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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Thirty-nine Weeks Ended August 6, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from _________ to_________
Commission file number 33-91600
SWEETHEART HOLDINGS INC.*
(Exact name of registrant as specified in its charter)
Delaware 06-1281287
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10100 Reisterstown Road, Owings Mills, Maryland 21117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 410/363-1111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock
as of July 31, 2002:
Sweetheart Holdings Inc. Class A Common Stock, $0.01 par value- 1,046,000 shares
Sweetheart Holdings Inc. Class B Common Stock, $0.01 par value- 4,393,200 shares
* The Registrant is the guarantor of the 12.0% Senior Subordinated Notes due
2003 of Sweetheart Cup Company Inc., a wholly owned subsidiary of the
Registrant.
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30, September 30,
2002 2001
------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 8,020 $ 11,616
Cash in escrow 131 8
Receivables, less allowances of $4,747 and $3,395 162,092 170,122
Inventories 206,571 225,021
Deferred income taxes 23,507 24,185
Assets held for sale 5,275 7,368
Other current assets 33,972 32,645
---------- ----------
Total current assets 439,568 470,965
Property, plant and equipment, net 257,308 260,666
Deferred income taxes 34,109 30,349
Spare parts 13,415 12,077
Goodwill, net 41,737 43,593
Due from SF Holdings 17,962 17,898
Other assets 24,903 23,959
---------- ----------
Total assets $ 829,002 $ 859,507
========== ==========
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 104,761 $ 96,072
Accrued payroll and related costs 41,994 46,892
Other current liabilities 49,865 50,257
Current portion of deferred gain on sale of assets 10,203 10,275
Current portion of long-term debt 9,914 16,942
---------- ----------
Total current liabilities 216,737 220,438
Commitments and contingencies (See Notes)
Deferred income taxes 4,334 4,334
Long-term debt 421,591 423,878
Deferred gain on sale of assets 75,435 83,672
Other liabilities 61,286 68,923
---------- ----------
Total liabilities 779,383 801,245
---------- ----------
Minority interest 2,243 2,130
---------- ----------
Shareholder's equity:
Class A Common Stock - Par value $.01 per share; 1,100,000 shares
authorized; 1,046,000 shares issued and outstanding 10 10
Class B Common Stock - Par value $.01 per share; 4,600,000 shares
authorized; 4,393,200 shares issued and outstanding 44 44
Additional paid-in capital 101,150 101,259
Accumulated deficit (44,559) (37,429)
Accumulated other comprehensive loss (9,269) (7,752)
---------- ----------
Total shareholder's equity 47,376 56,132
---------- ----------
Total liabilities and shareholder's equity $ 829,002 $859,507
========== ==========
See accompanying Notes to Consolidated Financial Statements.
2
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
For the For the For the For the
Thirteen Thirteen Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
June 30, June 24, June 30, June 24,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales $ 340,245 $ 342,072 $ 957,491 $ 961,368
Cost of sales 299,635 291,412 847,772 838,070
---------- ---------- ---------- ----------
Gross profit 40,610 50,660 109,719 123,298
Selling, general and administrative
expenses 28,082 24,443 86,005 82,641
Other expense (income), net 8,877 (894) 5,323 (7,013)
---------- ---------- ---------- ----------
Operating income 3,651 27,111 18,391 47,670
Interest expense, net of interest
income of $61, $-, $151 and $45 9,454 9,635 28,234 29,329
---------- ---------- ---------- ----------
Income (loss) before income
tax, minority interest and
extraordinary loss (5,803) 17,476 (9,843) 18,341
Income tax (benefit) expense (2,320) 6,843 (3,905) 7,248
Minority interest in subsidiary 40 57 113 57
---------- ---------- ---------- ----------
Income (loss) before
extraordinary loss (3,523) 10,576 (6,051) 11,036
Extraordinary loss on debt
extinguishment (net of income
tax benefit of $(719)) - - 1,079 -
---------- ---------- ---------- ----------
Net income (loss) $ (3,523) $ 10,576 $ (7,130) $ 11,036
========== ========== ========== ==========
Other comprehensive income (loss):
Net income (loss) $ (3,523) $ 10,576 $ (7,130) $ 11,036
Foreign currency translation
Adjustment (196) 524 (176) 1
Minimum pension liability
adjustment (net of income
tax of $(146), $285, $(894) (219) 427 (1,341) (2,348)
and $(1,565)) ---------- ---------- ---------- ----------
Comprehensive income (loss) $ (3,938) $ 11,527 $ (8,647) $ 8,689
========== ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
3
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the For the
Thirty-nine weeks Thirty-nine weeks
ended June 30, ended June 24,
2002 2001
--------------------- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (7,130) $ 11,036
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 26,723 22,948
Amortization of deferred gain (7,689) (7,707)
Deferred income tax expense - 5,059
(Gain) loss on sale of assets (3,107) 78
Changes in operating assets and liabilities:
Receivables 8,030 (7,434)
Inventories 18,450 7,352
Other current assets (1,326) (4,087)
Other assets (6,765) 2,347
Accounts payable 8,689 (12,705)
Accrued payroll and related costs (4,898) (9,103)
Other current liabilities (2,744) 2,107
Other liabilities (10,421) (3,877)
Other, net 1,046 (356)
---------- ----------
Net cash provided by operating activities 18,858 5,658
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (17,589) (21,690)
Payment for business acquisition - (18,827)
Due to/from SF Holdings (64) 502
Proceeds from sale of assets 5,280 369
---------- ----------
Net cash used in investing activities (12,373) (39,646)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing under credit facilities 191,522 42,394
Repayment under credit facilities (196,144) -
Repayments of other debt (5,336) (5,736)
Increase in cash in escrow (4,581) (764)
Decrease in cash in escrow 4,458 -
---------- ----------
Net cash (used in) provided by financing activities (10,081) 35,894
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (3,596) 1,906
CASH AND CASH EQUIVALENTS, beginning of period 11,616 4,828
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 8,020 $ 6,734
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 19,890 $ 23,202
========== ==========
Income taxes paid $ 808 $ 619
========== ==========
See accompanying Notes to Consolidated Financial Statements.
4
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
On March 25, 2002, pursuant to an Agreement and Plan of Merger, The
Fonda Group, Inc. ("Fonda") was merged (the "Merger") with and into Sweetheart
Cup Company Inc. ("Sweetheart Cup"), with Sweetheart Cup as the surviving
entity. In connection with the Merger, all of the assets and operations of Fonda
were assigned to, and all liabilities of Fonda were assumed by, Sweetheart Cup
by operation of law and all of the outstanding shares of Fonda were cancelled.
Sweetheart Cup, the surviving entity, is a wholly owned subsidiary of Sweetheart
Holdings Inc. ("Sweetheart Holdings") which is a wholly owned subsidiary of SF
Holdings Group, Inc. ("SF Holdings"). Pre-merger, Sweetheart Holdings and Fonda
were under common control, and therefore, the transaction has been accounted for
in a manner similar to a pooling-of-interests. The accompanying consolidated
financial statements of Sweetheart Holdings and its subsidiaries (the "Company")
have been restated for all periods presented.
