UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(mark one)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the nine week transition period from July 27, 1998 to September 27, 1998
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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $.001 par value, as of December 1, 1998:
Class A: 5,625,838 Shares
Class B: 564,586 Shares
Class C: 399,000 Shares
SF HOLDINGS GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements (unaudited):
Page
Consolidated Balance Sheets as of September 27, 1998 and July 26, 1998 (audited) 3
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the nine weeks ended September 27, 1998 and the thirteen weeks
ended October 26, 1997 4
Consolidated Statements of Cash Flows for the nine weeks ended
September 27, 1998 and the thirteen weeks ended October 26, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 16
SF HOLDINGS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 27, July 26,
1998 1998
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,630 $ 20,703
Cash in escrow 5,464 6,819
Accounts receivable, less allowance for doubtful
accounts of $2,621 and $3,569, respectively 116,731 120,112
Due from affiliates 608 1,313
Inventories 170,288 168,493
Deferred income taxes 16,920 17,322
Other current assets 21,613 20,026
------------- -------------
Total current assets 341,254 354,788
Property, plant and equipment, net 419,669 430,150
Goodwill, net 100,481 94,865
Deferred income taxes 32,956 32,572
Other assets, net 29,829 31,436
------------- -------------
TOTAL ASSETS $ 924,189 $ 943,811
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 70,703 $ 78,013
Accrued expenses 106,144 117,426
Current maturities of long-term debt 4,019 3,825
------------- -------------
Total current liabilities 180,866 199,264
Long-term debt 624,903 619,143
Other liabilities 62,729 61,865
Deferred income taxes 5,011 4,771
------------- -------------
Total liabilities 873,509 885,043
Exchangeable preferred stock 31,444 30,680
Minority interest in subsidiary 2,472 3,020
Redeemable common stock 2,150 2,139
Stockholders' equity 14,614 22,929
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 924,189 $ 943,811
============= =============
See notes to consolidated financial statements.
3
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
Nine Weeks Thirteen Weeks
Ended Ended
September 27, October 26,
1998 1997
------------- --------------
Net sales $ 259,080 $ 70,658
Cost of goods sold 235,038 57,519
------------- --------------
Gross profit 24,042 13,139
Selling, general and administrative expenses 20,320 8,413
Other income, net (511) -
------------- --------------
Income from operations 4,233 4,726
Interest expense (net of interest income
of $341 in 1998 and $52 in 1997) 14,214 2,936
------------- --------------
Income (loss) before income taxes, minority interest
and extraordinary loss (9,981) 1,790
Income taxes (benefit) provision (4,631) 751
Minority interest in subsidiary's loss (548) -
------------- --------------
Net income (loss) (4,802) 1,039
Payment-in-kind dividends on exchangeable preferred stock 764 -
------------- --------------
Net income (loss) applicable to common stock $ (5,566) $ 1,039
============= ==============
Statements of comprehensive income (loss):
Net income (loss) $ (4,802) $ 1,039
Other comprehensive income, net of income tax:
Minimum pension liability adjustment (2,393) -
Foreign translation adjustment (345) -
------------- --------------
(2,738) -
------------- --------------
Total comprehensive income (loss) $ (7,540) $ 1,039
============= ==============
See notes to consolidated financial statements.
