Item 1. BUSINESS
General
SF Holdings Group, Inc. ("SF Holdings" and with its subsidiaries, the "Company") believes it is one of the largest producers and marketers of disposable foodservice and food packaging products in North America with net sales of approximately $1.3 billion in Fiscal 2000. The Company sells a broad line of disposable paper, plastic and foam foodservice and food packaging products at all major price points under both branded and private labels to institutional foodservice and consumer foodservice customers, including large national accounts. The Company conducts its business through two principal operating subsidiaries, Sweetheart Holdings Inc. ("Sweetheart") and The Fonda Group, Inc. ("Fonda"), and markets its products under its well recognized Sweetheart(R), Trophy(R), Sensations(R), Hoffmaster(R) and Lily(R) brands.
The Company's product offerings cover a broad range within the industry, including (i) paper, plastic and foam foodservice products, primarily cups, lids, plates, bowls, plastic cutlery and food containers; (ii) tissue and specialty foodservice products, primarily napkins, table covers and placemats; and (iii) food packaging products, primarily containers for the dairy and food processing industries. In addition, the Company designs, manufactures and leases container filling equipment for use by dairies and other food processors. This equipment is specifically designed by Sweetheart to fill and seal its containers in customers' plants. During the third quarter of Fiscal 2000, Sweetheart acquired Sherwood Industries, Inc. ("Sherwood") which designs and produces cup making equipment, paper cups and other disposable food service products.
The Company sells its products to institutional foodservice and consumer foodservice customers, including large national accounts, located throughout the United States and Canada. The Company has developed and maintained long-term relationships with many of its customers. The Company's institutional foodservice customers, serviced by Sweetheart and Fonda, include (i) major foodservice distributors, (ii) national accounts, including quick service restaurants and catering services, and (iii) schools, hospitals and other major institutions. The Company's consumer foodservice customers, serviced primarily by Fonda, include supermarkets, mass merchandisers, warehouse clubs, party good stores and other retailers. The Company's food packaging customers, serviced by Sweetheart, include national and regional dairy and food companies.
SF Holdings was formed in December 1997 as a holding company to facilitate the acquisition by SF Holdings of 90% of the total outstanding common stock of Sweetheart, including 48% of the voting stock of Sweetheart (the "Sweetheart Investment"). On March 12, 1998, the Company consummated the Sweetheart Investment and acquired all of the outstanding capital stock of Fonda pursuant to a merger (the "Merger") whereby the stockholders of Fonda became the stockholders of the Company and Fonda became a wholly owned subsidiary of the Company.
On December 3, 1999, Creative Expressions Group, Inc. ("CEG"), an affiliate of the Company in the disposable party goods products business, became an 87% owned subsidiary of SF Holdings pursuant to a merger. The transaction has been accounted for in a manner similar to a pooling-of-interests. The accompanying consolidated financial statements have been restated for all periods presented to include the balance sheet and results of operations of CEG.
Products
The Company has historically sold its products to three principal customer groups, institutional foodservice, consumer foodservice and food packaging. Institutional foodservice customers primarily purchase disposable hot and cold drink cups, lids, food containers, plates, bowls, cutlery, napkins, tablecovers, placemats, straws and other specialty products. Products are sold directly and through distributors to quick service restaurant chains, full service restaurants, convenience stores, hospitals, airlines, theaters, school systems and other institutional customers. The Company sells disposable hot and cold drink cups, lids, plates, bowls, cutlery, napkins, tablecovers, placemats and other specialty disposable products, including specialty party goods, to consumer foodservice customers primarily through supermarkets, mass merchants, warehouse clubs, discount chains, party goods stores and other retail outlets. Food packaging customers primarily purchase paper and plastic containers for the dairy and food processing industries. Food packaging customers also lease filling and packaging machines from Sweetheart designed and manufactured by Sweetheart that fill and seal the containers in customers' plants. Sweetheart also manufactures and markets its products in Canada to national accounts and distributors.
Marketing and Sales
Sweetheart's institutional and consumer foodservice products are primarily sold to national accounts and through distributors to other end-users. Food packaging customers include national and regional dairies and food companies. Consumer products are sold to grocery, convenience and club stores. Sweetheart focuses its marketing efforts on both the distributor and the end-user customer. Sweetheart tailors programs, consisting of products, price, promotional and merchandising materials, training and sales/marketing coverage to effectively meet the specific needs of target customers and markets. Sweetheart sells these programs through both a direct sales organization and brokers. Sweetheart supports this process through the development of innovative new products, materials and processes, while leveraging its strong brand recognition and national network of manufacturing and distribution centers.
Fonda's marketing efforts are focused on (i) providing value-added products and services, (ii) cross-marketing products, designs or services between both institutional foodservice and consumer foodservice customers, (iii) developing new products that enhance the value of the bundle for the customer, (iv) developing new designs which capitalize on future trends, color palettes, and imagery and (v) increasing brand awareness through enhanced packaging and promotion. Fonda sells its products through an internal sales force and independent brokers. Fonda sells to both institutional foodservice customers which include restaurants, hotels, airlines, hospitals, and other non-retail foodservice institutions and consumer foodservice customers which include supermarkets, mass merchants, drug stores, warehouse clubs, specialty party, and other retail stores.
Production
The Company's plants operate on a variety of manufacturing schedules. Paper operations generally run five days per week at 24 hours per day, with Saturday scheduled as an overtime day when needed to meet customer demand. Plastic operations generally run seven days per week at 24 hours per day. Due to customer demand, the Company's overall plant utilization historically is substantially higher during late spring and summer than during fall and winter with the tissue plants at their highest utilization during the fall season. See "Item 2.
Item 2. PROPERTIES
The Company has manufacturing and distribution facilities located throughout the United States and Canada. All of the Company's facilities are well maintained, in good operating condition and suitable for the Company's operations. The table below provides summary information regarding the properties owned or leased by the Company.
- ---------- (1) M-Manufacturing; W-Warehouse; M/W-Manufacturing and Warehouse in same facility. (2) Lease expired November 30, 2000 and was not renewed. Equipment was moved to other facilities. (3) Subject to capital lease. (See Note 17 of the Notes to Consolidated Financial Statements)
Fonda also occupies several retail and storage facilities located throughout Indiana and Pennsylvania in connection with its party goods consumer business. These facilities are comprised of outlet stores and local storage facilities maintained for marketing purposes.
Item 3.
Item 3. LEGAL PROCEEDINGS
Aldridge. 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 with the United States Supreme Court, which was denied in January 1999. Sweetheart has been in the process of paying out the termination liability and associated expenses and as of December 21, 2000, has disbursed $12.3 million in termination payments. The estimate of the total termination liability and associated expenses, less payments to date, exceeds assets set aside in the Plan by approximately $8.0 million, which amount has been fully reserved by the Company.
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, the Company 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.
Fort James Corporation. A patent infringement action seeking injunctive ---------------------- relief and damages relating to Sweetheart's production and sale of certain paper plates entitled Fort James Corporation v. Sweetheart Cup Company Inc., Civil Action No. 97-C-1221, was filed in the United States District Court for the Eastern District of Wisconsin on November 21, 1997. During the fourth quarter of Fiscal 1999, mediation resulted in a settlement of this action whereby Sweetheart agreed to pay damages of $2.6 million. As of June 29, 2000, all payments in conjunction with this settlement had been paid.
Other. On July 13, 1999, Sweetheart received a letter from the EPA ----- identifying Sweetheart, among numerous others, as a "potential responsible party" under CERCLA, at a site in Baltimore, Maryland. The EPA letter states that it does not constitute a final determination by EPA concerning the liability of Sweetheart or any other entity. On December 20, 1999, Sweetheart received an information request letter from the EPA, pursuant to CERCLA, regarding a Container Recycling Superfund Site in Kansas City, Kansas. Sweetheart denies liability and has no reason to believe the final outcomes will have a material effect on the Company's financial condition or results of operations. However, no assurance can be given about the ultimate effect on the Company, if any, given the early stage of these investigations.
The Company is also involved in a number of legal proceedings arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company's financial position or results of operations.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for SF Holdings' common stock. SF Holding has never paid cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. SF Holdings' indenture governing the $144.0 million aggregate principal amount at maturity of 12 3/4% Senior Secured Discount Notes due 2008 (the "Discount Notes") and the instruments governing the indebtedness of Sweetheart and Fonda limit the payment of dividends or other distributions to SF Holdings. SF Holdings currently intends to retain future earnings to fund the development and growth of its business.
As of December 21, 2000, there were four, one and two holders of SF Holdings' Class A, Class B and Class C Common Stock, respectively.
Item 6.
Item 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
On December 3, 1999, Creative Expressions Group, Inc. ("CEG"), an affiliate of the Company in the disposable party goods products business, became an 87% owned subsidiary of SF Holdings pursuant to a merger. The transaction has been accounted for in a manner similar to a pooling-of-interests. The accompanying consolidated financial statements have been restated for all periods presented to include the balance sheet and results of operations of CEG.
Set forth below are selected historical consolidated financial data of the Company at the dates and for the fiscal years shown. The selected historical consolidated financial data at September 24, 2000, September 26, 1999, September 27, 1998 and July 26, 1998 and for Fiscal 2000, 1999, 1998 and TP 1998 is derived from historical consolidated financial statements of the Company and subsidiaries for such periods that have been audited by Deloitte & Touche, LLP, independent auditors and are included elsewhere herein. The selected historical financial data at July 27, 1997 and July 28, 1996 and for Fiscal 1997 and 1996 is derived from the historical financial statements of Fonda, the predecessor to the Company for such periods.
During Fiscal 2000, Sweetheart accelerated $0.5 million of amortization for unamortized debt issuance costs related to the early retirement of debt. These charges are shown as an extraordinary loss (net of $0.2 million of income taxes) on the Consolidated Statements of Operations and Other Comprehensive Income (Loss). In conjunction with the CEG Asset Purchase Agreement (the "Asset Purchase Agreement"), CEG also retired its long-term debt. As a result, CEG charged $0.9 million, or $0.5 million net of income tax benefit, to consolidated results of operation as an extraordinary item. This amount represented the unamortized deferred financing fees and other expenses pertaining to the CEG debt. During the quarter ended December 31, 1997, Sweetheart recorded a $1.5 million expense as a cumulative effect of change in accounting principle (net of $1.0 million of income taxes) relating to the implementation of EITF 97-13, which requires companies to expense any previously capitalized reengineering costs in connection with software installation.
(1) The 1998 Transition Period ("TP 1998") is the nine weeks ending September 27, 1998. (2) Fiscal 1998 includes a $15.9 million gain on the sale of substantially all of the fixed assets and certain related working capital (the "Mill Disposition") of its tissue mill in Gouverneur, New York (the "Mill") and settlement in connection with the termination by the owner of the co-generation facility formerly hosted by Fonda at the Mill of its obligation, among other things, to supply steam to the Mill (the "Steam Contract"). (3) Fonda incurred a $3.5 million extraordinary loss (net of a $2.5 million income tax benefit) in connection with the early retirement of debt consisting of the write-off of unamortized debt issuance costs, elimination of unamortized debt discount and prepayment penalties. (4) See Note 10 of the Notes to Consolidated Financial Statements
Item 7.
Item 7. 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.
General
SF Holdings was formed in December 1997 as a holding company to facilitate the Sweetheart Investment. 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. The following discussion of results of operations for the fiscal years ended July 26, 1998 and July 27, 1997 is based on the historical results of operations of Fonda for those periods and the results of operations of Sweetheart from March 12, 1998, the date of the consummation of the Sweetheart Investment, to June 30, 1998. Since the Sweetheart Investment, which was accounted for as a purchase, was consummated during the Company's third quarter of Fiscal 1998, the financial information contained herein with respect to the periods prior to the Sweetheart Investment does not reflect Sweetheart's results of operations; thus, this financial information is not necessarily indicative of the results of operations that would have been achieved had the Sweetheart Investment been consummated by the Company at the beginning of the periods presented herein or which may be achieved in the future.
On December 3, 1999, CEG, an affiliate of the Company in the disposable party goods products business, became an 87% owned subsidiary of SF Holdings pursuant to a merger. The transaction has been accounted for in a manner similar to a pooling-of-interests. The accompanying consolidated financial statements have been restated for all periods presented to include the balance sheet and results of operations of CEG.
Sweetheart and Fonda are converters and marketers of disposable paper, plastic and foam foodservice and food packaging products. The prices for each subsidiary's raw materials fluctuate. When raw material prices decrease, selling prices have historically decreased. The actual impact on each company from raw materials price changes is affected by a number of factors including the level of inventories at the time of a price change, the specific timing and frequency of price changes, and the lead and lag time that generally accompanies the implementation of both raw materials and subsequent selling price changes. In the event that raw materials prices decrease over a period of several months, each company may suffer margin erosion on the sale of such inventory.
Each of Fonda and 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 Fonda's and/or Sweetheart's cash flow from operations is insufficient to provide working capital necessary to fund their respective requirements, Fonda and/or Sweetheart will need to borrow under their respective credit facilities or seek other sources of capital. The Company believes that funds available under such credit facilities together with cash generated from operations, will be adequate to provide for each company's respective cash requirements for the next twelve months.
Recent Developments
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 agreed to assume the liabilities and obligations of Springprint arising under contracts or leases that are either assets purchased by the Company or a part of the accounts payable. The aggregate purchase price for the assets and working capital was $6.7 million, subject to post-closing adjustments.
Change of Fiscal Year-end
In October 1998, the Company changed its fiscal year end to the last Sunday in September. The following discussion compares the fiscal year ended September 24, 2000 to the Fiscal year ended September 26, 1999 and the fiscal year ended September 26, 1999 to the fiscal year ended July 26, 1998.
Fiscal 2000 Compared to Fiscal 1999
Net sales increased $94.9 million, or 8.0%, to $1.3 billion in Fiscal 2000 compared to $1.2 billion in Fiscal 1999. The following analysis includes sales from Sweetheart to Fonda and sales from Fonda to Sweetheart which were eliminated in consolidation.
Sweetheart results - Net sales increased $88.9 million, or 10.3%, (including intercompany sales to Fonda of $16.7 million and $6.8 million for Fiscal 2000 and Fiscal 1999, respectively) to $952.7 million in Fiscal 2000 compared to $863.8 million in Fiscal 1999 reflecting a 7.1% increase in sales volume and a 2.9% increase in average sales prices to domestic customers. During Fiscal 2000, Sweetheart experienced an increase in sales volume of those products with higher average selling prices. The increase in average realized sales price reflects a successful effort by Sweetheart to raise prices to institutional foodservice customers and to sell a mix of units with higher average selling prices. Sales volumes to institutional foodservice customers increased 6.4% primarily as a result of Sweetheart's focus on revenue growth with key customers. Sales volumes to food packaging customers increased 0.5% while average realized sales price increased 1.3%, primarily as a result of increased pricing resulting from raw material cost increases. Net sales to Canadian customers increased $8.4 million, or 14.1%, primarily due to increased sales volume of existing products to national accounts and the introduction of several new products.
