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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 Thirteen Weeks Ended December 24, 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 January 31, 2001:
SF Holdings Group, Inc. Class A Common Stock, $0.001 par value - 562,583 shares
SF Holdings Group, Inc. Class B Common Stock, $0.001 par value - 56,459 shares
SF Holdings Group, Inc. 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 CONDENSED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
December 24, September 24,
2000 2000
------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 7,586 $ 6,352
Cash in escrow 304 300
Receivables, less allowances of $3,833 and $3,534,
respectively 147,377 155,684
Due from affiliates 1,286 1,286
Inventories 225,798 226,657
Deferred income taxes 23,947 24,347
Refundable income taxes 622 622
Spare parts 24,731 24,066
Other current assets 6,031 6,428
---------- ----------
Total current assets 437,682 445,742
---------- ----------
Property, plant and equipment, net 259,149 263,368
Deferred income taxes 38,902 37,694
Spare parts 8,501 8,313
Goodwill, net 108,760 106,108
Other assets 18,940 19,904
---------- ----------
Total assets $ 871,934 $ 881,129
========== ==========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 82,632 $ 91,068
Accrued payroll and related costs 44,658 55,486
Other current liabilities 59,615 56,114
Current portion of deferred gain on sale of assets 10,275 10,275
Current portion of long-term debt 55,280 57,266
---------- ----------
Total current liabilities 252,460 270,209
---------- ----------
Commitments and contingencies - -
Deferred income taxes 4,209 4,209
Long-term debt 449,068 434,967
Deferred gain on sale of assets 91,379 93,948
Other liabilities 55,446 57,511
---------- ----------
Total liabilities 852,562 860,844
---------- ----------
Exchangeable preferred stock 43,293 41,794
Preferred Stock B, Series 2 15,000 15,000
Minority interest in subsidiary 3,317 3,169
Redeemable common stock 2,303 2,286
Shareholders' deficit (44,541) (41,964)
---------- ----------
Total liabilities and shareholders' equity $ 871,934 $ 881,129
========== ==========
See accompanying Notes to Consolidated Financial Statements.
2
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
For the For the
Thirteen Thirteen
weeks ended weeks ended
December 24, December 26,
2000 1999
------------- ---------------
Net sales $ 326,503 $ 305,820
Cost of sales 288,004 260,279
---------- ----------
Gross profit 38,499 45,541
Selling, general and administrative expenses 29,440 30,809
Other (income) expense, net (3,368) 1,448
---------- ----------
Operating income 12,427 13,284
Interest expense, net of interest income of $35
and $87, respectively 13,379 17,563
---------- ----------
(Loss) before income tax (benefit) and
minority interest (952) (4,279)
Income tax (benefit) (238) (1,384)
Minority interest in subsidiary's income 148 117
---------- ----------
Net (loss) (862) (3,012)
---------- ----------
Payment-in-kind dividends on exchangeable
preferred stock 1,499 1,317
---------- ----------
Net loss applicable to common stockholders $ (2,361) $ (4,329)
========== ==========
Other comprehensive (loss), net of tax:
Net (loss) $ (862) $ (3,012)
Foreign currency translation adjustment (214) 11
Minimum pension liability adjustment (net
of income taxes of $9 and ($76),
respectively) 14 (114)
---------- ----------
Other comprehensive (loss) (200) (103)
---------- ----------
Comprehensive (loss) $ (1,062) $ (3,115)
========== ==========
See accompanying Notes to Consolidated Financial Statements.
