UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 26, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number: 333-50683
SF Holdings Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3990796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
373 Park Avenue South
New York City, New York 10016
(212) 779-7448
(Address and telephone number of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting and non-voting equity of the
registrant held by non-affiliates of the registrant as of December 20, 1999:
There is no market for the Common Stock of registrant.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock $.001 par value, as of December 20, 1999:
Class A: 562,583 Shares
Class B: 56,459 Shares
Class C: 39,900 Shares
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PART I
ITEM 1. BUSINESS
General
SF Holdings Group, Inc. ("SF Holdings" and with its subsidiaries, the
"Company") believes it is one of the three largest converters and marketers of
disposable foodservice and packaging products in North America. The Company
sells a broad line of disposable paper, plastic and foam foodservice and food
packaging products under both branded and private labels to the institutional
and consumer markets, including large national accounts, and participates at all
major price points. The Company conducts its business through two principal
operating subsidiaries, Sweetheart Holdings Inc. ("Sweetheart") and The Fonda
Group, Inc. ("Fonda") and markets its products under its well recognized
Sweetheart(R), Trophy(R), Sensations(R), Hoffmaster(R) and Lily(R) brands.
The Company's product offerings are among the broadest in the industry,
including (i) paper, plastic and foam foodservice products, primarily cups,
lids, plates, bowls, plastic cutlery and food containers; (ii) tissue and
specialty foodservice products, primarily napkins and placemats; and (iii) food
packaging products, primarily containers for the dairy and food processing
industries.
The Company sells its products to more than 5,000 customers and serves
the institutional and consumer markets, including large national accounts,
located throughout the United States and Canada. In addition, the Company has
developed and maintained long-term relationships with many of its customers. The
Company's institutional customers, serviced by Sweetheart and Fonda, include (i)
major foodservice distributors, (ii) national accounts, including quick service
restaurants and catering services, and (iii) schools, hospitals and other major
institutions. The Company's consumer customers, serviced primarily by Fonda,
include supermarkets, mass merchandisers, warehouse clubs and other retailers.
The Company's food packaging customers, serviced by Sweetheart, include national
and regional dairy and food companies.
SF Holdings was formed in December 1997 as a holding company to
facilitate the acquisition by SF Holdings of 90% of the total outstanding common
stock of Sweetheart, including 48% of the voting stock of Sweetheart (the
"Sweetheart Investment"). On March 12, 1998, the Company consummated the
Sweetheart Investment and acquired all of the outstanding capital stock of Fonda
pursuant to a merger (the "Merger") whereby the stockholders of Fonda became the
stockholders of the Company and Fonda became a wholly-owned subsidiary of the
Company.
Recent Developments
On December 3, 1999, Creative Expressions Group, Inc. ("CEG"), an
affiliate of the Company in the disposable party goods products business, became
an 87% owned subsidiary of the Company pursuant to a merger. In connection with
the merger, 87% of CEG's common stock was exchanged for 15,000 shares of Class B
Series 2 Preferred Stock of the Company. On December 6, 1999, pursuant to an
asset purchase agreement entered into on November 21, 1999 (the "CEG Asset
Purchase Agreement"), Fonda purchased the intangible assets of CEG, including
domestic and foreign trademarks, patents, copyrights and customer lists. In
addition, pursuant to the CEG Asset Purchase Agreement, Fonda has agreed to
purchase over a sixty day period certain inventory of CEG. The aggregate
purchase price for the intangible assets and the inventory is $41 million ($16
million for the intangible assets and $25 million for the inventory), payable in
cash, the cancellation of certain notes and warrants, and the assumption of
certain liabilities. The agreement further provides that Fonda may acquire other
CEG assets in exchange for outstanding trade payables owed to Fonda by CEG. In
connection with this agreement, Fonda will cancel the CEG Agreements. See
"Certain Relationships and Related Transactions". Upon the consummation of the
CEG Asset Purchase Agreement, Fonda will market, manufacture and distribute
disposable party goods products directly to the specialty (party) channel of the
Company's consumer market. The transaction will be accounted for in a manner
similar to pooling-of-interests.
Products
General. The Company's principal products include: (i) paper, plastic
and foam foodservice products, such as paper, plastic and foam cups for both hot
and cold drinks and lids, white, colored and printed paper, plastic and foam
plates and bowls, straws, plastic cutlery, paper and plastic handled food pails,
food containers and trays
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for take-out of fast food; (ii) tissue and specialty foodservice products, such
as printed and solid napkins, printed and solid tablecovers, crepe paper,
placemats, doilies, tray covers, fluted products and paper and plastic portion
cups; and (iii) food packaging products, such as paper and plastic containers
for the dairy and food processing industries. The Company believes it holds one
of the top three market positions in white paper plates, decorated plates, bowls
and cups in the private label consumer market, as well as in plastic, paper and
foam cups, plates, bowls, plastic cutlery, lids, food containers, food pails,
trays and premium napkins in the institutional market. The Company also believes
it is the second largest supplier, in terms of sales, of containers to the
frozen dessert and cultured dairy products segments of the food packaging
industry in North America. These products are sold nationwide to supermarkets,
restaurant franchises, discount store chains, food processors and major food
distributors.
Paperboard, Plastic and Foam Foodservice Products
Beverage Service Products. Paper, plastic and foam cups, which
represent the largest portion of Sweetheart's sales, are sold to both the
institutional and consumer markets, including national accounts. Both Sweetheart
and Fonda offer a number of attractive cup and lid combinations for both hot and
cold beverages. Cups for the consumption of cold beverages are generally plastic
or wax coated for superior rigidity or made of double sided polyethylene, which
permits the printing of better quality graphics, while cups for the consumption
of hot beverages are made from paper which is poly-coated on one side or foam to
provide a barrier to heat transfer. Sweetheart sells plastic straws exclusively
to the institutional market. Sweetheart's beverage service products are sold
under the Sweetheart(R), Lily(R), Trophy(R), Preference(TM), Jazz(R),
Gallery(R), Clarity(R), Lumina(R), ClearLight(TM) and Go Cup(TM) brand names.
Fonda's hot and cold beverage cups are sold principally to the consumer market.
Tabletop Service Products. Paper plates and bowls, which represent the
largest portion of Fonda's sales, are sold primarily to the consumer market. In
Fiscal 1999, Fonda also started manufacturing certain of such products for
Sweetheart. These products include coated and uncoated white paper plates,
decorated plates and bowls. Sweetheart's plastic and foam plates and bowls and
plastic cutlery are sold to the institutional market. White uncoated and coated
paper plates are considered commodity items and are generally purchased by
cost-conscious consumers for everyday use. Printed and solid color plates and
bowls are value-added products and are purchased for everyday use as well as for
parties and seasonal celebrations, such as Halloween and Christmas. Sweetheart's
foam dinnerware, a value-added product, and plastic cutlery are sold to the
institutional market under the Silent Service(R), Centerpiece(R), Basix (R),
Guildware(R) and Simple Elegance(R) brand names.
Take-Out Containers. Sweetheart sells paper and plastic food containers
and lids primarily for the take-out of fast foods, and Fonda sells paper trays
and food pails, which are sold to the institutional market. Munchie Cup(R),
Flexstyles(R), Highlights(R) bowls, Maximizers(TM) and Scoop Cup are some of
Sweetheart's carry-out service brands.
Tissue and Specialty Foodservice Products
Tissue Converted Products. Napkins represent the second largest portion
of Fonda's sales and are sold under its Hoffmaster(R), Fonda(R) or Sensations(R)
brand names, as well as under national distributor private label names. Napkin
products range from decorated-colored, multi-ply napkins and simple custom
printed napkins featuring an end-user's name or logo to fully printed,
graphic-intensive napkins for the premium paper goods sector. Tablecovers,
ranging from economy to premium product lines, are sold under the Hoffmaster(R),
Linen-Like(R), Windsor(R) or Sensations(R) brand names. Fonda offers a broad
selection of tablecovers in one-, two-, and three-ply configurations and
produces tablecovers in white, solid color and one-to four-colored printed
products.
Specialty Products. The Company sells placemats, traycovers, paper
doilies, plastic and paper portion cups and fluted products in a variety of
shapes and sizes. Fonda produces unique decorated placemats in a variety of
shapes. In addition, Fonda uses a proprietary technology to produce non-skid
traycovers that serve the particular needs of the airline and healthcare
industries.
Paper Party Goods Products
Fonda manufactures paperboard and tissue products that, in Fiscal 1999,
it sold to CEG for distribution, including products it had licensed to CEG under
Fonda's Splash(R) or Party Creations(R) brand names. Upon consummation of the
CEG Asset Purchase Agreement, Fonda will also market and distribute such party
goods products directly to its specialty (party) channel. In Fiscal 1999, Fonda
also licensed crepe products under the Party
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Creations(R) brand to CEG. Party goods products include paper plates, napkins,
cups and tablecovers sold in ensembles or separately to party goods stores, mass
merchants, drug stores and grocery chains.
Food Packaging Products
Sweetheart's food packaging operations sell paper and plastic
containers and lids for ice cream, frozen novelty products and cultured foods,
and plastic containers for single-serving chilled juice products. Other products
include Sweetheart's Flex-E-Form(R) straight-wall paper manufacturing technology
and Flex-Guard(R), a spiral wound tamper-evident lid.
To enhance product sales, Sweetheart designs, manufactures and leases
container filling and lidding equipment to dairies and other food processors to
package food items in Sweetheart containers at their plants. Sweetheart's
filling and lidding equipment is leased to customers under the trade names
Auto-Pak(TM), Flex-E-Fill(R) and FoodPac(R). This equipment is manufactured in
Sweetheart's machine shop and assembly plant located in Owings Mills, Maryland.
Types of products packaged in Sweetheart's machines include ice cream,
factory-filled jacketed ice cream cones, cottage cheese, yogurt and squeeze-up
desserts.
Marketing and Sales
Sweetheart focuses its marketing efforts on both the distributor and
end-user customer. Sweetheart tailors programs, consisting of products, price,
promotional and merchandising materials, training and sales/marketing coverage
to effectively meet the specific needs of target customers and market segments.
Sweetheart sells these programs through a direct sales organization. Sweetheart
supports this process through the development of innovative new products,
materials and processes, while leveraging its strong brand recognition and
nationwide network of manufacturing and distribution centers.
Fonda's marketing efforts are principally focused on (i) providing
value-added services; (ii) category expansion by cross marketing products
between the consumer and institutional markets; (iii) developing new graphic
designs which Fonda believes will offer consumers recognized value; and (iv)
increasing brand awareness through enhanced packaging and promotion. Fonda sells
its products through an internal sales organization and independent brokers.
Fonda believes its experienced sales team and its ability to provide high levels
of customer service enhance its long-term relationships with its customers.
Fonda sells to more than 2,500 institutional and consumer customers located
throughout the United States.
Both Sweetheart and Fonda market their products primarily to customers
in the United States. During Fiscal 1999, sales to Sweetheart's customers in
Canada constituted approximately 7% of that company's net sales. In Fiscal 1999,
Fonda's five largest customers, including CEG, represented approximately 26% of
its net sales. Fonda's largest customer, CEG, accounted for 10% of its net
sales. Sweetheart's five largest customers represented approximately 32% of its
net sales and its largest customer accounted for approximately 12% of its net
sales. The loss of one or more large national customers could adversely affect
the Company's operating results.
Sweetheart Sales
Sweetheart has historically sold its products to two principal customer
groups, institutional foodservice and food packaging. Institutional foodservice
customers primarily purchase disposable hot and cold drink cups, lids, food
containers, plates, bowls, cutlery and straws. Products are sold directly to
national accounts and through distributors to quick service restaurant chains,
full service restaurants, convenience stores, hospitals, airlines, theaters,
school systems and other institutional customers. Institutional foodservice is
Sweetheart's largest customer group, accounting for approximately 82% of its net
sales during Fiscal 1999. Food packaging customers include national and regional
dairies and food processing company's which primarily purchase paper and plastic
containers. Sweetheart manufactures and markets its products in Canada to
national accounts and distributors. During Fiscal 1999, Sweetheart began selling
consumer foodservice products primarily through grocery stores, club stores and
convenience stores.
Fonda Sales
Institutional Market. Restaurants, schools, hospitals and other major
institutions comprise Fonda's institutional market. This market represented
approximately 49% of Fonda's net sales in Fiscal 1999. Fonda's
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predominant institutional customers of private label products include Sysco
Corporation, Alliant Foodservice, Inc. and Dinex International, Inc.
Institutional customers of branded products include U.S. Foodservice, Inc.,
Bunzl USA, Inc. and Edward Don and Company. The institutional market is serviced
by brokers and dedicated field service representatives located throughout the
United States. The field sales force works directly with these national and
regional distributors to service the needs of the various segments of the
foodservice industry.
Consumer Market. Supermarkets, mass merchants, warehouse clubs,
discount chains and other retail stores comprise the Fonda consumer market. This
market represented approximately 51% of Fonda's net sales in Fiscal 1999.
Fonda's consumer market is classified into four distribution channels: (i) the
grocery channel, which is serviced through a national and regional network of
brokers, (ii) the retail mass merchant channel, which is serviced directly by
field service representatives, (iii) the specialty (party) channel, which is
serviced principally through CEG (see "--Affiliated Company Sales") and (iv) the
warehouse club channel, which is serviced both through national and regional
networks of brokers and directly by field service representatives. Customers of
Fonda's branded consumer products include Publix Super Markets, Inc., Ames
Department Stores, Inc. and CVS Corporation. The Company's primary private label
customers in the consumer market include The Kroger Co., Topco Associates Inc.,
The Stop & Shop Companies, Inc., and The Great Atlantic & Pacific Tea Company,
Inc.
Affiliated Company Sales. In Fiscal 1999, Fonda's net sales of party
goods products to CEG were $26.9 million. As a result of the CEG Asset Purchase
Agreement, Fonda will market and distribute these products directly to the
specialty (party) channel.
Distribution
Each of the Company's manufacturing facilities and distribution
facilities includes sufficient warehouse space to store such respective
facility's raw materials and finished goods as well as products from the
Company's other facilities. Shipments of finished goods are made from each
facility via common carrier.
Competition
The disposable foodservice products industry is highly competitive. The
Company believes that competition is principally based on product quality,
customer service, price and graphics capability. Competitors include large
multinational companies as well as regional and local manufacturers. The
marketplace for these products is fragmented and includes participants that
compete across the full line of products, as well as those that compete with a
limited number of products. Some of the Company's major competitors are
significantly larger than the Company, are vertically integrated and have
greater access to financial and other resources.
The Company's primary competitors in the paper, plastic and foam
foodservice converted product categories include Dart Container Corporation,
Fort James Corp., Solo Cup Co., International Paper Foodservice Group, Tenneco
Inc, Imperial Bondware (a division of International Paper Co.), AJM Packaging
Corp., Temple Inland Inc., and Fold-Pak Corp. Major competitors in the tissue
and specialty foodservice converted product categories include Duni Corp.,
Erving Paper Products Inc., Fort James Corp. and Wisconsin Tissue Mills Inc. (a
subsidiary of Georgia-Pacific Corp.). Major competitors in the food packaging
categories include Cardinal Plastics, Inc., Landis Plastics, Inc., Norse Dairy
Systems, Inc., Polytainer, Ltd. and Sealright Co., Inc.
Raw Materials and Suppliers
Raw materials are a significant component of the Company's cost
structure. Principal raw materials for the Company's paperboard and tissue
operations include solid bleached sulfate paperboard and napkin tissue, obtained
from major domestic manufacturers. Other material components include bond paper,
waxed bond, corrugated boxes, poly bags, wax adhesives, coating and inks.
Paperboard, napkin tissue, bond paper and waxed bond paper are purchased in
"jumbo" rolls which may either be slit for in-line printing and processing,
printed and processed or printed and blanked for processing into final products.
Fonda's primary suppliers of paperboard stock are Georgia-Pacific Corp.,
Temple-Inland Inc., International Paper Co., and Gulf States Paper Corporation.
Sweetheart's primary suppliers of paperboard stock are Temple-Inland Inc.,
Georgia-Pacific Corp. and WWF International, Ltd. Lincoln is Fonda's primary
supplier of tissue. The principal raw material for the Company's plastic
operations is plastic resin (polystyrene, polypropylene and high density
polyethylene) purchased directly from major petrochemical companies and other
resin suppliers. Resin is processed and formed into cups, lids, cutlery, meal
service products, straws and containers through thermo forming and injection
molding processes. The Company manufactures foam products by extruding sheets of
plastic foam material that are converted into cups and
5
plates. The Company has a number of suppliers for substantially all of its raw
materials and believes current sources of supply for its raw materials are
adequate to meet its requirements.
Environmental Matters
The Company and its operations are subject to comprehensive and
frequently changing federal, state, local and foreign environmental and
occupational health and safety laws and regulations, including laws and
regulations governing emissions of air pollutants, discharges of waste and storm
water, and the disposal of hazardous wastes. The Company is subject to liability
for the investigation and remediation of environmental contamination (including
contamination caused by other parties) at properties that it owns or operates
and at other properties where the Company or its predecessors have arranged for
the disposal of hazardous substances. As a result, the Company is involved from
time to time in administrative and judicial proceedings and inquiries relating
to environmental matters. The Company believes that, except as noted below,
there are currently no pending investigations at the Company's plants and sites
relating to environmental matters. However, there can be no assurance that the
Company will not be involved in any other such proceeding in the future and that
any amount of future clean up costs and other environmental liabilities will not
be material.
The Company cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions
may be found to exist. Enactment of more stringent laws or regulations or more
strict interpretation of existing laws and regulations may require additional
expenditures by the Company, some of which could be material.
The Clean Air Act mandates the phase out of certain refrigerant
compounds, which will require Sweetheart to upgrade or retrofit air conditioning
and chilling systems during the next few years. Sweetheart has decided to
replace units as they become inefficient or unserviceable.
Some of the Company's facilities contain asbestos. Although there is no
current legal requirement to remove such asbestos, the Company has an ongoing
monitoring and maintenance program to maintain and/or remove such asbestos as
appropriate to prevent the release of friable asbestos. The Company does not
believe the costs associated with such program will be material to its business
or financial condition.
On July 13, 1999, Sweetheart received a letter from the Environmental
Protection Agency ("EPA") identifying Sweetheart, among numerous others, as a
"potential responsible party" under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, at a site in Baltimore,
Maryland. The EPA letter states that it does not constitute a final
determination by EPA concerning the liability of Sweetheart or any other entity.
The Company denies liability and has no reason to believe the final outcome of
this matter will have a material effect on the Company's financial condition or
results of operations. However, no assurance can be given about its ultimate
effect on the Company, if any, given the early stage of this investigation.