Fonda results - Net sales increased $22.7 million, or 6.9%, (including intercompany to Sweetheart of $11.8 million and $4.3 million for Fiscal 2000 and Fiscal 1999, respectively) to $352.0 million in Fiscal 2000, compared to $329.3 million in Fiscal 1999, reflecting an 11.6% increase in average realized sales price partially offset by a 4.8% decrease in sales volume. Net sales to consumer foodservice customers increased 5.6%, resulting from a 14.0% increase in average realized sales price, partially offset by a decrease in sales volume of 8.4%. Selling prices were positively affected by increases in raw material costs that were passed through to customers as well as more competitive market conditions. Net sales to institutional foodservice customers increased 8.8%, resulting from a 3.6% increase in average realized sales price and a 5.2% increase in sales volume. The increased sales volume to institutional foodservice customers was primarily due to an increase in sales of value-added converted tissue products and certain commodity paperboard products. The increase in average selling prices primarily resulted from a more favorable sales mix.
Gross profit increased $27.2 million, or 17.1%, to $186.1 million in Fiscal 2000 compared to $158.9 million in Fiscal 1999. As a percentage of net sales, gross profit increased to 14.6% in Fiscal 2000 from 13.4% in Fiscal 1999.
Sweetheart results - Gross profit increased $18.8 million, or 18.8%, to $118.8 million in Fiscal 2000 compared to $100.0 million in Fiscal 1999. As a percentage of net sales, gross profit increased to 12.5% in Fiscal 2000 from 11.6% in Fiscal 1999. This improvement is attributable to a shift in sales towards a more profitable product mix in combination with increased sales volume, improved manufacturing efficiencies and higher average selling prices, partially offset by increased raw material costs.
Fonda results - Gross profit increased $8.3 million, or 14.0%, to $67.7 million in Fiscal 2000, compared to $59.4 million in Fiscal 1999. As a percentage of net sales, gross profit increased from 18.0% in Fiscal 1999 to 19.2% in Fiscal 2000. Gross profit in Fiscal 2000 was positively affected by margin enhancement in value-added tissue products as well as cost reductions through manufacturing efficiencies.
Selling, general and administrative expenses decreased $5.4 million, or 4.5%, to $113.3 million in Fiscal 2000 compared to $118.7 million in Fiscal 1999. As a percentage of net sales, selling, general and administrative expenses decreased to 8.9% in Fiscal 2000 from 10.0% in Fiscal 1999. This decrease is due primarily to lower spending in the areas of legal and outside consulting services for Sweetheart. In Fiscal 1999 results of operations reflected an increased bad debt write-off associated with bankruptcy filings by two of the Fonda's top 25 customers. This decrease was supplemented by savings in Fiscal 2000 resulting from the consolidation of the CEG business.
Restructuring charge (credit) increased to a charge of $1.2 million in Fiscal 2000 compared to a credit of $0.5 million in Fiscal 1999. During Fiscal 2000, Sweetheart established a $0.5 million restructuring reserve in conjunction with the planned elimination of Sweetheart's centralized machine shop, primarily for severance and related costs in connection with workforce reductions. Fonda incurred a restructuring expense of $0.7 million in Fiscal 2000 in connection with the November 2000 closing of the Maspeth, New York facility which will result in the elimination of 130 positions by 2001. See Note 19 of the Notes to Consolidated Financial Statements.
Other (income) expense, net was $0.4 million of income in Fiscal 2000 compared to $0.3 million of income in Fiscal 1999. In Fiscal 2000, a $2.8 million gain was realized due to the amortization of the deferred gain in conjunction with the sale-leaseback transaction, coupled with a $0.7 million gain on the sale of a warehouse facility in Owings Mills, Maryland. These gains were partially offset by a $0.7 million management fee to American Industrial Partners Capital Fund, L.P. ("AIP"), an owner of Sweetheart, a $1.4 million expense accrual in connection with the Aldridge liability, 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, and a $0.2 million loss was incurred as a result of the sale of a building in St. Albans, Vermont and various pieces of machinery and equipment.
Operating income increased $31.1 million to $72.1 million in Fiscal 2000 compared to $41.0 million in Fiscal 1999 due to the reasons described above.
Interest expense, net decreased $4.9 million, or 7.0%, to $65.3 million in Fiscal 2000 compared to $70.2 million in Fiscal 1999. This decrease is attributable to lower interest rates on lower outstanding balances under the Company's revolving credit facilities and the June 2000 redemption of the Sweetheart Senior Secured Notes.
Income tax expense (benefit) increased $13.7 million to an expense of $4.1 million in Fiscal 2000 compared to a benefit of $9.6 million in Fiscal 1999. The effective rate for Fiscal 2000 was 61% compared to 33% in 1999. Both the 2000 and the 1999 effective tax rates reflect certain non-deductible costs relating to the investment in Sweetheart, the related financing and the proportionate results of both Fonda and Sweetheart.
Minority interest increased $2.5 million to an expense of $1.6 million in Fiscal 2000 compared to a credit of $0.9 million in Fiscal 1999.
Extraordinary loss on the early extinguishment of debt was $0.8 million net of the income tax benefit in Fiscal 2000 resulting from the redemption of Sweetheart's Senior Secured Notes and CEG's long term debt ( See Note 10 in the "Notes to Consolidated Financial Statements").
Net income (loss) increased $18.8 million, or 100.5%, to $0.1 million income in Fiscal 2000 compared to $18.7 million loss in Fiscal 1999 due to the reasons described above.
Fiscal 1999 Compared to Fiscal 1998
Net sales increased $559.1 million, or 89.8%, to $1,182.0 million in Fiscal 1999 compared to $622.9 million in Fiscal 1998 primarily as a result of the Sweetheart Investment. 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 $581.4 million, (including intercompany sales to Fonda of $6.8 million and $0.0 million for Fiscal 1999 and Fiscal 1998, respectively) primarily due to the effect of the consolidation of Sweetheart's results for a full year. In addition, for the third quarter of Fiscal 1999 compared to the period from March 12, 1998 to June 30, 1998, domestic net sales decreased by $1.1 million or 0.5%. This reflected a 0.7% decrease in domestic sales volume which was partially offset by a 0.2% increase in realized domestic sales price. The increase in average realized sales price reflects price increases in selected product lines which was partially offset by a shift in sales mix to lower priced products. Foodservice sales volume increased 1.2% primarily as a result of Sweetheart's focus on revenue growth with key customers. Food packaging sales volume decreased 12.7%, primarily resulting from decreases in demand by large accounts in the food packaging customer base due to market conditions. Canadian sales increased 9.9% from the prior comparable period due primarily to increased sales volume from the introduction of new products.
Fonda results - Net sales decreased $11.4 million, or 3.3%, (including intercompany to Sweetheart of $4.3 million and $0.2 million for Fiscal 1999 and Fiscal 1998, respectively) to $329.3 million in Fiscal 1999, compared to $340.7 million in Fiscal 1998. Fiscal 1998 included $13.3 million of net sales of tissue mill products prior to the March 1998 Mill Disposition. Excluding such tissue product sales, net sales increased $1.1 million in the converting operations. Net sales to consumer foodservice customers decreased 10.3%, resulting from a decrease in sales volume of 9.9% and a 0.4% decrease in average selling prices. Selling prices were adversely affected by reductions in raw material costs that were passed through to customers as well as more competitive market conditions. Net sales to institutional foodservice customers increased 10.5%, resulting from a 3.7% increase in volume and a 6.8% increase in sales price. The increased sales volume to institutional customers was primarily due to an increase in sales of value added converted tissue products and certain commodity paperboard products. The increase in average selling prices primarily resulted from the more favorable sales mix.
Gross profit increased $64.1 million, or 67.6%, to $158.9 million in Fiscal 1999 compared to $94.8 million in Fiscal 1998.
Sweetheart results - Gross profit increase $76.2 million to 11.5% of net sales in Fiscal 1999 from 8.3% in Fiscal 1998. The increase in gross profit was primarily due to the consolidation of Sweetheart's results for a full year, and partially due to a shift in sales mix to more profitable products and the cost reduction initiatives implemented by Sweetheart in the latter part of the 1998 fiscal year which has resulted in improved manufacturing efficiencies.
Fonda results - Gross profit decreased $11.9 million or 16.7%, to $59.4 million in Fiscal 1999, compared to $71.3 million in Fiscal 1998. Fiscal 1998 included $1.7 million of gross profit from tissue mill products prior to the Mill Disposition. Excluding the gross profit from such tissue product sales, gross profit decreased $10.2 million in the converting operations. As a percentage of net sales, gross profit decreased from 20.9% in Fiscal 1998 to 18.0% in Fiscal 1999. Gross profit in Fiscal 1999 was adversely affected by margin erosion in commodity paperboard products as well as excess costs incurred in implementing efficiency initiatives.
Selling, general and administrative expenses increased $45.5 million, or 62.2%, to $118.7 million in Fiscal 1999 compared to $73.2 million in Fiscal 1998. As a percentage of net sales, selling, general and administrative expenses decreased to 10.0% in Fiscal 1999 from 11.8% in Fiscal 1998. This percentage
decrease is due primarily to cost savings associated with headcount reductions which is partially offset by increased legal expenses of $2.0 million related to the Fort James settlement. See "Item 3. Legal Proceedings".
Restructuring charge (credit) was adjusted resulting in income of $0.5 million in Fiscal 1999 compared to an expense of $4.0 million in Fiscal 1998. In March 1998, Sweetheart established restructuring reserves primarily for severance and related costs in connection with workforce reductions. This plan has been completed, resulting in a reversal of $0.5 million. In Fiscal 1998, Fonda incurred $0.5 million related to a decision to close Fonda's Jacksonville, Florida facility and the St. Albans, Vermont administrative offices. Also in Fiscal 1998, a $1.3 million charge related to CEG's closure of its Indianapolis, Indiana manufacturing facility was incurred.
Other (income) expense, net was $0.3 million of income in Fiscal 1999 compared to $14.7 million of income in Fiscal 1998. In Fiscal 1999, the Sweetheart recognized $1.2 million gain on the sale of property, plant and equipment. In Fiscal 1998, Fonda incurred a $15.9 million gain on the Mill Disposition and the Steam Contract and a gain on the sale of other non-core assets.
Operating income increased $8.6 million to $41.0 million in Fiscal 1999 compared to an operating income of $32.4 million in Fiscal 1998 due to the reasons described above.
Interest expense, net increased $37.2 million, or 112.7%, to $70.2 million in Fiscal 1999 compared to $33.0 million in Fiscal 1998. This increase is a result of the Sweetheart Investment.
Income tax expense (benefit) decreased $10.8 million to a $9.6 million benefit in Fiscal 1999 compared to a $1.2 million expense in the Fiscal 1998. The effective rate for Fiscal 1999 was 33% compared to negative 215% in 1998. Both the 2000 and the 1999 effective tax rates reflect certain non-deductible costs relating to the investment in Sweetheart, the related financing and the proportionate results of both Fonda and Sweetheart.
Minority interest decreased $1.2 million to a credit of $0.9 million in Fiscal 1999 compared to a credit of $2.1 million in Fiscal 1998.
Net income (loss) decreased $19.0 million, or 6,333.3%, to a loss of $18.7 million in Fiscal 1999 compared to income of $0.3 million in Fiscal 1998 due to the reasons described above.
Liquidity And Capital Resources
Historically, the Company and its subsidiaries have relied on cash flow from operations, sales of non-core assets and revolving credit borrowings to finance its working capital requirements and capital expenditures. In Fiscal 2000, the Company funded its capital expenditures from the sale of assets and cash generated from operations. The Company expects to continue this method of funding for its Fiscal 2001 capital expenditures.
Net cash provided by operating activities in Fiscal 2000 was $9.4 million compared to net cash provided by operating activities of $51.5 million in Fiscal 1999. This decrease is due primarily to an increase in receivables resulting from increased sales and management's decision to build inventory in support of anticipated market expansion. These increases were partially offset by more favorable income from operating activities.
Working capital increased $268.2 million to $175.5 million at September 24, 2000 from a deficit of $92.7 million at September 26, 1999. This increase resulted primarily from the redemption of Sweetheart's Senior Secured Notes and the refinancing of Sweetheart's U.S. Credit Facility.
Capital expenditures for Fiscal 2000 were $25.3 million compared to $37.8 million in Fiscal 1999. Capital expenditures in Fiscal 2000 included $15.1 million for new production equipment, $3.5 million for facility improvements and $1.0 million for management information systems, with the remaining consisting primarily of routine capital improvements. Funding for the Fiscal 2000 capital expenditures was provided by cash generated from operations, $7.9 million from the sale of a distribution facility and $2.5 million from the sale of machinery. During Fiscal 2001, the Company intends to continue to rely on a combination of cash generated by operations and the sale of non-core assets to fund capital expenditures.
In connection with the Sweetheart Investment, the Company issued $144.0 million aggregate principal amount at maturity of 12 3/4% Senior Secured Discount Notes due 2008 (the "Discount Notes") and 28,800 shares of Class C Common Stock. Until March 15, 2003, accrued interest on the Discount Notes will not be paid but will accrete semi-annually, thereby increasing the value of the Discount Notes.
Also on March 12, 1998, the Company issued units consisting of $30.0 million of 13 3/4% Exchangeable Preferred Stock due 2009 (the "Exchangeable Preferred") and 11,100 shares of Class C Common Stock. Until March 15, 2003 cumulative dividends are paid quarterly, either in cash or by the issuance of additional shares of Exchangeable Preferred, at the Company's option. Thereafter, dividends will be payable in cash. The Exchangeable Preferred is exchangeable at the Company's option into 13 3/4% subordinated notes due March 15, 2009. As of December 21, 2000, all cumulative dividends on the Exchangeable Preferred have been paid by the issuance of additional shares of Exchangeable Preferred.
