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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Twenty-six Weeks Ended March 25, 2001
[ ] 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 May 1, 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 BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 25, September 24,
2001 2000
------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 9,066 $ 6,352
Cash in escrow 307 300
Receivables, less allowances of $4,078 and $3,534,
respectively 152,159 155,684
Due from affiliates 1,087 1,286
Inventories 232,013 226,657
Deferred income taxes 23,947 24,347
Refundable income taxes 843 622
Spare parts 24,976 24,066
Other current assets 7,295 6,428
---------- ----------
Total current assets 451,693 445,742
Property, plant and equipment, net 261,380 263,368
Deferred income taxes 41,392 37,694
Spare parts 8,603 8,313
Goodwill, net 107,326 106,108
Other assets 16,799 19,904
---------- ----------
Total assets $ 887,193 $ 881,129
========== ==========
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable $ 84,262 $ 91,068
Accrued payroll and related costs 49,779 55,486
Other current liabilities 50,649 56,114
Current portion of deferred gain on sale of assets 10,275 10,275
Current portion of long-term debt 56,518 57,266
---------- ----------
Total current liabilities 251,483 270,209
Commitments and contingencies (See Notes)
Deferred income taxes 4,209 4,209
Long-term debt 470,282 434,967
Deferred gain on sale of assets 88,810 93,948
Other liabilities 57,848 57,511
---------- ----------
Total liabilities 872,632 860,844
---------- ----------
Exchangeable preferred stock 44,860 41,794
Preferred Stock B, Series 2 15,000 15,000
Minority interest in subsidiary 3,111 3,169
Redeemable common stock 2,320 2,286
Shareholders' deficit (50,730) (41,964)
---------- ----------
Total liabilities and shareholders' deficit $ 887,193 $ 881,129
========== ==========
See accompanying Notes to Consolidated Financial Statements.
2
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
For the For the For the For the
Thirteen Thirteen Twenty-six Twenty-six
weeks ended weeks ended weeks ended weeks ended
March 25, March 26, March 25, March 26,
2001 2000 2001 2000
------------- ------------- ------------- ------------
Net sales $ 292,793 $ 289,374 $ 619,296 $ 595,194
Cost of sales 259,152 247,428 547,156 507,707
---------- ---------- ---------- ----------
Gross profit 33,641 41,946 72,140 87,487
Selling, general and administrative expenses 29,767 29,752 59,207 60,561
Other (income) expense, net (3,010) (3,012) (6,378) (1,564)
---------- ---------- ---------- ----------
Operating income 6,884 15,206 19,311 28,490
Interest expense, net of interest income of $56,
$180, $91 and $267, respectively 13,449 17,137 26,828 34,700
---------- ---------- ---------- ----------
Loss before income tax benefit, minority
interest and extraordinary loss (6,565) (1,931) (7,517) (6,210)
Income tax benefit (2,254) (466) (2,492) (1,850)
Minority interest in subsidiary's (income) loss (206) 229 (58) 346
---------- ---------- ---------- ----------
Loss before extraordinary loss (4,105) (1,694) (4,967) (4,706)
Extraordinary loss on debt extinguishment (net
of income taxes of ($350)) - 525 - 525
---------- ---------- ---------- ----------
Net loss (4,105) (2,219) (4,967) (5,231)
Payment-in-kind dividends on exchangeable
preferred stock 1,567 1,360 3,066 2,677
---------- ---------- ---------- ----------
Net loss applicable to common stockholders $ (5,672) $ (3,579) $ (8,033) $ (7,908)
========== ========== ========== ==========
Comprehensive loss, net of tax:
Net loss $ (4,105) $ (2,219) $ (4,967) $ (5,231)
Foreign currency translation adjustment (309) 60 (523) 71
Minimum pension liability adjustment (net
of income taxes of $(517), $(53),
$(508) and $(129), respectively) (776) (79) (762) (193)
---------- ---------- ---------- ----------
Comprehensive loss $ (5,190) $ (2,238) $ (6,252) $ (5,353)
========== ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
3
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the For the
Twenty-six Twenty-six
weeks ended weeks ended
March 25, March 26,
2001 2000
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,967) $ (5,231)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 17,082 27,666
Amortization of deferred gain (5,138) -
Interest accreted on debt 6,801 5,698
Deferred income tax benefit (2,492) (2,215)
(Gain) loss on sale of assets (406) (4,082)
Minority interest in subsidiary (58) 346
Changes in operating assets and liabilities
(net of business acquisition):
Receivables 4,975 721
Due from affiliates 199 190
Inventories (3,113) (29,934)
Other current assets (1,730) 322
Accounts payable and accrued expenses (21,003) 9,008
Other, net 3,286 1,631
---------- ----------
Net cash (used in) provided by operating activities (6,564) 4,120
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (12,650) (14,795)
Payment for business acquisition (6,654) -
Proceeds from sale of property, plant and equipment 322 8,517
---------- ----------
Net cash used in investing activities (18,982) (6,278)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under credit facilities 27,262 42,703
Repayments of other debt (3,995) (39,094)
Borrowing for business acquisition 5,000 -
---------- ----------
Net cash provided by financing activities 28,267 3,609
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,721 1,451
CASH AND CASH EQUIVALENTS, beginning of period 6,652 4,180
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 9,373 $ 5,631
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 19,729 $ 28,438
========== ==========
Income taxes paid (refunded) $ 254 $ (2,537)
========== ==========
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. Certain prior period amounts have been reclassified to
conform to the current period presentation.