4
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Weeks Thirteen Weeks
Ended Ended
September 27, October 26,
1998 1997
------------- -------------
Operating activities:
Net income $ (4,802) $ 1,039
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 14,053 1,491
Interest capitalized on debt 1,779 -
Provision for doubtful accounts (301) 71
Deferred income taxes (4,098) 789
Gain on building and equipment dispositions (201) (157)
Minority interest in subsidiary's loss (548) -
Changes in assets and liabilities:
Accounts receivable 3,707 (6,587)
Due from affiliates 583 170
Inventories (1,795) (1,937)
Other current assets (1,195) 3,238
Accounts payable and accrued expenses (15,568) 516
Income taxes payable (refundable) (373) 37
Other (2,889) (26)
------------- -------------
Net cash used in operating activities (11,648) (1,356)
------------- -------------
Investing activities:
Capital expenditures (12,138) (2,021)
Proceeds from building and equipment dispositions 7,124 260
------------- -------------
Net cash used in investing activities (5,014) (1,761)
------------- -------------
Financing activities:
Net increase in revolving credit borrowings 4,424 8,049
Repayments of long-term debt (53) (149)
Redemption of Fonda's common stock - (8,352)
Debt issuance costs (137) -
Decrease in escrow cash 1,355 -
------------- -------------
Net cash provided by (used in) financing activities 5,589 (452)
------------- -------------
Net decrease in cash (11,073) (3,569)
Cash and cash equivalents, beginning of period 20,703 5,908
------------- -------------
Cash and cash equivalents, end of period $ 9,630 $ 2,339
============= =============
Supplemental cash flow information:
Cash paid (refunded) during the period for:
Interest, including $96 capitalized in 1998 and
$192 in 1997 $23,335 $ 5,959
Income taxes, net of refunds 87 (71)
See notes to consolidated financial statements.
5
SF HOLDINGS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
SF Holdings Group, Inc. ("SF Holdings"), is a holding company that
conducts its operations through its subsidiaries, Sweetheart Holdings Inc.
("Sweetheart") and The Fonda Group, Inc. ("Fonda") (collectively, the
"Company"), and therefore has no significant cash flows independent of such
subsidiaries. The instruments governing the indebtedness of Sweetheart and Fonda
contain numerous restrictive covenants that restrict Sweetheart and Fonda's
ability to pay dividends or make other distributions to SF Holdings or to each
other. The Company believes that the combined operations of its subsidiaries
makes the Company one of the three largest converters and marketers of
disposable food service and food packaging products in North America.
The information included in the foregoing interim consolidated
financial statements of the Company are unaudited but, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments and accruals) which the Company considers necessary for a fair
presentation of the operating results for these periods. Results for interim
periods are not necessarily indicative of results for the entire year. These
condensed financial statements should be read in conjunction with the Company's
financial statements and notes thereto included in the Company's annual report
on Form 10-K.
On October 22, 1998, the Board of Directors of SF Holdings and Fonda
approved a change in their respective fiscal year ends from a fifty-two or
fifty-three week period which ends on the last Sunday in July to the same number
of periods which ends on the last Sunday in September. The nine week period from
July 27, 1998 to September 27, 1998, consolidates the results of operations of
Fonda for all periods presented and of Sweetheart from July 1, 1998 to September
27, 1998. Such period will be treated as a transition period that will not be
part of Fiscal 1998 which ended on July 26, 1998 or Fiscal 1999 which will end
on September 26, 1999.
The following summarized, pro forma results of operations assume the
Company's acquisitions in Fiscal 1998 occurred as of the beginning of the period
(in thousands).
Thirteen Weeks
Ended
October 26, 1997
--------------------
Net sales $ 299,475
Net loss $ (13,633)
2. INVENTORIES
Inventories consist of the following (in thousands):
September 27, July 26,
1998 1998
------------- -------------
Raw materials and supplies $ 43,960 $ 43,998
Work-in-process 8,883 9,456
Finished goods 117,445 115,039
============= =============
$ 170,288 $ 168,493
============= =============
3. 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
6
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. In October
1998, plaintiffs filed a Petition for Writ of Certiorari in the United States
Supreme Court.
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 seeking injunctive relief and damages
relating to Sweetheart's production and sale of certain paper plates entitled
Fort James Corp. v. Sweetheart Cup Company Inc., was filed in the U.S. District
Court for the Eastern District of Wisconsin on November 21, 1997. Sweetheart
filed an answer to the complaint denying liability and asserting various
defenses and counterclaims. Discovery proceedings are in process. 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.
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.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion for the Company contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
or future events could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, raw material costs, labor market conditions, the highly competitive
nature of the industry, and developments with respect to contingencies.
In October 1998, the Company changed its fiscal year end to the last
Sunday in September. The following discussion compares the nine week transition
period ended September 27, 1998 (the "Nine Week Transition Period") to the
thirteen week quarter ended October 27, 1997 (the "1998 First Quarter"). The
Nine Week Transition Period consolidates the results of operations of Fonda for
all periods presented and of Sweetheart from July 1, 1998 to September 27, 1998.
