of March 31, 2007 or the date of a merger or consolidation of Fonda with another
entity in which Fonda was not the surviving party. In 1997, 23,838 shares of
Redeemable Common were acquired by Fonda pursuant to the Stock Repurchase (as
defined below). The outstanding Redeemable Common was recorded in the July 27,
1997 consolidated balance sheet at the present value of the aggregate $2.8
million repurchase price discounted at a rate of 3% per annum. The annual
accretion to liquidation value has been charged to retained earnings. On March
12, 1998, in conjunction with the Merger, the outstanding Redeemable Common were
converted into shares of redeemable common stock of the Company.
The Class B Series 1 Preferred is convertible, at any time, into
1,334,945 shares of Class A Common Stock, at the option of the holder and is
required to be redeemed on the date immediately following the 12th anniversary
of the consummation of the Sweetheart Investment at a redemption price per
share, in cash, equal to the aggregate liquidation value. The holder of the
Class B Series 1 Preferred is not entitled to any voting rights, except as
otherwise required by law.
In April 1997, Fonda offered to repurchase up to 3,528,068 shares of
its common stock at $2.83 per share from its stockholders on a pro rata basis
(the "Stock Repurchase"). In Fiscal 1997, pursuant to the Stock Repurchase,
Fonda redeemed shares of Redeemable Common, as discussed above, and 47,677
shares of Class B common stock for $2.83 per share. 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. The
repurchased shares of Class B common stock were reported as Treasury Stock in
the July 27, 1997 consolidated balance sheet. Fonda redeemed the remaining
shares of Class A common stock in Fiscal 1998, prior to the Merger, for $9.8
million. All of the repurchased shares were canceled in Fiscal 1998, and in
connection therewith, paid in capital was charged $3.5 million and the remainder
of the purchase price was charged to retained earnings.
In conjunction with debt offerings in 1995, Fonda granted warrants to
purchase 437,480 shares of its Class B common stock for a nominal amount and
issued 174,782 shares of its Class B common stock. In Fiscal 1997, 47,677 of
such Class B shares were redeemed by the Company pursuant to the Stock
Repurchase. On March 12, 1998, in conjunction with the Merger, such warrants
were exercised and all then outstanding Class B common stock of Fonda was
converted into shares of Class B common stock of SF Holdings.
In September 1997, Fonda's Board of Directors granted its Chief
Executive Officer and then majority stockholder options to purchase 715,149
shares of Class A Common Stock at an option price of $2.83 per share. On March
12, 1998, in conjunction with the Merger, such options were converted into
options to purchase Class A Common Stock of the Company. Options to purchase
238,383 of such shares are vested. Options to purchase an additional 238,383
shares vest on October 1, 1998 and October 1, 1999 respectively, or
F-11
upon an initial public offering of the Company's common stock, whichever occurs
first; provided that the majority stockholder is employed by the Company on the
applicable vesting date. The proforma effect of such options on compensation
expense, as required by SFAS No. 123, was less than $.1 million.
The changes in retained earnings consists of the following (in
thousands):
Years Ended
-----------------------------------------------
July 26, July 27, July 28,
1998 1997 1996
------------- ------------- -------------
Balance, beginning of year $ 11,643 $ 8,371 $ 5,005
Net income 1,498 3,236 3,430
Dividends on Exchangeable (1,616) - -
Preferred
Retirement of Fonda's treasury (6,421) - -
stock
Transfer of liquidation value of redeemable common stock - 100 -
Accretion of redeemable common stock (63) (64) (64)
============= ============= =============
Balance, end of year $ 5,041 $ 11,643 $ 8,371
============= ============= =============
The Fonda Group, Inc. Stock Appreciation Unit Plan provides for the
granting of up to 200,000 units to key executives of Fonda. A grantee is
entitled to the appreciation in a unit's value from the date of the grant to the
date of its redemption. Unit value is based upon a formula consisting of net
income and book value criteria and grants vest over a five-year period. Fonda
granted 15,560 units in Fiscal 1998, 10,980 in Fiscal 1997 and 9,500 in Fiscal
1996 at an aggregate value on the date of grant of $.9 million, $.4 million and
$.3 million, respectively. Fonda recorded compensation expense of $.5 million in
Fiscal 1998, $.1 million in Fiscal 1997 and $.1 million in Fiscal 1996.
14. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
Years Ended
-----------------------------------------------
July 26, July 27, 1997 July 28, 1996
1998
------------- -------------- --------------
Current:
Federal $ 5,430 $ 1,449 $ 1,526
State 1,758 418 441
------------- -------------- --------------
7,188 1,867 1,967
------------- -------------- --------------
Deferred:
Federal (4,455) 2,328 423
State and (535) 677 110
foreign
------------- -------------- --------------
(4,990) 3,005 533
============= ============== ==============
$ 2,198 $ 4,872 $ 2,500
============= ============== ==============
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Deferred tax assets (liabilities) result from temporary
differences as follows (in thousands):
F-12
July 26, July 27,
1998 1997
------------- -------------
Deferred tax assets:
Capitalized inventory costs $ 2,122 $ 785
Allowance for doubtful accounts receivable 1,828 349
Accruals for health insurance and other employee benefits 9,877 1,911
Inventory and sales related reserves 10,265 567
Pension reserve 24,113 433
Benefit of tax carryforwards 79,039 370
Other 1,857 1,485
------------- -------------
129,101
5,900
Deferred tax liabilities:
Depreciation (68,385) (5,264)
LIFO recapture (15,593) -
------------------------------
(83,978) (5,264)
============= =============
$ 45,123 $ 636
============= =============
A reconciliation of the income tax provision to the amount computed
using the Federal statutory rate is as follows (in thousands):
Years Ended
------------------------------------------------
July 26, 1998 July 27, 1997 July 28, 1996
-------------- -------------- --------------
Income tax at statutory rate $ 635 $ 4,061 $ 2,076
Interest on Discount Notes 130 - -
Goodwill amortization 234 - -
State income taxes (net of Federal benefit) (18) 712 365
Other 1,217 99 59
============== ============== ==============
$ 2,198 $ 4,872 $ 2,500
============== ============== ==============
At July 26, 1998, Federal and state net operating loss carryforwards
were approximately $200 million, which expire at various dates through 2018.
15. LEASES
The Company leases certain of its facilities and equipment under
operating leases. Future minimum payments under noncancellable operating leases
with remaining terms of one year or more are $13.1 million in Fiscal 1999, $10.6
million in Fiscal 2000, $8.5 million in Fiscal 2001, $7.7 million in Fiscal
2002, $5 million in Fiscal 2003, and $9.7 million thereafter.
Rent expense was $5.8 million in Fiscal 1998, $2 million in Fiscal 1997
and $1.8 million in Fiscal 1996.
16. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended
------------------------------------------------
July 26, 1998 July 27, 1997 July 28, 1996
-------------- -------------- --------------
(in thousands)
Cash paid during the year for:
Interest, including $192 capitalized in 1998
and $163 capitalized in 1997 $ 15,220 $ 5,018 $ 6,029
Income taxes, net of refunds 4,708 614 5,611
Businesses acquired:
Fair value of assets acquired $ 774,776 $ 23,637 $ 59,090
Liabilities assumed (includes $30,000 of preferred stock and
$9,250 of notes payable accepted by sellers in Fiscal 1998
and Fiscal1996, respectively 674,806 594 13,872
============== ============== ==============
Cash paid $ 99,970 $ 23,043 $ 45,218
============== ============== ==============
F-13
17. RELATED PARTY TRANSACTIONS
The Company leases a building in Jacksonville, Florida from its
majority stockholder on terms the Company 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 $.2 million plus annual
increases based on changes in the Consumer Price Index ("CPI") through December
31, 2014. In addition, from January 1, 1998 to July 31, 2006, the majority
stockholder may require the Company to purchase the facility for $1.5 million,
subject to a CPI-based escalation. In Fiscal 1998, the Company decided to close
this facility and is currently seeking a sublease tenant. The Company does not
expect the outcome of this action to result in a material adverse effect on its
financial condition or results of operations. Rent expense, net of sublease
income on a portion of the premises subleased through May 1998 to Four M
Corporation ("Four M"), an affiliated company, was $.1 million in each of the
fiscal years 1998, 1997 and 1996.
