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 2001. 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. and its subsidiaries ("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. To enhance product sales, Sweetheart designs, manufactures and leases container filling and lidding equipment to dairies and other food processors to package food items in Sweetheart's containers at customers' plants. Types of products packaged in Sweetheart's machines include ice cream, factory-filled jacketed ice cream cones, cottage cheese, yogurt and squeeze-up desserts. Sweetheart also sells paper converting equipment used primarily in the manufacture of paper cups and food containers. This equipment is manufactured in Sweetheart's machine shop and assembly plants located in Owings Mills, Maryland and Kensington, Connecticut.
The Company sells its products to institutional foodservice and consumer foodservice customers, including large national accounts, located throughout the United States, Canada and Mexico. 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.
On March 12, 1998, the Company purchased 48% of Sweetheart's voting stock and 100% of its non-voting stock, or 90% of the total outstanding stock, from Sweetheart's then existing shareholders (the "Sweetheart Investment"). In connection therewith, the then existing shareholders continued to hold approximately 52% of the voting stock of Sweetheart of which American Industrial Partners Capital Fund L.P. ("AIP") holds approximately 27%. In addition, on March 12, 1998, 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 the Company pursuant to a merger. The transaction was accounted for in a manner similar to a pooling-of-interests.
Products
Sweetheart Sweetheart's principle products include disposable hot and cold drink cups, lids, food containers, plates, bowls, cutlery and straws. Paper, foam and plastic cups, lids and straws represent the largest part of Sweetheart's North American disposable foodservice operations. The largest single product type within this category is cups, which are offered in various sizes (ranging from 3 to 64 ounces) for both hot and cold beverages. Brand names of Sweetheart's principal beverage service products include: Sweetheart(R), Lily(R), Trophy(R), Preference(TM), Jazz(R), Gallery(R), Clarity(R), Lumina(R), ClearLight(R), and Go Cups(TM).
Sweetheart offers a variety of other disposable foodservice products which include paper, foam, and plastic plates and bowls, portion cups and cutlery. These products are sold to a broad array of commercial and on-site foodservice operators.
Sweetheart also offers carry-out service products consisting of paper and plastic tubs, containers, lids, and hinged foam containers. Sweetheart believes it is one of the largest manufacturers of paper tubs for chicken, popcorn and take-out foods in North America. Munchie(R), Flexstyle(R), Highlights(R), Maximizers(TM), and Scoop Cup are some of Sweetheart's carry-out service brands.
Other products include Sweetheart's Flex-E-Form(TM) straight-wall paper manufacturing technology which is a process used to package food products and Flex-Guard(TM), a paper spiral wound tamper-evident lid. In addition, Sweetheart provides foodservice customers with retail packages sold through retailers under various Sweetheart and private label brands.
To enhance product sales, Sweetheart designs, manufactures and leases container filling and lidding equipment to dairies and other food processors to package food items in Sweetheart's containers at customers' plants. Sweetheart's filling and lidding equipment is leased to customers under the trade names Auto-Pak, Flex-E-Fill(R) and FoodPac(R). Types of products packaged in Sweetheart's machines include ice cream, factory-filled jacketed ice cream cones, cottage cheese, yogurt and squeeze-up desserts. Sweetheart also designs and manufactures cup-making equipment. This equipment is manufactured in Sweetheart's machine shop and assembly plants located in Owings Mills, Maryland and Kensington, Connecticut.
Fonda Fonda's principal products include: (i) disposable paperboard products, such as white or printed paper plates, cups, and bowls, (ii) disposable tissue and other specialty products, such as plain or printed napkins, tablecovers, placemats, brown paper lunch bags and cutlery, and (iii) party goods accessory products, such as banners, cello bags, gift sacks, and invitations. Fonda believes it holds one of the top market positions in the commodity private label business.
Tabletop service products include paper plates and bowls which are sold to both institutional foodservice and consumer foodservice customers. White uncoated and coated paper plates are purchased for everyday use by cost-conscious consumers. Printed and solid color plates or bowls are considered value-added and are purchased for everyday use as well as seasonal celebrations. Fonda offers a variety of cup and lid combinations for both hot and cold beverages. Fonda's hot and cold cups are sold to both institutional foodservice and consumer foodservice customers. Fonda sells paper trays, food pails, and nested containers to institutional foodservice customers for use by restaurants, hotels, and other foodservice operators.
Tissue products include napkins and table covers and are sold under the Hoffmaster(R), Linen-Like(R), Sensations(R) and Fonda(R) brand names as well as private labels. Napkin products range from single-ply white beverage napkins, to custom printed dinner napkins, to color multi-ply napkins, to fully printed graphic-intensive napkins for the party goods sector. Table covers are also offered in a variety of configurations, colors, and sizes. Fonda sells placemats, traycovers, doilies, fluted baking products, portion control cups, brown paper lunch bags and cutlery to both institutional foodservice and consumer foodservice customers. Fonda also produces a non-skid traycover that serves the needs of healthcare
and airline use.
Fonda manufactures and purchases party goods products which include custom designed napkins, plates, cups, table covers, as well as a variety of accessory items to add to the ensemble. These items are sold in ensembles or separately to party goods stores, mass merchants, drug stores, and grocery chains. These items are sold in pre-packed displays as well as open stock cases.
Operations
As part of the Company's ongoing cost reduction and profit improvement initiatives, the Company began a program to rationalize, consolidate and improve its manufacturing facilities. The Company believes the consolidation program will improve the efficiency of Sweetheart's manufacturing sites without any adverse impact on customer service levels.
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) Subject to a purchase option which expires May 15, 2005. (3) Subject to a purchase option which expires April 30, 2002. (4) On September 25, 2001, the Company entered into a purchase and sale agreement pursuant to which it has agreed to sell this facility. The Company expects to consummate this sale by the end of December 2001. (5) On February 20, 2001, the Company's Board of Directors approved plans for the closure and sale of the Somerville, Massachusetts facility. The Company has reclassified this facility to assets held for sale. (6) Subject to capital lease. (See Note 19 of the Notes to Consolidated Financial Statements)
The Company 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
During Fiscal 2001, Sweetheart experienced a casualty loss at its Somerville, Massachusetts facility. Sweetheart carries business interruption insurance and has filed a claim with the insurance company. Settlement of the recovery amount is to be determined.
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084, was filed in state court in Georgia in April 1987 and later removed to federal court. The Plaintiffs claimed, among other things, that Sweetheart wrongfully terminated the Lily Tulip, Inc. Salary Retirement Plan (the "Plan") in violation of the Employee Retirement Income Security Act of 1974, as amended. The relief sought by Plaintiffs was to have the Plan termination declared ineffective. The United States Court of Appeals for the Eleventh Circuit (the "Circuit Court") ruled that the Plan was lawfully terminated on December 31, 1986, and judgment was entered dismissing the case in March 1996. The Circuit Court affirmed the judgment entered in favor of Sweetheart. Plaintiffs filed a petition for writ of certiorari to the United States Supreme Court, which
was denied in January 1999. Sweetheart expects to complete paying out the termination liability and associated expenses in connection with the Plan termination by December 31, 2001. As of September 30, 2001, Sweetheart disbursed $19.6 million in termination payments. The estimate of the total termination liability and associated expenses, less payments, exceeds the assets set aside in the Plan by $0.4 million, which amount has been fully reserved by the Company.
On November 29, 2001, the liquidating trustee of Ace Baking Company, Limited Partnership, filed a Complaint for Avoidance of Transfers and Disallowance or Subordination of Claims against Sweetheart in the United States Bankruptcy Court Eastern District of Wisconsin. The Complaint, among other things, seeks to avoid a portion of the consideration paid by Ace Baking Company to Sweetheart, as a fraudulent transfer, in connection with the sale by Sweetheart of its bakery business to Ace Baking in November 1997. In addition, the Trustee alleges that certain subsequent payments made by Ace Baking to Sweetheart in connection with such sale are avoidable preferences. We believe that the Trustee's claims are without merit and we intend to vigorously defend this matter. In addition, we have no reason to believe that the final outcome of this matter will have a material adverse effect on our financial condition or results of operations. However, we cannot assure you of the ultimate effect on us, if any, given the early stage of this matter.
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. Sweetheart responded to the EPA that upon review of its files it had no information with respect to any dealings with that site. 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 and in January 2000 Sweetheart responded to such inquiry. In both instances, Sweetheart has received no further communication from the EPA. Sweetheart denies liability and has no reason to believe the final outcomes will have a material adverse effect on Sweetheart's financial condition or results of operations. However, no assurance can be given about the ultimate effect on the Company.
The Company is subject to legal proceedings and other claims arising in the ordinary course of its business. The Company maintains insurance coverage of types and in amounts which it believes to be adequate and believes that it is not presently a party to any litigation, the outcome of which could reasonably be expected to have a material adverse effect on its financial condition or results of operations.
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 Holdings 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 12, 2001, 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
Set forth below are selected historical financial data of the Company at the dates and for the fiscal years shown. The selected historical financial data at September 30, 2001 and September 24, 2000 and for Fiscal 2001, 2000 and 1999 is derived from historical financial statements of the Company for such periods that have been audited by Deloitte & Touche LLP, independent auditors and are included elsewhere herein. The selected historical financial data at September 26, 1999, September 27, 1998, July 26, 1998 and July 27, 1997 and for the TP 1998 and Fiscal 1998 and 1997 is derived from the audited historical financial statements of the Company for such periods. (See "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.
On December 3, 1999, CEG, an affiliate of the Company in the disposable party goods products business, became an 87% owned subsidiary of the Company pursuant to a merger. The transaction was accounted for in a manner similar to a pooling-of-interests.
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.
Fiscal 2001 Compared to Fiscal 2000
Net sales increased $40.0 million, or 3.1% to $1.32 billion in Fiscal 2001 compared to $1.28 billion in Fiscal 2000. The following analysis includes sales from Sweetheart to Fonda and sales from Fonda to Sweetheart which were eliminated in consolidation.
Sweetheart Results Net sales increased $28.6 million, or 3.0%, (including intercompany sales to Fonda of $21.7 million and $16.7 million for Fiscal 2001 and Fiscal 2000, respectively) to $981.3 million in Fiscal 2001 compared to $952.7 million in Fiscal 2000 reflecting a 0.5% increase in sales volume and a 2.5% increase in average realized sales price. Realized selling prices increased as a result of a shift in product mix. Sales volume increased as a result of the incremental sales obtained from Sweetheart's acquisition of an 80% interest in Global Cup, S.A. De C.V. and its subsidiaries ("Global Cup") in April 2001. Net sales to Canadian customers increased $4.6 million, or 6.7%, primarily due to increased sales volume of existing products to national accounts, while prices remained flat.