Technology and Research
Sweetheart maintains facilities for the development of new products and
product line extensions in Owings Mills, Maryland. Sweetheart maintains a staff
of engineers and technicians who are responsible for product quality, process
control, improvement of existing products, development of new products and
processes and technical assistance in adhering to environmental rules and
regulations. Sweetheart is continually striving to expand its proprietary
manufacturing technology, further automate its manufacturing operations, and
develop improved manufacturing processes and product designs.
Employees
At September 26, 1999, Sweetheart employed approximately 6,245 persons,
of whom approximately 5,292 were hourly employees. Approximately 93.5% of such
employees were located at facilities in the United States and 6.5% were located
at facilities in Canada. Sweetheart currently has collective bargaining
agreements in effect at its facilities in Springfield, Missouri, Augusta,
Georgia and Toronto, Canada which cover all production, maintenance and
distribution hourly-paid employees at each respective facility and contain
standard provisions relating to, among other things, management rights,
grievance procedures, strikes and lockouts, seniority, and union rights. As of
September 26, 1999, approximately 19.5% of such Sweetheart hourly employees were
covered by the Sweetheart collective bargaining agreements. The current
expiration dates of the Sweetheart collective bargaining agreements at
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the Springfield, Augusta and Toronto facilities are March 4, 2001, October 31,
2002 and November 30, 2000, respectively. Sweetheart considers its relationship
with its employees to be good.
At September 26, 1999, Fonda employed approximately 1,600 persons, of
whom approximately 1,300 were hourly employees. Fonda has collective bargaining
agreements in effect at its facilities in Appleton, Wisconsin; Oshkosh,
Wisconsin; St. Albans, Vermont; Williamsburg, Pennsylvania and Maspeth, New York
which cover all production, maintenance and distribution hourly-paid employees
at each respective facility and contain standard provisions relating to, among
other things, management rights, grievance procedures, strikes and lockouts,
seniority, and union rights. The current expiration dates of the Fonda
Collective bargaining agreements at the Appleton, Oshkosh, St. Albans,
Williamsburg and Maspeth facilities are May 1, 2002, May 31, 2002, January 31,
2001, June 11, 2000 and October 31, 2001, respectively. Fonda considers its
relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company has converting facilities located throughout the United
States and Canada. All of the Company's facilities are well maintained, in good
operating condition and suitable for the Company's operations. The table below
provides summary information regarding the principal properties owned or leased
by Fonda and Sweetheart.
SIZE
(APPROXIMATE
MANUFACTURING/ AGGREGATE OWNED/
LOCATION WAREHOUSE SQUARE FEET) LEASED
-------- --------- ------------ ------
Fonda Facilities
Appleton, Wisconsin M/W 267,700 O
Glens Falls, New York M/W 59,100 O
Goshen, Indiana M/W 63,000 O
Lakeland, Florida M/W 45,000 L
Maspeth, New York M/W 130,000 L
Oshkosh, Wisconsin M/W 484,000 O
St. Albans, Vermont (2 facilities) M 124,900 O
W 182,000 L
Williamsburg, Pennsylvania M/W 146,000 O(1)
Sweetheart Facilities
Augusta, Georgia M/W 339,000 O
Baltimore, Maryland W 194,000 L
Conyers, Georgia (2 facilities) M/W 350,000 O
W 555,000 O
Chicago, Illinois (2 facilities) M/W 902,000 O
W 587,000 L
Dallas, Texas M/W 1,316,000 O
Manchester, New Hampshire M/W 160,000 O
North Las Vegas, Nevada (2 facilities) M/W 128,000 L
W 12,000 L
Ontario, California W 400,000 L
Owings Mills, Maryland (3 facilities) M/W 1,533,000 O
W 267,000 O
W(2) 406,000 O
Somerville, Massachusetts M/W 193,000 O
Springfield, Missouri (2 facilities) M/W 925,000 O
W 415,000 L
Wilmington, Massachusetts W(3) 307,000 L
Toronto, Ontario M/W 185,000 O
- ----------
(1) Subject to capital lease.
(2) Under contract of sale.
(3) Leased space was reduced from 400,000 in prior year.
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Sweetheart also leases a warehouse in Augusta, Georgia which was closed
in the latter part of Fiscal 1997. Sweetheart is currently subleasing such
property to a third party through March 31, 2001 and will continue to actively
seek to sublet the property through the lease termination date, March 31, 2008.
ITEM 3. Legal Proceedings
From time to time, the Company is subject to legal proceedings and
other claims arising in the ordinary course of its business. The Company
maintains insurance coverage of types and in amounts which it believes to be
adequate.
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084,
was initially filed in state court in Georgia in April 1987, and is currently
pending against Sweetheart in federal court. The remaining plaintiffs claimed,
among other things, that Sweetheart wrongfully terminated the Lily-Tulip, Inc.
Salary Retirement Plan (the "Plan") in violation of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). The relief sought by
plaintiffs was to have the plan termination declared ineffective. In December
1994, the United States Court of Appeals for the Eleventh Circuit (the "Circuit
Court") ruled that the Plan was lawfully terminated on December 31, 1986.
Following that decision, the plaintiffs sought a rehearing which was denied, and
subsequently filed a petition for a writ of certiorari with the United States
Supreme Court, which was also denied. Following remand, in March 1996, the
United States District Court for the Southern District of Georgia (the "District
Court") entered a judgment in favor of Sweetheart. Following denial of a motion
for reconsideration, the plaintiffs in April 1997 filed an appeal with the
Circuit Court. On May 21, 1998, the Circuit Court affirmed the judgment in favor
of Sweetheart. On June 10, 1998, the plaintiffs petitioned the Circuit Court for
a hearing of their appeal which petition was denied on July 29, 1998. In October
1998, plaintiffs filed a Petition for Writ of Certiorari to the United States
Supreme Court, which was denied in January 1999. Sweetheart has begun the
process of paying out the termination liability. As of December 15, 1999, the
Company has disbursed $8.6 million in termination payments.
On April 27, 1999, the plaintiffs filed a motion in the District Court
for reconsideration of the court's dismissal without appropriate relief and a
motion for attorneys' fees with a request for delay in determination of
entitlement to such fees. On June 17, 1999, the District Court deferred these
motions and ordered discovery in connection therewith. Discovery is expected to
be completed by the end of December 1999. 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
amounts 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 Corporation v. Sweetheart Cup Company Inc., Civil Action No.
97-C-1221, was filed in the United States District Court for the Eastern
District of Wisconsin on November 21, 1997. During the fourth quarter of Fiscal
1999, mediation resulted in a settlement of this action whereby Sweetheart
agreed to pay damages of $2.6 million. This amount has been fully reserved by
Sweetheart, with the first of two payments, $1.6 million, made on September 30,
1999. The second payment of $1.0 million is due July 1, 2000.
On July 13, 1999, Sweetheart received a letter from the EPA identifying
it, among numerous others, as a "potential responsible party" under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, at a site in Baltimore, Maryland. The EPA letter states that it does
not constitute a final determination by EPA concerning the liability of
Sweetheart or any other entity. Sweetheart denies liability and has no reason to
believe the final outcome of this matter will have a material effect on its
financial condition or results of operations. However, no assurance can be given
about its ultimate effect on Sweetheart, if any, given the early stage of this
investigation.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for SF Holdings' common
stock. SF Holdings has never paid any cash dividends on its common stock and
does not anticipate paying any cash dividends in the foreseeable future. SF
Holdings' indenture governing the $144.0 million aggregate principal amount at
maturity of 12 3/4% Senior Secured Discount Notes due 2008 (the "Discount
Notes") and the instruments governing the indebtedness of Sweetheart and Fonda
limit the payment of dividends or other distributions to SF Holdings. SF
Holdings currently intends to retain future earnings to fund the development and
growth of its business.
As of December 15, 1999, there were four, one, and two holders of SF
Holdings' Class A, Class B and Class C Common Stock, respectively.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the audited
consolidated financial statements of the Company. The information set forth
below is not necessarily indicative of results of future operations, and should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and related notes thereto included elsewhere in this Form 10K.
Nine
Year Weeks
Ended Ended
September September Years Ended July (1)
----------------------------------------------------
1999 (1) 1998 1998 1997 1996 1995
--------------- ------------- ------------- ------------ ------------ ------------
(Dollars in thousands)
Statement of Operations Data: (2)
Net sales $ 1,115,582 $259,080 $553,735 $ 252,513 $ 204,903 $97,074
Cost of goods sold 978,831 235,038 481,263 201,974 164,836 76,252
--------------- ------------- ------------- ------------ ------------ ------------
Gross profit 136,751 24,042 72,472 50,539 40,067 20,822
Selling, general and
administrative expenses 96,391 20,320 53,538 31,527 26,203 14,112
Other income, net (3) (1,176) (511) (12,166) (1,608) - -
--------------- ------------- ------------- ------------ ------------ ------------
Income from operations 41,536 4,233 31,100 20,620 13,864 6,710
Interest expense, net 65,357 14,214 29,304 9,017 7,934 2,943
--------------- ------------- ------------- ------------ ------------ ------------
Income (loss) before taxes and
extraordinary loss (23,821) (9,981) 1,796 11,603 5,930 3,767
Income taxes (7,750) (4,631) 2,198 4,872 2,500 1,585
Minority interest in subsidiary's loss (441) (548) (1,900) - - -
--------------- ------------- ------------- ------------ ------------ ------------
Income (loss) before
extraordinary loss (15,630) (4,802) 1,498 6,731 3,430 2,182
Extraordinary loss, net (4) - - - 3,495 - -
--------------- ------------- ------------- ------------ ------------ ------------
Net income $ (15,630) $ (4,802) $ 1,498 $ 3,236 $ 3,430 $ 2,182
=============== ============= ============= ============ ============ ============
Balance Sheet Data:
Cash $ 3,665 $ 20,703 $ 5,908 $ 1,467 $ 120
Working capital (deficit) (5) (112,828) 155,524 58,003 38,931 28,079
Property, plant and equipment, net 395,015 430,150 59,261 46,350 26,933
Total assets 901,874 943,811 179,604 136,168 79,725
Total indebtedness (6) 619,353 622,968 122,987 87,763 48,165
Exchangeable preferred stock 36,291 30,680 - - -
Minority interest in subsidiary 1,971 3,020 - - -
Redeemable common stock (7) 2,217 2,139 2,076 2,179 2,115
Stockholders' equity (5,497) 22,929 15,010 11,873 7,205
- ----------
(1) All fiscal years were 52 weeks. The Company's 1999 fiscal year ended on the
last Sunday in September. Previously, it ended on the last Sunday in July.
Certain prior year amounts have been reclassified to conform to current year
presentation.
(2) Includes the results of operations of the Company and acquisitions since
their respective dates of acquisition in accordance with purchase accounting.
See Note 3 to the Financial Statements.
(3) Fiscal 1998 includes a $15.9 million gain on the sale of substantially all
of the fixed assets and certain related working capital (the "Mill Disposition")
of its tissue mill in Gouverneur, New York (the "Mill") and settlement in
connection with the termination by the owner of the co-generation facility
formerly hosted by the Company at the Mill of its obligation, among other
things, to supply steam to the Mill (the "Steam Contract").
(4)The Company incurred a $3.5 million extraordinary loss (net of a $2.5 million
income tax benefit) in connection with the early retirement of debt consisting
of the write-off of unamortized debt issuance costs, elimination of unamortized
debt discount and prepayment penalties.
(5) Includes $275.4 million current portion of long-term debt (see Note 11).
(6) Includes short-term and long-term borrowings and current maturities of
long-term debt.
(7) See Note 14 to the Financial Statements.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements which
involve risks and uncertainties. The Company's actual results or future events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, raw
material costs, labor market conditions, the highly competitive nature of the
industry, and developments with respect to contingencies.
General
SF Holdings was formed in December 1997 as a holding company to
facilitate the Sweetheart Investment. The Company conducts all of its operations
through its principal operating subsidiaries, Sweetheart and Fonda and therefore
has no significant cash flows independent of such subsidiaries. The following
discussion of results of operations for the fiscal years ended July 26, 1998 and
July 27, 1997 is based on the historical results of operations of Fonda for
those periods and the results of operations of Sweetheart from March 12, 1998,
the date of the consummation of the Sweetheart Investment, to June 30, 1998.
Since the Sweetheart Investment, which was accounted for as a purchase, was
consummated during the Company's third quarter of Fiscal 1998, the financial
information contained herein with respect to the periods prior to the Sweetheart
Investment does not reflect Sweetheart's results of operations; thus, this
financial information is not necessarily indicative of the results of operations
that would have been achieved had the Sweetheart Investment been consummated by
the Company at the beginning of the periods presented herein or which may be
achieved in the future.
Sweetheart and Fonda are converters and marketers of disposable paper,
plastic and foam foodservice and food packaging products. The prices for each
subsidiary's raw materials fluctuate. When raw material prices decrease, selling
prices have historically decreased. The actual impact on each company from raw
materials price changes is affected by a number of factors including the level
of inventories at the time of a price change, the specific timing and frequency
of price changes, and the lead and lag time that generally accompanies the
implementation of both raw materials and subsequent selling price changes. In
the event that raw materials prices decrease over a period of several months,
each company may suffer margin erosion on the sale of such inventory.
Each of Fonda and Sweetheart's business is highly seasonal with a
majority of its net cash flows from operations realized in the second and third
quarters of the calendar year. Sales for such periods reflect the high seasonal
demands of the summer months when outdoor and away-from-home consumption
increases. In the event that Fonda's and/or Sweetheart's cash flow from
operations is insufficient to provide working capital necessary to fund their
respective production requirements, Fonda and/or Sweetheart will need to borrow
under their respective credit facilities or seek other sources of capital. 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.
Recent Developments
On December 3, 1999, CEG, an affiliate of the Company in the disposable
party goods products business, became an 87% owned subsidiary of the Company
pursuant to a merger. In connection with the merger, 87% of CEG's common stock
was exchanged for 15,000 shares of Class B Series 2 Preferred Stock of the
Company. On December 6, 1999, pursuant to the CEG Asset Purchase Agreement,
Fonda purchased the intangible assets of CEG, including domestic and foreign
trademarks, patents, copyrights and customer lists. In addition, pursuant to the
CEG Asset Purchase Agreement, Fonda has agreed to purchase over a sixty day
period certain inventory of CEG. The aggregate purchase price for the intangible
assets and the inventory is $41 million ($16 million for the intangible assets
and $25 million for the inventory), payable in cash, the cancellation of certain
notes and warrants and the assumption of certain liabilities. The agreement
further provides that Fonda may acquire other CEG assets in exchange for
outstanding trade payables owed to Fonda by CEG. In connection with this
agreement, Fonda will cancel the CEG Agreements. See "Certain Relationships and
Related Transactions". Upon the consummation of the CEG Asset Purchase
Agreement, Fonda will market, manufacture and distribute disposable party goods
products
11
directly to the specialty (party) channel of Fonda's consumer market. The
transaction will be accounted for in a manner similar to pooling-of-interests.
During Fiscal 1999, Fonda was engaged in an extensive program to
improve manufacturing efficiencies and upgrade production capabilities, which
included, among other things, the full implementation of the Manufacture and
Supply Agreement and further consolidation of its manufacturing operations (the
"Efficiency Initiatives"). This program has resulted in incremental expenses
arising from start-up, training and other related expenses in Fiscal 1999 and is
now substantially complete. In connection with the Efficiency Initiatives, (i)
in December 1998, Fonda purchased certain paper plate manufacturing assets from
Sweetheart, an affiliate, for $2.4 million and (ii) in February 1999, Fonda
entered into a five year operating lease whereby Fonda leases certain paper cup
manufacturing assets to Sweetheart.
Year 2000
Fonda and Sweetheart have completed their respective Year 2000
readiness programs 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.
During the assessment phase of its year 2000 readiness program, Fonda
identified potential Year 2000 issues, including those with respect to
information technology systems, technology embedded within equipment it uses as
well as equipment that interfaces with vendors and other third parties. Fonda
has 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 ready.
Embedded logic in manufacturing equipment has been tested and is now Year 2000
ready. Contingency plans have been developed for equipment that cannot be
upgraded. EDI trading partners and other key business partners have been
contacted to ensure that key business transactions are Year 2000 ready. Fonda
has received detailed business plans and commitments from all such key partners
that they are Year 2000 ready. Contingency plans have been developed to work
with trading partners or to replace suppliers who cannot meet our compliance
deadlines. Fonda acknowledges that its business systems are Year 2000 ready, but
may experience isolated incidences of non-compliance and potential outages with
respect to its information technology infrastructure. Fonda has allocated
internal resources to be ready to take action should any of these events occur.
Investors are cautioned, however, that Fonda's assessment of its readiness, of
the costs of performing the program and the risks attendant thereto, and of the
need for its contingency plans may change materially.
Sweetheart has completed the hardware and operating systems conversion
phase of its year 2000 readiness program. With respect to the application phase,
Sweetheart is Year 2000 ready in all systems. Sweetheart has also completed its
internal assessment phase for technology embedded within equipment and believes
that a significant portion of its manufacturing equipment will not be effected
by Year 2000 issues due to its operations use or it was Year 2000 ready when
purchased. Sweetheart has been in contact with key vendors and business partners
to ensure that key business transactions will be Year 2000 ready. As of
September 26, 1999, the Company has received detailed business plans and
commitments from the majority of these vendors that they are or will be Year
2000 ready. Sweetheart expects that its business systems will be Year 2000
ready, but it may experience isolated incidences of non-compliance and potential
outages with respect to its information technology infrastructure. The most
likely "worst case scenario" would be disruption of utility services. While such
failures could affect important operations of Sweetheart, Sweetheart cannot
presently estimate either the likelihood or the potential cost of such failures.
Sweetheart will allocate internal resources, to be ready to take action, as a
contingency plan, should these events occur. Investors are cautioned, however,
that Sweetheart's assessment of its readiness, the costs of performing the
program and the risks attendant thereto and the need for any additional
contingency plans may change materially.
As of September 26, 1999, both Sweetheart and Fonda have completed
their respective Year 2000 readiness programs, with each company having spent
$2.8 million, of which each company spent $1.6 million in Fiscal 1999. However,
there can be no assurance that Sweetheart or Fonda have identifed 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 readiness 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
12
impacted by Year 2000 problems which could cause fluctuations in the Company's
revenues and operating profitability.
Change of fiscal year-end
In October 1998, the Company changed its fiscal year end to the last
Sunday in September. The following discussion compares the fiscal year ended
September 26, 1999 to the fiscal year ended July 26, 1998 and the nine week
transition period ended September 27, 1998 (the "Nine Week Transition Period")
to the thirteen week period ended October 26, 1997 (the "1998 First Quarter").
