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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the Twenty-Six Weeks Ended
March 26, 2000
[ ] 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 (IRS Employer
incorporation or organization) Identification No.)
373 Park Avenue South, New York, New York 10016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212/779-7448
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 [ ]
The number of shares outstanding of the Registrant's common stock
as of April 24, 2000:
Class A Common Stock, $0.001 par value - 562,583 shares
Class B Common Stock, $0.001 par value - 56,459 shares
Class C Common Stock, $0.001 par value - 39,900 shares
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SF HOLDINGS GROUP, INC.
-----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except share data)
---------------------------------
(Unaudited)
March 26, September 26,
2000 1999(1)
------------- ---------------
Assets
------
Current assets:
Cash and cash equivalents $ 5,631 $ 4,180
Receivables, less allowances of $4,173 and $6,979,
respectively 135,763 136,629
Due from affiliates 661 538
Inventories 222,888 191,848
Deferred income taxes 20,757 20,547
Other current assets 22,785 24,330
--------- ---------
Total current assets 408,485 378,072
--------- ---------
Property, plant and equipment, net 373,744 387,309
Goodwill, net 96,563 98,176
Deferred income taxes 40,686 38,424
Other assets 29,923 35,229
--------- ---------
Total assets $ 949,401 $ 937,210
========= =========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 100,214 $ 80,786
Accrued expenses and other current liabilities 102,293 112,700
Current portion of long-term debt 288,764 276,845
--------- ---------
Total current liabilities 491,271 470,331
--------- ---------
Long-term debt 379,095 381,554
Other liabilities 61,132 62,494
Deferred income taxes 4,105 4,026
--------- ---------
Total liabilities 935,603 918,405
--------- ---------
Exchangeable preferred stock 38,968 36,291
Minority interest in subsidiary 2,317 1,971
Redeemable common stock 2,251 2,217
Stockholders' Deficit (29,738) (21,674)
---------- ----------
Total liabilities and stockholders' deficit $ 949,401 $ 937,210
========== ==========
(1) Restated, see Note 2 of the Notes to Consolidated Financial Statements
See accompanying Notes to Consolidated Financial Statements.
SF HOLDINGS GROUP, INC.
-----------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
AND OTHER COMPREHENSIVE INCOME (LOSS)
-------------------------------------
(Unaudited)
(In thousands)
For the For the For the For the
Thirteen Thirteen Twenty-six Twenty-six
weeks ended weeks ended weeks ended weeks ended
March 26, March 28, March 26, March 28,
2000 1999(1) 2000 1999(1)
------------ ------------ ------------ ------------
Net sales $ 289,374 $ 271,483 $ 595,194 $ 557,941
Cost of sales 247,428 238,758 507,707 493,745
--------- --------- ---------- ---------
Gross profit 41,946 32,725 87,487 64,196
Selling, general and administrative expenses 29,752 30,570 60,561 59,617
Other (income) expense, net (3,012) 284 (1,564) 504
---------- --------- ---------- ---------
Operating income 15,206 1,871 28,490 4,075
Interest expense, net of interest income of $180,
$163, $267 and $402, respectively 17,137 17,311 34,700 35,221
--------- --------- --------- ---------
Income (loss) before income tax expense
(benefit), minority interest and extraordinary
loss (1,931) (15,440) (6,210) (31,146)
Income tax expense (benefit) (466) (5,881) (1,850) (11,848)
Minority interest in subsidiary's income (loss) 229 (445) 346 (1,248)
---------- ---------- ---------- ----------
Net income (loss) before extraordinary loss (1,694) (9,114) (4,706) (18,050)
---------- ---------- ---------- -----------
Extraordinary loss on debt extinguishment (net of
income taxes of ($350)) 525 - 525 -
---------- --------- ---------- ----------
Net income (loss) (2,219) (9,114) (5,231) (18,050)
---------- ---------- ---------- ----------
Payment-in-kind dividends on exchangeable
preferred stock (1,360) (1,208) (2,677) (2,365)
---------- ---------- ---------- ----------
Net income (loss) applicable to common stock $ (3,579) $ (10,322) $ (7,908) $ (20,415)
========== ========== ========== ==========
Other comprehensive income (loss), net of tax:
Net income (loss) (2,219) (9,114) (5,231) (18,050)
Foreign currency translation adjustment 60 252 71 (11)
Minimum pension liability adjustment (79) (454) (193) 889
---------- ---------- ---------- ----------
Other comprehensive income (loss) (19) (202) (122) 878
---------- ---------- ---------- ----------
Comprehensive income (loss) $ (2,238) $ (9,316) $ (5,353) $ (17,172)
========== ========== ========== ==========
(1) Restated, see Note 2 of the Notes to Consolidated Financial Statements
See accompanying Notes to Consolidated Financial Statements.