Fonda Results Net sales increased $15.3 million, or 4.4%, (including intercompany to Sweetheart of $10.1 million and $11.8 million for Fiscal 2001 and Fiscal 2000, respectively) to $367.0 million in Fiscal 2001, compared to $351.7 million in Fiscal 2000, reflecting an 7.8% increase in average realized sales price partially offset by a 3.4% decrease in sales volume. Net sales to consumer foodservice customers decreased 1.7%, resulting from a decrease in sales volume of 11.8% partially offset by a 10.1% increase in average realized sales price. Net sales to consumer foodservice customers was negatively impacted by more competitive market conditions and Fonda's decision to reduce sales to certain customers experiencing deteriorating credit conditions, offset partially by a more favorable product mix. Net sales to institutional foodservice customers increased 13.7%, resulting from a 16.0% increase in sales volume and a 2.3% decrease in average realized sales price. This increase in institutional foodservice sales volume is primarily attributed to the acquisition of Springprint Medallion, a division of Marcal Paper Mills, Inc. ("Springprint").
Gross profit decreased $14.2 million, or 7.6%, to $171.9 million in Fiscal 2001 compared to $186.1 million in Fiscal 2000. As a percentage of net sales, gross profit decreased to 13.1% in Fiscal 2001 from 14.6% in Fiscal 2000.
Sweetheart Results Gross profit decreased $17.4 million, or 14.6%, to $101.4 million in Fiscal 2001 compared to $118.8 million in Fiscal 2000. As a percentage of net sales, gross profit decreased to 10.3% in Fiscal 2001 from 12.5% in Fiscal 2000. The decrease in gross profit is primarily attributable to the effects of the Sale-Leaseback Transaction whereby, in Fiscal 2000, Sweetheart sold certain of its production equipment and is leasing back this equipment under an operating lease. Consequently, cost of sales increased due to higher rent expense which has been partially offset by lower depreciation expense. Specifically, rent expense increased by $12.0 million net of a reduction in depreciation. Additionally, gross profit declined due to an increase in energy costs of $4.4 million and transportation costs of $4.9 million.
Fonda Results Gross profit increased $4.1 million, or 6.1%, to $71.5 million in Fiscal 2001, compared to $67.4 million in Fiscal 2000. As a percentage of net sales, gross profit increased from 19.2% in Fiscal 2000 to 19.5% in Fiscal 2001. Gross profit in Fiscal 2001 was positively effected by increased selling prices due in part from the acquisition of Springprint. This increase was partially offset by higher raw material and energy costs.
Selling, general and administrative expenses increased $1.4 million, or 1.2%, to $114.7 million in Fiscal 2001 compared to $113.3 million in Fiscal 2000. This increase resulted from Sweetheart's increase in wages of $2.5 million, increase in brokerage fees of $0.8 million and $0.7 million of on going operational expenses as a result of the Fiscal 2001 Global Cup acquisition. These increases were partially offset by a $2.3 million reduction in bad debt expense and a reduction in legal fees of $0.7 million from Sweetheart. As a percentage of net sales, selling, general and administrative expenses decreased to 8.7% in Fiscal 2001 from 8.9% in Fiscal 2000.
Restructuring charge decreased $0.7 million to a charge of $0.5 million in Fiscal 2001 compared to a charge of $1.2 million in Fiscal 2000. During Fiscal 2001, Fonda established a restructuring reserve of $0.5 million in conjunction with the planned consolidation of Fonda's administrative offices for the CEG in Indianapolis, Indiana into Fonda's administrative offices in Oshkosh, Wisconsin. This consolidation included the elimination of approximately 40 positions. The plan was approved by management on October 30, 2000 and announced to employees on May 1, 2001. The effective date of the consolidation and elimination of positions was delayed until the fourth quarter of Fiscal 2001. Severance payments of $0.1 million were paid during the fourth quarter of Fiscal 2001. During Fiscal 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. The plan was completed and approved by management on January 10, 2000 and announced to employees on March 7, 2000. Severance payments of $0.2 million, were paid in both the third and fourth quarters of Fiscal 2000. Also, during the fourth quarter of Fiscal 2000, Sweetheart reversed $0.2 million of this reserve as a result of 12 employees being placed into open positions within Sweetheart. During Fiscal 2000, Fonda announced that it intended to close its Maspeth, New York facility in the first quarter of Fiscal 2001 which would result in the elimination of 130 positions. In connection with such plans in Fiscal 2000, Fonda recognized $0.7 million of charges for severance and related costs.
Asset impairment expense was $2.2 million in Fiscal 2001 as a result of Sweetheart's evaluation of the usefulness of certain equipment in connection with the proposed consolidation of the Manchester, New Hampshire and Springfield, Missouri facilities with other existing facilities.
Other income, net increased $9.0 million to $9.4 million in Fiscal 2001 compared to $0.4 million in Fiscal 2000. Sweetheart recognized $10.3 million due to the amortization of the deferred gain in conjunction with the Sale-Leaseback Transaction. This gain was partially offset by $1.6 million in expenses related to the relocation of Sweetheart's Somerville, Massachusetts facility to North Andover, Massachusetts and Fonda's $0.2 million loss on the sale of a building in St. Albans, Vermont.
Operating income decreased $8.3 million to $63.8 million in Fiscal 2001 compared to $72.1 million in Fiscal 2000 due to the reasons described above.
Interest expense, net decreased $11.5 million, or 17.6%, to $53.8 million in Fiscal 2001 compared to $65.3 million in Fiscal 2000. This decrease is attributed to lower interest rates on higher outstanding revolving credit balances and the June 2000 redemption of the Sweetheart Senior Secured Notes.
Income tax expense increased $1.4 million to $5.5 million in Fiscal 2001 compared to $4.1 million in Fiscal 2000 as a result of higher pre-tax earnings. The effective rate for Fiscal 2001 was 55% compared to 61% in 2000. Both the 2001 and the 2000 effective tax rates reflect certain non-deductible costs relating to the investment in Sweetheart and the related financing.
Minority interest decreased $0.4 million to an expense of $1.2 million in Fiscal 2001 compared to an expense of $1.6 million in Fiscal 2000 due to lower profits at the respective subsidiaries and the termination of any CEG's operating activity.
Net income (loss) increased $3.2 million, or over 3,000%, to $3.3 million income in Fiscal 2001 compared to $0.1 million income in Fiscal 2000 due to the reasons described above.
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.
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 recognized 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"), a shareholder 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 due to increased earning from Sweetheart and CEG.
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 23 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.
Liquidity And Capital Resources
Historically, the Company has relied on cash flow from operations and revolving credit borrowings to finance its working capital requirements and capital expenditures. In Fiscal 2001, the Company funded its capital expenditures from the combination of cash generated from operations and additional borrowings. The Company expects to continue this method of funding for its Fiscal 2002 capital expenditures.
Net cash provided by operating activities in Fiscal 2001 was $12.1 million compared to net cash provided by operating activities of $9.4 million in Fiscal 2000. The increase in operating cash flow in Fiscal 2001 is primarily a result of increased net income and the Company's improved management of its receivables and inventory levels.
Net cash used in investing activities in Fiscal 2001 was $72.2 million compared to net cash provided by investing activities of $183.8 million in Fiscal 2000. This decrease is due primarily to the receipt of proceeds from the Sale-Leaseback Transaction on June 15, 2000 whereby Sweetheart Cup Company Inc. ("Sweetheart Cup") and Sweetheart Holdings Inc. ("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 decrease is partially offset by business acquisitions for an aggregate purchase price of $40.7 million in Fiscal 2001.
Net cash provided by financing activities in Fiscal 2001 was $65.7 million compared to net cash used in financing activities of $191.0 million in Fiscal 2000. Net cash provided in Fiscal 2001 primarily consisted of borrowings under the credit facilities. This decrease is primarily due to the redemption of Sweetheart's $190.0 million principal amount of the Senior Secured Notes in Fiscal 2000. The net proceeds generated from the Sale-Leaseback Transaction were used in part to redeem these notes, repay debt in connection with the acquisition of Sherwood Industries, Inc. ("Sherwood") and its subsidiaries and repay a portion of the outstanding balance under Sweetheart's U.S. Credit Facility.
Working capital increased $79.2 million to $254.2 million at September 30, 2001 from $175.0 million at September 24, 2000. These changes resulted primarily from reduced payroll expenses, the settlement of Sweetheart's Aldridge litigation liability and the refinancing of Fonda's Credit Facility.
Capital expenditures for Fiscal 2001 were $31.7 million compared to $25.3 million in Fiscal 2000. Capital expenditures in Fiscal 2001 included $11.5 million for new production equipment, $14.4 million for facility improvements and $0.8 million for management information systems, with the remaining consisting primarily of routine capital improvements. Funding for Fiscal 2001 capital expenditures was primarily provided by cash generated from operations.
On August 28, 2001, Fonda consummated the purchase of substantially all of the property, plant and equipment, intangibles and net working capital of the consumer division of Dopaco, Inc. ("Dopaco") located in El Cajon, California (the "Dopaco Acquisition"). In addition, pursuant to the Dopaco Agreement, Fonda assumed the liabilities and obligations of Dopaco arising under purchased contracts and leases. Dopaco's consumer division manufactures coated and uncoated white and decorated paper plates, bowls and lunch bags and serves primarily the private label markets of major west coast based grocery chains. The aggregate purchase price was $21.8 million, subject to post closing working capital adjustments, which was funded through bank financing. The Dopaco Acquisition has resulted in goodwill of $9.5 million. As a result of the potential post closing working capital adjustment, the final calculation, of which Fonda expects to be completed within one year, amounts and allocations of costs recorded may require adjustment based upon information coming to the attention of Fonda that is not
currently available.
On April 5, 2001, Sweetheart purchased an 80% interest in Global Cup. Global Cup manufactures, distributes and sells paper cups and lids throughout Mexico and exports to other Latin American countries. Sweetheart assumed the liabilities and obligations of Global Cup arising under contracts or leases that are either assets purchased by Sweetheart or a part of the accounts payable. The aggregate purchase price for the assets and working capital was $12.2 million which was paid in cash, subject to a post-closing working capital adjustment. The Global Cup acquisition has resulted in goodwill of $3.9 million. As a result of the potential post closing working capital adjustment, the final calculation of which Sweetheart expects to be completed within one year, amounts and allocations of costs recorded may require adjustment based upon information coming to the attention of Sweetheart that is not currently available.
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. In addition, pursuant to the Springprint Agreement, Fonda has assumed the liabilities and obligations of Springprint arising under contracts or leases that are either assets purchased by Fonda or a part of the accounts payable. The aggregate purchase price for the assets and working capital was $6.7 million, which was paid in cash. The Springprint acquisition has resulted in goodwill of $3.2 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 to several owner participants for a fair market value of $212.3 million. The proceeds from this sale were used in part to redeem the 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 Carryforwards".
