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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
Thirty-Nine Weeks Ended
June 25, 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 August 1, 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)
June 25, September 26,
2000 1999*
------------------ ----------------
Assets
------
Current assets:
Cash and cash equivalents $ 8,479 $ 4,180
Receivables, less allowances of $4,241 and $6,979, respectively 149,752 136,629
Due from affiliates 533 538
Inventories 219,530 191,848
Deferred income taxes 20,757 20,547
Other current assets 22,422 24,330
--------- ---------
Total current assets 421,473 378,072
--------- ---------
Property, plant and equipment, net 270,768 387,309
Goodwill, net 106,772 98,176
Deferred income taxes 38,474 38,424
Other assets 33,179 35,229
--------- ---------
Total assets $ 870,666 $ 937,210
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 97,365 $ 80,786
Accrued expenses and other current liabilities 106,617 112,700
Current portion of deferred gain on sale of assets 10,276 -
Current portion of long-term debt 15,139 276,845
--------- ---------
Total current liabilities 229,397 470,331
--------- ---------
Long-term debt 460,736 381,554
Deferred gain on sale of assets 96,516 -
Other liabilities 61,233 62,494
Deferred income taxes 4,105 4,026
--------- ---------
Total liabilities 851,987 918,405
--------- ---------
Shareholders' equity:
Exchangeable preferred stock 40,358 36,291
Minority interest in subsidiary 3,154 1,971
Redeemable common stock 2,268 2,217
Shareholders' deficit (27,101) (21,674)
---------- ----------
Total liabilities and shareholders' equity $ 870,666 $ 937,210
========== ==========
* 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 Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
June 25, 2000 June 27, 1999* June 25, 2000 June 27, 1999*
--------------- --------------- --------------- ---------------
Net sales $ 346,579 $ 315,179 $ 941,773 $ 873,120
Cost of sales 291,358 267,262 799,064 761,007
----------- ----------- ----------- -----------
Gross profit 55,221 47,917 142,709 112,113
Selling, general and administrative expenses 26,347 27,896 86,908 87,513
Other (income) expense, net 326 (170) (1,238) 334
----------- ------------ ------------ -----------
Operating income 28,548 20,191 57,039 24,266
Interest expense, net of interest income of $147,
$141, $414 and $543, respectively 18,713 17,792 53,413 53,013
----------- ----------- ----------- -----------
Income (loss) before income tax expense
(benefit), minority interest and extraordinary
loss 9,835 2,399 3,626 (28,747)
Income tax expense (benefit) 4,255 1,275 2,404 (10,573)
Minority interest in subsidiary's income (loss) 837 434 1,183 (814)
----------- ----------- ----------- ------------
Net income (loss) before extraordinary loss 4,743 690 39 (17,360)
----------- ----------- ----------- ------------
Extraordinary (loss) on debt extinguishment (net of
income tax benefit of $225 and $575 respectively) (337) - (862) -
------------ ----------- ------------ -----------
Net income (loss) 4,406 690 (823) (17,360)
----------- ----------- ------------ ------------
Payment-in-kind dividends on exchangeable
preferred stock (1,390) (1,221) (4,067) (3,586)
------------ ------------ ------------ ------------
Net income (loss) applicable to common stock $ 3,016 $ (531) $ (4,890) $ (20,946)
=========== ============ ============ ============
Other comprehensive income (loss), net of tax:
Net income (loss) 4,406 690 (823) (17,360)
Foreign currency translation adjustment (148) 323 (266) 312
Minimum pension liability adjustment (73) 627 (77) 1,516
------------ ----------- ------------ -----------
Other comprehensive income (loss) (221) 950 (343) 1,828
------------ ----------- ------------ -----------
Comprehensive income (loss) $ 4,185 $ 1,640 $ (1,166) $ (15,532)
=========== =========== ============ ============
* 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 CASH FLOWS
-------------------------------------
(Unaudited)
(In thousands)
For the For the
Thirty-nine Thirty-nine
weeks ended weeks ended
June 25, June 27,
2000 1999*
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (823) $ (17,360)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 40,405 42,771
Interest capitalized on debt 8,831 8,188
Deferred income tax credit 1,857 (8,532)
Gain on sale of assets (4,109) (305)
Minority interest in subsidiary 1,183 (814)
Changes in operating assets and liabilities:
Receivables (12,549) (13,953)
Due from affiliates (5) (3,257)
Inventories (21,938) (3,058)
Other current assets 2,499 (156)
Accounts payable and accrued expenses 5,518 23,380
Other, net (1,204) 5,974
------------ -----------
Net cash provided by (used in) operating activities 19,665 32,878
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (20,745) (29,154)
Proceeds from sale of property, plant and equipment 220,921 6,171
Payments for business acquired (12,411) -
------------ -----------
Net cash provided by (used in) investing activities 187,765 (22,983)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under credit facilities 25,602 60,574
Net borrowings (repayments) of other debt (228,733) (80,910)
Decrease in cash escrow - 3,842
----------- -----------
Net cash provided by (used in) financing activities (203,131) (16,494)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
4,299 (6,599)
CASH AND CASH EQUIVALENTS, beginning of period 4,180 9,898
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 8,479 $ 3,299
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 39,375 $ 28,481
=========== ===========
Income taxes paid (refunded) $ 1,209 $ (6,514)
=========== ============
SUPPLEMENTAL NON-CASH INVESTING ACTIVITY:
Note payable associated with business acquisition $ 2,914 $ -
=========== ===========
* 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 ACQUISITIONS
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 for $16
million. In addition, pursuant to the CEG Asset Purchase Agreement, Fonda
subsequently purchased certain inventory and acquired other CEG assets for cash
and in exchange for outstanding trade payables owed to Fonda by CEG for total
consideration of $25 million. 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.
On May 15, 2000, Sweetheart Cup acquired Sherwood Industries, Inc.
("Sherwood"), a manufacturer of paper cups, containers and cup making equipment.
Pursuant to a certain Stock Purchase Agreement among Sweetheart Cup and the
stockholders of Sherwood, Sweetheart Cup acquired all of the issued and
outstanding capital stock (the "Sherwood Acquisition") of Sherwood and its
subsidiaries for an aggregate purchase price of $17.4 million, subject to post
closing adjustments. As part of the purchase price, Sweetheart Cup issued to the
stockholders of Sherwood promissory notes due May 2005 in an aggregate principal
amount of $5.0 million and a present value of $2.9 million. Sweetheart Cup also
assumed $9.3 million of Sherwood debt, which was paid in full on June 15, 2000.
The Sherwood Acquisition has preliminarily resulted in goodwill of $11.0
million, which is being amortized over 20 years. The acquisition has been
accounted for using the purchase method of accounting. Amounts and allocations
of costs recorded may require adjustment based upon information coming to the
attention of the Company that is not currently available.
(3) INVENTORIES
The components of inventories are as follows (in thousands):
(Unaudited)
June 25, September 26,
2000 1999
-------------- ---------------
Raw materials and supplies $ 61,780 $ 53,627
Finished products 145,111 130,185
Work in progress 12,639 8,036
--------- ---------
Total inventories $ 219,530 $ 191,848
========== ==========
(4) LONG-TERM DEBT
Sweetheart completed the following transactions in the current period to
refinance its short-term debt. On June 15, 2000, Sweetheart's revolving credit
facility was amended and restated to extend the maturity of the $135.0 million
revolving credit facility, subject to borrowing base limitations, through June
15, 2005 and to add a term loan of $25.0 million that requires equal monthly
installments through June 2005. Borrowings under the revolving credit facility
will now bear interest, at the Sweetheart's election, at a rate equal to (i)
LIBOR plus 2.00% or (ii) a bank's base rate plus 0.25%, plus certain other fees.
Borrowings under the term loan will bear interest, at Sweetheart's election, at
a rate equal to (i) LIBOR plus 2.50% or (ii) a bank's base rate plus 0.50%, plus
certain other fees. The proceeds from the term loan were used in part to redeem
Sweetheart's Senior Secured Notes. The balance, as of June 25, 2000, under the
U.S. Credit Facility was approximately $95.0 million.
On June 15, 2000, Sweetheart funded the redemption of its $190.0 million
Senior Secured Notes due September 1, 2000 by depositing with the U.S. Trust
Company of New York funds sufficient to redeem such notes.