(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 balance sheet. The
adoption of SFAS No. 133 did not have a significant impact on the consolidated
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 an
impact on the consolidated financial statements.
(3) INVENTORIES
The components of inventories are as follows (in thousands):
(Unaudited)
March 25, September 24,
2001 2000
------------- ---------------
Raw materials and supplies $ 56,572 $ 66,941
Finished products 164,342 148,231
Work in progress 11,099 11,485
--------- ---------
Total inventories $ 232,013 $ 226,657
========= =========
5
(4) BUSINESS ACQUISITION
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 has 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.
The Springprint acquisition has resulted in goodwill of $3.6 million which is
being amortized over 20 years. 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 date of acquisition.
(5) RELATED PARTY TRANSACTIONS
During the twenty-six weeks ending March 25, 2001, the Company sold
$3.8 million of scrap paper to Fibre Marketing Group, LLC ("Fibre Marketing").
Included in accounts receivable as of March 25, 2001 was $1.6 million due from
Fibre Marketing. Other sales, if any, to affiliates during the twenty-six weeks
ending March 25, 2001 were not significant.
During the twenty-six weeks ending March 26, 2000, the Company sold
$3.3 million of scrap paper to Fibre Marketing. Included in accounts receivable
as of March 26, 2000 was $1.2 million due from Fibre Marketing. Other sales, if
any, to affiliates during the twenty-six weeks ending March 26, 2000 were not
significant.
During the twenty-six weeks ending March 25, 2001, the Company
purchased $3.6 million of corrugated containers from Box USA Group, Inc. ("Box
USA"), formerly known as Four M Corporation and $0.7 million of travel services
from Emerald Lady, Inc. Included in accounts payable, as of March 25, 2001, was
$0.5 million due to Box USA. Other purchases from affiliates, if any, during the
twenty-six weeks ending March 25, 2001 were not significant. During the period
ended March 25, 2001, the Company paid $1.5 million and $0.6 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 twenty-six weeks ending March 26, 2000, the Company
purchased $5.0 million of corrugated containers and services from Box USA and
$0.4 million of travel services from Emerald Lady, Inc. Included in accounts
payable, as of March 26, 2000, was $0.6 million due to Box USA. Other purchases
from affiliates, if any, during the twenty-six weeks ending March 26, 2000 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 at 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 its operations at this facility
and is currently subleasing the entire facility to an unrelated third party.
Rent expense, net of sublease income on the portion of the premises subleased,
was 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 or a
director of the Company.
6
(6) SF HOLDINGS STOCK COMPENSATION PLAN
During the twenty-six weeks ended March 25, 2001, the Company adopted
the SF Holdings Group, Inc. Share Incentive Plan ("the Share Incentive Plan") in
which the Company may grant options to its employees to purchase up to 95,995
shares of the Company's class D common stock. The Company has reserved 95,995
shares of class D common stock for issuance upon exercise of these options. The
exercise price of each option is determined by the Company at the date of grant
and an option's maximum term is 10 years. The options vest over a period of
three years.