Pursuant to an agreement, dated as of March 22, 2002 by and among
Dennis Mehiel, the Company's Chairman and Chief Executive Officer, SF Holdings,
American Industrial Partners Management Company, Inc., American Industrial
Partners Capital Fund L.P. ("AIP") and the other stockholders of Sweetheart
Holdings signatory to that certain Stockholders' Agreement, dated as of March
12, 1998, (together with AIP and any permitted transferee of shares of Class A
common stock or Class B common stock of Sweetheart Holdings ("the Shares"), the
"Original Stockholders"), all of the outstanding Shares not held by SF Holdings
(which consisted of 52% of the voting stock of Sweetheart Holdings) were
delivered to SF Holdings and exchanged for 96,000 shares of Class C common stock
of SF Holdings. As a result, SF Holdings became the sole beneficial owner of
100% of the issued and outstanding capital stock of Sweetheart Holdings. In
addition and in connection therewith, the Stockholders Agreement and related
stockholders' right agreement were terminated.
The information included in the foregoing interim financial statements
of the Company is unaudited but, in the opinion of management, includes all
adjustments (consisting only of normal recurring adjustments and accruals) which
the Company considers necessary for a fair presentation of the operating results
for these periods. Results for the interim periods are not necessarily
indicative of results for the entire year. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the annual reports on Form
10-K/A of Sweetheart Holdings and Form 10-K of Fonda for the fiscal year ended
September 30, 2001.
(2) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 prohibits the use of the pooling-of-interest method for
business combinations initiated after June 30, 2001 and also applies to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were accounted for by the
purchase method. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001 and applies to all goodwill and other intangible assets
recognized in an entity's balance sheet regardless of when these assets were
originally recognized. SFAS No. 142 requires that goodwill and certain
intangibles with an indefinite life not be amortized, but subject to an
impairment test on an annual basis. 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
5
reporting provisions of Accounting Principals Board Opinion No. 30, ("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. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The Company is currently evaluating the impact of SFAS No. 144 on its
consolidated financial statements.
In April 2002, the FASB issued pronouncement SFAS No. 145, Recission of
FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement addresses, among other items, the classification of
gains and losses from extinguishment of debt. In accordance with the statement,
any gain or loss on extinguishment of debt that does not meet the criteria in
APB No. 30 will no longer be classified as an extraordinary item for all periods
presented. This statement is effective for fiscal years beginning after May 15,
2002. The Company is currently evaluating the impact of SFAS No. 145 on its
consolidated financial statements.
(3) INVENTORIES
The components of inventories are as follows (in thousands):
(Unaudited)
June 30, September 30,
2002 2001
--------------- -----------------
Raw materials and supplies $ 47,679 $ 55,955
Finished products 148,863 158,297
Work in progress 10,029 10,769
---------- ----------
Total inventories $ 206,571 $ 225,021
========== ==========
(4) RELATED PARTY TRANSACTIONS
All of the affiliates (other than Fibre Marketing , LLC, a waste
recovery business in which the Company has a 25% interest ("Fibre Marketing"))
referenced below are directly or indirectly under the common ownership of the
Company's Chief Executive Officer. The Company believes that the transactions
described below which were entered into with related parties were negotiated on
terms which are at least as favorable as it could have obtained from unrelated
third parties and were negotiated on an arm's length basis.
During the thirty-nine weeks ended June 30, 2002, the Company sold $5.5
million of scrap paper and plastic to Fibre Marketing Group. Accounts receivable
as of June 30, 2002 included $1.2 million due from Fibre Marketing.
On November 1, 2001, Fibre Marketing issued to Fonda and Sweetheart Cup
promissory notes in the aggregate principal amount of approximately $1.2 million
in exchange for outstanding accounts receivable from Fibre Marketing. The notes
are secured by all of Fibre Marketing's account receivables, bear interest at an
annual rate of 7.0% and are payable in 36 equal monthly installments. As of June
30, 2002, $1.0 million is due to the Company.
During the thirty-nine weeks ended June 30, 2002, the Company purchased
$8.2 million of corrugated containers from Box USA Holdings, Inc. ("Box USA"), a
company in which the Company's Chief Executive Officer owns in excess of 10% of
its outstanding capital stock, and $0.8 million of travel
6
services from Emerald Lady, Inc, a company wholly owned by the Company's Chief
Executive Officer ("Emerald Lady"). Accounts payable, as of June 30, 2002
included $1.2 million due to Box USA.
The Company had a loan receivable from its Chief Executive Officer of
$0.3 million plus accrued interest at 5.06% at June 30, 2002. The loan is
payable upon demand.
During Fiscal 2000, the Company entered into a lease agreement with D&L
Development, LLC, an entity in which the Company's Chief Executive Officer
indirectly owns 47%, to lease a warehouse facility in Hampstead, Maryland.
During the thirty-nine weeks ending June 30, 2002 and the thirty-nine weeks
ending June 24, 2001, rental payments under this lease were $2.8 million and
$2.6 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, the Company began leasing a facility in North
Andover, Massachusetts from D&L Andover Property, LLC, an entity in which the
Company's Chief Executive Officer indirectly owns 50%. During the thirty-nine
weeks ending June 30, 2002 and the thirty-nine weeks ending June 24, 2001,
rental payments under this lease were $1.1 million and $1.0 million,
respectively. Annual rental payments under the 20 year lease are $1.5 million in
the first year, which escalates at a rate of 2% each year thereafter.
The Company leases a building in Jacksonville, Florida from the
Company's Chief Executive Officer. Annual payments under the lease are $0.2
million plus annual increases based on changes in the Consumer Price Index
("CPI") through December 31, 2014. In addition, the Chief Executive Officer can
require the Company to purchase the facility for $1.5 million, subject to a
CPI-based escalation, until July 31, 2006. In Fiscal 1998, the Company
terminated its operations at this facility and is currently subleasing the
entire facility. Rent expense, net of sublease income on the portion of the
premises subleased is $0.1 million during the thirty-nine weeks ending June 30,
2002.
During the thirty-nine weeks ended June 24, 2001, the Company sold $5.2
million of scrap paper and plastic to Fibre Marketing. Accounts receivable as of
June 24, 2001 included $2.5 million due from Fibre Marketing and $0.7 million
due from SF Holdings.
During the thirty-nine weeks ended June 24, 2001, the Company purchased
$5.7 million of corrugated containers from Box USA and $0.8 million of travel
services from Emerald Lady. Accounts payable, as of June 24, 2001, included $0.5
million due to Box USA.
On December 3, 1999, Creative Expressions Group, Inc. ("CEG"), an
affiliate of the Company in the disposable party goods products business, became
an 87% owned subsidiary of SF Holdings pursuant to a merger (the "CEG Merger").
On December 6, 1999, pursuant to the CEG Asset Purchase Agreement, the Company
purchased the intangible assets of CEG, including domestic and foreign
trademarks, patents, copyrights and customer lists. CEG's net assets and
liabilities that were not acquired by the Company pursuant to the CEG Asset
Purchase Agreement were acquired by SF Holdings and have been classified as "Due
to/from SF Holdings".
