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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 31, 2002
[ ] 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 10, 2002:
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 - 62,855 shares
SF Holdings Group, Inc. Class C Common Stock, $0.001 par value - 135,900 shares
SF Holdings Group, Inc. Class D Common Stock, $0.001 par value - No Shares
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SF HOLDINGS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
March 31, September 30,
2002 2001
--------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 5,944 $ 11,869
Cash in escrow 4,480 8
Receivables, less allowances of $4,456 and $3,395 156,373 167,855
Due from affiliates 41 1,347
Inventories 207,149 225,021
Deferred income taxes 23,469 24,007
Refundable income taxes 665 665
Spare parts 24,675 23,273
Assets held for sale 7,428 10,210
Other current assets 9,856 9,372
----------- -----------
Total current assets 440,080 473,627
Property, plant and equipment, net 265,429 265,795
Deferred income taxes 31,065 38,107
Spare parts 11,677 12,077
Goodwill, net 121,451 118,307
Other assets 25,709 24,472
----------- -----------
Total assets $ 895,411 $ 932,385
=========== ===========
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable $ 115,912 $ 96,072
Accrued payroll and related costs 42,593 46,892
Other current liabilities 44,120 49,260
Current portion of deferred gain on sale of assets 10,275 10,275
Current portion of long-term debt 8,726 16,942
----------- -----------
Total current liabilities 221,626 219,441
Commitments and contingencies (See Notes)
Deferred income taxes 4,252 4,252
Long-term debt 496,737 542,575
Deferred gain on sale of assets 78,535 83,672
Other liabilities 54,505 58,628
----------- -----------
Total liabilities 855,655 908,568
Minority interest in subsidiaries 2,154 6,427
Exchangeable preferred stock 51,714 48,209
Preferred Stock B, Series 2 15,000 15,000
Redeemable common stock 2,393 2,356
Shareholders' deficit (31,505) (48,175)
----------- -----------
Total liabilities and shareholders' deficit $ 895,411 $ 932,385
=========== ===========
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 For the For the
Thirteen Thirteen Twenty-six Twenty-six
weeks ended weeks ended weeks ended weeks ended
March 31, March 25, March 31, March 25,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales $ 296,371 $ 292,793 $ 617,246 $ 619,296
Cost of sales 267,762 259,152 548,277 547,156
----------- ----------- ----------- -----------
Gross profit 28,609 33,641 68,969 72,140
Selling, general and administrative
expenses 28,847 29,767 58,345 59,207
Other income, net (173) (3,010) (3,296) (6,378)
----------- ----------- ----------- -----------
Operating income (loss) (65) 6,884 13,920 19,311
Interest expense, net of interest income
of $57, $56, $91 and $91 13,107 13,449 26,284 26,828
----------- ----------- ----------- -----------
Loss before income tax benefit,
minority interest and
extraordinary gain (13,172) (6,565) (12,364) (7,517)
Income tax benefit (4,921) (2,254) (4,210) (2,492)
Minority interest in subsidiaries (93) (206) 73 (58)
----------- ----------- ----------- -----------
Loss before extraordinary gain (8,158) (4,105) (8,227) (4,967)
Extraordinary gain on debt
extinguishment(net of income tax
expense of $12,296 and $12,296) (18,444) - (18,444) -
----------- ----------- ----------- -----------
Net income (loss) 10,286 (4,105) 10,217 (4,967)
Payment-in-kind dividends on exchangeable
preferred stock 1,791 1,567 3,505 3,066
----------- ----------- ----------- -----------
Net income (loss) applicable to
common shareholders $ 8,495 $ (5,672) $ 6,712 $ (8,033)
=========== =========== =========== ===========
Other comprehensive income (loss):
Net income (loss) $ 10,286 $ (4,105) $ 10,217 $ (4,967)
Foreign currency translation
adjustment 159 (309) 20 (523)
Minimum pension liability
adjustment (net of income taxes
of $813, $(517), $(748) and
$(508)) 1,220 (776) (1,122) (762)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 11,665 $ (5,190) $ 9,115 $ (6,252)
=========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
3
SF HOLDINGS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Twenty-six For the Twenty-six
weeks ended weeks ended
March 31, March 25,
2002 2001
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 10,217 $ (4,967)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 19,127 17,082
Amortization of deferred gain (5,137) (5,138)
Gain on sale of assets (2,526) (406)
Interest accreted on debt 7,203 6,801
Minority interest in subsidiaries 73 (58)
Extraordinary gain on debt extinguishment (18,444) -
Changes in operating assets and liabilities (net of business
acquisition):
Receivables 12,788 5,174
Inventories 17,872 (3,112)
Other current assets (1,885) (1,994)
Other assets (9,370) 1,471
Accounts payable 19,840 (8,672)
Accrued payroll and related costs (4,299) (5,707)
Other current liabilities (4,928) (4,889)
Other liabilities (8,462) (1,544)
Other, net 255 (605)
------------ ------------
Net cash provided by (used in) operating activities 32,324 (6,564)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (13,783) (12,650)
Payment for business acquisition - (6,654)
Proceeds from sale of assets 5,262 322
------------ ------------
Net cash used in investing activities (8,521) (18,982)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing under credit facilities 173,804 32,263
Repayment under credit facilities (196,144) -
Payments of other debt (2,916) (3,996)
Increase in cash in escrow (5,253) (7)
Decrease in cash in escrow 781 -
------------ ------------
Net cash (used in) provided by financing activities (29,728) 28,260
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (5,925) 2,714
CASH AND CASH EQUIVALENTS, beginning of period 11,869 6,352
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 5,944 $ 9,066
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 17,958 $ 19,729
============ ============
Income taxes paid $ 890 $ 254
============ ============
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 subsidiary, Sweetheart Holdings Inc.
("Sweetheart"), and therefore has no significant cash flows independent of such
subsidiary. Sweetheart conducts its operations through its principal operating
subsidiary Sweetheart Cup Company Inc. ("Sweetheart Cup"). The "Company" shall
refer herein to SF Holdings and its subsidiary. The instruments governing the
indebtedness of Sweetheart and Sweetheart Cup contain numerous restrictive
covenants that restrict their ability to pay dividends or make other
distributions to SF Holdings. The Company believes that it is one of the largest
converters and marketers of plastic and paper disposable food service and food
packaging products in North America.