During the twenty-six weeks ended March 25, 2001, the Company granted
options to purchase an aggregate of 40,137 shares of its class D common stock to
certain employees. Certain of the exercise prices of the options were below the
fair market value of the Company's common stock at the date of the grant. During
the three year vesting period, these discounts of $1.6 million are being
amortized as compensation expense and credited to additional paid-in capital by
the Company. Amortization expense relating to the Company's stock options was
$0.6 million for the twenty-six weeks ended March 25, 2001.
(7) OTHER (INCOME) EXPENSE
During the twenty-six weeks ended March 25, 2001, Sweetheart recognized
a $5.1 million gain from the amortization of the deferred gain in connection
with a sale-leaseback transaction. In the quarter ended June 25, 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. ("the Sale-Leaseback Transaction")
During the twenty-six weeks ended March 26, 2000, Sweetheart realized a
$4.1 million gain on the sale of a warehouse facility in Owings Mills, Maryland.
This gain was partially offset by a one-time write-off of a $1.0 million
unsecured note receivable issued in connection with the Fiscal 1998 sale of the
bakery business due to the bankruptcy of the borrower.
(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 has been in
the process of paying out the termination liability and associated expenses and
as of March 25, 2001, Sweetheart has disbursed $12.3 million in termination
payments. The estimate of the total termination liability and associated
expenses, less payments, exceeds
7
assets set aside in the Plan by approximately $8.0 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 the Company's financial position or results of operations.
The Company is also involved in a number of legal proceedings arising
in the ordinary course of business, none of which is expected to have a material
adverse effect on the Company's consolidated financial position or results of
operations.
(9) 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):
For the Thirteen For the Thirteen
weeks ended weeks ended
March 25, 2001 March 26, 2000
-------------------- --------------------
Net sales:
Sweetheart $ 219,617 $ 217,380
Fonda 79,773 78,063
Corporate and eliminations (6,597) (6,069)
---------- ----------
Net Sales $ 292,793 $ 289,374
========== ==========
Income from operations excluding other income:
Sweetheart $ 2,391 $ 9,671
Fonda 3,030 2,629
Corporate and eliminations (1,547) (106)
---------- ----------
Total income from operations $ 3,874 $ 12,194
========== ==========
8
For the Twenty-six For the Twenty-six
weeks ended weeks ended
March 25, 2001 March 26, 2000
---------------------- ----------------------
Net sales:
Sweetheart $ 453,196 $ 431,595
Fonda 179,939 175,635
Corporate and eliminations (13,839) (12,036)
---------- ----------
Net Sales $ 619,296 $ 595,194
========== ==========
Income from operations excluding other income:
Sweetheart $ 5,588 $ 18,508
Fonda 9,639 8,529
Corporate and eliminations (2,294) (111)
---------- ----------
Total income from operations $ 12,933 $ 26,926
========== ==========
(10) SUBSEQUENT EVENT
On April 5, 2001, Sweetheart purchased an 80% interest in Global Cup,
S.A. De C.V. and its subsidiaries ("Global Cup"), Mexican companies which
manufacture, distribute and sell paper cups and lids throughout Mexico and
export to other Latin American countries. The aggregate purchase price was $12.0
million, subject to post-closing adjustments. This acquisition is not included
within the consolidated financial statements and its impact is expected to be
minimal to the Company's current financial results.
As of March 30, 2001, Creative Expression Group, Inc. ("CEG"), a
subsidiary of the Company, repurchased 12% of its issued and outstanding common
stock from certain shareholders for an aggregate purchase price of approximately
$0.3 million, subject to adjustment. As a result of such repurchases, the
Company owns 88.1% of the issued and outstanding common stock of CEG.
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
9
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 Sweetheart's and/or Fonda's cash flow from operations is insufficient
to provide working capital necessary to fund their respective requirements,
Sweetheart and/or Fonda 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 April 5, 2001, Sweetheart purchased an 80% interest in Global Cup,
S.A. De C.V. and its subsidiaries ("Global Cup"), Mexican companies which
manufacture, distribute and sell paper cups and lids throughout Mexico and
export to other Latin American countries. The aggregate purchase price was $12.0
million, subject to post-closing adjustments. This acquisition is not included
within the consolidated financial statements and its impact is expected to be
minimal to the Company's current financial results.
As of March 30, 2001, Creative Expression Group, Inc. ("CEG"), a
subsidiary of the Company, repurchased 12% of its issued and outstanding common
stock from certain shareholders for an aggregate purchase price of approximately
$0.3 million, subject to adjustment. As a result of such repurchases, the
Company owns 88.1% of the issued and outstanding common stock of CEG.
