UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the thirteen weeks ended December 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 February 1, 1999:
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 Condensed Balance Sheets as of December 27, 1998
and July 26, 1998 (audited) 3
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the thirteen weeks ended December 27, 1998 and January 25, 1998 4
Consolidated Statements of Cash Flows for the thirteen weeks ended
December 27, 1998 and January 25, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SF HOLDINGS GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
December 27, July 26,
1998 1998
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,638 $ 20,703
Cash in escrow 7,349 6,819
Accounts receivable, less allowance for doubtful
accounts of $2,596 and $3,569, respectively 112,039 120,112
Due from affiliates 5,469 1,313
Inventories 153,766 168,493
Deferred income taxes 17,268 17,322
Other current assets 21,929 20,026
------------- -------------
Total current assets 321,458 354,788
Property, plant and equipment, net 414,305 430,150
Goodwill, net 99,683 94,865
Deferred income taxes 37,979 32,572
Other assets, net 30,301 31,436
------------- -------------
TOTAL ASSETS $903,726 $943,811
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 62,899 $ 78,013
Accrued expenses 104,351 117,426
Current maturities of long-term debt 3,972 3,825
------------- -------------
Total current liabilities 171,222 199,264
Long-term debt 621,884 619,143
Other liabilities 62,705 61,865
Deferred income taxes 5,382 4,771
------------- -------------
Total liabilities 861,193 885,043
Exchangeable preferred stock 32,601 30,680
Minority interest in subsidiary 1,743 3,020
Redeemable common stock 2,166 2,139
Stockholders' equity 6,023 22,929
============= =============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $903,726 $943,811
============= =============
See notes to consolidated financial statements.
3
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
Thirteen Weeks Ended
--------------------------------------
December 27, January 25,
1998 1998
------------- --------------
Net sales $ 272,803 $ 66,016
Cost of goods sold 246,351 53,492
------------- --------------
Gross profit 26,452 12,524
Selling, general and administrative expenses 24,500 8,776
Other (income) expense, net 239 (309)
------------- --------------
Income from operations 1,713 4,057
Interest expense (net of interest income
of $307 and $141) 16,477 3,067
------------- --------------
Income (loss) before income taxes and minority interest (14,764) 990
Income taxes (benefit) provision (5,590) 417
Minority interest in subsidiary's loss (729) -
------------- --------------
Net income (loss) (8,445) 573
Payment-in-kind dividends on exchangeable preferred stock 1,157 -
============= ==============
Net income (loss) applicable to common stock $ (9,602) $ 573
============= ==============
Statements of comprehensive income (loss):
Net income (loss) $ (8,445) $ 573
Other comprehensive income, net of income tax:
Minimum pension liability adjustment 1,343 -
Foreign translation adjustment (263) -
------------- --------------
Total comprehensive income (loss) $ (7,365) $ 573
============= ==============
See notes to consolidated financial statements.
4
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Thirteen Weeks Ended
--------------------------------------
December 27, January 25,
1998 1998
------------- -------------
Operating activities:
Net income (loss) $ (8,445) $ 573
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 13,982 1,475
Interest capitalized on debt 2,664 -
Provision for doubtful accounts 19 37
Deferred income taxes (5,909) (251)
Gain on building and equipment dispositions (112) (308)
Minority interest in subsidiary's loss (729) -
Changes in assets and liabilities:
Accounts receivable 4,361 5,851
Due from affiliates (4,537) (1,035)
Inventories 16,522 3,910
Other current assets (287) 37
Accounts payable and accrued expenses (5,396) 499
Other 1,802 (108)
------------- -------------
Net cash provided by operating activities 13,935 10,680
------------- -------------
Investing activities:
Capital expenditures (15,624) (2,387)
Proceeds from building and equipment dispositions 3,131 219
Payments for business acquisitions - (6,712)
------------- -------------
Net cash used in investing activities (12,493) (8,880)
------------- -------------
Financing activities:
Net decrease in revolving credit borrowings (5,168) (2,020)
Repayments of long-term debt (381) (159)
Redemption of Fonda's common stock - (1,436)
Debt issuance costs - -
Decrease in escrow cash (1,885) -
------------- -------------
Net cash used in financing activities (7,434) (3,615)
------------- -------------
Net decrease in cash (5,992) (1,815)
Cash and cash equivalents, beginning of period 9,630 2,339
------------- -------------
Cash and cash equivalents, end of period $ 3,638 $ 524
============= =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 2,994 $ 204
Income taxes, net of refunds $ 2,255 $ 169
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 for the fiscal year ended July 26, 1998 and its transition report
on Form 10-Q for the nine week period ended September 27, 1998.
