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 twenty-six weeks ended March 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-50683
SF Holdings Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3990796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
373 Park Ave. South
New York, NY 10016
(212) 779-7448
(Address and telephone number of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $.001 par value, as of May 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 March 28, 1999
and July 26, 1998 (audited) 3
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the thirteen and twenty-six weeks ended March 28, 1999
and April 26, 1998 4
Consolidated Statements of Cash Flows for the twenty-six weeks ended
March 28, 1999 and April 26, 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 15
Signatures 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SF HOLDINGS GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
March 28, July 26,
1999 1998
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,058 $ 20,703
Cash in escrow 1,594 6,819
Accounts receivable, less allowance for doubtful
accounts of $2,396 and $3,569, respectively 115,493 120,112
Due from affiliates 6,442 1,313
Inventories 170,094 168,493
Deferred income taxes 17,032 17,322
Other current assets 21,959 20,026
------------- -------------
Total current assets 338,672 354,788
Property, plant and equipment, net 411,191 430,150
Goodwill, net 99,788 94,865
Deferred income taxes 43,031 32,572
Other assets, net 29,010 31,436
------------- -------------
TOTAL ASSETS $ 921,692 $ 943,811
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 87,838 $ 78,013
Accrued expenses 97,017 117,426
Current maturities of long-term debt 3,996 3,825
------------- -------------
Total current liabilities 188,851 199,264
Long-term debt 627,899 619,143
Other liabilities 65,772 61,865
Deferred income taxes 5,429 4,771
------------- -------------
Total liabilities 887,951 885,043
Exchangeable preferred stock 33,809 30,680
Minority interest in subsidiary 1,224 3,020
Redeemable common stock 2,182 2,139
Stockholders' equity (deficit) (3,474) 22,929
============= =============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 921,692 $ 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 Twenty-six Weeks Ended
-------------------------------- --------------------------------
March 28, April 26, March 28, April 26,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
Net sales $253,450 $115,525 $526,253 $181,541
Cost of goods sold 226,386 101,856 472,737 155,362
-------------- -------------- -------------- --------------
Gross profit 27,064 13,669 53,516 26,179
Selling, general and
administrative expenses 24,429 12,478 48,929 21,240
Other (income) expense, net 271 (6,896) 510 (7,206)
-------------- -------------- -------------- --------------
Income from operations 2,364 8,087 4,077 12,145
Interest expense, net 16,172 6,928 32,649 9,995
-------------- -------------- -------------- --------------
Income (loss) before income taxes (13,808) 1,159 (28,572) 2,150
Income taxes provision (benefit) (5,228) 802 (10,818) 1,076
Minority interest in subsidiary's loss (519) (1,425) (1,248) (1,425)
-------------- -------------- -------------- --------------
Net income (loss) (8,061) 1,782 (16,506) 2,499
Payment-in-kind dividends on
exchangeable preferred stock 1,208 573 2,365 573
-------------- -------------- -------------- --------------
Net income (loss) applicable to
common stock $ (9,269) $ 1,209 $(18,871) $ 1,926
============== ============== ============== ==============
Statements of comprehensive income (loss):
Net income (loss) $ (8,061) $ 1,782 $(16,506) $ 2,499
Other comprehensive income, net of income tax:
Minimum pension liability adjustment (454) - 889 -
Foreign translation adjustment 252 93 (11) 93
-------------- -------------- -------------- --------------
(202) 93 878 93
-------------- -------------- -------------- --------------
Total comprehensive income (loss) $ (8,263) $ 1,875 $(15,628) $ 2,592
============== ============== ============== ==============
See notes to consolidated financial statements.