Thirteen Weeks Ended March 25, 2001 Compared to Thirteen Weeks Ended March 26,
2000 (Unaudited)
Net sales increased $3.4 million, or 1.2%, to $292.8 million for the
thirteen weeks ended March 25, 2001 compared to $289.4 million for the thirteen
weeks ended March 26, 2000. 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 $2.2 million, or 1.0%, (including sales
to Fonda of $3.9 million for the thirteen weeks ended March 25, 2001 and $3.1
million for the thirteen weeks ended March 26, 2000) to $219.6 million for the
thirteen weeks ended March 25, 2001 compared to $217.4 million for the thirteen
weeks ended March 26, 2000, reflecting a 0.7% decrease in sales volume and a
1.7% increase in average realized sales price. Net sales to institutional
foodservice customers increased 3.8%, reflecting a 1.2% decrease in sales volume
and a 5.0% increase in average realized sales price. More specifically, the
decrease in sales volume reflects a shift from high volume lower price products
towards lower volume products with higher sales prices. Net sales to food
packaging customers decreased 2.8% reflecting a 4.1% decrease in sales volume
and a 1.3% increase in average realized sales price. This decrease is primarily
due to industry consolidation and competition which resulted in a decrease in
demand from large food packaging customers.
Fonda results - Net sales increased $1.7 million, or 2.2%, (including sales to
Sweetheart of $2.5 million for the thirteen weeks ended March 25, 2001 and $3.3
million for the thirteen weeks ended March 26, 2000) to $79.8 million for the
thirteen weeks ending March 25, 2001, compared to $78.1 million for the thirteen
weeks ending March 26, 2000, reflecting an 8.4% increase in average realized
sales price partially offset by a 6.2% decrease in sales volume. Net sales to
consumer foodservice customers increased 5.0%, resulting from a 10.6% increase
in average realized sales price, partially offset by a decrease in sales volume
of 5.6%. Net sales to institutional foodservice customers decreased 1.3%,
10
resulting from a 6.0% increase in average realized sales price, partially offset
by a 7.3% decrease 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 Fonda's decision to reduce sales to certain
consumer customers experiencing deteriorating credit conditions; however, these
lower volumes were partially offset by additional volume from the Springprint
acquisition.
Gross profit decreased $8.3 million, or 19.8%, to $33.6 million for the
thirteen weeks ended March 25, 2001 compared to $41.9 million for the thirteen
weeks ended March 26, 2000. As a percentage of net sales, gross profit decreased
to 11.5% for the thirteen weeks ended March 25, 2001 from 14.5% for the thirteen
weeks ended March 26, 2000.
Sweetheart results - Gross profit decreased $8.3 million, or 29.3%, to $20.0
million for the thirteen weeks ended March 25, 2001 compared to $28.3 million
for the thirteen weeks ended March 26, 2000. As a percentage of net sales, gross
profit decreased to 9.1% for the thirteen weeks ended March 25, 2001 from 13.0%
for the thirteen weeks ended March 26, 2000. The decrease in gross profit is
primarily attributable to the effects of a sale-leaseback transaction. In the
quarter ended June 25, 2000, Sweetheart sold certain production equipment in
connection with a sale-leaseback transaction and is leasing this equipment under
an operating lease ("the Sale-Leaseback Transaction"). 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 more favorable financing. Consequently, cost of sales
has increased due to higher rent expense which has been partially offset by
lower depreciation expense. In addition, Sweetheart's historically higher
interest expense has decreased. Specifically, rent expense increased by $4.0
million net of a reduction in depreciation. Additionally, gross profit declined
due to an increase in energy costs of $1.8 million and an increase in additional
warehousing costs of $0.9 million related to Sweetheart's Mid Atlantic
Distribution Center.
Fonda results - Gross profit increased $0.1 million, or 0.7%, to $14.0 million
for the thirteen weeks ending March 25, 2001, compared to $13.9 million for the
thirteen weeks ending March 26, 2000. As a percentage of net sales, gross profit
decreased from 17.8% for the thirteen weeks ending March 26, 2000 to 17.5% for
the thirteen weeks ending March 25, 2001. Gross profit for the thirteen weeks
ending March 25, 2001 was positively affected by increased selling prices which
were partially offset by higher raw material and energy costs.
Selling, general and administrative expenses were unchanged at $29.8
million for the thirteen weeks ending March 25, 2001 and for the thirteen weeks
ending March 26, 2000.