SF HOLDINGS GROUP, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(In thousands)
For the Twenty- For the Twenty-
six weeks ended six weeks ended
March 26, March 28,
2000 1999(1)
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (5,231) $ (18,050)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 27,666 28,159
Interest capitalized on debt 5,698 5,353
Deferred income tax credit (2,215) (10,667)
Gain on sale of assets (4,082) (170)
Minority interest in subsidiary 346 (1,248)
Changes in operating assets and liabilities:
Receivables 721 (3,851)
Due from affiliates 190 81
Inventories (29,934) (4,619)
Other current assets 322 (317)
Accounts payable and accrued expenses 9,008 15,975
Other, net 1,631 3,188
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Net cash provided by (used in) operating activities 4,120 13,834
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (14,795) (20,613)
Proceeds from sale of property, plant and equipment 8,517 5,210
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Net cash provided by (used in) investing activities (6,278) (15,403)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under revolving credit
facilities 42,703 43,102
Repayment of other debt (39,094) (48,941)
Decrease in cash escrow - 3,870
---------- ----------
Net cash provided by (used in) financing activities 3,609 (1,969)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,451 (3,538)
CASH AND CASH EQUIVALENTS, beginning of period 4,180 9,898
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 5,631 $ 6,360
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 28,438 $ 24,464
========== ==========
Income taxes paid (refunded) $ (2,537) $ (5,091)
========== ==========
(1) Restated, see Note 2 of the Notes to Consolidated Financial Statements
See accompanying Notes to Consolidated Financial Statements
SF HOLDINGS GROUP, INC.
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
(1) BASIS OF PRESENTATION
SF Holdings Group, Inc. ("SF Holdings"), is a holding company that conducts
its operations through its subsidiaries, Sweetheart Holdings Inc. ("Sweetheart")
and The Fonda Group, Inc. ("Fonda") (collectively, the "Company"), and therefore
has no significant cash flows independent of such subsidiaries. The instruments
governing the indebtedness of Sweetheart and Fonda contain numerous restrictive
covenants that restrict Sweetheart and Fonda's ability to pay dividends or make
other distributions to SF Holdings or to each other. The Company believes that
the combined operations of its subsidiaries makes the Company one of the three
largest converters and marketers of disposable food service and food packaging
products in North America.
The information included in the foregoing interim consolidated financial
statements of the Company are unaudited but, in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments and
accruals) which the Company considers necessary for a fair presentation of the
operating results for these periods. Results for interim periods are not
necessarily indicative of results for the entire year. These condensed financial
statements should be read in conjunction with the Company's financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
fiscal year ended September 26, 1999. Certain prior period amounts have been
reclassified to conform to current period presentation.
(2) BUSINESS ACQUISITION
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. As a result of this transaction, Fonda
markets, manufactures and distributes disposable party goods products directly
to the specialty (party) channel of its consumer market. The transaction has
been accounted for in a manner similar to pooling-of-interests. The accompanying
financial statements have been restated for all periods presented to include
CEG's balance sheet and results of operations.