(5) LONG-TERM DEBT OBLIGATIONS
On June 10, 2002, the Company entered into a loan agreement with the
Department of Business and Economic Development, a principal department of the
State of Maryland, to borrow $2.0 million (the "Maryland Loan"). The Maryland
Loan bears interest at a rate ranging from 3.0% to 8.0% per annum depending on
certain employment rates at the Company's Owings Mills, Maryland facility. The
Maryland Loan is payable in quarterly installments through March 1, 2007. As of
June 30, 2002, $2.0
7
million was outstanding at an annual interest rate of 3.0%.
On March 25, 2002, the Company entered into a supplemental indenture to
the Indenture (the "Indenture") governing its $110 million 10 1/2% Senior
Subordinated Notes due 2003 (the "$110 Senior Subordinated Notes") to amend the
definition of "Change of Control" in the Indenture to substitute Dennis Mehiel,
the Company's Chairman and Chief Executive Officer, for AIP and to make certain
other conforming changes. The Company offered to pay $5.00 for each $1,000 in
principal amount of the $110 Senior Subordinated Notes (the "Consent Fee") to
holders of the $110 Senior Subordinated Notes who had properly furnished, and
not revoked, their consent on or prior to the expiration date of the consent
solicitation (the "Consent Solicitation"). As a result of the consummation of
the Consent Solicitation, the $110 Senior Subordinated Notes began to accrue
interest at 12% per annum as of March 1, 2002. The Company paid the Consent Fee
to the holders of the $110 Senior Subordinated Notes who consented prior to the
expiration of the Consent Solicitation. Such Consent Fee has been capitalized in
other assets and is being amortized over the term of the $110 Senior
Subordinated Notes.
On March 25, 2002, the Company refinanced its senior revolving credit
facility with Bank of America, N.A., as agent (the "Senior Credit Facility"),
which replaced each of Sweetheart Cup's and Fonda's existing domestic revolving
credit and term loan facilities. The Senior Credit Facility has a maturity date
of March 25, 2007; however, in the event that the Company has not refinanced,
repaid or extended the $110 Senior Subordinated Notes prior to March 1, 2003,
the Senior Credit Facility shall terminate on that date. The Senior Credit
Facility allows for a maximum credit borrowing of $235 million subject to
borrowing base limitations and satisfaction of other conditions of borrowing.
The revolving borrowings have a maximum of the lesser of $235 million less the
balance of the term loans or $215 million. The term loans have a maximum of $25
million and are payable monthly through March 2005. Borrowings under the Senior
Credit Facility, at the Company's election, bear interest at either (i) a bank's
base rate revolving loan reference rate plus 0.5% or (ii) LIBOR plus 2.5%. For
the thirty-nine weeks ended June 30, 2002, the weighted average annual interest
rate for the Senior Credit Facility was 4.85%. The Senior Credit Facility is
collateralized by the Company's accounts, inventory, general intangibles and
certain other assets. The fee for outstanding letters of credit is 2.00% per
annum and there is a commitment fee of 0.375% per annum on the daily average
unused amount of the commitments. As of June 30, 2002, $31.7 million was
available under the Senior Credit Facility.
Extraordinary loss on debt extinguishment was $1.1 million, net of the
income tax benefit in the thirty-nine weeks ended June 30, 2002, resulting from
the refinancing of the Company's Senior Credit Facility.
(6) SF HOLDINGS STOCK OPTION PLAN
During the thirty-nine weeks ended June 24, 2001, SF Holdings granted
options to purchase shares of its common stock to certain employees of the
Company. The options vest over a period of three years. Certain of the exercise
prices of the options were below the fair market value of SF Holdings' common
stock at the date of the grant. During the vesting period, these discounts of
$0.3 million are being amortized as compensation expense and credited to
additional paid-in capital by the Company. Amortization expense relating to SF
Holdings' stock options was $47,000 and $104,000 for the thirty-nine weeks ended
June 30, 2002 and the thirty-nine weeks ended June 24, 2001, respectively.
8
(7) ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows
(in thousands):
(Unaudited)
June 30, September 30,
2002 2001
------------- ---------------
Foreign currency translation adjustment $ (1,987) $ (1,811)
Minimum pension liability adjustment (7,282) (5,941)
--------- ---------
Accumulated other comprehensive loss $ (9,269) $ (7,752)
========= =========
(8) OTHER EXPENSE (INCOME), NET
During the thirty-nine weeks ended June 30, 2002, the Company realized
$7.7 million due to the amortization of the deferred gain in conjunction with
the Fiscal 2000 sale-leaseback transaction. Also, during the thirty-nine weeks
ended June 30, 2002, the Company recognized a $3.0 million gain associated with
the sale of the Company's manufacturing facility in Manchester, New Hampshire.
These gains were offset by a $5.4 million write-off of the management services
agreement between Sweetheart Holdings and SF Holdings, which had been assigned
and assumed by Fonda in 1998 and the Company's write-off of $2.6 million of
assets related to business initiatives which were abandoned subsequent to the
Merger. Additionally, the Company incurred $7.6 million of costs in connection
with the rationalization, consolidation and improvement of the Company's
manufacturing facilities. Included in the $7.6 million of costs is a $1.6
million restructuring reserve which the Company established in conjunction with
a workforce reduction program as a result of the Company's consolidation
initiatives. The workforce reduction program was approved by management on June
19, 2002 and announced to employees on June 28, 2002. Severance payments of $1.6
million will be paid in the fourth quarter of Fiscal 2002 and the first three
quarters of Fiscal 2003. The $1.6 million reserve has been included in the
"Other current liabilities" on the consolidated balance sheet as of June 30,
2002.
During the thirty-nine weeks ended June 24, 2001, the Company realized
$7.7 million due to the amortization of the deferred gain in connection with the
Fiscal 2000 sale-leaseback transaction. Also, during the thirty-nine weeks ended
June 24, 2001, the Company recognized $1.1 million of expense in association
with the relocation of a manufacturing facility from Somerville, Massachusetts
to North Andover, Massachusetts.
(9) CONTINGENCIES
During Fiscal 2001, the Company experienced a casualty loss at its
Somerville, Massachusetts facility. The Company 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 the Company 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 the Company. Plaintiffs filed a petition for writ
of certiorari to the United States
9
Supreme Court, which was denied in January 1999. The Company expects to complete
paying out the termination liability and associated expenses in connection with
the Plan termination by December 31, 2002. As of June 30, 2002, the Company
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 $0.6 million, which amount has been fully reserved by
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.
10
(10) SWEETHEART CUP COMPANY INC.
All of the outstanding stock of Sweetheart Cup is owned by Sweetheart
Holdings and thereby Sweetheart Holdings is the only guarantor of the $110
Senior Subordinated Notes, as amended. The guarantee is full and unconditional.