Pursuant to an agreement, dated as of March 22, 2002 by and among SF
Holdings, Dennis Mehiel, the Company's Chairman and Chief Executive Officer,
American Industrial Partners Management Company, Inc., American Industrial
Partners Capital Fund L.P. ("AIP") and the other stockholders of Sweetheart
signatory to that certain Stockholders' Agreement (the "Stockholders'
Agreement"), dated as of March 12, 1998, (together with AIP and any permitted
transferee of shares of Class A common stock or Class B common stock of
Sweetheart ("the Shares"), the "Original Stockholders"), all of the outstanding
Shares not held by SF Holdings (which consisted of 52% of the voting stock of
Sweetheart) were delivered to SF Holdings and exchanged for 96,000 shares of
Class C common stock of SF Holdings. As a result, SF Holdings became the sole
beneficial owner of 100% of the issued and outstanding capital stock of
Sweetheart. In addition and in connection therewith, the Stockholders Agreement
and related stockholders' right agreement were terminated. As a result, the
excess of the fair value of the Class C common stock issued to the Original
Stockholders over the fair value of the remaining net assets acquired by SF
Holdings in the amount of $5.5 million has been recorded as goodwill.
The information included in the foregoing interim financial statements
of the Company is unaudited but, in the opinion of management, includes 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 consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the fiscal year ended September 30, 2001.
(2) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 prohibits the use of the pooling-of-interest method for
business combinations initiated after June 30, 2001 and also applies to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were accounted for by the
purchase method. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001 and applies to all goodwill and other intangible assets
recognized in an entity's balance sheet. The Company has adopted SFAS No. 141
and is currently evaluating the impact of SFAS No. 142 on its consolidated
financial statements.
In October 2001, the FASB issued pronouncement SFAS No. 144, Impairment
or Disposal of Long-Lived Assets. This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of Accounting Principals Board Opinion No.
30, Reporting the Results of
5
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that Opinion).
This Statement also amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company is
currently evaluating the impact of SFAS No. 144 on its consolidated financial
statements.
(3) INVENTORIES
The components of inventories are as follows (in thousands):
(Unaudited)
March 31, September 30,
2002 2001
------------- ---------------
Raw materials and supplies $ 51,156 $ 55,955
Finished products 145,950 158,297
Work in progress 10,043 10,769
---------- ----------
Total inventories $ 207,149 $ 225,021
========== ==========
(4) RELATED PARTY TRANSACTIONS
All of the affiliates referenced below are directly or indirectly under
the common ownership of the Company's Chief Executive Officer. The Company
believes that the transactions described below which were entered into with
related parties were negotiated on terms which are at least as favorable as it
could have obtained from unrelated third parties and were negotiated on an arm's
length basis.
During the twenty-six weeks ended March 31, 2002, Sweetheart sold $3.8
million of scrap paper to Fibre Marketing Group, LLC, a waste paper recovery
business in which Sweetheart has a 25% interest ("Fibre Marketing"). Accounts
receivable as of March 31, 2002 included $0.8 million due from Fibre Marketing.
During the twenty-six weeks ended March 31, 2002, Fibre Marketing
issued to Sweetheart a promissory note in the principal amount of $1.2 million
in exchange for outstanding accounts receivable from Fibre Marketing. The note
bears interest at an annual rate of 7.0% and is payable in 36 equal monthly
installments. As of March 31, 2002, $1.1 million is due to Sweetheart.
During the twenty-six weeks ended March 31, 2002, Sweetheart purchased
$4.9 million of corrugated containers from Box USA Holdings, Inc. ("Box USA"), a
company in which the Company's Chief Executive Officer owns in excess of 10% of
its outstanding capital stock, and $0.6 million of travel services from Emerald
Lady, Inc, a company wholly owned by the Company's Chief Executive Officer
("Emerald Lady"). Accounts payable, as of March 31, 2002 included $0.9 million
due to Box USA.
Sweetheart had a loan receivable from its Chief Executive Officer
totaling $0.3 million plus accrued interest at 5.06% at March 31, 2002. The loan
is payable upon demand.
During Fiscal 2000, Sweetheart entered into a lease agreement with D&L
Development, LLC, an entity in which the Company's Chief Executive Officer
indirectly owns 47%, to lease a warehouse facility in Hampstead, Maryland.
During the twenty-six weeks ending March 31, 2002 and the twenty-six weeks
ending March 25, 2001, rental payments under this lease were $1.9 million and
$1.5 million,
6
respectively. Annual rental payments under the 20 year lease are $3.7 million
for the first 10 years of the lease and $3.8 million annually, thereafter.
During Fiscal 2000, Sweetheart began leasing a facility in North
Andover, Massachusetts from D&L Andover Property, LLC, an entity in which the
Company's Chief Executive Officer indirectly owns 50%. During the twenty-six
weeks ending March 31, 2002 and the twenty-six weeks ending March 25, 2001,
rental payments under this lease were $0.8 million and $0.6 million,
respectively. Annual rental payments under the 20 year lease are $1.5 million in
the first year, which escalates at a rate of 2% each year thereafter.
Sweetheart leases a building in Jacksonville, Florida from the
Company's Chief Executive Officer. 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, the Chief Executive Officer can
require Sweetheart to purchase the facility for $1.5 million, subject to a
CPI-based escalation, until July 31, 2006. In Fiscal 1998, Sweetheart terminated
its operations at this facility and is currently subleasing the entire facility.
Rent expense, net of sublease income on the portion of the premises subleased is
not significant.
During the twenty-six weeks ended March 25, 2001, Sweetheart sold $3.8
million of scrap paper to Fibre Marketing. Accounts receivable as of March 25,
2001 included $1.6 million due from Fibre Marketing.
During the twenty-six weeks ended March 25, 2001, Sweetheart purchased
$3.6 million of corrugated containers from Box USA and $0.7 million of travel
services from Emerald Lady. Accounts payable, as of March 25, 2001, included
$0.5 million due to Box USA.
(5) LONG-TERM DEBT OBLIGATIONS
On January 25, 2002, SF Holdings refinanced a portion of its 12 3/4%
Senior Discount Notes due 2008 (the "SF Holdings Discount Notes") with a group
of unaffiliated investment entities (the "Investor"), whereby the Investor
purchased $103.2 million (approximately 71%) of the aggregate principal amount
outstanding of the SF Holdings Discount Notes which had a carrying value of
$89.6 million. SF Holdings and the Investor have amended, effective January 25,
2002, the Indenture governing the SF Holdings Discount Notes to eliminate
substantially all of the restrictive covenants. SF Holdings' certificate of
incorporation has also been amended to conform the terms of its Exchangeable
Preferred Stock to the amendments made to the Indenture. SF Holdings and the
Investor have also agreed to reduce the aggregate principal amount of the SF
Holdings Discount Notes held by the Investor to $55 million, with an effective
cash interest rate of 14.26% (15.25% if interest is paid-in-kind through March
31, 2004) and extended the maturity date to January 25, 2009. Interest and
principal under the SF Holdings Discount Notes are collateralized by a 49%
interest in the common stock of Sweetheart.