On May 15, 2000, Sweetheart Cup acquired all of the issued and outstanding capital stock of Sherwood and its subsidiaries pursuant to a Stock Purchase Agreement among Sweetheart Cup and the stockholders of Sherwood (the "Sherwood Agreement") for an aggregate purchase price of $17.4 million of which $12.4 million was paid in cash, subject to post-closing adjustments. As part of the purchase price, Sweetheart Cup issued to the stockholders of Sherwood non-interest bearing promissory notes due May 2005 in an aggregate principal amount of $5.0 million and a present value of $2.9 million. Sweetheart Cup also assumed $9.3 million of Sherwood's debt, which was paid in full on June 15, 2000.
In connection with a sale-leaseback transaction, on June 15, 2000, Sweetheart Cup and Sweetheart Holdings 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. The proceeds from this sale were used in part to redeem Sweetheart's Senior Secured Notes, repay debt in connection with the acquisition of Sherwood and repay a portion of the outstanding balance under the U.S. Credit Facility.
Pursuant to a lease dated as of June 1, 2000 ("the Lease") between Sweetheart Cup and State Street Bank and Trust Company of Connecticut, National Association ("State Street"), as trustee, Sweetheart Cup leases the production equipment sold in connection with the sales lease-back 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 will be 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 carry-forward. See "--Net Operating Loss Carry-forwards".
On June 15, 2000, Sweetheart refinanced its revolving credit facility (the "U.S. Credit Facility") to extend the maturity of the $135 million revolving credit facility, subject to borrowing base limitations, through June 15, 2005 and to add a term loan of $25 million that requires equal monthly principal payments of $0.4 million through June 2005. Both the term loan and the revolving credit facility have an accelerated maturity date of July 1, 2003 if Sweetheart's Senior Subordinated Notes due September 1, 2003 are not refinanced before June 1, 2003. Borrowings under the revolving credit facility bear interest, at Sweetheart's election, at a rate equal to (i) LIBOR plus 2.00% or (ii) a bank's base rate plus 0.25%, plus certain other fees. Borrowings under the term loan bear interest, at Sweetheart's election, at a rate equal to (i) LIBOR plus 2.50% or (ii) a bank's base rate plus 0.50%, plus certain other fees. The credit facility is collateralized by inventories and receivables with the term loan portion of the credit facility further collateralized by certain production equipment. As of September 24, 2000, $56.1 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 Cups, 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 September 24, 2000, Cdn $1.8 million (approximately $1.2 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.
On January 12, 2000, Fonda's revolving credit facility was amended to increase the revolving facility to $55 million, subject to borrowing base limitations. The facility is collateralized by eligible accounts receivable and inventories, certain general intangibles and the proceeds on the sale of accounts receivable and inventory. On February 28, 2000, Fonda's revolving credit facility was amended to extend the maturity through September 30, 2001. Borrowings are available at the bank's prime rate plus 0.25% or at LIBOR plus 2.25% at Fonda's election. At September 24, 2000, $40.7 million was outstanding and $14.3 million was the maximum remaining advance available based upon eligible collateral. Although Fonda intends to refinance this debt, there can be no assurances that Fonda will be able to obtain such refinancing on terms and conditions acceptable to Fonda.
On September 25, 2000, Fonda's revolving credit facility was amended to include a term loan of $5 million. This amount is payable in equal monthly installments through the maturity date of September 30, 2001, at an annual rate of LIBOR plus 2.5%. The proceeds from this term loan were used to partially finance the purchase of Springprint.
Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor with respect to $110 million of Senior Subordinated Notes. The Senior Subordinated Notes bear interest at 10.50% per annum, payable semi-annually in arrears on March 1 and September 1 and mature on September 1, 2003. The 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 101.313% until September 1, 2001 and 100% thereafter. The Senior Subordinated Notes are subordinate in right of payment to the prior payment in full of all borrowings under the U.S. Credit Facility, all obligations under the Lease, and all other indebtedness not otherwise prohibited.
On June 15, 2000, Sweetheart issued a redemption notice to the holders of its Senior Secured Notes due September 1, 2000. In connection therewith, Sweetheart paid $190.0 million plus accrued interest to the U.S. Trust Company of New York in settlement of the Senior Secured Notes.
In 1997, Fonda issued $120 million of 9-1/2% Series A Senior Subordinated Notes due 2007 (the "Notes") with interest payable semiannually. Payment of the principal of, and interest on, the Notes is subordinate in right of payment to Senior Debt (as defined therein) which includes the revolving credit facility. The principal amount of the Notes is payable on February 28, 2007. Fonda may, at its election, redeem the Notes at any time after March 1, 2002 at a redemption price equal to a percentage (104.75% after March 1, 2002 and declining in annual steps to 100% after March 1, 2005) of the principal amount thereof plus accrued interest. The 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 Notes at a redemption price equal to 101% of the principal amount thereof plus accrued interest.
During Fiscal 1998, Fonda redeemed shares of Class A common stock (pre-Merger shares) for $9.8 million pursuant to an offer to repurchase a certain number of shares of its common stock (pre-Merger shares) from its stockholders on a pro rata basis.
The instruments governing the indebtedness of the Company and its subsidiaries contain customary covenants and events of default, including without limitation, restrictions on, subject to defined exceptions, the payment of dividends, the incurrence of additional indebtedness, investment activities and transactions with affiliates.
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 with the United States Supreme Court, which was denied in January 1999. Sweetheart has been in the process of paying out the termination liability and associated expenses and as of December 21, 2000, has disbursed $12.3 million in termination payments. The estimate of the total termination liability and associated expenses, less payments, exceeds assets set aside in the Plan by approximately $8.0 million, which amount has been fully reserved.
On April 27, 1999, the plaintiffs filed a motion in the District Court for reconsideration of the court's dismissal without appropriate relief and a motion for attorneys' fees with a request for delay in determination of entitlement to such fees. On June 17, 1999, the District Court deferred these motions and ordered discovery in connection therewith. Discovery has been completed and Sweetheart is awaiting further action by the plaintiffs. Due to the complexity involved in connection with the claims asserted in this case, Sweetheart cannot determine at present with any certainty the amount of damages it would be required to pay should the plaintiffs prevail; accordingly, there can be no assurance that such amounts would not have a material adverse effect on Sweetheart's financial position or results of operations.
A patent infringement action seeking injunctive relief and damages relating to Sweetheart's production and sale of certain paper plates entitled Fort James Corporation v. Sweetheart Cup Company Inc., Civil Action No. 97-C-1221, was filed in the United States District Court for the Eastern District of Wisconsin on November 21, 1997. During the fourth quarter of Fiscal 1999, mediation resulted in a settlement of this action whereby Sweetheart agreed to pay damages of $2.6 million. As of June 29, 2000, all payments in conjunction with this settlement had been paid.
On July 13, 1999, Sweetheart received a letter from the EPA identifying Sweetheart, among numerous others, as a "potential responsible party" under CERCLA, at a site in Baltimore, Maryland. The EPA letter states that it does not constitute a final determination by EPA concerning the liability of Sweetheart or any other entity. On December 20, 1999, Sweetheart received an information request letter from the EPA, pursuant to CERCLA, regarding a Container Recycling Superfund Site in Kansas City, Kansas. Sweetheart denies liability and has no reason to believe the final outcomes will have a material effect on its financial condition or results of operations. However, no assurance can be given about the ultimate effect on Sweetheart, if any, given the early stage of these investigations.
The Company believes that cash generated by each of Fonda's and Sweetheart's operations, combined with amounts available under its respective credit facilities in addition to funds generated by asset sales should be sufficient to fund each of Fonda's and Sweetheart's respective capital expenditures needs, debt service requirements, payments in conjunction with lease commitments and working capital needs, including Sweetheart's termination liabilities under the Plan in the next twelve months.
Net Operating Loss Carry-forwards
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 sufficient taxable income is expected in the future to realize these NOLs, there can be no assurance that future taxable income will be generated to utilize such NOLs.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and requires that an entity recognize all derivatives at fair value in the statement of financial position. The Company and its' subsidiaries have evaluated this standard which is effective for Fiscal 2001 and has concluded that SFAS No.133 will not have a significant impact on the financial statement presentation.
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 Company and its' subsidiaries have evaluated this bulletin which is effective for Fiscal 2001 and has concluded that SAB No.101 will not have a significant impact on the financial statement presentation.
Item7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
NONE
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this report, beginning on page 30.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the directors, executive officers and key employees of SF Holdings as of December 21, 2000. All directors hold office until the next annual meeting of shareholders and until their successors are duly elected and qualified. Officers serve at the discretion of the Board of Directors.
Name Age Position - ---- --- -------- Dennis Mehiel 58 Chairman and Chief Executive Officer
Thomas Uleau 56 President, Chief Operating Officer and Director
Hans H. Heinsen 47 Senior Vice President, Chief Financial Officer and Treasurer
Harvey L. Friedman 65 Secretary and General Counsel
Alfred B. DelBello 64 Vice Chairman
James Armenakis 57 Director
W. Richard Bingham 64 Director
Gail Blanke 52 Director
John A. Catsimatidis 52 Director
Chris Mehiel 61 Director
Jerome T. Muldowney 55 Director
Alan D. Scheinkman 50 Director
G. William Seawright 59 Director
Lowell P. Weicker 69 Director
Mr. Mehiel has been Chairman of the Board and Chief Executive Officer of SF Holdings since December 1998. He has served as Chairman and Chief Executive Officer of Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Mehiel is also Chairman and Chief Executive Officer of Fonda and Creative Expressions Group ("CEG"). Since August 2000, he has been a director of Four M Corporation ("Four M"), a converter and seller of interior packaging, corrugated sheets and corrugated containers, which he co-founded. From 1966 until August 2000, he was Chairman of Four M, and since 1977 (except during a leave of absence from April 1994 through July 1995) he was the Chief Executive Officer of Four M. Mr. Mehiel is also currently a director of Box USA Holdings, Inc ("BoxUSA").
Mr. Uleau has been President, Chief Operating Officer and a Director of SF Holdings since February 1998 and Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Uleau is also Executive Vice President of Fonda. He has been a director of Fonda since 1988. He has also served in a variety of executive officer positions at Fonda since 1988. He served as Executive Vice President and Chief Financial Officer of Four M from 1989 through 1993 and its Chief Operating Officer in 1994.
Mr. Heinsen has served as Senior Vice President, Chief Financial Officer and Treasurer of SF Holdings since February 1998 and Senior Vice President - Finance and Chief Financial Officer of Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Heinsen also serves as Senior Vice President and Treasurer of Fonda since February 1997, Chief Financial Officer of Fonda since June 1996 and Chief Financial Officer of CEG since November 1998. Prior to joining Fonda, Mr. Heinsen spent 21 years in a variety of corporate finance positions with The Chase Manhattan Bank, N.A.
Mr. Friedman has been Secretary and General Counsel of the Company since February 1998 and Secretary and General Counsel of Fonda from May 1996. He was also a Director of Fonda from 1985 to January 1997. Mr. Friedman is also Secretary and General Counsel of CEG, Four M and Box USA of New Jersey and is a director of CEG. He was formerly a partner of Kramer, Levin, Naftalis & Frankel, a New York City law firm.
Mr. DelBello has served as Vice Chairman of the Company since February 1998 and Vice Chairman of Fonda since January 1997 and a Director of Fonda since 1990. Since July 1995, Mr. DelBello has been a partner in the law firm of DelBello, Donnellan & Weingarten & Tartaglia, LLP. From September 1992 to July 1995 he was a partner in the law firm of Worby DelBello Donnellan & Weingarten. Prior thereto, he had been President of DelBello Associates, a consulting firm, since 1985. Mr. DelBello served as Lieutenant Governor of New York State from 1983 to 1985.
Mr. Armenakis has served as a Director of the Company since February 1998 and Director of Fonda since June 1997. He is a senior partner in the law firm of Armenakis & Armenakis.
Mr. Bingham has been a Director of SF Holdings since March 1998 and has been a Director of Sweetheart Holdings and Sweetheart Cup since August 1993. He co-founded American Industrial Partners Management Company, Inc. ("AIPM") and has been a director and officer of the firm since 1989. He is also a general partner of AIP. Prior to joining AIPM, Mr. Bingham was director of the Corporate Finance Department, a member of the Board and director of Mergers & Acquisitions at Lehman Brothers Kuhn Loeb Inc. Mr. Bingham is also currently a director of Bucyrus International, Great Lakes Carbon Corporation, RBX Group, Inc., Standadyne Automotive Corporation and Deerfield Associates.
Ms. Blanke has served as a Director of the Company since February 1998 and as a Director of Fonda since January 1997. She has been President and Chief Executive Officer of Gail Blanke's Lifedesigns, LLC since March 1995. Lifedesigns was founded in March 1995 as a division of Avon Products, Inc. ("Avon") and was spun off from Avon in March 1997. Prior thereto, she held the position of Corporate Senior Vice President of Avon since August 1991. She also held a number of management positions at CBS, Inc., including the position of Manager of Player Promotion for the New York Yankees. Ms. Blanke will be serving her second consecutive term as President of the New York Women's Forum.
Mr. Catsimatidis has served as a Director of the Company since February 1998 and as a Director of Fonda since January 1997. He has been Chairman and Chief Executive Officer of the Red Apple Group, Inc., a company with diversified holdings that include oil refining, supermarkets, real estate, aviation and newspapers, since 1969. Mr. Catsimatidis serves as a director of Sloan's Supermarket, Inc. and News Communications, Inc. He also serves on the board of trustees of New York Hospital, St. Vincent Home for Children, New York University Business School, Athens College, Independent Refiners Coalition and New York State Food Merchants Association.
Mr. Chris Mehiel, has been a Director of the Company since February 1998 and a Director of Fonda since January 1997. Mr. Mehiel is a co-founder of Four M and has been Executive Vice President, Chief Operating Officer and a director of Four M since September 1995 and Chief Financial Officer from August 1997 until July 2000. He is an executive officer of the managing member of Fibre Marketing Group, LLC, the successor to Fibre Marketing Group, Inc., ("Fibre Marketing") a waste paper recovery business which he co-founded, and was President from 1994 to January 1996. From 1993 to 1994, Mr. Mehiel served as President and Chief Operating Officer of Box USA of New Jersey. From 1982 to 1992, Mr. Mehiel served as the President and Chief Operating Officer of Specialty Industries, Inc., a waste paper processing and container manufacturing company. Mr. Muldowney has served as a Director of the Company since February 1998 and as a Director of Fonda since 1990. Since January 1996, Mr. Muldowney has been a Managing Director of AIG Global Investment Corp. and since March 1995 he has been a Senior Vice President of AIG Domestic Life Companies ("AIG Life"). Prior thereto, he had been a Vice President of AIG Life since 1982. In addition, from 1986 to 1996, he served as President of AIG Investment Advisors, Inc. He is currently a director of AIG Life and AIG Equity Sales Corp.