4
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Twenty-six Weeks Ended
---------------------------------
March 28, April 26,
1999 1998
------------- -------------
Operating activities:
Net income (loss) $ (16,506) $ 2,499
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 28,180 5,466
Interest capitalized on debt 5,353 1,318
Provision for doubtful accounts 162 42
Deferred income taxes (10,123) (1,367)
Gain on building and equipment dispositions (170) (9,613)
Minority interest in subsidiary's loss (1,248) (1,425)
Changes in assets and liabilities:
Accounts receivable 240 215
Due from affiliates (5,603) (920)
Inventories 194 5,235
Other current assets (317) (353)
Accounts payable and accrued expenses 12,409 5,344
Other 3,971 (1,600)
------------- -------------
Net cash provided by operating activities 16,542 4,841
------------- -------------
Investing activities:
Capital expenditures (26,799) (5,110)
Proceeds from business and equipment dispositions 5,210 21,157
Payments for business acquisitions - (101,901)
Other - 1,931
------------- -------------
Net cash used in investing activities (21,589) (83,923)
------------- -------------
Financing activities:
Net decrease in revolving credit borrowings (1,670) (4,349)
Proceeds from long-term debt - 77,538
Repayments of long-term debt (725) (319)
Proceeds from issuance of exchangeable preferred stock - 15,000
Redemption of Fonda's common stock - (1,436)
Debt issuance costs - (3,507)
Decrease in escrow cash 3,870 1,403
Other - 371
------------- -------------
Net cash provided by financing activities 1,475 84,701
------------- -------------
Net increase (decrease) in cash (3,572) 5,619
Cash and cash equivalents, beginning of period 9,630 2,339
------------- -------------
Cash and cash equivalents, end of period $ 6,058 $ 7,958
============= =============
Supplemental cash flow information:
Cash paid during the period for:
Interest $26,220 $ 204
Income taxes, net of refunds $ 2,323 $ 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 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 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.
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):
March 28, July 26,
1999 1998
------------- -------------
Raw materials and supplies $ 48,154 $ 43,998
Work-in-process 8,585 9,456
Finished goods 113,355 115,039
------------- -------------
$ 170,094 $ 168,493
============= =============
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
manufactures and supplies 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 entered into operating leases, whereby the Company leases to CEG
certain non-manufacturing assets for annual lease income of $.1 million.
Independent appraisals were obtained to determine the fairness of both the
purchase price and lease terms. The Company believes the terms on which it (i)
manufactures and supplies product for CEG, (ii) purchased manufacturing assets
from CEG, and (iii) leased
6
non-manufacturing assets to CEG are at least as favorable as those it could have
obtained from unrelated third parties and were negotiated on an arm's length
basis.
In December 1998, Fonda purchased certain paper plate manufacturing
assets from Sweetheart for $2.4 million. In February 1999, Fonda entered into a
five year operating lease with Sweetheart, whereby Fonda leases certain paper
cup manufacturing assets to Sweetheart with a net book value of $1.3 million for
annual lease income of $.2 million. Independent appraisals were obtained to
determine the fairness of both the purchase price and lease terms. The Company
believes the terms on which Fonda purchased manufacturing assets from Sweetheart
and leases manufacturing assets to Sweetheart 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 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, Inc. Salary Retirement Plan (the "Plan")
was lawfully terminated. Sweetheart is in the process of determining the 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 six months. On April 27, 1999, the plaintiffs filed a motion in
U.S. district court for reconsideration of the court's dismissal without
appropriate relief, and a motion for attorney's fees with a request for delay in
determination of entitlement of such fees. Management is currently reviewing
these motions to determine what effect, if any, they may have on the payments
referred to above. 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 as defined by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on management's current expectations
and involve a number of known and unknown risks and uncertainties that could
cause the actual results, performance or achievements of the Company to be
materially different from those anticipated in these forward-looking statements.
Such risks and uncertainties include, but are not limited to, the highly
competitive nature of the industry, raw material costs and fluctuations in
demand for the Company's products due in part to general economic and business
conditions.
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.
Debt instruments of Fonda and Sweetheart restrict each subsidiary's ability to
pay dividends or make other distributions to SF Holdings or each other.
As a result of the change in Fonda's 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 for Fonda are between the thirteen and twenty-six week periods ended
March 28, 1999 (the "1999 Fonda Thirteen Week Period" and the "1999 Fonda
Twenty-six Week Period") and the same number of weekly periods ended April 26,
1998 (the "1998 Fonda Thirteen Week Period" and the "1998 Fonda Twenty-six Week
Period").