Extraordinary gain on debt extinguishment included a gain of $19.5
million which was net of the write-off of $2.1 million of deferred financing
fees and $13.0 million of income tax expenses, resulting from the refinancing of
the SF Holdings Discount Notes.
In connection with the above, SF Holdings issued to the Investor a
warrant to purchase a 7% ownership interest in SF Holdings (the "SF Warrant").
The fair value of this SF Warrant at the date of issuance of $1.2 million was
recorded as paid-in capital with a corresponding reduction in the carrying value
of the SF Holdings Discount Notes, and will be amortized as additional interest
expense over the term of the SF Holdings Discount Notes.
7
On March 25, 2002, Sweetheart entered into a supplemental indenture to
the Indenture (the "Indenture") governing its $110 million 10 1/2% Senior
Subordinated Notes due 2003 (the "$110 Senior Subordinated Notes") to amend the
definition of "Change of Control" in the Indenture to substitute Dennis Mehiel,
the Company's Chairman and Chief Executive Officer, for AIP and to make certain
other conforming changes. Sweetheart offered to pay $5.00 for each $1,000 in
principal amount of the $110 Senior Subordinated Notes (the "Consent Fee") to
holders of the $110 Senior Subordinated Notes who had properly furnished, and
not revoked, their consent on or prior to the expiration date of the consent
solicitation (the "Consent Solicitation"). As a result of the consummation of
the Consent Solicitation, the $110 Senior Subordinated Notes began to accrue
interest at 12% per annum as of March 1, 2002. Sweetheart paid the Consent Fee
to the holders of the $110 Senior Subordinated Notes who consented prior to the
expiration of the Consent Solicitation. Such Consent Fee has been capitalized in
other assets and is being amortized over the term of the $110 Senior
Subordinated Notes.
On March 25, 2002, Sweetheart refinanced its senior revolving credit
facility with Bank of America, N.A., as agent (the "Senior Credit Facility"),
which replaced each of Sweetheart Cup and the Fonda Group, Inc.'s ("Fonda")
existing domestic revolving credit and term loan facilities. The Senior Credit
Facility has a maturity date of March 25, 2007; however, in the event that
Sweetheart has not refinanced, repaid or extended the $110 Senior Subordinated
Notes prior to March 1, 2003, the Senior Credit Facility shall terminate on that
date. The Senior Credit Facility allows for a maximum credit borrowing of $235
million subject to borrowing base limitations and satisfaction of other
conditions of borrowing. The revolving borrowings have a maximum of the lesser
of $235 million less the balance of the term loans or $215 million. The term
loans have a maximum of $25 million and are payable monthly through March 2005.
Borrowings under the Senior Credit Facility, at Sweetheart's election, bear
interest at either (i) a bank's base rate revolving loan reference rate plus
0.5% or (ii) LIBOR plus 2.5%. For the twenty-six weeks ended March 31, 2002, the
weighted average annual interest rate for the Senior Credit Facility was 4.92%.
The Senior Credit Facility is collateralized by Sweetheart's receivables,
inventory, general intangibles and certain other assets. 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. As of March 31,
2002, $52.5 million was available under the Senior Credit Facility.
Extraordinary gain on debt extinguishment included a loss of $1.1
million, net of the income tax benefit of $0.7 million, resulting from the
refinancing of Sweetheart's Senior Credit Facility.
(6) SF HOLDINGS STOCK OPTION 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 SF Holdings' Class D common stock. SF Holdings 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 SF Holdings at the date of grant
and an option's maximum term is 10 years.
During the twenty-six weeks ended March 25, 2001, SF Holdings granted
options to purchase shares of its common stock to certain employees of the
Company. Certain officers of the Company were issued options that vested
one-third immediately with the remaining options vesting over two years, while
all other eligible employees were issued options that vest over a period of
three years. The exercise prices of the options granted to the officers and
certain employees were below the fair market value of SF Holdings' common stock
at the date of the grant. During the vesting periods, these discounts of $1.6
million are being amortized as compensation expense and credited to additional
paid-in capital by SF Holdings. Amortization expense relating to SF Holdings'
stock options was $0.2 million for the
8
twenty-six weeks ended March 31, 2002 and $0.6 million for the twenty-six weeks
ended March 25, 2001.
(7) OTHER (INCOME) EXPENSE
During the twenty-six weeks ended March 31, 2002, Sweetheart realized
$5.1 million due to the amortization of the deferred gain in conjunction with
the Fiscal 2000 sale-leaseback transaction. Also, during the twenty-six weeks
ended March 31, 2002, Sweetheart recognized a $3.0 million gain in association
with the sale of a Sweetheart manufacturing facility in Manchester, New
Hampshire. These gains were partially offset by $4.4 million in expenses
reflecting certain costs incurred with the rationalization, consolidation and
improvement of Sweetheart's manufacturing facilities.
During the twenty-six weeks ended March 25, 2001, Sweetheart realized
$5.1 million due to the amortization of the deferred gain in connection with the
Fiscal 2000 sale-leaseback transaction.
(8) CONTINGENCIES
During Fiscal 2001, Sweetheart experienced a casualty loss at its
Somerville, Massachusetts facility. Sweetheart carries business interruption
insurance and has filed a claim with the insurance company. Settlement of the
recovery amount is to be determined.
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 filed in state court in Georgia in April 1987 and later removed to federal
court. The 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. The relief
sought by Plaintiffs was to have the Plan termination declared ineffective. The
United States Court of Appeals for the Eleventh Circuit (the "Circuit Court")
ruled that the Plan was lawfully terminated on December 31, 1986, and judgment
was entered dismissing the case in March 1996. The Circuit Court affirmed the
judgment entered in favor of Sweetheart. Plaintiffs filed a petition for writ of
certiorari to the United States Supreme Court, which was denied in January 1999.
Sweetheart expects to complete paying out the termination liability and
associated expenses in connection with the Plan termination by June 30, 2002. As
of March 31, 2002, Sweetheart disbursed $19.6 million in termination payments.