Mr. Scheinkman has been a Director of the Company since April 2000. Since January 1998 Mr. Scheinkman has been County Attorney of Westchester County, New York, Counsel to the County Executive and Board of Legislators. Prior thereto, Mr. Scheinkman was in private practice with Scheinkman, Fredman & Kosan LLP. Mr. Scheinkman is also an adjunct professor of law at Pace University, School of Law and St. John's University, School of Law.
Mr. Seawright has served as a Director of the Company since February 1998 and as a Director of Fonda since January 1997. He has been President and Chief Executive Officer of Stanhome Inc., a manufacturer and distributor of giftware and collectibles, since 1993. Prior thereto, he was President and Chief Executive Officer of Paddington, Inc., an importer of distilled spirits, since 1990. From 1986 to 1990, he was President of Heublein International, Inc.
Mr. Weicker, Jr. has served as a Director of the Company since February 1998 and as a Director of Fonda since January 1997. Mr. Weicker served as Governor of the State of Connecticut from January 1991 through January 1995. From 1968 to 1989, Mr. Weicker served in the U.S. Congress. He currently serves as a Director of Compuware Corporation, World Wrestling Federation Entertainment, Inc., HPSC, Inc. and United States Tobacco, Inc.
Compensation of Directors
Directors of the Company who are not employees of SF Holdings or directors of Fonda or Sweetheart receive annual compensation of (i) $12,000, (ii) $1,000 for each Board meeting attended, and (iii) $1,000 for each committee meeting attended which is not held on the date of a board meeting. Directors who are employees of the Company or directors of Fonda or Sweetheart do not receive any compensation or fees for service on the Board of Directors or any committee thereof.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned, whether paid or deferred, to the Company's Chief Executive Officer and its other four most highly compensated executive officers (collectively, the "Named Officers") for Fiscal 2000, Fiscal 1999, the 1998 Nine Week Transition Period ("1998 TP") and Fiscal 1998 for services rendered in all capacities to the Company during such periods. The Company has concluded that the aggregate amount of perquisites and other personal benefits paid to each of the named executive officers did not exceed the lesser of (i) 10% of such officer's total annual salary and bonus or (ii) $50,000. Thus, such amounts are not reflected in the following table.
(1) The Fonda SAR Plan was terminated on September 14, 2000, effective as of October 1, 1999. No SARs were issued during Fiscal 2000 or Fiscal 1999. All vested SARs were redeemed on September 20, 2000. See "--Stock Appreciation Rights".
(2) Reflects matching contributions under 401(k) Plans, long-term disability and life insurance premiums paid (See "Employee Benefit Plans").
Stock Option Plan
Pursuant to the Sweetheart Investment, Dennis Mehiel currently holds 71,515 currently exercisable options to purchase Class A Common Stock of SF Holdings.
On March 12, 1998, all outstanding options to purchase stock of Sweetheart were cashed out in full pursuant to the agreement governing the Sweetheart Investment.
Stock Appreciation Rights
No Fonda SARs were issued to Named Officers during Fiscal 2000. On September 14, Fonda terminated the SAR plan effective as of October 1, 1999. In total, 15,600 Fonda SARs were redeemed at their October 1, 1999 value from Named Officers at a total cost of $506,064. All unvested SARs held by Named Officers not redeemed by Fonda were forfeited.
Employee Benefit Plans
A majority of Sweetheart's employees ("Participants") are covered under a 401(k) defined contribution plan. Effective January 1, 2000, Sweetheart provides a matching contribution of 100% on the first 2% of a participant's salary and 50% on the next 4% of a participant's salary. Sweetheart's match is currently limited to participant contributions up to 6% of participant salaries. In addition, Sweetheart is allowed to make discretionary contributions. Certain employees are covered under defined benefit plans. Benefits under these plans are generally based on fixed amounts for each year of service.
Sweetheart sponsors various defined benefit post-retirement health care plans that cover substantially all full-time employees. The plans, in most cases, pay stated percentages of most medical expenses incurred by retirees after subtracting payments by Medicare or other providers and after a stated deductible has been met. Participants generally become eligible after reaching age 60 with ten years of service. The majority of Sweetheart's plans are contributory, with retiree contributions adjusted annually.
Fonda provides certain union and non-union employees with retirement and disability income benefits under defined benefit pension plans. Fonda's policy has been to fund annually the minimum contributions required by applicable regulations.
On January 1, 1997, Fonda adopted a defined contribution benefit plan. All non-union employees and certain union employees are covered under the 401(k) savings and investment plans. Employee contributions are matched to varying amounts according to the plan as it relates to a particular facility and in addition, at the discretion of Fonda. Fonda also participates in multi-employer pension plans for certain of its union employees. See Note 21 of the Notes to Consolidated Financial Statements.
The executive officers of SF Holdings are not covered under any of the Sweetheart or Fonda defined benefit plans. Rather, such persons are covered under defined contribution plans only.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 21, 2000, with respect to the shares of common stock of SF Holdings beneficially owned by each person or group that is known by the Company to be a beneficial owner of more than 5% of the outstanding common stock of SF Holdings, the directors and officers of the Company, and all directors and officers of the Company, as a group.
Number of Percent Name of Beneficial Owner Shares Ownership - ------------------------ ----------------- --------------
Dennis Mehiel 373 Park Avenue South New York City, NY 10016 715,850 (1) 73.25%
Thomas Uleau 10100 Reisterstown Road Owings Mills, Maryland 21117 13,487 1.38%
Directors and executive officers as a Group (3 persons) 738,872 75.60%
(1) Includes 15,165 shares of Class A common stock of SF Holdings that would be issuable upon conversion of Class B Series 1 Preferred Stock held by CEG, 116,647 shares of Class A common stock of SF Holdings that would be issuable upon conversion of Class B Series 2 Preferred Stock, 71,515 shares underlying options to purchase Class A common stock of SF Holdings, which are presently exercisable, and 134,138 shares which Mr. Mehiel has the power to vote pursuant to a voting trust agreement.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All of the affiliates referenced below are directly or indirectly under the common ownership of the Company's Chief Executive Officer.
Fonda leases a building in Jacksonville, Florida from Dennis Mehiel on terms Fonda believes are no less favorable than could be obtained from independent third parties and were negotiated on an arm's length basis. Annual payments under the lease are $0.2 million plus annual increases based on changes in the Consumer Price Index ("CPI") through December 31, 2014. In addition, Mr. Mehiel can require Fonda to purchase the facility for $1.5 million, subject to a CPI-based escalation, until July 31, 2006. In Fiscal 1998, Fonda terminated its operations at this facility and is currently subleasing the entire facility. Four M subleased
a portion of this facility through May 1998 and again from October 1999 through February 2000. Rent expense, net of sublease income on the portion of the premises subleased to Four M during Fiscal 2000 was less than $0.2, and through May 1998 was $0.1 million in Fiscal 1999, less than $0.1 million in the 1998 TP, and $0.1 million in Fiscal 1998.
On December 3, 1999, CEG became an 87% owned subsidiary of the Company pursuant to a merger. In connection with the merger, 87% of CEG's common stock was exchanged for 15,000 shares of Class B Series 2 Preferred Stock of the Company. On December 6, 1999, pursuant to the CEG Asset Purchase Agreement, Fonda purchased the intangible assets of CEG, including domestic and foreign trademarks, patents, copyrights, and customer lists. In addition, pursuant to the CEG Asset Purchase Agreement, Fonda purchased certain inventory of CEG. The aggregate purchase price for the intangible assets and the inventory is $41 million ($16 million for the intangible assets and $25 million for the inventory), payable in cash, the cancellation of certain notes and warrants, and the assumption of certain liabilities. Pursuant to the agreement, Fonda also acquired other CEG assets in exchange for outstanding trade payables owed to Fonda by CEG. In connection with this agreement, Fonda canceled all other agreements with CEG. As a result of the CEG Asset Purchase Agreement, Fonda markets, manufactures and distributes disposable party goods products directly to the specialty (party) channel of the consumer foodservice market. Independent appraisals were obtained to determine the fairness of the purchase price for such assets. Fonda believes the terms on which it purchased such assets are at least as favorable as it could have obtained from unrelated third parties and were negotiated on an arm's length basis.
Pursuant to a certain agreement with the stockholders of Sweetheart as of December 29, 1997 (the "Sweetheart Stockholders"), following the fifth anniversary of the consummation of the Sweetheart Investment, the Sweetheart Stockholders have the right to exchange their shares of Class A common stock of Sweetheart for warrants (the "Exchange Warrants") to purchase, for nominal consideration, shares of Class C Common Stock of SF Holdings representing 10% of the total outstanding shares of common stock of SF Holdings at the consummation of the Sweetheart Investment on a fully diluted basis. SF Holdings has the right to cause such exchange and has the right to thereafter repurchase the Exchange Warrants, in whole or in part, for an aggregate call price of $50.0 million, subject to increase at 12.5% per annum until the fifth anniversary of the consummation of the Sweetheart Investment. Upon the occurrence of a merger (as defined in such agreement), the Sweetheart Stockholders will be required to exchange their shares of Class A common stock of Sweetheart for the Exchange Warrants. In addition, in the event SF Holdings proposes to sell shares of Class A common stock or Class B common stock of Sweetheart in an amount greater than 30% of the outstanding shares of Sweetheart common stock, the Sweetheart Stockholders will have the right to participate in such sale. In the event SF Holdings proposes to sell shares of Sweetheart common stock in an amount greater than 30% of the outstanding shares of Sweetheart common stock, then SF Holdings will have the right to require the Sweetheart Stockholders to sell all, but not less than all, of their shares of Sweetheart common stock.
During Fiscal 1998, Fonda purchased a 38.2% ownership interest in Fibre Marketing from a director of Fonda for $0.2 million. Four M is also a member of Fibre Marketing. Fonda granted Sweetheart the right to acquire 50% of it's interest in Fibre Marketing for $0.1 million. During Fiscal 2000, Fonda sold a 13.2% interest in Fibre Marketing to Mehiel Enterprises, Inc. for $0.1 million, retaining a 25% ownership interest in Fibre Marketing. Fonda believes that the terms on which it purchased and sold such interest are at least as favorable as those it could otherwise have obtained from an unrelated third party and were negotiated on an arm's length basis.
During the fourth quarter of Fiscal 2000, Sweetheart entered into a lease agreement with D&L Development, LLC, an entity in which the Company's CEO has an interest, to lease a warehouse facility in Hampstead, Maryland. In Fiscal 2000, rental payments under this lease were $0.7 million. 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.
In November 2000, Sweetheart began leasing a facility from D&L Andover Property, LLC, an entity in which the Company's CEO has an interest. 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.
During Fiscal 2000, Sweetheart and Fonda combined, sold $7.4 million of scrap paper to Fibre Marketing. Included in accounts receivable as of September 24, 2000 is $1.3 million due from Fibre Marketing. Other sales to affiliates during Fiscal 2000 were not significant.
During Fiscal 2000, Sweetheart and Fonda combined, purchased $9.7 million of corrugated containers from Box USA Holdings, Inc. ("Box USA"), $0.2 million of other services from Four M Corporation ("Four M") and $0.9 million of travel services from Emerald Lady, Inc.. Included in accounts payable, as of September 24, 2000, is $0.1 million due to Box USA. Other purchases from affiliates during Fiscal 2000 were not significant.
During Fiscal 1999, Sweetheart and Fonda combined, sold $4.1 million of scrap paper to Fibre Marketing. Included in accounts receivable as of September 26, 1999 is $1.1 million due from Fibre Marketing. Other sales to affiliates during Fiscal 1999 were not significant.
During Fiscal 1999, Sweetheart and Fonda combined, purchased $7.9 million of corrugated containers from Box USA and $0.9 million of travel services from Emerald Lady, Inc.. Included in accounts payable, as of September 26, 1999, is $0.5 million due to Box USA. Other purchases from affiliates during Fiscal 1999 were not significant.
At September 24, 2000, Fonda had loans receivable from its Chief Executive Officer totaling $275,000 plus accrued interest at 10%. This loan is payable upon demand. During Fiscal 1999, the Company also had a $150,000 loan receivable with another executive officer plus accrued interest at 5.39% which was paid in full in June 1999.
SF Holdings and Fonda intend to file consolidated Federal income tax returns, and pursuant to a tax sharing agreement, Fonda will pay SF Holdings its allocable share of the consolidated group's consolidated Federal income tax liability, which, in general, will equal the tax liability Fonda would have paid if it had filed separate tax returns.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. The financial statements listed in the "Index to Consolidated Financial Statements."
2. The financial statement schedule listed in the "Index to Consolidated Financial Statement Schedules."
Exhibits 2.1 through 10.8 are incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Registration Statement on Form S-4, as amended (File No. 333-50683). Exhibits 10.9 through 10.18 are incorporated herein by reference to the exhibit with the corresponding
number filed as part of the Company's Registration Statement on Form S-4, as amended (File No. 333-51563).
2.1 Investment Agreement, dated as of December 29, 1997, among the Stockholders of Sweetheart Holdings Inc. ("Sweetheart Holdings"), Creative Expressions Group, Inc.("CEG") and SF Holdings Group, Inc. ("SF Holdings"). 3.1 Restated Certificate of Incorporation of the Company. 3.2 By-laws of the Company. 3.3* Amended and Restated Certificate of Incorporation of SF Holdings Group, Inc. 3.4* Certificate of Designation of Class B Series 2 Preferred Stock of SF Holdings Group, Inc. 4.1 Indenture, dated as of March 12, 1998, between SF Holdings and The Bank of New York. 4.2 Form of 12 3/4% Series A and Series B Senior Secured Discount Notes, dated as of March 12, 1998 (incorporated by reference to Exhibit 4.1). 4.3 Registration Rights Agreement, dated as of March 12, 1998, among SF Holdings, Bear, Stearns & Co. Inc. and SBC Warburg Dillon Read Inc. (the "Initial Purchasers"). 4.4 Registration Rights Agreement, dated as of March 20, 1998, between the Company, American Industrial Partners Management Company, Inc. ("AIPM") and Bear, Stearns & Co., Inc. 4.5 Form of Certificate of Exchangeable Preferred Stock. 4.6 Form of Indenture between the Company and The Bank of New York governing the 13 3/4% Subordinated Notes due March 15, 2009. 4.7 Paragraph A of Article Fourth of the Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1). 10.1 Stockholders' Rights Agreement, dated as of March 12, 1998, among SF Holdings and the persons listed on Schedule I thereto. 10.2 Stockholders' Agreement, dated as of March 12,1998, among Sweetheart Holdings, SF Holdings and the Original Stockholders. 10.3 Stockholders Agreement, dated as of March 12, 1998, among SF Holdings and the Initial Purchasers. 10.4 Pledge Agreement, dated as of March 12, 1998, between SF Holdings and the Bank of New York. 10.5 Tax Sharing Agreement, dated as of March 12, 1998, among SF Holdings and The Fonda Group, Inc ("Fonda"). 10.6 Second Restated Management Services Agreement, dated as of March 12, 1998, among Sweetheart Holdings, Sweetheart Cup Company Inc. ("Sweetheart Cup"), American Industrial Partners Management Company, Inc. ("AIPM") and SF Holdings. 10.7 Amendment No. 1 to Second Restated Management Services Agreement, dated as of March 12, 1998, among Sweetheart Holdings, Sweetheart Cup, AIPM and SF Holdings. 10.8 Assignment and Assumption Agreement, dated as of March 12, 1998, between SF Holdings and Fonda. 10.9 Stockholders Agreement, dated as of March 20, 1998, between the Company and Bear, Stearns & Co., Inc. 10.19 Asset Purchase Agreement, dated as of December 6, 1999 between Creative Expressions Group, Inc and Fonda. 10.20* Agreement and plan of merger, dated as of December 3, 1999, amongst SF Holdings, Inc., SF Holdings Acquisition Holdings Corp. and Creative Expressions Group, Inc.. 27.1* Financial Data Schedule.