The Company did not recast the data for the nine week period ended September 28,
1997 because certain review procedures and significant judgmental estimates that
are implemented only on a quarterly basis were not implemented for the nine week
period ended September 28, 1997. As a result of changes in certain computer
systems, the Company believes it would be impractical to implement these review
procedures and make the judgmental estimates to recast the prior nine week
period.
General
SF Holdings Group, Inc. ("SF Holdings") conducts all of its operations
through its principal operating subsidiaries, Sweetheart Holdings Inc.
("Sweetheart") and The Fonda Group, Inc. ("Fonda") (collectively, the "Company")
and therefore has no significant cash flows independent of such subsidiaries.
The investment in Sweetheart was consummated on March 12, 1998 and was
accounted for as a purchase. The financial information with respect to the 1998
First Quarter contained herein, 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 investment in
Sweetheart been consummated by the Company at the beginning of such period or
which may be achieved in the future. In addition, the financial information
contained herein does not 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 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.
8
Results of Operations
Nine weeks ended Thirteen weeks ended
September 27, October 26,
1998 1997
------------------------- -------------------------
% of Net % of Net
Amount Sales Amount Sales
------------ ------------ ----------- ------------
(Dollars in millions)
Net sales $ 259.1 100.0 % $ 70.7 100.0 %
Cost of goods sold 235.0 90.7 57.5 81.4
------------ ------------ ----------- ------------
Gross profit 24.0 9.3 13.1 18.6
Selling, general and
administrative expenses 20.3 7.8 8.4 11.9
Other income, net (0.5) (0.2) - -
------------ ------------ ----------- ------------
Income from operations 4.2 1.6 4.7 6.7
Interest expense, net 14.2 5.5 2.9 4.2
------------ ------------ ----------- ------------
Income before taxes (10.0) (3.9) 1.8 2.5
Income tax (benefit) provision (4.6) (1.8) 0.8 1.1
Minority interest in subsidiary's loss (0.5) (0.2) - -
------------ ------------ ----------- ------------
Net income $ (4.8) (1.9)% $ 1.0 1.5 %
============ ============ =========== ============
Nine Weeks Ended September 27, 1998 Compared to Thirteen Weeks Ended October 26,
1997
Net sales were $259.1 million in the Nine Week Transition Period
(including $216.4 million as a result of the consolidation of Sweetheart) and
$70.7 million in the 1998 First Quarter. Net sales decreased $3.4 million,
excluding the effects of consolidating Sweetheart, from $46.1 million for the
comparable nine week period ended September 28, 1997 to $42.7 million for the
Nine Week Transition Period. The 1997 nine week period included $3.0 million of
net sales of tissue mill products relating to operations that were sold in March
1998. For the comparable nine week periods, excluding the effects of
consolidating Sweetheart, sales volume in the Company's converting operations
increased 2.7% in the consumer market and decreased 9.4% in the institutional
market. Average selling prices decreased 4.7% in the consumer market and
increased 13.3% in the institutional market. The reduction in selling prices in
the consumer market primarily reflects lower pricing of certain party goods
products sold to Creative Expressions Group ("CEG"), an affiliate of the
Company. Under the terms of the License Agreement entered into in March 1998,
has the right to CEG sell, market, distribute and manufacture certain party
goods previously manufactured and distributed by the Company under various
brands. In connection therewith, the Company receives a royalty of 5% of CEG's
cash flow as determined in accordance with a formula specified in such
agreement. CEG has notified the Company of its intention to focus solely on
selling, marketing and distributing and will outsource all of its manufacturing
requirements. The Company has historically manufactured party goods products for
CEG and it expects to continue to do so in the future. During the Nine Week
Transition Period, the reduction in sales revenues of such party goods products
sold to CEG exceeded royalty income by approximately $.7 million. In the
institutional market, the reduction in sales volume and offsetting increase in
selling prices was primarily due to a change in sales mix, whereby the Company
emphasized the sale of value added converted tissue products rather than
commodity products.