The estimate of the total termination liability and associated expenses, less
payments, exceeds the assets set aside in the Plan by $0.1 million, which amount
has been fully reserved by Sweetheart.
On November 29, 2001, the liquidating trustee of Ace Baking Company,
Limited Partnership, filed a Complaint for Avoidance of Transfers and
Disallowance or Subordination of Claims against Sweetheart in the United States
Bankruptcy Court Eastern District of Wisconsin. The Complaint, among other
things, seeks to avoid a portion of the consideration paid by Ace Baking Company
to Sweetheart, as a fraudulent transfer, in connection with the sale by
Sweetheart of its bakery business to Ace Baking in November 1997. In addition,
the trustee alleges that certain subsequent payments made by Ace Baking to
Sweetheart in connection with such sales are avoidable preferences. On April 12,
2002, the parties entered into a settlement agreement, pursuant to which the
complaint has been dismissed with prejudice, the effect of which does not have
any material adverse effect on Sweetheart.
The Company is subject to legal proceedings and other claims arising in
the ordinary course of its business. The Company maintains insurance coverage of
types and in amounts which it believes to be adequate and believes that it is
not presently a party to any litigation, the outcome of which could reasonably
be expected to have a material adverse effect on its financial condition or
results of operations.
9
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 products, potential equipment malfunctions and
pending litigation. For additional information, see the SF Holdings Group Inc.'s
("SF Holdings") (the "Company") annual report on Form 10-K for the most recent
fiscal year.
General
SF Holdings was formed in December 1997 and conducts all of its
operations through its subsidiary, Sweetheart Holdings Inc. ("Sweetheart"), and
therefore has no significant cash flows or operations independent of such
subsidiary.
Sweetheart is a converter and marketer of disposable paper, plastic and
foam foodservice, consumer and food packaging products. The prices for raw
materials fluctuate. When raw material prices decrease, selling prices have
historically decreased. The actual impact 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, Sweetheart may suffer margin
erosion on the sale of such inventory.
Sweetheart'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
cash flow from operations is insufficient to provide working capital necessary
to fund its requirements, Sweetheart will need to borrow under its senior
revolving credit facility with Bank of America, N.A or seek other sources of
capital. Sweetheart believes that funds available under its senior revolving
credit facility together with cash generated from operations, will be adequate
to provide for cash requirements for the next twelve months.
Recent Developments
On January 25, 2002, SF Holdings refinanced a portion of its 12 3/4%
Senior Discount Notes due 2008 (the "SF Holdings Discount Notes") with a group
of unaffiliated investment entities (the "Investor"), whereby the Investor
purchased $103.2 million (approximately 71%) of the aggregate principal amount
outstanding of the SF Holdings Discount Notes which had a carrying value of
$89.6 million. SF Holdings and the Investor have amended, effective January 25,
2002, the Indenture governing the SF Holdings Discount Notes to eliminate
substantially all of the restrictive covenants. SF Holdings' certificate of
incorporation has also been amended to conform the terms of its Exchangeable
Preferred Stock to the amendments made to the Indenture. SF Holdings and the
Investor have also agreed to reduce the aggregate principal amount of the SF
Holdings Discount Notes held by the Investor to $55 million, with an effective
cash interest rate of 14.26% (15.25% if interest is paid-in-kind through March
31, 2004) and extended the maturity date to January 25, 2009. Interest and
principal under the SF Holdings Discount Notes are collateralized by a 49%
interest in the capital stock of Sweetheart.
10
Extraordinary gain on debt extinguishment included a gain of $19.5
million which was net of the write-off of $2.1 million of deferred financing
fees and $13.0 million of income tax expenses, resulting from the refinancing of
the SF Holdings Discount Notes.
In connection with the above, SF Holdings issued to the Investor a
warrant to purchase a 7% ownership interest in SF Holdings (the "SF Warrant").
The fair value of this SF Warrant at the date of issuance of $1.2 million was
recorded as paid-in capital with a corresponding reduction in the carrying value
of the SF Holdings Discount Notes, and will be amortized as additional interest
expense over the term of the SF Holdings Discount Notes.
Pursuant to an agreement, dated as of March 22, 2002 by and among SF
Holdings, Dennis Mehiel, the Company's Chairman and Chief Executive Officer,
American Industrial Partners Management Company, Inc., American Industrial
Partners Capital Fund L.P. ("AIP") and the other stockholders of Sweetheart
signatory to that certain Stockholders' Agreement (the "Stockholders'
Agreement"), dated as of March 12, 1998, (together with AIP and any permitted
transferee of shares of Class A common stock or Class B common stock of
Sweetheart ("the Shares"), the "Original Stockholders"), all of the outstanding
Shares not held by SF Holdings (which consisted of 52% of the voting stock of
Sweetheart) were delivered to SF Holdings and exchanged for 96,000 shares of
Class C common stock of SF Holdings. As a result, SF Holdings became the sole
beneficial owner of 100% of the issued and outstanding capital stock of
Sweetheart. In addition and in connection therewith, the Stockholders Agreement
and related stockholders' right agreement were terminated. As a result, the
excess of the fair value of the Class C common stock issued to the Original
Stockholders over the fair value of the remaining net assets acquired by SF
Holdings in the amount of $5.5 million has been recorded as goodwill.
On March 25, 2002, Sweetheart entered into a supplemental indenture to
the Indenture (the "Indenture") governing its $110 million 10 1/2% Senior
Subordinated Notes due 2003 (the "$110 Senior Subordinated Notes") to amend the
definition of "Change of Control" in the Indenture to substitute Dennis Mehiel,
the Company's Chairman and Chief Executive Officer, for AIP and to make certain
other conforming changes. Sweetheart offered to pay $5.00 for each $1,000 in
principal amount of the $110 Senior Subordinated Notes (the "Consent Fee") to
holders of the $110 Senior Subordinated Notes who had properly furnished, and
not revoked, their consent on or prior to the expiration date of the consent
solicitation (the "Consent Solicitation"). As a result of the consummation of
the Consent Solicitation, the $110 Senior Subordinated Notes began to accrue
interest at 12% per annum as of March 1, 2002. Sweetheart paid the Consent Fee
to the holders of the $110 Senior Subordinated Notes who consented prior to the
expiration of the Consent Solicitation. Such Consent Fee has been capitalized in
other assets and is being amortized over the term of the $110 Senior
Subordinated Notes.