The Company did not recast the data for the comparative fiscal years ended
September 26, 1998 and September 28, 1997, or for the nine week period ended
September 28, 1997 because certain review procedures and significant judgmental
estimates that are implemented on a quarterly basis only, were not implemented
for such periods. As a result of changes in certain computer systems, the
Company believes it would be impractical to implement these review procedures
and make such judgmental estimates to recast the prior fiscal years or nine week
period.
Results of Operations
Year ended Years Ended July
September -----------------------------------------------
1999 1998 1997
---------------------- --------------------- ---------------------
% of % of % of
Net Net Net
Amount Sales Amount Sales Amount Sales
------ ----- ------ ----- ------ -----
(Dollars in millions)
Net sales $ 1,115.6 100.0 % $ 553.7 100.0 % $ 252.5 100.0 %
Cost of goods sold 978.8 87.7 481.3 86.9 202.0 80.0
------------ -------- ------------ -------- ------------ --------
Gross profit 136.8 12.3 72.5 13.1 50.5 20.0
Selling, general and
administrative expenses 96.4 8.6 53.5 9.7 31.5 12.5
Other income, net (1.2) (0.1) (12.2) (2.2) (1.6) (0.6)
------------ -------- ------------ -------- ------------ --------
Income from operations 41.5 3.7 31.1 5.6 20.6 8.2
Interest expense, net 65.4 5.9 29.3 5.3 9.0 3.6
------------ -------- ------------ -------- ------------ --------
Income (loss) before taxes
and extraordinary loss (23.8) (2.1) 1.8 0.3 11.6 4.6
Income tax expense (benefit) (7.8) (0.7) 2.2 0.4 4.9 1.9
Minority interest in subsidiary's loss (0.4) 0.0 (1.9) (0.3) - -
------------ -------- ------------ -------- ------------ --------
Income (loss) before
extraordinary loss (15.6) (1.4) 1.5 0.3 6.7 2.7
Extraordinary loss, net - - - - 3.5 1.4
------------ -------- ------------ -------- ------------ --------
Net income (loss) $ (15.6) (1.4)% $ 1.5 0.3 % $ 3.2 1.3 %
============ ======== ============ ======== ============ ========
Fiscal 1999 Compared to Fiscal 1998
Net sales increased $561.8 million to $1.1 billion in Fiscal 1999 due
primarily to the Sweetheart Investment in March 1998, which was partially offset
by a $8.6 million decrease in net sales at Fonda and the elimination of
intercompany sales. The following analysis includes $6.8 million of sales from
Sweetheart to Fonda and $4.3 million of sales from Fonda to Sweetheart, which
were eliminated in consolidation. Sweetheart results- Net sales increased $581.4
million, (including intercompany sales to Fonda) primarily due to the effect of
the consolidation of Sweetheart's results for a full year. In addition, for the
third quarter of Fiscal 1999 compared to the period from March 12,1998 to June
30, 1998, domestic net sales decreased by $1.1 million, or 0.5%. This reflected
a 0.7% decrease in domestic sales volume which was partially offset by a 0.2%
increase in realized domestic sales price. The increase in average realized
sales price reflects price increases in selected product lines which was
partially offset by a shift in sales mix to lower priced products. Foodservice
sales volume increased 1.2% primarily as a result of Sweetheart's focus on
revenue growth with key customers. Food packaging sales volume decreased 12.7%,
primarily resulting from decreases in demand by large accounts in the food
packaging
13
customer base due to market conditions. Canadian sales increased 9.9% from the
prior comparable period due primarily to increased sales volume from the
introduction of new products. Fonda results- Net sales decreased $8.6 million
(including intercompany sales to Sweetheart). Fiscal 1998 included $13.3 million
net sales of tissue mill products prior to the March 1998 Mill Disposition.
Excluding such tissue product sales, net sales increased $4.8 million in the
converting operations. Net sales of party goods products decreased 8.7%,
primarily due to the CEG Agreements. Such agreements resulted in a significant
increase in volume, which was more than offset by a significant reduction in
selling prices. The lower selling prices reflect cost savings from the License
Agreement as well as anticipated savings that the Company had begun to realize
from implementation of the Manufacture and Supply Agreement. Excluding such
party goods products, net sales in the consumer market increased 1.6%, resulting
from an increase in sales volume of 5.3%, which was partially offset by a 3.5%
decrease in average selling prices. Selling prices in this market were adversely
affected by reductions in raw material costs that were passed through to
customers as well as more competitive market conditions. In the institutional
market, net sales increased 5.2%, resulting from a 3.6% increase in sales price
and a 1.5% increase in volume. The increased sales volume in the institutional
market was primarily due to an increase in sales of value added converted tissue
products and certain commodity paperboard products. The increase in average
selling prices primarily resulted from the favorable effect on sales mix.
Gross profit increased $64.3 million to $136.8 million in Fiscal 1999.
As a percentage of net sales, gross profit decreased from 13.1% in Fiscal 1998
to 12.3% in Fiscal 1999 primarily due to a reduction in margins at Fonda and the
effect of historically lower margins at Sweetheart compared to Fonda and the
increased effect of Sweetheart on the percentage. Sweetheart results- Gross
profit increased $76.2 million to 11.5% of net sales in Fiscal 1999 from 8.3% in
Fiscal 1998. The increase in gross profit was primarily due to the consolidation
of Sweetheart's results for a full year, and partially due to a shift in sales
mix to more profitable products and the cost reduction initiatives implemented
by Sweetheart in the latter part of the 1998 fiscal year which has resulted in
improved manufacturing efficiencies Fonda results- Gross profit decreased $11.6
million from 18.0% of net sales in Fiscal 1998 to 14.2% in Fiscal 1999. Fiscal
1998 included $1.7 million gross profit from tissue mill products prior to the
Mill Disposition. Excluding the gross profit from such tissue product sales,
gross profit decreased $9.9 million in the converting operations. Gross profit
in Fiscal 1999 was adversely affected by reduced selling prices of party goods
products sold to CEG, described above, margin erosion in commodity paperboard
products, as well as excess costs incurred in implementing the Efficiency
Initiatives. Gross profit is expected to improve in future periods as the cost
savings resulting from the Efficiency Initiatives are realized, and as a result
of recent price increases in various product lines, however, there can be no
assurance that such improvements will occur.
Selling, general and administrative expenses increased $42.9 million to
$96.4 million in Fiscal 1999. An increase of $48.5 million of such expenses was
attributable to Sweetheart, partially offset by a reduction of costs at Fonda.
As a percentage of net sales, selling, general and administrative expenses
decreased from 9.7% in Fiscal 1998 to 8.6% in Fiscal 1999. 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 CEG Agreements, as well as the closure
of an administrative office.
Other income in Fiscal 1998 includes a $15.9 million pre-tax gain from
the sale of Fonda's tissue mill operations and the July 1998 settlement of a
steam contract related to such operations. The gain was partially offset by $2.1
million of charges resulting from the Sweetheart Investment.
Income from operations was $41.5 million in Fiscal 1999 and $31.1
million in Fiscal 1998 as a result of the above.
Interest expense, net of interest income increased $36.1 million to
$65.4 million in Fiscal 1999. The increase was primarily due to the
consolidation of Sweetheart and the related financing thereof.
The effective income tax rate was 32.5% in Fiscal 1999 compared to
122.4% in Fiscal 1998. Both the 1999 and 1998 periods reflect certain
non-deductible costs relating to the investment in Sweetheart and the related
financing. The effective tax rate is affected by such non-deductible costs as
well as the proportionate results of both
14
Fonda and Sweetheart. As a result of the above and the addback of minority
interest representing 10% of Sweetheart's historical loss, the net loss was
$15.6 million in Fiscal 1999 compared to net income of $1.5 million in Fiscal
1998.
Fiscal 1998 Compared to Fiscal 1997
Net sales increased $301.2 million, or 119%, to $553.7 million
primarily as a result of the Sweetheart Investment. The Sweetheart Investment
resulted in a $282.3 million increase in net sales. The increase in net sales is
also due in part to increased sales volume in Fonda's converting operations
resulting from the 1997 Fonda Acquisitions and Leisureway Acquisition, and to a
lesser extent increased sales volume in Fonda's converted tissue products. Sales
volume in such converting operations increased 12% in the consumer markets and
7% in the institutional markets.
Average selling prices increased 5% in the institutional markets and 1%
in the consumer markets. Net sales of tissue mill products declined $6.1 million
resulting from the Mill Disposition on March 24, 1998 and a shift in mix due to
competitive market conditions Increased sales of commodity white paper from the
new paper machine were offset by reduced sales of deep tone paper due to
competitive market conditions.
Gross profit increased $21.9 million, or 43.4%, to $72.5 million. The
Sweetheart Investment resulted in a $23.5 million increase in gross profit. The
offsetting decrease in gross profit is the result of Fonda's operations,
primarily a $4.5 million decrease in gross profit in tissue mill products,
partially offset by an increase in gross profit in the converting operations.
The decrease in gross profit of tissue mill products was due to the Mill
Disposition, as well as the increased sales of lower margin white paper, reduced
sales of higher margin deep tone paper, and increased manufacturing costs
resulting from the start-up of the second paper machine. In the converting
operations, the increase in gross profit attributable to the 1997 Fonda
Acquisitions and the Leisureway Acquisition and higher margins in converted
tissue products were partially offset by increased costs of paperboard, which
were not recovered through price adjustments. As a percentage of net sales,
gross profit decreased from 20.0% in Fiscal 1997 to 13.1% in Fiscal 1998 for the
reasons set forth above.
Selling, general and administrative expenses increased $22.0 million,
or 69.8%, to $53.5 million. The Sweetheart Investment resulted in $19.1 million
of such increase. The remaining $2.9 million increase was primarily due to
increased selling expenses resulting from the increase in Fonda's net sales. As
a percentage of net sales, selling, general and administrative expenses
decreased from 12.5% in Fiscal 1997 to 9.7% in Fiscal 1998.
Other income, net primarily includes a 15.9 million gain on the Mill
Disposition and the Steam Contract.
Income from operations increased $10.5 million, or 50.8%, to $31.1
million due to the reasons discussed above. Excluding other income, net, as a
percentage of net sales, income from operations decreased from 8.8% in Fiscal
1997 to 7.8% in Fiscal 1998.
Interest expense, net of interest income, increased $20.3 million to
$29.3 million. The increase includes $4.0 million from the issuance of the
Discount Notes and $14.0 million from Sweetheart indebtedness since the date of
the Sweetheart Investment. The remainder of the increase was due to higher
borrowing levels at Fonda resulting from the issuance in the third quarter of
Fiscal 1997 of the Fonda Notes, which was partially offset by lower interest
rate debt.
The effective tax rate was 122% in Fiscal 1998 compared to a 42%
effective rate in Fiscal 1997 which reflects certain non-deductible costs in
Fiscal 1998 relating to the Sweetheart Investment and the financing in
connection therewith.
As a result of the above and the addback of minority interest
representing 10% of Sweetheart's historical loss, income before extraordinary
loss was $1.5 million in Fiscal 1998 compared to $6.7 million in Fiscal 1997.
In Fiscal 1997, the Company incurred a $3.5 million extraordinary loss
(net of a $2.5 million income tax benefit) in connection with Fonda's early
retirement of debt consisting of the write-off of unamortized debt issuance
costs, elimination of unamortized debt discount, and prepayment penalties. As a
result of the above, net income was $1.5 million in Fiscal 1998 compared to $3.2
million in Fiscal 1997.
15
Nine Weeks Ended September 27, 1998 Compared to Thirteen Weeks Ended October 26,
1997
Nine weeks ended Thirteen weeks ended
September 27, October 26,
1998 1997
-------------------------- -------------------------
% of % of
Amount Net Sales Amount Net 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 1.7 4.7 6.7
Interest expense, net 14.2 5.5 2.9 4.2
------------ ------------- ----------- ------------
Income before taxes (10.0) (3.8) 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 $ (4.9) (1.9)% $ 1.0 1.5 %
============ ============= =========== ============
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 CEGDuring 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 Fonda 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.
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,
16
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, sale of non-core assets and borrowings to finance their respective
working capital requirements, capital expenditures and acquisitions. SF Holdings
is a holding company and does not anticipate any material cash needs until 2003
when interest on the Discount Notes and dividends on the Exchangeable Preferred
become payable in cash.
The negative working capital results from the reclassification of the
Sweetheart Secured Notes which mature on September 1, 2000 and the Sweetheart
U.S. Credit Facility (as defined below) which matures on August 1, 2000,
totaling $274.5 million, from long-term to current debt.
Net cash provided by operating activities in Fiscal 1999 was $42.7
million compared to $7.9 million in Fiscal 1998. Sweetheart provided $49.8
million in Fiscal 1999 compared to a use of cash of $4.0 million in the 1998
Transition Period and $1.8 million provided in Fiscal 1998. This increase at
Sweetheart is due to the consolidation of their results for a full year, the
improvement in their operating performance and the reduction of cash expended on
non-recurring charges. Fonda used $7.7 million in Fiscal 1999 in its operating
activities and $7.6 million in the 1998 Transition Period. Net cash provided by
Fonda's operating activities was $7.0 million in Fiscal 1998. The use of cash
from operating activities in Fiscal 1999 and the 1998 Transition Period includes
a $14.0 million increase in affiliated company receivables, primarily due to
increased sales to CEG as a result of the CEG Agreements (see "Certain
Relationships and Related Transactions") as well as extended payment terms. The
Company expects that upon consummation of the CEG Asset Purchase Agreement, CEG
will satisfy all amounts due. A $5.4 million decrease in Fonda's trade
receivables, was also primarily due to the CEG Agreements, as all party goods
products previously sold to unaffiliated companies are now sold to CEG.
Capital expenditures in Fiscal 1999 were $40.8 million, including (i)
$13.8 million at Sweetheart for new production equipment, $3.8 million for
facility improvements, and $1.5 million for management information systems; (ii)
$10.3 million at Fonda for converting equipment, primarily associated with its
Efficiency Initiatives, and $.8 million for management information systems. The
remaining capital expenditures in Fiscal 1999 were primarily routine capital
improvements. Capital expenditures in Fiscal 1998 were $13.7 million, including
(i) $2.2 million at Sweetheart for new cup making equipment and $1.0 million for
management information systems and (ii) $1.8 million at Fonda related to the
installation of a second paper machine at the Mill and $1.2 million for plate
converting equipment. The remaining $7.5 million in Fiscal 1998 were for routine
capital improvements. Capital expenditures in Fiscal 1997 were $10.4 million,
including $8.2 million related to the installation of a second paper machine at
the Mill. The remaining $2.2 million in Fiscal 1997 were for routine capital
improvements. In addition, during Fiscal 1998 Fonda (i) received proceeds of
$34.8 million, net of transaction costs and fees, from (a) the Mill Disposition,
(b) the Steam Contract, and (c) the sale of unutilized equipment; and (ii)
acquired certain net assets of a manufacturer of white paper plates for $6.9
million. (See Note 3 of Notes to Financial Statements).
Funding for the cash portion of the Sweetheart Investment, including
transaction fees, was provided by (i) $77.5 million in net proceeds from the
sale of units consisting of $144.0 million aggregate principal amount at
maturity of 12 3/4% Senior Secured Discount Notes due 2008 (the "Discount
Notes") and 28,800 shares of Class C Common
17
Stock, and (ii) a $15 million investment in Class B preferred stock by CEG.
Until March 15, 2003, accrued interest on the Discount Notes will not be paid
but will accrete semi-annually, thereby increasing the value of the Discount
Notes.
Also on March 12, 1998, the Company issued units consisting of $30.0
million of 13 3/4% Exchangeable Preferred Stock due 2009 (the "Exchangeable
Preferred") and 11,100 shares of Class C Common Stock. Until March 15, 2003
cumulative dividends may be paid quarterly, either in cash or by the issuance of
additional shares of Exchangeable Preferred, at the Company's option.
Thereafter, dividends will be payable in cash. The Exchangeable Preferred is
exchangeable at the Company's option into 13 3/4% subordinated notes due March
15, 2009. As of December 15, 1999, dividends on the Exchangeable Preferred have
been paid by the issuance of additional shares of Exchangeable Preferred.
The principal amount of Fonda's $120 million of 9 1/2% Series A Senior
Subordinated Notes due 2007 (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 expires March 31, 2001,
provides up to $50 million borrowing capacity, collateralized by eligible
accounts receivable and inventories, certain general intangibles and the
proceeds on the sale of accounts receivable and inventory. At September 26,
1999, $11.7 million was outstanding and $27.8 million was the maximum advance
available based upon eligible collateral. At September 26, 1999, borrowings were
available at the bank's prime rate (8.50%) plus .25% and at LIBOR (approximately
5.38%) plus 2.25%. At December 15, 1999, as a result of the CEG Asset Purchase
Agreement, $21.4 million was outstanding and $16.5 million was the maximum
advance available.
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 August 1, 2000 and as of September 26,
1999, $42.3 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. A Canadian subsidiary of Sweetheart has a term loan and revolving
credit facility 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 26, 1999, Cdn $4.3 million (approximately $2.9
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 the face
amount, plus accrued interest. Although Sweetheart intends to refinance this
debt, there can be no assurances that Sweetheart will be able to obtain such
refinancing on terms and conditions acceptable to the Company. 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 (102.625% 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
18
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, Fonda reinvested approximately $10 million of the net proceeds from
the Mill Disposition in fixed assets within 270 days of such disposition.
In January 1999, the United States Supreme Court denied plaintiffs'
Petition for Writ of Certiorari in the matter of Aldridge v. Lily-Tulip, Inc.
Salary Retirement Plan Benefits Committee and Fort Howard Cup Corporation, Civil
Action No. CV 187-084. The court decided that the Plan was lawfully terminated.
On April 27, 1999, the Plaintiffs filed a motion in the District Court for
reconsideration of the court's dismissal without appropriate relief and a motion
for attorneys' fees with a request for delay in determination of entitlement to
such fees. On June 17, 1999, the District Court deferred these motions and
ordered discovery in connection therewith. Discovery is expected to be completed
by the end of December 1999. Sweetheart has begun the process of paying out the
termination liability. As of the fiscal year ending September 26, 1999,
Sweetheart had disbursed $3.7 million in termination payments. The initial
estimate of the total termination liability, less these payments, exceeds assets
set aside in the Plan by approximately $16.3 million, which amount has been
fully reserved by Sweetheart. As of December 15, 1999, Sweetheart has disbursed
$8.6 million in termination payments. The remaining payments are expected to be
paid during Fiscal 2000. Sweetheart's operating plan contemplates that cash
generated by operations and amounts available under its credit facilities will
be sufficient to make the required payments under the Plan when due. However,
there can be no assurance that Sweetheart will achieve its operating plan and
have the necessary cash to make these payments. Failure by Sweetheart to make
such payments could have a material adverse effect on the Company and its
financial condition. See "Item 3. Legal Proceedings".