On October 22, 1998, the Board of Directors of SF Holdings and Fonda
approved a change in their respective fiscal year ends from a fifty-two or
fifty-three week period which ends on the last Sunday in July to the same number
of weekly periods which end on the last Sunday in September. The nine-week
transition period ending September 27, 1998 was not part of the fiscal year
ended July 26, 1998 and will not be part of Fiscal 1999, which will end on
September 26, 1999.
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
January 25, 1998
-----------------------
Net sales $ 265,166
Net loss $ (8,632)
2. CASH IN ESCROW
Cash received by Sweetheart as proceeds from the sale of assets is
restricted to qualified capital expenditures under Sweetheart's indenture
agreement, and is held in escrow until utilized.
3. INVENTORIES
Inventories consist of the following (in thousands):
December 27, July 26,
1998 1998
------------- -------------
Raw materials and supplies $ 46,826 $ 43,998
Work-in-process 7,732 9,456
Finished goods 99,208 115,039
============= =============
$ 153,766 $ 168,493
============= =============
6
4. RELATED PARTY TRANSACTIONS
In December 1998, Fonda entered into an Exclusive Manufacture and
Supply Agreement (the "Manufacture and Supply Agreement") with Creative
Expressions Group ("CEG"), an affiliate. Pursuant to such agreement, Fonda will
manufacture and supply all of CEG's requirements for, among other items,
disposable paper plates, cups, napkins and tablecovers. Fonda sells such
manufactured products to CEG in accordance with a formula based on cost.
Also in December 1998, Fonda purchased certain manufacturing assets
from CEG for $4.9 million and in a separate transaction, purchased certain paper
plate manufacturing assets from Sweetheart Holdings Inc., an affiliate, for $2.4
million. An independent appraisal was obtained, for each transaction, to
determine the fairness of the respective purchase prices. The Company believes
the terms on which such assets were purchased and/or sold are at least as
favorable as those it could have obtained from unrelated third parties and were
negotiated on an arm's length basis. The purchase of assets by Fonda from
Sweetheart was eliminated in consolidation.
5. CONTINGENCIES
On January 11, 1999, the United States Supreme Court denied plaintiff's
petition for Writ of Certiorari in the matter of Aldridge v. Lily-Tulip, Inc.
Salary Retirement Plan Benefits Committee and Fort Howard Cup Corporation. The
court has decided that the Lily-Tulip, Inc. Salary Retirement Plan (the "Plan")
was lawfully terminated. Sweetheart is in the process of determining the timing
and amount of total payouts for which the Plan is liable. The initial estimate
of the total termination liability exceeds assets set aside in the Plan by
approximately $17 million, which has been fully reserved. Sweetheart expects to
fund such payments within the next nine months. See Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -Liquidity and Capital Resources.
A patent infringement action seeking injunctive relief and damages
relating to Sweetheart's production and sale of certain paper plates entitled
Fort James 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.
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, general economic and business conditions, and
developments with respect to contingencies.
As a result of the change in the fiscal year from the fifty-two or
fifty-three week period which ends on the last Sunday in July to the same number
of weekly periods which end on the last Sunday in September, the quarterly
comparisons are between the thirteen weeks ended December 27, 1998 (the "1999
First Fiscal Quarter") and the thirteen weeks ended January 25, 1998 (the "1998
Second Fiscal Quarter").
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. As a result, the financial information with respect
to the 1998 Second Fiscal Quarter contained herein does not reflect Sweetheart's
results of operations. Accordingly, such 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. For more
information regarding Sweetheart's results of operations, reference is made to
Sweetheart's annual report on Form 10-K for the fiscal year ended September 27,
1998 and its quarterly report on Form 10-Q for the thirteen week period ending
December 27, 1998.
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.