3
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Thirteen For the Thirteen
weeks ended weeks ended
December 24, December 26,
2000 1999
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (862) $ (3,012)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,791 13,963
Amortization of deferred gain (2,568) -
Interest accreted on debt 3,370 3,020
Deferred income tax (benefit) (238) (2,225)
(Gain) / Loss on sale of assets (398) 53
Minority interest in subsidiary 148 117
Changes in operating assets and liabilities:
Receivables 9,615 6,700
Due from affiliates - (224)
Inventories 3,102 (8,495)
Other current assets (313) 1,380
Accounts payable and accrued expenses (18,506) (1,322)
Other, net 485 (411)
---------- ----------
Net cash provided by operating activities 2,626 9,544
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (3,539) (4,479)
Acquisition of business (1,950) -
Proceeds from sale of property, plant and equipment 197 93
---------- ----------
Net cash (used in) investing activities (5,292) (4,386)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under credit facilities 6,129 (5,836)
Repayments of other debt (2,225) (376)
Change in escrow account (4) -
---------- ----------
Net cash provided by (used in) financing activities 3,900 (6,212)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,234 (1,054)
CASH AND CASH EQUIVALENTS, beginning of period 6,352 4,180
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 7,586 $ 3,126
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 4,675 $ 3,197
========== ==========
Income taxes paid $ 20 $ (74)
========== ==========
See accompanying Notes to Consolidated Financial Statements.
4
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 largest converters and marketers of disposable food
service and food packaging products in North America.
The information included in the foregoing interim 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 the 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 24, 2000.
(2) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 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 adoption of SFAS No. 133 did not have a significant impact on the financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 establishes accounting and reporting standards for
revenue recognition and requires that an entity not recognize revenue until it
is realized or realizable and earned. The adoption of SAB No.101 did not have a
significant impact on the financial statements.
(3) INVENTORIES
The components of inventories are as follows (in thousands):
(Unaudited)
December 24, September 24,
2000 2000
-------------- ---------------
Raw materials and supplies $ 62,897 $ 66,941
Finished products 152,208 148,231
Work in progress 10,693 11,485
--------- ---------
Total inventories $ 225,798 $ 226,657
========= =========
5
(4) BUSINESS ACQUISITIONS
On September 25, 2000, pursuant to an asset purchase agreement dated
August 9, 2000 (the "Springprint Agreement"), Fonda purchased substantially all
of the property, plant and equipment, intangibles and net working capital of
Springprint Medallion, a division of Marcal Paper Mills, Inc. ("Springprint").
In addition, pursuant to the Springprint Agreement, Fonda assumed the
liabilities and obligations of Springprint arising under contracts or leases
that are either assets purchased by Fonda or a part of the accounts payable. The
aggregate purchase price for the assets and working capital was $6.7 million,
subject to post-closing adjustments. The Springprint acquisition has
preliminarily resulted in goodwill, as of December 24, 2000, of $3.6 million,
which is being amortized over 20 years. Amounts and allocations of costs
recorded may require adjustment based upon information coming to the attention
of Fonda that is not currently available.
The Springprint acquisition has been accounted for under the purchase
method and the results have been included in the consolidated statements of
operations since the respective date of the acquisition. Goodwill amortization
was not significant for the thirteen weeks ending December 24, 2000.
(5) RELATED PARTY TRANSACTIONS
During the thirteen weeks ending December 24, 2000, the Company sold
$1.6 million of scrap paper to Fibre Marketing Group, LLC ("Fibre Marketing").
Included in accounts receivable as of December 24, 2000 were $1.4 million due
from Fibre Marketing. Other sales, if any, to affiliates during the thirteen
weeks ending December 24, 2000 were not significant.
During the thirteen weeks ending December 26, 1999, the Company sold
$1.3 million of scrap paper to Fibre Marketing. Included in accounts receivable
as of December 26, 1999 were $1.2 million due from Fibre Marketing. Other sales,
if any, to affiliates during the thirteen weeks ending December 26, 1999 were
not significant.
During the thirteen weeks ending December 24, 2000, the Company
purchased $1.8 million of corrugated containers from Box USA Holding, Inc.,
formerly known as Four M Corporation ("Box USA") and $0.2 million of travel
services from Emerald Lady, Inc. Included in accounts payable, as of December
24, 2000, is $0.1 million due to Box USA. Other purchases from affiliates, if
any, during the thirteen weeks ending December 24, 2000 were not significant.
During the period ended December 24, 2000, the Company paid $0.6 million and
$0.2 million of rental payments to D&L Development, LLC. and D&L Andover
Property, LLC., respectively. The Company's Chief Executive Officer has an
interest in both entities.