Fonda's sales and income from operations are historically lowest in
January and February. As a result, the four week period in January (which is
included in the 1999 Fonda Thirteen Week Period) historically has had lower
sales compared to the four week period in April (which is included in the 1998
Fonda Thirteen Week Period). In the twenty-six week comparison, the seasonality
effect is reduced as sales in the four week period in October (which is included
in the 1999 Fonda Twenty-six Week Period) historically have not been materially
different than those in the four week period in April (which is included in the
1998 Fonda Twenty-six Week Period).
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 thirteen week and twenty-six week periods contained herein reflects
Sweetheart's results of operations for the period March 12, 1998 to March 31,
1998. 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
and twenty-six week periods ending March 28, 1999.
Sweetheart and Fonda are converters and marketers of disposable paper,
plastic and foam food service and food packaging products. The price of the
Company's primary raw materials, including SBS paperboard and plastic resin,
historically fluctuates. These fluctuations are generally passed on to customers
through price increases or reductions. However, in the short term, the Company
is at risk of margin erosion. The severity of such margin erosion depends on
various factors including inventory levels at the time of a price change, the
timing and frequency of such price changes, and the lead and lag time that
generally accompanies the implementation of both raw materials and subsequent
selling price changes.
Each of Fonda and Sweetheart's business is seasonal as away from home
consumption of disposable products increases in the late spring and summer. This
results in disproportionately higher net income in the last six months of the
fiscal year as cost absorption improves from a more profitable sales and
production mix.
In connection with the License Agreement, as described below, 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
manufactures and supplies all of CEG's requirements for, among other items,
disposable paper plates, cups, napkins and tablecovers.
8
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 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.
Recent Developments
Fonda is engaged in an extensive program to improve manufacturing
efficiencies and upgrade production capabilities, which includes, among other
things, the full implementation of the Manufacture and Supply Agreement and
further consolidation of its manufacturing operations (the "Fonda Efficiency
Initiatives"). This program has and will continue to result in incremental
expenses arising from start-up, training and other related expenses. In
connection with the Fonda Efficiency Initiatives, (i) in December 1998, Fonda
purchased certain paper plate manufacturing assets from Sweetheart for $2.4
million and (ii) in February 1999, Fonda entered into a five year operating
lease whereby it leases certain paper cup manufacturing assets to Sweetheart.
Results of Operations
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------------------------- ---------------------------------------------
March 28, 1999 April 26, 1998 March 28, 1999 April 26, 1998
------------------- -------------------- ------------------- --------------------
% of % of % of % of
Net Net Net Net
Amount Sales Amount Sales Amount Sales Amount Sales
----------- ------- ----------- -------- ---------- ------- ----------- --------
(Dollars in millions)
Net sales $ 253.5 100.0 % $ 115.5 100.0 % $ 526.3 100.0 % $ 181.5 100.0 %
Cost of goods sold 226.4 89.3 101.9 88.2 472.7 89.8 155.4 85.6
----------- ------- ----------- -------- ---------- ------- ----------- --------
Gross profit 27.1 10.7 13.7 11.8 53.5 10.2 26.2 14.4
Selling, general and
administrative expenses 24.4 9.6 12.5 10.8 48.9 9.3 21.2 11.7
Other income, net 0.3 0.1 (6.9) (6.0) 0.5 0.1 (7.2) (4.0)
----------- ------- ----------- -------- ---------- ------- ----------- --------
Income from operations 2.4 0.9 8.1 7.0 4.1 0.8 12.1 6.7
Interest expense, net 16.2 6.4 6.9 6.0 32.6 6.2 10.0 5.5
----------- ------- ----------- -------- ---------- ------- ----------- --------
Income (loss) before taxes (13.8) (5.4) 1.2 1.0 (28.6) (5.4) 2.2 1.2
Income tax provision (benefit) (5.2) (2.1) 0.8 0.7 (10.8) (2.1) 1.1 0.6
Minority interest (0.5) (0.2) (1.4) (1.2) (1.2) (0.2) (1.4) (0.8)
----------- ------- ----------- -------- ---------- ------- ----------- --------