---------------- * filed herein. (b) No reports were filed on Form 8-K during the fiscal year ended September 24, 2000.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 30
Consolidated Balance Sheets as of September 24, 2000 and September 26, 1999 31
Consolidated Statements of Operations and Other Comprehensive Income (Loss) for Fiscal Years 2000, 1999, the nine weeks ended September 27, 1998 and the fifty two weeks ended July 26, 1998 32
Consolidated Statements of Cash Flows for Fiscal Years 2000, 1999, the nine weeks ended September 27, 1998 and the fifty two weeks ended July 26, 1998 33
Consolidated Statements of Shareholders' Equity for Fiscal Years 2000, 1999, the nine weeks ended September 27, 1998 and the fifty two weeks ended July 26, 1998 34
Notes to Consolidated Financial Statements 35
INDEPENDENT AUDITORS' REPORT
Board of Directors The SF Holdings Group, Inc.
We have audited the accompanying consolidated balance sheets of The SF Holdings Group, Inc. (the "Company") as of September 24, 2000 and September 26, 1999, and the related consolidated statements of operations and other comprehensive income (loss), cash flows and shareholders' equity for the years ended September 24, 2000 and September 26,1999, the nine week transition period ended September 27, 1998 and the year ended July 26, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 24, 2000 and September 26, 1999, and the results of its operations and its cash flows for the years ended September 24, 2000 and September 26,1999, the nine week transition period ended September 27, 1998 and the year ended July 26, 1998 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in Fiscal 2000 the Company acquired an affiliate. The transaction has been accounted for in a manner similar to a pooling-of-interests and accordingly, the consolidated financial statements have been restated for all periods presented.
/s/ DELOITTE & TOUCHE LLP Baltimore, Maryland December 12, 2000
SF HOLDINGS GROUP, INC. ----------------------- CONSOLIDATED BALANCE SHEETS --------------------------- (In thousands, except share data) ---------------------------------
1 - Restated, See Note 1 to Consolidated Financial Statements See accompanying Notes to Consolidated Financial Statements.
SF HOLDINGS GROUP, INC. ----------------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- AND OTHER COMPREHENSIVE INCOME (LOSS) ------------------------------------- (In thousands) --------------
1 - Restated, See Note 1 to Consolidated Financial Statements See accompanying Notes to Consolidated Financial Statements.
SF HOLDINGS GROUP, INC. ----------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (In thousands) --------------
See accompanying Notes to Consolidated Financial Statements.
SF HOLDINGS GROUP, INC. ----------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ----------------------------------------------- (In thousands) --------------
See accompanying Notes to Consolidated Financial Statements.
SF HOLDINGS GROUP, INC. ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------
As used in these notes, unless the context otherwise requires, the "Company" shall refer to SF Holdings Inc. ("SF Holdings") and its subsidiaries, including Sweetheart Holdings Inc. ("Sweetheart") and The Fonda Group, Inc. ("Fonda").
The Company is one of the largest producers of plastic and paper disposable foodservice and food packaging products in North America. In Fiscal 2000, the Company had net sales of approximately $1.3 billion. The Company sells a broad line of disposable paper, plastic and foam foodservice and food packaging products under both branded and private labels to institutional foodservice and consumer foodservice customers, including large national accounts, and participates at all major price points. The Company conducts its business through two principal operating subsidiaries, Sweetheart and Fonda and markets its products under its well recognized Sweetheart(R), Trophy(R), Sensations(R), Hoffmaster(R) and Lily(R) brands. In addition, Sweetheart designs, manufactures and leases container filling equipment for use by dairies and other food processors. This equipment is specifically designed by Sweetheart to fill and seal containers in customers' plants. One national customer of Sweetheart accounted for 11.1% of its net sales in Fiscal 2000.
1. PRIOR YEARS RESTATEMENT
On December 3, 1999, Creative Expressions Group, Inc. ("CEG"), an affiliate of the Company in the disposable party goods products business, became an 87% owned subsidiary of SF Holdings pursuant to a merger (the "CEG Merger"). The companies are under common control, and therefore, the transaction has been accounted for in a manner similar to a pooling-of-interests method. The financial statements have been restated for all periods presented to include the balance sheet and results of operations of CEG (See Note 16).
The following information presents certain income statement data of the separate companies for the periods preceding the CEG Merger:
Sales from SF Holdings to CEG were eliminated and have been excluded from net sales as presented. Intercompany sales to CEG were $30.0 million in Fiscal 2000, $40.1 million in Fiscal 1999, $6.9 million in the 1998 Transition Period and $17.0 million in Fiscal 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal year end - In Fiscal 1998, the Company's Board of Directors approved a change in the Company's fiscal year from the year ended September 30 to the 52 or 53 week period ending on the last Sunday in September. Fiscal 2000 is the 52 week period ended September 24, 2000. Fiscal 1999 is the 52 week period ended September 26, 1999. The nine-week period from July 27, 1998 to September 27, 1998 (the "1998 Transition Period") has been treated as a transition period that was not part of Fiscal 1998 or Fiscal 1999. Fiscal 1998 is the 52 week period ended July 26, 1998.
Principles of Consolidation and Translation - The financial statements include the accounts of the Company and its subsidiaries on a consolidated basis as of September 24, 2000, September 26, 1999, September 27, 1998 and July 26, 1998 for Fiscal Years 2000, 1999, the 1998 Transition Period and Fiscal 1998. Assets and liabilities denominated in Canadian dollars are translated at the rates of exchange in effect at the balance sheet date. Income amounts are translated at the average of the monthly exchange rates. The cumulative effect of translation adjustments is deferred and classified as a cumulative translation adjustment. All inter-company accounts and transactions have been eliminated.
The Company incorporates the results of Fibre Marketing Group, LLC ("Fibre Marketing") based upon the equity method of accounting for its relative share of the profit and or loss of Fibre Marketing for the corresponding period (See Note 16).
Cash, including Cash Equivalents, Restricted Cash and Cash in Escrow - The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash overdrafts are reclassified to accounts payable and accrued payroll and related costs. Cash received as proceeds from the sale of assets is restricted to qualified capital expenditures under the terms of a lease agreement and is held in escrow with the trustee until utilized.
Inventories - The Company accounts for inventories using the first-in first-out (FIFO) method.
Property, Plant and Equipment - Property, plant and equipment is recorded at cost, less accumulated depreciation, and is depreciated on the straight-line method over the estimated useful lives of the assets, with the exception of property, plant and equipment acquired prior to January 1, 1991, which is depreciated on the declining balance method.
The asset lives of buildings and fixtures range between 12 and 50 years. The asset lives of equipment range between 3 and 18 years. The asset lives of leasehold improvements range between 5 and 10 years.
Deferred Catalog Cost and Advertising Expense - Fonda expenses the costs of advertising as incurred, except for catalog costs, which are capitalized and amortized over the expected period of future benefits. Direct response advertising consists primarily of catalogs that include order forms for Fonda's products. The everyday products catalog costs are expensed over a period of twelve months, while the spring, fall and holiday season catalog costs are amortized over periods ranging from four to six months coinciding with shipments of products.
At September 24, 2000 and September 26, 1999, $215,000 and $290,000, respectively, of unamortized catalog costs were included in other current assets. Advertising expense was $193,000 in Fiscal 2000, $101,000 in Fiscal 1999, $27,000 in the 1998 Transition Period and $451,000 in Fiscal 1998. Catalog expense was $559,000 in Fiscal 2000, $746,000 in Fiscal 1999, $165,000 in the 1998 Transition Period, and $748,000 in Fiscal 1998.
Advanced Royalties and Minimum License Guarantees - The Company enters into licensing agreements with third parties for the right to use their designs and trademarks. Certain agreements require minimum guarantees of royalties, as well as advance payments. Advance royalty payments are recorded as other current assets and are charged to expense as royalties are earned. Minimum license guarantees are recorded as an other asset, with a corresponding payable, when the agreement is executed and are charged to expense based on actual
sales. The Company charges to expense remaining advance royalties and minimum license guarantees when management determines that actual related product sales are significantly less than original estimates.
As of September 24, 2000 and September 26,1999, the Company had $450,000 and $536,000 in minimum license guarantees and advance royalties, net of reserves, respectively. Future minimum royalty payments are $60,000 in 2001 and $187,000 thereafter.
Revenue Recognition - Revenue is recognized upon shipment of product. Also, Sweetheart rents filling equipment to certain of its customers and recognizes this income over the life of the lease.
Goodwill - Goodwill represents the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired and is amortized on a straight-line basis over twenty years. The carrying value of goodwill is reviewed when facts and circumstances suggest that it may be impaired. The Company assesses its recoverability by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted projected future cash flows. Should the review indicate that goodwill is not recoverable, the Company's carrying value of the goodwill would be reduced by the estimated shortfall of the cash flows.
Income Taxes - Deferred income taxes are provided to recognize temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities.
Reclassifications - Certain prior period balances have been reclassified to conform with current presentation.
Impact of Recently Issued Accounting Standards - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and requires that an entity recognize all derivatives at fair value in the statement of financial position. The Company has evaluated this process which is effective for Fiscal 2001 and has concluded that SFAS No. 133 will not have a significant impact on the financial statement presentation.
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 Company has evaluated this bulletin which is effective for Fiscal 2001 and has concluded that SAB No.101 will not have a significant impact on the financial statement presentation.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting fiscal years. Actual results could differ from those estimates.
3. INVENTORIES
The components of inventories are as follows (in thousands):
September 24, September 26, 2000 1999 --------------- --------------- Raw materials and supplies $ 66,941 $ 51,002 Finished products 148,231 130,329 Work in progress 11,485 8,036 ---------- -------- Total inventories $ 226,657 $189,367 ========= ========
4. INCOME TAXES
The income tax provision includes the following components (in thousands):
----------- --------- ----------------- --------------- Nine Weeks Ended Fifty Two Weeks Fiscal Fiscal September 27, Ended July 26, 2000 1999 1998 1998 ----------- --------- ----------------- --------------- Current- Federal $ 3,749 $ (866) $ (187) $ 5,254 State 1,195 423 (84) 1,712 Foreign 270 - - - -------- --------- --------- ---------
Total current 5,214 (443) (271) 6,966 -------- --------- ---------- ---------
Deferred - Federal (157) (7,515) (3,272) (5,095) State (943) (1,575) (482) (626) Foreign - (28) (345) - -------- --------- --------- ---------
Total deferred (1,100) (9,118) (4,099) (5,721) -------- --------- --------- ---------
$ 4,114 $ (9,561) $ (4,370) $ 1,245 ======== ========= ========= =========
The effective tax rate varied from the U.S. Federal tax rate of 35% for Fiscal 2000, 1999 and 1998 as a result of the following:
Nine Weeks Ended Fiscal Fiscal September Year Ended 2000 1999 27, 1998 July 26, 1998 -------- ------ ------------- -------------
U.S. Federal tax rate 35% 35% 35% 35%
State income taxes, net of U.S. Federal tax impact 5 3 4 (121) Interest on discount notes 6 (1) (1) (22) Non-deductible amortization 12 (3) (2) (30) Other 3 (1) 11 (77) --- --- --- ------ Effective tax rate 61% 33% 47% (215)% === === === ======
Deferred income taxes reflect the net tax effects of net operating loss carry-forwards, tax credit carry-forwards, and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company's net deferred tax assets and liabilities are as follows:
Sweetheart has net operating loss carry-forwards for income tax purposes of approximately $32 million, which will expire in 2018. Although future earnings cannot be predicted with certainty, management currently believes that realization of the net deferred tax asset is more likely than not.
5. PROPERTY, PLANT AND EQUIPMENT, NET
The Company's major classes of property, plant and equipment, net are as follows (in thousands):
September 24, September 26, 2000 1999 ---------------- --------------
Land & Buildings $ 136,548 $ 144,693 Leasehold improvements 1,282 1,194 Machinery and equipment 205,568 324,631 Construction in progress 11,006 6,957 --------- ----------
Total property, plant and equipment 354,404 477,475 --------- ----------
Accumulated depreciation (91,036) (90,166) --------- ---------- Property, plant and equipment, net $ 263,368 $ 387,309 ========= ==========
Depreciation expense was $43.2 million in Fiscal 2000, $50.3 million in Fiscal 1999, $12.3 million in the 1998 Transition Period and $17.4 million in Fiscal 1998. In addition, property, plant and equipment includes buildings under capital lease at a cost of $2.2 million and a net book value of $1.4 million at
September 24, 2000 and $1.5 million at September 26, 1999.