During the thirteen weeks ending December 26, 1999, the Company
purchased $2.4 million of corrugated containers and $0.1 million of services
from Box USA and $0.2 million of travel services from Emerald Lady, Inc.
Included in accounts payable, as of December 26, 1999, is $0.5 million due to
Box USA. Other purchases from affiliates, if any, during the thirteen weeks
ending December 26, 1999 were not significant.
Fonda leases a building in Jacksonville, Florida from Dennis Mehiel,
the Company's Chief Executive Officer, on terms Fonda 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 $0.2
million plus annual increases based on changes in the Consumer Price Index
("CPI") through December 31, 2014. In addition, Mr. Mehiel can require Fonda to
purchase the facility for $1.5 million, subject to a CPI-based escalation, until
July 31, 2006. In Fiscal 1998, Fonda terminated it operations at
6
this facility and is currently subleasing the entire facility to Bradco Supply
Corporation. Rent expense, net of sublease income is not significant.
All of the above referenced affiliates, other than the D&L entities,
are under the common control of the Company's Chief Executive Officer.
(6) OTHER (INCOME) EXPENSE
During the period ended December 24, 2000, Sweetheart recognized $2.6
million of income due to the amortization of deferred gain in conjunction with a
sale-leaseback transaction. Sweetheart sold certain production equipment in
connection with this transaction and is leasing this equipment under an
operating lease. The net proceeds from this sale were partially used to retire
Sweetheart's Senior Secured Notes. Additionally, SF Holdings recognized a gain
of $0.5 million from the sale of a building in Indianapolis, Indiana.
During the period ended December 26, 1999, Sweetheart experienced a
one-time write-off of a $1.0 million unsecured note receivable issued to
Sweetheart in connection with the Fiscal 1998 sale of the bakery business due to
the bankruptcy of the borrower.
(7) 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 been in
the process of paying out the termination liability and associated expenses and
as of December 24, 2000, has disbursed $12.3 million in termination payments.
The estimate of the total termination liability and associated expenses, less
payments, exceeds assets set aside in the Plan by approximately $7.9 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.
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
7
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.
(8) BUSINESS SEGMENTS
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 reconciliations to consolidated amounts are
presented in the table below (in thousands):
------------------ -----------------
(Unaudited)
For the Thirteen For the Thirteen
weeks ended weeks ended
December 24, December 26,
2000 1999
------------------ -----------------
Net sales:
Sweetheart $ 233,579 $ 214,216
Fonda 100,166 97,572
Corporate and eliminations (7,242) (5,968)
---------- ----------
Total Sales $ 326,503 $ 305,820
========== ==========
Income from operations excluding other
income:
Sweetheart $ 5,019 $ 7,153
Fonda 7,171 5,975
Corporate and eliminations 237 156
---------- ----------
Total income from operations $ 12,427 $ 13,284
========== ==========
(9) SUBSEQUENT EVENT
On January 13, 2001, Sweetheart experienced a casualty loss due to a
fire at its Somerville, Massachusetts facility. Sweetheart carries both property
damage and business interruption insurance. As a result of which Sweetheart has
no reason to believe that this loss will have a material adverse effect on its
financial condition or results of operations; however, given the early stage of
the loss assessment, no assurance can be given as to the ultimate effect of such
loss on Sweetheart.
8
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"), is a holding company that
conducts its operations through its subsidiaries, Sweetheart Holdings Inc.
("Sweetheart") and The Fonda Group, Inc. ("Fonda") (collectively, the
"Company"). The Company conducts all of its operations through its principal
operating subsidiaries, Sweetheart and Fonda, and therefore, has no significant
cash flows or operations independent of such subsidiaries.
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 Sweetheart and Fonda's business is seasonal with a majority of
its net cash flow from operations realized during the last six months of the
fiscal 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 requirements,
Fonda and/or Sweetheart will need to borrow under their respective credit
facilities or seek other sources of capital. Sweetheart and Fonda believe 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 for the next twelve months.