The following financial information for Sweetheart Cup and its subsidiaries,
Sweetheart Holdings and the Company is presented in accordance with Rule 3-10 of
Regulation S-K (in thousands):
Consolidated Balance Sheet
June 30, 2002
----------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 8,020 $ - $ - $ 8,020
Cash in escrow 131 - - 131
Receivables 208,333 - (46,241) 162,092
Raw materials inventory 47,679 - - 47,679
Work in progress inventory 10,029 - - 10,029
Finished goods inventory 148,863 - - 148,863
Assets held for sale - 5,275 - 5,275
Other current assets 57,479 2,517 (2,517) 57,479
---------- ---------- ----------- ----------
Total current assets 480,534 7,792 (48,758) 439,568
Property, plant and equipment, net 257,308 - - 257,308
Other assets 143,164 107,592 (118,630) 132,126
---------- ---------- ----------- ----------
Total assets $ 881,006 $ 115,384 $ (167,388) $ 829,002
========== ========== ============ ==========
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 104,761 $ - $ - $ 104,761
Other current liabilities 114,493 - (2,517) 111,976
----------- ----------- ----------- ----------
Total current liabilities 219,254 - (2,517) 216,737
Long-term debt 421,591 46,241 (46,241) 421,591
Other liabilities 223,921 - (82,866) 141,055
---------- ---------- ----------- ----------
Total liabilities 864,766 46,241 (131,624) 779,383
---------- ---------- ----------- ----------
Minority interest 2,243 - - 2,243
---------- ---------- ----------- ----------
Shareholder's equity:
Class A common stock - 10 - 10
Class B common stock - 44 - 44
Additional paid-in capital 100,660 101,090 (100,600) 101,150
Accumulated deficit (77,394) (32,001) 64,836 (44,559)
Accumulated other comprehensive loss (9,269) - - (9,269)
---------- ---------- ----------- ----------
Total shareholder's equity 13,997 69,143 (35,764) 47,376
---------- ---------- ----------- ----------
Total liabilities and shareholder's equity $ 881,006 $ 115,384 $ (167,388) $ 829,002
========== ========== =========== ==========
11
Consolidated Balance Sheet
September 30, 2001
----------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 11,616 $ - $ - $ 11,616
Cash in escrow 8 - - 8
Receivables 216,688 9 (46,575) 170,122
Raw materials inventory 55,955 - - 55,955
Work in progress inventory 10,769 - - 10,769
Finished goods inventory 158,297 - - 158,297
Assets held for sale - 7,368 - 7,368
Other current assets 56,830 - - 56,830
----------- ---------- ----------- ----------
Total current assets 510,163 7,377 (46,575) 470,965
Property, plant and equipment, net 182,117 102,768 (24,219) 260,666
Other assets 143,120 21,496 (36,740) 127,876
---------- ---------- ----------- ----------
Total assets $ 835,400 $ 131,641 $ (107,534) $ 859,507
========== ========== =========== ==========
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable $ 89,840 $ 6,232 $ - $ 96,072
Other current liabilities 110,839 14,769 (1,242) 124,366
---------- ---------- ----------- ----------
Total current liabilities 200,679 21,001 (1,242) 220,438
Long-term debt 423,878 45,333 (45,333) 423,878
Other liabilities 182,124 - (25,195) 156,929
---------- ---------- ----------- ----------
Total liabilities 806,681 66,334 (71,770) 801,245
---------- ---------- ----------- ----------
Minority interest 2,130 - - 2,130
---------- ---------- ----------- ----------
Shareholder's equity:
Class A common stock - 10 - 10
Class B common stock - 44 - 44
Additional paid-in capital 100,769 101,090 (100,600) 101,259
Accumulated deficit (66,428) (35,837) 64,836 (37,429)
Accumulated other comprehensive loss (7,752) - - (7,752)
---------- ---------- ----------- ----------
Total shareholder's equity 26,589 65,307 (35,764) 56,132
---------- ---------- ----------- ----------
Total liabilities and shareholder's equity $ 835,400 $ 131,641 $ (107,534) $ 859,507
========== ========== =========== ==========
12
Consolidated Statement of Operations
For the Thirteen Weeks Ended June 30, 2002
----------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- ---------------
Net sales $ 340,245 $ - $ - $ 340,245
Cost of sales 299,635 - - 299,635
---------- ---------- ----------- ----------
Gross profit 40,610 - - 40,610
Selling, general and administrative expenses 28,081 1 - 28,082
Other expense, net 8,877 - - 8,877
---------- ---------- ----------- ----------
Operating income (loss) 3,652 (1) - 3,651
Interest expense (income), net 9,482 (28) - 9,454
---------- ---------- ----------- ----------
Income (loss) before income tax
and minority interest (5,830) 27 - (5,803)
Income tax (benefit) expense (2,331) 11 - (2,320)
Minority interest in subsidiary 40 - - 40
---------- ---------- ----------- ----------
Net income (loss) $ (3,539) $ 16 $ - $ (3,523)
========== ========== =========== ==========
Other comprehensive income (loss):
Net income (loss) $ (3,539) $ 16 $ - $ (3,523)
Foreign currency translation
adjustment (196) - - (196)
Minimum pension liability
adjustment(net of income
taxes of $(146)) (219) - - (219)
---------- ---------- ----------- ----------
Comprehensive income (loss) $ (3,954) $ 16 $ - $ (3,938)
========== ========== =========== ==========
13
Consolidated Statement of Operations
For the Thirteen Weeks Ended June 24, 2001
----------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- ---------------
Net sales $ 342,072 $ 59,796 $ (59,796) $ 342,072
Cost of sales 297,118 54,802 (60,508) 291,412
---------- ---------- ----------- ----------
Gross profit 44,954 4,994 712 50,660
Selling, general and administrative expenses 23,966 477 - 24,443
Other income, net (1,606) - 712 (894)
---------- ---------- ----------- ----------
Operating income 22,594 4,517 - 27,111
Interest expense, net 8,460 1,175 - 9,635
---------- ---------- ----------- ----------
Income before income tax expense and
minority interest 14,134 3,342 - 17,476
Income tax expense 5,506 1,337 - 6,843
Minority interest in subsidiary 57 - - 57
----------- ---------- ----------- ----------
Net income $ 8,571 $ 2,005 $ - $ 10,576
========== ========== =========== ==========
Other comprehensive income:
Net income $ 8,571 $ 2,005 $ - $ 10,576
Foreign currency translation
adjustment 524 - - 524
Minimum pension liability
adjustment (net of income
taxes of $285) 427 - - 427
---------- ---------- ----------- ----------
Comprehensive income $ 9,522 $ 2,005 $ - $ 11,527
========== ========== =========== ==========
14
Consolidated Statement of Operations
For the Thirty-nine Weeks Ended June 30, 2002
----------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- ---------------
Net sales $ 957,491 $ 116,485 $ (116,485) $ 957,491
Cost of sales 858,722 106,760 (117,710) 847,772
---------- ---------- ----------- ----------
Gross profit 98,769 9,725 1,225 109,719
Selling, general and administrative expenses 85,073 932 - 86,005
Other expense, net 4,098 - 1,225 5,323
---------- ---------- ----------- ----------
Operating income 9,598 8,793 - 18,391
Interest expense, net 25,835 2,399 - 28,234
---------- ---------- ----------- ----------
Income (loss) before income tax,
minority interest and extraordinary
loss (16,237) 6,394 - (9,843)
Income tax (benefit) expense (6,463) 2,558 - (3,905)
Minority interest in subsidiary 113 - - 113
---------- --------- ----------- ----------
Income (loss) before extraordinary
loss (9,887) 3,836 - (6,051)
Extraordinary loss on debt extinguishment
(net of income tax benefit of $(719)) 1,079 - - 1,079
---------- ---------- ----------- ----------
Net income (loss) $ (10,966) $ 3,836 $ - $ (7,130)
========== ========== =========== ==========
Other comprehensive income (loss):