During Fiscal 1998, Fonda redeemed shares of Class A common stock
(pre-Merger shares) for $9.8 million pursuant to an offer to repurchase a
certain number of shares of its common stock (pre-Merger shares) from its
stockholders on a pro rata basis.
During Fiscal 1999, 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 non-core asset sales by
Sweetheart should be sufficient to fund each of Fonda's and Sweetheart's
respective operating needs, including Sweetheart's termination liabilities under
the Plan, planned capital expenditures and debt service requirements for the
foreseeable future.
Net Operating Loss Carryforwards
As of September 26, 1999, Sweetheart had approximately $214 million of
net operating loss carryforwards ("NOLs") which expire at various dates from
2004 through 2019. Fonda has $1.9 million of state net operating loss
carryforwards which expire at various dates from 2003 through 2020. For federal
income tax purposes, Fonda's net operating losses will be carried back to Fiscal
1998. Although the Company expects that sufficient taxable income will be
generated in the future to realize these NOLs, there can be no assurance future
taxable income will be generated to utilize such NOLs.
Impact of Recently Issued Accounting Standards
19
The impact of recently issued accounting standards is discussed in Note
2 of Notes to the Financial Statements.
20
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company is exposed to market risk related to interest rates on its
fixed and variable rate long-term debt.
Variable interest rate risk: The Company's earnings are affected by
changes in short-term interest rates as a result of its borrowings under its
revolving credit agreement. Based on amounts outstanding under the Company's
revolving credit agreement at September 26, 1999, a 100 basis point increase in
market rates would increase interest expense and decrease earnings before income
taxes by approximately $.1 million. This sensitivity analysis does not consider
any actions management might take to mitigate its exposure in the event of a
change of such magnitude.
Fixed interest rate risk: The fair value of the Company's fixed rate
debt may also be subject to interest rate risk. Generally, the fair market value
of fixed interest rate debt will increase as interest rates fall and decrease as
interest rates rise. Based upon the interest rate of the Company's fixed rate
debt at September 26, 1999, the fair value of such debt approximate their
carrying amounts except as follows: the Discount Notes, the Fonda Notes and the
Sweetheart Subordinated Notes are approximately 67%, 87% and 86%, respectively,
of carrying amounts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements and Schedule attached hereto and listed in
Item 14 (a)(1) and (a)(2) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of SF Holdings:
NAME AGE POSITION
---- --- --------
Dennis Mehiel 57 Chairman and Chief Executive Officer
Thomas Uleau 55 President, Chief Operating Officer and Director
Hans Heinsen 46 Senior Vice President, Chief Financial Officer
and Treasurer
Harvey L. Friedman 57 Secretary and General Counsel
Alfred B. DelBello 64 Vice Chairman
James Armenakis 56 Director
W. Richard Bingham 63 Director
Gail Blanke 51 Director
John A. Catsimatidis 51 Director
Chris Mehiel 60 Director
Jerome T. Muldowney 54 Director
G. William Seawright 58 Director
Lowell P. Weicker, Jr. 68 Director
Dennis Mehiel has been Chairman and Chief Executive Officer of SF
Holdings since December 1997. He has been Chairman and Chief Executive Officer
of Fonda since it was purchased in 1988. In addition, Mr. Mehiel is Chief
Executive Officer of Sweetheart. Since 1966 he has been Chairman of Four M
Corporation ("Four M"), a converter and seller of interior packaging, corrugated
sheets and corrugated containers which he co-founded, and since 1977 (except
during a leave of absence from April 1994 through July 1995) he has been the
Chief Executive
21
Officer of Four M. Mr. Mehiel is also the Chairman of Box USA of New Jersey,
Inc. ("Box of New Jersey"), a manufacturer of corrugated containers, and
Chairman and Chief Executive Officer of CEG.
Thomas Uleau has been President, Chief Operating Officer and a Director
of SF Holdings since February 1998. Prior to that, he had been President of
Fonda from January 1997 and Chief Operating Officer of Fonda since 1994. He has
been a director of Fonda since 1988. In addition, Mr. Uleau is President and
Chief Operating Officer of Sweetheart since February 1998. Mr. Uleau was
Executive Vice President of Fonda from 1994 to 1996 and from 1988 to 1989. He
has been Executive Vice President of CEG since 1996. He served as Executive Vice
President and Chief Financial Officer of Four M from 1989 through 1993 and its
Chief Operating Officer in 1994. He is also currently a director of Four M, CEG,
and Box of New Jersey.
Hans Heinsen has been Senior Vice President, Chief Financial Officer
and Treasurer of SF Holdings since February 1998. He has been Senior Vice
President and Treasurer of Fonda since January 1997 and Chief Financial Officer
of Fonda since June 1996. Mr. Heinsen is also Chief Financial Officer and Vice
President Finance of Sweetheart. Prior to joining Fonda, Mr. Heinsen spent 21
years in a variety of corporate finance positions with The Chase Manhattan Bank,
N.A.
Harvey L. Friedman has been Secretary and General Counsel of SF
Holdings since February 1998. He is also Secretary and General Counsel of Fonda.
He was a director of Fonda from 1985 to January 1997. Mr. Friedman is also the
Secretary and General Counsel of CEG, Four M and Box of New Jersey and is a
director of CEG. He was formerly a partner of Kramer, Levin, Naftalis & Frankel,
a New York City law firm.
Alfred B. DelBello has served as Vice Chairman of SF Holdings since
February 1998. He has served as Vice Chairman of Fonda since January 1997 and a
director of Fonda since 1990. Since July 1995, Mr. DelBello has been a partner
in the law firm of DelBello, Donnellan & Weingarten & Tartaglia, LLP. From
September 1992 to July 1995 he was a partner in the law firm of Worby DelBello
Donnellan & Weingarten. Prior thereto, he had been President of DelBello
Associates, a consulting firm, since 1985. Mr. DelBello served as Lieutenant
Governor of New York State from 1983 to 1985.
James Armenakis has served as a Director of SF Holdings since February
1998 and a director of Fonda since June 1997. He is a senior partner in the law
firm of Armenakis & Armenakis.
W. Richard Bingham became a Director of SF Holdings upon the
consummation of the Sweetheart Investment. Mr. Bingham co-founded American
Industrial Partners Management Company, Inc. ("AIPM") and has been a director
and officer of the firm since 1989. He is also a general partner of American
Industrial Partners. Prior to co-founding AIPM, Mr. Bingham was a Managing
Director of Shearson Lehman Brothers from 1984 until 1987. Prior to joining
Shearson Lehman Brothers, Mr. Bingham was Director of the Corporate Finance
Department, a member of the board, and head of Mergers & Acquisitions at Lehman
Brothers Kuhn Loeb Inc. Prior thereto, he directed investment banking operations
at Kuhn Loeb & Company where he was a partner and member of the board and
executive committee. He formerly served on the board of directors of Avis Inc.,
ITT Life Insurance Corporation and Valero Energy Corporation.
Gail Blanke has served as a Director of SF Holdings since February
1998. She also has been a director of Fonda since January 1997. She has been
President and Chief Executive Officer of Gail Blanke's Lifedesigns, LLC since
March 1995. Lifedesigns was founded in March 1995 as a division of Avon
Products, Inc. ("Avon") and was spun off from Avon in March 1997. Prior thereto,
she held the position of Corporate Senior Vice President of Avon since August
1991. She also held a number of management positions at CBS, Inc., including the
position of Manager of Player Promotion for the New York Yankees. Ms. Blanke
will be serving her second consecutive term as President of the New York Women's
Forum.
John A. Catsimatidis has served as a Director of SF Holdings since
February 1998 and as a director of Fonda since January 1997. He has been
Chairman and Chief Executive Officer of the Red Apple Group, Inc., a company
with diversified holdings that include oil refining, supermarkets, real estate,
aviation and newspapers, since 1969. Mr. Catsimatidis serves as a director of
Sloan's Supermarket, Inc. and New's Communications, Inc. He also serves on the
board of trustees of New York Hospital, St. Vincent Home for Children, New York
University
22
Business School, Athens College, Independent Refiners Coalition and New York
State Food Merchant's Association.
Chris Mehiel, the brother of Dennis Mehiel, has been a Director of SF
Holdings since February 1998 and a director of Fonda since January 1997. Mr.
Mehiel is a co-founder of Four M and has been Executive Vice President, Chief
Operating Officer and a director of Four M since September 1995 and Chief
Financial Officer since August 1997. He is an executive officer of the managing
member of Fibre Marketing Group, LLC, the successor to Fibre Marketing Group,
Inc., a waste paper recovery business which he co-founded, and was President
from 1994 to January 1996. From 1993 to 1994, Mr. Mehiel served as President and
Chief Operating Officer of Box of New Jersey. From 1982 to 1992, Mr. Mehiel
served as the President and Chief Operating Officer of Specialty Industries,
Inc., a waste paper processing and container manufacturing company.
Jerome T. Muldowney has served as a Director of SF Holdings since
February 1998 and as a director of Fonda since 1990. Since January 1996, Mr.
Muldowney has been a Managing Director of AIG Global Investment Corp. and since
March 1995 he has been a Senior Vice President of AIG Domestic Life Companies
("AIG Life"). Prior thereto, he had been a Vice President of AIG Life since
1982. In addition, from 1986 to 1996, he served as President of AIG Investment
Advisors, Inc. He is currently a director of AIG Life and AIG Equity Sales Corp.
G. William Seawright has served as a Director of SF Holdings since
February 1998 and as a director of Fonda since January 1997. He has been
President and Chief Executive Officer of Stanhome Inc., a manufacturer and
distributor of giftware and collectibles, since 1993. Prior thereto, he was
President and Chief Executive Officer of Paddington, Inc., an importer of
distilled spirits, since 1990. From 1986 to 1990, he was President of Heublein
International, Inc.
Lowell P. Weicker, Jr. has served as a Director of SF Holdings since
February 1998 and as a director of Fonda since January 1997. Mr. Weicker served
as Governor of the State of Connecticut from January 1991 through January 1995.
From 1962 to 1989, Mr. Weicker served in the U.S. Congress. In 1992, Mr. Weicker
earned the Profiles in Courage Award from the John F. Kennedy Library
Foundation.
ITEM 11. EXECUTIVE COMPENSATION
No executive officer of SF Holdings was paid any compensation by SF
Holdings. SF Holdings' executive officers also serve as executive officers of
Sweetheart and/or Fonda and such persons are not separately compensated by SF
Holdings. In addition, except as set forth below under "Stock Options," In
Fiscal 2000, the Company expects to establish a stock option and restricted
stock program to select employees of the Company and its subsidiaries.
The following table sets forth the compensation earned, whether paid or
deferred, to the Company's Chief Executive Officer and its other four most
highly compensated executive officers (collectively, the "Named Officers") for
Fiscal 1999, the 1998 Nine Week Transition Period ("1998 TP"), Fiscal 1998, and
Fiscal 1997 for services rendered in all capacities to the Company during such
periods. In addition to their positions at Fonda, Dennis Mehiel, Thomas Uleau
and Hans Heinsen are executive officers of Sweetheart. In addition, Michael
Hastings, an officer of Fonda, is an officer of Sweetheart. In Fiscal 1999, such
persons received compensation from both Sweetheart and Fonda.
SECURITIES ALL OTHER
NAME AND PRINCIPAL UNDERLYING COMPEN-
POSITION YEAR SALARY BONUS OTHER(1) SARS (#) (2) SATION (3)
-------- ---- ------ ----- -------- ------------ ----------
Dennis Mehiel 1999 $524,650 $415,000 $-- -- $--
Chairman and Chief 1998 TP 88,793 -- --
Executive Officer 1998 304,150 150,000 -- -- --
1997 168,750 75,000 -- -- --
Thomas Uleau 1999 $348,654 $445,000 -- -- 78,037(4)
President and Chief 1998 59,456 -- -- -- 4,004
23
SECURITIES ALL OTHER
NAME AND PRINCIPAL UNDERLYING COMPEN-
POSITION YEAR SALARY BONUS OTHER(1) SARS (#) (2) SATION (3)
-------- ---- ------ ----- -------- ------------ ----------
Operating Officer 1998 230,631 80,000 -- 1,950 42,313(4)
1997 196,250 75,000 -- 1,950 9,504
Hans Heinsen 1999 235,140 217,000 -- -- 13,547
Senior Vice President, 1998 TP 36,175 -- -- -- 1,548
Chief Financial Officer 1998 206,392 90,000 -- 1,950 10,705
and Treasurer 1997 56,000 -- 1,950 10,371
170,000
Michael Hastings 1999 $199,231 $255,000 -- -- 49,722(5)
Senior Vice President 1998 TP 33,162 -- -- -- 52,957(5)
1998 184,704 60,000 -- 1,950 9,246
1997 164,423 60,000 -- 1,950 8,203
Robert Korzenski 1999 222,181 75,000 -- -- 13,767
Senior Vice President(1) 1998 TP 30,769 -- -- -- 1,548
1998 188,590 100,000 -- 1,950 10,419
1997 164,423 50,000 1,950 10,216
- ----------
(1) The Company has concluded that the aggregate amount of perquisites and
other personal benefits paid to each of the Named Officers did not
exceed the lesser of (i) 10% of such officer's total annual salary and
bonus and (ii) $50,000. Thus, such amounts are not reflected in the
table.
(2) Reflects Fonda SARs.
(3) Reflects matching contributions by Fonda under Fonda's 401(k) Plans,
long-term disability, and life insurance premiums
(4) Includes relocation expenses of $67,604 in Fiscal 1999 and $29,167 in
Fiscal 1998.
(5) Includes relocation expenses of $41,414 in Fiscal 1999 and $50,249 in
the 1998 TP.
Director Compensation
Directors who are not employees of SF Holdings or directors of Fonda or
Sweetheart receive annual compensation of (i) $12,000, (ii) $1,000 for each
Board meeting attended, (iii) $1,000 for each committee meeting attended which
is not held on the date of a Board meeting and (iv) 100 SARs of SF Holdings.
Directors who are employees of SF Holdings or directors of Fonda or Sweetheart
do not receive any compensation or fees for service on the Board of Directors or
any committee thereof.
Stock Options
Pursuant to the Sweetheart Investment, Dennis Mehiel currently holds
71,515 currently exercisable options to purchase Class A Common Stock of SF
Holdings.
On March 12, 1998, all outstanding options to purchase stock of
Sweetheart were cashed out in full pursuant to the agreement governing the
Sweetheart Investment.
24
The following table provides information on the vested status of stock
appreciation rights ("SARs") at September 26, 1999 to the Named Officers. There
were no SARs granted during Fiscal 1999.
1999 SAR Grant Number of
------------------------------------------------------------------ Unexercised
SARs at
% of Total Sept. 26, 1999
# of Granted to Exercise --------------------
Securities Employees or Base Expira-
Underlying In Fiscal Price Per tion Exercisable/ (1)
Name Grant Year Share Date Unexercisable
-------------- ---------------- ------------ ----------- --------------------
Thomas Uleau -- -- -- -- 3,900/3,900
Hans Heinsen -- -- -- -- 2,340/3,510
Michael Hastings -- -- -- -- 3,900/3,900
Robert Korzenski -- -- -- -- 3,900/3,900
(1) Unless otherwise determined by the Administering Committee of Fonda's SAR
Plan, awards of SARs will vest on each anniversary of their grant at the
rate of 20% per year commencing on the first anniversary date. However,
unless otherwise determined by the Administering Committee, in the event
that at the time of any grant of SARs the grantee has not been continuously
employed by Fonda for at least five years, such vesting will be subject to
the completion of such five-year period. Upon voluntary termination of
employment, involuntary termination without cause or termination due to
death, disability or retirement at age 60 or above, all unvested SARs will
be forfeited and vested SARs not previously redeemed will be redeemed
automatically by Fonda as of the date of termination.
Employee Benefit Plans
Fonda
Fonda provides certain union and non-union employees with retirement
and disability income benefits under defined benefit pension plans. Fonda's
policy has been to fund annually the minimum contributions required by
applicable regulations.
Fonda provides 401(k) savings and investment plans for the benefit of
non-union employees. Employee contributions are matched at the discretion of
Fonda. On January 1, 1997, Fonda adopted a defined contribution benefit plan for
all non-union employees for which contributions and costs are based on
participant earnings. Fonda also participates in multi-employer pension plans
for certain of its union employees. See Note 18 of the Notes to Financial
Statements.
None of the executive officers of SF Holdings is covered under any of
Fonda's defined benefit plans. Rather, such persons are covered under defined
contribution plans.
Sweetheart
A majority of Sweetheart's employees ("participants") are covered under
a 401(k) defined contribution plan. Sweetheart's annual contributions to this
defined contribution plan represent a 50% match on participant contributions.
Sweetheart's match is limited to participant contributions up to 6% of
participant salaries. In addition, Sweetheart is allowed to make discretionary
contributions. Certain Sweetheart employees are covered under defined benefit
plans. Benefits under these plans are generally based on fixed amounts for each
year of service.
Sweetheart sponsors various defined benefit postretirement health care
plans that cover substantially all full-time employees. The plans, in most
cases, pay stated percentages of most medical expenses incurred by retirees,
after subtracting payments by Medicare or other providers and after a stated
deductible has been met. Participants generally become eligible after reaching
age 60 with ten years of service. The majority of Sweetheart's plans are
contributory, with retiree contributions adjusted annually. Sweetheart does not
fund the plans.
25
None of the executive officers of SF Holdings is covered under any of
Sweetheart's defined benefit plans. Rather, such persons are covered under
defined contribution plans only.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of December 15,
1999 with respect to the beneficial ownership of the shares of common stock of
SF Holdings.
BENEFICIAL OWNERSHIP
--------------------
NAME AND ADDRESS OF NUMBER OF PERCENTAGE OF
BENEFICIAL OWNER SHARES OWNERSHIP(1)(2)
---------------- ------ ---------------
Dennis Mehiel
373 Park Avenue South
New York City, NY 10016 . . . . . . . . . . . . . . 692,969 80.2%
Thomas Uleau
10100 Reisterstown Road
Owings Mills, Maryland 21117 . . . . . . . . . . . 12,739 1.5%
All executive officers and directors
as a group (3 persons) . . . . . . . . . . . . . . 715,243 82.8%
(1) Includes 56,459 shares of Class B common stock, 39,900 shares of Class C
common stock and 133,494 shares of Class A common stock of SF Holdings that
would be issuable upon conversion of Class B Series 1 Preferred Stock.