In conjunction with the Sherwood Acquisition, Sweetheart Cup issued to the
stockholders of Sherwood subordinated promissory notes in an aggregate principal
amount of $5.0 million due May 2005. The present value of these notes as
recorded is $2.9 million, which will accrete interest at an annual rate of
10.85% over the term of the notes.
(5) DEFERRED GAIN ON SALE OF ASSETS
In connection with a sale-leaseback transaction, on June 15, 2000,
Sweetheart Cup and Sweetheart Holdings Inc. sold certain production equipment
located in Owings Mills, Maryland, Chicago, Illinois and Dallas, Texas for a
fair market value of $212.3 million to several owner participants. Pursuant to a
lease dated as of June 1, 2000 ("the Lease") between Sweetheart Cup and State
Street Bank and Trust Company of Connecticut, National Association ("State
Street"), Sweetheart Cup will lease such production equipment from State Street,
as owner trustee for several owner participants, through November 9, 2010. The
associated property, plant and equipment was removed from the balance sheet and
a deferred gain of $107.0 million was recorded and will be amortized over the
term of the Lease. Annual rental payments under the Lease will be approximately
$32.0 million.
(6) SEGMENTS
(in thousands)
For the For the For the For the
Thirteen Thirteen Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Net Sales:
Sweetheart $ 264,605 $ 234,290 $ 696,200 $ 633,588
Fonda 89,702 85,348 265,337 245,163
Intersegment elimination (7,728) (4,459) (19,764) (5,631)
------------ ------------ ------------ ------------
Total Sales $ 346,579 $ 315,179 $ 941,773 $ 873,120
============ ============ ============ ============
Income from operations, excluding other income:
Sweetheart $ 24,022 $ 17,301 $ 42,530 $ 17,358
Fonda 4,768 2,998 13,297 7,666
Corporate and eliminations 84 (278) (26) (424)
----------- ------------ ------------ ------------
Total income from operations $ 28,874 $ 20,021 $ 55,801 $ 24,600
============ ============ ============ ============
(7) EXTRAORDINARY LOSS
In conjunction with the merger between CEG and the Company (see Note 2,
herein), CEG retired its long-term debt. As a result, CEG charged $915,000, or
$549,000 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.
During June 2000, in conjunction with the redemption of Sweetheart's Senior
Secured Notes and the refinancing of the U.S. Credit Facility, Sweetheart
charged approximately $522,000, or approximately $313,000 net of income tax
benefit, to results of operations as an extraordinary item, representing the
unamortized deferred financing fees, prepaid interest and redemption fees
pertaining to such debt.
(8) 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 is in the
process of paying out the termination liability and associated expenses and as
of June 25, 2000, had disbursed $9.6 million in termination payments. The
initial estimate of the total termination liability and associated expenses,
less payments, exceeds assets set aside in the Plan by approximately $10.2
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. As of June 29,
2000, all payments in conjunction with this settlement have been paid.
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 fourth 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.
Thirteen Weeks Ended June 25, 2000 Compared to Thirteen Weeks Ended June 27,
1999 (Unaudited)
Net sales increased $31.4 million, or 10.0%, to $346.6 million for the
thirteen weeks ended June 25, 2000 due to net sales increases at both Sweetheart
and Fonda. The following analysis includes $4.9 million of sales from Sweetheart
to Fonda and $2.8 million of sales from Fonda to Sweetheart, which were
eliminated in consolidation.
Sweetheart Results:
Net sales increased $30.3 million, or 12.9%, to $264.6 million for the
thirteen weeks ended June 25, 2000 compared to $234.3 million for the thirteen
weeks ended June 27, 1999, reflecting a 7.3% increase in sales volume and a 5.6%
increase in average realized sales price. Net sales to institutional foodservice
customers increased 12.9%, reflecting a 6.7% increase in sales volume and a 6.2%
increase in average realized sales price. This increase is primarily the result
of Sweetheart's focus on revenue growth with key institutional foodservice
customers, peak seasonal demand and customer price initiatives. Net sales to
food packaging customers increased 3.5%, reflecting a 1.4% increase in sales
volume and a 2.1% increase in average realized sales price. This growth is
primarily the result of increased seasonal demand by large food packaging
accounts and increased pricing resulting from raw material cost increases. Net
sales to consumer customers increased 119.1% as a result of Sweetheart's focus
on expanding into the consumer market.