On March 12, 1998, the Company entered into a license agreement with
CEG, whereby CEG was granted the exclusive rights to use certain trademarks and
trade names in connection with the manufacture, distribution and sale of
disposable party goods products for a period of five years, subject to
extension. In connection therewith, the Company will receive an annual royalty
equal to 5% of CEG's cash flow, as determined in accordance with a formula
specified in such agreement. The Company believes that the terms of such
agreement are at least as favorable as those it could otherwise have obtained
from unrelated third parties and were negotiated on an arm's length basis. In
addition, in accordance with such agreement, the Company, at CEG's request,
manufactures and sells to CEG certain party goods products, principally napkins
and paper plates. The Company sells such products to CEG on terms no less
favorable to it than those it could otherwise have obtained from unrelated third
parties. In Fiscal 1998, the Company's net sales of such party goods products
were approximately $36 million and royalty income from CEG was $.1 million.
On March 12, 1998, the Company amended certain terms of the $2.6
million Promissory Note dated February 27, 1997, made by CEG in favor of the
Company (the "CEG Note"). The 10% annual interest rate on the CEG Note was
converted to pay-in-kind, the CEG Note's 2002 maturity was extended for an
additional three years and the CEG Note was made subordinate to Senior Debt (as
such term is defined therein). In connection with such amendment, the Company
was also issued a warrant to purchase, for a nominal amount, 2.5% of CEG's
common stock. The Company believes that the terms of such loan and the
amendments thereto are no more favorable to CEG than those that CEG could
otherwise have obtained from unrelated third parties and such terms were
negotiated on an arm's length basis.
On May 15, 1998, the Company purchased a 38.2% ownership interest in
Fibre Marketing Group, LLC ("Fibre Marketing"), a waste paper recovery business,
from a director of the Company for $.2 million. Four M is also a member of Fibre
Marketing. The Company believes that the terms on which it purchased such
interest are at least as favorable as those it could otherwise have obtained
from unrelated third parties and were negotiated on an arms length basis.
Net sales to CEG were $17 million in Fiscal 1998, $7.8 million in
Fiscal 1997 and $1.9 million in Fiscal 1996. Net sales to Fibre Marketing were
$4.2 million in Fiscal 1998, $3.6 million in Fiscal 1997 and $4 million in
Fiscal 1996. The Company also purchases corrugated containers from Four M,
totaling $2.0 million in Fiscal 1998, $.9 million in Fiscal 1997 and $.2 million
in Fiscal 1996. The Company believes that the terms on which it sold or
purchased products from related parties are at least as favorable as those it
could otherwise have obtained from unrelated third parties and were negotiated
on an arm's length basis.
18. EMPLOYEE BENEFIT PLANS
The Company provides certain union and non-union employees with
retirement and disability income benefits under defined benefit pension plans.
On December 31, 1996, the benefit accruals were frozen for participants in
Fonda's non-union pension plans resulting in a $.7 million reduction in the
pension liability. The Company's policy has been to fund annually the minimum
contributions required by applicable regulations.
Pursuant to the Asset Purchase Agreement covering the Hoffmaster
acquisition, Scott made required aggregate contributions of $.9 million to the
Fonda plans. As such, in Fiscal 1997, Fonda reversed a $.7 million pension
reserve that had previously been accrued for such contributions.