(2) Includes 71,515 shares underlying options to purchase Class A common stock
of SF Holdings, which are presently exercisable, and 134,138 shares which
Mr. Mehiel has the power to vote pursuant to a voting trust agreement
between his spouse, Edith Mehiel, and himself.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Fonda leases a building in Jacksonville, Florida from Dennis Mehiel on
terms the Company believes are no less favorable than could be obtained from
independent third parties and were negotiated on an arm's length basis. Annual
payments under the lease are $.2 million plus annual increases based on changes
in the Consumer Price Index ("CPI") through December 31, 2014. In addition, Mr.
Mehiel can require the Company to purchase the facility for $1.5 million,
subject to a CPI-based escalation, until July 31, 2006. In Fiscal 1998, the
Company terminated it operations at this facility and had been seeking a
sublease tenant. Effective October 1, 1999, Four M Corporation ("Four M"), an
affiliate, has assumed a portion of the obligations under this lease. Rent
expense, net of sublease income on a portion of the premises subleased through
May 1998 to Four M, was $.1 million in Fiscal 1999, less than $.1 million in the
1998 Transition Period, and $.1 million in both Fiscal 1998 and 1997.
In Fiscal 1998, Fonda entered into a license agreement with CEG,
whereby CEG was granted the exclusive rights to use certain of Fonda's
trademarks and trade names in connection with the manufacture, distribution and
sale of disposable party goods products for a period of five years, subject to
extension. In connection therewith, Fonda has received an annual royalty equal
to 5% of CEG's cash flow, as determined in accordance with a formula specified
in such agreement. In Fiscal 1999, Fonda entered into an exclusive manufacture
and supply agreement with CEG (together with the before mentioned license
agreement, the "CEG Agreements"). 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 Fonda's cost. Also in Fiscal 1999,
Fonda purchased certain manufacturing assets from CEG for $4.9 million and
entered into operating leases whereby Fonda 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 assets purchased from CEG were recorded in machinery and
equipment as a carryover of CEG's book value ($1.4 million) and the excess of
the purchase price over such CEG amounts, net of income tax, was charged to
stockholders' equity. Fonda believes the terms on which it (i) granted license
rights to CEG, (ii) manufactured and supplied products for CEG, (iii) purchased
manufacturing assets from CEG, and (iv)
26
leased 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.
On December 3, 1999, CEG became an 87% owned subsidiary of the Company
pursuant to a merger. In connection with the merger, 87% of CEG's common stock
was exchanged for 15,000 shares of Class B Series 2 Preferred Stock of the
Company. On December 6, 1999, pursuant to the CEG Asset Purchase Agreement,
Fonda purchased the intangible assets of CEG, including domestic and foreign
trademarks, patents, copyrights, and customer lists. In addition, pursuant to
the CEG Asset Purchase Agreement, Fonda has agreed to purchase over a sixty day
period certain inventory of CEG. The aggregate purchase price for the intangible
assets and the inventory is $41 million ($16 million for the intangible assets
and $25 million for the inventory), payable in cash, the cancellation of certain
notes and warrants, and the assumption of certain liabilities. The agreement
further provides that Fonda may acquire other CEG assets in exchange for
outstanding trade payables owed to Fonda by CEG. In connection with this
agreement, Fonda will cancel the CEG Agreements. Upon the consummation of the
CEG Asset Purchase Agreement, Fonda will market, manufacture and distribute
disposable party goods products directly to the specialty (party) channel of the
Company's consumer market. Independent appraisals were obtained to determine the
fairness of the purchase price for such assets. Fonda believes the terms on
which it purchased such assets are at least as favorable as it could have
obtained from unrelated third parties and were negotiated on an arm's length
basis.
On March 12, 1998, Fonda amended certain terms of the $2.6 million
Promissory Note dated February 27, 1997, made by CEG in favor of Fonda (the "CEG
Note"). The 10% annual interest rate on the CEG Note was converted to
pay-in-kind, the CEG Note's 2002 maturity was extended for an additional three
years and the CEG Note was made subordinate to Senior Debt (as such term is
defined therein). In connection with such amendment, Fonda was also issued a
warrant to purchase, for a nominal amount, 2.5% of CEG's common stock. The
Company believes that the terms of such loan and the amendments thereto are no
more favorable to CEG than those that CEG could otherwise have obtained from
unrelated third parties and such terms were negotiated on an arm's length basis.
The CEG Note was canceled on December 6, 1999 in partial consideration of the
CEG Asset Purchase Agreement.
Pursuant to a certain agreement with the stockholders of Sweetheart as
of December 29, 1997 (the "Sweetheart Stockholders"), following the fifth
anniversary of the consummation of the Sweetheart Investment, the Sweetheart
Stockholders have the right to exchange their shares of Class A common stock of
Sweetheart for warrants (the "Exchange Warrants") to purchase, for nominal
consideration, shares of Class C Common Stock of SF Holdings representing 10% of
the total outstanding shares of common stock of SF Holdings at the consummation
of the Sweetheart Investment on a fully diluted basis. SF Holdings has the right
to cause such exchange and has the right to thereafter repurchase the Exchange
Warrants, in whole or in part, for an aggregate call price of $50.0 million,
subject to increase at 12.5% per annum until the fifth anniversary of the
consummation of the Sweetheart Investment. Upon the occurrence of a merger (as
defined in such agreement), the Sweetheart Stockholders will be required to
exchange their shares of Class A common stock of Sweetheart for the Exchange
Warrants. In addition, in the event SF Holdings proposes to sell shares of Class
A common stock or Class B common stock of Sweetheart in an amount greater than
30% of the outstanding shares of Sweetheart common stock, the Sweetheart
Stockholders will have the right to participate in such sale. In the event SF
Holdings proposes to sell shares of Sweetheart common stock in an amount greater
than 30% of the outstanding shares of Sweetheart common stock, then SF Holdings
will have the right to require the Sweetheart Stockholders to sell all, but not
less than all, of their shares of Sweetheart common stock.
On May 15, 1998, Fonda purchased a 38.2% ownership interest in Fibre
Marketing Group, LLC ("Fibre Marketing"), a waste paper recovery business, from
a Director of the Company for $.2 million. Fonda granted Sweetheart the right to
acquire 50% of Fonda's interest in Fibre Marketing for $.1 million. Four M is
also a member of Fibre Marketing. The Company believes the terms on which it
purchased such interest are at least as favorable as those it could otherwise
have obtained from an unrelated third party and were negotiated on an arm's
length basis.
Net sales to CEG were $26.9 million in Fiscal 1999, $6.9 million in the
1998 Transition Period, $17.0 million in Fiscal 1998 and $7.8 million in Fiscal
1997. Accounts receivable from CEG was $12.6 million at September 26, 1999
compared to $.5 million at July 26, 1998. Net sales to Fibre Marketing were $3.9
million in Fiscal 1999, $.4 million in the 1998 Transition Period, $4.2 million
in Fiscal 1998 and $3.6 million in Fiscal 1997. The Company also
27
purchases corrugated containers from Four M, which were $7.8 million in Fiscal
1999, $1.4 million in the 1998 Transition Period, $1.1 million in Fiscal 1998
and $.9 million in Fiscal 1997. The Company believes that the terms on which it
sold or purchased products from related parties are at least as favorable as
those it could otherwise have obtained from unrelated third parties and were
negotiated on an arm's length basis. In Fiscal 1998, the Company contracted with
The Emerald Lady, Inc., an affiliate, to provide air transportation services.
The Company incurred $.9 million for such services in Fiscal 1999, $.1 million
in the 1998 Transition Period and $.3 million in Fiscal 1998. The Company
believes that the terms on which it purchases such services are at least as
favorable as those it could otherwise have obtained from unrelated third parties
and were negotiated on an arm's length basis. All of the above mentioned
affiliates are under the common control of the Company's Chief Executive
Officer.
At September 26, 1999, Fonda had demand loan receivables from its Chief
Executive Officer totaling $275,000 plus accrued interest at 10% .
SF Holdings and Fonda intend to file consolidated Federal income tax
returns, and pursuant to a tax sharing agreement, Fonda will pay SF Holdings its
allocable share of the consolidated group's consolidated Federal income tax
liability, which, in general, will equal the tax liability Fonda would have paid
if it had filed separate tax returns.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) (1) - Financial Statements
The following financial statements of the Company are included in this
report:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of September 26, 1999
and July 26, 1998 F-2
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the year ended September 26, 1999,
the nine week transition period ended September 27, 1998,
and the years ended July 26, 1998 and July 27, 1997 F-3
Consolidated Statements of Cash Flows for the year
ended September 26, 1999, the nine week transition
period ended September 27, 1998, and the years ended
July 26, 1998 and July 27, 1997 F-4
Notes to Financial Statements F-5
(a) (2) - Financial Statement Schedule
The following schedule to the financial statements of the Company is
included in this report:
Schedule
II - Valuation and Qualifying Accounts S-1
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required or are inapplicable, and therefore have been omitted.
(a) (3) Exhibits:
Exhibits 2.1 through 10.8 are incorporated herein by reference to the
exhibit with the corresponding number filed as part of the Company's
Registration Statement on Form S-4, as amended (File No. 333-50683).
Exhibits 10.9 through 10.18 are incorporated herein by reference to the
exhibit with the corresponding number filed as part of the Company's
Registration Statement on Form S-4, as amended (File No. 333-51563).
Exhibit # Description of Exhibit
2.1 Investment Agreement, dated as of December 29, 1997, among the
Stockholders of Sweetheart Holdings Inc. ("Sweetheart
Holdings"), Creative Expressions Group, Inc. ("CEG") and SF
Holdings Group, Inc. ("SF Holdings").
3.1 Restated Certificate of Incorporation of the Company.
3.2 By-laws of the Company.
4.1 Indenture, dated as of March 12, 1998, between SF Holdings and
The Bank of New York.
4.2 Form of 123/4% 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.
29
4.7 Paragraph A of Article Fourth of the Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.1).
10.1 Stockholders' Rights Agreement, dated as of March 12, 1998,
among SF Holdings and the persons listed on Schedule I
thereto.
10.2 Stockholders' Agreement, dated as of March 12, 1998, among
Sweetheart Holdings, SF Holdings and the Original
Stockholders.
10.3 Stockholders Agreement, dated as of March 12, 1998, among SF
Holdings and the Initial Purchasers.
10.4 Pledge Agreement, dated as of March 12, 1998, between SF
Holdings and the Bank of New York.
10.5 Tax Sharing Agreement, dated as of March 12, 1998, among SF
Holdings and The Fonda Group, Inc ("Fonda").
10.6 Second Restated Management Services Agreement, dated as of
March 12, 1998, among Sweetheart Holdings, Sweetheart Cup
Company Inc. ("Sweetheart Cup"), American Industrial Partners
Management Company, Inc. ("AIPM") and SF Holdings.
10.7 Amendment No. 1 to Second Restated Management Services
Agreement, dated as of March 12, 1998, among Sweetheart
Holdings, Sweetheart Cup, AIPM and SF Holdings.
10.8 Assignment and Assumption Agreement, dated as of March 12,
1998, between SF Holdings and Fonda.
10.9 Stockholders Agreement, dated as of March 20, 1998, between
the Company and Bear, Stearns & Co., Inc.
10.10 Executive Retention Pay Agreement, dated as of October 1,
1997, between Sweetheart Holdings and Daniel M. Carson.
10.11 Executive Retention Pay Agreement, dated as of October 1,
1997, between Sweetheart Holdings and William H. Haas.
10.12 Executive Retention Pay Agreement, dated as of October 1,
1997, between Sweetheart Holdings and James R. Mullen.
10.13 Special Incentive Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and William H.
Haas dated November 18, 1996.
10.14 Special Incentive Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and Daniel M.
Carson dated November 18, 1996.
10.15 Special Incentive Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and James R.
Mullen dated November 18, 1996.
10.16 Employee Relocation Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and James R.
Mullen dated December 19, 1997.
10.17 Employee Relocation Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and Daniel M.
Carson dated December 19, 1997.
10.18 Employee Relocation Agreement between Sweetheart Holdings Inc.
and its subsidiary, Sweetheart Cup Company Inc. and William H.
Haas dated December 19, 1997.
10.19* Asset Purchase Agreement, dated as of December 6, 1999 between
Creative Expressions Group, Inc and Fonda.
16.1 Letter regarding change in certifying accountant.
27.1 * Financial Data Schedule.
----------------
* filed herein.
(b) No reports were filed on Form 8-K during the fourth quarter ended September
26, 1999.
30
SIGNATURES
Pursuant to the requirements of Section 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on December 27, 1999. SF
HOLDINGS GROUP, INC.
By: /s/ DENNIS MEHIEL
-----------------
Dennis Mehiel
Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the date indicated. Signature Title(s) Date
/s/ DENNIS MEHIEL Chairman of the Board and December 27, 1999
----------------------------- Chief Executive Officer
Dennis Mehiel (Principal Executive Officer)
/s/ THOMAS ULEAU President, Chief Operating December 27, 1999
----------------------------- Officer and Director
Thomas Uleau
/s/ HANS H. HEINSEN Senior Vice President, Chief December 27, 1999
--------------------------- Financial Officer and Treasurer
Hans H. Heinsen (Principal Financial and Accounting
Officer)
/s/ ALFRED B. DELBELLO Vice Chairman December 27, 1999
---------------------------
Alfred B. DelBello
/s/ W. RICHARD BINGHAM Director December 27, 1999
---------------------------
W. Richard Bingham
/s/ JAMES J. ARMENAKIS Director December 27, 1999
---------------------------
James J. Armenakis
/s/ JOHN A. CATSIMATIDIS Director December 27, 1999
---------------------------
John A. Catsimatidis
/s/ CHRIS MEHIEL Director December 27, 1999
---------------------------
Chris Mehiel
/s/ JEROME T. MULDOWNEY Director December 27, 1999
---------------------------
Jerome T. Muldowney
/s/ G. WILLIAM SEAWRIGHT Director December 27, 1999
---------------------------
G. William Seawright
/s/ LOWELL P. WEICKER, JR. Director December 27, 1999
---------------------------
Lowell P. Weicker, Jr.
31
INDEPENDENT AUDITORS' REPORT
Board of Directors
SF Holdings Group, Inc.
We have audited the accompanying consolidated balance sheets of SF
Holdings Group, Inc. and subsidiaries (the "Company") as of September 26, 1999
and July 26, 1998 and the related consolidated statements of operations and
comprehensive income (loss), and cash flows for the year ended September 26,
1999, the nine week transition period ended September 27, 1998, and the years
ended July 26, 1998 and July 27, 1997. Our audits also included the financial
statement schedule listed at Item 14(a)2. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of SF Holdings Group, Inc. and
subsidiaries as of September 26, 1999 and July 26, 1998 and the results of its
operations and its cash flows for the year ended September 26, 1999, the nine
week transition period ended September 27, 1998, and the years ended July 26,
1998 and July 27, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Baltimore, Maryland
December 23, 1999
F-1
SF HOLDINGS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 26, July 26,
1999 1998
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,665 $ 20,703
Cash in escrow - 6,819
Accounts receivable, less allowance for doubtful
accounts of $2,630 and $3,569, respectively 113,012 120,112
Due from affiliates 13,834 1,313
Inventories 169,994 168,493
Deferred income taxes 19,167 17,322
Spare parts 18,421 17,940
Other current assets 6,154 2,086
-------------- --------------
Total current assets 344,247 354,788
Property, plant and equipment, net 395,015 430,150
Goodwill, net 98,176 94,865
Deferred income taxes 38,424 32,572
Other assets, net 26,012 31,436
-------------- --------------
$ 901,874 $ 943,811
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 77,680 $ 78,013
Accrued expenses and other current liabilities 103,398 117,426
Current maturities of long-term debt 275,997 3,825
-------------- --------------
Total current liabilities 457,075 199,264
Long-term debt 343,356 619,143
Other liabilities 62,435 61,865
Deferred income taxes 4,026 4,771
-------------- --------------
Total liabilities 866,892 885,043
Exchangeable preferred stock 36,291 30,680
Minority interest in subsidiary 1,971 3,020
Redeemable common stock, $.01 par value,
28,776 shares issued and outstanding 2,217 2,139
Stockholders' equity (deficit) (5,497) 22,929
-------------- --------------
$ 901,874 $ 943,811
============== ==============
See notes to consolidated financial statements.
F-2
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Nine
Year Weeks Years Ended
Ended Ended -----------------------------
September 26, September 27, July 26, July 27,
1999 1998 1998 1997
---------------- -------------- ------------- -------------
Net sales $1,115,582 $259,080 $553,735 $252,513
Cost of goods sold 978,831 235,038 481,263 201,974
---------------- -------------- ------------- -------------
Gross profit 136,751 24,042 72,472 50,539
Selling, general and administrative expenses 96,391 20,320 53,538 31,527
Other income, net (1,176) (511) (12,166) (1,608)
---------------- -------------- ------------- -------------
Income from operations 41,536 4,233 31,100 20,620
Interest expense (net of interest income
of $905, $251, $557 and $490) 65,357 14,214 29,304 9,017
---------------- -------------- ------------- -------------
Income (loss) before income taxes, minority
interest and extraordinary loss (23,821) (9,981) 1,796 11,603
Income taxes (benefit) provision (7,750) (4,631) 2,198 4,872
Minority interest in subsidiary's loss (441) (548) (1,900) -
---------------- -------------- ------------- -------------
Income (loss) before extraordinary loss (15,630) (4,802) 1,498 6,731
Extraordinary loss from debt extinguishment, net - - - 3,495
---------------- -------------- ------------- -------------
Net income (loss) (15,630) (4,802) 1,498 3,236
Payment-in-kind dividends on exchangeable
preferred stock 4,847 764 1,616 -
---------------- -------------- ------------- -------------
Net income (loss) applicable to
common stock $ (20,477) $ (5,566) $ (118) $ 3,236
================ ============== ============= =============
Statements of comprehensive income (loss):
Net income (loss) $ (15,630) $ (4,802) $ 1,498 $ 3,236
Other comprehensive income (loss):
Minimum pension liability adjustment
(net of $(1,501) and $1,595 income tax) 2,255 (2,393) - -
Foreign translation adjustment 272 (345) (476) -
---------------- -------------- ------------- -------------
2,527 (2,738) (476) -
---------------- -------------- ------------- -------------
Total comprehensive income (loss) $ (13,103) $ (7,540) $ 1,022 $ 3,236
================ ============== ============= =============
See notes to consolidated financial statements.