Net income (loss) $ (8.1) (3.2)% $ 1.8 1.5 % $ (16.5) (3.1)% $ 2.5 1.4 %
=========== ======= =========== ======== ========== ======= =========== ========
Thirteen Weeks Ended March 28, 1999 Compared to Thirteen Weeks Ended April 26,
1998
Net sales increased $137.9 million to $253.5 million in the 1999
thirteen week period. The consolidation of Sweetheart in March 1998 resulted in
incremental sales of $146.8 million. The 1998 Fonda Thirteen Week Period
included $4.3 million of net sales of tissue mill products relating to
operations that were sold in March 1998. Excluding such tissue mill sales,
Fonda's net sales decreased $3.7 million due to the effects of seasonality on
the quarterly comparison, partially offset by increased sales resulting from the
CEG Agreements. Sales volume in Fonda's converting operations increased 17.3% in
the consumer market and decreased 1.5% in the institutional market. Average
selling prices decreased 18.9% in the consumer market and increased 6.0% in the
institutional market. The increased volume in the consumer market was due to the
increase in tissue products sold to CEG in accordance with the CEG Agreements.
Such increase more than offset the reduction in volume due to the effects of
seasonality resulting from comparing the 1999 Fonda Thirteen Week Period (which
includes the four week period in January 1999) with the 1998 Fonda Thirteen Week
Period (which includes the four week period in April 1998). The reduction in
selling prices in the consumer market reflects cost savings from the License
Agreement as well as savings that Fonda is beginning to realize and expects to
realize more fully in future periods upon full
9
implementation of the Manufacture and Supply Agreement. In the institutional
market, the increase in selling prices and reduction in sales volume were
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 increased $13.4 million to $27.1 million in the 1999
thirteen week period. The consolidation of Sweetheart resulted in an increase in
gross profit of $15.7 million. As a percentage of net sales, gross profit
decreased from 11.8% in the 1998 thirteen weeks to 10.7% in the 1999 period
primarily due to the effect of lower margins at Sweetheart compared to Fonda.
However, Sweetheart's margin improved from 6.7% in the 1998 thirteen week period
to 9.7% in the 1999 period due to increased sales volumes and the cost reduction
initiatives implemented in the latter part of the 1998 fiscal year. Gross
margins in the 1999 Fonda Thirteen Week Period were adversely affected by
reduced selling prices of consumer products, described above, as well as excess
costs incurred in implementing the Fonda Efficiency Initiatives. Gross margins
are expected to improve in future periods upon full implementation of the Fonda
Efficiency Initiatives, however, there can be no assurance that such will occur.
Selling, general and administrative expenses increased $12.0 million to
$24.4 million in the 1999 thirteen week period. An increase of $13.6 million of
such expenses resulted from the consolidation of Sweetheart. As a percentage of
net sales, selling, general and administrative expenses decreased from 10.8% in
the 1998 thirteen week period to 9.6% in the 1999 period. The decrease as a
percentage of net sales was partially 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 and marketing costs due to the License Agreement, as well as the
closure of an administrative office.
Other income, net in the 1998 thirteen week period includes a $9.3
million pre-tax gain from the sale of Fonda's tissue mill operations. The gain
was partially offset by $2.1 million of charges at Sweetheart resulting from the
acquisition.
Income from operations was $2.4 million in the 1999 thirteen week
period and $8.1 million in the 1998 thirteen week period as a result of the
above.
Interest expense, net of interest income was $16.2 million in the 1999
thirteen week period and $6.9 million in the 1998 thirteen week period. The
increase was due to the consolidation of Sweetheart and the related financing
thereof.
The effective tax rate was 37.9% in the 1999 thirteen week period and
57.5% in the 1998 thirteen week period. Both the 1999 and 1998 periods reflect
certain non-deductible costs relating to the investment in Sweetheart and the
related financing. As a result of the above and the addback of minority interest
representing 10% of Sweetheart's historical loss, the net loss was $8.1 million
in the 1999 thirteen week period compared to net income of $1.9 million in the
1998 thirteen week period.