6. ACQUISITIONS
On May 15, 2000, Sweetheart Cup acquired Sherwood, a manufacturer of paper cups, containers and cup making equipment. Pursuant to a certain Stock Purchase Agreement among Sweetheart Cup and the stockholders of Sherwood, Sweetheart Cup acquired all of the issued and outstanding capital stock (the "Sherwood Acquisition") of Sherwood and its subsidiaries for an aggregate purchase price of $17.4 million of which $12.4 million was paid in cash, subject to post closing adjustments. As part of the purchase price, Sweetheart Cup issued to the stockholders of Sherwood promissory notes due May 2005 in an aggregate principal amount of $5.0 million and a present value of $2.9 million. Sweetheart Cup also assumed $9.3 million of Sherwood debt, which was paid in full on June 15, 2000. The Sherwood Acquisition has preliminarily resulted in goodwill as of September 24, 2000 of $11.2 million, which is being amortized over 20 years. The acquisition has been accounted for using the purchase method of accounting. Amounts and allocations of costs recorded may require adjustment based upon information coming to the attention of the Company that is not currently available. The consolidated financial statements of the Company include the activity for Sherwood from May 15, 2000 to September 24, 2000. The inclusion of this acquisition within the financial statements presented had a minimal impact on the Company's results.
On March 12, 1998, the Company acquired 90% of the total outstanding common stock, including 48% of the voting stock, of Sweetheart, a manufacturer of disposable food service and food packaging products, for $125 million (the "Sweetheart Investment"), plus transaction fees and expenses of approximately $4.5 million. The aggregate purchase price consisted of $88 million in cash, a demand promissory note of $7 million (which was satisfied immediately following the consummation of the Sweetheart Investment) and $30 million of exchangeable preferred stock (see Note 13). The excess of the purchase price over the Company's preliminary evaluation of the fair value of the net assets acquired was $74 million and has been recorded as goodwill.
The following summarized, unaudited pro forma results of operations assume the Fiscal 1998 acquisition occurred as of the beginning of the year (in thousands),
Fifty Two Weeks Ended July 26, 1998 ------------- Net sales $ 1,195,709 Loss before extraordinary loss $ (38,810)
Pursuant to a certain agreement with the stockholders of Sweetheart as of December 29, 1997 (the "Sweetheart Stockholders"), following the fifth anniversary of the consummation of the Sweetheart Investment, the Sweetheart Stockholders have the right to exchange their shares of Class A common stock of Sweetheart for warrants (the "Exchange Warrants") to purchase, for nominal consideration, shares of Class C Common Stock of SF Holdings representing 10% of the total outstanding shares of common stock of SF Holdings at the consummation of the Sweetheart Investment on a fully diluted basis. SF Holdings has the right to cause such exchange and has the right to thereafter repurchase the Exchange Warrants, in whole or in part, for an aggregate call price of $50 million, subject to increase at 12.5% per annum until the fifth anniversary of the consummation of the Sweetheart Investment. Upon the occurrence of a merger (as defined in such agreement), the Sweetheart Stockholders will be required to exchange their shares of Class A common stock of Sweetheart for the Exchange Warrants. In addition, in the event SF Holdings proposes to sell shares of Sweetheart common stock in an amount greater than 30% of the outstanding shares of Sweetheart common stock, then SF Holdings will have the right to require the Sweetheart Stockholders to sell all, but not less than
all, of their shares of Sweetheart common stock.
In January 1998, Fonda acquired certain net assets of Leisureway, Inc., a manufacturer of white paper plates, for $7.2 million including deferred payments of $0.3 million and acquisition costs. The excess of the purchase price over the Fonda's evaluation of the fair value of the net assets acquired was $7.1 million and has been recorded as goodwill.
The above acquisition has been accounted for under the purchase method and the results have been included in the consolidated statements of operations since the respective date of acquisition. Goodwill amortization was $1.0 million in Fiscal 2000, $1.2 million in Fiscal 1999, $0.2 million in the 1998 Transition Period and $1.0 million in Fiscal 1998. Accumulated amortization was $4.0 million and $3.0 million at September 24, 2000 and September 26, 1999, respectively. The inclusion of this acquisition within the financial statements presented had a minimal impact on the Company's results.
7. OTHER ASSETS
The components of other assets are as follows (in thousands):
September 24, September 26, 2000 1999 ------------- -------------
Debt issuance costs, net of accumulated amortization $ 10,786 $ 11,912 Notes receivable - 4,084 Intangible asset 1,902 1,909 Prepaid assets 3,076 989 Other 4,140 5,083 -------- --------
Total other assets $ 19,904 $ 23,977 ======== ========
Amortization of debt issuance costs totaled $3.7 million in Fiscal 2000, $3.9 million in Fiscal 1999, $0.4 million in the 1998 Transition Period and $1.6 million in Fiscal 1998.
8. OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows (in thousands):
September 24, September 26, 2000 1999 --------------- -------------
Sales allowances $ 19,054 $ 16,967 Litigation, claims and assessments (See Note 24) 9,288 20,004 Deferred rent payable 8,631 - Taxes, other than income taxes 3,295 4,434 Interest payable 3,167 5,615 Medical & other insurance 1,565 1,060 Freight 1,467 1,554 Other 9,647 8,635 ------- -------- Total other current liabilities $ 56,114 $ 58,269 ======== ========
9. DEFERRED GAIN ON SALE OF ASSETS
In connection with a sale-leaseback transaction, on June 15, 2000, Sweetheart Cup and Sweetheart Holdings Inc. sold certain production equipment located in Owings Mills, Maryland, Chicago, Illinois and Dallas, Texas for a fair market value of $212.3 million to several owner participants. Pursuant to a lease dated as of June 1, 2000 ("the Lease") between Sweetheart Cup and State Street Bank and Trust Company of Connecticut, National Association ("State Street"), Sweetheart Cup will lease such production equipment from State Street, as owner trustee for several owner participants, through November 9, 2010. The associated property, plant and equipment was removed from the balance sheet and a deferred gain of $107.0 million was recorded and will be amortized over 125 months which is the term of the Lease. Annual rental payments under the Lease will be approximately $32.0 million.
10. LONG-TERM OBLIGATIONS
Long-term debt, including amounts payable within one year, is as follows (in thousands):
September 24, September 26, 2000 1999 ------------- ------------------
U.S. Credit Facility $ 102,249 $ 84,476 Fonda Revolving Credit Agreement 40,710 11,710 Canadian Credit Facility 10,320 9,416 10.5% Senior Subordinated Notes 110,000 110,000 Sherwood Industries Notes 3,541 - Other - Fonda 1,168 1,733 Fonda Senior Subordinated Notes 120,000 120,000 SF Holdings Discount Notes 104,245 92,018 CEG Debt - 39,046 9.625% Senior Secured Notes - 190,000 ---------- ---------- Total debt 492,233 658,399
Less - Current portion of long-term debt (57,266) (277,693) ---------- ----------
Total long-term debt $ 434,967 $ 380,706 ========== ==========
The aggregate annual maturities of long-term debt at September 24, 2000 are as follows (in thousands):
Fiscal 2001 $ 57,266 Fiscal 2002 5,120 Fiscal 2003 115,122 Fiscal 2004 5,128 Fiscal 2005 and thereafter 309,597 ----------- $ 492,233 ===========
U.S. Credit Facility - On June 15, 2000, Sweetheart's revolving credit facility (the "U.S. Credit Facility") was amended and restated to extend the maturity of the $135 million revolving credit facility, subject to borrowing base limitations, through June 15, 2005 and to add a term loan of $25 million that requires equal monthly 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 will now 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 will bear interest, at Sweetheart's election, at a rate equal to (i) LIBOR plus 2.50% or (ii) a bank's base rate plus 0.50%, plus certain other fees. In Fiscal 2000, the weighted average annual interest rate for the U.S. Credit Facility was 9.57%. The credit facility is collateralized by Sweetheart's inventories and receivable with the term loan portion of the credit facility further collateralized by certain production equipment. As of September 24, 2000, $56.1 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.
The indebtedness of Sweetheart Cup under the U.S. Credit Facility is guaranteed by Sweetheart Holdings and secured by a first priority perfected security interest in inventory, accounts receivable and all proceeds of the foregoing of Sweetheart Cup, a first priority security interest, shared with the sale-leaseback owner participants, in Shared Collateral (as defined in the U.S. Credit Facility to include primarily all capital stock owned by Sweetheart Holdings and Sweetheart Cup and of each of their respective present and future direct subsidiaries, all inter-company indebtedness payable to Sweetheart Holdings or Sweetheart Cup by Sweetheart Holdings, Sweetheart Cup or their respective present and future subsidiaries, and any proceeds from business interruption insurance) and a first priority perfected security interest in certain equipment.
The U.S. Credit Facility contains various covenants that limit, or restrict, among other things, indebtedness, dividends, leases, capital expenditures and the use of proceeds from asset sales and certain other business activities. Additionally, Sweetheart must maintain on a consolidated basis, certain specified ratios at specified times, including, without limitation, maintenance of minimum fixed charge coverage ratio. Sweetheart is currently in compliance with all covenants under the U.S. Credit Facility. The U.S. Credit Facility provides for partial mandatory prepayments upon the sale of equipment collateral unless net proceeds are used to purchase replacement collateral and full repayment upon any change of control (as defined in the Agreement).
Fonda Revolving Credit Agreement - On January 12, 2000, Fonda's revolving credit facility was amended to increase the revolving facility to $55 million, subject to borrowing base limitations and collateralized by eligible accounts receivable and inventories, certain general intangibles and the proceeds on the sale of accounts receivable and inventory. On February 28, 2000, Fonda's revolving credit facility was amended to extend the maturity through 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 September 24, 2000, $40.7 million was outstanding and $14.3 million was the maximum remaining advance available based upon eligible collateral. Although Fonda intends to refinance this debt, there can be no assurances that Fonda will be able to obtain such refinancing on terms and conditions acceptable to Fonda.
Canadian Credit Facility - A 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 Cups, 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 September 24, 2000, Cdn $1.8 million (approximately $1.2 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 the Sweetheart.
Senior Subordinated Notes - Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor with respect to $110 million of Senior Subordinated Notes.
The Senior Subordinated Notes bear interest at 10.50% per annum, payable semi-annually in arrears on March 1 and September 1 and mature on September 1, 2003. The 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 101.313% until September 1, 2001 and 100% thereafter. The Senior Subordinated Notes are subordinate in right of payment to the prior payment in full of all borrowings under the U.S. Credit Facility, all obligations under the Lease, and all other indebtedness not otherwise prohibited.
The 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.
Sherwood Industries Notes - As part of the Sherwood Acquisition on May 15, 2000, Sweetheart Cup issued to the stockholders of Sherwood promissory notes due May 2005 in an aggregate principal amount of $5.0 million and a present value of $2.9 million.
Fonda Senior Subordinated Notes - In 1997, Fonda issued $120 million of 9-1/2% Series A Senior Subordinated Notes due 2007 (the "Notes") with interest payable semi-annually. Payment of the principal of, and interest on, the Notes is subordinate in right of payment to Senior Debt (as defined therein), which includes the revolving credit facility. The principal amount of the Notes is payable on February 28, 2007. Fonda may, at its election, redeem the 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 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 Notes at a redemption price equal to 101% of the principal amount thereof plus accrued interest.
SF Holdings Discount Notes - On March 12, 1998, the Company issued units consisting of $144 million aggregate principal amount at maturity of 12 3/4% Senior Secured Discount Notes due 2008 (the "Discount Notes") and 288,000 shares of Class C Common Stock for net proceeds of $77.5 million. Until March 15, 2003, accrued interest on the Discount Notes will not be paid but will accrete semi-annually, thereby increasing the carrying value of the Discount Notes. The fair value of such Class C Common Stock ($2.4 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 Discount Notes. The resulting discount, as well as $4.5 million of financing fees included in other assets, is being amortized as additional interest expense over the term of the Discount Notes.
CEG Debt - In conjunction with the CEG Asset Purchase Agreement, CEG retired its long term debt during Fiscal 2000. At September 26, 1999 the long term debt consisted of (i) a $22.8 million revolving line of credit, (ii) a $10.0 million senior subordinated notes and (iii) a $5.4 million junior subordinated note.
Senior Secured Notes - On June 15, 2000, Sweetheart issued a redemption notice to the holders of its Senior Secured Notes due September 1, 2000. In connection therewith, Sweetheart paid $190.0 million plus accrued interest with the U.S. Trust Company of New York in settlement of the Senior Secured Notes.
Pursuant to the terms of the instruments governing the indebtedness of the Company, Fonda and Sweetheart, each company is subject to certain affirmative and negative covenants customarily contained in agreements of this type, including, without limitation, covenants that restrict, subject to specified exceptions (i) mergers and acquisitions, (ii) capital expenditures, (iii) dividends, and (iv) additional indebtedness. In addition, such debt instruments restrict each subsidiary's ability to pay dividends or make other distributions to SF Holdings. The credit facilities also require that each subsidiary satisfy certain financial covenants.
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments included in current assets and current liabilities approximate their estimated fair value because of the relatively short maturities of these instruments. Long-term debt instruments, other than the Company's Senior Secured Discount Notes, Sweetheart's Senior Subordinated Notes and Fonda's Senior Subordinated Notes have variable interest rates that fluctuate along with current market conditions and thus the carrying value approximates their fair value.
The following are the fair values of the Company's, Sweetheart's and Fonda's notes, based on independent third party information.
The fair value of the SF Holdings Notes are estimated to be $6.4 million lower than the carrying value at September 24, 2000 and $6.4 million lower than the carrying value at September 26, 1999.
The fair value of Sweetheart's Senior Subordinated Notes are estimated to be $7.7 million lower than the carrying value at September 24, 2000 and $12.1 million lower than the carrying value at September 26, 1999.
The fair value of the Fonda's Senior Subordinated Notes is estimated to be $15.6 million lower than the carrying value at September 24, 2000 and $20.4 million lower than the carrying value at September 26, 1999.
12. OTHER LIABILITIES
The components of other liabilities are as follows (in thousands):
September 24, September 26, 2000 1999 ------------- -------------
Post-retirement health care benefits (See Note 21) $ 47,965 $ 46,792 Pensions (See Note 21) 5,648 10,508 Prepaid vendor credits 750 1,500 Other 3,148 3,838 -------- --------
Total other liabilities $ 57,511 $ 62,638 ======== ========
13. PREFERRED STOCK
Exchangeable Preferred Stock
On March 12, 1998, the Company issued units consisting of $30 million of 13 3/4% Exchangeable Preferred Stock due 2009 (the "Exchangeable Preferred") and 11,100 shares of Class C Common Stock. Until March 15, 2003, cumulative dividends on the Exchangeable Preferred are paid quarterly, at the Company's 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 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 the Company's option into 13 3/4% subordinated notes due March 15, 2009.
As of December 21, 2000, 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 $41.8 million and $36.3 million as of September 24, 2000 and as of September 26, 1999, respectively. The Exchangeable Preferred is not entitled to any vote, except as required in the Company's certificate of incorporation and provided by law.