Other (income) expense, net was unchanged at $3.0 million of income
for the thirteen weeks ending March 25, 2001 and for the thirteen weeks ending
March 26, 2000.
Operating income decreased $8.3 million, or 54.6%, to $6.9 million for
the thirteen weeks ended March 25, 2001 compared to $15.2 million for the
thirteen weeks ended March 26, 2000, due to the reasons stated above.
Interest expense, net decreased $3.7 million, or 21.6%, to $13.4
million for the thirteen weeks ended March 25, 2001 compared to $17.1 million
for the thirteen weeks ended March 26, 2000. This decrease is attributable to
lower interest rates 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 the Sale-Leaseback Transaction.
Net loss increased $1.9 million, or 86.4%, to $4.1 million for the
thirteen weeks ended March 25, 2001 compared to $2.2 million for the thirteen
weeks ended March 26, 2000, due to the reasons stated above.
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Twenty-six Weeks Ended March 25, 2001 Compared to Twenty-six Weeks Ended
March 26, 2000 (Unaudited)
Net sales increased $24.1 million, or 4.0%, to $619.3 million for the
twenty-six weeks ended March 25, 2001 compared to $595.2 million for the
twenty-six weeks ended March 26, 2000. 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 $21.6 million, or 5.0%, (including
sales to Fonda of $8.7 million for the twenty-six weeks ended March 25, 2001 and
$6.6 million for the twenty-six weeks ended March 26, 2000) to $453.2 million
for the twenty-six weeks ended March 25, 2001 compared to $431.6 million for the
twenty-six weeks ended March 26, 2000, reflecting a 2.2% increase in sales
volume and a 2.8% increase in average realized sales price. Net sales to
institutional foodservice customers increased 6.5%, reflecting a 3.1% increase
in sales volume and a 3.4% increase in average realized sales price. Net sales
to food packaging customers decreased 1.5%, reflecting a 2.7% decrease in sales
volume and a 1.2% increase in average realized sales price. This decrease is
primarily due to industry consolidation and competition which resulted in a
decrease in demand from large food packaging customers.
Fonda results - Net sales increased $4.3 million, or 2.4%, (including sales to
Sweetheart of $5.0 million for the twenty-six weeks ended March 25, 2001 and
$5.9 million for the twenty-six weeks ended March 26, 2000) to $179.9 million
for the twenty-six weeks ending March 25, 2001, compared to $175.6 million for
the twenty-six weeks ending March 26, 2000, reflecting a 9.6% increase in
average realized sales price partially offset by a 7.2% decrease in sales
volume. Net sales to consumer foodservice customers increased 0.9%, resulting
from a 7.2% increase in average realized sales price, partially offset by a
decrease in sales volume of 6.3%. Net sales to institutional foodservice
customers increased 4.6%, resulting from a 13.5% increase in average realized
sales price, partially offset by a 8.9% decrease 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 Fonda's decision to
reduce sales to certain consumer customers experiencing deteriorating credit
conditions; however, these lower volumes were partially offset by additional
volumes from the Springprint acquisition.
Gross profit decreased $15.4 million, or 17.6%, to $72.1 million for
the twenty-six weeks ended March 25, 2001 compared to $87.5 million for the
twenty-six weeks ended March 26, 2000. As a percentage of net sales, gross
profit decreased to 11.6% for the twenty-six weeks ended March 25, 2001 from
14.7% for the twenty-six weeks ended March 26, 2000.
Sweetheart results - Gross profit decreased $15.5 million, or 28.1%, to $39.7
million for the twenty-six weeks ended March 25, 2001 compared to $55.2 million
for the twenty-six weeks ended March 26, 2000. As a percentage of net sales,
gross profit decreased to 8.8% for the twenty-six weeks ended March 25, 2001
from 12.8% for the twenty-six weeks ended March 26, 2000. The decrease in gross
profit is primarily attributable to higher rent expense due to the effects of
the Sale-Leaseback Transaction. In the quarter ended June 25, 2000, Sweetheart
sold certain production equipment in connection with the 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 more favorable financing. Consequently,
cost of sales increased as a result of higher rent expense which has been
partially offset by lower depreciation expense. In addition, Sweetheart's
historically higher interest expense has decreased. Specifically, rent expense
increased by $8.0 million net of a reduction in depreciation. Additionally,
gross profit declined due to an increase in energy costs of $4.4 million,
additional warehousing costs of $1.9 million related to Sweetheart's Mid
Atlantic Distribution Center and increased freight costs of $0.7 million.