F-3
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine
Year Weeks Years Ended
Ended Ended -----------------------------
September 26, September 27, July 26, July 27,
1999 1998 1998 1997
-------------- ------------- -------------- -------------
Operating activities:
Net income (loss) $ (15,630) $ (4,802) $ 1,498 $ 3,236
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 57,427 14,053 20,646 4,954
Write-off of unamortized debt discount
and issuance costs - - - 4,234
Interest capitalized on debt 11,046 1,779 3,707 684
Provision for doubtful accounts 760 (301) 476 457
Deferred income taxes (7,610) (4,098) (4,990) 3,005
Net gain on business and equipment dispositions
and settlement of long-term contracts (1,150) (201) (16,333) -
Minority interest in subsidiary's loss (441) (548) (1,900) -
Changes in assets and liabilities:
Accounts receivable 2,733 3,707 (16,725) (2,007)
Due from affiliates (13,226) 583 (377) (213)
Inventories 294 (1,795) 12,442 (1,178)
Other current assets (1,866) (1,195) 2,797 (3,273)
Accounts payable and accrued expenses 5,364 (15,941) 3,940 (2,299)
Other 4,991 (2,889) 2,711 673
-------------- ------------- -------------- -------------
Net cash provided by (used in)
operating activities 42,692 (11,648) 7,892 8,273
-------------- ------------- -------------- -------------
Investing activities:
Capital expenditures (40,784) (12,138) (13,727) (10,363)
Proceeds from business and equipment
dispositions 7,435 7,124 34,793 -
Payments for business acquisitions - - (99,970) (23,043)
Other - - - (2,600)
-------------- ------------- -------------- -------------
Net cash used in investing activities (33,349) (5,014) (78,904) (36,006)
-------------- ------------- -------------- -------------
Financing activities:
Revolving credit borrowings (repayments), net (16,909) 4,424 765 (32,842)
Proceeds from long-term debt - - 84,351 120,000
Repayments of long-term debt (3,863) (53) (6,000) (49,879)
Proceeds from exchangeable preferred stock - - 15,000 -
Redemption of Fonda's common stock - - (9,788) (203)
Debt issuance costs - (137) (3,762) (4,902)
Decrease in escrow cash 5,464 1,355 4,870 -
Other - 371 -
-------------- ------------- -------------- -------------
Net cash provided by (used in)
financing activities (15,308) 5,589 85,807 32,174
-------------- ------------- -------------- -------------
Net increase (decrease) in cash (5,965) (11,073) 14,795 4,441
Cash and cash equivalents, beginning of period 9,630 20,703 5,908 1,467
-------------- ------------- -------------- -------------
Cash and cash equivalents, end of period $ 3,665 $ 9,630 $ 20,703 $ 5,908
============== ============= ============== =============
F-4
SF HOLDINGS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND ORGANIZATION
SF Holdings Group, Inc. ("SF Holdings"), is a holding company that
conducts its operations through its subsidiaries, Sweetheart Holdings Inc.
("Sweetheart") and The Fonda Group, Inc. ("Fonda") (collectively the "Company"),
and therefore has no significant cash flows independent of such subsidiaries.
The instruments governing the indebtedness of Sweetheart and Fonda contain
numerous covenants that restrict Sweetheart and Fonda's ability to pay dividends
or make other distributions to the Company or to each other. The Company
believes that the combined operations of its subsidiaries makes the Company one
of the three largest converters and marketers of disposable foodservice and food
packaging products in North America.
SF Holdings was formed in December 1997 to facilitate the Sweetheart
Investment (see Note 3). On March 12, 1998, in connection with the Sweetheart
Investment, SF Holdings acquired all of the outstanding capital stock of Fonda
pursuant to a merger whereby the stockholders of Fonda became stockholders of SF
Holdings and Fonda became a wholly-owned subsidiary of SF Holdings (the
"Merger"). The Merger has been accounted for in a manner similar to a pooling of
interests and the accompanying consolidated financial statements include the
historical accounts of Fonda for all periods presented. The consolidated balance
sheet as of July 26, 1998 includes Sweetheart as of June 30, 1998. The
consolidated statement of operations for the 1998 Transition Period (see Note 2)
and Fiscal 1998 includes the results of Sweetheart's operations for July 1 1998
to September 27, 1998, and the period from the date of the consummation of the
Sweetheart Investment, March 12, 1998, to June 30, 1998, respectively. All
intercompany accounts and transactions have been eliminated.
2. SIGNIFICANT ACCOUNTING POLICIES
Management Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from those estimates.
Fiscal Year-- The Company's fiscal year is the fifty-two or fifty-three
week period which ends on the last Sunday in September. The fiscal year ended
September 26, 1999 ("Fiscal 1999") was a fifty-two week period. Previously, the
Company's fiscal year end was the same number of weekly periods ending on the
last Sunday in July. The nine week period from July 27, 1998 to September 27,
1998 (the "1998 Transition Period") has been treated as a transition period that
was not part of the fiscal year ended July 26, 1998 or the fiscal year ended
September 26, 1999. The 1998 and 1997 fiscal years ("Fiscal 1998" and "Fiscal
1997", respectively) were fifty-two week periods ended July 26, 1998 and July
27, 1997, respectively.
Revenue recognition--Revenue is recognized upon shipment of product.
Cash, including cash equivalents and cash in escrow--All highly liquid
investments with an original maturity of three months or less are considered to
be cash equivalents. Cash received by Sweetheart as proceeds from the sale of
its assets is restricted to qualified capital expenditures under Sweetheart bond
indentures and is held in escrow with the trustee until utilized.
Inventories--Inventories are valued at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment--Property, plant and equipment is stated
at cost or fair market value for business acquisitions. Depreciation is computed
by use of the straight-line method over the estimated useful lives of the
assets.
Goodwill--Goodwill represents the excess of the purchase price over the
fair value of tangible and identifiable intangible net assets acquired and is
amortized on a straight-line basis over forty years for the Sweetheart
Investment
F-5
and twenty years for all other acquisitions. The carrying value of goodwill is
reviewed when facts and circumstances suggest that it may be impaired. The
Company assesses its recoverability by determining whether the amortization of
the goodwill balance over its remaining life can be recovered through
undiscounted projected future cash flows.
Income Taxes--Deferred income taxes are provided on the differences
between the basis of assets and liabilities for financial reporting and income
tax purposes using presently enacted tax rates.
Debt Issuance Costs--Included in other assets are unamortized debt
issuance costs of $7.9 million at September 26, 1999 and $11.5 million at July
26, 1998 which are being amortized over the terms of the respective borrowing
agreements.
Foreign Currency Translation--The Company's Canadian subsidiary's
assets and liabilities are translated at the rates of exchange in effect at the
balance sheet date. Income amounts are translated at the average of the monthly
exchange rates. The cumulative effect of translation adjustments is deferred and
classified as a component of stockholders' equity.
Fair Value of Financial Instruments--The estimated fair value of
financial instruments included in current assets and liabilities approximate
their carrying amounts because of the relatively short maturities of these
instruments. At September 26, 1999, the estimated fair value of fixed rate debt
obligations, which are thinly traded, approximate their carrying amounts except
as follows (as defined in Note 10): the Discount Notes, the Fonda Notes and the
Sweetheart Subordinated Notes are approximately 67%, 87% and 86%, respectively,
of carrying amounts.
Impact of Recently Issued Accounting Standards--In Fiscal 1999, the
Company adopted Financial Accounting Standards Board ("FASB"), No. 130,
Reporting Comprehensive Income (see Statements of Operations and Comprehensive
Income (Loss), FASB No. 131, Disclosures about Segments of an Enterprise and
Related Information (see Note 17) and FASB No. 132, Employers' Disclosure about
Pensions and Other Postretirement Benefits (see Note 20). FASB No. 133
Accounting for Derivative Instruments and Hedging Activities establishes
accounting and reporting standards for derivative instruments and requires that
an entity recognize all derivatives at fair value in the statement of financial
position. The Company is in the process of evaluating FASB No. 133, which is
effective for Fiscal 2001.
3. BUSINESS ACQUISITIONS
The following acquisitions have been accounted for under the purchase
method and their results of operations have been included in the consolidated
statements of operations since the respective dates of acquisition. Goodwill
amortization was $3.2 million in Fiscal 1999, $.8 million in the 1998 Transition
Period, $1.6 million in Fiscal 1998 and $.4 million in Fiscal 1997. Accumulated
amortization was $6.2 million and $2.2 million at September 26, 1999 and July
26, 1998, respectively.
The following summarized, unaudited pro forma results of operations
assume the Fiscal 1998 and 1997 Acquisitions occurred as of the beginning of
each of the years (in thousands).
Years Ended
-------------------------------
July 26, 1998 July 27, 1997
--------------- ------------
Net sales $ 1,126,527 $ 1,162,377
Loss before extraordinary loss $ (37,573) $ (11,435)
Fiscal 1998 Acquisitions
On March 12, 1998, the Company acquired 90% of the total outstanding
common stock, including 48% of the voting stock, of Sweetheart, a manufacturer
of disposable foodservice and food packaging products, for $125 million (the
"Sweetheart Investment"), plus transaction fees and expenses of approximately
$4.5 million. The aggregate purchase price consisted of $88 million in cash, a
demand promissory note of $7 million (which was satisfied immediately following
the consummation of the Sweetheart Investment) and $30 million of exchangeable
preferred stock (see Note 12). Funding for the cash portion of the purchase
price and financing fees was provided by $77.5 million in net proceeds from the
sale of Senior Secured Discount Notes (see Note 11) and a $15 million investment
in Class B Preferred Stock by Creative Expressions Group, Inc. ("CEG"), an
affiliate of the Company. The excess of the
F-6
purchase price over the Company's evaluation of the fair value of the net assets
acquired was $74 million and has been recorded as goodwill.
Pursuant to a certain agreement with the stockholders of Sweetheart as
of December 29, 1997 (the "Sweetheart Stockholders"), following the fifth
anniversary of the consummation of the Sweetheart Investment, the Sweetheart
Stockholders have the right to exchange their shares of Class A common stock of
Sweetheart for warrants (the "Exchange Warrants") to purchase, for nominal
consideration, shares of Class C Common Stock of SF Holdings representing 10% of
the total outstanding shares of common stock of SF Holdings at the consummation
of the Sweetheart Investment on a fully diluted basis. SF Holdings has the right
to cause such exchange and has the right to thereafter repurchase the Exchange
Warrants, in whole or in part, for an aggregate call price of $50 million,
subject to increase at 12.5% per annum until the fifth anniversary of the
consummation of the Sweetheart Investment. Upon the occurrence of a merger (as
defined in such agreement), the Sweetheart Stockholders will be required to
exchange their shares of Class A common stock of Sweetheart for the Exchange
Warrants. In addition, in the event SF Holdings proposes to sell shares of
Sweetheart common stock in an amount greater than 30% of the outstanding shares
of Sweetheart common stock, then SF Holdings will have the right to require the
Sweetheart Stockholders to sell all, but not less than all, of their shares of
Sweetheart common stock.
In January 1998, the Company acquired certain net assets of Leisureway,
Inc., a manufacturer of white paper plates, for $7.2 million, including deferred
payments of $.3 million and acquisition costs. The excess of the purchase price
over the Company's evaluation of the fair value of the net assets acquired was
$7.1 million and has been recorded as goodwill.
Fiscal 1997 Acquisitions
In June 1997, the Company acquired all of the outstanding capital stock
of Heartland Mfg. Corp., a manufacturer of paper plates, for $12.6 million,
including acquisition costs. The excess of the purchase price over the Company's
evaluation of the fair value of the net assets acquired was $9.3 million and has
been recorded as goodwill.
Also in June 1997, the Company acquired from Tenneco, Inc. net assets
relating to the manufacture of placemats and other disposable tabletop products
for $7 million, including acquisition costs. The excess of the purchase price
over the Company's evaluation of the fair value of the net assets acquired was
$1.3 million and has been recorded as goodwill.
4. OTHER INCOME, NET
On March 24, 1998, Fonda consummated an agreement to sell substantially
all of the fixed assets and certain related working capital of its specialty and
deep tone tissue mill (the "Mill"). In addition, on July 1, 1998, Fonda
consummated an agreement with the owner of the co-generation facility at the
Mill, whereby the owner of such facility terminated its obligation to supply
steam to the Mill and to make certain land lease payments. As a result of these
transactions, Fonda realized net proceeds of $38.5 million and recorded a gain
of $15.9 million which was included in other income, net. Such net proceeds
included a $3.7 million note receivable (included in other assets) from the
disposition of the Mill, due in March 2008, with 5.7% interest payable in the
form of additional notes receivable. Pursuant to an asset sale covenant under
the indenture covering the Notes, Fonda reinvested $10 million of such net
proceeds in fixed assets within 270 days of such disposition.
As a result of the application of purchase accounting by the Company
for the Sweetheart Investment, the charges described in this paragraph were
established in the acquisition balance sheet and had no effect on the Company's
consolidated results of operations. In connection with the Sweetheart
Investment, Sweetheart incurred $20.7 million of one-time charges, consisting
primarily of: (i) $4.4 million of financial advisory and legal fees; (ii) $3.7
million of severance expenses as a result of the termination of certain
Sweetheart officers pursuant to executive separation agreements and retention
plans for certain key executives; and (iii) $10.5 million of charges for
severance and asset disposition costs, including severance costs related to a
15% salaried workforce reduction and a less than 5% hourly workforce reduction,
and asset disposition costs related to rationalization of certain product lines,
and in connection therewith, disposal of associated property and equipment.
F-7
In Fiscal 1997, other income, net includes a net $2.9 million from the
settlement of a lawsuit. Partially offsetting this gain was a $1.3 million
charge for anticipated costs of the closure of the Company's Three Rivers,
Michigan facility. The charge covers the costs for the termination of employees
as well as ongoing costs to maintain the facility until its disposition, which
occurred in Fiscal 1999.
5. INVENTORIES
Inventories consist of the following (in thousands):
September 26, July 26,
1999 1998
-------- --------
Raw materials and supplies $ 53,124 $ 43,998
Work-in-process 7,448 9,456
Finished goods 109,422 115,039
-------- --------
$169,994 $168,493
======== ========
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
Lives In September 26, July 26,
Years 1999 1998
------------ ---------- ----------
Land and buildings 20-50 $ 132,321 $ 133,935
Machinery and equipment 3-13 345,846 310,690
Construction in progress 6,957 34,519
--------- ---------
485,124 479,144
Less: accumulated depreciation (90,109) (48,994)
--------- ---------
$ 395,015 $ 430,150
========= =========
Depreciation expense was $50.3 million in Fiscal 1999, $12.3 million in
the 1998 Transition Period, $17.1 million in Fiscal 1998 and $3.9 million in
Fiscal 1997. In addition, property, plant and equipment includes buildings under
capital lease at a cost of $2.3 million and a net book value of $1.6 million at
September 26, 1999 and $1.7 million at July 26, 1998.
7. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base, and
their dispersion across many different geographical regions.
8. OTHER ASSETS
Other assets consist of the following (in thousands):
September 26, July 26,
1999 1998
-------------- --------------
Debt issuance costs, net $ 11,912 $ 15,971
Notes receivable 7,118 6,479
Intangible assets 2,290 2,500
Other 4,692 6,486
-------------- --------------
$ 26,012 $ 31,436
============== ==============
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following
(in thousands):
F-8
September 26, July 26,
1999 1998
------------- -------------
Compensation and benefits $ 54,632 $ 50,624
Interest payable 4,591 16,203
Promotion and sales allowances 12,415 9,005
Restructuring costs - 8,256
Litigation related (see Note 21) 20,004 14,570
Other 11,756 18,768
------------- -------------
$103,398 $117,426
============= =============
The restructuring costs at July 26, 1998, include $5.9 million in
connection with the Sweetheart Investment (see Note 3) and the remainder
primarily relates to facility closures in connection with restructuring charges
incurred by Sweetheart prior to the Sweetheart Investment. Sweetheart utilized
$7.9 million of such reserve for its intended purposes and the remaining $.4
million was charged to other income in Fiscal 1999.
10. OTHER LIABILITIES
Other liabilities consist of the following (in thousands):
September 26, July 26,
1999 1998
-------------- --------------
Postretirement benefits $ 47,068 $ 46,876
Pensions 10,508 13,040
Prepaid vendor credits 1,500 -
Other 3,359 1,949
-------------- --------------
$ 62,435 $ 61,865
============== ==============
11. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
September 26, July 26,
1999 1998
------------- -------------
Discount Notes $ 92,018 $ 78,909
Sweetheart Secured Notes 190,000 190,000
Sweetheart Subordinated Notes 110,000 110,000
Sweetheart U.S. Credit Facility 84,476 110,081
Sweetheart Canadian Credit Facility 9,416 9,116
Fonda Senior Subordinated Notes 120,000 120,000
Fonda Credit Facility 11,710 -
Other 1,733 4,862
------------- -------------
619,353 622,968
Less amounts due within one year 275,997 3,825
------------- -------------
$343,356 $619,143
============= =============
Principal maturities of long-term debt, including amounts due within
one year, include: $276.0 million in Fiscal 2000, $20.9 million in Fiscal 2001,
$.1 million in Fiscal 2002, $110.1 million in Fiscal 2003, $.1 million in Fiscal
2004 and $212.2 million thereafter.
On March 12, 1998, the Company issued units consisting of $144 million
aggregate principal amount at maturity of 12 3/4% Senior Secured Discount Notes
due 2008 (the "Discount Notes") and 288,000 shares of Class C Common Stock for
net proceeds of $77.5 million. Until March 15, 2003, accrued interest on the
Discount Notes will not be paid but will accrete semi-annually, thereby
increasing the carrying value of the Discount Notes. The fair value of such
Class C Common Stock ($2.4 million) at the date of issuance was recorded as
common stock and
F-9
paid-in capital with a corresponding reduction in the carrying value of the
Discount Notes. The resulting discount, as well as $4.5 million of financing
fees included in other assets, is being amortized as additional interest expense
over the term of the Discount Notes.
The Sweetheart Notes include: (i) $190 million of 9 5/8% Senior Secured
Notes due September 1, 2000 (the "Sweetheart Secured Notes") and (ii) $110
million of 10 1/2% Senior Subordinated Notes due September 1, 2003 (the
"Sweetheart Subordinated Notes"). Sweetheart may, at its election, redeem the
Sweetheart Secured Notes at any time at 100% 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
(102.625% starting September 1, 1999 and declining in annual increments to 100%
after August 31, 2001) of the principal amount, plus accrued interest. The
Sweetheart Notes provide that upon the occurrence of a Change of Control (as
defined therein) the holders will have the option to require the redemption of
the Sweetheart Notes at a redemption price equal to 101% of the principal
amount, plus accrued interest.