Recent Developments
On January 13, 2001, Sweetheart experienced a casualty loss due to a
fire at its Somerville, Massachusetts facility. Sweetheart carries both property
damage and business interruption insurance. As a result of which Sweetheart has
no reason to believe that this loss will have a material adverse effect on its
financial condition or results of operations. Given the early stage of the loss
assessment, no assurance can be given as to the ultimate effect of such loss on
Sweetheart.
On December 31, 2000, James Armenakis resigned as a director from SF
Holdings. On January 1, 2001, Edith Mehiel was elected as a director of SF
Holdings.
9
Thirteen Weeks Ended December 24, 2000 Compared to Thirteen Weeks Ended
December 26, 1999 (Unaudited)
Net sales increased $20.7 million, or 6.8%, to $326.5 million for
the thirteen weeks ended December 24, 2000 compared to $305.8 million for the
thirteen weeks ended December 26, 1999. The following analysis includes sales
from Sweetheart to Fonda and sales from Fonda to Sweetheart which were
eliminated in consolidation.
Sweetheart results - Net sales increased $19.4 million, or 9.1%, (including
intercompany sales to Fonda of $4.8 million and $3.5 million for Fiscal 2000 and
Fiscal 1999, respectively) to $233.6 million for the thirteen weeks ended
December 24, 2000 compared to $214.2 million for the thirteen weeks ended
December 26, 1999, reflecting a 6.2% increase in sales volume and a 2.9%
increase in average realized sales price. Net sales to institutional foodservice
customers increased 7.3%, reflecting a 4.7% increase in sales volume and a 2.6%
increase in average realized sales price. Net sales to food packaging customers
had no significant change from prior year.
Fonda results - Net sales increased $2.6 million, or 2.7%, (including
intercompany sales to Sweetheart of $2.5 million and $2.6 million for Fiscal
2000 and Fiscal 1999, respectively) to $100.2 million for the thirteen weeks
ending December 24, 2000, compared to $97.6 million for the thirteen weeks
ending December 26, 1999, reflecting a 17.8% increase in average realized sales
price partially offset by a 15.1% decrease in sales volume. Net sales to
consumer foodservice customers decreased 2.0%, resulting from a 20.7% increase
in average realized sales price, partially offset by a decrease in sales volume
of 22.7%. Net sales to institutional foodservice customers increased 9.5%,
resulting from a 5.1% increase in average realized sales price and a 4.4%
increase in sales volume. Selling prices to both consumer and institutional
customers were positively affected by increases in raw material costs that were
passed through to customers as well as more competitive market conditions. These
favorable price increases were offset by lower volumes due to competitive market
conditions and lower sales to customers that are experiencing financial
distress.
Gross profit decreased $7.0 million, or 15.4%, to $38.5 million for the
thirteen weeks ended December 24, 2000 compared to $45.5 million for the
thirteen weeks ended December 26, 1999. As a percentage of net sales, gross
profit decreased to 11.8% for the thirteen weeks ended December 24, 2000 from
14.9% for the thirteen weeks ended December 26, 1999.
Sweetheart results - Gross profit decreased $7.2 million, or 26.8%, to $19.7
million for the thirteen weeks ended December 24, 2000 compared to $26.9 million
for the thirteen weeks ended December 26, 1999. As a percentage of net sales,
gross profit decreased to 8.4% for the thirteen weeks ended December 24, 2000
from 12.6% for the thirteen weeks ended December 26, 1999. The decrease in gross
profit is primarily attributable to the effects of a sale-leaseback transaction.
In Fiscal 2000, Sweetheart sold certain production equipment in connection with
a sale-leaseback transaction. Sweetheart is leasing this equipment under an
operating lease. The net proceeds from this sale were partially used to retire
Sweetheart's Senior Secured Notes. This refinancing enabled Sweetheart to use a
portion of its Net Operating Loss Carryforward and obtain a more favorable
interest rate. Consequently, expenses that were historically recorded as
interest and depreciation are now being recorded as operating expenses.