Twenty-six Weeks Ended March 28, 1999 Compared to Twenty-six Weeks Ended April
26, 1998
Net sales increased $344.7 million to $526.3 million in the 1999
twenty-six week period. The consolidation of Sweetheart in March 1998 resulted
in incremental sales of $349.5 million. The 1998 Fonda Twenty-six Week Period
included $8.6 million of net sales of tissue mill products relating to
operations that were sold in March 1998. Excluding such tissue mill sales, net
sales increased $3.8 million due primarily to the effects of the CEG Agreements
and, to a lesser extent, the effects of seasonality on the twenty-six week
comparison. Sales volume in Fonda's converting operations increased 24.5% in the
consumer market and decreased 1.5% in the institutional market. Average selling
prices decreased 16.5% in the consumer market and increased 5.6% in the
institutional market. The increased volume in the consumer market was due to the
increase in tissue products sold to CEG in accordance with the CEG Agreement
and, to a lesser extent, the effects of seasonality resulting from comparing the
1999 Fonda Twenty-six Week Period (which includes the four week period in
October 1998) with the 1998 Fonda Twenty-six Week Period (which includes the
four week period in April 1998). The reduction in selling prices in the consumer
market reflects cost savings from the License Agreement as well as savings that
10
Fonda is beginning to realize and expects to realize more fully 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 were 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 increased $27.3 million to $53.5 million in the 1999
twenty-six week period. The consolidation of Sweetheart resulted in an increase
in gross profit of $30.1 million. As a percentage of net sales, gross profit
decreased from 14.4% in the 1998 twenty-six weeks to 10.2% in the 1999 period
primarily due to the effect of lower margins at Sweetheart compared to Fonda.
However, Sweetheart's margin improved from 6.7% in the 1998 thirteen week period
to 8.3% in the 1999 period due to increased sales volumes and the cost reduction
initiatives implemented in the latter part of the 1998 fiscal year. Gross
margins in the 1999 Fonda Twenty-six Week Period were adversely affected by
reduced selling prices of consumer products, described above, as well as excess
costs incurred in implementing the Fonda Efficiency Initiatives. Gross margins
are expected to improve in future periods upon full implementation of the Fonda
Efficiency Initiatives, however, there can be no assurance that such will occur.
Selling, general and administrative expenses increased $27.7 million to
$48.9 million in the 1999 twenty-six week period. An increase of $29.5 million
of such expenses resulted from the consolidation of Sweetheart. As a percentage
of net sales, selling, general and administrative expenses decreased from 10.8%
in the 1998 twenty-six week period to 9.3% in the 1999 twenty-six week period.
The decrease as a percentage of net sales was partially 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 and marketing costs due to the License Agreement, as
well as the closure of an administrative office.
Other income in the 1998 twenty-six week period includes a $9.3 million
pre-tax gain from the sale of Fonda's tissue mill operations. The gain was
partially offset by $2.1 million of charges at Sweetheart resulting from the
acquisition.
Income from operations was $4.1 million in the 1999 twenty-six week
period and $12.1 million in the 1998 twenty-six week period as a result of the
above.
Interest expense, net of interest income was $32.6 million in the 1999
twenty-six week period and $10.0 million in the 1998 twenty-six week period. The
increase was due to the consolidation of Sweetheart and the related financing
thereof.
The effective tax rate was 37.9% in the 1999 twenty-six week period and
50% in the 1998 twenty-six week period. Both the 1999 and 1998 periods reflect
certain non-deductible costs relating to the investment in Sweetheart and the
related financing. As a result of the above and the addback of minority interest
representing 10% of Sweetheart's historical loss, the net loss was $16.5 million
in the 1999 twenty-six week period compared to net income of $2.5 million in the
1998 twenty-six week period.