Sweetheart's U.S. revolving credit facility, as amended,
provides for up to $135 million in borrowings, subject to borrowing base
limitations (the "Sweetheart U.S. Credit Facility"). Borrowings under the
Sweetheart U.S. Credit Facility mature on August 1, 2000 and as of September 26,
1999, $42.3 million is available. Borrowings bear interest, at Sweetheart's
election at a rate equal to LIBOR plus 2.25% or a bank's base rate plus 1%. The
Sweetheart U.S. Credit Facility is secured by Sweetheart's accounts receivable,
inventory, equipment, intellectual property, general intangibles and the
proceeds on the sale of any of the foregoing. A Canadian subsidiary of
Sweetheart has a term loan and revolving credit agreement which provides for a
term loan facility of up to Cdn $10 million and a revolving credit facility of
up to Cdn $10 million (the "Sweetheart Canadian Credit Facility" and with the
Sweetheart U.S. Credit Facility, the "Sweetheart Credit Facilities"). Term loan
borrowings under the Sweetheart Canadian Credit Facility are payable quarterly
through May 2001 and revolving credit and term loan borrowings have a final
maturity date of June 15, 2001. As of September 26, 1999, Cdn $4.3 million
(approximately $2.9 million) was available under such Canadian facility. The
Sweetheart Canadian Credit Facility is secured by all of the existing and after
acquired real and personal, tangible assets of such Canadian subsidiary and the
net proceeds on the sale of any of the foregoing. Borrowings under the
Sweetheart Credit Facilities bear interest at an index rate plus 2.25% with
respect to the revolving credit borrowings, and an index rate plus 2.50% with
respect to the term loan borrowings.
In Fiscal 1997, Fonda issued $120 million of 9 1/2% Series A Senior
Subordinated Notes due 2007 (the "Fonda Notes"), with interest payable
semi-annually. Proceeds from the issuance of the Fonda Notes were primarily used
to retire debt. The Company incurred a $3.5 million extraordinary loss (net of a
$2.5 million income tax benefit) in connection with the early retirement of debt
consisting of the write-off of unamortized debt issuance costs, elimination of
unamortized discount and prepayment penalties.
Fonda has a $50 million revolving credit agreement with a bank,
expiring March 31, 2001 and collateralized by eligible accounts receivable and
inventories, certain general intangibles and the proceeds on the sale of
accounts receivable and inventory. At September 26, 1999, $27.8 million was the
maximum advance available based upon eligible collateral. A commitment fee of
.375% per annum is charged on the unutilized portion of the facility. At
September 26, 1999, borrowings were available at the bank's prime rate (8.50%)
plus .25% and at LIBOR (approximately 5.38%) plus 2.25%.
Pursuant to the terms of the instruments governing the indebtedness of
the Company, Fonda and Sweetheart, each company is subject to certain
affirmative and negative covenants customarily contained in agreements of this
type, including, without limitation, covenants that restrict, subject to
specified exceptions (i) mergers and acquisitions, (ii) capital expenditures,
(iii) dividends, and (iv) additional indebtedness. In addition, such debt
instruments restrict each subsidiary's ability to pay dividends or make other
distributions to SF Holdings. The credit facilities also require that each
subsidiary satisfy certain financial covenants.
12. EXCHANGEABLE PREFERRED STOCK
On March 12, 1998, the Company issued units consisting of $30 million
of 13 3/4% Exchangeable Preferred Stock due 2009 (the "Exchangeable Preferred")
and 11,100 shares of Class C Common Stock. Until March 15,
F-10
2003, cumulative dividends on the Exchangeable Preferred may be paid quarterly,
at the Company's option, subject to certain restrictions, either in cash or by
the issuance of additional shares of Exchangeable Preferred. Thereafter,
dividends will be payable in cash, subject to certain exceptions. The fair value
of such Class C Common Stock ($.9 million) at the date of issuance was recorded
as common stock and paid-in capital with a corresponding reduction in the
carrying value of the Exchangeable Preferred. The resulting discount is being
amortized as additional preferred stock dividends over the term of the
Exchangeable Preferred. The Exchangeable Preferred is exchangeable at the
Company's option into 13 3/4% subordinated notes due March 15, 2009. As of
September 26, 1999, dividends on the Exchangeable Preferred have been paid by
the issuance of additional shares of Exchangeable Preferred. The Exchangeable
Preferred is not entitled to any vote, except as required in the Company's
certificate of incorporation and provided by law.
13. MINORITY INTEREST IN SUBSIDIARY
Minority interest represents the 10% total common stock interest in
Sweetheart retained by the 52% voting stockholders, based on historical cost as
of March 12, 1998, and as adjusted to September 26, 1999 to reflect such
stockholders' interest in Sweetheart's net loss.
14. STOCKHOLDERS' EQUITY AND REDEEMABLE COMMON STOCK
On March 12, 1998, in conjunction with the Merger, each share of Class
A and Class B common stock of Fonda, and options and warrants to purchase such
shares, were converted into 47.6766 shares of Class A or Class B Common Stock of
the Company, and options and warrants to purchase such shares, respectively. In
Fiscal 1999, the Company completed a one for ten negative stock split on Common
Stock Classes A, B and C. Stockholders' equity, adjusted for such conversion
consists of the following (in thousands, except share data):
September 26, July 26,
1999 1998
------------- -------------
Preferred Stock Class B, $.01 par value, 100,000 shares authorized, none issued $ - $ -
Preferred Stock Class B Series 1, $.01 par value, 15,000 shares authorized
and issued , at liquidation value 15,000 15,000
Common Stock Class A, $.001 par value, 1,500,000 shares authorized,
562,583 issued and outstanding in 1999 and 1998 6 6
Common Stock Class B, $.001 par value, 100,000 shares authorized,
56,459 issued and outstanding in 1999 and 1998 1 1
Common Stock Class C, $.001 par value, 200,000 shares authorized,
39,900 issued and outstanding in 1999 and 1998 - -
Paid-in capital 3,357 3,357
Retained earnings (deficit) (23,174) 5,041
Minimum pension liability (138)
Translation adjustment (549) (476)
------------- -------------
$ (5,497) $ 22,929
============= =============
The Class B Series 1 preferred stock is not entitled to receive
dividends and is not entitled to any vote, except as otherwise provided by law.
Such preferred stock is convertible, at any time, into 133,494 shares of Class A
Common Stock and is required to be redeemed on March 13, 2010.
The rights of holders of Class A, Class B and Class C Common Stock are
identical except as to voting and conversion rights. The Class A Common Stock is
entitled to one vote per share and has no cumulative voting rights in the
election of directors. The Class B Common Stock is entitled to one-tenth of a
vote per share and shall vote together with the Class A Common Stock as a single
class; provided, however, that the vote of the holders of a majority of shares
of Class B Common Stock shall be required for the amendment or modification of
the Company's certificate of incorporation in any way that would adversely
affect the rights of the Class B Common Stock. The Class C Common Stock is not
entitled to any vote whatsoever, except to the extent provided by law. The Class
B Common Stock may, at any time, be converted into Class A Common Stock at the
option of the holder other than a "Non-Converting Holder" (as defined in the
certificate of incorporation), or at the option of any Non-Converting Holder
concurrently with a sale or other transfer of Class B Common Stock to any
person, other than a Non-Converting Holder. The Class C Common Stock may,
following an underwritten public offering of common stock, be converted into
Class A Common Stock at the option of the holder, or at the option of the
Company.
All common stockholders are entitled, among other things, (i) to share
ratably in dividends and (ii) in the event of liquidation, distribution or a
sale of assets, dissolution or winding-up of the Company, to share ratably in
the distribution of assets legally available therefor.
Prior to the Merger, Fonda paid $9.8 million in Fiscal 1998 and $.2
million in Fiscal 1997 to repurchase shares of its then outstanding Class A
Common Stock and its Class A Common Stock subject to a redemption agreement
("Redeemable Common") from its stockholders. The repurchase of the Redeemable
Common for less than the present value of the liquidation amount as of the date
of repurchase resulted in a credit to retained earnings in Fiscal 1997. In
conjunction with the Merger, the treasury stock was canceled and the outstanding
Redeemable Common were converted into shares of redeemable common stock of SF
Holdings and the book value of the Redeemable Common at that date was credited
to retained earnings.
In Fiscal 1998, Fonda's Board of Directors granted the Company's Chief
Executive Officer and majority stockholder options to purchase shares of Class A
Common Stock at an option price equal to the current market value. In
conjunction with the Merger, such options were converted into options to
purchase shares of Class A common stock of SF Holdings. The proforma effect of
such options on compensation expense, as required by SFAS No. 123, was less than
$.1 million in each of Fiscal 1999, the 1998 Transition Period and Fiscal 1998.
The changes in stockholders' equity consists of the following (in
thousands):
F-11
Nine
Year Weeks Years Ended
Ended Ended -----------------------------
September 26, September 26, July 26, July 27,
Retained earnings: 1999 1998 1998 1997
-------------- -------------- -------------- -------------
Balance, beginning of year $ (536) $ 5,041 $ 11,643 $ 8,371
Net income (loss) (15,630) (4,802) 1,498 3,236
Dividends on Exchangeable Preferred (4,847) (764) (1,616) -
Purchase of affiliate assets in excess
of affiliates book value (see Note 19) (2,094)
Retirement of Fonda's treasury stock - - (6,421) -
Transfer of liquidation value of
redeemable common stock - - - 100
Accretion of redeemable common stock (67) (11) (63) (64)
-------------- -------------- -------------- -------------
Balance, end of year $ (23,174) $ (536) $ 5,041 $ 11,643
============== ============== ============== =============
Minimum pension liability
Balance, beginning of year $ (2,393) $ -
Change in comprehensive income 2,255 (2,393)
-------------- --------------
Balance, end of year $ (138) $ (2,393)
============== ==============
Translation adjustment
Balance, beginning of year $ (821) (476) $ -
Change in comprehensive income 272 (345) (476)
-------------- -------------- --------------
Balance, end of year $ (549) $ (821) $ (476)
============== ============== ==============
The Fonda Group, Inc. Stock Appreciation Unit Plan provides for the
granting of up to 200,000 units to key executives of the Company. A grantee is
entitled to the appreciation in a unit's value from the date of the grant to the
date of its redemption. Unit value is based upon a formula consisting of net
income (loss) and book value criteria and grants vest over a five-year period.
The Company granted 15,560 units in Fiscal 1998 and 10,980 units in Fiscal 1997
at an aggregate value on the date of grant of $.9 million and $.4 million,
respectively. There were no units granted in Fiscal 1999. The Company recorded
compensation expense of $.5 million in Fiscal 1998 and $.1 million in Fiscal
1997. No compensation expense was recorded in Fiscal 1999 or in the 1998
Transition Period. As of September 26, 1999, 40,530 units are outstanding.
15. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
Nine
Year Weeks Years Ended
Ended Ended -----------------------------
September 26, September 27, July 26, 1998 July 27, 1997
1999 1998 1998 1997
-------------- -------------- ------------- -------------
Current:
Federal $ (325) $ (416) $ 5,430 $ 1,449
State 304 (116) 1,758 418
-------------- -------------- ------------- -------------
(21) (532) 7,188 1,867
-------------- -------------- ------------- -------------
Deferred:
Federal (6,301) (3,272) (4,455) 2,328
State (1,400) (482) (535) 677
Foreign (28) (345)
-------------- -------------- ------------- -------------
(7,729) (4,099) (4,990) 3,005
-------------- -------------- ------------- -------------
$ (7,750) $ (4,631) $ 2,198 $ 4,872
============== ============== ============= =============
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets
F-12
and liabilities for financial reporting and income tax purposes. Deferred tax
assets (liabilities) result from temporary differences as follows (in
thousands):
September 26, July 26,
1998 1998
------------- -------------
Deferred tax assets:
Capitalized inventory costs $ 1,631 $ 2,122
Allowance for doubtful accounts receivable 1,110 1,828
Accruals for health insurance and other employee benefits 7,065 9,877
Inventory and sales related reserves 9,209 10,265
Pension reserve 26,990 24,113
Benefit of tax carryforwards 90,790 79,039
Other 289 1,857
------------- -------------
137,084 129,101
Deferred tax liabilities:
Depreciation (72,461) (68,385)
LIFO recapture (11,058) (15,593)
------------- -------------
(83,519) (83,978)
------------- -------------
$ 53,565 $ 45,123
============= =============
A reconciliation of the income tax provision to the amount computed
using the Federal statutory rate is as follows (in thousands):
Nine
Year Weeks Years Ended
Ended Ended ----------------------------
September 26, September 27, July 26, July 27,
1999 1998 1998 1997
-------------- -------------- ------------- -------------
Income tax at statutory rate $ (8,337) $ (3,493) $ 635 $ 4,061
State income taxes (net of federal benefit) (756) (389) (18) 712
Interest on Discount Notes 386 62 130 -
Goodwill amortization 787 202 1,049 -
Other 170 (1,013) 402 99
-------------- -------------- ------------- -------------
$ (7,750) $ (4,631) $ 2,198 $ 4,872
============== ============== ============= =============
At September 26, 1999, Sweetheart has federal and state net operating
loss carryforwards of $214 million, which expire at various dates from 2004
through 2019. Fonda has $1.9 million of state net operating loss carryforwards
which expire at various dates from 2003 through 2020. For federal income tax
purposes, Fonda's net operating losses will be carried back to Fiscal 1998.
SF Holdings and Fonda intend to file consolidated Federal income tax
returns, and pursuant to a tax sharing agreement, Fonda will pay SF Holdings its
allocable share of the consolidated group's consolidated Federal income tax
liability, which, in general, will equal the tax liability Fonda would have paid
if it had filed separate tax returns.
16. LEASES
The Company leases certain of its facilities and equipment under
operating leases. Future minimum payments under noncancellable operating leases
with remaining terms of one year or more are $14.5 million in Fiscal 2000, $11.2
million in Fiscal 2001, $10.1 million in Fiscal 2002, $8.1 million in Fiscal
2003, $6.2 million in Fiscal 2004, and $26.2 million thereafter.
Rent expense was $22.5 million in Fiscal 1999, $4.3 million in the 1998
Transition Period, $5.8 million in Fiscal 1998 and $2 million in Fiscal 1997.
17. BUSINESS SEGMENTS
F-13
The Company is a holding company and its reportable segments consist of
the operations of its two significant operating subsidiaries Sweetheart and
Fonda. Sweetheart primarily manufactures and sells disposable paper, plastic and
foam foodservice and food packaging products to customers in institutional
markets. Fonda primarily manufactures and sells disposable paper and tissue
based foodservice products to customers in institutional and consumer markets.
Data for such segments and a reconciliation to consolidated amounts are
presented in the table below (in thousands):
Nine
Year Weeks Years Ended
Ended Ended -----------------------------
September 26, September 27, July 26, July 27,
1999 1998 1998 1997
--------------- -------------- ------------- -------------
Net sales:
Sweetheart $ 863,781 $ 216,542 $ 282,394
Fonda 262,837 42,679 258,649 $ 233,233
Other (1) - - 16,760 22,902
Intersegment elimination (11,036) (141) (4,068) (3,622)
--------------- -------------- ------------- -------------
$ 1,115,582 $ 259,080 $ 553,735 $ 252,513
=============== ============== ============= =============
Income from operations, excluding other income:
Sweetheart $ 32,165 $ 2,797 $ 4,433
Fonda 8,518 952 12,843 $ 14,364
Other (1) - - 1,682 4,101
Corporate and eliminations (323) (27) (24) 547
--------------- -------------- ------------- -------------
$ 40,360 $ 3,722 $ 18,934 $ 19,012
=============== ============== ============= =============
Depreciation and amortization:
Sweetheart $ 50,508 $ 12,951 $ 14,222
Fonda 6,598 1,039 5,821 $ 4,783
Other (1) - - 335 171
Corporate and eliminations 321 63 268 -
--------------- -------------- ------------- -------------
$ 57,427 $ 14,053 $ 20,646 $ 4,954
=============== ============== ============= =============
Interest expense, net
Sweetheart $ 41,671 $ 10,516 $ 13,341
Fonda 11,926 1,796 12,006 $ 9,017
Corporate 11,760 1,902 3,957 -
--------------- -------------- ------------- -------------
$ 65,357 $ 14,214 $ 29,304 $ 9,017
=============== ============== ============= =============
Total assets:
Sweetheart $ 715,684 $ 750,885 $ 766,456
Fonda 185,921 173,967 178,112 $ 160,688
Other (1) - - 416 18,916
Corporate and eliminations 269 (663) (1,173) -
--------------- -------------- ------------- -------------
$ 901,874 $ 924,189 $ 943,811 $ 179,604
=============== ============== ============= =============
Capital expenditures:
Sweetheart $ 30,790 $ 11,390 $ 6,688
Fonda 12,379 748 4,630 $ 1,762
Other (1) - - 2,409 8,601
Eliminations (2,385) - - -
--------------- -------------- ------------- -------------
$ 40,784 $ 12,138 $ 13,727 $ 10,363
=============== ============== ============= =============
(1) Other consists of Fonda's tissue mill operations which were sold in March
1998.
Sweetheart has one national customer that accounted for more than 10%
of its net sales in each period. Net sales to such customer was $98.8 million in
fiscal 1999, $26.4 million in the 1998 Transition Period and $100.9 million in
Fiscal 1998. Fonda has one customer that accounted for 10% of its net sales in
Fiscal 1999. All net sales were to customers in the United States, except for
sales to Sweetheart customers in Canada which amounted to
F-14
approximately 7% of Sweetheart sales in each period. All assets are located in
the United States, except for $37.9 million and $32.9 million at September
26,1999 and June 30, 1998, respectively, which were located in Canada.