Recent Developments
In connection with the License Agreement, Fonda and Creative
Expressions Group ("CEG"), an affiliate, entered into an Exclusive Manufacture
and Supply Agreement in December 1998 (the "Manufacture and Supply Agreement").
Pursuant to the Manufacture and Supply Agreement, Fonda will manufacture and
supply all of CEG's requirements for, among other items, disposable paper
plates, cups, napkins and tablecovers. Fonda sells such manufactured products to
CEG in accordance with a formula based on cost, as defined in such agreement.
The Company believes that such agreement will enable Fonda to increase the
utilization of its manufacturing capacity. Pursuant to the License Agreement,
CEG has the right, among other things, to distribute certain products previously
8
distributed by Fonda and in exchange therefor, Fonda receives a royalty of 5% of
CEG's cash flow as determined in accordance with a formula specified in such
agreement.
Results of Operations
Thirteen Weeks Ended
-------------------------------------------------------
December 27, January 25,
1998 1998
------------------------- -------------------------
Amount % of Net Sales Amount % of Net Sales
------------ ---------------------------- ----------------
(Dollars in millions)
Net sales $ 272.8 100.0 % $ 66.0 100.0 %
Cost of goods sold 246.4 90.3 53.5 81.0
------------ ------------ ----------- ------------
Gross profit 26.5 9.7 12.5 19.0
Selling, general and
administrative expenses 24.5 9.0 8.8 13.3
Other (income) expense, net 0.2 0.1 (0.3) (0.5)
------------ ------------ ----------- ------------
Income from operations 1.7 0.6 4.1 6.1
Interest expense, net 16.5 6.0 3.1 4.6
------------ ------------ ----------- ------------
Income (loss) before taxes (14.8) (5.4) 1.0 1.5
Income tax (benefit) provision (5.6) (2.0) 0.4 0.6
Minority interest in subsidiary's loss (0.7) (0.3) - -
------------ ------------ ----------- ------------
Net income (loss) $ (8.4) (3.1)% $ 0.6 0.9 %
============ ============ =========== ============
Thirteen Weeks Ended December 27, 1998 Compared to January 25, 1998
Net sales were $272.8 million in the 1999 First Fiscal Quarter
(including $203.8 million as a result of the consolidation of Sweetheart) and
$66.0 million in the 1998 Second Fiscal Quarter. The 1998 Second Fiscal Quarter
included $4.2 million of net sales of tissue mill products relating to
operations that were sold in March 1998. Sales volume in Fonda's converting
operations increased 32.3% in the consumer market and decreased 1.6% in the
institutional market. Average selling prices decreased 9.5% in the consumer
market and increased 8.8% in the institutional market. The increased volume in
the consumer market was primarily due to the effects of seasonality resulting
from comparing the 1999 First Fiscal Quarter (which includes the four week
period in October 1998) with the 1998 Second Fiscal Quarter (which includes the
four week period in January 1998). Sales in Fonda's converting operations were
$6.3 million higher in the four weeks of October 1998 compared to the four weeks
of January 1998. The reduction in selling prices in the consumer market
primarily results from lower pricing of certain products sold to CEG. This
reduction in selling prices reflects cost savings from the License Agreement as
well as savings that Fonda expects to realize in future periods upon full
implementation of the Manufacture and Supply Agreement. In the institutional
market, the increase in selling prices and reduction in sales volume was
primarily due to a change in sales mix, whereby Fonda emphasized the sale of
value added converted tissue products rather than commodity products.
Gross profit was $26.5 million in the 1999 First Fiscal Quarter
(including $14.3 million as a result of the consolidation of Sweetheart) and
$12.5 million in the 1998 Second Fiscal Quarter. As a percentage of net sales,
gross profit decreased from 19.0% in the 1998 Second Fiscal Quarter to 9.7% in
the 1999 First Fiscal Quarter primarily due to lower margins at Sweetheart. In
addition, Fonda's gross margins in the 1999 First Fiscal Quarter were adversely
affected by reduced selling prices of consumer products, described above, and
are expected to improve in future periods upon full implementation of the
Manufacture and Supply Agreement, however, there can be no assurance that such
will occur.