(3) INVENTORIES
The components of inventories are as follows (in thousands):
(Unaudited)
March 26, September 26,
2000 1999
--------------- ----------------
Raw materials and supplies $ 59,235 $ 53,627
Finished products 153,764 130,185
Work in progress 9,889 8,036
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Total inventories $ 222,888 $ 191,848
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(4) SEGMENTS
For the For the For the For the
Thirteen Thirteen Twenty-six Twenty-six
weeks ended weeks ended weeks ended weeks ended
March 26, March 28, March 26, March 28,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Net Sales:
Sweetheart $ 217,379 $ 195,389 $ 431,595 $ 399,298
Fonda 78,063 77,168 175,635 159,815
Intersegment elimination (6,068) (1,074) (12,036) (1,172)
----------- ----------- ----------- -----------
Total Sales $ 289,374 $ 271,483 $ 595,194 $ 557,941
=========== =========== =========== ===========
Income from operations, excluding other income:
Sweetheart $ 9,671 $ 1,625 $ 18,508 $ 57
Fonda 2,629 632 8,529 4,668
Corporate and eliminations (106) (102) (111) (146)
----------- ----------- ----------- -----------
Total income from operations $ 12,194 $ 2,155 $ 26,926 $ 4,579
=========== =========== =========== ===========
(5) EXTRAORDINARY LOSS
In conjunction with the merger (see Note 2, herein), CEG retired its
long-term debt. As a result, CEG charged $875,000, or $525,000 net of income tax
benefit, to results of operations as an extraordinary item. This amount
represented the unamortized deferred financing fees and other expenses
pertaining to such debt.
(6) 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 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 entered in favor
of Sweetheart. On June 10, 1998, the plaintiffs petitioned the Circuit Court for
a rehearing of their appeal which petition was denied on July 29, 1998. 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 and as of March 26, 2000 had
disbursed $8.9 million in termination payments. The initial estimate of the
total termination liability, less these payments, exceeds assets set aside in
the Plan by approximately $11.6 million, which amount has been fully reserved by
Sweetheart.
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 has been completed and
Sweetheart is awaiting further action by the plaintiffs. Due to the complexity
involved in connection with the claims asserted in this case, Sweetheart cannot
determine at present with any certainty the amount of damages it
would be required to pay should the plaintiffs prevail; accordingly, there can
be no assurance that such amounts would not have a material adverse effect on
Sweetheart'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 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 ("CERCLA"), 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.
On December 20, 1999, Sweetheart received an information request letter from the
EPA, pursuant to CERCLA, regarding a Container Recycling Superfund Site in
Kansas City, Kansas. Sweetheart denies liability and has no reason to believe
the final outcomes will have a material effect on Sweetheart's financial
condition or results of operations. However, no assurance can be given about the
ultimate effect on Sweetheart, if any, given the early stage of the
investigations.
The Company is also involved in a number of legal proceedings arising in
the ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position or results of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Forward-looking statements in this filing, including those in the Notes to
Consolidated Financial Statements, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties and actual
results could differ materially. Such risks and uncertainties include, but are
not limited to, general economic and business conditions, competitive market
pricing, increases in raw material costs, energy costs and other manufacturing
costs, fluctuations in demand for the Company's products, potential equipment
malfunctions and pending litigation. For additional information, see the
Company's annual report on Form 10-K for the most recent fiscal year.
General
SF Holdings Group, Inc. ("SF Holdings") conducts all of its operations
through its principal operating subsidiaries, Sweetheart Holdings Inc.
("Sweetheart") and The Fonda Group, Inc. ("Fonda") (collectively, the "Company")
and therefore has no significant cash flows independent of such subsidiaries.
Each of Fonda and Sweetheart's business is seasonal with a majority of its
net cash flows from operations realized in the third and forth quarters of the
fiscal year. Sales of paperboard products for such periods reflect the high
seasonal demands of the summer months when outdoor and away-from-home
consumption increases. This results in disproportionately higher net income in
the last six months of the fiscal year as cost absorption improves resulting
from a more profitable sales and production mix. In addition, Fonda's tissue
based and specialty party goods products experience increased volume and a high
percentage of its net income in the first and fourth fiscal quarters due to the
buildup of seasonal business between Halloween and the Super Bowl. In the event
that Fonda's and/or Sweetheart's cash flow from operations is insufficient to
provide working capital necessary to fund their respective production
requirements, Fonda and/or Sweetheart will need to borrow under their respective
credit facilities or seek other sources of capital. Although the Company
believes that funds available under such credit facilities together with cash
generated from operations, will be adequate to provide for each company's
respective cash requirements, there can be no assurance that such capital
resources will be sufficient in the future.