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 by operating activities in 1999 twenty-six week
period was $16.5 million compared to $4.3 million in the 1998 twenty-six week
period. Sweetheart provided $15.7 million in the 1999 period compared to a use
of $2.9 million in the 1998 period. Excluding the effects of consolidating
Sweetheart, the reduction in cash provided by operations is primarily due to the
buildup in amounts due from affiliates resulting from the implementation of the
CEG Agreements. In March 1999, CEG's second largest customer, representing over
10% of CEG's net sales during its 1998 fiscal year, filed a Chapter 11
bankruptcy petition. As a result, and for other reasons, Fonda intends to
reevaluate the adequacy of its affiliate reserves.
11
Capital expenditures were $26.8 million, including $11.6 million at
Sweetheart for new production equipment, $4.4 million at Sweetheart relating to
its Canadian operations and $8.7 million at Fonda for converting equipment. See
Note 4 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 in the next
twelve months. As of March 28, 1999, dividends on the Exchangeable Preferred
have been paid by the issuance of additional shares of Exchangeable Preferred.
Fonda's revolving credit facility, as amended, provides up to $50
million borrowing capacity, is collateralized by accounts receivable and
inventories, certain general intangibles and the proceeds on the sale of
accounts receivable and inventory. The maturity date of such facility has been
extended to September 1, 2001. At March 28, 1999, there was $3.8 million
outstanding and $33.2 million was the maximum advance available based upon
eligible collateral. At March 28, 1999, 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"). As of March 28, 1999, $12.5
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%. A Canadian subsidiary of Sweetheart has a 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"). As of March 28, 1999, Cdn
$2.8 million (approximately $1.9 million) was available under such facility.
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.
Sweetheart's Senior Secured Notes and its U.S. Credit Facility mature
in September 2000, and August 2000, respectively. Although the Company intends
to refinance this debt, there can be no assurance that it will be able to obtain
such refinancing on acceptable terms and conditions.
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.
During the 1999 twenty-six week period, the Company did not incur
material costs for compliance with environmental law and regulations.
In January 1999, Sweetheart 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 decided that the Lily-Tulip Salary Retirement
Plan (the "Plan") was lawfully terminated. Sweetheart is in the process of
determining the 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
Sweetheart. Sweetheart expects to fund such payments within the next six months.
On April 27, 1999, the plaintiffs filed a motion in U.S. district court for
reconsideration of the court's dismissal without appropriate relief, and a
motion for attorney's fees with a request for delay in determination of
entitlement of such fees. Management is currently reviewing these motions to
determine what effect, if any, they may have on the payments referred to above.
Sweetheart's operating plan contemplates that cash generated by operations and
amounts available under its credit facilities will be sufficient to make the
required payments under the Plan when due. However, there can be no assurance
that the Sweetheart will achieve its operating plan and have the necessary cash
to make these payments. Failure by Sweetheart to make such payments will have a
material adverse effect on Sweetheart and its financial condition.
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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 its
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 has upgraded its telephone, data
communication and network systems to ensure that they are Year 2000 compliant.
Embedded logic in manufacturing equipment is all being tested and upgraded.
Contingency plans are being developed for equipment that cannot be upgraded. The
embedded logic project is expected to be completed by October 1999. EDI trading
partners and other key business partners have been contacted to ensure that key
business transactions will be Year 2000 compliant. Contingency plans are being
developed to work with trading partners or to replace suppliers who cannot meet
Fonda's compliance deadlines.. 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 completed its hardware and operating systems
conversion. With respect to the application phase, Sweetheart is compliant in
its planning, order management, manufacturing and warehousing systems.
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, manufacturing and warehouse
management, together with manual systems, would allow Sweetheart to ship
products to customers and engage in other critical business functions.
As of May 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 $2.2 million as of March 28, 1999, including
$1.0 million in the twenty-six weeks ended March 28, 1999. Fonda has spent $2.6
million as of March 28, 1999, including $1.4 million in the 1999 twenty-six
weeks. 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.
13
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:
--------
27.1 Financial Data Schedule.
(b) No reports on Form 8-K were filed in the thirteen weeks ended March 28,
1999.
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: May 12, 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)
15