Gross profit was $24.0 million in the Nine Week Transition Period
(including $17.5 million as a result of the consolidation of Sweetheart) and
$13.1 million in the 1998 First Quarter. As a percentage of net sales, gross
profit decreased from 18.6% in the 1998 First Quarter to 9.3% in the Nine Week
Transition Period primarily due to lower margins at Sweetheart and to a lesser
extent the gross margin impact resulting from reduced selling prices of consumer
products in connection with the License Agreement, which were not sufficiently
offset by royalty revenues. The Company believes the reductions in net sales and
gross profit in connection with the License Agreement, reflect transition and
timing issues which are expected to be recovered in future periods, however,
there can be no assurance that such will occur.
9
Selling, general and administrative expenses were $20.3 million in the
Nine Week Transition Period (including $14.7 million as a result of the
consolidation of Sweetheart) and $8.4 million in the 1998 First Quarter. As a
percentage of net sales, selling, general and administrative expenses decreased
from 11.9% in the 1998 First Quarter to 7.8% in the Nine Week Transition Period.
The percentage reduction was primarily due to the effects of consolidating
Sweetheart, for which selling, general and administrative costs as a percentage
of net sales are historically lower than at Fonda due to economies of scale. In
addition, the percentage reduction was also impacted by the reduction in
selling, marketing and distribution costs at Fonda due to the License Agreement
and partially offset by the sale of Fonda's tissue mill operations, for which
selling, general and administrative costs were low relative to net sales.
Income from operations was $4.2 million in the Nine Week Transition
Period and $4.7 million in the 1998 First Quarter due to the reasons discussed
above. As a percentage of net sales, income from operations decreased from 6.7%
in the 1998 First Quarter to 1.6% in the Nine Week Transition Period.
Interest expense, net of interest income was $14.2 million in the Nine
Week Transition Period (including $12.5 million as a result of the consolidation
of Sweetheart and financing thereof) and $2.9 million in the 1998 First Quarter.
For Fonda, outstanding debt levels and interest rates were comparable in the two
periods.
The effective tax rate was 46.4% in the Nine Week Transition Period,
which reflects certain non-deductible costs relating to the investment in
Sweetheart and the related financing, and 42% in the 1998 First Quarter. As a
result of the above and the addback of minority interest representing 10% of
Sweetheart's historical loss, the net loss was $4.8 million in the Nine Week
Transition Period compared to net income of $1.0 million in the 1998 First
Quarter.
Liquidity and Capital Resources
Historically, the Company's subsidiaries have relied on cash flow from
operations and borrowings to finance their respective working capital
requirements, capital expenditures and acquisitions. In addition, Sweetheart has
recently begun to fund a majority of its capital expenditures from the sale of
assets.
Net cash used in operating activities in the Nine Week Transition
Period was $11.6 million (including $4 million relating to the consolidation of
Sweetheart) compared to $1.4 million in the 1998 First Quarter. Excluding the
effects of consolidating Sweetheart, the increase in cash used is primarily due
to the reduction in net income and the receipt of $2.9 million from the
settlement of a lawsuit in the 1998 First Quarter.
Capital expenditures in the Nine Week Transition Period were $12.1
million including $4.2 million at Sweetheart for new cup making equipment and
$.6 million for management information systems. The remainder of capital
expenditures in the Nine Week Transition Period was for routine capital
improvements. The $2 million of capital expenditures in the 1998 First Quarter
included $1.4 million related to the installation of the second paper machine at
the Company's former tissue mill, which was sold in March 1998.
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 (as defined below) and dividends on the
Exchangeable Preferred (as defined below) become payable in cash.
On March 12, 1998, the Company issued $144.0 million aggregate
principal amount at maturity of 12 3/4% Senior Secured Discount Notes due 2008
(the "Discount Notes"). 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 $30.0
million of 13 3/4% Exchangeable Preferred Stock due 2009 (the "Exchangeable
Preferred"). 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 December 1, 1998, dividends on
the Exchangeable Preferred have been paid by the issuance of additional shares
of Exchangeable Preferred.