Recent Developments
On December 20, 1999, Sweetheart Cup entered into a Stock Purchase
Agreement with the stockholders of Sherwood Industries, Inc. ("Sherwood"), a
manufacturer of paper cups, containers and cup making equipment, pursuant to
which Sweetheart Cup will acquire all of the issued and outstanding capital
stock (the "Sherwood Acquisition") of Sherwood and its subsidiaries for an
aggregate purchase price of $19.0 million, subject to adjustment for changes in
working capital. On April 6, 2000, all of the conditions to closing were
satisfied. The Company expects the foregoing transaction to be consummated
during the third quarter of Fiscal 2000.
Thirteen Weeks Ended March 26, 2000 Compared to Thirteen Weeks Ended
March 28, 1999 (Unaudited)
Net sales increased $17.9 million, or 6.6%, to $289.4 million for the
thirteen weeks ended March 26, 2000 due to net sales increases at both
Sweetheart and Fonda. The following analysis includes $3.1 million of sales from
Sweetheart to Fonda and $2.9 million of sales from Fonda to Sweetheart, which
were eliminated in consolidation.
Sweetheart Results:
Net sales increased $22.0 million, or 11.3%, to $217.4 million for the
thirteen weeks ended March 26, 2000 compared to $195.4 million for the thirteen
weeks ended March 28, 1999, reflecting a 7.9% increase in sales volume and a
3.4% increase in average realized sales price. Net sales to institutional
foodservice customers increased 12.6%, reflecting a 8.9% increase in sales
volume and a 3.7% increase in average realized sales price. This increase is
primarily the result of Sweetheart's focus on revenue growth with key
institutional foodservice customers. Net sales to food packaging customers
increased 1.4%, reflecting a 0.9% increase in sales volume and a 0.5% increase
in average realized sales price. This growth is primarily the result of
increased demand by large accounts in the food packaging customer base and
increased pricing resulting from raw material cost increases.
Fonda Results:
Net sales increased $0.9 million, or 1.2%, to $78.1 million for the
thirteen weeks ended March 26, 2000 compared to $77.2 million for the thirteen
weeks ended March 28, 1999, reflecting a 1.9% increase in average realized sales
price and a 0.7% decrease in sales volume. The increase in net sales is
primarily due to increased average realized sales prices in both the
institutional and consumer markets, partially offset by lower volumes in the
consumer market. Net sales to institutional customers increased 6.2%, reflecting
a 5.4% increase in sales volume and an 0.8% increase in average realized sales
price. The increase is primarily the result of the Fonda's focus on revenue
growth with key institutional customers. Net sales to consumer customers
decreased 1.6%, reflecting a 0.7% increase in average realized sales price and a
2.3% decrease in sales volume. This decrease results primarily from competitive
market conditions.
Gross profit increased $9.2 million, or 28.2%, to $41.9 million for the
thirteen weeks ended March 26, 2000. As a percentage of net sales, gross profit
increased to 14.5% for the thirteen weeks ended March 26, 2000 from 12.1% in the
thirteen weeks ended March 28, 1999 primarily due to increased margins at
Sweetheart.
Sweetheart Results:
Gross profit increased $9.3 million, or 49.2%, to $28.3 million for the
thirteen weeks ended March 26, 2000 compared to $19.0 million for the thirteen
weeks ended March 28, 1999. As a percentage of net sales, gross profit increased
to 13.0% for the thirteen weeks ended March 26, 2000 from 9.7% for the thirteen
weeks ended March 28, 1999. This improvement is attributable to a shift in sales
towards a more profitable product mix, improved manufacturing efficiencies and
improved margins through customer price initiatives.
Fonda Results:
Gross profit increased $0.2 million, or 1.3%, to $13.9 million for the
thirteen weeks ended March 26, 2000 compared to $13.7 million for the thirteen
weeks ended March 28, 1999. This increase is primarily attributable to increased
net sales. As a percentage of net sales, gross profit was 17.8% for both the
thirteen weeks ended March 26, 2000 and the thirteen weeks ended March 28, 1999.