Preferred Stock Class B
On March 12, 1998, the Company 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 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 shareholders. 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.
14. MINORITY INTEREST IN SUBSIDIARIES
Minority interest represents 10% and 13% of the total common stock interest in Sweetheart and CEG, respectively, not owned by the Company. The 10% minority interest in Sweetheart is held by the 52% voting stockholders, based on historical cost as of March 12, 1998, and as adjusted to September 24, 2000 to reflect such stockholders' interest in Sweetheart's net income.
15. STOCKHOLDERS' EQUITY AND REDEEMABLE COMMON STOCK
On March 12, 1998, in conjunction with the merger, each share of Class A and Class B common stock of Fonda, and options and warrants to purchase such shares, were converted into 47.6766 shares of Class A or Class B Common Stock of the Company, respectively.
In Fiscal 1998, Fonda's Board of Directors granted the Company's Chief Executive Officer and majority stockholder options to purchase shares of Class A Common Stock at an option price equal to the
current market value. In conjunction with the merger, such options were converted into options to purchase 71,515 shares of Class A Common Stock of SF Holdings. The proforma effect of such options on compensation expense, as required by SFAS No. 123, was less than $.1 million in each of Fiscal 2000, Fiscal 1999, the 1998 Transition period and Fiscal 1998.
In Fiscal 1999, the Company completed a one for ten reverse stock split on Common Stock Classes A, B, and C. Shareholders' equity, adjusted for such conversion consists of the following (in thousands, except share data):
The rights of holders of Class A, Class B, and Class C Common Stock are identical except as to voting and conversion rights. The Class A Common Stock is entitled to one vote per share and has no cumulative voting rights in election of directors. The Class B Common Stock is entitled to one-tenth of a vote per share and shall vote together with Class A Common Stock as a single class; provided, however, that the vote of the holders of a majority of shares of Class B Common stock shall be required for the amendment or modification of the Company's certificate of incorporation in any way that would adversely affect the rights of the Class B Common Stock. The Class C Common Stock is not entitled to any vote whatsoever, except to the extent provided by law. The Class B Common Stock may, at any time, be converted into Class A Common Stock at the option of the holder other than a " Non-Converting Holder" (as identified in the certificate of incorporation), or at the option of any Non-Converting Holder concurrently with a sale or other transfer of Class B Common Stock to any person, other than a Non-Converting Holder. The Class C Common Stock may, following an under written public offering of common stock, be converted into Class A Common Stock at the option of the holder, or at the option of the Company.
All common stockholders are entitled , among other things, (I) to share ratably in dividends and (ii) in the event liquidation, distribution or a sale of assets, dissolution or winding-up of the Company, to share ratably in the distribution of assets legally available therefor.
Prior to the merger, Fonda paid $9.8 million in fiscal 1998 and $.2 million in Fiscal 1997 to repurchase shares of its then outstanding Class A Common Stock and its Class A Common Stock subject to redemption agreement ("Redeemable Common") from its stockholders. The repurchase of the Redeemable Common for less than the present value of the liquidation amount as of the date of repurchase resulted in a credit to retained earnings in Fiscal 1997. In conjunction with the merger, the treasury stock was canceled and the outstanding Redeemable Common were converted into shares of redeemable common stock of SF Holdings and the book value of the Redeemable Common at that date was credited to retained earnings.
On September 14, 2000, Fonda terminated the Stock Appreciation Unit Plan (the "SAR Plan") effective as of October 1, 1999. In total, 24,780 SARs were redeemed at a total cost to the Company of $0.5 million. The SAR Plan had provided for the granting of up to 200,000 units to key executives of the Company. A grantee was entitled to the appreciation in a unit's value from the date of the grant to the date of its redemption. Unit value was based upon a formula consisting of net income (loss) and book value criteria and grants vested over a five-year period. The Company granted 15,560 units in Fiscal 1998 and 10,980 units in Fiscal 1997 at an aggregate value on the date of grant of $0.9 million and $0.4 million, respectively. There were no units granted in Fiscal Years 2000 or 1999. The Company recorded compensation expense of $0.5 million in Fiscal 1998 and $0.1 million in Fiscal 1997. No compensation expense was required to be recorded in Fiscal Years 2000, 1999 or in the 1998 Transition Period. As of September 20, 2000, all vested units have been redeemed.
16. RELATED-PARTY TRANSACTIONS
All of the affiliates referenced below are directly or indirectly under the common ownership of the Company's Chief Executive Officer (CEO).
Fonda leases a building in Jacksonville, Florida from Dennis Mehiel, CEO, on terms Fonda believes are no less favorable than could be obtained from independent third parties and were negotiated on an arm's length basis. Annual payments under the lease are $0.2 million plus annual increases based on changes in the Consumer Price Index ("CPI") through December 31, 2014. In addition, Mr. Mehiel can require Fonda to purchase the facility for $1.5 million, subject to a CPI-based escalation, until July 31, 2006. In Fiscal 1998, Fonda terminated its operations at this facility and is currently subleasing the entire facility. Four M subleased a portion of this facility through May 1998 and again from October 1999 through February 2000. Rent expense, net of sublease income on the portion of the premises subleased to Four M during Fiscal 2000 was less than $0.2, and through May 1998 was $0.1 million in Fiscal 1999, less than $0.1 million in the 1998 TP, and $0.1 million in Fiscal 1998.
On December 3, 1999, CEG became an 87% owned subsidiary of the Company pursuant to a merger. In connection with the merger, 87% of CEG's common stock was exchanged for 15,000 shares of Class B Series 2 Preferred Stock of the Company. On December 6, 1999, pursuant to the CEG Asset Purchase Agreement, Fonda purchased the intangible assets of CEG, including domestic and foreign trademarks, patents, copyrights, and customer lists. In addition, pursuant to the CEG Asset Purchase Agreement, Fonda purchased certain inventory of CEG. The aggregate purchase price for the intangible assets and the inventory is $41 million ($16 million for the intangible assets and $25 million for the inventory), payable in cash, the cancellation of certain notes and warrants, and the assumption of certain liabilities. Pursuant to the agreement, Fonda also acquired other CEG assets in exchange for outstanding trade payables owed to Fonda by CEG. In connection with this agreement, Fonda canceled all other agreements with CEG. As a result of the CEG Asset Purchase Agreement, Fonda markets, manufactures and distributes disposable party goods products directly to the specialty (party) channel of the consumer foodservice market. Independent appraisals were obtained to determine the fairness of the purchase price for such assets. Fonda believes the terms on which it purchased such assets are at least as favorable as it could have obtained from unrelated third parties and were negotiated on an arm's length basis.
Pursuant to a certain agreement with the stockholders of Sweetheart as of December 29, 1997 (the "Sweetheart Stockholders"), following the fifth anniversary of the consummation of the Sweetheart Investment, the Sweetheart Stockholders have the right to exchange their shares of Class A common stock of Sweetheart for warrants (the "Exchange Warrants") to purchase, for nominal consideration, shares of Class C Common Stock of SF Holdings representing 10% of the total outstanding shares of common stock of SF Holdings at the consummation of the Sweetheart Investment on a fully diluted basis. SF Holdings has the right
to cause such exchange and has the right to thereafter repurchase the Exchange Warrants, in whole or in part, for an aggregate call price of $50.0 million, subject to increase at 12.5% per annum until the fifth anniversary of the consummation of the Sweetheart Investment. Upon the occurrence of a merger (as defined in such agreement), the Sweetheart Stockholders will be required to exchange their shares of Class A common stock of Sweetheart for the Exchange Warrants. In addition, in the event SF Holdings proposes to sell shares of Class A common stock or Class B common stock of Sweetheart in an amount greater than 30% of the outstanding shares of Sweetheart common stock, the Sweetheart Stockholders will have the right to participate in such sale. In the event SF Holdings proposes to sell shares of Sweetheart common stock in an amount greater than 30% of the outstanding shares of Sweetheart common stock, then SF Holdings will have the right to require the Sweetheart Stockholders to sell all, but not less than all, of their shares of Sweetheart common stock.
During Fiscal 1998, the Fonda purchased a 38.2% ownership interest in Fibre Marketing from a director of Fonda for $0.2 million. Four M is also a member of Fibre Marketing. Fonda granted Sweetheart the right to acquire 50% of it's interest in Fibre Marketing for $0.1 million. During Fiscal 2000, Fonda sold a 13.2% interest in Fibre Marketing to Mehiel Enterprises, Inc. for $0.1 million, retaining a 25% ownership interest in Fibre Marketing. Fonda believes that the terms on which it purchased and sold such interest are at least as favorable as those it could otherwise have obtained from an unrelated third party and were negotiated on an arm's length basis.
During the fourth quarter of Fiscal 2000, Sweetheart entered into a lease agreement with D&L Development, LLC, an entity in which the Company's CEO has an interest, to lease a warehouse facility in Hampstead, Maryland. In Fiscal 2000, rental payments under this lease were $0.7 million. 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.
In November 2000, Sweetheart began leasing a facility from D&L Andover Property, LLC, an entity in which the Company's CEO has an interest. 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.
During Fiscal 2000, the Company sold $7.4 million of scrap paper to Fibre Marketing. Included in accounts receivable as of September 24, 2000 is $1.3 million due from Fibre Marketing. Other sales to affiliates during Fiscal 2000 were not significant.
During Fiscal 2000, the Company purchased $9.7 million of corrugated containers from Box USA Holdings, Inc. ("Box USA"), $0.2 million of other services from Four M Corporation ("Four M") and $0.9 million of travel services from Emerald Lady, Inc.. Included in accounts payable, as of September 24, 2000, is $0.1 million due to Box USA. Other purchases from affiliates during Fiscal 2000 were not significant.
During Fiscal 1999, the Company sold $4.1 million of scrap paper to Fibre Marketing. Included in accounts receivable as of September 26, 1999 is $1.1 million due from Fibre Marketing. Other sales to affiliates during Fiscal 1999 were not significant.
During Fiscal 1999, the Company purchased $7.9 million of corrugated containers from Box USA and $0.9 million of travel services from Emerald Lady, Inc.. Included in accounts payable, as of September 26, 1999, is $0.5 million due to Box USA. Other purchases from affiliates during Fiscal 1999 were not significant.
At September 24, 2000, the Company had loans receivable from its Chief Executive Officer totaling $275,000 plus accrued interest at 10%. This loan is payable upon demand. During Fiscal 1999, the Company also had a $150,000 loan receivable with another executive officer plus accrued interest at 5.39% which was paid in full in June 1999.
SF Holdings and Fonda intend to file consolidated Federal income tax returns, and pursuant to a tax sharing agreement, Fonda will pay SF Holdings its allocable share of the consolidated group's consolidated Federal income tax liability, which, in general, will equal the tax liability Fonda would have paid if it had filed separate tax returns.
17. LEASE COMMITMENTS
The Company leases certain transportation vehicles, warehouse and office facilities and machinery and equipment under both cancelable and non-cancelable operating leases, most of which expire within ten years and may be renewed by the Company. Rent expense under such arrangements totaled $34.8 million, $26.1 million, $4.8 million and $8.3 million for Fiscal Years 2000, 1999 1998 Transition Period and 1998, respectively. Future minimum rental commitments under non-cancelable operating leases in effect at September 24, 2000 are as follows (in thousands):
Fiscal 2001 $ 53,077 Fiscal 2002 50,819 Fiscal 2003 47,707 Fiscal 2004 44,766 Fiscal 2005 42,592 Fiscal 2006 and thereafter 238,808 ---------
$ 477,769 =========
Fonda leases a warehouse facility in Williamsburg, Pennsylvania which is being accounted for as a capital lease. The term of this lease is 15 years, expiring in Fiscal 2005. The initial cost of the lease was $2.2 million and the net capital lease value is $1.4 million as of September 24, 2000 and was $1.5 million as of September 26, 1999. The future minimum lease payments are $0.2 million in Fiscal 2001, $0.1 million in Fiscal 2002, $0.2 million in Fiscal 2003, $0.1 million in Fiscal 2004 and $0.1 million in Fiscal 2005. The present value of the future minimum lease payments is $0.6 million.
In connection with a sale-leaseback transaction, on June 15, 2000, Sweetheart Cup and Sweetheart Holdings sold certain production equipment located in Owings Mills, Maryland; Chicago, Illinois; and Dallas, Texas for a fair market value of $212.3 million to several owner participants.
Pursuant to the Lease dated as of June 1, 2000 between Sweetheart Cup and State Street, Sweetheart Cup will lease such production equipment from State Street, as owner trustee for several owner participants through November 9, 2010. Sweetheart Cup may renew the Lease at its option for up to four consecutive renewal terms of two years each. Sweetheart may also purchase such equipment for fair market value either at the conclusion of the Lease term or November 21, 2006, at its option. Sweetheart's obligations in connection with the Lease are collateralized by substantially all of Sweetheart's property, plant and equipment owned as of June 15, 2000. This 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 this transaction as an operating lease, expensing the $32.0 million annualized rental payments and removing the property, plant and equipment sold from its balance sheet. A deferred gain of $107.0 million was realized from this sale and will be amortized over 125 months, which is the term of the Lease.
18. OTHER EXPENSE (INCOME)
In Fiscal 2000, the Company paid a $0.7 million management fee to American Industrial Partners Capital Fund, L.P. ("AIP"), an owner of Sweetheart and accrued a $1.4 million expense in connection with the Aldridge liability. The Company also realized a $0.7 million gain on the sale of a warehouse facility in Owings Mills, Maryland and a $2.8 million gain due to the amortization of the deferred gain in conjunction with the sale-leaseback transaction. These gains were 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. A $0.2 million loss was incurred as a result of the sale of a building in St. Albans, Vermont and various pieces of machinery and equipment.
In Fiscal 1999, the Company paid a $0.8 million management fee to AIP. Sweetheart sold certain of its paper plate and paper cup equipment at a net gain of $0.4 million and consolidated a facility in Canada resulting in a $0.8 million gain on the sale of duplicate assets.
In Fiscal 1998, the Company paid a $0.6 million management fee to AIP. On March 24, 1998, Fonda consummated an agreement to sell substantially all of the fixed assets and certain related working capital of its specialty and deep tone tissue mill (the "Mill"). In addition, on July 1, 1998, Fonda consummated an agreement with the owner of the co-generation facility at the Mill, whereby the owner of such facility terminated its obligation to supply steam to the Mill and to make certain land lease payments. As a result of these transactions, Fonda realized net proceeds of $38.5 million and recorded a gain of $15.9 million, which was included in other income, net. Net proceeds included a $3.7 million note receivable (included in other assets) from the disposition of the Mill, due in March 2008, with 5.7% interest payable in the form of additional notes receivable. Pursuant to an asset sale covenant under the indenture covering the Notes, Fonda reinvested approximately $10 million of such net proceeds in fixed assets within 270 days of such disposition.