F-14
The net periodic pension cost for benefits earned in the respective
years is computed as follows (in thousands):
Years Ended
-------------------------------------------
July 26, 1998 July 27, July 28,
1997 1996
-------------- ------------ ------------
Service cost $ 562 $ 433 $ 731
Interest cost 1,654 403 455
Return on plan assets (1,719) (751) (313)
Deferred gain 99 487 -
============== ============ ============
Net periodic pension cost $ 596 $ 572 $ 873
============== ============ ============
The funded status of the plans and the amount recognized in the balance
sheets is as follows (in thousands):
July 26, 1998 July 27, 1997
----------------------------- -----------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
------------- -------------- -------------- -------------
Accumulated benefit obligation:
Vested $ 2,136 $ 59,646 $ 2,004 $ 3,515
Non-vested - 3,127 30 49
------------- -------------- -------------- -------------
Total $ 2,136 $ 62,773 $ 2,034 $ 3,564
============= ============== ============== =============
Projected benefit obligation $ 2,136 $ 62,773 $ 2,034 $ 3,564
Plan assets at fair value, primarily
common stocks and government obligations
2,371 44,554 2,170 2,846
------------- -------------- -------------- -------------
Projected benefit obligation
in excess of plan assets (235) 18,219 (136) 718
Unrecognized net gains and deferrals 203 (594) 136 329
============= ============== ============== =============
Accrued pension cost $ (32) $ 17,625 $ - $ 1,047
============= ============== ============== =============
The actuarial present values of accumulated and projected benefit
obligations were determined using discount rates of 7%, except for union plans
which used 8% in 1997. The expected rate of return on assets ranged from an
assumption of 8% to 10%.
The Company provides 401(k) savings and investment plans for the
benefit of non-union and certain union employees. The costs for these plans were
$2.1 million in Fiscal 1998, $.8 million in Fiscal 1997 and $.4 million in
Fiscal 1996.
The Company also participates in multi-employer pension plans for
certain of its union employees. Contributions to these plans, at a defined rate
per hour worked, amounted to $.6 million in 1998, $.6 million in 1997, and $1.3
million in 1996.
19. POSTRETIREMENT HEALTH CARE PLANS
Sweetheart sponsors various defined benefit postretirement 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 participation. The majority of Sweetheart's plans are
contributory, with retiree contributions adjusted annually. The plans are not
funded.
The following table analyzes the plans' unfunded, accrued
postretirement health care cost liability as reflected on the balance sheet (in
thousands):
F-15
July 26, 1998
--------------
Accumulated postretirement benefit obligation:
Retirees $ 29,296
Other fully eligible participants 4,615
Other actives 12,989
--------------
46,900
Unrecognized prior service costs 420
Unrecognized actuarial gain 2,045
==============
$ 49,365
==============
The components of net postretirement health care cost are as follows
(in thousands):
Period ended
July 26, 1998
-------------
Service cost $ 274
Interest cost 982
Net amortization and deferral (41)
=============
Net postretirement benefits costs $ 1,215
=============
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%. Net postretirement health care cost
was computed using a weighted average discount rate of 7.0% for the period ended
July 26, 1998. For measuring the expected postretirement benefit obligation, a
9% annual rate of increase in the per capita claims cost was assumed. This rate
is assumed to decrease by 1.0% per year to an ultimate rate of 5.0%. The health
care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of July 26,1998 by approximately $2.5 million and the
aggregate of the service and interest cost components of net postretirement
benefits cost by approximately $.1 million.
20. COMMITMENTS AND CONTINGENCIES
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation was initially filed in state
court in Georgia in April 1987, and is currently pending against Sweetheart in
federal court. The remaining issue involved in the case is a claim 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"). In December 1994, the United States Circuit Court of
Appeals for the Eleventh Circuit (the "Circuit Court") ruled that the Plan was
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 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 judgement 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. Plaintiffs have filed a motion in the District Court
for attorneys fees. No amount has been specified in such motion.
The Company believes that it will ultimately prevail on the remaining
material issues in the Aldridge litigation. 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
amount would not have a material adverse effect on the Company's financial
position or results of operations.