Selling, general and administrative expenses decreased $0.8 million, or
2.6%, to $29.8 million for the thirteen weeks ended March 26, 2000 compared to
$30.6 million for the thirteen weeks ended March 28, 1999. A $1.0 million
increase in such costs at Sweetheart was principally attributable to an increase
in bad debt expense resulting from a customer's bankruptcy filing. A $1.8
million decrease in such costs at Fonda was principally attributable to a
one-time write-off of a customer receivable in March 1999, coupled with cost
savings initiatives instituted by management in Fiscal 2000.
Other (income) expense increased $3.3 million, to income of $3.0 million
for the thirteen weeks ended March 26, 2000 compared to an expense of $0.3
million for the thirteen weeks ended March 28, 1999. This increase was primarily
the result of Sweetheart realizing a gain on the sale of a warehousing facility,
which was partially offset by restructuring charges associated with the
discontinuation of the centralized machine shop operation which will be phased
out during the remainder of Fiscal 2000 including the elimination of
approximately 65 positions.
Operating income increased $13.3 million, to $15.2 million for the thirteen
weeks ended March 26, 2000 compared to $1.9 million for the thirteen weeks ended
March 28, 1999, due to the reasons stated above.
Interest expense, net decreased $0.2 million to $17.1 million for the
thirteen weeks ended March 26, 2000 compared to $17.3 million for the thirteen
weeks ended March 28, 1999. During the quarter, Fonda realized lower interest
expense due primarily to the reduction of capitalized interest related to debt
extinguished during the consolidation, while Sweetheart's net interest remained
flat.
Net income (loss) increased $6.9 million, to a net loss of $2.2 million for
the thirteen weeks ended March 26, 2000 compared to a $9.1 million net loss for
the thirteen weeks ended March 28, 1999, due to the reasons stated above.
Twenty-six Weeks Ended March 26, 2000 Compared to Twenty-six Weeks Ended
March 28, 1999 (Unaudited)
Net sales increased $37.3 million, or 6.7%, to $595.2 million for the
twenty-six weeks ended March 26, 2000 due to net sales increases at both
Sweetheart and Fonda. The following analysis includes $6.6 million of sales from
Sweetheart to Fonda and $5.4 million of sales from Fonda to Sweetheart, which
were eliminated in consolidation.
Sweetheart Results:
Net sales increased $32.3 million, or 8.1%, to $431.6 million for the
twenty-six weeks ended March 26, 2000 compared to $399.3 million for the
twenty-six weeks ended March 28, 1999, reflecting a 5.6% increase in sales
volume and a 2.5% increase in average realized sales price. Net sales to
institutional foodservice customers increased 9.1%, reflecting a 6.3% increase
in sales volume and a 2.8% increase in average realized sales price. This
increase is primarily the result of Sweetheart's focus on revenue growth with
key institutional foodservice customers. Net sales to food packaging customers
increased 0.1%, reflecting a 0.3% increase in average realized sales price
offset by a 0.2% decrease in sales volume. This increase is primarily due to
increased pricing resulting from raw material cost increases.
Fonda Results:
Net sales increased $15.8 million, or 9.9%, to $175.6 million for the
twenty-six weeks ended March 26, 2000 compared to $159.8 million for the
twenty-six weeks ended March 28, 1999, reflecting a 6.8% increase in sales
volume and a 2.9% increase in average realized sales price. This increase is
primarily due to increased average realized sales prices in the consumer market
and increased volume in both the institutional and consumer markets driven by
seasonal sales and key customer growth. Net sales to institutional customers
increased 10.2%, reflecting a 10.8% increase in sales volume as a result of
Fonda's focus on revenue growth with key institutional customers, partially
offset by a 0.5% decrease in average realized sales price, reflecting a shift in
sales mix. Net sales to consumer customers increased 9.7%, reflecting a 5.6%
increase in sales volume and a 3.9% increase in average realized sales price.
This increase was primarily driven by peak holiday and millennium sales as well
as the restocking of inventory for key customers.
Gross profit increased $23.3 million, or 36.3%, to $87.5 million for the
twenty-six weeks ended March 26, 2000. As a percentage of net sales, gross
profit increased to 14.7% in the twenty-six weeks ended March 26, 2000 from
11.5% for the twenty-six weeks ended March 28, 1999 primarily due to increased
margins at Sweetheart.