19. RESTRUCTURING CHARGE (CREDIT)
During the quarter ended March 26, 2000, Sweetheart established a restructuring reserve of $0.7 million in conjunction with the planned elimination of Sweetheart's centralized machine shop operation from which 53 positions would be eliminated. During the quarter ended, September 24, 2000, Sweetheart reversed $0.2 million of this reserve as a result of 12 employees being placed into open positions within Sweetheart. Approximately $0.1 million of the restructuring reserve remained at September 24, 2000, which Sweetheart expects to utilize through December 2000. A restructuring charge of $0.7 million was incurred in Fiscal 2000 due to the initiation of a restructuring exit activity for the November 2000 closing of the Maspeth, New York facility which will result in the elimination of 130 positions. This amount is recorded as part of other current liabilities on the balance sheet.
In the quarter ended March 31, 1998, Sweetheart reduced its salaried workforce by approximately 15% and hourly workforce by less than 5%. In connection with such plans, Sweetheart recognized $5.1 million of charges for severance and related costs, of which $1.4 million of cash expenditures remained unpaid as of September 27, 1998. During Fiscal 1999, Sweetheart paid $1.0 million of severance and related costs. In addition, $0.4 million of the restructuring reserve was decreased as the restructuring plan was completed.
In May 1998, Fonda decided to close its administrative offices in St. Albans, Vermont and relocate such offices, including its principal executive offices, to Oshkosh, Wisconsin. Fonda accrued $0.5 million in 1998 for severance and other costs relating to such relocation which was spent in Fiscal 1999. Also, in Fiscal 1998, Fonda initiated a restructuring exit activity of $1.3 million for the closure of a manufacturing facility in Indianapolis, Indiana.
In Fiscal 1998, Sweetheart recognized certain non-recurring charges, consisting primarily of $4.4
million of financial advisory and legal fees associated with the SF Holdings Investment, $3.7 million of severance expenses as a result of the termination of certain officers of the Company pursuant to executive separation agreements and retention plans for certain key executives, $3.4 million of expense based on actuarial estimates associated with pending litigation and asset write-downs of $1.8 million associated with the sale of the Riverside, California facility. These expenses were offset in part by the $3.3 million gain on the sale of the bakery business.
In the quarter ended March 31, 1998, Sweetheart decided to rationalize certain product lines. As a result, the Company evaluated the recoverability of the carrying value of the equipment and other assets utilized for such product lines, which resulted in a $5.0 million charge to write-down the assets to their fair market value.
In the quarter ended September 30, 1997, Sweetheart adopted a restructuring plan designed to improve efficiency and enhance its competitiveness. Restructuring charges of $9.7 million were recognized, consisting of cash charges primarily related to severance costs, as well as costs to close and exit the Riverside facility. Including the unspent portion of these charges, Sweetheart had total restructuring reserves of $13.2 million classified as "Other current liabilities" as of September 30, 1997. During Fiscal 1998, Sweetheart paid $8.8 million of severance, plant closure and related costs. In addition, $4.2 million of the restructuring reserve was decreased due to a change in the restructuring plan as a result of a change in senior management in connection with the SF Holdings Investment. During Fiscal 1999, Sweetheart paid $0.1 million of severance and related expenses. In addition, $0.1 million of the restructuring reserve was decreased as the restructuring plan was completed.
20. EXTRAORDINARY LOSS
During Fiscal 2000, in conjunction with the redemption of Sweetheart's Senior Secured Notes and the refinancing of the U.S. Credit Facility, Sweetheart charged $0.5 million, or $0.3 million net of income tax benefit, to results of operations as an extraordinary item, which amount represents the unamortized deferred financing fees, prepaid interest and redemption fees pertaining to such debt.
In conjunction with the CEG Asset Purchase Agreement, CEG retired its long-term debt. As a result, CEG charged $0.9 million, or $0.5 million net of income tax benefit, to results of operations as an extraordinary item. This amount represented the unamortized deferred financing fees and to other expenses pertaining to such debt.
21. EMPLOYEE BENEFIT AND POST-RETIREMENT HEALTH CARE PLANS
Sweetheart sponsors various defined benefit post-retirement health care plans that cover substantially all full-time employees. The plans, in most cases, pay stated percentages of most medical expenses by retirees after subtracting payments by Medicare or other providers and after a stated deductible has been met. Participants generally become eligible after reaching age 60 with ten years of service. The majority of such plans are contributory, with retiree contributions adjusted annually. Sweetheart does not fund the plans. Both Sweetheart and Fonda provide certain union and non-union employees with retirement and disability income benefits under defined pension plans. Pension costs are based upon the actuarially determined normal costs plus interest on and amortization of the unfunded liabilities. The benefits for participants in Fonda's non-union pension plans are frozen. In Fiscal 1999, the assets and obligations of a pension plan for a significant number of the Company's union employees were transferred to a multi-employer pension plan resulting in a $.2 million credit to income. The Company's policy is to annually fund the minimum contributions required by applicable regulations.
A majority of the Company's employees ("Participants") are covered under a 401(k) defined contribution plan. In addition, the Company is allowed to make discretionary contributions. Costs charged against operations
for this defined contribution plan were $10.7 million, $7.1 million, $1.1 million and $2.1 million for Fiscal 2000, Fiscal 1999, the 1998 Transition Period and Fiscal 1998 respectively. Certain employees are covered under defined benefit plans. Certain benefits under the plans are generally based on fixed amounts for each period of service.
Net periodic cost for the Company's pension and other benefit plans consists of the following (in thousands):
------------------------------------------- Nine Weeks Fifty Two Ended Weeks Ended Fiscal Fiscal September July 2000 1999 27, 1998 26, 1998 -------------------------------------------
Pension Benefits Service Cost $ 971 $ 1,400 $ 295 $ 667 Interest Cost 4,481 4,527 1,047 1,675 Return on plan assets (4,819) (4,662) (798) (1,721) Net amortizations and deferrals 64 310 (295) 104 ------- -------- --------- -------- Net periodic pension cost $ 697 $ 1,575 $ 249 $ 725 ------- -------- --------- -------- Other Benefits Service Cost $ 874 $ 1,071 $ 235 $ 340 Interest Cost 3,212 3,347 886 1,052 Net amortizations and deferrals (383) - - (41) ------- -------- --------- -------- Net periodic benefit cost $ 3,703 $ 4,418 $ 1,121 $ 1,351 ------- -------- --------- --------
The following table sets f the change in benefit obligation for the Company's benefit plans (in thousands):
The following sets forth the amounts recognized in the Consolidated Balance Sheets:
Pension Benefits ---------------- September 24, September 26, 2000 1999 --------------- -------------- Funded status $ (6,014) $ (12,575) Intangible asset 184 191 Other (gain) loss (4,164) (1,729) Deferred income taxes 125 92 Accrued other comprehensive (income) loss 187 138 --------- ---------- Net liability recognized $ (9,682) $ (13,883) --------- ----------
The assumptions used in computing the preceding information are as follows:
For measurement purposes, a 7% annual rate of increase in health care benefits was assumed for 2000. The rate is assumed to decrease gradually to 5% for 2002 and will remain at that level thereafter.
A one percentage point change in the assumed health care cost trend rate would have the following effects:
One Percentage One Percentage Point Increase Point Decrease ---------------- ------------------- Effect on accumulated post- retirement benefit obligation $2,994 $(2,633) Effect on net periodic post- retirement benefit cost $193 $(163)
22. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are as follows (in thousands):
September 24, September 26, 2000 1999 -------------- --------------
Foreign currency translation adjustment $ (671) $ (549) Minimum pension liability adjustment (187) (138) ------- ------- Accumulated other comprehensive income (loss) $ (858) $ (687) ======= =======
23. 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 consumer markets. Data for such segments and a reconciliations to consolidated amounts are presented in the table below (in thousands):
Sweetheart has one national customer that accounted for more that 10.0% of its sales in each period. Net sales to such customer were $100.7 million in Fiscal 2000, $98.8 million in Fiscal 1999, $26.4 million in the 1998 Transition Period, $100.9 million in Fiscal 1998. Fonda has one national customer that accounted for more that 10% of its net sales only in Fiscal 1999. All net sales were to customers in the United States, except for sales to Sweetheart customers in Canada which amounted to approximately 7.1% of Sweetheart sales in each period. All assets are located in the United States except for $38.9 million and $37.9 million at September 24, 2000 and September 26, 1999, respectively, which were located in Canada.
24. CONTINGENCIES
Aldridge. 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 with the United States Supreme Court, which was denied in January 1999. Sweetheart has been in the process of paying out the termination liability and associated expenses and as of December 21, 2000, has disbursed $12.3 million in termination payments. The estimate of the total termination liability and associated expenses, less payments, exceeds assets set aside in the Plan by approximately $8.0 million, which amount has been fully reserved by the Company.
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, the Company 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.
Fort James Corporation. A patent infringement action seeking injunctive ---------------------- relief and damages relating to Sweetheart's production and sale of certain paper plates entitled Fort James Corporation v. Sweetheart Cup Company Inc., Civil Action No. 97-C-1221, was filed in the United States District Court for the Eastern District of Wisconsin on November 21, 1997. During the fourth quarter of Fiscal 1999, mediation resulted in a settlement of this action whereby Sweetheart agreed to pay damages of $2.6 million. As of June 29, 2000, all payments in conjunction with this settlement had been paid.
Other. On July 13, 1999, Sweetheart received a letter from the ----- Environmental Protection Agency ("EPA") identifying Sweetheart, among numerous others, as a "potential responsible party" under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), at a site in Baltimore, Maryland. The EPA letter states that it does not constitute a final determination by EPA concerning the liability of Sweetheart or any other entity. On December 20, 1999, Sweetheart received an information request letter from the EPA, pursuant to CERCLA, regarding a Container Recycling Superfund Site in Kansas City, Kansas. Sweetheart denies liability and has no reason to believe the final outcomes will
have a material effect on the Company's financial condition or results of operations. However, no assurance can be given about the ultimate effect on the Company, if any, given the early stage of the investigations.
The Company is also involved in a number of legal proceedings arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company's financial position or results of operations.
25. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The condensed financial statements of the parent company only are as follows (in thousands):
---------------- -------------- September 24, September 26, Balance Sheet 2000 1999 ---------------- -------------- Assets Cash and cash equivalents $ 42 $ - Refundable income tax 324 - Other current assets 100 100 Investments in subsidiaries 107,025 98,947 Deferred finance fees 3,572 4,049 Deferred income taxes 10,601 6,320 ---------- ---------- Total Assets $ 121,664 $ 109,416 ========== ==========
Liabilities and Stockholders' Equity (Deficit) Accrued expense $ 303 $ 257 Discount notes 104,245 92,018 Exchangeable preferred stock 41,794 36,291 Preferred Stock B, Series 2 15,000 - Redeemable common stock 2,286 2,217 Stockholders' equity (deficit) (41,964) (21,367) ---------- ---------- Total Liabilities and Equity (Deficit) $ 121,664 $ 109,416 ========== ==========
26. SUBSEQUENT EVENTS
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 working capital of Springprint Medallion, a division of Marcal Paper Mills, Inc. The aggregate purchase price for the assets and net working capital was $6.7 million, subject to post closing adjustments. This acquisition is not included within the financial statements and its impact is expected to be minimal to the Company's results.
On October 30, 2000, Sweetheart entered into a 20 year lease obligation for a manufacturing facility located in North Andover, Massachusetts. In the first year, the annual rent payment is $1.5 million. Beginning with the second year and each succeeding lease year, the rental will be an amount equal to the sum of the base rent in effect as of the last day of the immediately preceding lease year plus an amount equal to 2% of the amount determined pursuant to the foregoing year's base rent.
On December 8, 2000 CEG sold a manufacturing facility in Indianapolis, Indiana for $975 thousand. CEG does not expect to incur a loss from the sale.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
Independent Auditors' Report 60
Schedule II - Valuation and Qualifying Accounts 61
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of The SF Holdings, Inc.:
We have audited the consolidated financial statements of SF Holdings, Inc. (the "Company") as of September 24, 2000 and September 26, 1999, and for the years ended September 24, 2000 and September 26, 1999, the nine week transition period ended September 27, 1998 and the year ended July 26, 1998, and have issued our report thereon dated December 12, 2000; such consolidated financial statements and report are included in this Form 10-K. The consolidated schedule listed in the accompanying index is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
/s/DELOITTE & TOUCHE LLP Baltimore, Maryland December 12, 2000
SCHEDULE II
SF HOLDINGS INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (in thousands)
(1) Includes recoveries on accounts previously written-off, translation adjustments and reclassifications. (2) Accounts written-off.
SIGNATURES
Pursuant to the requirements of Section 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized on December 21, 2000.
SF HOLDINGS GROUP, INC. (Registrant)
By: /s/ DENNIS MEHIEL ---------------------- Dennis Mehiel Chairman of the Board and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities.
Signature Title(s)
/s/ DENNIS MEHIEL Chairman of the Board and Chief - -------------------------- Executive Officer (Principal Executive Officer) Dennis Mehiel
/s/ THOMAS ULEAU Executive Vice President and Director - -------------------------- Thomas Uleau
/s/ HANS H. HEINSEN Senior Vice President, Chief Financial - -------------------------- Officer and Treasurer (Principal Hans H. Heinsen Financial and Accounting Officer)
/s/ ALFRED B. DELBELLO Vice Chairman - -------------------------- Alfred B. DelBello
/s/ JAMES J. ARMENAKIS Director - -------------------------- James J. Armenakis
/s/ W. RICHARD BINGHAM Director - -------------------------- W. Richard Bingham
/s/ GAIL BLANKE Director - -------------------------- Gail Blanke
/s/ JOHN A. CATSIMATIDIS Director - -------------------------- John A. Catsimatidis
/s/ CHRIS MEHIEL Director - -------------------------- Chris Mehiel
/s/ JEROME T. MULDOWNEY Director - -------------------------- Jerome T. Muldowney
/s/ ALAN D. SCHEINKMAN Director - -------------------------- Alan D. Scheinkman
/s/ G. WILLLAM SEAWRIGHT Director - -------------------------- G. William Seawright
/s/ LOWELL P. WEICKER, JR. Director - -------------------------- Lowell P. Weicker, Jr.