Net income (loss) $ (10,966) $ 3,836 $ - $ (7,130)
Foreign currency translation
adjustment (176) - - (176)
Minimum pension liability
adjustment (net of income
taxes of $(894)) (1,341) - - (1,341)
---------- ---------- ----------- ----------
Comprehensive income (loss) $ (12,483) $ 3,836 $ - $ (8,647)
========== ========== =========== ==========
15
Consolidated Statement of Operations
For the Thirty-nine Weeks Ended June 24, 2001
----------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- ---------------
Net sales $ 961,368 $ 176,011 $ (176,011) $ 961,368
Cost of sales 854,867 161,348 (178,145) 838,070
---------- ---------- ----------- ----------
Gross profit 106,501 14,663 2,134 123,298
Selling, general and administrative expenses 81,129 1,512 - 82,641
Other income, net (9,147) - 2,134 (7,013)
---------- ---------- ----------- ----------
Operating income 34,519 13,151 - 47,670
Interest expense, net 26,252 3,077 - 29,329
---------- ---------- ----------- ----------
Income before income tax expense and
minority interest 8,267 10,074 - 18,341
Income tax expense 3,218 4,030 - 7,248
Minority interest in subsidiary 57 - - 57
----------- ---------- ----------- ----------
Net income $ 4,992 $ 6,044 $ - $ 11,036
========== ========== =========== ==========
Other comprehensive income:
Net income $ 4,992 $ 6,044 $ - $ 11,036
Foreign currency translation
adjustment 1 - - 1
Minimum pension liability
adjustment (net of income
taxes of $(1,565)) (2,348) - - (2,348)
---------- ---------- ----------- ----------
Comprehensive income $ 2,645 $ 6,044 $ - $ 8,689
========== ========== =========== ==========
16
Consolidated Statement of Cash Flows
For the Thirty-nine Weeks Ended June 30, 2002
----------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 18,858 $ 88,148 $ (88,148) $ 18,858
---------- ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (17,589) - - (17,589)
Due to/from SF Holdings (64) - - (64)
Proceeds from sale of assets 5,280 - - 5,280
---------- ---------- ----------- ----------
Net cash used in investing activities (12,373) - - (12,373)
---------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under credit facilities 191,522 - - 191,522
Repayments under credit facilities (196,144) - - (196,144)
Repayments of other debt (5,336) - - (5,336)
Repayment of intercompany equipment financing - (88,148) 88,148 -
Increase in cash escrow, net (4,581) - - (4,581)
Decrease in cash escrow, net 4,458 - - 4,458
---------- ---------- ----------- ----------
Net cash used in financing activities (10,081) (88,148) 88,148 (10,081)
---------- ---------- ----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,596) - - (3,596)
CASH AND CASH EQUIVALENTS, beginning of period 11,616 - - 11,616
---------- ---------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 8,020 $ - $ - $ 8,020
========== ========== =========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 19,890 $ - $ - $ 19,890
========== ========== =========== ==========
Income taxes paid $ 808 $ - $ - $ 808
========== ========== =========== ==========
17
Consolidated Statement of Cash Flows
For the Thirty-nine Weeks Ended June 24, 2001
----------------------------------------------------------
Sweetheart
Sweetheart Sweetheart Holdings Holdings
Cup Holdings Elimination Consolidated
------------ ------------ ------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 5,658 $ 12,525 $ (12,525) $ 5,658
---------- ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (21,690) - - (21,690)
Payment for business acquisition (18,827) - - (18,827)
Due to/from SF Holdings 502 - - 502
Proceeds from sale of assets 369 - - 369
---------- ---------- ----------- ----------
Net cash used in investing activities (39,646) - - (39,646)
---------- ---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under credit facilities 42,394 - - 42,394
Repayments of other debt (5,736) - - (5,736)
Repayment of intercompany equipment financing - (12,525) 12,525 -
Increase in cash in escrow (764) - - (764)
---------- ---------- ----------- ----------
Net cash provided by financing activities 35,894 (12,525) 12,525 35,894
---------- ---------- ----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,906 - - 1,906
CASH AND CASH EQUIVALENTS, beginning of period 4,828 - - 4,828
---------- ---------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 6,734 $ - $ - $ 6,734
========== ========= =========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 23,202 $ - $ - $ 23,202
========== ========== =========== ==========
Income taxes paid $ 619 $ - $ - $ 619
========== ========== =========== ==========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Forward-looking statements in this filing, including those in the Notes
to Consolidated Financial Statements, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties and actual
results could differ materially. Such risks and uncertainties include, but are
not limited to, general economic and business conditions, competitive market
pricing, increases in raw material costs, energy costs and other manufacturing
costs, fluctuations in demand for Sweetheart Holdings Inc. ("Sweetheart
Holdings"), together with its wholly owned subsidiary Sweetheart Cup Company
Inc. ("Sweetheart Cup"), and collectively with its other subsidiaries, (the
"Company") products, potential equipment malfunctions and pending litigation.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United Sates of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. On an on-going basis,
management evaluates its estimates and judgments, including those related to
18
accounts receivable reserves, inventory reserves, long-lived assets, revenue
recognition, income taxes and contingencies. Management bases its estimates and
judgment on historical experience and on various other factors that are believed
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
For a list of the critical accounting policies that management
believes, among others, affect its more significant judgments and estimates used
in the preparation of its consolidated financial statements, refer to
Management's Discussion and Analysis in the annual reports on Form 10-K/A of
Sweetheart Holdings and Form 10-K of The Fonda Group, Inc. ("Fonda") for Fiscal
2001.
General
The Company believes it is one of the largest producers and marketers
of disposable foodservice and food packaging products in North America. 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, consumer foodservice and food packaging
customers. The Company markets its products under its well recognized:
Sweetheart(R), Lily(R), Trophy(R), Jazz(R), Preference(TM), Go Cup(R), Silent
Service(R), Centerpiece(R), Basix(R), Guildware(R), Simple Elegance(R),
Sensations(R), Hoffmaster(R), Paper Art(R), and Touch of Color(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, food trays and food containers; (ii)
tissue and specialty foodservice products, primarily napkins, table covers,
placemats and lunch bags; and (iii) food packaging products, primarily
containers for the dairy and food processing industries. To enhance product
sales, the Company designs, manufactures and leases container filling and
lidding equipment to dairies and other food processors to package food items in
the Company's containers at customers' plants. Types of products packaged in the
Company's machines include: ice cream, factory-filled jacketed ice cream cones,
cottage cheese, yogurt and squeeze-up desserts. The Company also sells paper
converting equipment used primarily in the manufacture of paper cups and food
containers.