10
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, is collateralized by eligible
accounts receivable and inventories, certain general intangibles and the
proceeds on the sale of accounts receivable and inventory. At September 27,
1998, there was no outstanding balance and $39.3 million was the maximum advance
available based upon eligible collateral. At September 27, 1998, borrowings were
available at the bank's prime rate (8.50%) plus .25% and at LIBOR (approximately
5.40%) 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 September
27, 1998, $8.8 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 September 27, 1998, Cdn $5.4 million
(approximately $3.6 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 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 at a redemption
price equal to a percentage (103.938% 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 sale of the tissue
mill, Fonda is required to (i) reinvest approximately $10 million of such
proceeds
11
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
November 30, 1998, the Company has reinvested or has committed to reinvest
amounts in excess of $10 million, primarily in napkin and plate-making
equipment.
During the Nine Week Transition Period, 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.
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 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 April 1999 and January 1999, respectively.
Financial, corporate and in-house developed systems are scheduled for compliance
by July 1999. Sweetheart has completed its internal assessment phase for
technology embedded within equipment and is awaiting responses from certain
vendors. Sweetheart believes a significant portion of its manufacturing
equipment is not affected by Year 2000 issues due to its operations use, or was
compliant when purchased. Sweetheart has or is in the process of contacting key
vendors and business partners, to ensure that key business transactions will 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.
As of December 1, 1998, Sweetheart and Fonda estimate the total cost of
their respective Year 2000 program at $2.7 million and $3.4 million,
respectively, of which each has spent $1.2 million as of September 27, 1998,
including $.2 million by Fonda in the Nine Week Transition Period. 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 their computer systems in advance of their occurrence or
that they will be able to successfully remedy all problems that are discovered.
Failure by Sweetheart or
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Fonda and/or their significant vendors and customers to complete Year 2000
compliance programs in a timely manner could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the revenue stream and financial stability of existing customers may
be adversely impacted by Year 2000 problems which could cause fluctuations in
the Company's revenues and operating profitability.
Net Operating Loss Carryforwards
As of September 27, 1998, the Company had approximately $202 million of
net operating loss carryforwards ("NOLs") which expire at various dates through
2018. Although the Company expects that sufficient taxable income will be
generated in the future to realize these NOLs, there can be no assurance future
taxable income will be generated to utilize such NOLs.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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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.
4.2 Form of 12 3/4% Series A and Series B Senior Secured Discount
Notes, dated as of March 12, 1998 (incorporated by reference
to Exhibit 4.1).
4.3 Registration Rights Agreement, dated as of March 12, 1998,
among SF Holdings, Bear, Stearns & Co. Inc. and SBC Warburg
Dillon Read Inc. (the "Initial Purchasers").
4.4 Registration Rights Agreement, dated as of March 20, 1998,
between the Company, American Industrial Partners Management
Company, Inc. ("AIPM") and Bear, Stearns & Co., Inc.
4.5 Form of Certificate of Exchangeable Preferred Stock.
4.6 Form of Indenture between the Company and The Bank of New
York governing the 133/4% Subordinated Notes due March 15,
2009.
4.7 Paragraph A of Article Fourth of the Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.1).
10.1 Stockholders' Rights Agreement, dated as of March 12, 1998,
among SF Holdings and the persons listed on Schedule I
thereto.
10.2 Stockholders' Agreement, dated as of March 12, 1998, among
Sweetheart Holdings, SF Holdings and the Original
Stockholders.
10.3 Stockholders Agreement, dated as of March 12, 1998, among SF
Holdings and the Initial Purchasers.
10.4 Pledge Agreement, dated as of March 12, 1998, between SF
Holdings and the Bank of New York.
10.5 Tax Sharing Agreement, dated as of March 12, 1998, among SF
Holdings and The Fonda Group, Inc ("Fonda").
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.
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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.
27.1 * Financial Data Schedule.
----------------
o filed herein.
(b) A report on Form 8-K was filed on October 30, 1998 under item 8 for the
change in the Company's year-end from the last Sunday in July to the last
Sunday in September.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized.
Date: December 4, 1998
SF HOLDINGS GROUP, INC.
By: /s/ HANS H. HEINSEN
-------------------
Hans H. Heinsen
Senior Vice President, Chief Financial
Officer and Treasurer (Principal Financial
And Accounting Officer)
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