Fonda Results:
Net sales increased $4.4 million, or 5.1%, to $89.7 million for the
thirteen weeks ended June 25, 2000 compared to $85.3 million for the thirteen
weeks ended June 27, 1999, reflecting an 11.2% increase in average realized
sales price and a 6.1% 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 5.4%, reflecting
a 0.1% increase in sales volume and a 5.3% increase in average realized sales
price. The increase is primarily the result of higher pricing reflecting raw
material cost increases. Net sales to consumer customers increased 4.9%,
reflecting a 15.1% increase in average realized sales price and a 10.2% decrease
in sales volume. This increase resulted primarily from higher pricing reflecting
raw material cost increases, partially offset by decreased volume as a result of
competitive market conditions and lower sales to certain customers experiencing
financial difficulties.
Gross profit increased $7.3 million, or 15.2%, to $55.2 million for the
thirteen weeks ended June 25, 2000. As a percentage of net sales, gross profit
increased to 15.9% for the thirteen weeks ended June 25, 2000 from 15.2% in the
thirteen weeks ended June 27, 1999 primarily due to increased margins at Fonda.
Sweetheart Results:
Gross profit increased $4.7 million, or 13.9%, to $38.4 million for the
thirteen weeks ended June 25, 2000 compared to $33.7 million for the thirteen
weeks ended June 27, 1999. As a percentage of net sales, gross profit increased
to 14.5% for the thirteen weeks ended June 25, 2000 from 14.4% for the thirteen
weeks ended June 27, 1999. This improvement is attributable to a shift in sales
towards a more profitable product mix in combination with increased volume,
improved manufacturing efficiencies and improved margins through customer price
initiatives, partially offset by increased raw material costs.
Fonda Results:
Gross profit increased $2.4 million, or 16.2%, to $17.0 million for the
thirteen weeks ended June 25, 2000 compared to $14.6 million for the thirteen
weeks ended June 27, 1999. This increase is primarily attributable to the
Fonda's completion of its consolidation and manufacturing efficiency
initiatives, which began in the prior fiscal year. As a percentage of net sales,
gross profit was 18.9% for the thirteen weeks ended June 25, 2000 compared to
17.1% for the thirteen weeks ended June 27, 1999.
Selling, general and administrative expenses decreased $1.5 million, or
5.6%, to $26.3 million for the thirteen weeks ended June 25, 2000 compared to
$27.9 million for the thirteen weeks ended June 27, 1999. A $2.2 million
decrease in such costs at Sweetheart was principally attributable to lower
spending in the areas of legal and information technology. A $0.6 million
increase in such costs at Fonda was principally attributable to higher selling
expenses in conjunction with increased sales and additional depreciation
expenses related to computer system upgrades.
Other (income) expense decreased $0.5 million, to expense of $0.3 million
for the thirteen weeks ended June 25, 2000 compared to income of $0.2 million
for the thirteen weeks ended June 27, 1999. This decrease was primarily the
result of a restructuring reserve in connection with the planned November 2000
closing of Fonda's Maspeth, New York facility, which will result in the
elimination of approximately 130 positions.
Operating income increased $8.4 million, to $28.6 million for the thirteen
weeks ended June 25, 2000 compared to $20.2 million for the thirteen weeks ended
June 27, 1999, due to the reasons stated above.
Interest expense, net increased $0.9 million to $18.7 million for the
thirteen weeks ended June 25, 2000 compared to $17.8 million for the thirteen
weeks ended June 27, 1999. During the quarter, Sweetheart's acceleration of
interest expense in conjunction with the redemption of the Senior Secured Notes,
as well as higher interest rates led to this increase. This was partially offset
by lower interest expense at Fonda due primarily to the reduction of capitalized
interest related to debt extinguished during the consolidation and lower average
outstanding balances at both Fonda and Sweetheart.