Specifically, rent expense increased by $5.2 million net of a reduction in
depreciation. Additionally, gross profit declined due to an increase in energy
costs of $1.8 million and rent expense from a new leased facility of $0.2
million.
Fonda results - Gross profit increased $0.1 million, or 0.5%, to $19.0 million
for the thirteen weeks ending December 24, 2000, compared to $18.9 million for
the thirteen weeks ending December 26, 1999. As a percentage of net sales, gross
profit decreased from 19.4% for the thirteen weeks ending December 26, 1999 to
19.0% for the thirteen weeks ending December 24, 2000. Gross profit for the
thirteen weeks ending December 24, 2000 was positively affected by increased
selling prices which were offset by higher raw material costs.
Selling, general and administrative expenses decreased $1.4 million,
or 4.5%, to $29.4 million in the thirteen weeks ended December 24, 2000 compared
to $30.8 million in the thirteen weeks ended December 26, 1999. This decrease
primarily resulted from a decrease in the workforce from the Creative
Expressions Group consolidation and a reduction in selling expenses.
10
Other (income) expense increased $4.8 million, to income of $3.4
million for the thirteen weeks ended December 24, 2000 compared to an expense of
$1.4 million in the thirteen weeks ended December 26, 1999 This increase is due
to a $2.5 million amortization of deferred gain in Fiscal 2001 in connection
with a sale-leaseback transaction and a $1.0 million write-off of an unsecured
note receivable issued in connection with the Fiscal 1998 sale of the bakery
business which was recorded in Fiscal 2000.
Operating income decreased $0.9 million, to $12.4 million in the
thirteen weeks ended December 24, 2000 compared to $13.3 million in the thirteen
weeks ended December 26, 1999, due to the reasons stated above.
Interest expense, net decreased $4.2 million, or 23.9%, to $13.4
million in the thirteen weeks ended December 24, 2000 compared to $17.6 million
in the thirteen weeks ended December 26, 1999. This decrease is attributable to
lower outstanding balances under both Sweetheart's and Fonda's respective
revolving credit facilities and the June 2000 redemption of Sweetheart's Senior
Secured Notes. As a result of a sale-leaseback transaction, interest expense has
declined while rent expense has increased.
Net income (loss) decreased $2.1 million, to loss of $0.9 million in
the thirteen weeks ended December 24, 2000 compared to a loss of $3.0 million
loss in the thirteen weeks ended December 26, 1999, due to the reasons stated
above.
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. The Company
expects to continue this method of funding for its 2001 capital expenditures.
Net cash provided by operating activities decreased $6.9 million to
source of $2.6 million in the thirteen weeks ended December 24, 2000 compared to
a source of $9.5 million in the thirteen weeks ended December 26, 1999. This is
primarily due to a reduction in accounts payable which resulted from a decrease
in inventory purchases.
Capital expenditures for the thirteen weeks ended December 24, 2000
were $3.5 million compared to $4.5 million for the thirteen weeks ended December
26, 1999. Capital expenditures in the thirteen weeks ended December 24, 2000
included $1.3 million for new production equipment, $1.5 million on growth and
expansion projects, with the remaining consisting primarily of routine capital
improvements.
Pursuant to a lease dated as of June 1, 2000 ("the Lease") between
Sweetheart Cup Company, Inc. ("Sweetheart Cup") and State Street Bank and Trust
Company of Connecticut, National Association ("State Street"), as trustee,
Sweetheart Cup leases the production equipment sold in connection with the
sale-leaseback transaction from State Street as owner trustee for several owner
participants, through November 9, 2010. Sweetheart Cup has the option to renew
the Lease for up to four consecutive renewal terms of two years each. Sweetheart
also has the option to purchase such equipment for fair market value either at
the conclusion of the Lease term or November 21, 2006. Sweetheart's obligations
under the Lease are collateralized by substantially all of it's property, plant
and equipment owned as of June 15, 2000. The Lease contains various covenants,
which prohibit, or limit, among other things, dividend payments, equity
repurchases or redemption, the incurrence of additional indebtedness and certain
other business activities.