Sweetheart has a revolving credit facility as amended (the "U.S. Credit Facility") that, subject to borrowing base limitations, allows for a maximum revolving credit borrowing of $145 million through June 15, 2005 and a term loan of $25 million that requires equal monthly principal payments of $0.4 million through June 2005. Both the term loan and the revolving credit facility have an accelerated maturity date of July 1, 2003 if Sweetheart's Senior Subordinated Notes due September 1, 2003 are not refinanced before June 1, 2003. Borrowings under the revolving credit facility bear interest, at Sweetheart's election, at a rate
equal to (i) LIBOR plus 2.00% or (ii) a bank's base rate plus 0.25%, plus certain other fees. Borrowings under the term loan bear interest, at Sweetheart's election, at a rate equal to (i) LIBOR plus 2.50% or (ii) a bank's base rate plus 0.50%, plus certain other fees. In Fiscal 2001, the weighted average annual interest rate for the U.S. Credit Facility was 7.58%. The credit facility is collateralized by Sweetheart's inventories and receivables with the term loan portion of the credit facility further collateralized by certain production equipment. As of September 30, 2001, $31.6 million was available under the revolving credit facility and the term loan balance was $12.9 million. The fee for outstanding letters of credit is 2.00% per annum and there is a commitment fee of 0.375% per annum on the daily average unused amount of the commitments. As of September 30, 2001, LIBOR was 2.64% and the bank's base rate was 6.00%.
On August 28, 2001, Fonda refinanced its credit facility to provide for a revolving credit facility, subject to borrowing base limitations of up to $65 million through August 26, 2004, and a term loan in an amount of $15 million that requires equal monthly principal payments of $0.3 million through August 2004 with the balance due on August 26, 2004 (the "Credit Facility"). The Credit Facility is collateralized by all of Fonda's receivables, inventories, and equipment, certain general intangibles and other property, and the proceeds on the sale of receivables and inventories. Borrowings under the revolving credit facility bear interest at the bank's prime rate plus 0.50% or at LIBOR plus 2.50% at the election of Fonda. Borrowings under the term loan bear interest at the bank's prime rate plus 0.75% or at LIBOR plus 2.75% at the election of Fonda. As of September 30, 2001, the bank's prime rate was 6.00%, and the LIBOR rate was 2.64%. In Fiscal 2001, the weighted average interest rate for the Credit Facility was 7.70%. At September 30, 2001, $49.6 million was outstanding and $15.4 million was the maximum remaining advance available based upon eligible collateral.
On June 19, 2001, Sweetheart's Canadian subsidiary refinanced its credit agreement (the "Canadian Credit Facility") which provides for a term loan facility of Cdn $15 million (approximately US $9.5 million) and a revolving credit facility of up to Cdn $15 million (approximately US $9.5 million). The term borrowings are payable quarterly through May 2004. Both the revolving credit and term loan borrowings have a final maturity date of June 15, 2004. The Canadian Credit Facility is secured by all existing and thereafter acquired real and personal tangible assets of Lily and net proceeds on the sale of any of the foregoing. Borrowings under the Canadian Credit Facility bear interest at an index rate plus 1.75% with respect to the revolving credit facility and an index rate plus 2.00% with respect to the term loan borrowings. As of September 30, 2001, Cdn $1.0 million (approximately US $0.6 million) was available under the revolving facility and the term loan balance was Cdn $14.5 million (approximately US $9.2 million) under the Canadian Credit Facility.
In 1993, Sweetheart Cup issued $110 million of 10-1/2% Senior Subordinated Notes due 2003 ("Senior Subordinate Notes") with interest payable semi-annual. The Senior Subordinated Notes are subject to redemption at the option of Sweetheart, in whole or in part, at the redemption price equal to 100% of the outstanding principal amount, plus accrued interest to the redemption date. The Senior Subordinated Notes are subordinate in right of payment to the prior payment in full of all borrowings under Sweetheart's 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.
In Fiscal 1997, Fonda issued $120 million of 9-1/2% Senior Subordinated Notes due 2007 (the "Fonda Notes") with interest payable semi-annually. Payment of the principal and interest is subordinate in right to payment of Fonda's Credit Facility. Fonda may, at its election, redeem the Fonda Notes at any time after March 1, 2002 at a redemption price equal to a percentage (104.750% after March 1, 2002 and declining annually to 100% after March 1, 2005) of the principal amount thereof plus accrued interest. The Fonda 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 Fonda Notes at a redemption price equal to 101% of the principal amount thereof plus accrued interest.
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 28,800 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.
Also on March 12, 1998, the Company issued units consisting of $30 million of 13 3/4% Exchangeable Preferred Stock due March 13, 2009 (the "Exchangeable Preferred") and 11,100 shares of Class C Common Stock. Until March 12, 2003, cumulative dividends on the Exchangeable Preferred are paid quarterly, at 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 12, 2001, all cumulative dividends on the Exchangeable Preferred have been paid by the issuance of additional shares of Exchangeable Preferred. The value of the Exchangeable Preferred, was $48.2 million and $41.8 million as of September 30, 2001 and September 24, 2000, respectively. The Exchangeable Preferred is not entitled to any vote, except as required in the Company's certificate of incorporation and by law.
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.
Pursuant to the terms of the instruments governing the indebtedness of the Company, the Company is subject to certain affirmative and negative covenants customarily contained in agreements of this type, including, without limitations covenants that restrict, subject to specified exceptions (i) mergers, consolidations, asset sales or changes in capital structure, (ii) creation or acquisition of subsidiaries, (iii) purchase or redemption of capital stock or declaration or payment of dividends or distributions on such capital stock, (iv) incurrence of additional indebtedness, (v) investment activities, (vi) granting or incurrence of liens to secure other indebtedness, (vii) prepayment or modification of the terms of subordinated indebtedness, and (viii) engaging in transactions with affiliates.
During Fiscal 2001, Sweetheart experienced a casualty loss at its Somerville, Massachusetts facility. Sweetheart carries business interruption insurance and has filed a claim with the insurance company. Settlement of the recovery amount is to be determined.
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084, was filed in state court in Georgia in April 1987 and later removed to federal court. The Plaintiffs claimed, among other things, that Sweetheart wrongfully terminated the Lily Tulip, Inc. Salary Retirement Plan (the "Plan") in violation of the Employee Retirement Income Security Act of 1974, as amended. The relief sought by Plaintiffs was to have the Plan termination declared ineffective. The United States Court of Appeals for the Eleventh Circuit (the "Circuit Court") ruled that the Plan was lawfully terminated on December 31, 1986, and judgment was entered dismissing the case in March 1996. The Circuit Court affirmed the judgment entered in favor of Sweetheart. Plaintiffs filed a petition for writ of certiorari to the United States Supreme Court, which was denied in January 1999. Sweetheart expects to complete paying out the termination liability and associated expenses in connection with the Plan termination by December 31, 2001. As of September 30, 2001, Sweetheart had disbursed $19.6 million in termination payments. The estimate of the total termination liability and associated expenses, less payments, exceeds the assets set aside in the Plan by $0.4 million, which amount has been fully reserved by Sweetheart.
On November 29, 2001, the liquidating trustee of Ace Baking Company, Limited Partnership, filed a Complaint for Avoidance of Transfers and Disallowance or Subordination of Claims against Sweetheart in the United States Bankruptcy Court Eastern District of Wisconsin. The Complaint, among other things, seeks to avoid a portion of the consideration paid by Ace Baking Company to Sweetheart, as a fraudulent transfer, in connection with the sale by Sweetheart of its bakery business to Ace Baking in November 1997. In addition, the Trustee alleges that certain subsequent payments made by Ace Baking to Sweetheart in connection with such sale are avoidable preferences. We believe that the Trustee's claims are without merit and we intend to vigorously defend this matter. In addition, we have no reason to believe that the final outcome of this matter will have a material adverse effect on our financial condition or results of operations. However, we cannot assure you of the ultimate effect on us, if any, given the early stage of this matter.
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. Sweetheart responded to the EPA that upon review of its files it had no information with respect to any dealings with that site. 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 and in January 2000 Sweetheart responded to such inquiry. In both instances, Sweetheart has received no further communication from the EPA. Sweetheart denies liability and has no reason to believe the final outcomes will have a material adverse effect on Sweetheart's financial condition or results of operations. However, no assurance can be given about the ultimate effect on Sweetheart.
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.
The Company is contemplating various strategic options which may include a restructuring of its business debt and capital structure, including, among other things, the public sale or private placement of debt or equity securities of the Company or its subsidiaries, joint venture transactions, new borrowings, the
refinancing of the Company's existing debt agreements, open market purchases, tender offers or exchange offers of the Company's outstanding securities. There can be no assurances that any of these strategic options will be consummated.
Net Operating Loss Carryforwards
As of September 30, 2001, Sweetheart had approximately $28 million of net operating loss ("NOL") carryforwards for federal income tax purposes, which expire in 2018. Although Sweetheart expects that sufficient taxable income will be generated in the future to realize these NOLs, there can be no assurance that future taxable income will be generated to utilize such NOLs.
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements: Statement of Financial Accounting Standard ("SFAS") No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 prohibits the use of the pooling-of-interest method for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and applies to all goodwill and other intangible assets recognized in an entity's balance sheet. The Company has adopted SFAS No. 141 and is currently evaluating the impact of SFAS No. 142 on its consolidated financial statements.
In October 2001, the FASB issued pronouncement SFAS No. 144 Impairment or Disposal of Long-Lived Assets. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principals Board Opinion ("APB") No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company is currently evaluating the impact of SFAS No. 144 on its consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and requires that an entity recognize all derivatives at fair value in the balance sheet. The Company adopted SFAS No. 133 effective September 25, 2000. The adoption of SFAS No. 133 did not have an impact on the consolidated financial statements.
Item 7a
Item 7a QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Sweetheart is exposed to market risk in the ordinary course of business, which consists primarily of interest rate risk associated with our variable rate debt. All borrowing under the US Credit Facility and Canadian Credit Facility, each of which contains a revolving and term credit facility, bear interest at a variable rate. Borrowings under the revolving credit facility bear interest, at Sweetheart's election, at a rate equal (i) LIBOR plus 2.00% or (ii) a bank's base rate plus 0.25%, plus certain 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. Borrowings under the Canadian Credit Facility bear interest at an index rate plus 1.75% with respect to the revolving credit borrowings and an index rate
plus 2.00% with respect to the term loan borrowings. As of September 30, 2001, the outstanding indebtedness under the US Credit Facility was $126.2 million and the Canadian Credit Facility was $16.6 million in US dollars. Based upon these amounts, the annual net income would change by approximately $0.9 million for each one percentage point change in the interest rates applicable to our variable debt. The level of the exposure to interest rate movements may fluctuate significantly as a result of changes in the amount of indebtedness outstanding under the revolving credit facilities.
Fonda is exposed to market risk in the ordinary course of business, which consists primarily of interest rate risk associated with its variable rate debt. Borrowings under the revolving credit facility bear interest at the bank's prime rate plus 0.50% or at LIBOR. Borrowings under the term loan bear interest at the bank's prime rate plus 0.75% or at LIBOR plus 2.75% at the election of Fonda. At September 30, 2001, $49.6 million was outstanding and $15.4 million was the maximum remaining advance available based upon eligible collateral. Based upon these amounts, the annual net income would change by approximately $0.4 million for each one percentage point change in the interest rates applicable to Fonda's variable debt. The level of the exposure to interest rate movements may fluctuate significantly as a result of changes in the amount of indebtedness outstanding under the revolving credit facilities.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements and Schedule attached hereto and listed in Item 14 (a)(1) and (a)(2) hereof.