Net income (loss) increased $3.7 million, to $4.4 million for the thirteen
weeks ended June 25, 2000 compared to a $0.7 million for the thirteen weeks
ended June 27, 1999, due to the reasons stated above.
Thirty-nine Weeks Ended June 25, 2000 Compared to Thirty-nine Weeks Ended June
27, 1999 (Unaudited)
Net sales increased $68.7 million, or 7.9%, to $941.8 million for the
thirty-nine weeks ended June 25, 2000 due to net sales increases at both
Sweetheart and Fonda. The following analysis includes $11.5 million of sales
from Sweetheart to Fonda and $8.3 million of sales from Fonda to Sweetheart,
which were eliminated in consolidation.
Sweetheart Results:
Net sales increased $62.6 million, or 9.9%, to $696.2 million for the
thirty-nine weeks ended June 25, 2000 compared to $633.6 million for the
thirty-nine weeks ended June 27, 1999, reflecting a 6.6% increase in sales
volume and a 3.2% increase in average realized sales price. Net sales to
institutional foodservice customers increased 9.4%, reflecting a 5.9% increase
in sales volume and a 3.5% increase in average realized sales price. This
increase is primarily the result of Sweetheart's focus on revenue growth with
key institutional foodservice customers and customer price initiatives. Net
sales to food packaging customers increased 1.4%, reflecting a 0.4% increase in
sales volume and 1.0% increase in average realized sales price. This growth is
primarily the result of increased demand by large food packaging accounts and
increased pricing resulting from raw material cost increases. Net sales to
consumer customers increased 264.1% as a result of Sweetheart's focus on
expanding into the consumer market.
Fonda Results:
Net sales increased $20.2 million, or 8.2%, to $265.3 million for the
thirty-nine weeks ended June 25, 2000 compared to $245.1 million for the
thirty-nine weeks ended June 27, 1999, reflecting a 1.2% decrease in sales
volume and a 9.4% 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 the institutional market driven by seasonal sales and
key customer growth. Net sales to institutional customers increased 8.9%,
reflecting a 7.1% increase in sales volume as a result of Fonda's focus on
revenue growth with key institutional customers, coupled with a 1.8% increase in
average realized sales price, reflecting increased prices from raw material cost
increases. Net sales to consumer customers increased 7.8%, reflecting a 14.2%
increase in average realized sales price, partially offset by a 6.4% decrease in
sales volume. This increase resulted primarily from higher pricing reflecting
raw material cost increases, partially offset by decreased volume as a result of
competitive market conditions and lower sales to certain customers experiencing
financial difficulties.
Gross profit increased $30.6 million, or 27.3%, to $142.7 million for the
thirty-nine weeks ended June 25, 2000. As a percentage of net sales, gross
profit increased to 15.2% in the thirty-nine weeks ended June 25, 2000 from
12.8% for the thirty-nine weeks ended June 27, 1999 primarily due to increased
margins at Sweetheart.
Sweetheart Results:
Gross profit increased $26.4 million, or 39.4%, to $93.6 million for the
thirty-nine weeks ended June 25, 2000 compared to $67.1 million for the
thirty-nine weeks ended June 27, 1999. As a percentage of net sales, gross
profit increased to 13.4% for the thirty-nine weeks ended June 25, 2000 from
10.6% for the thirty-nine weeks ended June 27, 1999. This improvement is
attributable to a shift in sales to a more profitable product mix in combination
with increased volume, improved manufacturing efficiencies and improved margins
through customer price initiatives.
Fonda Results:
Gross profit increased $4.3 million, or 9.5%, to $49.8 million for the
thirty-nine weeks ended June 25, 2000 compared to $45.5 million for the
thirty-nine weeks ended June 27, 1999. This increase is primarily attributable
to the Fonda's completion of its consolidation and manufacturing efficiency
initiatives, which began in the prior fiscal year. As a percentage of net sales,
gross profit increased to
18.8% for the thirty-nine weeks ended June 25, 2000 from 18.6% for the
thirty-nine weeks ended June 27, 1999.