A patent infringement action entitled Fort James Corp. v. Sweetheart
Cup Company Inc., was filed on November 21, 1997. Sweetheart has filed an answer
to the complaint denying liability and asserting various affirmative defenses
and counterclaims. The Company does not believe that the ultimate liability, if
any, would have a material adverse effect on Sweetheart's financial position or
results of operations.
F-16
The Company is subject to legal proceeding and other claims arising in
the ordinary course of its business. The Company maintains insurance coverage of
types and in amounts which it believes to be adequate and believes that it is
not presently a party to any litigation, the outcome of which could reasonably
be expected to have a material adverse effect on its financial condition or
results of operations.
The Company has commitments to purchase paperboard from three vendors.
The total annual commitment is for the purchase of 49,200 tons of paperboard
through April 2001. The price per ton will be based on market rates, less
applicable rebates for all of these commitments. In addition, the Company has a
commitment through calendar 1999 to purchase 11,000 tons of tissue paper in 1998
and 10,000 tons in 1999, at the lower of a formula based price or market rates.
21. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
See Notes 10, 11 and 13 for information relating to the Discount Notes,
exchangeable preferred stock and the redeemable common stock. The condensed
financial statements of the parent company only are as follows (in thousands):
July 26, 1998
-----------------
Balance Sheet
Assets
Cash $ 106
Investments in subsidiaries 128,857
Deferred finance fees 4,505
Deferred income taxes 1,444
=================
$ 134,912
=================
Liabilities and Stockholders' Equity
Accrued expenses $ 255
Discount Notes 78,909
Exchangeable preferred stock 30,680
Redeemable common stock 2,139
Stockholders' equity 22,929
=================
$ 134,912
=================
F-17
Year ended
July 26, 1998
-----------------
Statement of Operations
General and administrative expenses $ (24)
Interest expense (net of interest income (3,957)
of $18)
-----------------
Loss before income taxes and equity in subsidiaries (3,981)
Income tax benefit 1,444
Equity in income of subsidiaries 4,035
-----------------
Net income 1,498
Payment-in-kind dividends on exchangeable preferred 1,616
stock
=================
Net loss applicable to common stock $ (118)
=================
Statement of Cash Flows
Operating activities:
Net income $ 1,498
Equity in income of subsidiaries (4,035)
Amortization of deferred finance fees 268
Interest capitalized on debt 3,707
Income taxes receivable (1,444)
Decrease in accrued expenses (919)
-----------------
Net cash used in operating activities (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
-----------------
Increase in cash and balance at end of year $ 106
=================
22. SUBSEQUENT EVENT
On October 22, 1998, the Board of Directors approved a change in the
Company's fiscal year end from a fifty-two or fifty-three week period which ends
on the last Sunday in July to the same number of periods which ends on the last
Sunday in September. Also, on the same date, Sweetheart's Board of Directors
approved a change in its fiscal year-end from September 30 to the fifty-two or
fifty-three week periods which ends on the last Sunday of September. The Company
and Fonda will file transition reports for the period July 27, 1998 to September
27, 1998 on Form 10-Q.
F-18
Schedule II
SF HOLDINGS GROUP, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions
---------
Balance at Charged to
beginning Charged to Other Balance at
of Cost and Accts.- Deductions- end of
Description Period Expenses Describe describe period
----------- ------ -------- -------- -------- ------
Year ended July 26, 1998:
Allowance for doubtful
accounts . . . . . . . . . . $961 476 2,748(2) 61(1) $3,569
. . . 57(3) 110(4)
2(5)
Year ended July 27, 1997:
Allowance for doubtful
accounts . . . . . . . . . .
$549 457 -- 45(1) $ 961
Year ended July 28, 1996:
Allowance for doubtful
accounts . . . . . . . . . .
$401 148 100(2) 100(1) $ 549
- -------------------------------------------------------------------------------------------------------------------
(1) Amounts written-off
(2) Additions related to acquisitions
(3) Recoveries
(4) Deduction related to dispositions
(5) Foreign translation adjustment
S-1