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 12, 2001. 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 59 Chairman and Chief Executive Officer
Thomas Uleau 57 Vice Chairman and Senior Vice President
Hans H. Heinsen 48 Senior Vice President, Chief Financial Officer and Treasurer
Harvey L. Friedman 59 Secretary and General Counsel
Michael Hastings 54 Senior Vice President
Robert Korzenski 47 Senior Vice President
Alfred B. DelBello 65 Director
Gail Blanke 53 Director
John A. Catsimatidis 53 Director
Chris Mehiel 62 Director
Edith Mehiel 56 Director
Jerome T. Muldowney 56 Director
Alan D. Scheinkman 51 Director
G. William Seawright 60 Director
Lowell P. Weicker, Jr. 70 Director
Mr. Mehiel has been Chairman of the Board and Chief Executive Officer of the Company 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 July 2000, he has been a director of Box USA Holdings, Inc. ("Box USA"), formerly Four M Corporation ("Four M"), a converter and seller of interior packaging, corrugated sheets and corrugated containers, which he co-founded. From 1966 until July 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 Chief Executive Officer and a director of Mannkraft Corporation, formerly, Box USA of New Jersey Inc., a manufacturer of corrugated containers.
Mr. Uleau has been Vice Chairman and Senior Vice President of the Company since March 1, 2001. Prior thereto he was President, Chief Operating Officer and a Director of the Company since February 1998. He is also Executive Vice President and a director of Sweetheart Holdings and Sweetheart Cup since March 1, 2001 and prior thereto he served as President, Chief Operating Officer and a director of Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Uleau has also served as Executive Vice President of Fonda since March 1998 and 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. He has been Executive Vice President of CEG since 1996 and as a director of CEG.
Mr. Heinsen has been Senior Vice President, Chief Financial Officer and Treasurer of the Company
since February 1998 and Senior Vice President - Finance and Chief Financial Officer of Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Heinsen has also served 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 since May 1996. He also served as a director of Fonda from 1985 to January 1997. He has been Secretary and General Counsel of Sweetheart Holdings and Sweetheart Cup since March 1, 2001. Mr. Friedman is also Secretary and General Counsel of CEG and Mannkraft Corporation and is a director of CEG. He was formerly a partner of Kramer Levin Naftalis & Frankel LLP, a New York City law firm.
Mr. Hastings has been Senior Vice President of the Company since January 2001. He has been President of Sweetheart Holdings and Sweetheart Cup since March 1, 2001 and prior thereto was Senior Vice President - Sales and Marketing for Sweetheart Holdings and Sweetheart Cup since March 1998. Mr. Hastings was also Senior Vice President of Fonda. Prior to joining the Sweetheart, Mr. Hastings served as President of the Fonda Division of Fonda, which he joined in May 1995. From December 1990 to April 1995, Mr. Hastings served as Vice President of Sales and Marketing and as a director of Anchor Packaging Company, a manufacturer of institutional films and thermoformed plastic packaging. Prior to joining Anchor Packaging Company, Mr. Hastings was employed for over 25 years in a variety of positions in the paper and plastic industries, including sales, marketing and plant operations management at Scott Paper Company and Thompson Industries.
Mr. Korzenski has been Senior Vice President of the Company since January 2001. He has been President and Chief Operating Officer of Fonda since March 1998. Prior to that, he had been Senior Vice President of Fonda since January 1997 and President of the Hoffmaster division since its acquisition by Fonda in March 1995. From October 1988 to March 1995, he served as Vice President of Operations and Vice President of Sales of Scott Institutional, a division of Scott Paper Company ("Scott"). Prior to that, he was Director of National Sales at Thompson Industries.
Mr. DelBello has served as a director of the Company since February 1998, 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.
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, the brother of Dennis 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 was Executive Vice President, Chief Operating Officer and a director of Four M from September 1995 until July 2000 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 of which he was President from 1994 to January 1996. Fonda owns a 25% interest in Fibre Marketing. From 1993 to 1994, Mr. Mehiel served as President and Chief Operating Officer of Mannkraft Corporation. 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.
Ms. Edith Mehiel, the former spouse of Dennis Mehiel, has been a director of the Company since March 1, 2001.
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 2001, Mr. Scheinkman has been a member of the law firm of Epstein Becker and Green P.C. From January 1998 to December 2000 he was 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 Associate Minority Counsel to the New York Senate. He also serves as a director of NCO Portfolio Management Inc.
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. In 1992, Mr. Weickel earned the Profiles in Courage Award from the John F. Kennedy Library Foundation. 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 2001, 2000 and 1999 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"). (3) Reflects $2,580 of life insurance premiums and $409,960 for personal expenses paid by Sweetheart. (4) Included in other compensation is $11,726 paid for relocation by Fonda. (5) Included in other compensation is $17,565 paid for relocation by Fonda.
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.
During Fiscal 2001, the Company adopted the SF Holdings Group, Inc. Share Incentive Plan in which the Company may grant options to its employees to purchase up to 95,995 shares of the Company's Class D Common Stock. The Company has reserved 95,995 shares of Class D Common Stock for issuance upon exercise of these options. The exercise price of each option is determined by the Company at the date of grant and an option's maximum term is 10 years.
During Fiscal 2001, the Company granted options to purchase shares of its common stock to certain employees of the Company. Certain officers of the Company were issued options that vested one-third immediately with the remaining options vesting over two years, while all other eligible employees were issued options that vest over a period of three years. The exercise prices of the options granted to the officers and certain employees were below the fair market value of the Company's common stock at the date of the grant. During the vesting periods, these discounts of $1.6 million are being amortized as compensation expense and credited to additional paid-in capital by the Company. Amortization expense relating to stock options was $1.2 million for Fiscal 2001.
In Fiscal 2001, the weighted average fair value of the stock options, issued to the officers was $1.4 million estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions: dividend yield of zero, risk-free interest rate of 5.75%, and expected live of option grants of two years. The weighted average fair value of the stock options, issued to all other eligible employees was $0.5 million in Fiscal 2001 estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions: dividend yield of zero, risk-free interest rate of 2.75%, and expected life of option grants of three years.
The following table summarizes information about grants of stock options that have been made during Fiscal 2001 to each of the officers:
Stock Appreciation Rights
On September 14, 2000 Fonda terminated the SAR plan effective as of October 1, 1999. In total, 10,140 SARs were redeemed at their October 1, 1999 value from Named Officers at a total cost of $293,210. 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 Company 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 Fonda's 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.
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 12, 2001, 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.
Percent Name of Beneficial Owner Number of Shares Ownership - --------------------------------- ---------------- --------------
Dennis Mehiel 373 Park Avenue South New York City, NY 10016 716,037 (1) 71.8%
Thomas Uleau 10100 Reisterstown Road Owings Mills, Maryland 21117 16,366 (2) 1.6%
Directors and executive officers as a Group (6 persons) 755,270 (3) 75.8%
(1) Includes 15,352 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. (2) Includes 3,498 shares of Class A Common Stock of SF Holdings that would be issuable upon conversion of Class B Series 2 Preferred Stock and 3,333 shares underlying options to purchase Class D Common Stock of SF Holdings, which are presently exercisable. (3) Includes an aggregate of 13,332 shares underlying options to purchase Class D Common Stock of SF Holdings which are presently exercisable.
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. The Company believes that transactions entered into with related parties were negotiated on terms which are at least as favorable as it could have obtained from unrelated third parties and were negotiated on an arm's length basis.
During Fiscal 2001, the Company sold $7.7 million of scrap paper to Fibre Marketing, a waste paper recovery business in which Fonda has a 25% interest and which the Chief Executive Officer co-founded, and was President from 1994 to January 1996. Included in accounts receivable as of September 30, 2001 is $2.0 million due from Fibre Marketing. Other sales to affiliates during Fiscal 2001 were not significant.
During Fiscal 2001, the Company purchased $7.6 million of corrugated containers from Box USA and $1.0 million of travel services from Emerald Lady, Inc. ("Emerald Lady"), a company wholly owned by the Company's Chief Executive Officer. Included in accounts payable, as of September 30, 2001, is $0.6 million due to Box USA. Other purchases from affiliates during Fiscal 2001 were not significant.
At September 30, 2001, Fonda has a loan receivable from its Chief Executive Officer totaling $0.3 million plus accrued interest at 5.06%. At September 24, 2000, Fonda had a loan receivable from its Chief Executive Officer totaling $0.3 million plus accrued interest at 10%. During Fiscal 1999, Fonda had a $0.2 million loan receivable with another executive officer plus accrued interest at 5.39% which was paid in full in June 1999. CEG has advanced the Chief Executive Officer $1.9 million. The
loans are payable upon demand.
During Fiscal 2000, Sweetheart entered into a lease agreement with D&L Development, LLC, an entity in which Sweetheart's Chief Executive Officer indirectly owns 47%, to lease a warehouse facility in Hampstead, Maryland. In Fiscal 2001 and 2000, rental payments under this lease were $3.6 million and $0.7 million, respectively. Annual rental payments under the 20 year lease are $3.7 million for the first 10 years of the lease and $3.8 million annually, thereafter.
During Fiscal 2000, Sweetheart began leasing a facility in North Andover, Massachusetts from D&L Andover Property, LLC, an entity in which Sweetheart's Chief Executive Officer indirectly owns 50%. In Fiscal 2001, rental payments under this lease were $1.4 million. 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, Fonda sold a 13.2% interest in Fibre Marketing to Mehiel Enterprises, Inc. for $0.1 million. Prior to Fiscal 2000, Fonda had a 38.2% ownership in Fibre Marketing of which Fonda had granted Sweetheart the right to acquire 50% of it's interest in Fibre Marketing for $0.1 million. Fonda retains a 25% ownership interest in Fibre Marketing and accounts for its ownership interest using the equity method. During Fiscal 2001, 2000 and 1999, Fonda recorded a loss of $67,000, income of $241,000, and a loss of $43,000, respectively.
Fonda leases a building in Jacksonville Florida from Fonda's Chief Executive Officer. Annual payments under the lease are $0.2 million plus annual increases based on changes in the Consumer Price Index ("CPI") through December 31, 2014. In addition, the Chief Executive Officer can require Fonda to purchase the facility for $1.5 million, subject to a CPI-based escalation, until July 31, 2006. In Fiscal 1998, Fonda terminated it operations at this facility and is currently subleasing the entire facility. Four M Corporation ("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 2001 was less than $0.2 million, Fiscal 2000 was less than $0.2, and through May 1998 was $0.1 million in Fiscal 1999.
During Fiscal 2000, the Company sold $7.6 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, $0.2 million of other services from 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.
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 the CEG Asset Purchase Agreement, Fonda canceled previous agreements with CEG including all licensing and manufacturing arrangements and a certain Promissory Note dated February 27, 1997. Independent appraisals were obtained to determine the fairness of the purchase price for such assets.