On March 25, 2002, pursuant to an Agreement and Plan of Merger, the
Fonda Group, Inc. ("Fonda") was merged (the "Merger") with and into Sweetheart
Cup Company Inc. ("Sweetheart Cup"), with Sweetheart Cup as the surviving
entity. In connection with the Merger, all of the assets and operations of Fonda
were assigned to, and all liabilities of Fonda were assumed by, Sweetheart Cup
by operation of law and all of the outstanding shares of Fonda were cancelled.
Sweetheart Cup is a wholly owned subsidiary of Sweetheart which is a wholly
owned subsidiary of SF Holdings.
On March 25, 2002, Sweetheart refinanced its senior revolving credit
facility with Bank of America, N.A., as agent (the "Senior Credit Facility"),
which replaced each of Sweetheart Cup's and Fonda's existing domestic revolving
credit and term loan facilities. The Senior Credit Facility has a maturity date
of March 25, 2007; however, in the event that Sweetheart has not refinanced,
repaid or extended the $110 Senior Subordinated Notes prior to March 1, 2003,
the Senior Credit Facility shall terminate on that date. The Senior Credit
Facility allows for a maximum credit borrowing of $235 million subject to
borrowing base limitations and satisfaction of other conditions of borrowing.
The revolving borrowings have a maximum of the lesser of $235 million less the
balance of the term loans or $215 million. The term loans have a maximum of $25
million and are payable monthly through March 2005. Borrowings under the Senior
Credit Facility, at Sweetheart's election, bear interest at either (i) a
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bank's base rate revolving loan reference rate plus 0.5% or (ii) LIBOR plus
2.5%. For the twenty-six weeks ended March 31, 2002, the weighted average annual
interest rate for the Senior Credit Facility was 4.92%. The Senior Credit
Facility is collateralized by Sweetheart's receivables, inventory, general
intangibles and certain other assets. 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. As of March 31, 2002, $52.5
million was available under the Senior Credit Facility.
Extraordinary gain on debt extinguishment included a loss of $1.1
million, net of the income tax benefit of $0.7 million, resulting from the
refinancing of the Senior Credit Facility.
Thirteen Weeks Ended March 31, 2002 Compared to Thirteen Weeks Ended
March 25, 2001 (Unaudited)
Net sales increased $3.6 million, or 1.2%, to $296.4 million for the
thirteen weeks ended March 31, 2002 compared to $292.8 million for the thirteen
weeks ended March 25, 2001, reflecting a 4.5% increase in sales volume and a
3.3% decrease in average realized sales price. Sales volumes increased as a
result of incremental sales obtained from the acquisitions of an 80% interest in
Global Cup, S.A. De C.V. and its subsidiaries ("Global") in April 2001 and of
substantially all of the property, plant and equipment, intangible and net
working capital of the consumer division of Dopaco, Inc. ("Dopaco") in August
2001. Average realized prices decreased as a result of lower raw material costs
and competitive pressures.
Gross profit decreased $5.0 million, or 14.9%, to $28.6 million for the
thirteen weeks ended March 31, 2002 compared to $33.6 million for the thirteen
weeks ended March 25, 2001. As a percentage of net sales, gross profit decreased
to 9.7% for the thirteen weeks ended March 31, 2002 from 11.5% for the thirteen
weeks ended March 25, 2001. The decrease in gross profit reflects lower fixed
costs absorption as Sweetheart's inventory production decreased from the prior
year. In addition, gross profit was negatively impacted by lower average
realized sales prices reflecting decreases in raw material costs and
manufacturing inefficiencies related to Sweetheart's initiatives to rationalize,
consolidate and improve its manufacturing facilities.
Selling, general and administrative expenses decreased $1.0 million, or
3.4%, to $28.8 million for the thirteen weeks ended March 31, 2002 compared to
$29.8 million for the thirteen weeks ended March 25, 2001. This decrease is
primarily due to reductions in variable compensation costs of $0.3 million,
promotional advertising expenses of $0.4 million and information technology
costs of $0.4 million. These favorable changes were partially offset by an
increase in bad debt expense of $0.5 million due to recent customer bankruptcy
filings.
Other income, net decreased $2.8 million, or 93.3%, to $0.2 million for
the thirteen weeks ended March 31, 2002 compared to $3.0 million for the
thirteen weeks ended March 25, 2001. This decrease is primarily due to $2.6
million of costs incurred in association with the rationalization, consolidation
and improvement of Sweetheart's manufacturing facilities.
Operating income (loss) decreased $7.0 million, or 101.5%, to a loss of
$0.1 million for the thirteen weeks ended March 31, 2002 compared to income of
$6.9 million for the thirteen weeks ended March 25, 2001, due to the reasons
stated above.
Interest expense, net decreased $0.3 million, or 2.2%, to $13.1 million
for the thirteen weeks ended March 31, 2002 compared to $13.4 million for the
thirteen weeks ended March 25, 2001. This decrease is attributable to lower
interest rates on higher average balances which was partially offset by the
increase in coupon interest on the $110 Senior Subordinated Notes which was
effective March 1, 2002.
Income tax benefit increased $2.6 million, or 113.0%, to $4.9 million
in the thirteen weeks ended March 31, 2002 compared to $2.3 million for the
thirteen weeks ended March 25, 2001 as a result of a
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larger pre-tax loss. The effective rates for the thirteen weeks ended March 31,
2002 and the thirteen weeks ended March 25, 2001 were 37% and 34%, respectively.
Minority interest decreased $0.1 million, or 50.0%, to $0.1 million in
the thirteen weeks ended March 31, 2002 compared to $0.2 million for the
thirteen weeks ended March 25, 2001 as a result of decrease earnings of
Sweetheart.
Extraordinary gain on debt extinguishment was $18.4 million net of the
income taxes in the thirteen weeks ended March 31, 2002 resulting from the
refinancing of the SF Holdings Discount Notes and the Senior Credit Facility.
Net income (loss) increased $14.4 million, or 351.2%, to income of
$10.3 million for the thirteen weeks ended March 31, 2002 compared to a loss of
$4.1 million for the thirteen weeks ended March 25, 2001, due to the reasons
stated above.
Twenty-six Weeks Ended March 31, 2002 Compared to Twenty-six Weeks Ended
March 25, 2001 (Unaudited)
Net sales decreased $2.1 million, or 0.3%, to $617.2 million for the
twenty-six weeks ended March 31, 2002 compared to $619.3 million for the
twenty-six weeks ended March 25, 2001, reflecting a 2.1% decrease in average
realized sales price and a 1.8% increase in sales volume. Average realized
prices decreased as a result of lower raw material costs and competitive
pressures. Sales volumes increased as a result of incremental sales obtained
from Sweetheart's acquisitions of Global in April 2001 and Dopaco in August
2001.