Fonda results - Gross profit increased $0.3 million, or 0.9%, to $33.1 million
for the twenty-six weeks ending March 25, 2001, compared to $32.8 million for
the twenty-six weeks ending March 26, 2000. As a percentage of net sales, gross
profit decreased from 18.7% for the twenty-six weeks ending March 26, 2000 to
18.4% for the twenty-six weeks ending March 25, 2001. Gross profit for the
twenty-six weeks ending March 25, 2001 was positively affected by increased
selling prices which were partially offset by higher raw material and energy
costs.
12
Selling, general and administrative expenses decreased $1.4 million,
or 2.3%, to $59.2 million for the twenty-six weeks ended March 25, 2001 compared
to $60.6 million for the twenty-six weeks ended March 26, 2000. This change is
attributable to a bad debt expense of $2.3 million which was recorded for the
twenty-six weeks ended March 26, 2000 and a reduction in consulting fees of $1.2
million which was offset by an increase in wages of $1.7 million for Sweetheart.
Also, this decrease resulted from a reduction in the Fonda workforce as a result
of the CEG consolidation.
Other (income) expense increased $4.8 million, or 300%, to income of
$6.4 million for the twenty-six weeks ended March 25, 2001 compared to income of
$1.6 million for the twenty-six weeks ended March 26, 2000. This change resulted
from the amortization of $5.1 million of the deferred gain in conjunction with
the Sale-Leaseback Transaction compared to a gain of $4.1 million from the sale
of a warehouse facility which was partially offset by a one-time write-off of
$1.0 million unsecured note receivable issued in connection with the Fiscal 1998
sale of the bakery business for Sweetheart.
Operating income decreased $9.2 million, or 32.3% to $19.3 million for
the twenty-six weeks ended March 25, 2001 compared to $28.5 million for the
twenty-six weeks ended March 26, 2000, due to the reasons stated above.
Interest expense, net decreased $7.9 million, or 22.8%, to $26.8
million for the twenty-six weeks ended March 25, 2001 compared to $34.7 million
for the twenty-six weeks ended March 26, 2000. This decrease is attributable to
lower interest rates 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 the Sale-Leaseback Transaction.
Net loss decreased $0.2 million, or 3.8%, to $5.0 million for the
twenty-six weeks ended March 25, 2001 compared to $5.2 million for the
twenty-six weeks ended March 26, 2000, 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 from operating activities decreased $10.7 million to a use of
$6.6 million in the twenty-six weeks ended March 25, 2001 compared to a source
of $4.1 million in the twenty-six weeks ended March 26, 2000. This is primarily
due to a reduction in accounts payable which resulted from a decrease in
inventory purchases.
Capital expenditures for the twenty-six weeks ended March 25, 2001 were
$12.7 million compared to $14.8 million for the twenty-six weeks ended March 26,
2000. Capital expenditures in the twenty-six weeks ended March 25, 2001 included
$4.9 million for new production equipment, $6.4 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 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.
13
Sweetheart Cup 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 Sweetheart'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.
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.
Sweetheart has a revolving credit facility (the "U.S. Credit Facility")
of $135 million subject to borrowing base limitations with a maturity of June
15, 2005 and 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 March 25, 2001, $28.7
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 March 25, 2001, Cdn $1.4 million
(approximately $0.9 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, and certain general intangibles. 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 March 25, 2001,
$40.4 million was outstanding and $14.6 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.
In addition to the revolving credit facility, Fonda's credit facility
also includes a term loan of $5 million. This amount is payable in equal monthly
installments through the maturity date of September 30, 2001. Borrowings under
the term loan bear interest, at Fonda's election, equal to the bank's prime
14
rate plus 0.5% or 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 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 March 25, 2001, 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
$8.0 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 the Company's financial position or results of operations.
The Company is also involved in a number of legal proceedings arising
in the ordinary course of business, none of which is expected to have a material
adverse effect on the Company's consolidated financial position or results of
operations.
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 Sweetheart's and Fonda'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 assurance that
future taxable income will be generated to utilized such NOLs.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NONE
15
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K:
A report on Form 8-K was filed on March 15, 2001 under Item 5 to
announce a change in executive management.
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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: May 1, 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)
17