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) Reports on Form 8-K during fiscal year ended September 30, 2001:
A report on Form 8-K was filed on March 15, 2001 under Item 5.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 35
Consolidated Balance Sheets as of September 30, 2001 and September 24, 2000 36
Consolidated Statements of Operations and Other Comprehensive Loss for Fiscal Years 2001, 2000 and 1999 37 Consolidated Statements of Cash Flows for Fiscal Years 2001, 2000 and 1999 38
Consolidated Statements of Shareholders' Equity for Fiscal Years 2001, 2000 and 1999 39
Notes to Consolidated Financial Statements 40
INDEPENDENT AUDITORS' REPORT
Board of Directors SF Holdings Group, Inc.
We have audited the accompanying consolidated balance sheets of SF Holdings Group, Inc. and subsidiaries (the "Company") as of September 30, 2001 and September 24, 2000, and the related consolidated statements of operations and other comprehensive loss, shareholders' deficit, and cash flows for each of the three fiscal years in the period ended September 30, 2001. 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 30, 2001 and September 24, 2000, and the results of their operations and their cash flows for each of the three fiscal years in the period ended September 30, 2001 in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP Baltimore, Maryland December 7, 2001
SF HOLDINGS GROUP, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
See accompanying Notes to Consolidated Financial Statements.
SF HOLDINGS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS (In thousands)
Fiscal
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' DEFICIT (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 Group, 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 2001, 2000 and 1999, the Company had net sales of approximately $1.3 billion, $1.3 billion and $1.2 billion, respectively. 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.
1. SIGNIFICANT ACCOUNTING POLICIES
Fiscal year end - The Company's fiscal year end is the 52 or 53 week period ending on the last Sunday in September. Fiscal 2001 is the 53 week period ended September 30, 2001. Fiscal 2000 is the 52 week period ended September 24, 2000. Fiscal 1999 is the 52 week period ended September 26, 1999.
Principles of Consolidation and Translation - The consolidated financial statements include the accounts of the Company and its subsidiaries. Assets and liabilities denominated in foreign currencies are translated at the rates of exchange in effect at the balance sheet date. Revenues and expenses 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 in shareholders' equity and comprehensive income. All inter-company accounts and transactions have been eliminated.
The accounts of the Company's Mexican subsidiary, Global Cup, are consolidated as of and for the period ended August 31, 2001 due to the time needed to consolidate this subsidiary. No events occurred related to this subsidiary in September 2001 that materially affected the Company's consolidated financial position or results of operations.
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 - Inventories are stated at the lower of cost or market, using the first-in first-out method.
Property, Plant and Equipment - Property, plant and equipment is recorded at cost, less accumulated depreciation, or fair market value for business acquisitions 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 improvements range between 2 and 50 years and have an average useful life of 22 years. The asset lives of machinery and equipment range between 2 and 13 years and have an average useful life of 12.5 years.
Costs related to construction in progress are accumulated as incurred and transferred to property, plant and equipment when put into service, at which time, the asset is depreciated over its useful life.
Revenue Recognition - Revenue is recognized upon shipment of product and when collectability is reasonably assured. Also, the Company rents filling equipment to certain of its customers and recognizes this income over the life of the lease. The Company's sales are evidenced and the sales price fixed based upon either a purchase order, contract or buying agreement with the customer. The Company's freight terms are either FOB shipping point or freight prepaid by the customer. The customer may also be eligible for promotional incentives or rebates. The Company at the time of sale records a reserve for promotional allowances, rebates and other discounts based on historical experience, which are charged to net sales.
Shipping and Handling Costs - Amounts billed to customers in sales transactions related to shipping and handling, if any, are included in net sales. Shipping and handling costs incurred by the Company are included in cost of sales.
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.
Environmental Cleanup Costs - The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. The Company determines its liability on a site by site basis and records a liability at the time when it is probable and can be reasonably estimated.
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 year balances have been reclassified to conform with the current presentation.
Concentration of Credit Risk - Financial instruments, which potentially subject the Company to credit risk, consist principally of receivables. Concentration of credit risk with respect to receivables is considered to be limited due to the Company's customer base and the diversity of its geographic sales areas. The Company performs ongoing credit evaluations of its customers' financial condition. The Company maintains a provision for probable credit losses based upon expected collectability of all receivables.
Impact of Recently Issued Accounting Standards - In June 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements: Statement of Financial Accounting Standard ("SFAS") No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 prohibits the use of the pooling-of-interest method for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and applies to all goodwill and other intangible assets recognized in an entity's balance sheet. The Company has adopted SFAS No. 141 and is currently evaluating the impact of SFAS No. 142 on its consolidated financial statements.
In October 2001, the FASB issued pronouncement SFAS No. 144 Impairment or Disposal of Long-Lived Assets. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principals Board Opinion ("APB") No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The Company is currently evaluating the impact of SFAS No. 144 on its consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and requires that an entity recognize all derivatives at fair value in the balance sheet. The Company adopted SFAS No. 133 effective September 25, 2000. The adoption of SFAS No. 133 did not have an impact on the consolidated financial statements.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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.
Deferred Catalog Cost and Advertising Expense - The Company 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 30, 2001 and September 24, 2000, $0.3 million and $0.2 million, respectively, of unamortized catalog costs were included in other current assets. Advertising expense was $0.3 million in Fiscal 2001, $0.2 million in Fiscal 2000 and $0.7 million in Fiscal 1999. Catalog expense was $0.4 million in Fiscal 2001, $0.6 million in Fiscal 2000 and $0.7 million in Fiscal 1999.
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 30, 2001 and September 24, 2000, Fonda had $0.5 million in minimum license guarantees and advance royalties, net of reserves. Future minimum royalty payments are $0.4 million in 2002 and $0.1 million thereafter.
2. INVENTORIES
The components of inventories are as follows (in thousands):
September 30, September 24, 2001 2000 ------------- ----------------
Raw materials and supplies $ 55,955 $ 66,941 Finished products 158,297 148,231 Work in progress 10,769 11,485 --------- --------- Total inventories $ 225,021 $ 226,657 ========= =========
3. INCOME TAXES
The income tax provision includes the following components (in thousands):
Fiscal ------------------------------ 2001 2000 1999 --------- -------- --------- Current: Federal $ 2,254 $ 3,749 $ (866) State 453 1,195 423 Foreign - 270 - --------- -------- ---------
Total current 2,707 5,214 (443) --------- -------- ---------
Deferred: Federal 2,965 (157) (7,515) State 263 (943) (1,575) Foreign (429) - (28) --------- -------- ---------
Total deferred 2,799 (1,100) (9,118) --------- -------- ---------
Total income tax provision (benefit) $ 5,506 $ 4,114 $ (9,561) ========= ======== =========
The effective tax rate varied from the U.S. Federal tax rate of 35% for Fiscal 2001, 2000 and 1999 as a result of the following:
Fiscal ------------------------- 2001 2000 1999 ------- ------- -------
U.S. Federal tax rate 35% 35% 35% State income taxes, net of U.S. Federal tax impact 5 5 3 Interest on discount notes 5 6 (1) Non-deductible amortization 8 12 (3) Other 2 3 (1) ---- ---- ---- Effective tax rate 55% 61% 33% ==== ==== ====
Deferred income taxes reflect the net tax effects of net operating loss carryforwards, tax credit carryforwards, 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 (in thousands):
Sweetheart has net operating loss carryforwards for income tax purposes of approximately $28 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.
No provision has been made for U.S. federal deferred income taxes on approximately $12 million of accumulated and undistributed earnings of the Foreign subsidiaries at September 30, 2001 since it is the present intention of management to reinvest the undistributed earnings in foreign operations indefinitely. In addition, the determination of the amount of unrecognized U.S. federal deferred income tax liability for unremitted earnings related to the investments in the Foreign subsidiaries is not practicable.
4. ASSETS HELD FOR SALE
On February 20, 2001 and August 3, 2001, Sweetheart's Board of Directors approved plans for the closure and sale of the Somerville, Massachusetts facility and the Manchester, New Hampshire facility, respectively. These facilities are being consolidated into one location in North Andover, Massachusetts. Sweetheart anticipates the sale of both facilities and has reclassified the facilities to assets held for sale. On September 25, 2001, Sweetheart entered into a contract to sell the Manchester, New Hampshire facility. Sweetheart expects to consummate the sale by the end of December 2001. The sale is expected to result in a net gain.
5. OTHER CURRENT ASSETS
The components of other current assets are as follows (in thousands):
September 30, September 24, 2001 2000 ------------- -------------
Vendor receivable $ 3,141 $ 2,637 Prepaid expenses 4,951 2,125 Other 1,280 1,126 ------- -------
Total other current assets $ 9,372 $ 5,888 ======= =======
6. PROPERTY, PLANT AND EQUIPMENT, NET
The Company's major classes of property, plant and equipment, net are as follows (in thousands):
September 30, September 24, 2001 2000 ------------- ------------
Land and buildings $ 128,017 $ 136,548 Leasehold improvements 678 1,282 Machinery and equipment 229,617 205,568 Construction in progress 16,587 11,006 --------- ---------
Total property, plant and equipment 374,899 354,404
Less - accumulated depreciation 109,104 91,036 --------- ---------
Property, plant and equipment, net $ 265,795 $ 263,368 ========= =========
Depreciation of property, plant and equipment was $27.9 million, $43.2 million and $50.3 million in Fiscal 2001, 2000 and 1999, respectively. In addition, property, plant and equipment includes buildings under capital lease at a cost of $2.4 million and a net book value of $1.5 million at September 30, 2001 and a cost of $2.2 million and a net book value of $1.4 million at September 24, 2000.
7. ACQUISITIONS
On August 28, 2001, Fonda consummated the purchase of substantially all of the property, plant and equipment, intangibles and net working capital of the consumer division of Dopaco, Inc. ("Dopaco") located in El Cajon, California (the "Dopaco Acquisition"). In addition, pursuant to the Dopaco Agreement, Fonda assumed the liabilities and obligations of Dopaco arising under purchased contracts and leases. Dopaco's consumer division manufactures coated and uncoated white and decorated paper plates, bowls and lunch bags and serves primarily the private label markets of major west coast based grocery chains. The aggregate purchase price was $21.8 million, subject to post closing working capital adjustments, which was funded through a bank financing. The Dopaco Acquisition has resulted in goodwill of $9.5 million. As a result of the potential post closing working capital adjustment, the final calculation of which Fonda expects to be completed within one year, amounts and allocations of costs recorded may require adjustment based upon information coming to the attention of Fonda that is not currently available.
On April 5, 2001, Sweetheart purchased an 80% interest in Global Cup, S.A. De C.V. and its subsidiaries ("Global Cup"). Global Cup manufactures, distributes and sells paper cups and lids throughout Mexico and exports to other Latin American countries. Sweetheart has assumed the liabilities and obligations of Global Cup arising under contracts or leases that are either assets purchased by Sweetheart or a part of the accounts payable. The aggregate purchase price for the assets and working capital was $12.2 million which was paid in cash, subject to a post-closing working capital adjustment. The Global Cup acquisition has resulted in goodwill of $3.9 million. As a result of the potential post closing working capital adjustment, the final calculation of which Sweetheart expects to be completed within one year, amounts and allocations of costs recorded may require adjustment based upon information coming to the attention of Sweetheart that is not currently available.