Selling, general and administrative expenses decreased $0.6 million, or
0.7% to $86.9 million for the thirty-nine weeks ended June 25, 2000 compared to
$87.5 million for the thirty-nine weeks ended June 27, 1999. A $1.3 million
decrease at Fonda, attributable to savings resulting from the consolidation
effort and Sweetheart's lower spending in the areas of legal and information
technology is partially offset by increased bad debt resulting from a Sweetheart
customer's bankruptcy filing.
Other (income) expense increased $1.5 million, to income of $1.2 million
for the thirty-nine weeks ended June 25, 2000 compared to an expense of $0.3
million for the thirty-nine weeks ended June 27, 1999. This increase was
primarily the result of Sweetheart's realization of a gain from the sale of a
warehouse facility and the amortization of deferred gain in conjunction with the
sale-leaseback transaction, partially offset by the following; (i) the write-off
of an unsecured note receivable by Sweetheart issued in connection with the
Fiscal 1998 sale of the bakery business (ii) a restructuring reserve for the
discontinuation of Sweetheart's centralized machine shop operation which will be
phased out during the remainder of Fiscal 2000 including the elimination of
approximately 65 positions and (iii) a restructuring reserve in connection with
the planned November 2000 closing of Fonda's Maspeth, New York facility, which
will result in the elimination of approximately 130 positions.
Operating income increased $32.8 million, to $57.0 million for the
thirty-nine weeks ended June 25, 2000 compared to operating income of $24.3
million for the thirty-nine weeks ended June 27, 1999, due to the reasons stated
above.
Interest expense, net increased $0.4 million, or 0.7% to $53.4 million for
the thirty-nine weeks ended June 25, 2000 compared to $53.0 million for the
thirty-nine weeks ended June 27, 1999. This is due primarily to the acceleration
of interest expense in conjunction with the redemption of Sweetheart's Senior
Secured Notes, as well as higher interest rates, partially offset by lower
outstanding balances, under Sweetheart's credit facilities.
Net income (loss) increased $16.6 million, to a net loss of $0.8 million
for the thirty-nine weeks ended June 25, 2000 compared to a $17.4 million net
loss for the thirty-nine weeks ended June 27, 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 $13.1 million to $19.7
million in the thirty-nine weeks ended June 25, 2000 compared to $32.8 million
in the thirty-nine weeks ended June 27, 1999. This is primarily due to (i)
Sweetheart management's decision to build inventories and increased inventory
levels in conjunction with the Sherwood Acquisition, (ii) increased accounts
payable relating to inventories at Sweetheart, partially offset by (iii) more
favorable income from operating activities at both Sweetheart and Fonda.
Capital expenditures for the thirty-nine weeks ended June 25, 2000 were
$20.7 million compared to $29.2 million for the thirty-nine weeks ended June 27,
1999. Capital expenditures in the thirty-nine weeks ended June 25, 2000 included
$12.0 million for new production equipment and $1.8 million spent on growth and
expansion projects at Sweetheart, with the remaining consisting primarily of
routine capital improvements.
In January 2000, the 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 September 30, 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 June 25, 2000,
there was $33.6 million outstanding and $21.1 million was the maximum advance
available based upon eligible collateral.
On May 15, 2000, Sweetheart Cup acquired Sherwood Industries, Inc.
("Sherwood"), a manufacturer of paper cups, containers and cup making equipment.
Pursuant to a certain Stock Purchase Agreement among Sweetheart Cup and the
stockholders of Sherwood, Sweetheart Cup acquired all of the issued and
outstanding capital stock (the "Sherwood Acquisition") of Sherwood and its
subsidiaries for an aggregate purchase price of $17.4 million, subject to post
closing adjustments. As part of the purchase price, Sweetheart Cup issued to the
stockholders of Sherwood promissory notes due May 2005 in an aggregate principal
amount of $5.0 million and a present value of $2.9 million. Sweetheart Cup also
assumed $9.3 million of Sherwood debt, which was paid in full on June 15, 2000.
In connection with a sale-leaseback transaction, on June 15, 2000,
Sweetheart Cup and Sweetheart Holdings Inc. sold certain production equipment
located in Owings Mills, Maryland, Chicago, Illinois and Dallas, Texas for a
fair market value of $212.3 million to several owner participants. The proceeds
from this sale were used in part to redeem the Senior Secured Notes, repay debt
in connection with the Sherwood Acquisition and repay a portion of the
outstanding balance under the U.S. Credit Facility.