Sweetheart Results:
Gross profit increased $21.8 million, or 65.1%, to $55.2 million for the
twenty-six weeks ended March 26, 2000 compared to $33.4 million for the
twenty-six weeks ended March 28, 1999. As a percentage of net sales, gross
profit increased to 12.8% for the twenty-six weeks ended March 26, 2000 from
8.4% for the twenty-six weeks ended March 28, 1999. This improvement is
attributable to a shift in sales to a more profitable product mix, improved
manufacturing efficiencies and improved margins through customer price
initiatives.
Fonda Results:
Gross profit increased $1.9 million, or 6.3%, to $32.8 million for the
twenty-six weeks ended March 26, 2000 compared to $30.9 million for the
twenty-six weeks ended March 28, 1999. The increase was primarily due to
increased net sales of specialty party goods products, increased selling prices
of paperboard products, and increased volume of institutional tissue products.
As a percentage of net sales, gross profit decreased to 18.7% for the twenty-six
weeks ended March 26, 2000 from 19.3% for the twenty-six weeks ended March 28,
1999. This decrease in gross profit margin reflects manufacturing inefficiencies
related to consolidation as well as competitive market conditions in the
consumer market.
Selling, general and administrative expenses increased $1.0 million, or
1.7%, to $60.6 million for the twenty-six weeks ended March 26, 2000 compared to
$59.6 million for the twenty-six weeks ended March 28, 1999. A $2.9 million
increase in such costs at Sweetheart was principally attributable to an increase
in bad debt expense resulting from a customer's bankruptcy filing. A $1.9
million decrease in such costs at Fonda was principally attributable to a
one-time write-off of a customer receivable in March 1999, coupled with cost
savings initiatives instituted by management in Fiscal 2000.
Other (income) expense increased $2.1 million, to income of $1.6 million
for the twenty-six weeks ended March 26, 2000 compared to an expense of $0.5
million for the twenty-six weeks ended March 28, 1999. This increase was
primarily the result of Sweetheart realizing a gain from the sale of a warehouse
facility, offset by the following; (i) the write-off of an unsecured note
receivable issued in connection with the Fiscal 1998 sale of the bakery business
and (ii) a restructuring reserve for the discontinuation of the centralized
machine shop operation which will be phased out during the remainder of Fiscal
2000 including the elimination of approximately 65 positions.
Operating income increased $24.4 million, to $28.5 million for the
twenty-six weeks ended March 26, 2000 compared to operating income of $4.1
million for the twenty-six weeks ended March 28, 1999, due to the reasons stated
above.
Interest expense, net decreased $0.5 million, or 1.4% to $34.7 million for
the twenty-six weeks ended March 26, 2000 compared to $35.2 million for the
twenty-six weeks ended March 28, 1999. This decrease is attributable to lower
outstanding balances under Sweetheart's U. S. Credit Facility, which was
partially offset by an increase in market interest rates, coupled with Fonda's
lower interest expense resulting primarily from the reduction in amortization of
debt issue costs related to debt extinguished during the CEG consolidation.
Net income (loss) increased $12.9 million, to a net loss of $5.2 million
for the twenty-six weeks ended March 26, 2000 compared to a $18.1 million net
loss for the twenty-six weeks ended March 28, 1999, due to the reasons stated
above.
Liquidity and Capital Resources
Historically, the Company's subsidiaries have relied on cash flow from
operations, the sale of non-core assets and borrowings to finance their
respective working capital requirements, capital expenditures and acquisitions.
The Company expects to continue this method of funding for its 2000 capital
expenditures.
Net cash provided by operating activities decreased $9.7 million to $4.1
million in the twenty-six weeks ended March 26, 2000 compared to $13.8 million
in the twenty-six weeks ended March 28, 1999. This is primarily due to
Sweetheart management's decision to build inventories, partially offset by more
favorable income from operating activities at both Sweetheart and Fonda and
improved collection of outstanding accounts receivable at Fonda.
Capital expenditures for the twenty-six weeks ended March 26, 2000 were
$14.8 million compared to $20.6 million for the twenty-six weeks ended March 28,
1999. Capital expenditures in the
twenty-six weeks ended March 26, 2000 included $4.6 million for new production
equipment and $7.4 million spent on growth and expansion projects at Sweetheart,
with the remaining consisting primarily of routine capital improvements.