Gross profit decreased $3.1 million, or 4.3%, to $69.0 million for the
twenty-six weeks ended March 31, 2002 compared to $72.1 million for the
twenty-six weeks ended March 25, 2001. As a percentage of net sales, gross
profit decreased to 11.2% for the twenty-six weeks ended March 31, 2002 from
11.6% for the twenty-six weeks ended March 25, 2001. The decrease in gross
profit reflects a decrease in fixed costs absorption as Sweetheart's inventory
production was down from prior year. In addition, gross profit was negatively
impacted by lower average realized sales prices reflecting decreases in material
cost and manufacturing inefficiencies related to Sweetheart's consolidation
initiatives.
Selling, general and administrative expenses decreased $0.9 million, or
1.5%, to $58.3 million for the twenty-six weeks ended March 31, 2002 compared to
$59.2 million for the twenty-six weeks ended March 25, 2001. This decrease in
expense is primarily due to reductions in variable compensation costs of $1.7
million and information technology costs of $0.3 million. These favorable
changes were partially offset by an in increase in bad debt expense of $1.3
million due to recent customer bankruptcy filings.
Other income decreased $3.1 million, or 48.4%, to income of $3.3
million for the twenty-six weeks ended March 31, 2002 compared to income of $6.4
million for the twenty-six weeks ended March 25, 2001. This decrease is
primarily due to $4.4 million of costs incurred in association with the
rationalization, consolidation and improvement of Sweetheart's manufacturing
facilities which was partially offset by a $3.0 million gain associated with the
sale of Sweetheart's manufacturing facility in Manchester, New Hampshire.
Operating income decreased $5.4 million, or 28.0% to $13.9 million for
the twenty-six weeks ended March 31, 2002 compared to $19.3 million for the
twenty-six weeks ended March 25, 2001, due to the reasons stated above.
Interest expense, net decreased $0.5 million, or 1.9%, to $26.3 million
for the twenty-six weeks ended March 31, 2002 compared to $26.8 million for the
twenty-six weeks ended March 25, 2001. This decrease is attributable to lower
interest rates on higher average balances which was partially offset by the
increase in coupon interest on the $110 Senior Subordinated Notes which was
effective March 1, 2002.
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Income tax benefit increased $1.7 million, or 68.0%, to $4.2 million in
the twenty-six weeks ended March 31, 2002 compared to $2.5 million for the
twenty-six weeks ended March 25, 2001 as a result of a larger pre-tax loss. The
effective rates for the thirteen weeks ended March 31, 2002 and the twenty-six
weeks ended March 25, 2001 were 34% and 33%, respectively.
Minority interest decreased $0.2 million, or 200.0%, to an expense of
$0.1 million in the twenty-six weeks ended March 31, 2002 compared to income of
$0.1 million for the twenty-six weeks ended March 25, 2001 as a result of
decrease earning of Sweetheart.
Extraordinary gain on debt extinguishment was $18.4 million net of the
income taxes in the twenty-six weeks ended March 31, 2002 resulting from the
refinancing of the SF Holdings Discount Notes and the Senior Credit Facility.
Net income (loss) increased $15.2 million, or 304%, to income of $10.2
million for the twenty-six weeks ended March 31, 2002 compared to a loss of $5.0
million for the twenty-six weeks ended March 25, 2001, due to the reasons stated
above.
Liquidity And Capital Resources
Historically, the Company has relied on cash generated by operations,
combined with amounts available under revolving credit borrowings in addition to
funds generated by asset sales to fund capital expenditure needs, debt service
requirements, payments in conjunction with lease commitments and working capital
needs. In the twenty-six weeks ended March 31, 2002, the Company funded its
capital expenditures from a combination of cash generated from operations,
borrowings from the revolving credit facility and funds generated from asset
sales. The Company expects to continue this method of funding for the remainder
of its Fiscal 2002 capital expenditures.
Net cash provided by operating activities in the twenty-six weeks ended
March 31, 2002 was $32.3 million compared to net cash used in operating
activities of $6.6 million in the twenty-six weeks ended March 25, 2001. This
increase is primarily due to better collection of receivables, a reduction in
inventories and improved accounts payable management.
Net cash used in investing activities in the twenty-six weeks ended
March 31, 2002 was $8.5 million compared to $19.0 million in the twenty-six
weeks ended March 25, 2001. This decrease is primarily due to the receipt of
proceeds from the sale of the Manchester, New Hampshire facility in the
twenty-six weeks ended March 31, 2002 and the purchase of substantially all of
the property, plant and equipment, intangibles and net working capital of
Springprint Medallion, a division of Marcal Paper Mills, Inc. in the twenty-six
weeks ended March 25, 2001.
Net cash used in financing activities in the twenty-six weeks ended
March 31, 2002 was $29.7 million compared to net cash provided by financing
activities of $28.3 million in the twenty-six weeks ended March 25, 2001. This
change is primarily due to the reduction of the Senior Credit Facility balances,
the proceeds received from the sale of the Manchester, New Hampshire facility
and cash generated from operations.
Working capital decreased $35.7 million to $218.5 million at March 31,
2002 from $254.2 million at September 30, 2001. This decrease resulted from
current assets decreasing $33.5 million, primarily due to improved collection of
receivables and management of inventories.
Capital expenditures for the twenty-six weeks ended March 31, 2002 were
$13.8 million compared to $12.7 million for the twenty-six weeks ended March 25,
2001. Capital expenditures in the twenty-six weeks ended March 31, 2002 included
$6.1 million for new production equipment; $4.2
14
million associated with the implementation of Sweetheart's consolidation
program; $2.7 million for facility improvements and $0.8 million primarily for
routine capital improvements.