The Company sells its products to institutional foodservice and
consumer 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 include (i) major foodservice distributors, (ii) national
accounts, including quick service restaurants and catering services, and (iii)
schools, hospitals and (iv) other major institutions. The Company's consumer
customers include (i) supermarkets, (ii) mass merchandisers, (iii) warehouse
clubs, (iv) party good stores and (v) other retailers. The Company's food
packaging customers include (i) national and regional dairy and (ii) food
companies.
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.
Raw materials are critical components of the Company's cost structure.
The prices for these raw materials may fluctuate. When raw material prices
decrease, selling prices have historically decreased.
19
The actual impact from raw materials price changes is affected by a number of
factors including the level of inventories at the time of a price change, the
specific timing and frequency of price changes, and the lead and lag time that
generally accompanies the implementation of both raw materials and subsequent
selling price changes. In the event that raw materials prices decrease over a
period of several months, the Company may suffer margin erosion on the sale of
such inventory.
Selling, general and administrative expenses consist primarily of
salaries, benefits, promotional and advertising costs, rent, depreciation of
equipment and broker fees.
The Company'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 the
Company's cash flow from operations is insufficient to provide working capital
necessary to fund its requirements, the Company will need to borrow under its
credit facility or seek other sources of capital. The Company believes that
funds available under such credit facility together with cash generated from
operations, will be adequate to provide for cash requirements for the next
twelve months.
On March 25, 2002, pursuant to an Agreement and Plan of Merger, Fonda
was merged (the "Merger") with and into Sweetheart Cup, with Sweetheart Cup as
the surviving entity. In connection with the Merger, all of the assets and
operations of Fonda were assigned to, and all liabilities of Fonda were assumed
by, Sweetheart Cup by operation of law and all of the outstanding shares of
Fonda were cancelled. Sweetheart Cup is a wholly owned subsidiary of Sweetheart
Holdings which is a wholly owned subsidiary of SF Holdings. Sweetheart Holdings
and Fonda are under common control, and therefore, the transaction has been
accounted for in a manner similar to a pooling-of-interests. The accompanying
financial information has been restated for all periods presented.
Thirteen Weeks Ended June 30, 2002 Compared to Thirteen Weeks Ended
June 24, 2001 (Unaudited)
Net sales decreased $1.9 million, or 0.6%, to $340.2 million for the
thirteen weeks ended June 30, 2002 compared to $342.1 million for the thirteen
weeks ended June 24, 2001, reflecting a 2.2% increase in sales volume and a 2.8%
decrease in average realized sales prices. Sales volume increased as a result of
incremental sales obtained from the Company's acquisition of an 80% interest in
Global Cup, S.A. De C.V. and its subsidiaries ("Global") in April 2001 and the
Company's acquisition of substantially all of the property, plant and equipment,
intangible and net working capital of the consumer division of Dopaco, Inc.
("Dopaco") in August 2001. Average realized sales prices decreased as a result
of lower raw material costs and competitive pressures.
Gross profit decreased $10.1 million, or 19.9%, to $40.6 million for
the thirteen weeks ended June 30, 2002 compared to $50.7 million for the
thirteen weeks ended June 24, 2001. As a percentage of net sales, gross profit
decreased to 11.9% for the thirteen weeks ended June 30, 2002 from 14.8% for the
thirteen weeks ended June 24, 2001. Gross profit was negatively impacted by
lower average realized sales prices reflecting a decrease in raw material costs
and manufacturing inefficiencies related to the Company's initiatives to
rationalize, consolidate and improve its manufacturing facilities.
Selling, general and administrative expense increased $3.7 million, or
15.2%, to $28.1 million for the thirteen weeks ended June 30, 2002 compared to
$24.4 million for the thirteen weeks ended June 24, 2001. This increase resulted
primarily from $1.7 million of increased promotional and advertising expenses,
$0.9 million of increased legal fees, and $0.5 million of increased expenses
resulting from the acquisition of Dopaco.
Other expense (income), net changed $9.8 million, to an expense of
$8.9 million for the thirteen weeks ended June 30, 2002 compared to income of
$0.9 million for the thirteen weeks ended June 24, 2001. This change is
primarily due to (i) a $4.6 million write-off of the management services
agreement between Sweetheart Holdings and SF Holdings, which had been assigned
and assumed by Fonda in 1998 (ii) a $2.6 million write-off of assets related to
certain business initiatives which were abandoned
20
subsequent to the Merger and (iii) $3.3 million of costs incurred in connection
with the rationalization, consolidation and improvement of the Company's
manufacturing facilities, which included a $1.6 million restructuring reserve
that the Company established in conjunction with a workforce reduction program
as a result of these consolidation initiatives.
Operating income (loss) decreased $23.4 million, or 86.3%, to $3.7
million for the thirteen weeks ended June 30, 2002 compared to income of $27.1
million for the thirteen weeks ended June 24, 2001, due to the reasons stated
above.
Interest expense, net decreased $0.1 million, or 1.0%, to $9.5 million
for the thirteen weeks ended June 30, 2002 compared to $9.6 million for the
thirteen weeks ended June 24, 2001. This decrease is attributable to lower
interest rates on higher average balances which was partially offset by the
increase in coupon interest on the $110 Senior Subordinated Notes from 10.5% to
12.0% which was effective March 1, 2002.
Income tax expense (benefit) decreased $9.1 million, or 133.8%, to a
benefit of $2.3 million in the thirteen weeks ended June 30, 2002 compared to an
expense of $6.8 million for the thirteen weeks ended June 24, 2001 as a result
of a pre-tax loss in Fiscal 2002 compared to a profit in Fiscal 2001. The
effective rates for the thirteen weeks ended June 30, 2002 and the thirteen
weeks ended June 24, 2001 were 40% and 39%, respectively.
Minority interest in subsidiary decreased $17,000, or 29.8%, to $40,000
in the thirteen weeks ended June 30, 2002 compared to $57,000 in the thirteen
weeks ended June 24, 2001. This amount represents the 20% ownership of Global's
income.
Net income (loss) decreased $14.1 million, or 133.0%, to a $3.5 million
loss for the thirteen weeks ended June 30, 2002 compared to income of $10.6
million for the thirteen weeks ended June 24, 2001, due to the reasons stated
above.
Thirty-nine Weeks Ended June 30, 2002 Compared to Thirty-nine Weeks Ended
June 24, 2001 (Unaudited)
Net sales decreased $3.9 million, or 0.4%, to $957.5 million for the
thirty-nine weeks ended June 30, 2002 compared to $961.4 million for the
thirty-nine weeks ended June 24, 2001, reflecting a 2.4% decrease in average
realized sales prices and a 2.0% increase in sales volume. Average realized
sales prices decreased as a result of lower raw material costs and competitive
pressures. Sales volume increased as a result of incremental sales obtained from
the Company's acquisitions of Global in April 2001 and Dopaco in August 2001.