On September 25, 2000, pursuant to an asset purchase agreement dated August 9, 2000 (the "Springprint Agreement"), Fonda purchased substantially all of the property, plant and equipment, intangibles and net working capital of Springprint Medallion, a division of Marcal Paper Mills, Inc. ("Springprint"). In addition, pursuant to the Springprint Agreement, Fonda has assumed the liabilities and obligations of Springprint arising under contracts or leases that are either assets purchased by Fonda or a part of the accounts payable. The aggregate purchase price for the assets and working capital was $6.7 million, which was paid in cash. The Springprint acquisition has resulted in goodwill of $3.2 million.
On May 15, 2000, Sweetheart acquired Sherwood Industries Inc. ("Sherwood"), a manufacturer of paper cups, containers and cup making equipment. Pursuant to a certain Stock Purchase Agreement among Sweetheart and the stockholders of Sherwood, Sweetheart acquired all of the issued and outstanding capital stock (the "Sherwood Acquisition") of Sherwood and its subsidiaries for an aggregate purchase price of $16.8 million of which $12.1 million was paid in cash. As part of the purchase price, Sweetheart issued to the stockholders of Sherwood non-interest bearing promissory notes due May 2005 for $4.7 million and a present value of $2.7 million (assuming an interest rate of 10.85% per annum). Sweetheart also assumed $9.3 million of Sherwood debt, which was paid in full on June 15, 2000. The Sherwood acquisition has resulted in goodwill of $10.7 million.
The above acquisitions have been accounted for under the purchase method and their results have been included in the consolidated statements of operations since the respective dates of acquisition. Goodwill amortization was $1.9 million in Fiscal 2001, $1.2 million in Fiscal 2000 and $1.2 million in Fiscal 1999. Accumulated amortization was $6.1 million and $4.2 million at September 30, 2001 and September 24, 2000, respectively. The inclusion of these acquisitions within the consolidated financial statements presented had a minimal impact on the Company's pro forma results.
8. OTHER ASSETS
The components of other assets are as follows (in thousands):
September 30, September 24, 2001 2000 ------------- -------------
Debt issuance costs, net of accumulated amortization $ 9,840 $ 10,786 Intangible pension asset (See Note 24) 2,188 1,902 Deposits 1,461 2,166 Other 10,983 5,590 --------- ---------
Total other assets $ 24,472 $ 20,444 ========= =========
Amortization of debt issuance costs was $2.2 million in Fiscal 2001, $3.7 million in Fiscal 2000 and $3.9 million in Fiscal 1999.
9. OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows (in thousands):
September 30, September 24, 2001 2000 ------------- -------------
Sales allowances $ 21,641 $ 19,054 Litigation, claims and assessments (See Note 27) 1,426 9,288 Deferred rent payable 8,169 8,631 Taxes, other than income taxes 3,084 3,295 Interest payable 3,337 3,167 Freight 1,481 1,467 Other 10,122 11,212 --------- ---------
Total other current liabilities $ 49,260 $ 56,114 ========= =========
10. DEFERRED GAIN ON SALE OF ASSETS
In connection with a sale-leaseback transaction, on June 15, 2000, Sweetheart Cup Company Inc. ("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 using the straight line method over 125 months which is the term of the Lease. Annual rental payments under the Lease will be approximately $31.5 million.
11. LONG-TERM OBLIGATIONS
Long-term debt, including amounts payable within one year, is as follows (in thousands):
September 30, September 24, 2001 2000 ------------- -------------
Sweetheart U.S. Credit Facility $ 126,222 $ 102,249 Sweetheart Canadian Credit Facility 16,630 10,320 Fonda Revolving Credit Agreement 64,362 40,710 Sweetheart Senior Subordinated Notes 110,000 110,000 Fonda Senior Subordinated Notes 120,000 120,000 Sweetheart Sherwood Industries Notes 3,153 3,541 Fonda Other 453 1,168 SF Holdings Discount Notes 118,697 104,245 --------- --------- Total debt 559,517 492,233
Less - Current portion of long-term debt 16,942 57,266 --------- --------- Total long-term debt $ 542,575 $ 434,967 ========= =========
The aggregate annual maturities of long-term debt at September 30, 2001 are as follows (in thousands):
Fiscal 2002 $ 16,942 Fiscal 2003 119,475 Fiscal 2004 67,872 Fiscal 2005 116,531 Fiscal 2006 - Thereafter 238,697 --------- $ 559,517 =========
Sweetheart U.S. Credit Facility - Sweetheart has a revolving credit facility as amended (the "U.S. Credit Facility") that, subject to borrowing base limitations, allows for a maximum revolving credit borrowing of $145 million through June 15, 2005 and a term loan of $25 million that requires equal monthly principal payments of $0.4 million through June 2005. Both the term loan and the revolving credit facility have an accelerated maturity date of July 1, 2003 if Sweetheart's Senior Subordinated Notes due September 1, 2003 are not refinanced before June 1, 2003. Borrowings under the revolving credit facility bear interest, at Sweetheart's election, at a rate equal to (i) LIBOR plus 2.00% or (ii) a bank's base rate plus 0.25%, plus certain other fees. Borrowings under the term loan bear interest, at Sweetheart's election, at a rate equal to (i) LIBOR plus 2.50% or (ii) a bank's base rate plus 0.50%, plus certain other fees. In Fiscal 2001, the weighted average annual interest rate for the U.S. Credit Facility was 7.58%. The U.S. Credit Facility is collateralized by Sweetheart's inventories and receivables with the term loan portion of the credit facility further collateralized by certain production equipment. As of September 30, 2001, $31.6 million was available under such facility and the term loan balance was approximately $12.9 million. The fee for outstanding letters of credit is 2.00% per annum and there is a commitment fee of 0.375% per annum on the daily average unused amount of the commitments. As of September 30, 2001, LIBOR was 2.64% and the bank's base rate was 6.00%.
The indebtedness of Sweetheart Cup under the U.S. Credit Facility is guaranteed by Sweetheart
Holdings Inc. 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 Inc. and Sweetheart Cup and of each of their respective present and future direct subsidiaries, all inter-company indebtedness payable to Sweetheart Holdings Inc. or Sweetheart Cup by Sweetheart Holdings Inc., 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).
Sweetheart Canadian Credit Facility - On June 19, 2001, Sweetheart's Canadian subsidiary refinanced its credit agreement (the "Canadian Credit Facility") which provides for a term loan facility of Cdn $15 million (approximately US $9.5 million) and a revolving credit facility of up to Cdn $15 million (approximately US $9.5 million). The term borrowings are payable quarterly through May 2004. Both the revolving credit and term loan borrowings have a final maturity date of June 15, 2004. The Canadian Credit Facility is secured by all existing and thereafter acquired real and personal tangible assets of Lily-Tulip, Inc., a subsidiary of Sweetheart Cup. ("Lily") and net proceeds on the sale of any of the foregoing. Borrowings under the Canadian Credit Facility bear interest at an index rate plus 1.75% with respect to the revolving credit facility and an index rate plus 2.00% with respect to the term loan borrowings. As of September 30, 2001, Cdn $1.0 million (approximately US $0.6 million) was available under the revolving facility and the term loan balance was Cdn $14.5 million (approximately US $9.2 million) under the Canadian Credit Facility.
Fonda Revolving Credit Agreement - On August 28, 2001, Fonda refinanced its credit facility to provide for a revolving credit facility, subject to borrowing base limitations of up to $65 million through August 26, 2004, and a term loan in an amount of $15 million that requires equal monthly principal payments of $0.3 million through August 2004 with the balance due on August 26, 2004 (the "Credit Facility"). The Credit Facility is collateralized by all of Fonda's receivables, inventories, and equipment, certain general intangibles and other property, and the proceeds on the sale of receivables and inventories. Borrowings under the revolving credit facility bear interest at the bank's prime rate plus 0.50% or at LIBOR plus 2.50% at the election of Fonda. Borrowings under the term loan bear interest at the bank's prime rate plus 0.75% or at LIBOR plus 2.75% at the election of Fonda. As of September 30, 2001, the bank's prime rate was 6.00%, and the LIBOR rate was 2.64%. In Fiscal 2001, the weighted average interest rate for the Credit Facility was 7.70%. At September 30, 2001, $49.6 million was outstanding and $15.4 million was the maximum remaining advance available based upon eligible collateral.
Sweetheart Senior Subordinated Notes - Sweetheart Cup is the obligor and Sweetheart Holdings Inc. 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 100%. 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.
Fonda Senior Subordinated Notes - In Fiscal 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 and interest is subordinate in right to payment of the Credit Facility. 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.
Sweetheart 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 the principal amount of $5.0 million and a present value of $2.9 million. On March 19, 2001, the principal amount was reduced by $0.3 million as a result of the working capital adjustment to $4.7 million and present value of $2.7 million.
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 28,800 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.
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.
12. 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 $73.6 million lower that the carrying value at September 30, 2001 and $59.2 million lower than the carrying value at September 24, 2000.
The fair value of Sweetheart's Senior Subordinated Notes are estimated to be $2.2 million lower than the carrying value at September 30, 2001 and $7.7 million lower than the carrying value at September 24, 2000.
The fair value of Fonda's Senior Subordinated Notes is estimated to be $3.6 million lower than the carrying value at September 30, 2001 and $20.4 million lower than the carrying value at September 24, 2000.
13. OTHER LIABILITIES
The components of other liabilities are as follows (in thousands):
September 30, September 24, 2001 2000 ------------- -------------
Post-retirement health care benefits (See Note 24) $ 46,851 $ 47,965 Pensions (See Note 24) 8,716 5,648 Other 3,061 3,898 --------- --------- Total other liabilities $ 58,628 $ 57,511 ========= =========
14. MINORITY INTEREST IN SUBSIDIARIES
Minority interest represents 10%, 11.5% and 20% of the total common stock interest in Sweetheart, Creative Expressions Group, Inc. ("CEG"), and Global Cup, 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 reflect such shareholders' interest in Sweetheart's net income.
15. 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 March 13, 2009 (the "Exchangeable Preferred") and 11,100 shares of Class C Common Stock. Until March 12, 2003, cumulative dividends on the Exchangeable Preferred are paid quarterly, at 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 12, 2001, all cumulative dividends on the Exchangeable Preferred have been paid by the issuance of additional shares of Exchangeable Preferred. The value of the Exchangeable Preferred, was $48.2 million and $41.8 million as of September 30, 2001 and September 24, 2000, 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.
16. SHAREHOLDERS' DEFICIT AND REDEEMABLE COMMON STOCK
Shareholders' deficit is as follows (in thousands, except share data):
The rights of holders of Class A, Class B, Class C and Class D 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 the election of directors. The Class B Common Stock is entitled to one-tenth of a vote per share and shall vote together with the 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 and Class D Common Stock is not entitled to any vote whatsoever, except to the extent otherwise 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 underwritten public offering of common stock or refinancing of the Company's 12 3/4% Senior Secured Discount Notes due 2008, be converted into Class A Common Stock at the option of the holder, or at the option of the Company. The Class D Common Stock may, following an underwritten 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 of liquidation, distribution or sale of assets, dissolution or winding-up of the Company, to share ratably in the distribution of assets legally available therefor.