On March 25, 2002, Sweetheart refinanced its Senior Credit Facility
with Bank of America, N.A., as agent, which replaced each of Sweetheart and
Fonda's existing domestic revolving credit and term loan facilities. The Senior
Credit Facility has a maturity date of March 25, 2007; however, in the event
that Sweetheart has not refinanced, repaid or extended the $110 Senior
Subordinated Notes prior to March 1, 2003, the Senior Credit Facility shall
terminate on that date. The Senior Credit Facility allows for a maximum credit
borrowing of $235 million subject to borrowing base limitations and satisfaction
of other conditions of borrowing. The revolving borrowings have a maximum of the
lesser of $235 million less the balance of the term loans or $215 million. The
term loans have a maximum of $25 million and are payable monthly through March
2005. Borrowings under the Senior Credit Facility, at Sweetheart's election,
bear interest at either (i) a bank's base rate revolving loan reference rate
plus 0.5% or (ii) LIBOR plus 2.5%. For the twenty-six weeks ended March 31,
2002, the weighted average annual interest rate for the Senior Credit Facility
was 4.92%. The Senior Credit Facility is collateralized by Sweetheart's
receivables, inventory, general intangibles and certain other assets. 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.
As of March 31, 2002, $52.5 million was available under the Senior Credit
Facility.
Sweetheart's Canadian subsidiary has a credit agreement (the "Canadian
Credit Facility") which provides for a term loan and a credit facility with a
maximum credit borrowing of Cdn $30 million (approximately US $18.8 million)
subject to borrowing base limitations and satisfaction of other conditions of
borrowing. The term borrowings are payable quarterly through May 2004. Both the
revolving credit and term loan borrowings have a final maturity date of June 15,
2004. The Canadian Credit Facility is secured by all existing and thereafter
acquired real and personal tangible assets of Sweetheart's Canadian subsidiary
and net proceeds on the sale of any of the foregoing. Borrowings under the
Canadian Credit Facility bear interest at an index rate plus 1.75% with respect
to the revolving credit facility and an index rate plus 2.00% with respect to
the term loan borrowings. As of March 31, 2002, Cdn $2.3 million (approximately
US $1.4 million) was available under the revolving facility and the term loan
balance was Cdn $13.4 million (approximately US $8.4 million) under the Canadian
Credit Facility.
In connection with a sale-leaseback transaction, on June 15, 2000,
Sweetheart Cup, and Sweetheart sold certain production equipment located in
Owings Mills, Maryland, Chicago, Illinois and Dallas, Texas to several owner
participants for a fair market value of $212.3 million.
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. 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 is being
15
amortized over 125 months, which is the term of the Lease. The taxable gain in
the amount of $147.8 million has allowed Sweetheart to utilize a substantial
portion of its net operating loss carryforwards.
Sweetheart Cup is the obligor and Sweetheart the guarantor with respect
to the $110 Senior Subordinated Notes. Interest on the $110 Senior Subordinated
Notes is payable semi-annually in arrears on March 1 and September 1. As a
result of the consummation of the Consent Solicitation, the $110 Senior
Subordinated Notes began to accrue interest at 12% per annum as of March 1,
2002. The $110 Senior Subordinated Notes are subject to redemption at the option
of Sweetheart, in whole or in part, at the redemption price (expressed as
percentages of the principal amount), plus accrued interest to the redemption
date, at a call premium of 100%. The $110 Senior Subordinated Notes are
Subordinated in right of payment to the prior payment in full of all borrowings
under the Senior Credit Facility, all obligations under the Lease, and all other
indebtedness not otherwise prohibited. The $110 Senior Subordinated Notes
contain various covenants which prohibit, or limit, among other things, asset
sales, change of control, dividend payments, equity repurchases or redemption,
the incurrence of additional indebtedness, the issuance of disqualified stock,
certain transactions with affiliates, the creation of additional liens and
certain other business activities.
In Fiscal 1997, Sweetheart issued $120 million of 9-1/2% Series A
Senior Subordinated Notes due 2007 (the "$120 Senior Subordinated Notes") with
interest payable semi-annually. Payment of the principal and interest is
subordinate in right to payment of the Senior Credit Facility. Sweetheart may,
at its election, redeem the $120 Senior Subordinated Notes at any time after
March 1, 2002 at a redemption price equal to a percentage (104.750% after March
1, 2002 and declining in annual steps to 100% after March 1, 2005) of the
principal amount thereof plus accrued interest. The $120 Senior Subordinated
Notes provide that upon the occurrence of a change of control (as defined
therein), the holders thereof will have the option to require the redemption of
the $120 Senior Subordinated Notes at a redemption price equal to 101% of the
principal amount thereof plus accrued interest.
On January 25, 2002, SF Holdings refinanced a portion of its SF
Holdings Discount Notes with a group of unaffiliated investment entities (the
"Investor"), whereby the Investor purchased $103.2 million (approximately 71%)
of the aggregate principal amount outstanding of the SF Holdings Discount Notes
which had a carrying value of $89.6 million. SF Holdings and the Investor have
amended, effective January 25, 2002, the Indenture governing the SF Holdings
Discount Notes to eliminate substantially all of the restrictive covenants. SF
Holdings' certificate of incorporation has also been amended to conform the
terms of SF Holdings' Exchangeable Preferred Stock to the amendments made to the
Indenture. SF Holdings and the Investor have also agreed to reduce the aggregate
principal amount of the SF Holdings Discount Notes held by the Investor to $55
million, with an effective cash interest rate of 14.26% (15.25% if interest is
paid in kind through March 31, 2004) and extended the maturity date to January
25, 2009. Interest and principal under the SF Holdings Discount Notes are
collateralized by a 49% interest in the capital stock of Sweetheart. SF Holdings
expensed $2.1 million in deferred financing fees as a result of the refinancing.
In connection with the above, SF Holdings issued to the Investor a
warrant to purchase a 7% ownership interest in SF Holdings (the "SF Warrant").
The fair value of this SF Warrant at the date of issuance of $1.2 million was
recorded as paid-in capital with a corresponding reduction in the carrying value
of the SF Holdings Discount Notes, and will be amortized as additional interest
expense over the term of the SF Holdings Discount Notes.
On March 12, 1998, SF Holdings issued units consisting of $30 million
of 13 3/4% Exchangeable Preferred Stock due March 13, 2009 (the "Exchangeable
Preferred") and 11,100 shares of Class C common stock. Until March 12, 2003,
cumulative dividends on the Exchangeable Preferred are paid quarterly, at SF
Holdings' option, subject to certain restrictions, either in cash or by the
issuance of additional shares of Exchangeable Preferred. Thereafter, dividends
will be payable in cash, subject to certain exceptions. The
16
fair value of such Class C common stock ($0.9 million) at the date of issuance
was recorded as common stock and paid-in capital with a corresponding reduction
in the carrying value of the Exchangeable Preferred. The resulting discount is
being amortized as additional preferred stock dividends over the term of the
Exchangeable Preferred. The Exchangeable Preferred is exchangeable at SF
Holdings' option into 13 3/4% subordinated notes due March 15, 2009.