Gross profit decreased $13.6 million, or 11.0%, to $109.7 million for
the thirty-nine weeks ended June 30, 2002 compared to $123.3 million for the
thirty-nine weeks ended June 24, 2001. As a percentage of net sales, gross
profit decreased to 11.5% for the thirty-nine weeks ended June 30, 2002 from
12.8% for the thirty-nine weeks ended June 24, 2001. The decrease in gross
profit reflects a decrease in fixed costs absorption as the Company's inventory
production was down from the prior year. In addition, gross profit was
negatively impacted by lower average realized sales prices reflecting decreases
in raw material costs and manufacturing inefficiencies related to the Company's
consolidation initiatives.
Selling, general and administrative expense increased $3.4 million, or
4.1%, to $86.0 million for the thirty-nine weeks ended June 30, 2002 compared to
$82.6 million for the thirty-nine weeks ended June 24, 2001. This increase
resulted primarily from $1.6 million of increased promotional and advertising
expenses, $1.5 million of increased bad debt expense due to customer bankruptcy
filings and $1.0 million and $1.3 million of increased expenses due to the
acquisitions of both Global and Dopaco, respectively. These increases were
partially offset by $2.0 million in reduced salaries and benefits.
21
Other expense (income), net changed $12.3 million, or 175.7%, to an
expense of $5.3 million for the thirty-nine weeks ended June 30, 2002 compared
to a benefit of $7.0 million for the thirty-nine weeks ended June 24, 2001. This
decrease is primarily due to (i) a $5.4 million write-off of the management
services agreement between Sweetheart Holdings and SF Holdings, which had been
assigned and assumed by Fonda in 1998 (ii) a $2.6 million write-off of assets
related to business initiatives which were abandoned subsequent to the Merger
and (iii) $7.6 million of costs incurred in connection with the rationalization,
consolidation and improvement of the Company's manufacturing facilities, which
included a $1.6 million restructuring reserve that the Company established in
conjunction with a workforce reduction program as a result of these
consolidation initiatives. These expenses were partially offset by a $3.0
million gain associated with the sale of the Company's manufacturing facility in
Manchester, New Hampshire.
Operating income (loss) decreased $29.3 million, or 61.4%, to $18.4
million for the thirty-nine weeks ended June 30, 2002 compared to $47.7 million
for the thirty-nine weeks ended June 24, 2001, due to the reasons stated above.
Interest expense, net decreased $1.1 million, or 3.8%, to $28.2 million
for the thirty-nine weeks ended June 30, 2002 compared to $29.3 million for the
thirty-nine weeks ended June 24, 2001. This decrease is attributable to lower
interest rates on higher average balances which was partially offset by the
increase in interest rate on the $110 Senior Subordinated Notes form 10.5% to
12.0% which was effective March 1, 2002.
Income tax expense (benefit) decreased $11.1 million, or 154.2%, to a
benefit of $3.9 million in the thirty-nine weeks ended June 30, 2002 compared to
an expense of $7.2 million for the thirty-nine weeks ended June 24, 2001 as a
result of pre-tax loss in Fiscal 2002 compared to a profit in Fiscal 2001. The
effective rates for the thirty-nine weeks ended June 30, 2002 and the
thirty-nine weeks ended June 24, 2001 were 40%, respectively.
Minority interest in subsidiary increased $56,000, or 98.2%, to
$113,000 in the thirty-nine weeks ended June 30, 2002 compared to $57,000 in the
thirty-nine weeks ended June 24, 2001. This amount represents the 20% ownership
of Global's income.
Extraordinary loss on debt extinguishment was $1.1 million net of the
income tax benefit in the thirty-nine weeks ended June 30, 2002 resulting from
the refinancing of the Company's Senior Credit Facility.
Net income (loss) decreased $18.1 million, or 164.5%, to a loss of $7.1
million for the thirty-nine weeks ended June 30, 2002 compared to income of
$11.0 million for the thirty-nine weeks ended June 24, 2001, due to the reasons
stated 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 the thirty-nine weeks ended June 30, 2002, the Company
funded its capital expenditures from a combination of cash generated from
operations, borrowings from the revolving credit facility and funds generated
from asset sales. The Company expects to continue this method of funding for the
remainder of its Fiscal 2002 capital expenditures.
Net cash provided by operating activities was $18.9 million in the
thirty-nine weeks ended June 30, 2002 compared $5.7 million in the thirty-nine
weeks ended June 24, 2001. This increase is primarily due to a reduction in
inventories and decreased account receivable balances which resulted from lower
raw material price levels combined with higher account payable balances due to
longer terms.
Net cash used in investing activities was $12.4 million in the
thirty-nine weeks ended June 30,
22
2002 compared to $39.6 million in the thirty-nine weeks ended June 24, 2001.
This decrease is primarily due to the receipt of net proceeds from the sale of
the Manchester, New Hampshire facility in the thirty-nine weeks ended June 30,
2002 and the Company's purchase of substantially all of the property, plant and
equipment, intangibles and net working capital of Springprint Medallion, a
division of Marcal Paper Mills, Inc. in the thirty-nine weeks ended June 24,
2001.
Net cash used in financing activities was $10.1 million in the
thirty-nine weeks ended June 30, 2002 compared to net cash provided by financing
activities of $35.9 million in the thirty-nine weeks ended June 24, 2001. This
change is primarily due to a reduction of the Company's Senior Credit Facility
balances.
Working capital decreased $27.7 million to $222.8 million at June 30,
2002 from $250.5 million at September 30, 2001. This decrease resulted from
current assets decreasing $31.4 million, primarily due to lower inventories and
account receivable balances which resulted from lower raw material price levels.
Capital expenditures for the thirty-nine weeks ended June 30, 2002 were
$17.6 million compared to $21.7 million for the thirty-nine weeks ended June 24,
2001. Capital expenditures in the thirty-nine weeks ended June 30, 2002 included
$7.8 million for new production equipment; $5.8 million associated with the
implementation of the Company's consolidation program; $2.8 million for facility
improvements; and $1.2 million primarily for routine capital improvements.
On June 10, 2002, the Company entered into a loan agreement with the
Department of Business and Economic Development, a principal department of the
State of Maryland, to borrow $2.0 million (the "Maryland Loan"). The Maryland
Loan bears interest at a rate ranging from 3.0% to 8.0% per annum depending on
certain employment rates at the Company's Owings Mills, Maryland facility. The
Maryland Loan is payable in quarterly installments through March 1, 2007. As of
June 30, 2002, $2.0 million was outstanding at an annual interest rate of 3.0%.
The Company has a senior revolving credit facility with Bank of
America, N.A., as agent (the "Senior Credit Facility"). The Senior Credit
Facility has a maturity date of March 25, 2007; however, in the event that the
Company has not refinanced, repaid or extended the $110 Senior Subordinated
Notes prior to March 1, 2003, the Senior Credit Facility shall terminate on that
date. The Senior Credit Facility allows for a maximum credit borrowing of $235
million subject to borrowing base limitations and satisfaction of other
conditions of borrowing. The revolving borrowings have a maximum of the lesser
of $235 million less the balance of the term loans or $215 million. The term
loans have a maximum of $25 million and are payable monthly through March 2005.