Selling, general and administrative expenses were $24.5 million in the
1999 First Fiscal Quarter (including $15.9 million as a result of the
consolidation of Sweetheart) and $8.8 million in the 1998 Second Fiscal Quarter.
As a percentage of net sales, selling, general and administrative expenses
decreased from 13.3% in the 1998 Second Fiscal Quarter to 9.0% in the 1999 First
Fiscal Quarter. The decrease as a percentage of net sales was
9
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 at Fonda by the reduction in selling, marketing and
distribution costs due to the License Agreement, as well as the closure of an
administrative office. Such decreases were partially offset by the sale of
Fonda's tissue mill operation, for which selling, general and administrative
costs were low relative to net sales.
Income from operations was $1.7 million in the 1999 First Fiscal
Quarter (including an operating loss of $1.8 million as a result of the
consolidation of Sweetheart) and $4.1 million in the 1998 Second Fiscal Quarter
due to the reasons discussed above and other income realized in the 1998 Second
Fiscal Quarter from the sale of equipment by Fonda.
Interest expense, net of interest income was $16.5 million in the 1999
First Fiscal Quarter (including $13.7 million as a result of the consolidation
of Sweetheart and financing thereof) and $3.1 million in the 1998 Second Fiscal
Quarter.
The effective tax rate was 37.9% in the 1999 First Fiscal Quarter,
which reflects certain non-deductible costs relating to the investment in
Sweetheart and the related financing, and 42% in the 1998 Second Fiscal Quarter.
As a result of the above and the addback of minority interest representing 10%
of Sweetheart's historical loss, the net loss was $8.4 million in the 1999 First
Fiscal Quarter compared to net income of $.6 million in the 1998 Second Fiscal
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
been funding a majority of its capital expenditures from the sale of assets.
Net cash provided operating activities in 1999 First Fiscal Quarter was
$13.9 million (including $12.4 million relating to the consolidation of
Sweetheart) compared to $10.7 million in the 1998 Second Fiscal Quarter.
Excluding the effects of consolidating Sweetheart, the reduction in cash
provided by operations is primarily due to the seasonal reduction in working
capital in January 1998, which was included in the 1998 Second Fiscal Quarter,
and a buildup in amounts due from affiliates resulting from the implementation
of the License Agreement.
Capital expenditures were $15.6 million, including $5.5 million at
Sweetheart for new production equipment and $4.9 million at Fonda to purchase
converting equipment. See Note 3 of Notes to Financial Statements. The remainder
of capital expenditures was primarily for routine capital improvements.
None of SF Holdings, Fonda or Sweetheart anticipates any material
capital expenditures in the next twelve months other than those funded through
asset sales and available cash from the respective subsidiaries. SF Holdings is
a holding company and does not anticipate any material cash needs 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.
The $120 million 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 (104.75% after March 1, 2002 and
declining in annual steps to 100% after March 1, 2005) of the principal amount
thereof plus accrued interest. The Fonda Notes provide that upon the
10
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 December 27, 1998,
there was no outstanding balance and $35.5 million was the maximum advance
available based upon eligible collateral. At December 27, 1998, borrowings were
available at a bank's prime rate plus .25% or at LIBOR 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 December
27, 1998, $11.9 million is available. Borrowings under the Sweetheart U.S.
Credit Facility bear interest, at Sweetheart's election, at a rate equal to
LIBOR plus 2.25%, or a bank's base rate plus 1.00%. 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 December 27, 1998, Cdn $1.7 million
(approximately $1.1 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 101.604% and declining 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.
Fonda has reinvested amounts in excess of $10 million from the sale of
its tissue mill, within the required time period, as specified in accordance
with the asset sale covenant under the indenture governing Fonda's Notes.
11
During the 1999 First Fiscal Quarter, the Company did not incur
material costs for compliance with environmental law and regulations.