As of December 12, 2001, all cumulative dividends on the Exchangeable
Preferred have been paid by the issuance of additional shares of Exchangeable
Preferred. The value of the Exchangeable Preferred, was $51.7 million and $48.2
million as of March 31, 2002 and September 30, 2001, respectively. The
Exchangeable Preferred is not entitled to any vote, except as required in SF
Holdings' certificate of incorporation and by law.
On March 12, 1998, SF Holdings authorized 100,000 shares of Preferred
Stock Class B, $.001 par value. On March 12, 1998, 15,000 shares of Class B
Series 1 preferred stock, $.001 par value, were issued to Creative Expression
Group, Inc. ("CEG") in consideration for a $15 million investment. On December
3, 1999, 15,000 shares of Class B Series 2 preferred stock were issued in
connection with the merger with CEG in consideration for 87% of shares of CEG's
common stock with a liquidation value of $15 million.
The Class B Series 1 and Series 2 preferred stock are not entitled to
receive dividends. The holder of Class B Series 1 preferred stock is not
entitled to any vote, except as otherwise provided by law. The holders of Class
B Series 2 preferred stock are entitled to one vote for each share held in all
matters voted on by the stockholders. Each series of preferred stock is
convertible, at any time, into 133,494 shares of Class A Common Stock and is
required to be redeemed on March 13, 2010, provided funds are legally available
for such purposes.
Pursuant to the terms of the instruments governing the indebtedness of
the Company, the Company is subject to certain affirmative and negative
covenants customarily contained in agreements of this type, including, without
limitations covenants that restrict, subject to specified exceptions (i)
mergers, consolidations, asset sales or changes in capital structure, (ii)
creation or acquisition of subsidiaries, (iii) purchase or redemption of capital
stock or declaration or payment of dividends or distributions on such capital
stock, (iv) incurrence of additional indebtedness, (v) investment activities,
(vi) granting or incurrence of liens to secure other indebtedness, (vii)
prepayment or modification of the terms of subordinated indebtedness, and (viii)
engaging in transactions with affiliates.
During Fiscal 2001, Sweetheart experienced a casualty loss at its
Somerville, Massachusetts facility. Sweetheart carries business interruption
insurance and has filed a claim with the insurance company. Settlement of the
recovery amount is to be determined.
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 filed in state court in Georgia in April 1987 and later removed to federal
court. The 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. The relief
sought by Plaintiffs was to have the Plan termination declared ineffective. The
United States Court of Appeals for the Eleventh Circuit (the "Circuit Court")
ruled that the Plan was lawfully terminated on December 31, 1986, and judgment
was entered dismissing the case in March 1996. The Circuit Court affirmed the
judgment entered in favor of Sweetheart. Plaintiffs filed a petition for writ of
certiorari to the United States Supreme Court, which was denied in January 1999.
Sweetheart expects to complete paying out the termination liability and
associated expenses in connection with the Plan termination by June 30, 2002. As
of March 31, 2002, Sweetheart disbursed $19.6 million in termination payments.
The estimate of the total termination liability and associated expenses, less
payments, exceeds the assets set aside in the Plan by $0.1 million, which amount
has been fully reserved by Sweetheart.
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On November 29, 2001, the liquidating trustee of Ace Baking Company,
Limited Partnership, filed a Complaint for Avoidance of Transfers and
Disallowance or Subordination of Claims against Sweetheart in the United States
Bankruptcy Court Eastern District of Wisconsin. The Complaint, among other
things, seeks to avoid a portion of the consideration paid by Ace Baking Company
to Sweetheart, as a fraudulent transfer, in connection with the sale by
Sweetheart of its bakery business to Ace Baking in November 1997. In addition,
the trustee alleges that certain subsequent payments made by Ace Baking to
Sweetheart in connection with such sales are avoidable preferences. On April 12,
2002, the parties entered into a settlement agreement, pursuant to which the
complaint has been dismissed with prejudice, the effect of which does not have
any material adverse effect on Sweetheart.
The Company is subject to legal proceedings and other claims arising in
the ordinary course of its business. The Company maintains insurance coverage of
types and in amounts which it believes to be adequate and believes that it is
not presently a party to any litigation, the outcome of which could reasonably
be expected to have a material adverse effect on its financial condition or
results of operations.
The Company believes that cash generated by Sweetheart's operations,
combined with amounts available under the Senior Credit Facility in addition to
funds generated by asset sales should be sufficient to fund Sweetheart's capital
expenditure 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.
The Company continues to contemplate various strategic options which
may include a restructuring of its business debt and capital structure,
including, among other things, the public sale or private placement of debt or
equity securities of the Company or its subsidiaries, joint venture
transactions, new borrowings, the refinancing of the Company's existing debt
agreements, open market purchases, tender offers or exchange offers of the
Company's outstanding securities. There can be no assurances that any of these
strategic options will be consummated.
Net Operating Loss Carryforwards
As of September 30, 2001, Sweetheart had approximately $28 million of
net operating loss ("NOL") carryforwards 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 utilize such NOLs.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Sweetheart is exposed to market risk in the ordinary course of
business, which consists primarily of interest rate risk associated with its
variable rate debt. All borrowing under the Senior Credit Facility and Canadian
Credit Facility, each of which contains a revolving and term credit facility,
bear interest at a variable rate. Borrowings under the Senior Credit Facility,
at Sweetheart's election, bear interest at either (i) a bank's base rate
revolving loan reference rate plus 0.5% or (ii) LIBOR plus 2.5%. Borrowings
under the Canadian Credit Facility bear interest at an index rate plus 1.75%
with respect to the revolving credit borrowings and an index rate plus 2.00%
with respect to the term loan borrowings. As of March 31, 2002, the outstanding
indebtedness under the Senior Credit Facility was $166.6 million and the
Canadian Credit Facility was $15.0 million in U.S. dollars. As of March 31,
2002, $52.5 million was available under the Senior Credit Facility and Cdn $2.3
million (approximately US $1.4 million) was available under Canadian Credit
Facility. Based upon these amounts, the annual net income would change by
approximately $1.1 million for each one percentage point change in the interest
rates applicable to the variable rate debt. The level of the exposure to
interest rate movements may fluctuate significantly as a result of changes in
the amount of indebtedness outstanding under the revolving credit facilities.
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PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
A report on Form 8-K was filed on February 1, 2002 under Item 5
and Item 7.
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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 10, 2002 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)
20