11
Sweetheart is accounting for the sale-leaseback 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 125 months, which is the term of the Lease.
On June 15, 2000, Sweetheart refinanced its revolving credit facility
(the "U.S. Credit Facility") 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
principal payments of $0.4 million through June 2005. Both the term loan and the
revolving credit facility have an accelerated maturity date of July 1, 2003 if
Sweetheart's Senior Subordinated Notes due September 1, 2003 are not refinanced
before June 1, 2003. Borrowings under the revolving credit facility bear
interest, at 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 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 credit facility is collateralized by Sweetheart's inventories and
receivables with the term loan portion of the credit facility further
collateralized by certain production equipment. As of December 24, 2000, $43.7
million was available under such facility. The fee for outstanding letters of
credit is 2.00% per annum and there is a commitment fee of 0.375% per annum on
the daily average unused amount of the commitments.
Sweetheart's Canadian subsidiary has a Credit Agreement (the
"Canadian Credit Facility") which provides for a term loan facility of up to Cdn
$10 million and a revolving credit facility of up to Cdn $10 million. Term loan
borrowings under the 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. The Canadian Credit Facility is secured by all existing and
thereafter acquired real and personal tangible assets of Lily, a subsidiary of
Sweetheart Cup, and net proceeds on the sale of any of the foregoing. Borrowings
under the 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. As of December 24, 2000, Cdn $4.2
million (approximately $2.8 million) was available under the Canadian Credit
Facility. Sweetheart intends to refinance this debt prior to its maturity
however, there can be no assurances that it will be able to obtain such
refinancing on terms and conditions acceptable to Sweetheart.
Fonda has a $55 million revolving credit facility subject to borrowing
base limitations. The credit facility is collateralized by eligible accounts
receivable, inventories, certain general intangibles and the proceeds on the
sale of accounts receivable and inventory. The credit facility matures on
September 30, 2001. Borrowings are available at the bank's prime rate plus 0.25%
or at LIBOR plus 2.25% at the election of Fonda. At December 24, 2000, $36.7
million was outstanding and $18.3 million was the maximum remaining advance
available based upon eligible collateral. Although Fonda intends to refinance
this debt, there can be no assurances that Fonda will be able to obtain such
refinancing on terms and conditions acceptable to Fonda.
Fonda's credit facility includes a term loan of $5 million. This amount
is payable in equal monthly installments through the maturity date of September
30, 2001, at an annual rate of LIBOR plus 2.5%. The proceeds from this term loan
were used to partially finance the purchase of Springprint.
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
12
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 been in
the process of paying out the termination liability and associated expenses and
as of December 24, 2000, has disbursed $12.3 million in termination payments.
The estimate of the total termination liability and associated expenses, less
payments, exceeds assets set aside in the Plan by approximately $7.9 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.
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.
Management believes that cash generated by each of Sweetheart's and
Fonda's operations, combined with amounts available under its respective credit
facilities, in addition to funds generated by asset sales 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 24, 2000, Sweetheart had approximately $32 million of
net operating loss ("NOL") carry-forwards for federal income tax purposes, which
expire in 2018. Although Sweetheart expects that sufficient taxable income will
be generated in the future to realize these NOLs, there can be no such assurance
that such future taxable income will be generated.
Item 3. QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NONE
13
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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 been in
the process of paying out the termination liability and associated expenses and
as of December 24, 2000, Sweetheart has disbursed $12.3 million in termination
payments. The estimate of the total termination liability and associated
expenses, less payments, exceeds assets set aside in the Plan by approximately
$7.9 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.
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.
Each of Sweetheart and Fonda 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.
14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.5 Certificate of Amendment of the Certificate of Incorporation
of SF Holdings Group, Inc.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the thirteen weeks ended
December 24, 2000.
15
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: January 31, 2001 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)
16
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: January 31, 2001 By: _____________________________
------------------
Hans H. Heinsen
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer and Duly
Authorized Officer)
17