Pursuant to a lease dated as of June 1, 2000 ("the Lease") between
Sweetheart Cup and State Street Bank and Trust Company of Connecticut, National
Association ("State Street"), Sweetheart Cup will lease such production
equipment from State Street, as owner trustee for several owner participants,
through November 9, 2010. Sweetheart Cup may renew the Lease at its option for
up to four consecutive renewal terms of two years each. Sweetheart may also
purchase such equipment for fair market value either at the conclusion of the
Lease term or November 21, 2006, at its option. Sweetheart's obligations in
connection with the Lease are collateralized by substantially all of its
property, plant and equipment owned as of June 15, 2000.
Sweetheart is accounting for this transaction as an operating lease,
expensing the $32.0 million annualized rental payments and removing the
property, plant and equipment sold from its balance sheet. A deferred gain of
$107.0 million was realized from this sale and will be amortized over the term
of the lease. The taxable gain will allow Sweetheart to utilize a substantial
portion of its net operating loss carryforward.
On June 15, 2000, the Sweetheart's revolving credit facility (the "U.S.
Credit Facility") was amended and restated to extend the maturity of the $135
million revolving credit facility, subject to borrowing base limitations,
through June 15, 2005 and to add a term loan of $25 million that requires equal
monthly installments through June 2005. Both the term loan and revolving credit
facility have an accelerated maturity date of July 1, 2003 if the Senior
Subordinated Notes due September 1, 2003 are not refinanced before June 1, 2003.
Borrowings under the revolving credit facility will now bear interest, at the
Sweetheart's election, at a rate equal to (i) LIBOR plus 2.00% or (ii) a bank's
base rate plus 0.25%, plus certain other fees. Borrowings under the term loan
will bear interest, at the Sweetheart's election, at a rate equal to (i) LIBOR
plus 2.50% or (ii) a bank's base rate plus 0.50%, plus certain other fees. The
credit facility is collateralized by the inventories and receivables with the
term loan portion of the credit facility further collateralized by certain
production equipment. As of June 25, 2000, $60.9 million was available under
such facility.
Sweetheart also has a credit facility providing 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 June 25, 2000, Cdn $4.2 million (approximately US $2.8
million) was available under such facility. 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.
On June 15, 2000, Sweetheart issued a redemption notice to the holders of
its Senior Secured Notes due September 1, 2000. In connection therewith,
Sweetheart deposited $190.0 million plus accrued interest with the U.S. Trust
Company of New York and as of August 1, 2000, substantially all of the notes
have been redeemed.
These transactions set forth above are expected to increase Sweetheart's
annual net income by approximately $8.0 million. This increase will be comprised
of (i) decreased interest expense and (ii) increased other income, as the gain
from the asset sale is amortized over the lease term, partially offset by (iii)
decreased gross profit, as increased rent expense will exceed depreciation
expense, and (iv) increased income tax expenses.
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 is in the process of paying out the termination liability and
associated expenses and as of June 25, 2000, had disbursed $9.6 million in
termination payments. The initial estimate of the total termination liability
and associated expenses, less payments, exceeds assets set aside in the Plan by
approximately $10.2 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. As of June 29,
2000, all payments in conjunction with this settlement have been paid.
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 funds generated by asset sales by Sweetheart
should be sufficient to fund each of Fonda's and Sweetheart's respective capital
expenditures needs, debt service requirements, payments in conjunction with
lease commitments and working capital needs, including Sweetheart's termination
liabilities under the Plan 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.
A taxable gain was realized from the June 15, 2000 sale-leaseback
transaction, which will allow Sweetheart to utilize a substantial portion of its
NOLs. Although the Company expects that sufficient taxable income will be
generated in the future to realize the remainder of these NOLs, there can be no
assurance that future taxable income will be generated to utilize the remaining
NOLs.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NONE
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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. As of June 29,
2000, all payments in conjunction with this settlement have been paid.
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 June 25, 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: August 1, 2000 By: /s/ Hans H. Heinsen
-------------- -------------------
Hans H. Heinsen
Senior Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer and
Duly Authorized Officer)