In January 2000, outstanding balances on CEG's revolving credit facility,
12% senior subordinated notes and junior subordinated notes were paid in full.
Outstanding balances on such debt totaled $22.0 million at September 26, 1999.
Fonda's revolving credit facility, which matures on March 31, 2001,
provides up to $55 million borrowing capacity, is collateralized by eligible
accounts receivable and inventories, certain general intangibles and the
proceeds on the sale of accounts receivable and inventory. At March 26, 2000,
there was $40.3 million outstanding and $13.2 million was the maximum advance
available based upon eligible collateral.
Sweetheart's revolving credit facility allows up to $135.0 million in
borrowings, subject to borrowing base limitations (the "U.S. Credit Facility").
Borrowings under the U.S. Credit Facility mature on August 1, 2000. As of March
26, 2000, $35.8 million was available under such facility. Although Sweetheart
intends to refinance this debt, there can be no assurances that it will be able
to obtain such refinancing on terms and conditions acceptable to the Company. As
of April 17, 2000, $24.7 million was available under such facility, which
primarily reflects the issuance of letters of credit related to the Sherwood
Acquisition, see "Recent Developments".
Sweetheart also has a credit facility which provides for a term loan of up
to Cdn $10.0 million and revolving credit of up to Cdn $10.0 million that expire
on June 15, 2001. As of March 26, 2000, Cdn $1.4 million (approximately US $1.0
million) was available under such facility.
Sweetheart's Senior Secured Notes mature on September 1, 2000. Although the
Company intends to refinance this debt, there can be no assurances that the
Company will be able to obtain such refinancing on terms and conditions
acceptable to the Company.
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. The discovery process has been
completed and Sweetheart is awaiting further action by the plaintiffs.
Sweetheart has begun the process of paying out the termination liability and as
of March 26, 2000 had disbursed $8.8 million in termination payments. The
initial estimate of the total termination liability, less these payments,
exceeds assets set aside in the Plan by approximately $11.6 million, which
amount has been fully reserved by Sweetheart. 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 Sweetheart's
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.
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.
The Company believes that cash generated by each of Fonda's and
Sweetheart's operations, combined with amounts available under its respective
credit facilities in addition to both funds generated by asset sales and
proceeds from expected refinancing by Sweetheart should be sufficient to fund
each of Fonda's and Sweetheart's respective capital expenditures needs, debt
service requirements and working capital needs, including Sweetheart's
termination liabilities under the Plan and acquisition of Sherwood, in the next
twelve months.
Net Operating Loss Carryforwards
As of September 26, 1999, Sweetheart had approximately $214 million of net
operating loss carryforwards ("NOLs") for federal income tax purposes, which
expire at various dates through 2019. Fonda has $1.9 million of state net
operating loss carryforwards which expire at various dates from 2003 to 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
that future taxable income will be generated to utilize the NOLs.
Item 3. QUANTATATIVE AND QUALATATIVE DISCLOSURES ABOUT MARKET RISK
NONE
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On January 11, 1999, the United States Supreme Court denied Plaintiff's
petition for Writ of Certiorari in the matter of Aldridge v. Lily-Tulip, Inc.
Salary Retirement Benefits Committee and Fort Howard Cup Corporation, Civil
Action No. CV 187-084. 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
has been completed and Sweetheart is awaiting further action by the plaintiffs.
Due to the complexity involved in connection with the claims asserted in this
case, Sweetheart cannot determine at present with any certainty the amount of
damages it would be required to pay should the plaintiffs prevail; accordingly,
there can be no assurance that such amounts would not have a material adverse
effect on Sweetheart's financial position or results of operations.
The Company is also involved in a number of legal proceedings arising in
the ordinary course of business, none of which is expected to have a material
adverse effect on the Company's financial position or results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the thirteen
weeks ended March 26, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its duly authorized officer and principal financial officer.
SF HOLDINGS GROUP, INC.
(registrant)
Date: April 24, 2000 By: /s/ Hans H. Heinsen
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Hans H. Heinsen
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)