The Company and a shareholder have a redemption agreement, whereby the shareholder has the right to require the Company to repurchase all its shares at the earlier of March 31, 2007 or the date a merger or consolidation of the Company with another entity in which the Company is not the surviving party. The aggregate repurchase price for the outstanding shares is $2.8 million discounted from March 31, 2007 at a rate of 3% per annum. The redemption agreement also contains redemption rights whereby the Company can require the shareholder to redeem the shares after March 31, 2000 on the same terms specified above. The shares are disclosed at the present value of their liquidation value on the consolidated balance sheets. The annual accretion to liquidation value is being charged to deficit.
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 Fonda of $0.5 million. The SAR Plan had provided for the granting of up to 200,000 units to key executives of Fonda. 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 and 26,540 units in Fiscal 1998 and in Fiscal 1997 at an aggregate value of the date of grant of $1.3 million. There were no units granted in Fiscal Years 2000 or 1999. No compensation expense was required to be recorded in Fiscal Years 2000 and 1999. As of September 20, 2000, all vested units had been redeemed and all unvested units were cancelled.
17. STOCK OPTION PLAN
During Fiscal 2001, the Company adopted the SF Holdings Group, Inc. Share Incentive Plan in which the Company may grant options to its employees to purchase up to 95,995 shares of the Company's Class D Common Stock. The Company has reserved 95,995 shares of Class D Common Stock for issuance upon exercise of these options. The exercise price of each option is determined by the Company at the date of grant and an option's maximum term is 10 years.
During Fiscal 2001, the Company granted options to purchase shares of its common stock to certain employees of the Company. Certain officers of the Company were issued options that vested one-third immediately with the remaining options vesting over two years, while all other eligible employees were issued options that vest over a period of three years. The exercise prices of the options granted to the officers and certain employees were below the fair market value of the Company's common stock at the date of the grant. During the vesting periods, these discounts of $1.6 million are being amortized as compensation expense and credited to additional paid-in capital by the Company. Amortization expense relating to stock options was $1.2 million for Fiscal 2001.
A summary of stock option transactions are as follows:
Weighted Average Stock Options Exercised Price ------------- ---------------- Outstanding, September 25, 2000 - $ - Granted 40,135 102.09 Forfeited (700) 117.38 ------- -------- Outstanding, September 30, 2001 39,435 $ 101.82 ======= ========
The following table summarizes information about stock options outstanding at September 30, 2001:
The Company applies APB No. 25 and related interpretations in accounting for stock options. Had compensation costs for stock options been determined based on fair value at the option grant dates, in accordance with the provisions of SFAS No. 123, the Company's net income for Fiscal 2001 would have been reduced to the pro forma amount indicated below (in thousands):
Net income: As reported $ 3,328 Pro forma $ 3,167
In Fiscal 2001, the weighted average fair value of the stock options, issued to the officers was $1.4 million estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions: dividend yield of zero, risk-free interest rate of 5.75%, and expected live of option grants of two years. The weighted average fair value of the stock options, issued to all other eligible employees was $0.5 million in Fiscal 2001 estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions: dividend yield of zero, risk-free interest rate of 2.75%, and expected life of option grants of three years. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future pro forma effects.
18. RELATED-PARTY TRANSACTIONS
All of the affiliates referenced below are directly or indirectly under the common ownership of the Company's Chief Executive Officer. The Company believes that transactions entered into with related parties were negotiated on terms which are at least as favorable as it could have obtained from unrelated third parties and were negotiated on an arm's length basis.
During Fiscal 2001, the Company sold $7.7 million of scrap paper to Fibre Marketing Group, LLC, the successor to Fibre Marketing Group, Inc., a waste paper recovery business in which Fonda has a 25% interest ("Fibre Marketing") and which the Chief Executive Officer co-founded, and was President from 1994 to January 1996. Included in accounts receivable as of September 30, 2001 is $2.0 million due from Fibre Marketing. Other sales to affiliates during Fiscal 2001 were not significant.
During Fiscal 2001, the Company purchased $7.6 million of corrugated containers from Box USA Holdings, Inc. ("Box USA"), formerly Four M Corporation ("Four M"), a converter and seller of interior packaging, corrugated sheets and corrugated containers which the Chief Executive Officer co-founded and $1.0 million of travel services from Emerald Lady, Inc. ("Emerald Lady"), a company wholly owned by the Company's Chief Executive Officer. Included in accounts payable, as of September 30, 2001, is $0.6 million due to Box USA. Other purchases from affiliates during Fiscal 2001 were not significant.
At September 30, 2001, Fonda has a loan receivable from its Chief Executive Officer totaling $0.3 million plus accrued interest at 5.06%. At September 24, 2000, Fonda had a loan receivable from its Chief Executive Officer totaling $0.3 million plus accrued interest at 10%. During Fiscal 1999, Fonda had a $0.2 million loan receivable with another executive officer plus accrued interest at 5.39% which was paid in full in June 1999. CEG has advanced the Chief Executive Officer $1.9 million. The loans are payable upon demand.
During Fiscal 2000, Sweetheart entered into a lease agreement with D&L Development, LLC, an entity in which Sweetheart's Chief Executive Officer indirectly owns 47%, to lease a warehouse facility in Hampstead, Maryland. In Fiscal 2001 and 2000, rental payments under this lease were $3.6 million and $0.7 million, respectively. Annual rental payments under the 20 year lease are $3.7 million for the first 10 years of the lease and $3.8 million annually, thereafter.
During Fiscal 2000, Sweetheart began leasing a facility in North Andover, Massachusetts from D&L Andover Property, LLC, an entity in which Sweetheart's Chief Executive Officer indirectly owns 50%. In Fiscal 2001, rental payments under this lease were $1.4 million. 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, Fonda sold a 13.2% interest in Fibre Marketing to Mehiel Enterprises, Inc. for $0.1 million. Prior to Fiscal 2000, Fonda had a 38.2% ownership in Fibre Marketing of which Fonda had granted Sweetheart the right to acquire 50% of it's interest in Fibre Marketing for $0.1 million. Fonda retains a 25% ownership interest in Fibre Marketing and accounts for its ownership interest using the equity method. During Fiscal 2001, 2000 and 1999 Fonda recorded a loss of $67,000, income of $241,000, and a loss of $43,000, respectively.
Fonda leases a building in Jacksonville Florida from Fonda's Chief Executive Officer. Annual payments under the lease are $0.2 million plus annual increases based on changes in the Consumer Price Index ("CPI") through December 31, 2014. In addition, the Chief Executive Officer can require Fonda to purchase the facility for $1.5 million, subject to a CPI-based escalation, until July 31, 2006. In Fiscal 1998, Fonda terminated it operations at this facility and is currently subleasing the entire facility. Four M Corporation ("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 2001 was less than $0.2 million, Fiscal 2000 was less than $0.2, and through May 1998 was $0.1 million in Fiscal 1999.
During Fiscal 2000, the Company sold $7.6 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, $0.2 million of other services from Four M and $0.9 million of travel services from Emerald Lady. 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. 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.
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 the CEG Asset Purchase Agreement, Fonda canceled previous agreements with CEG including all licensing and manufacturing arrangements and a certain Promissory Note dated February 27, 1997. Independent appraisals were obtained to determine the fairness of the purchase price for such assets.
19. 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 was $60.7 million, $34.8 million and $26.1 million for Fiscal Years 2001, 2000 and 1999, respectively. Future minimum rental commitments under non-cancelable operating leases in effect at September 30, 2001 are as follows (in thousands):
Fiscal 2002 55,862 Fiscal 2003 52,095 Fiscal 2004 49,251 Fiscal 2005 46,610 Fiscal 2006 44,566 Thereafter 240,461 ---------- $ 488,845
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. The future minimum lease payments are $0.1 million in Fiscal 2002, Fiscal 2003, Fiscal 2004 and Fiscal 2005. The present value of the future minimum lease payments is $0.4 million.
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 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, plan 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 $31.5 million annual rental payments and removing the property, plant and equipment sold from its balance sheet. A deferred gain of $107.0 million was realized from this sale and is being amortized over 125 months, which is the term of the Lease.
20. RESTRUCTURING CHARGE (CREDIT)
During the quarter ended June 24, 2001, Fonda established a restructuring reserve of $0.5 million in conjunction with the planned consolidation of the administrative offices of CEG in Indianapolis, Indiana into Fonda's administrative offices in Oshkosh, Wisconsin. This consolidation included the elimination of approximately 40 positions. The plan was approved by management on October 30, 2000 and announced to employees on May 1, 2001. The effective date of the consolidation and elimination of positions was delayed until the fourth quarter of Fiscal 2001. Severance payments of $0.1 million were paid during the fourth quarter of Fiscal 2001. As of September 30, 2001, the remaining reserve of $0.4 million is included within the other current liabilities on the balance sheet and will be utilized during Fiscal 2002.
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. The plan was completed and approved by management on January 10, 2000 and announced to employees on March 7, 2000. Severance payments of $0.2 million, were paid in both the third and fourth quarters of Fiscal 2000. Also, during the fourth quarter of Fiscal 2000, Sweetheart reversed $0.2 million of this reserve as a result of 12 employees being placed into open positions within Sweetheart. The balance of this reserve is included within the "Other current liabilities" on the balance sheet. The balance of this reserve was $0.7 million at the end of the quarter ended March, 26, 2000; $0.5 million at the end of the quarter ended June 25, 2000; and $0.1 million at the end of the fiscal year ended September 24, 2000. Sweetheart utilized the remaining $0.1 million of the restructuring reserve in the first quarter of Fiscal 2001.
During Fiscal 2000, Fonda announced that it intended to close its Maspeth, New York facility in the first quarter of Fiscal 2001 which would result in the elimination of 130 positions. In connection with such plans in Fiscal 2000, Fonda recognized $0.7 million of charges for severance and related costs, of which $0.6 million remained unpaid as of September 24, 2000 and was included within the other current liabilities on the balance sheet. Severance payments of $0.1 million, $0.5 million, $0.08 million, and $0.02 million were paid during the quarters ended September 24, 2000, December 24, 2000,
March 25, 2001, and June 24, 2001, respectively.
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 remained unpaid as of September 27, 1998 and was included within the "Other current liabilities" on the balance sheet. Severance payments of $0.6 million, $0.3 million, $0.06 million, and $0.02 million were paid during the quarters ending December 27, 1998, March 28, 1999, June 27, 1999, and September 26, 1999, respectively. Also, during the quarter ending September 26, 1999, Sweetheart reversed $0.5 million of this reserve as the plan was completed and fringe and benefit expenses associated with such severed employees severed were lower than planned.
21. ASSET IMPAIRMENT EXPENSE
In the quarter ended September 30, 2001, Sweetheart approved plans to consolidate its Manchester, New Hampshire and Springfield, Missouri operations into other existing facilities throughout Sweetheart. As a result, Sweetheart evaluated the usefulness of certain equipment at these facilities and wrote-off the remaining book value of $2.2 million to operations.