Borrowings under the Senior Credit Facility, at the Company's election, bear
interest at either (i) a bank's base rate revolving loan reference rate plus
0.5% or (ii) LIBOR plus 2.5%. For the thirty-nine weeks ended June 30, 2002, the
weighted average annual interest rate for the Senior Credit Facility was 4.85%.
The Senior Credit Facility is collateralized by the Company's accounts,
inventory, general intangibles and certain other assets. The fee for outstanding
letters of credit is 2.00% per annum and there is a commitment fee of 0.375% per
annum on the daily average unused amount of the commitments. As of June 30,
2002, $31.7 million was available under the Senior Credit Facility.
The Company's Canadian subsidiary has a credit agreement (the "Canadian
Credit Facility") which provides for a term loan and a credit facility with a
maximum credit borrowing of Cdn $30 million (approximately US $18.8 million)
subject to borrowing base limitations and satisfaction of other conditions of
borrowing. The term borrowings are payable quarterly through May 2004. Both the
revolving credit and term loan borrowings have a final maturity date of June 15,
2004. The Canadian Credit Facility is secured by all existing and thereafter
acquired real and personal tangible assets of the Company's Canadian subsidiary
and net proceeds on the sale of any of the foregoing. Borrowings under
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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. For the thirty-nine weeks ended June 30,
2002, the weighted average annual interest rate for the Canadian Credit Facility
was 4.32%. As of June 30, 2002, Cdn $1.4 million (approximately US $0.9 million)
was available under the revolving facility and the term loan balance was Cdn
$12.9 million (approximately US $8.5 million) under the Canadian Credit
Facility.
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. Pursuant
to a lease dated as of June 1, 2000 (the "Lease") between Sweetheart Cup and
State Street Bank and Trust Company of Connecticut, National Association ("State
Street"), as trustee, Sweetheart Cup leases the production equipment sold in
connection with the sale-leaseback transaction from State Street as owner
trustee for several owner participants, through November 9, 2010. Sweetheart Cup
has the option to renew the Lease for up to four consecutive renewal terms of
two years each. Sweetheart Cup also has the option to purchase such equipment
for fair market value either at the conclusion of the Lease term or November 21,
2006. The Company's obligations under the Lease are collateralized by
substantially all of the Company'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. The
Company is accounting for the sale-leaseback transaction as an operating lease,
expensing the $32.0 million annualized rental payments. 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. The taxable gain in the amount of $147.8
million has allowed the Company to utilize a substantial portion of its net
operating loss carry-forward.
Sweetheart Cup is the obligor and Sweetheart Holdings the guarantor
with respect to the $110 Senior Subordinated Notes which are due September 1,
2003. Interest on the $110 Senior Subordinated Notes is payable semi-annually in
arrears on March 1 and September 1. The $110 Senior Subordinated Notes began to
accrue interest at 12% per annum as of March 1, 2002. The $110 Senior
Subordinated Notes are subject to redemption at the option of the Company, in
whole or in part, at the redemption price (expressed as percentages of the
principal amount), plus accrued interest to the redemption date, at a call
premium of 100%. The $110 Senior Subordinated Notes are Subordinated in right of
payment to the prior payment in full of all borrowings under the Senior Credit
Facility, all obligations under the Lease, and all other indebtedness not
otherwise prohibited. The $110 Senior Subordinated Notes contain various
covenants which prohibit, or limit, among other things, asset sales, change of
control, dividend payments, equity repurchases or redemption, the incurrence of
additional indebtedness, the issuance of disqualified stock, certain
transactions with affiliates, the creation of additional liens and certain other
business activities.
In Fiscal 1997, the Company issued $120 million of 9-1/2% Series A
Senior Subordinated Notes due 2007 (the "$120 Senior Subordinated Notes") with
interest payable semi-annually. Payment of the principal and interest is
subordinate in right to payment of the Senior Credit Facility. The Company may,
at its election, redeem the $120 Senior Subordinated Notes at any time after
March 1, 2002 at a redemption price equal to a percentage (104.750% after March
1, 2002 and declining in annual steps to 100% after March 1, 2005) of the
principal amount thereof plus accrued interest. The $120 Senior Subordinated
Notes provide that upon the occurrence of a change of control (as defined
therein), the holders thereof will have the option to require the redemption of
the $120 Senior Subordinated Notes at a redemption price equal to 101% of the
principal amount thereof plus accrued interest.
The instruments governing the indebtedness of the Company contain
customary covenants and events of default, including without limitation,
restrictions on, subject to defined exceptions, the payment
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of dividends, the incurrence of additional indebtedness, investment activities
and transactions with affiliates.
During Fiscal 2001, the Company experienced a casualty loss at its
Somerville, Massachusetts facility. The Company 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 the Company 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 the Company. Plaintiffs filed a petition for writ
of certiorari to the United States Supreme Court, which was denied in January
1999. The Company expects to complete paying out the termination liability and
associated expenses in connection with the Plan termination by December 31,
2002. As of June 30, 2002, the Company 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 $0.6
million, which amount has been fully reserved by 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.
Management believes that cash generated by operations, amounts
available under the Company's credit facilities and funds generated from asset
sales should be sufficient to meet the Company's expected operating needs,
planned capital expenditures, payments in conjunction with the Company's lease
commitments and debt service requirements in the next twelve months.
The Company is evaluating 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, sale of assets, 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, the Company had approximately $28 million of
net operating loss ("NOL") carryforwards for federal income tax purposes, which
expire in 2018. Although the Company 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.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk in the ordinary course of
business, which consists primarily of interest rate risk associated with its
variable rate debt. All borrowing under the Senior Credit Facility and Canadian
Credit Facility, each of which contains a revolving and term credit facility,
bear interest at a variable rate. Borrowings under the Senior Credit Facility,
at the Company's election, bear interest at either (i) a bank's base rate
revolving loan reference rate plus 0.5% or (ii) LIBOR plus 2.5%. Borrowings
under the Canadian Credit Facility bear interest at an index rate plus 1.75%
with respect to the revolving credit borrowings and an index rate plus 2.00%
with respect to the term loan borrowings. As of June 30, 2002, the outstanding
indebtedness under the Senior Credit Facility was $178.3 million and the
Canadian Credit Facility was $17.4 million in U.S. dollars. As of June 30, 2002,
$31.7 million was available under the Senior Credit Facility and Cdn $1.4
million (approximately US $0.9 million) was available under Canadian Credit
Facility. Based upon these amounts, the annual net income would change by
approximately $1.2 million for each one percentage point change in the interest
rates applicable to the variable rate debt. The level of the exposure to
interest rate movements may fluctuate significantly as a result of changes in
the amount of indebtedness outstanding under the revolving credit facilities.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.67 Loan Agreement between Sweetheart Cup Company, Inc. and
the Department of Business and Economic Development, a
principal department of the State of Maryland
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chief Executive Officer
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chief Financial Officer
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its duly authorized officer and principal financial officer.
SWEETHEART HOLDINGS INC.
(registrant)
Date: August 6, 2002 By: /s/ Hans H. Heinsen
-------------- -------------------
Hans H. Heinsen
Senior Vice President - Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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