18. SUPPLEMENTAL CASH FLOW INFORMATION
Nine
Year Weeks Years Ended
Ended Ended -----------------------------
September 26, September 27, July 26, July 27,
1999 1998 1998 1997
--------------- -------------- -------------- --------------
Cash paid during the year for:
Interest, including $192 capitalized
in 1998 and $163 in 1997 $ 51,860 $ 23,335 $ 15,220 $ 5,018
Income taxes, net of refunds 1,798 87 4,708 614
Businesses acquired:
Fair value of assets acquired,
including goodwill $774,776 $ 23,637
Liabilities assumed (includes $30,000 of preferred stock and
$9,250 of notes payable accepted by sellers in Fiscal 1998 674,806 594
-------------- --------------
$ 99,970 $ 23,043
============== ==============
19. RELATED PARTY TRANSACTIONS
Fonda leases a building in Jacksonville, Florida from the majority
stockholder of the Company on terms the Company believes are no less favorable
than could be obtained from independent third parties and were negotiated on an
arm's length basis. Annual payments under the lease are $.2 million plus annual
increases based on changes in the Consumer Price Index ("CPI") through December
31, 2014. In addition, the majority stockholder can require the Company to
purchase the facility for $1.5 million, subject to a CPI-based escalation, until
July 31, 2006. In Fiscal 1998, the Company terminated it operations at this
facility and had been seeking a sublease tenant. Effective October 1, 1999, Four
M Corporation ("Four M"), an affiliate, has assumed a portion of the obligations
under this lease. Rent expense, net of sublease income on a portion of the
premises subleased through May 1998 to Four M, was $.1 million in Fiscal 1999,
less than $.1 million in the 1998 Transition Period, and $.1 million in both
Fiscal 1998 and 1997.
In Fiscal 1998, Fonda entered into a license agreement with CEG,
whereby CEG was granted the exclusive rights to use certain of Fonda's
trademarks and trade names in connection with the manufacture, distribution and
sale of disposable party goods products for a period of five years, subject to
extension. In connection therewith, Fonda has received an annual royalty equal
to 5% of CEG's cash flow, as determined in accordance with a formula specified
in such agreement. In Fiscal 1999, Fonda entered into an exclusive manufacture
and supply agreement with CEG (together with the before mentioned license
agreement, the "CEG Agreements"). Pursuant to such agreement, and until December
6, 1999, Fonda manufactured and supplied all of CEG's requirements for, among
other items, disposable paper plates, cups, napkins and tablecovers. Fonda sold
such manufactured products to CEG in accordance with a formula based on Fonda's
cost. Also in Fiscal 1999, Fonda purchased certain manufacturing assets from CEG
for $4.9 million and entered into operating leases whereby Fonda 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 assets purchased from CEG were recorded in
machinery and equipment as a carryover of CEG's book value ($1.4 million) and
the excess of the purchase price over such CEG amounts was charged to retained
earnings. The Company believes the terms on which it (i) granted licence rights
to CEG, (ii) manufactures and supplies products for CEG, (iii) purchased
manufacturing assets from CEG, and (iv) leased 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. Pursuant to the CEG Asset
Purchase Agreement (see Note 23), Fonda will cancel the CEG Agreements.
In Fiscal 1998, Fonda amended certain terms of the $2.6 million
Promissory Note dated February 27, 1997, made by CEG in favor of Fonda (the "CEG
Note"). The 10% annual interest rate on the CEG Note was converted to
pay-in-kind, the CEG Note's 2002 maturity was extended for an additional three
years and the CEG Note was made subordinate to Senior Debt (as such term is
defined therein). In connection with such amendment, Fonda was also
F-15
issued a warrant to purchase, for a nominal amount, 2.5% of CEG's common stock.
The Company believes that the terms of such loan and the amendments thereto are
no more favorable to CEG than those that CEG could otherwise have obtained from
unrelated third parties and such terms were negotiated on an arm's length basis.
The loan is included in other assets. The CEG Note was canceled on December 6,
1999 in partial consideration of the CEG Asset Purchase Agreement (see Note 23).
In Fiscal 1998, Fonda purchased a 38.2% ownership interest in Fibre
Marketing Group, LLC ("Fibre Marketing"), a waste paper recovery business, from
a director of the Company for $.2 million. Four M is also a member of Fibre
Marketing. Fonda granted Sweetheart the right to acquire 50% of the Company's
interest in Fibre Marketing for $.1 million. The Company believes that the terms
on which it purchased such interest are at least as favorable as those it could
otherwise have obtained from an unrelated third party and were negotiated on an
arm's length basis.
Net sales to CEG were $26.9 million in Fiscal 1999, $6.9 million in the
1998 Transition Period, $17.0 million in Fiscal 1998 and $7.8 million in Fiscal
1997. Accounts receivable from CEG was $12.6 million at September 26, 1999
compared to $.5 million at July 26, 1998. Net sales to Fibre Marketing were $4.2
million in Fiscal 1999, $.4 million in the 1998 Transition Period, $4.2 million
in Fiscal 1998 and $3.6 million in Fiscal 1997. The Company also purchases
corrugated containers from Four M, which were $7.8 million in Fiscal 1999, $1.4
million in the 1998 Transition Period, $1.1 million in Fiscal 1998 and $.9
million in Fiscal 1997. The Company believes that the terms on which it sold or
purchased products from related parties are at least as favorable as those it
could otherwise have obtained from unrelated third parties and were negotiated
on an arm's length basis. In Fiscal 1998, the Company contracted with The
Emerald Lady, Inc., an affiliate, to provide air transportation services. The
Company incurred $.9 million for such services in Fiscal 1999, $.1 million in
the 1998 Transition Period and $.3 million in Fiscal 1998. The Company believes
that the terms on which it purchases such services are at least as favorable as
those it could otherwise have obtained from unrelated third parties and were
negotiated on an arm's length basis. All of the above mentioned affiliates are
under the common control of the Company's Chief Executive Officer.
At September 26, 1999, Fonda had demand loan receivables with its Chief
Executive Officer totaling $275,000 plus accrued interest at 10%. During Fiscal
1999, Fonda also had a $150,000 loan receivable with another executive officer
plus accrued interest at 5.39%, which was paid in full in June 1999.
20. EMPLOYEE BENEFIT PLANS
Sweetheart sponsors various defined benefit post-retirement health care
plans that cover substantially all full-time employees. The plans, in most
cases, pay stated percentages of most medical expenses incurred by retirees
after subtracting payments by Medicare or other providers and after a stated
deductible has been met. Participants generally become eligible after reaching
age 60 with ten years of service. The majority of such plans are contributory,
with retiree contributions adjusted annually. Sweetheart does not fund the
plans. Both Sweetheart and Fonda provide certain union and non-union employees
with retirement and disability income benefits under defined benefit pension
plans. Pension costs are based upon the actuarially determined normal costs plus
interest on and amortization of the unfunded liabilities. The benefits for
participants in Fonda's non-union pension plans are frozen. In Fiscal 1999, the
assets and obligations of a pension plan for a significant number of the
Company's union employees were transferred to a multi-employer pension plan
resulting in a $.2 million credit to income. The Company's policy is to annually
fund the minimum contributions required by applicable regulations.
The net periodic cost for pension and other benefit plans is as follows
(in thousands):
F-16
Nine
Year Weeks Years Ended
Ended Ended -----------------------------
September 26, September 27, July 26, July 27,
Pension benefits 1999 1998 1998 1997
-------------- -------------- ------------- -------------
Service cost $ 1,274 $ 273 $ 562 $ 433
Interest cost 4,486 1,040 1,654 403
Return on plan assets (4,650) (796) (1,719) (751)
Net amortization and deferrals 288 (299) 99 487
-------------- -------------- ------------- -------------
Net periodic pension cost $ 1,398 $ 218 $ 596 $ 572
============== ============== ============= =============
Other benefits
Service cost $ 1,027 $ 228 $ 274
Interest cost 3,271 873 982
Net amortization and deferrals (41)
-------------- -------------- -------------
Net periodic pension cost $ 4,298 $ 1,101 $ 1,215
============== ============== =============
The funded status of the plans and the changes in benefit obligations and plan
assets is as follows (in thousands):
Pension benefits Other benefits
----------------------------- ------------------------------
September 26, July 26, September 26, July 26,
1999 1998 1999 1998
------------- ------------- -------------- --------------
Change in benefit obligation:
Benefit obligation at beginning of period $ 64,909 $ 63,407 $ 46,900 $ 47,071
Service cost 1,547 562 1,255 274
Interest cost 5,526 1,654 4,144 982
Amendments 202 219 (3,520) -
Actuarial gain (loss) (2,962) 226 (3,117) (1,005)
Benefits paid (5,082) (1,159) (3,256) (422)
Transfer to multi-employer plan (3,857) - - -
------------- ------------- -------------- --------------
Benefit obligation at end of period 60,283 64,909 42,406 46,900
Change in plan assets
Fair value of plan assets at beginning of period 46,925 44,681 - -
Actual return on plan assets 4,073 1,650 - -
Contributions to plan 5,807 1,753 3,256 422
Benefits paid (5,082) (1,159) (3,256) (422)
Transfer to multi-employer plan (3,665) - - -
------------- ------------- -------------- --------------
Fair value of plan assets at end of period 48,058 46,925 - -
Funded status (12,225) (17,984) (42,406) (46,900)
Unrecognized prior service costs 248 600 (3,520) (420)
Unrecognized (gain) loss (1,798) (209) (4,064) (2,045)
------------- ------------- -------------- --------------
Accrued pension liability $ (13,775) $ (17,593) $ (49,990) $ (49,365)
============= ============= ============== ==============
For purposes of the above table, the benefit obligation at the
beginning of Fiscal 1999 is as of July 26, 1998 and the changes in benefit
obligation and in plan assets include amounts for the 1998 Transition Period.
The actuarial present values of accumulated and projected benefit obligations
were determined using discount rates of 7.75% in Fiscal 1999 and 7% in Fiscal
1998. The expected rate of return on assets ranged from an assumption of 8% to
10%. As of September 26, 1999 and July 26, 1998 the Company had plans with
benefit obligations in excess of plan assets. Benefit obligations for such plans
at September 26, 1999 and July 26, 1998 were $58.0 million and $59.2 million,
respectively, and plan assets were $45.4 million and $41.3 million,
respectively.
F-17
The amounts recognized in the Consolidated Balance Sheets are as
follows:
Pension benefits Other benefits
----------------------------- -----------------------------
September 26, July 26, September 26, July 26,
1999 1998 1999 1998
-------------- ------------- -------------- -------------
Accrued benefit liability $ (14,035) $ (17,662) $ (49,990) $ (49,365)
Intangible asset 28 69 - -
Deferred income tax 94 - - -
Other comprehensive (income) loss 138 - - -
-------------- ------------- -------------- -------------
$ (13,775) $ (17,593) $ (49,990) $ (49,365)
============== ============= ============== =============
The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.75% in Fiscal 1999 and 7.0%
in Fiscal 1998. Net postretirement health care cost was computed using a
weighted average discount rate of 8.0% in Fiscal 1999 and 7.0% in Fiscal 1998.
For measuring the expected postretirement benefit obligation, a 8% annual rate
of increase in the per capita claims cost was assumed in Fiscal 1999 (9% in
Fiscal 1998). This rate is assumed to decrease by 1.0% per year to an ultimate
rate of 5.0%. The health care cost trend rate assumption has a significant
effect on the amounts reported. To illustrate, increasing the assumed health
care cost trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of September 26,1999 by
approximately $3.1 million and the aggregate of the service and interest cost
components of net postretirement benefits cost by approximately $.2 million.
The Company provides 401(k) savings and investment plans for the
benefit of non-union and certain union employees. The costs for these plans were
$6.3 million in Fiscal 1999, $1.1 million for the 1998 Transition Period, $2.1
million in Fiscal 1998 and $.8 million in Fiscal 1997.
The Company also participates in multi-employer pension plans for
certain of its union employees. Contributions to these plans, at a defined rate
per hour worked, amounted to $.7 million in Fiscal 1999, less than $.1 million
for the 1998 Transition Period, $.6 million in 1998 and $.6 million in 1997.
21. CONTINGENCIES
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084,
was initially filed in state court in Georgia in April 1987, and is currently
pending against Sweetheart in federal court. The remaining plaintiffs claimed,
among other things, that Sweetheart wrongfully terminated the Lily-Tulip, Inc.
Salary Retirement Plan (the "Plan") in violation of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). The relief sought by
plaintiffs was to have the plan termination declared ineffective. In December
1994, the United States Court of Appeals for the Eleventh Circuit (the "Circuit
Court") ruled that the Plan was lawfully terminated on December 31, 1986.
Following that decision, the plaintiffs sought a rehearing which was denied, and
subsequently filed a petition for a writ of certiorari with the United States
Supreme Court, which was also denied. Following remand, in March 1996, the
United States District Court for the Southern District of Georgia (the "District
Court") entered a judgment in favor of Sweetheart. Following denial of a motion
for reconsideration, the plaintiffs in April 1997 filed an appeal with the
Circuit Court. On May 21, 1998, the Circuit Court affirmed the judgment in favor
of Sweetheart. On June 10, 1998, the plaintiffs petitioned the Circuit Court for
a hearing of their appeal which petition was denied on July 29, 1998. In October
1998, plaintiffs filed a Petition for Writ of Certiorari to the United States
Supreme Court, which was denied in January 1999. Sweetheart has begun the
process of paying out the termination liability. As of December 15, 1999, the
Company has disbursed $8.6 million in termination payments.
On April 27, 1999, the plaintiffs filed a motion in the District Court
for reconsideration of the court's dismissal without appropriate relief and a
motion for attorneys' fees with a request for delay in determination of
entitlement to such fees. On June 17, 1999, the District Court deferred these
motions and ordered discovery in connection therewith. Discovery is expected to
be completed by the end of December 1999. 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
amounts would not have a material adverse effect on the Company's financial
position or results of operations.
F-18
A patent infringement action seeking injunctive relief and damages
relating to Sweetheart's production and sale of certain paper plates entitled
Fort James Corporation v. Sweetheart Cup Company Inc., Civil Action No.
97-C-1221, was filed in the United States District Court for the Eastern
District of Wisconsin on November 21, 1997. During the fourth quarter of Fiscal
1999, mediation resulted in a settlement of this action whereby Sweetheart
agreed to pay damages of $2.6 million. This amount has been fully reserved by
Sweetheart, with the first of two payments, $1.6 million, made on September 30,
1999. The second payment of $1.0 million is due July 1, 2000.
On July 13, 1999, Sweetheart received a letter from the EPA identifying
it, among numerous others, as a "potential responsible party" under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, at a site in Baltimore, Maryland. The EPA letter states that it does
not constitute a final determination by EPA concerning the liability of
Sweetheart or any other entity. Sweetheart denies liability and has no reason to
believe the final outcome of this matter will have a material effect on its
financial condition or results of operations. However, no assurance can be given
about its ultimate effect on Sweetheart, if any, given the early stage of this
investigation.
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.
22. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
See Notes 11, 12 and 14 for information relating to the Discount Notes,
exchangeable preferred stock and the redeemable common stock. The condensed
financial statements of the parent company only are as follows (in thousands):
September 26, July 26,
1999 1998
--------- ---------
Balance Sheet
Assets
Cash $ -- $ 106
Other current assets 100
Investments in subsidiaries 114,817 128,857
Deferred finance fees 4,049 4,505
Deferred income taxes 6,320 1,444
--------- ---------
$ 125,286 $ 134,912
========= =========
Liabilities and Stockholders' Equity
Accrued expenses $ 257 $ 255
Discount Notes 92,018 78,909
Exchangeable preferred stock 36,291 30,680
Redeemable common stock 2,217 2,139
Stockholders' equity (deficit) (5,497) 22,929
========= =========
$ 125,286 $ 134,912
========= =========
F-19
Nine
Year Weeks Year
Ended Ended Ended
September 26, September 27, July 26,
1999 1998 1998
--------------- --------------- --------------
Statement of Operations
General and administrative expenses $ (47) $ (27) $ (24)
Management fee income 200 92
Interest expense, net (11,760) (1,902) (3,957)
--------------- --------------- --------------
Loss before income taxes and equity in subsidiaries (11,607) (1,837) (3,981)
Income tax benefit 4,082 664 1,444
Equity in income (loss) of subsidiaries (8,105) (3,629) 4,035
--------------- --------------- --------------
Net income (15,630) (4,802) 1,498
Payment-in-kind dividends on exchangeable
preferred stock 4,847 764 1,616
--------------- --------------- --------------
Net loss applicable to common stock $ (20,477) $ (5,566) $ (118)
=============== =============== ==============
Statement of Cash Flows
Operating activities:
Net income (loss) $ (15,630) $ (4,802) $ 1,498
Equity in (income) loss of subsidiaries 8,105 3,629 (4,035)
Amortization of deferred finance fees 714 124 268
Interest capitalized on debt 11,046 1,779 3,707
Income taxes receivable (4,082) (664) (1,444)
Decrease in accrued expenses (154) (171) (919)
--------------- --------------- --------------
Net cash used in operating activities (1) (105) (925)
--------------- --------------- --------------
Investing activities:
Sweetheart Investment (88,000)
--------------
Financing activities:
Proceeds from issuance of Discount Notes 77,538
Proceeds from issuance of exchangeable preferred stock 15,000
Debt issuance costs (3,507)
--------------
Net cash provided by financing activities 89,031
--------------- --------------- --------------
Net increase in cash (1) (105) 106
Cash at beginning of period 1 106
--------------- --------------- --------------
Cash at end of period $ - $ 1 $ 106
=============== =============== ==============
23. SUBSEQUENT EVENT
On December 3, 1999, CEG became an 87% owned subsidiary of SF Holdings
pursuant to a merger. In connection with the merger, 87% of CEG's common stock
was exchanged for 15,000 shares of Class B Series 2 Preferred Stock of the
Company. On December 6, 1999, pursuant to an asset purchase agreement entered
into on November 21, 1999 (the "CEG Asset Purchase Agreement"), Fonda purchased
the intangible assets of CEG, including domestic and foreign trademarks,
patents, copyrights and customer lists. In addition, pursuant to the CEG Asset
Purchase Agreement, Fonda has agreed to purchase over a sixty day period certain
inventory of CEG. The aggregate purchase price for the intangible assets and the
inventory is $41 million ($16 million for the intangible assets and $25 million
for the inventory), payable in cash, the cancellation of certain notes and
warrants and the assumption of certain liabilities. The agreement further
provides that Fonda may acquire other CEG assets in exchange for outstanding
trade payables owed to it by CEG. In connection with this agreement, Fonda will
cancel the CEG Agreements (see Note 19). Upon the consummation of the CEG Asset
Purchase Agreement, Fonda will market, manufacture and distribute disposable
party goods products directly to the specialty (party) channel of its consumer
market.
F-20
SCHEDULE II
THE SF HOLDINGS GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
Additions
---------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end
Classification of period expenses accounts Deductions of period
-------------- --------------- ------------- ------------- ------------ ---------------
Allowance for Doubtful Accounts
Year ended September 26, 1999 $2,621 760 751 (1) $2,630
Transition Period ended
September 27, 1998 $3,569 (301) 647 (1) $2,621
Year ended July 26, 1998 $ 961 476 2,748 (2) 561 (1) $3,569
57 (3) 110 (4)
2 (5)
Year ended July 27, 1997 $ 549 457 -- 45 (1) $ 961