22. OTHER EXPENSE (INCOME)
In Fiscal 2001, Sweetheart realized $10.3 million due to the amortization of the deferred gain in conjunction with the sale-leaseback transaction. This amortization of the deferred gain was partially offset by $1.6 million in expenses in associated with the relocation of a manufacturing facility from Somerville, Massachusetts to North Andover, Massachusetts.
In Fiscal 2000, Sweetheart realized a $4.1 million gain on the sale of a warehouse facility in Owings Mills, Maryland and $2.8 million due to the amortization of the deferred gain in conjunction with the sale-leaseback transaction. The amortization of the deferred gain was partially offset by a one-time write-off of a $1.0 million unsecured note receivable issued in connection with the Fiscal 1998 sale of the bakery business due to the bankruptcy of the borrower. Sweetheart also incurred $1.4 million of expenses associated with the Aldridge Liability (See Note 27).
In Fiscal 1999, 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.
23. 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 loss, which amount represents the unamortized deferred financing fees 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 loss. This amount represented the unamortized deferred financing fees and to other expenses pertaining to such debt.
24. 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 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 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 Fonda's union employees were transferred to a multi-employer pension plan resulting in a $0.2 million credit to income. The Company's policy is to annually fund the minimum contributions required by applicable regulations. In Fiscal 2001, all assets of a discontinued pension plan were distributed in full settlement of the plan's obligations. A credit to income of $30,000 was recognized as a result of this settlement. During Fiscal 2001, the valuation date for the plan assets and the contributions was changed from September to June and resulted in no significant effect.
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 $6.8 million, $6.3 million, and $4.8 million for Fiscal 2001, Fiscal 2000, and Fiscal 1999 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.
Fonda also participates in multi-employer pension and 401(k) saving plans for certain of its union employees. Contributions to these plans, at a defined rate per hour worked were $1.0 million in Fiscal 2001, $1.8 million in Fiscal 2000, and $0.9 million in Fiscal 1999.
Net periodic cost for the Company's pension and other benefit plans consists of the following (in thousands):
Fiscal ---------------------------- 2001 2000 1999 -------- -------- --------
Pension Benefits Service cost $ 943 $ 971 $ 1,400 Interest cost 4,583 4,481 4,527 Return on plan assets (4,937) (4,819) (4,662) Net amortizations and deferrals (259) 64 310 Additional amounts recognized (26) - - -------- -------- -------- Net periodic pension cost $ 304 $ 697 $ 1,575 -------- -------- -------- Other Benefits Service cost $ 791 $ 874 $ 1,071 Interest cost 3,183 3,212 3,347 Net amortizations and deferrals (383) (383) - Net actuarial cost (232) - - -------- -------- -------- Net periodic benefit cost $ 3,359 $ 3,703 $ 4,418 -------- -------- --------
The following table sets forth 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 (in thousands):
Pension Benefits ---------------- September 30, September 24, 2001 2000 ------------- ------------- Funded status $ (14,641) $ (6,014) Intangible asset 1,547 184 Other (gain) loss (770) (4,164) Deferred income taxes 2,441 125 Accrued other comprehensive (income) loss 3,663 187 ---------- ---------- Net liability recognized $ (7,760) $ (9,682) ========== ==========
The assumptions used in computing the preceding information are as follows:
For measurement purposes, a 6% annual rate of increase in health care benefits was assumed for
2001. 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 $2,010 $(1,855) Effect on net periodic post- retirement benefit cost $ 286 $ (256)
25. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows (in thousands):
September 30, September 24, 2001 2000 --------------- ---------------
Foreign currency translation adjustment $ (1,063) $ (671) Minimum pension liability adjustment (3,663) (187) --------- ------- Accumulated other comprehensive loss $ (4,726) $ (858) ========= =======
26. 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):
Fiscal ------------------------------------------ 2001 2000 1999 ------------- ------------ ------------- Net sales: Sweetheart $ 981,348 $ 952,728 $ 863,781 Fonda 366,969 351,970 329,259 Corporate and elimination (31,645) (27,810) (11,036) ------------ ------------ ------------ Total $ 1,316,672 $ 1,276,888 $ 1,182,004 ============ ============ ============
Income from operations, excluding restructuring, asset impairment and other income, net: Sweetheart $ 34,154 $ 53,050 $ 32,165 Fonda 24,166 19,806 8,373 Corporate and elimination (1,134) (87) (323) ------------ ------------ ------------ Total $ 57,186 $ 72,769 $ 40,215 ============ ============ ============
Depreciation and amortization: Sweetheart $ 25,853 $ 42,445 $ 50,508 Fonda 7,651 7,373 6,033 Corporate and elimination 20 207 321 ------------ ------------ ------------ Total $ 33,524 $ 50,025 $ 56,862 ============ ============ ============
Interest expense, net: Sweetheart $ 23,519 $ 36,825 $ 41,671 Fonda 15,352 15,783 16,742 Corporate and elimination 14,928 12,704 11,760 ------------ ------------ ------------ Total $ 53,799 $ 65,312 $ 70,173 ============ ============ ============
Capital expenditures: Sweetheart $ 26,488 $ 23,474 $ 30,790 Fonda 5,213 2,815 9,371 Corporate and elimination - (1,020) (2,385) ------------ ------------ ------------ Total $ 31,701 $ 25,269 $ 37,776 ============ ============ ============
Total assets: Sweetheart $ 679,760 $ 661,749 Fonda 258,310 229,173 Corporate and elimination (5,685) (9,793) ------------ ------------ Total $ 932,385 $ 881,129 ============ ============
Sweetheart has one customer that accounted for more that 10.0% of its sales in each year. Net sales to such customer were $109.4 million in Fiscal 2001, $100.7 million in Fiscal 2000 and $98.8 million in Fiscal 1999. Fonda has no customer that accounted for more that 10% of its net sales in Fiscal 2001, 2000 and 1999. All net sales were to customers in the United States, except for sales to Sweetheart customers in Canada and Mexico which amounted to approximately 7.5% and 0.6% of its net sales in Fiscal 2001. All assets are located in the United States except for $38.5 million and $38.9 million in Canada and $17.6 million in Mexico at September 30, 2001 and at September 24, 2000, respectively.
27. CONTINGENCIES
During Fiscal 2001, Sweetheart experienced a casualty loss at its Somerville, Massachusetts facility. Sweetheart carries business interruption insurance and has filed a claim with the insurance
company. Settlement of the recovery amount is to be determined.
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV 187-084, was filed in state court in Georgia in April 1987 and later removed to federal court. The Plaintiffs claimed, among other things, that Sweetheart wrongfully terminated the Lily Tulip, Inc. Salary Retirement Plan (the "Plan") in violation of the Employee Retirement Income Security Act of 1974, as amended. The relief sought by Plaintiffs was to have the Plan termination declared ineffective. The United States Court of Appeals for the Eleventh Circuit (the "Circuit Court") ruled that the Plan was lawfully terminated on December 31, 1986, and judgment was entered dismissing the case in March 1996. The Circuit Court affirmed the judgment entered in favor of Sweetheart. Plaintiffs filed a petition for writ of certiorari to the United States Supreme Court, which was denied in January 1999. Sweetheart expects to complete paying out the termination liability and associated expenses in connection with the Plan termination by December 31, 2001. As of September 30, 2001, Sweetheart disbursed $19.6 million in termination payments. The estimate of the total termination liability and associated expenses, less payments, exceeds the assets set aside in the Plan by $0.4 million, which amount has been fully reserved by Sweetheart.
On November 29, 2001, the liquidating trustee of Ace Baking Company, Limited Partnership, filed a Complaint for Avoidance of Transfers and Disallowance or Subordination of Claims against Sweetheart in the United States Bankruptcy Court Eastern District of Wisconsin. The Complaint, among other things, seeks to avoid a portion of the consideration paid by Ace Baking Company to Sweetheart, as a fraudulent transfer, in connection with the sale by Sweetheart of its bakery business to Ace Baking in November 1997. In addition, the Trustee alleges that certain subsequent payments made by Ace Baking to Sweetheart in connection with such sale are avoidable preferences. We believe that the Trustee's claims are without merit and we intend to vigorously defend this matter. In addition, we have no reason to believe that the final outcome of this matter will have a material adverse effect on our financial condition or results of operations. However, we cannot assure you of the ultimate effect on us, if any, given the early stage of this matter.
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. Sweetheart responded to the EPA that upon review of its files it had no information with respect to any dealings with that site. 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 and in January 2000 Sweetheart responded to such inquiry. In both instances, Sweetheart has received no further communication from the EPA. Sweetheart denies liability and has no reason to believe the final outcomes will have a material adverse effect on Sweetheart's financial condition or results of operations. However, no assurance can be given about the ultimate effect on Sweetheart.
The Company is subject to legal proceedings and other claims arising in the ordinary course of its business. The Company maintains insurance coverage of types and in amounts which it believes to be adequate and believes that it is not presently a party to any litigation, the outcome of which could reasonably be expected to have a material adverse effect on its financial condition or results of operations.
28. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The condensed financial statements of the parent company only are as follows (in thousands):
September 30, September 24, Balance Sheets 2001 2000 --------------- ---------------
Assets Cash and cash equivalents $ 68 $ 42 Refundable income tax 665 324 Other current assets 100 100 Investments in subsidiaries 116,368 107,025 Deferred finance fees 3,096 3,572 Deferred income taxes 15,813 10,601 ---------- ---------- Total Assets $ 136,110 $ 121,664 ========== ==========
Liabilities and Stockholders' Deficit Accrued expenses $ 23 $ 303 Discount notes 118,697 104,245 Exchangeable preferred stock 48,209 41,794 Preferred Stock B, Series 2 15,000 15,000 Redeemable common stock 2,356 2,286 Shareholders' deficit (48,175) (41,964) ---------- --------- Total Liabilities and Shareholders' Deficit $ 136,110 $ 121,664 ========== ==========
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
Independent Auditors' Report 66
Schedule II - Valuation and Qualifying Accounts 67
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of SF Holdings Group, Inc.
We have audited the consolidated financial statements of SF Holdings Group, Inc. and subsidiaries (the "Company") as of September 30, 2001 and September 24, 2000, and for each of the three fiscal years in the period ended September 30, 2001 and have issued our report thereon dated December 7, 2001; such consolidated financial statements and report are included in this Form 10-K. Our audits also included the consolidated financial statement schedule listed in the accompanying index. This consolidated financial statement schedule 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 7, 2001
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.
(3) Inventory 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 12, 2001.
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/ HARVEY L. FRIEDMAN Secretary and General Counsel - ---------------------- Harvey L. Friedman
/s/ ALFRED B. DELBELLO Vice Chairman - ---------------------- Alfred B. DelBello
/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/ EDITH MEHIEL Director - --------------- Edith Mehiel
/s/ JEROME T. MULDOWNEY Director - ----------------------- Jerome T. Muldowney
Signature Title(s)
/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.