In January 1999, the Company was notified that the United States
Supreme Court had denied plaintiffs' petition for Writ of Certiorari in the
matter of Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan Benefits Committee
and Fort Howard Cup Corporation. The court has decided that the Lily-Tulip
Salary Retirement Plan (the "Plan") was lawfully terminated. The Company is in
the process of determining the timing and amount of total payouts for which the
Plan is liable. The initial estimate of the total termination liability exceeds
assets set aside in the Plan by approximately $17 million, which amount has been
fully reserved by the Company. The Company expects to fund such payments within
the next nine months. The Company's operating plan contemplates that cash
generated by operations and amounts available under the Company's credit
facilities will be sufficient to make the required payments under the Plan when
due. However, there can be no assurance that the Company will achieve its
operating plan and have the necessary cash to make these payments. Failure by
the Company to make such payments will have a material adverse effect on the
Company and its financial condition.
The Company believes that cash generated by each of Fonda's and
Sweetheart's operations, combined with amounts available under its respective
credit facilities as well as funds generated by asset sales by Sweetheart should
be sufficient to fund each of Fonda's and Sweetheart's respective capital
expenditures needs, debt service requirements and working capital needs,
including Sweetheart's termination liabilities under the Plan, for the
foreseeable future.
Year 2000
Many of Sweetheart's and Fonda's computer systems may be unable to
process dates beyond December 31, 1999. This could result in system failures or
miscalculations which could have a material adverse effect on the Company's
business, financial condition or results of operations. Each of Sweetheart and
Fonda has implemented a Year 2000 compliance program intended to identify the
programs and infrastructures that could be effected by Year 2000 issues and
resolve the problems that were identified on a timely basis.
Fonda has completed the assessment phase, in which it has identified
potential Year 2000 issues, including those with respect to information
technology systems, technology embedded within equipment Fonda uses as well as
equipment that interfaces with vendors and other third parties. Fonda has also
completed the upgrade of its hardware and software systems which run most of
Fonda's data processing and financial reporting software applications and has
consolidated certain of its in-house developed computer systems into the
upgraded systems. In addition, Fonda is working with vendors to ensure that its
telephone systems and other embedded technologies are Year 2000 compliant. The
telephone system is expected to be Year 2000 compliant by May 1999. 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 has also completed the hardware and operating
systems conversion. With respect to the application phase, Sweetheart is
compliant in its planning, order management and warehousing systems.
Manufacturing systems are in final testing and are expected to be compliant by
April 1999. 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 be
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, together
with manual systems, would allow Sweetheart to ship products to customers and
engage in other critical business functions.
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As of February 1, 1999, Sweetheart and Fonda estimate the total cost of
their respective Year 2000 program at $2.7 million and $3.2 million,
respectively. Sweetheart has spent $2.0 million as of December 27, 1998,
including $.8 million in the thirteen weeks ended December 27, 1998. Fonda has
spent $2.2 million as of December 27, 1998, including $1.0 million in the 1999
First Fiscal Quarter. Expenditures have been, and are expected to be, funded
from cash flows from the respective company's operations, available cash,
borrowings under each company's respective credit facility, or by lease.
However, there can be no assurance that Sweetheart or Fonda will identify all
Year 2000 issues in their computer systems in advance of their occurrence or
that they will be able to successfully remedy all problems that are discovered.
Failure by Sweetheart or Fonda and/or their significant vendors and customers to
complete Year 2000 compliance programs in a timely manner could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the revenue stream and financial stability of existing
customers may be adversely impacted by Year 2000 problems which could cause
fluctuations in the Company's revenues and operating profitability.
Net Operating Loss Carryforwards
As of September 27, 1998, Sweetheart had approximately $202 million of
net operating loss carryforwards ("NOLs") which expire at various dates through
2018. Although the Company expects that sufficient taxable income will be
generated in the future to realize these NOLs, there can be no assurance future
taxable income will be generated to utilize such NOLs.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibits 2.1 through 10.8 are incorporated herein by reference to the
exhibit with the corresponding number filed as part of the Company's
Registration Statement on Form S-4, as amended (File No. 333-50683).
Exhibits 10.9 through 10.18 are incorporated herein by reference to the
exhibit with the corresponding number filed as part of the Company's
Registration Statement on Form S-4, as amended (File No. 333-51563).
Exhibit # 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 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.
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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.
----------------
* 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 fiscal 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: February 10, 1999
SF HOLDINGS GROUP, INC.
By: /s/ HANS H. HEINSEN
---------------------
Hans H. Heinsen
Senior Vice President, Chief Financial
Officer and Treasurer (Principal Financial
And Accounting Officer)
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